** **

**SECURITIES AND EXCHANGECOMMISSION**

**Washington, D.C. 20549**

 

**FORM 10-Q**

 
| **ý** | **QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE  SECURITIES EXCHANGE ACT OF 1934** |
|------------|----------------------------------------------------------------------------------------------|

** **

**For the quarterly period ended March 31, 2002**

** **

**or,**

** **
| **o** | **TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE  SECURITIES EXCHANGE ACT OF 1934** |
|-------|-----------------------------------------------------------------------------------------------|

 

**For the transition periodfrom          to          **

 

**Commission file number 0-27012**

 

**Insignia Solutions plc**

(Exactname of Registrant as specified in its charter)

 

| **England and Wales**                                           |   | **Not applicable**                       |
|-----------------------------------------------------------------|--------|------------------------------------------|
| (State or other  jurisdiction of incorporation or organization) |   | (I.R.S. employer  identification number) |

 

----

 

| **41300 Christy Street  Fremont  California 94538  United States of America  (510) 360-3700** |   | **Mercury Park, Wycombe Lane  Wooburn Green  High Wycombe, Bucks HP10 0HH  United Kingdom  (44) 1628-539500** |
|-----------------------------------------------------------------------------------------------|--------|---------------------------------------------------------------------------------------------------------------|

 

**(Address and telephone number of principal executive officesand principal places of business)**

 

Indicate by check markwhether the registrant: (1) has filed all reports required to be filed bySection 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding12 months (or for such shorter period that the registrant was required to filesuch reports), and (2) has been subject to such filing requirements for thepast 90 days.  Yes  ý   No  o

 

As of May 3, 2002, therewere 20,019,729 ordinary shares of £0.20 each nominal value, outstanding.

 

 

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|           | **INSIGNIA  SOLUTIONS PLC**                                                                          |
|----------------|------------------------------------------------------------------------------------------------------|
|           |                                                                                                 |
|           | **PART 1 – FINANCIAL  INFORMATION**                                                             |
|           |                                                                                                 |
| **Item 1.**    | **Financial Statements:**                                                                            |
|           |                                                                                                 |
|           | Condensed  Consolidated Balance Sheets at March 31, 2002 and December 31, 2001                       |
|           |                                                                                                 |
|           | Condensed  Consolidated Statements of Operations for the three months ended March 31,  2002 and 2001 |
|           |                                                                                                 |
|           | Condensed  Consolidated Statements of Cash Flows for the three months ended March 31,  2002 and 2001 |
|           |                                                                                                 |
|           | Notes  to Unaudited Condensed Consolidated Financial Statements                                      |
|           |                                                                                                 |
| **Item  2.**   | **Management’s  Discussion and Analysis of Financial Condition and Results of Operations**      |
|           |                                                                                                 |
| **Item  3.**   | **Quantitative  and Qualitative Disclosures About Market Risk.**                                     |
|           |                                                                                                 |
|           | **PART II – OTHER INFORMATION**                                                                 |
|           |                                                                                                 |
| **Item 6.**    | **Exhibits and Reports  on Form 8-K**                                                                |
|           |                                                                                                 |
| **Signatures** |

 

2

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**PARTI – FINANCIAL INFORMATION**

 

### **Item 1.  Financial Statements**

## **INSIGNIASOLUTIONS PLC**

**CONDENSED CONSOLIDATED BALANCE SHEETS**

**(amounts in thousands, unaudited)**

 
|                                                                            |   | **March 31,  2002** |   | **December  31,  2001** |   |
|---------------------------------------------------------------------------------|--------|---------------------|--------|-------------------------|--------|
| **ASSETS**                                                                      |   |                |   |                    |   |
| Current assets:                                                                 |   |                |   |                    |   |
| Cash and cash  equivalents                                                      |   | $                   | 6,582  |                    | $      | 8,643 |   |
| Restricted cash                                                                 |   | 250                 |   | —                  |   |
| Accounts  receivable, net of allowances of $473 and $488, respectively          |   | 4,584               |   | 6,015                   |   |
| Prepaid royalties                                                               |   | 1,880               |   | 1,139                   |   |
| Prepaid and  other current assets                                               |   | 1,265               |   | 1,269                   |   |
| Total current  assets                                                           |   | 14,561              |   | 17,066                  |   |
|                                                                            |   |                |   |                    |   |
| Property and  equipment, net                                                    |   | 306                 |   | 352                     |   |
| Restricted cash                                                                 |   | —              |   | 250                     |   |
| Other  non-current assets                                                       |   | 100                 |   | 100                     |   |
|                                                                            |   | $                   | 14,967 |                    | $      | 17,768 |   |
|                                                                            |   |                |   |                    |   |
| **LIABILITIES, MANDATORILY REDEEMABLE  WARRANTS AND SHAREHOLDERS’ EQUITY** |   |                |   |                    |   |
| Current  liabilities:                                                           |   |                |   |                    |   |
| Accounts payable                                                                |   | $                   | 1,018  |                    | $      | 1,011 |   |
| Accrued  liabilities                                                            |   | 1,164               |   | 1,179                   |   |
| Deferred revenue                                                                |   | 1,694               |   | 4,054                   |   |
| Income taxes  payable                                                           |   | 187                 |   | 189                     |   |
| Total current  liabilities                                                      |   | 4,063               |   | 6,433                   |   |
|                                                                            |   |                |   |                    |   |
| Commitments and  Contingencies (Note 5)                                         |   |                |   |                    |   |
|                                                                            |   |                |   |                    |   |
| Mandatorily  redeemable warrants                                                |   | 1,440               |   | 1,440                   |   |
|                                                                            |   |                |   |                    |   |
| Shareholders’  equity:                                                     |   |                |   |                    |   |
| Ordinary shares                                                                 |   | 6,408               |   | 6,278                   |   |
| Additional paid-in  capital                                                     |   | 59,280              |   | 58,869                  |   |
| Accumulated  deficit                                                            |   | (55,763             | )      | (54,791                 | )      |
| Other  accumulated comprehensive loss                                           |   | (461                | )      | (461                    | )      |
| Total  shareholders’ equity                                                |   | 9,464               |   | 9,895                   |   |
|                                                                            |   |                |   |                    |   |
|                                                                            |   | $                   | 14,967 |                    | $      | 17,768 |   |

 

The accompanying notesare an integral part of these condensed consolidated financial statements.

 

3

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**INSIGNIASOLUTIONS PLC**

**CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS**

**(amounts in thousands, except per share amounts, unaudited)**

 
|                                            |   | **Three  months ended  March 31,** |   |
|-------------------------------------------------|--------|------------------------------------|--------|
|                                            |   | **2002**                           |   | **2001** |   |
|                                            |   |                               |   |   |   |
| Net revenues:                                   |   |                               |   |   |   |
| License                                         |   | $                                  | 2,988  |   | $ | 1,081 |   |
| Service                                         |   | 556                                |   | 615 |   |
|                                            |   |                               |   |   |   |
| Total net  revenues                             |   | 3,544                              |   | 1,696 |   |
|                                            |   |                               |   |   |   |
| Cost of net  revenues:                          |   |                               |   |   |   |
| License                                         |   | 1,014                              |   | 611 |   |
| Service                                         |   | 197                                |   | 184 |   |
|                                            |   |                               |   |   |   |
| Total cost of  net revenues                     |   | 1,211                              |   | 795 |   |
|                                            |   |                               |   |   |   |
| Gross margin                                    |   | 2,333                              |   | 901 |   |
|                                            |   |                               |   |   |   |
| Operating  expenses:                            |   |                               |   |   |   |
| Sales and  marketing                            |   | 1,721                              |   | 1,731 |   |
| Research and  development                       |   | 1,196                              |   | 1,594 |   |
| General and  administrative                     |   | 938                                |   | 1,251 |   |
|                                            |   |                               |   |   |   |
| Total operating  expenses                       |   | 3,855                              |   | 4,576 |   |
|                                            |   |                               |   |   |   |
| Operating loss                                  |   | (1,522                             | )      | (3,675 | ) |
|                                            |   |                               |   |   |   |
| Interest income,  net                           |   | 21                                 |   | 224 |   |
| Other income  (expense), net                    |   | (32                                | )      | 31 |   |
|                                            |   |                               |   |   |   |
| Loss before  income taxes                       |   | (1,533                             | )      | (3,420 | ) |
|                                            |   |                               |   |   |   |
| Benefit for  income taxes                       |   | (561                               | )      | — |   |
|                                            |   |                               |   |   |   |
| Net loss                                        |   | $                                  | (972   | ) | $ | (3,420 | ) |
|                                            |   |                               |   |   |   |
| Basic and  diluted net loss per share           |   | $                                  | (0.05  | ) | $ | (0.18 | ) |
|                                            |   |                               |   |   |   |
| Weighted average  shares and share equivalents: |   |                               |   |   |   |
| Basic and  diluted                              |   | 19,574                             |   | 18,654 |   |

 

# The accompanying notes are an integral part of thesecondensed consolidated financial statements.

 

4

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**INSIGNIA SOLUTIONS PLC**

**CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS**

**(amounts in thousands, unaudited)**

 
|                                                                         |   | **Three  months ended  March 31,** |       |
|------------------------------------------------------------------------------|--------|------------------------------------|------------|
|                                                                         |   | **2002**                           |       | **2001** |   |
| Cash flows from  operating activities:                                       |   |                               |       |   |   |
| Net loss                                                                     |   | $                                  | (972       | ) | $ | (3,420 | ) |
| Adjustments to  reconcile net loss to net cash used in operating activities: |   |                               | ** ** |   | ** ** |
| Depreciation                                                                 |   | 67                                 |       | 89 |   |
| Allowance for  doubtful accounts                                             |   | (15                                | )          | (161 | ) |
| Other                                                                        |   | —                             |       | 3 |   |
| Net changes in  assets and liabilities:                                      |   |                               |       |   |   |
| Accounts  receivable, net                                                    |   | 1,446                              |       | 227 |   |
| Prepaid  royalties                                                           |   | (741                               | )          | — |   |
| Prepaid and  other current assets                                            |   | (4                                 | )          | (115 | ) |
| Other  non-current assets                                                    |   | —                             |       | (100 | ) |
| Accounts payable                                                             |   | 7                                  |       | (536 | ) |
| Accrued  liabilities                                                         |   | (15                                | )          | (380 | ) |
| Accrued  royalties                                                           |   | —                             |       | 203 |   |
| Deferred revenue                                                             |   | (2,360                             | )          | (36 | ) |
| Income taxes  payable                                                        |   | (2                                 | )          | (149 | ) |
| Net cash used in  operating activities                                       |   | (2,581                             | )          | (4,375 | ) |
| Cash flows from  investing activities:                                       |   |                               |       |   |   |
| Purchases of  property and equipment                                         |   | (21                                | )          | (95 | ) |
| Product line  sale proceeds held in escrow                                   |   | —                             |       | (77 | ) |
| Product line  sale proceeds released from escrow                             |   | —                             |       | 141 |   |
| Net cash used in  investing activities                                       |   | (21                                | )          | (31 | ) |
| Cash flows from  financing activities:                                       |   |                               |       |   |   |
| Proceeds from  issuance of shares, net                                       |   | (1                                 | )          | 4,274 |   |
| Proceeds from  exercise of warrants                                          |   | 481                                |       | — |   |
| Proceeds from  exercise of stock options                                     |   | 61                                 |       | 125 |   |
| Net cash  provided by financing activities                                   |   | 541                                |       | 4,399 |   |
| Net decrease in  cash and cash equivalents                                   |   | (2,061                             | )          | (7 | ) |
| Cash and cash  equivalents at beginning of the period                        |   | 8,643                              |       | 12,051 |   |
| Cash and cash  equivalents at end of the period                              |   | $                                  | 6,582      |   | $ | 12,044 |   |

 

The accompanying notesare an integral part of these condensed consolidated financial statements.

 

5

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**INSIGNIA SOLUTIONS PLC**

 

**NOTES TO UNAUDITED CONDENSED CONSOLIDATED**

**FINANCIAL STATEMENTS**

 

**Note1.  Basis of presentation**

 

The condensed consolidated financial statements are unaudited.  However, in the opinion of management, alladjustments (consisting only of normal recurring adjustments) which arenecessary for a fair presentation of the financial position and results for theinterim period have been included.

 

During the past 24 months, Insignia hasincurred an aggregate loss from operations and negative operating cash flows of$17,902,000 and $22,591,000, respectively. Insignia has undertaken measures to reduce operating expenses andredesign its commercial efforts to adapt to new developments.  As part of these new developments, Insignia’scurrent plans may require obtaining additional financing within the next 12months.  If such financing is notobtained, or if Insignia experiences a significant shortfall in expectedrevenue, Insignia will need to further reduce the level of expenses in order tomeet Insignia’s working capital requirements during the next 12 months.

 

Insignia follows accounting policies that are in accordance withprinciples generally accepted in the United States of America.  Insignia conducts most of its business in U.S.dollars.  All amounts included in thefinancial statements and in the notes herein are in U.S. dollars unlessdesignated ''£'', in which case they are in British pound sterling. Theexchange rates between the U.S. dollar and the British pound sterling were$1.43 and $1.45 (expressed in U.S. dollars per British pound sterling) at March31, 2002 and 2001, respectively. 

 

The results of operations for the three months ended March 31, 2002 arenot necessarily indicative of the results to be expected for the entire fiscalyear, which ends on December 31, 2002.

 

These unaudited condensedconsolidated financial statements should be read in conjunction with thefinancial statements and notes thereto for the year ended December 31, 2001,included in Insignia Solutions plc’s (“Insignia”) 2001 Annual Report and Form10-K.

 

**Note2.  Net income (loss) per share**

 

Net income (loss) per share is presented on a basic and diluted basis,and is computed using the weighted average number of ordinary shares andordinary equivalent shares outstanding during the period.  Ordinary equivalent shares consist ofwarrants and stock options (using the treasury stock method).  Under the basic method of calculating netincome (loss) per share, ordinary equivalent shares are excluded from thecomputation.  Under the diluted methodof calculating net income (loss) per share, ordinary equivalent shares areexcluded from the computation, if their effect is antidilutive.

 

6

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Statement regarding computation of loss per share  (in thousands except per share data,****unaudited):

 
|                                                                        |   | **Three  months endedMarch 31,** |   |
|-----------------------------------------------------------------------------|--------|----------------------------------|--------|
|                                                                        |   | **2002**                         |   | **2001** |   |
|                                                                        |   |                             |   |   |   |
| Net loss                                                                    |   | $                                | (972   | ) | $ | (3,420 | ) |
|                                                                        |   |                             |   |   |   |
| Calculation of  basic and diluted loss per share:                           |   |                             |   |   |   |
| Weighted average  number of ordinary shares outstanding used in computation |   | 19,574                           |   | 18,654 |   |
|                                                                        |   |                             |   |   |   |
| Basic and  diluted loss per share                                           |   | $                                | (0.05  | ) | $ | (0.18 | ) |

 

At March 31, 2002 and March 31, 2001, the weighted averagenumber of options and warrants were 259,000 and 1,251,100 shares, respectively,but were not included in the year-to-date calculation of diluted EPS becausetheir inclusion would have been anti-dilutive.

 

**Note3.  Comprehensive income (loss)**

 

Statement of Financial Accounting Standards No. 130, “Reporting ComprehensiveIncome” (“FAS 130”), requires that all items recognized under accountingstandards as components of comprehensive earnings be reported in an annualstatement that is displayed with the same prominence as other annual financialstatements.  FAS 130 also requires thatan entity classify items of other comprehensive earnings by their nature in anannual financial statement. Comprehensive income, as defined, includes all changes in equity duringa period from non-owner sources.

 

Total comprehensive loss was not different from the net loss reportedfor the three months ended March 31, 2001.

 

**Note4.  New accounting pronouncements**

 

In July 2001, the Financial Accounting Standards Board (FASB) issuedStatement of Financial Accounting Standards, “SFAS”, No. 141, "BusinessCombinations'' and SFAS No. 142, "Goodwill and Other Intangible Assets''.Under SFAS No. 141, all business combinations initiated after June 30, 2001must be accounted for using the purchase method. SFAS No. 142 requires, amongother things, the discontinuance of goodwill amortization.  In addition, the standard includesprovisions upon adoption for the reclassification of certain existingrecognized intangibles as goodwill, reassessment of  the useful  lives ofexisting recognized  intangibles  and the testing for impairment of existinggoodwill and other intangibles. Insignia adopted SFAS No. 142 effective January1, 2002.  The adoption of thesestatements, SFAS No. 141 and 142, did not have a material impact on Insignia’sfinancial position and results of operations. 

 

In July 2001, the FASBs Emerging Issues Task Force (EITF) reached finalconsensus on EITF No. 00-25, Vendor Income Statement Characterization of ConsiderationPaid to a Reseller of the Vendor’s Products (EITF 00-25).  EITF 00-25 generally requires 

 

7

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that consideration, including equity instruments, given to a customerbe clasified in a vendor’s financial statements not as an expense, but as anoffset to revenue up to the amount of cumulative revenue recognized or to berecognized.  In November 2001, the EITFreached consensus on EITF No. 01-09, Accounting for Consideration Given by a Vendorto a Customer or Reseller of the Vendor’s Products (EITF 01-09).  EITF 01-09 clarifies and modifies certainitems discussed in EITF 00-25. Insignia  adopted these newstandards in the quarter ended March 31, 2002. The implementation of EITF 00-25, EITF 01-09, and the accompanyinginterpretive guidance did not have a material impact on Insignia’s financialposition, results of operations, or cash flows.

 

In August 2001, the FASB issued Statement of Financial AccountingStandard No. 144 (SFAS 144) Accounting for the Impairment or Disposal ofLong-Lived Assets, which was effective January 1, 2002.  SFAS 144 supersedes FASB Statement No. 121,Accounting for the Impairment or Disposal of Long-Lived Assets and forLong-Lived Assets to be Disposed of, and the accounting and reportingprovisions relating to the disposal of a segment of a business set forth inAccounting Principles Board Opinion No. 30. This Statement retains many of the fundamental provisions of SFAS 121and expands the scope of discontinued operations to include more disposaltransactions.  Insignia adopted SFAS 144effective January 1, 2002.  Theimplementation of SFAS 144 did not have a material effect on Insignia’sfinancial statements.

 

In August 2001, the FASB issued Statement of Financial AccountingStandard No. 143 (SFAS 143) Accounting for the Asset Retirement Obligations, whichis effective for fiscal years beginning after June 15, 2002.  Earlier adoption is encouraged.  SFAS 143 addresses financial accounting andreporting for obligations associated with the retirement of tangible long-livedassets and the associated asset retirement costs.  Insignia does not believe the adoption of SFAS 143 will have amaterial effect on its financial statements.

 

In February 2002, the EITF issued Topic Number D-103 Income StatementCharacterization of Reimbursements Received for Out-of-Pocket ExpensesIncurred, which was effective for financial statements beginning after December31, 2001.  Topic Number D-103 requiresthat reimbursements received for out-of-pocket expenses incurred, generally, becharacterized as revenue in the statement of operations.  Insignia has adopted Topic Number D-103effective January 1, 2002.  Insignia hashistorically recorded reimbursements of out-of-pocket expenses as net amounts incost of services revenue in the statement of operations.  In accordance with the transition guidanceincluded in Topic Number D-103, adoption required the reclassification offinancial statements for prior periods presented for comparative purposes.  The adoption of Topic Number D-103 did notaffect Insignia’s net loss, financial position or cash flows.  The reclassification did affect thepresentation of certain revenue and cost of revenue items contained withinInsignia’s financial statements.

 

**Note5.  Commitments and Contingencies**

 

In September 2001, Insignia and Sun Microsystems, Inc. (“Sun”) enteredinto Amendment No. 3 (the “Amendment”) to the Technology License andDistribution Agreement (the “Distribution Agreement”) between the twocompanies.  In addition, in June 2001,the two companies entered into an addendum (the “Addendum”) to the DistributionAgreement relating to distribution of products to an Insignia customer.  The Amendment and the Addendum each requireInsignia to make non-refundable royalty prepayments to Sun.  A total of $5,650,000 of prepaid royalties 

 

8

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were paid to Sun under these agreements through the first quarter of2002, and these agreements require additional royalty prepayments due to Suntotaling $1,350,000 in the second quarter of 2002.  

 

During 1998, Insignia sublet until March 2002 facilities it formerlyoccupied in the United Kingdom, on substantially the same terms as thoseapplicable to Insignia.  Insignia’slease on the subleased premises expires in September 2017, except that withseven months’ notice Insignia may elect to terminate the lease in September2002, 2007 and 2012.  In January 2002,Insignia entered into an agreement with the landlord to terminate the lease onApril 3, 2002.  The termination requiresInsignia to pay on April 3, 2002 a surrender payment of approximately $470,000.

 

**Note6.  Segment information**

** **

Statement of Financial Accounting Standards 131, “Disclosures about Segmentsof an Enterprise and Related Information” (“SFAS 131”), provides for segmentreporting based upon the “management” approach.  The management approach designates the internal organization thatis used by management for makingoperating decisions and assessing performance as the source of Insignia’sreportable segments.  SFAS 131 alsorequires disclosures about products and services, geographic areas, and majorcustomers.

 

Insignia operates in a single industry segment providing virtualmachine technology which enables software applications and operating systems tobe run on various computer platforms. In the first quarter of 2002, Phoenix Technologies, Ltd.  (“Phoenix”), accounted for 78% of totalrevenues.  In the first quarter of 2001,General Instrument Corporation dba The Broadband Communications Sector ofMotorola, Inc. (“Motorola”), Grape Systems, Inc. (“Grape”), and EchelonCorporation (“Echelon”) accounted for 29%, 12% and 11% of total revenues,respectively.  No other customeraccounted for 10% or more of Insignia's total revenues during the first quarterof 2002 and 2001.

 

9

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**Geographic information**

** **

Financialinformation by geographical region is summarized below (in thousands): 

 
|                                   |   | **Three months ended  March 31,** |   |
|----------------------------------------|--------|-----------------------------------|--------|
|                                   |   | **2002**                          |   | **2001** |   |
| Revenues from  unaffiliated customers: |   |                              |   |   |   |
| United States                          |   | $                                 | 3,512  |   | $ | 1,493 |   |
| International                          |   | 32                                |   | 203 |   |
| Consolidated                           |   | $                                 | 3,544  |   | $ | 1,696 |   |
| Intercompany  revenues:                |   |                              |   |   |   |
| United States                          |   | $                                 | 25     |   | $ | 162 |   |
| International                          |   | 1,468                             |   | 701 |   |
| Consolidated                           |   | $                                 | 1,493  |   | $ | 863 |   |
| Operating loss:                        |   |                              |   |   |   |
| United States                          |   | $                                 | (891   | ) | $ | (1,908 | ) |
| International                          |   | (631                              | )      | (1,767 | ) |
| Consolidated                           |   | $                                 | (1,522 | ) | $ | (3,675 | ) |
| Identifiable  assets:                  |   |                              |   |   |   |
| United States                          |   | $                                 | 11,029 |   | $ | 8,163 |   |
| International                          |   | 39,238                            |   | 41,017 |   |
| Intercompany  items and eliminations   |   | (35,300                           | )      | (26,763 | ) |
| Consolidated                           |   | $                                 | 14,967 |   | $ | 22,417 |   |
| Long-lived  assets:                    |   |                              |   |   |   |
| United States                          |   | $                                 | 166    |   | $ | 473 |   |
| International                          |   | 35,540                            |   | 27,155 |   |
| Intercompany  items and eliminations   |   | (35,300                           | )      | (26,763 | ) |
| Consolidated                           |   | $                                 | 406    |   | $ | 865 |   |

 

All of the internationalrevenues and substantially all of the international identifiable assets relateto Insignia's operations in the United Kingdom.  Intercompany sales are accounted for at prices intended toapproximate those that would be charged to unaffiliated customers. 

 

Revenues from United States operations included export sales of$131,000 and $231,000 for the three months ended March 31, 2002 and 2001,respectively.

 

10

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Revenue by geographic area for the quarter ended March 31, 2002 was asfollows (in thousands):

 
|                        |   | **U.S.** |   | **U.S.  Exports** |   | **Europe** |   | **Total** |   |
|-----------------------------|--------|----------|--------|-------------------|--------|------------|--------|-----------|--------|
|                        |   |     |   |              |   |       |   |      |   |
| Distributor                 |   | $        | 2,858  |              | $      | 60         |   | $         | — |   | $ | 2,918 |   |
| OEM                         |   | 518      |   | 71                |   | 9          |   | 598       |   |
| End User                    |   | 6        |   | —            |   | 22         |   | 28        |   |
|                        |   |     |   |              |   |       |   |      |   |
| Total                       |   | $        | 3,382  |              | $      | 131        |   | $         | 31     |   | $ | 3,544 |   |
|                        |   |     |   |              |   |       |   |      |   |
| Percentage of total revenue |   | 95       | %      | 4                 | %      | 1          | %      | 100       | %      |

 

Revenue bygeographic area for the quarter ended March 31, 2001 was as follows (inthousands):

 
|                        |   | **U.S.** |   | **U.S.  Exports** |   | **Europe** |   | **Total** |   |
|-----------------------------|--------|----------|--------|-------------------|--------|------------|--------|-----------|--------|
|                        |   |     |   |              |   |       |   |      |   |
| Distributor                 |   | $        | 214    |              | $      | 225        |   | $         | — |   | $ | 439 |   |
| OEM                         |   | 1,049    |   | 5                 |   | 191        |   | 1,245     |   |
| End User                    |   | —   |   | —            |   | 12         |   | 12        |   |
|                        |   |     |   |              |   |       |   |      |   |
| Total                       |   | $        | 1,263  |              | $      | 230        |   | $         | 203    |   | $ | 1,696 |   |
|                        |   |     |   |              |   |       |   |      |   |
| Percentage of total revenue |   | 74       | %      | 14                | %      | 12         | %      | 100       | %      |

 

There were noEuropean countries that accounted for more than 10% of total revenue. 

 

**Note7.  Private placement and warrants**

 

In December 1999,Insignia entered into agreements whereby Insignia issued 1,063,515 ordinaryshares in ADS form, bundled with warrants, at a price of $4.23 per share toCastle Creek Technology Partners LLC and four other investors of whom one is amember of Insignia’s board of directors. Insignia received $4.5 million lessoffering expenses totaling $0.4 million. The bundled warrants give theinvestors the right to purchase a total of 319,054 ADSs at an exercise price of$5.29 per ADS.  The warrants expire onDecember 9, 2004.    The securities wereissued by Insignia in reliance upon the exemption from registration providedunder Rule 506 of Regulation D promulgated under the Securities Act of 1933 (the“Securities Act”).

 

During 2000, Insigniaissued a total of 19,994 ordinary shares in ADS form at various prices, rangingfrom $6.281 to $16.50 to a director of Insignia, as payment for drawdown feesunder a Line of Credit arrangement entered into in March 2000.  The securities were issued in reliance uponthe exemption from registration provided under Section 4(2) of the SecuritiesAct.

 

11

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On November 24, 2000 Insignia entered into agreements whereby Insigniaissued 3,600,000 ordinary shares in ADS form, bundled with warrants, at a priceof $5.00 per share to a total of 23 investors, including Sun Microsystems,Bsquare, and a member of Insignia’s board of directors.  Insignia received $18.0 million less offeringexpenses totaling $2.0 million.  Thebundled warrants give the investors the right to purchase 1,800,000 ADSs at anexercise price of the lower of the average quoted closing sale price ofInsignia’s ADSs for the ten trading days ending on the day preceding the dateof the warrant holder’s intent to exercise less a 10% discount, and $6.00.  In the second quarter of 2001, threeinvestors exercised their warrants for 282,500 ADSs. In the first quarter of2002, three investors exercised their warrant rights for 400,000 ADSs.  The warrants expire on November 24, 2003,however, subject to certain conditions, if the quoted sale price of the ADSsexceed $9.00 per share for any thirty consecutive trading days, Insignia maycancel the warrants upon sixty days prior written notice. Insignia also issueda warrant to purchase 225,000 ADSs to the placement agent exercisable at aprice of $5.00 per ADS.  This warrantexpires on November 24, 2005.  Thesecurities were issued by Insignia in reliance upon the exemption fromregistration provided under Rule 506 of Regulation D promulgated under theSecurities Act.

 

On December 31, 2000 Insignia issued a total of251,333 ordinary shares in ADS form to Quantum Peripherals (Europe) SA, at aper share price of $4.23 per share under the terms of a convertible promissorynote entered into on October 20, 1999. The securities were issued in reliance upon the exemption fromregistration provided under Section 4 (2) of the Securities Act.

 

On February 12, 2001 Insignia entered into agreements whereby Insigniaissued 940,000 ordinary shares in ADS form, bundled with warrants, at a priceof $5.00 per share to a total of 4 investors, including Wind River Systems,Inc. and a member of Insignia’s board of directors.  The bundled warrants gave the investors the right to purchase470,000 ADSs, at an exercise price of the lower of the average quoted closingsale price of Insignia’s ADSs for the ten trading days ending on the daypreceding the date of the warrant holder’s intent to exercise less a 10%discount, and $6.00.  The warrantsexpire on February 12, 2004, however, subject to certain conditions, if thequoted sale price of the ADSs exceed $9.00 per share for any thirty consecutivetrading days, Insignia may cancel the warrants upon sixty days prior writtennotice.  Insignia received $4.7 millionless offering expenses totaling $0.5 million. Insignia also issued a warrant to purchase 25,000 ADSs to the placementagent exercisable at a price of $5.00 per ADS. This warrant expires on February 12, 2006.  The securities were issued by Insignia in reliance upon theexemption from registration provided under Rule 506 of Regulation D promulgatedunder the Securities Act.  

 

### **Dilution Adjustments**

 

As noted above, in December 1999, Insignia issued 1,063,515 ordinaryshares in ADS form at a price of $4.23 per share through a privateplacement.  Along with ADSs, Insigniaalso issued to the investors warrants that entitle them to purchase a total of319,054 ADSs at an exercise price of $5.29 per ADS.  As described below, the exercise price and the number of ADSsissuable under the warrants are subject to various adjustments.  

 

Under the December 1999private placement, the investors received warrants to purchase three ADSs forevery 10 ADSs they purchased.  Theexercise price of the warrants was set at 125% of the original per ADS purchaseprice, or $5.29.  However, the warrantscontain anti-dilution 

 

12

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provisions which decrease this exercise price and increase the numberof ADSs purchasable if Insignia sells or is deemed to sell any shares at belowmarket price during the term of the warrants, which ends on December 9,2004.  The private placement that closedon November 24, 2000 was a sale which triggered the anti-dilution provisions inthe warrants, and, as a consequence, the exercise price of the warrants hasbeen decreased from $5.29 to $4.77 per ADS, and the number of ADSs purchasablehas increased to 353,834.  The privateplacement on February 12, 2001 also triggered the anti-dilution provisions ofthe warrants issued on December 9, 1999. However, the effect of such dilution was less than 1% of the exerciseprice, and, consequently, such adjustment is deferred until such time as theaccumulation of this adjustment and future adjustments exceed at least 1% ofthe exercise price.

 

As part of their warrant agreements, the investors may be entitled tocash payments upon the occurrence of certain Major Transactions, as defined inthe warrant agreements, including change of control provisions.  Cash payments are determined in amethodology described in the agreement. Such methodology is impacted by market price.  A major transaction is defined as a merger, reorganization, orsale of all or substantially all of the assets of Insignia in which thestockholders of Insignia immediately prior to the transaction possess less than50% of the voting power of the surviving entity (or its parent) immediatelyafter the transaction.

 

Under the December 1999 private placement, the investors were entitledto additional warrants to purchase ADSs at £0.20 nominal value per share if theaverage of the closing bid price of the ADSs over the ten days before anadjustment date was less than $4.23. The adjustment dates commenced on March 10, 2000 and occurred on the 10thof each month through March 10, 2001, inclusive.  The rights for an adjustment date to occur would terminate uponrelease of at least $4.75 million of the funds held in escrow by Citrix onDecember 9, 1999.  However, not enoughof the funds held were released to trigger this termination.  As calculated, the average bid price ofInsignia’s ADSs on all the adjustment dates exceeded $4.23 per share andconsequently no adjustment occurred. The adjustment rights have now expired.

 

Insignia obtained a third-party valuation to allocate fair value toamounts received from the private placement between the ADSs and thewarrants.  In 1999 the amount allocatedto mandatorily redeemable warrants totaled $1.440 million, of which $0.590million was allocated to the warrant, and $0.850 million was allocated to theadditional warrant.  Of the remainingnet proceeds received, $2.619 million was allocated to mandatorily redeemablecapital.  The $2.619 million ofmandatorily redeemable capital was reclassed, when the registration statementfor the ADSs and the ADSs underlying the warrants issued in  the December 1999 private placementbecame  effective on March 28, 2000, ofwhich $0.340 million was classified as ordinary shares and $2.279 million wasclassified as additional paid-in capital.

 

Amounts classified aswarrants will remain outside  of  shareholders’ equity  for the  life of   the warrant or until they areexercised,  whichever  occurs first.  This  classification  reflects  certainpotential  cash payments  that may occur, should  Insignia  complete a  major  transaction,  such  as  a takeover, during  the  life of the  warrants.  If a major transaction had occurred asof  March 31, 2002, the maximum cashpayout would have been $352,772 based on the estimated  Black-Scholes value ofthe warrant. 

 

Limitations in the transaction agreements preclude these investors inquestion from achieving certain levels of beneficial ownership.  The securities purchase agreement, thewarrants and the 

 

13

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additional warrants contain the restriction thatInsignia may not issue, and a selling investor may not purchase, and thewarrants and additional warrants may not be exercised for any ADSs, if doing sowould cause such investor to beneficially own more than 9.9% of the totalordinary shares in issue as determined in accordance with Section 13(d) of theSecurities Exchange Act of 1934.  Underthe additional warrants, if such investors are prohibited from exercising the additionalwarrant as a result of the 9.9% restriction, the selling investor may, at itsoption and in addition to its other rights under the securities purchaseagreement and the warrant, retain the warrant or demand payment, in cash, fromInsignia 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 todecrease their level of beneficial ownership, and exercising the warrants toreceive additional ADSs.  This could resultin additional dilution to the holders of Insignia’s ADSs and a potentialdecrease in the price of the ADSs.

 

**Note8.  Line of credit**

 

On March 20, 2000, Insignia entered into an agreement with a directorand members of his family whereby they would provide Insignia a $5.0 millionline of credit with a commitment fee of four points based upon the total amountof the line and drawdown/termination fee of two points for drawdown ortermination.  The interest rate onamounts drawn down was at prime plus 2% until June 30, 2000 and thereafter atprime plus 4% per annum simple interest, payable in cash at the repaymentdate.  Insignia 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 aspayment for drawdown fees under the line of credit arrangement.  On November 27, 2000 Insignia repaid thissum, along with all accrued interest and the termination fee due.

 

On March 28, 2002, Insignia's U.S. subsidiary, Insignia Solutins, Inc.("Insignia U.S.") entered into an accounts receivable financingagreement with Silicon Valley Bank.  Thefinancing agreement allows Insignia U.S. to borrow an amount up to 80% ofeligible receivables not to exceed $1,200,000, with interest at the bank’sprime rate plus two percentage points. The agreement expires on March 27, 2003.  Borrowing is subject to compliance with certain covenants,including a requirement to maintain specific financial ratios.  Borrowings are secured by substantially allof the assets of Insignia U.S.  InsigniaU.S. was in compliance with these covenants at March 31, 2002, and at that timethere were no outstanding borrowings under this credit facility.

 

**Note9.  Related party transaction**

 

During the three months ended March 31, 2002 and the twelve monthsended December 31, 2001, Insignia recognized revenue of $2,775,000 and$4,975,000, respectively, from Phoenix. The CEO of Phoenix was a director on Insignia’s board of directors fromMarch 1997 until March 2001. 

 

During the three months ended March 31, 2002 and the twelve monthsended December 31, 2001, Insignia recognized revenue of $25,000 and $329,000,respectively, from Wind River Systems, Inc. (“Wind River”).  Wind River participated in a privateplacement of equity in Insignia in February 2001 on the same terms as the otherthree investors in the private placement. Wind River paid the aggregate purchase price of $2,000,000 for 400,000ordinary shares 

 

14

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represented by ADRs and warrants to purchase 200,000 additionalordinary shares represented by ADRs.  In addition, a Vice President of Wind River, John C. Fogelin, wasappointed to Insignia’s board of directors in January 2001.

 

On February 13, 2001,Insignia entered into a promissory note with Richard M. Noling, President andChief Executive Officer of Insignia whereby Mr. Noling borrowed $150,000 fromInsignia U.S.  The promissory note isdue in three equal installments, on each annual anniversary from the date ofthe note.  The note was amended onJanuary 24, 2002 to extend the first and subsequent installments one year.  The first installment is now due on February13, 2003.  Interest accrues on the unpaidprincipal balance at a rate per annum equal to the prime lending rate of interestas listed in the Wall Street Journal plus 1%. Accrued interest is due and payable monthly in arrears on the lastcalendar day of each month, beginning March 31, 2001.  In addition, on July 17, 2001, Mr. Noling received an interestfree loan of $50,000.  The $50,000 loanwas repaid in full on September 30, 2001.

 

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**Item2.  Management’s Discussion and Analysisof Financial Condition and Results of Operations**

 

The following discussion and analysis should be read in conjunctionwith the unaudited condensed consolidated financial statements and notesthereto included in Part I - Item 1 of this Form 10-Q and the “Management’sDiscussion and Analysis of Financial Condition and Results of Operations” set forthin Insignia’s Form 10-K for the year ended December 31, 2001 (the “Form 10-K”).

 

**Futureoperating results**

** **

This Form 10-Q contains forward-looking statements.  These forward-looking statements concernmatters which include, but are not limited to, the revenue model and market forthe Jeode product line, the features, benefits and advantages of the Jeodeplatform, international operations and sales, gross margins, spending levels,the availability of licenses to third-party proprietary rights, business andsales strategies, matters relating to proprietary rights, competition, exchangerate fluctuations and Insignia’s liquidity and capital needs.  These and other statements regarding mattersthat are not historical are forward-looking statements.  These matters involve risks anduncertainties that could cause actual results to differ materially from thosein the forward-looking statements.  Inaddition to the factors discussed above, among other factors that could causeactual results to differ materially are the following: the demand for the Jeodeplatform; the performance and functionality of Jeode technology; Insignia’sability to deliver products on time, and market acceptance of new products orupgrades of existing products; the timing of, or delay in, large customerorders; continued availability of technology and intellectual property licenserights; product life cycles; quality control of products sold; competitiveconditions in the industry; economic conditions generally or in variousgeographic areas; and the risks listed from time to time in the reports thatInsignia files with the U.S. Securities and Exchange Commission.  Factors that could cause or contribute tosuch differences in results and outcomes include without limitation thosediscussed below as well as those discussed elsewhere in this Report.  Readers are cautioned not to place unduereliance on these forward-looking statements, which reflect management’sanalysis only as of the date hereof. Insignia assumes no obligation to update these forward-lookingstatements to reflect actual results or changes in factors or assumptionsaffecting such forward-looking statements.

 

Insignia continues to face significant risks associated with thesuccessful execution of its new product strategy.  These risks include, but are not limited to continued technologyand product development, introduction and market acceptance of new products,changes in the marketplace, liquidity, competition from existing and newcompetitors who may enter the marketplace, and retention of key personnel.  Due to the generally long sales cyclesassociated with the Jeode platform, including a licensing process which usuallytakes as long as six to nine months to complete, Insignia does not currentlyhave accurate visibility of future order rates and demand for its productsgenerally.  There can be no assurancethat Jeode platform products will achieve market acceptance.

 

Insignia has experienced operating losses in each quarter since thesecond quarter of 1996.  To achieveprofitability, Insignia will have to increase its revenue.  Insignia’s ability to increase 

 

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revenues depends upon the success of its Jeode product line.  Jeode has been available since March 1999,and it may not achieve widespread market acceptance.  If Insignia is unable to generate higher revenues from Jeode inthe form of development license fees, maintenance and support fees, commercialuse royalties and customer-funded engineering services, Insignia’s currentrevenue levels will be insufficient to sustain its business.

 

The following table sets forth the unaudited condensed consolidatedresults of operations as a percentage of total revenues for the three monthperiods ended March 31, 2002 and 2001.

 

|                         |   | **Three  months ended  March 31,** |   |
|------------------------------|--------|------------------------------------|--------|
|                         |   | **2002**                           |   | **2001** |   |
| Net revenues:                |   |                               |   |   |   |
| License                      |   | 84.3                               | %      | 63.7 | % |
| Service                      |   | 15.7                               | %      | 36.3 | % |
|                         |   |                               |   |   |   |
| Total net  revenues          |   | 100.0                              | %      | 100.0 | % |
|                         |   |                               |   |   |   |
| Cost of net  revenues:       |   |                               |   |   |   |
| License                      |   | 28.6                               | %      | 36.0 | % |
| Service                      |   | 5.6                                | %      | 10.9 | % |
|                         |   |                               |   |   |   |
| Total cost of  net revenues  |   | 34.2                               | %      | 46.9 | % |
|                         |   |                               |   |   |   |
| Gross margin                 |   | 65.8                               | %      | 53.1 | % |
|                         |   |                               |   |   |   |
| Operating  expenses:         |   |                               |   |   |   |
| Sales and  marketing         |   | 48.6                               | %      | 102.1 | % |
| Research and  development    |   | 33.7                               | %      | 94.0 | % |
| General and  administrative  |   | 26.5                               | %      | 73.7 | % |
|                         |   |                               |   |   |   |
| Total operating  expenses    |   | 108.8                              | %      | 269.8 | % |
|                         |   |                               |   |   |   |
| Operating loss               |   | (43.0                              | )%     | (216.7 | )% |
|                         |   |                               |   |   |   |
| Interest income,  net        |   | 0.6                                | %      | 13.2 | % |
| Other income  (expense), net |   | (0.9                               | )%     | 1.8 | % |
|                         |   |                               |   |   |   |
| Loss before  income taxes    |   | (43.3                              | )%     | (201.7 | )% |
|                         |   |                               |   |   |   |
| Benefit for  income taxes    |   | (15.8                              | )%     | 0 | % |
|                         |   |                               |   |   |   |
| Net loss                     |   | (27.5                              | )%     | (201.7 | )% |

 

17

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**Overview**

 

Insignia, which commenced operations in 1986, develops, markets andsupports software technologies that implement accelerated virtual machinetechnology for memory-constrained smart devices.

 

In January 1998, Insignia announced its intention to launch a newproduct line called the JeodeÔplatform, based on Insignia’s Embedded Virtual Machine (“EVM”TM)technology.  Insignia also explored newmarkets that would leverage Insignia’s 16 years of emulation softwaredevelopment experience.  The Jeodeplatform is Insignia’s implementation of Sun Microsystems, Inc.’s (“Sun”) Java®technology tailored for smart devices. It leverages patent-pending intellectual property to provide theseresource-constrained devices with high performance, fully-compatible Java appletand application support.   The productbecame available for sale in March 1999. The Jeode platform was the principal product line of Insignia in thefirst quarter of 2002.  Insignia expectsthat it will continue to rely upon sales of Jeode products, plus new productsthat may be introduced, for Insignia’s revenue in the foreseeable future.  The Jeode product line revenue model isbased on original equipment manufacturers’ (“OEMs”) and channel partners’customer transactions.  

 

During 2001, Insignia began development of a range of products for themobile handset and wireless carrier industry. These products build on our position as a Virtual Machine (“VM”)supplier for manufacturers of mobile devices and allow wireless carriers tobuild valuable incremental services. Insignia is planning for these new products to be shipped before the endof  2002.

 

Insignia’s principal product line in past years was SoftWindowsTM.  This product enabled Microsoft Windows(“Windows”®) applications to be run on most Apple Computer Inc. (“Apple”®)Macintosh computers and many UNIX workstations.  Revenues from this product line grew until 1995, but declinedsignificantly after that date, along with margins.  This was due to a declining demand for Apple Macintosh productsand increased competition.  Insigniaalso shipped RealPC, a low cost software product that allowed consumers to playgames and other applications designed for Intel-based PCs on their PowerMacintosh computers.  In 1999 Managementtook steps to discontinue these product lines, thus allowing Insignia to focusexclusively on its Jeode platform business strategy.

 

**Critical Accounting Policies**

** **

The consolidated financial statements are prepared in accordance withgenerally accepted accounting principals. Certain of Insignia's accounting policies require the application ofsignificant judgement by management in selecting the appropriate assumptionsfor calculating financial estimates. These estimates affect the reported amounts of assets and liabilities atthe dates of the financial statements and the reported amounts of revenues andexpenses during the reporting periods. By their nature, these judgements are subject to an inherent degree ofuncertainty.  The most significantestimates and assumptions relate to revenue recognition, accounts receivable,the recoverability of prepaid royalties, and the adequacy of allowances fordoubtful accounts.  Actual amounts coulddiffer from these estimates.

 

Insignia recognizes revenue in accordance with Statement of Position97-2, "Software Revenue Recognition", as amended.  SOP 97-2 requires that four basic criteriamust be met before revenue can be recognized: (1) persuasive evidence of anarrangement exists; (2) delivery has occurred or services have been rendered; (3) the fee is fixedand determinable; and (4) collectibility is reasonably assured.  Determination of criteria (3) and (4) arebased on management's judgments regarding the fixed nature of the fee chargedfor services rendered and products delivered and the collectibility of thosefees.  Should changes in conditionscause management to determine these criteria are not met for certain futuretransactions, revenue recognized for any reporting period could be adverselyaffected.

 

At the time of the transaction, Insignia assesses whether the feeassociated with its revenue transactions is fixed and determinable based on thepayment terms associated with the transaction. If a significant portion of a fee is due after the normal payment terms,which are 30 to 90 days from invoice date, Insignia accounts for the fee as notbeing fixed and determinable.  In thesecases, Insignia recognizes revenue as the fees become due.

 

For arrangements with multiple obligations (for example, undeliveredmaintenance and support), Insignia allocates revenue to each component of thearrangement using the residual value method based on the fair value of theundelivered elements, which is specific to Insignia.  This means that Insignia will defer revenue from the arrangmentfee equivalent to the fair value of the undelivered elements.  Fair value for the ongoing maintenance andsupport obligation is based upon separate sales of renewals to other customersor upon renewal rates quoted in the contracts. Fair value of services, such as training or consulting, is based uponseparate sales by Insignia of these services to other customers.

 

Insignia recognizes revenue for maintenance services ratably over thecontract term.  Insignia's training andconsulting services are billed based on hourly rates, and Insignia generallyrecognizes revenue as these services are performed.  However, at the time of entering into a transaction, Insigniaassesses whether or not any services included within the arrangement requireInsignia to perform a significant work either to alter the underlying softwareor to build additional complex interfaces so that the software performs as thecustomer requests.  If these servicesare included as part of an arrangement, Insignia recognizes the entire feeusing the percentage of completion method. Insignia estimates the percentage of completion based on Insignia'sestimate of the total costs estimated to complete the project as a percentageof the costs incurred to date and the estimated costs to complete.

 

Insignia's agreements with licensors sometimes require Insignia to makeadvance royalty payments and pay royalties based on product sales.  Prepaid royalties are capitalized andamortized as cost of sales based on the contractual royalty rate based onactual net product sales.  Insigniacontinually evaluates recoverability of prepaid royalties and, if necessary,will charge to cost of sales any amount that Insignia deems unlikely to berecoverable in the future.  Whilehistorically Insignia has not recorded any unrecoverable prepaid royalties,Insignia cannot guarantee that future experiences will be within itsexpectations.  Prepaid royalties areclassified as current assets based on estimated net product sales within thenext year.

 

**Revenues**

 
|               |   | **Three months ended  March 31,** |   |
|--------------------|--------|-----------------------------------|--------|
|               |   | **2002**                          |   | **2001** |   |
|               |   | **(in thousands)**                |   |
|               |   |                              |   |   |   |
| License revenue    |   | $                                 | 2,988  |   | $ | 1,081 |   |
| Service revenue    |   | 556                               |   | 615 |   |
| Total net  revenue |   | $                                 | 3,544  |   | $ | 1,696 |   |

 

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The Jeode product line was the primary business of Insignia for thefirst quarter of 2002 and 2001.  Revenuefrom the Jeode product line is derived from four main sources: the sale of adevelopment license, the sale of annual maintenance and supportcontracts/services, prepaid royalties and commercial use royalties based onshipments of products that include Jeode technology, and customer-fundedengineering activities.

 

In the first quarter of 2002, total revenues increased by 109% comparedto total revenues for the first quarter of 2001.  The increase was primarily due to increased license revenuesrelating to the Jeode platform product line. The Jeode platform accounted for 100% of total revenue for the threemonths ended March 31, 2002 and 2001. Insignia expects to see continued acceleration in the adoption of theJeode platform.  However, due to revenuerecognition factors, not all this growth will necessarily translate intorevenue at the time of sale.

 

License revenue and service revenue accounted for 84% and 16%,respectively, of total revenues in the first quarter of 2002.  In the first quarter of 2001, licenserevenue and service revenue accounted for 64% and 36%, respectively.

 

License revenue increased 176% in the first quarter of 2002 compared tolicense revenues in the first quarter of 2001. Jeode license revenues for the three months ended March 31, 2002 and thethree months ended March 31, 2001 accounted for 100% of total license revenues.

 

Service revenue in the first quarter of 2002 was 10% lower than servicerevenue in the first quarter of 2001. The decrease was primarily due to decreased Jeode engineering and Jeodesupport contracts.  Jeode servicerevenues for the three months ended March 31, 2002 and the three months endedMarch 31, 2001 accounted for 100% of total service revenues.

 

Deferred revenue decreased $2,360,000 in the first quarter of 2002compared to the fourth quarter of 2001. The decrease primarily reflected the revenue recognition ofapproximately $2,000,000 from a June 2001 agreement with Phoenix Technologies,Ltd. (“Phoenix”).

 

Sales to distributors and OEM’s representing more than 10% of totalrevenue in each period accounted for the following percentages of totalrevenues.

 
|                 |   | **Three months ended  March 31,** |   |
|----------------------|--------|-----------------------------------|--------|
|                 |   | **2002**                          |   | **2001** |   |
|                 |   |                              |   |   |   |
| Distributors:        |   |                              |   |   |   |
| Phoenix              |   | 78                                | %      |   | * |
| Grape Systems,  Inc. |   |                              | *      | 12 | % |
|                 |   |                              |   |   |   |
| All  Distributors:   |   | 82                                | %      | 26 | % |
|                 |   |                              |   |   |   |
| OEM’s:          |   |                              |   |   |   |
| Motorola, Inc.       |   |                              | *      | 29 | % |
| Echelon  Corporation |   |                              | *      | 11 | % |
| All OEM’s       |   | 17                                | %      | 73 | % |
| * Less than 10%      |   |                              |   |   |   |

 

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Sales to customers outside the United States, derived mainly fromcustomers in Europe and Asia, represented approximately 5% of total revenues inthe three months ended March 31, 2002 and 26% of total revenues in the threemonths ended March 31, 2001.  Insigniamarkets Jeode to smart device manufacturers in the United States, Europe andJapan.

 

**Cost of revenues and gross margin**

 
|                           |   | **Three months ended  March 31,**      |   |
|--------------------------------|--------|----------------------------------------|--------|
|                           |   | **2002**                               |   | **2001** |   |
|                           |   | **(in thousands, except percentages)** |   |
|                           |   |                                   |   |   |   |
| Cost of license  revenue       |   | $                                      | 1,014  |   | $ | 611 |   |
| Gross margin:  license revenue |   | 66                                     | %      | 43 | % |
|                           |   |                                   |   |   |   |
| Cost of service  revenue       |   | 197                                    |   | 184 |   |
| Gross margin:  service revenue |   | 65                                     | %      | 70 | % |
|                           |   |                                   |   |   |   |
| Total cost of  revenues        |   | $                                      | 1,211  |   | $ | 795 |   |
| Gross margins:  total revenues |   | 66                                     | %      | 53 | % |

 

Cost of license revenue is mainly comprised of royalties to thirdparties, along with the costs of documentation, duplication and packaging.  Cost of service revenue includes costsassociated with customer-funded engineering activities and end-user supportunder maintenance contracts.

 

Insignia believes that the significant  factors  affecting the Jeode  platform gross margin  include pricing ofthe development license, pricing of the unit usage and royalties to thirdparties such as Sun Microsystems, Inc. (“Sun”).  In early 1999, Insignia signed a five-year agreement with Sununder which Sun established Insignia as an authorized Virtual MachineProvider.  Under this agreement,Insignia will pay Sun a per unit royalty on each Jeode platform-enabled smartdevice shipped by Insignia’s customers, plus a royalty on all developmentlicenses put in place between Insignia and its customers. In the third quarterof 2001, Insignia amended its license agreement with Sun.  The amendment expanded the scope of thelicensed technology, changed the royalty rate, limited the royalty obligationsto only per units licensed, established a prepaid royalty schedule and extendedthe expiration date of the contract from March 2004 to June 2004.  License revenue gross margins in the quarterended March 31, 2002 were 66%, compared to 43% for the same period in2001.  The increase in license revenuegross margins reflected the revised royalty arrangement with Sun and a largetransaction with lower gross margins in the first quarter of 2001.

 

Gross margin for service revenue is impacted by the level of andpricing terms of customer funded engineering activities, which can vary fromcustomer to customer, from contract to contract and based on the level ofmaintenance contracts sold.  Grossmargin for service revenue decreased in the first quarter of 2002 to 65% from70% in the same period of 2001 due to less favorable labor costs on fixed priceengineering consulting contracts.

 

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#### **Operatingexpenses**

 
|                          |   | **Three  months ended  March 31,**     |   |
|-------------------------------|--------|----------------------------------------|--------|
|                          |   | **2002**                               |   | **2001** |   |
|                          |   | **(in thousands, except percentages)** |   |
|                          |   |                                   |   |   |   |
| Sales and  marketing          |   | $                                      | 1,721  |   | $ | 1,731 |   |
| Percentage of  total revenues |   | 49                                     | %      | 102 | % |
|                          |   |                                   |   |   |   |
| Research and  development     |   | $                                      | 1,196  |   | $ | 1,594 |   |
| Percentage of  total revenues |   | 34                                     | %      | 94 | % |
|                          |   |                                   |   |   |   |
| General and  administrative   |   | $                                      | 938    |   | $ | 1,251 |   |
| Percentage of  total revenues |   | 26                                     | %      | 74 | % |

 

Sales and marketing expenses consist primarily of personnel and relatedoverhead costs, salesperson commissions, advertising and promotional expenses,trade shows and legal fees for intellectual property protection. Sales andmarketing expenses decreased by 1% in the quarter ended March 31, 2002 from thequarter ended March 31, 2001.  Thedecrease primarily reflected a $103,000 reduction in personnel and relatedtravel costs, a $61,000 reduction in legal fees for intellectual propertyprotection, and a $47,000 reduction in overhead costs, offset substantially bya $194,000 increase in marketing expenditures for the new product launch.  Insignia anticipates a moderate increase insales and marketing expenses in the near term as Insignia continues to increaseits marketing and sales organization for its Jeode product line and expandsinto other product lines.  Insignia hasestablished a direct sales force in the United States, Europe and Japan.Insignia has also developed relationships with strategic partners to leveragethe Jeode technology.

 

Research and development expenses consist primarily of personnel costs,overhead costs relating to occupancy and equipment depreciation.  Research and development expenses decreasedby 25% in the three months ended March 31, 2002, compared to the same period in2001, of which substantially all of the decrease was due to reductions inpersonnel.  Research and developmentexpenses are expected to increase moderately in the near term as Insigniafurther enhances its Jeode technology. In accordance with Statement ofFinancial Accounting Standards No. 86, software development costs are expensedas incurred until technological feasibility is established, after which anyadditional costs are capitalized. In the first three months of 2002 and 2001,no development expenditures were capitalized, as there were no amounts thatqualified for capitalization.

 

General and administrative expenses consist primarily of personnel andrelated overhead costs for finance, corporate legal, information systems, humanresources and general management. General and administrative expenses decreasedby 25% in the three months ended March 31, 2002, compared to the same period of2001. The decrease primarily reflected a $156,000 reduction in personnel costsand related expenses and a $200,000 reduction in bad debt expense, offset inpart by a $39,000 increase in insurance costs. General and administrative expenses are expected to decrease moderatelyin the near term.

 

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**Interestincome (expense), net**

 
|                            |   | **Three months ended  March 31,**      |   |
|---------------------------------|--------|----------------------------------------|--------|
|                            |   | **2002**                               |   | **2001** |   |
|                            |   | **(in thousands, except percentages)** |   |
|                            |   |                                   |   |   |   |
| Interest income  (expense), net |   | $                                      | 21     |   | $ | 224 |   |
| Percentage of  total revenues   |   | 1                                      | %      | 13 | % |
|                                 |        |                                        |        |  |  |  |  |

 

Interest income (expense), net decreased from income of $224,000 in thethree months ended March 31, 2001 to income of $21,000 in the three monthsended March 31, 2002.  The decrease ininterest income in the first quarter of 2002 was primarily due to a combinationof lower interest rates and lower cash and cash equivalent balances.

### ** **

### **Other income, net**

 
|                          |   | **Three months ended  March 31,**      |   |
|-------------------------------|--------|----------------------------------------|--------|
|                          |   | **2002**                               |   | **2001** |   |
|                          |   | **(in thousands, except percentages)** |   |
|                          |   |                                   |   |   |   |
| Other income, net             |   | $                                      | (32    | ) | $ | 31 |   |
| Percentage of  total revenues |   | (1                                     | )%     | 2 | % |
|                               |        |                                        |        |  |  |  |  |

 

Other income, net decreased from income of $31,000 in the three monthsended March 31, 2001 to expense of $32,000 in the three months ended March 31,2002, primarily reflecting foreign exchange gains or losses in the respectiveperiods.

 

For the three months ended March 31, 2002 approximately 96% ofInsignia’s total revenues and over 48% of its operating expenses weredenominated in United States dollars. Most of the remaining revenues and expenses of Insignia are Britishpound sterling denominated and consequently Insignia is exposed to fluctuationsin British pound sterling exchange rates. To hedge against this currency exposure, Insignia has, from time totime, entered into foreign currency options and forward exchange contracts forperiods and amounts consistent with the amounts and timing of its anticipatedBritish pound sterling denominated operating cash flow requirements.

 

Insignia has, at times, an investment portfolio of fixed income securitiesthat are classified as “available-for-sale-securities.”  These securities, like all fixed incomeinstruments, are subject to interest rate risk and will fall in value if marketinterest rates increase.  Insigniaattempts to limit this exposure by investing primarily in short-termsecurities.

 

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**Benefitfor income taxes**

 
|                       |   | **Three months ended  March 31,** |   |
|----------------------------|--------|-----------------------------------|--------|
|                       |   | **2002**                          |   | **2001** |   |
|                       |   | **(in thousands)**                |   |
|                       |   |                              |   |   |   |
| Benefit for  income taxes  |   | $                                 | 561    |   | $ | — |   |
| Effective income  tax rate |   | —                            |   | — |   |
|                            |        |                                   |        |  |  |  |  |

 

Insignia’s benefit for income taxes for the three months ended March31, 2002 primarily represented a refund received from the United Kingdom forresearch and development claims. Insignia has recorded a full valuation allowance against all deferredtax assets, primarily comprising net operating losses, on the basis thatsignificant uncertainty exists with respect to their realization.

 

**Liquidity and capital resources**

 
|                                                              |   | **March 31,**      |   |
|-------------------------------------------------------------------|--------|--------------------|--------|
|                                                              |   | **2002**           |   | **2001** |   |
|                                                              |   | **(in thousands)** |   |
|                                                              |   |               |   |   |   |
| Cash, cash  equivalents and restricted cash                       |   | $                  | 6,832  |   | $ | 12,294 |   |
| Cash and cash  equivalents held in escrow                         |   | $                  | — |   | $ | 4,986 |   |
| Working capital  (deficit)                                        |   | $                  | 10,498 |   | $ | 17,303 |   |
| Net cash used in  operating activities for the three month period |   | $                  | (2,581 | ) | $ | (4,378 | ) |

 

Insignia has transitioned its product focus from compatibility productsto its Jeode product line based on Insignia’s virtual machine technology.  This change in product focus has resulted ina redirection of available resources from Insignia’s historical revenue basetowards the development and marketing efforts associated with the Jeodeplatform, which was released for general availability in March 1999.  Cash used in operating activities in thefirst quarter of 2002 totaled $2.6 million compared to $4.4 million for thesame period in 2001.

 

Insignia’s cash, cash equivalents, restricted cash, and funds held inescrow, were $6.8 million at March 31, 2002, a decrease of $10.5 million from$17.3 million at March 31, 2001. Working capital decreased to $10.5 million at March 31, 2002, from $17.3million at March 31, 2001.  Theprincipal source of working capital came from warrant exercises and receivablecollections.  Capital additions totaled$21,000 and $95,000 for the three months ending March 31, 2002 and March 31,2001, respectively.

 

In September 2001, Insignia and Sun Microsystems, Inc. (“Sun”) enteredinto Amendment No. 3 (the “Amendment”) to the Technology License andDistribution Agreement (the “Distribution Agreement”) between the twocompanies.  In addition, in June 2001,the two companies entered into an addendum (the “Addendum”) to the DistributionAgreement relating to distribution of products to an Insignia customer.  The Amendment and the Addendum each requireInsignia to make non-refundable royalty prepayments to Sun.  A total of $5,650,000 of prepaid royalties

 

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were paid to Sun under these agreements through the first quarter of2002, and these agreements require additional royalty prepayments due to Suntotaling $1,350,000 in the second quarter of 2002.

 

During 1998, Insignia sublet until March 2002 facilities it formerlyoccupied in the United Kingdom, on substantially the same terms as thoseapplicable to Insignia.  Insignia’slease on the subleased premises expires in September 2017, except that withseven months’ notice Insignia may elect to terminate the lease in September2002, 2007 and 2012.  In January 2002,Insignia entered into an agreement with the landlord to terminate the lease onApril 13, 2002.  On April 3, 2002,Insignia made a surrender payment of approximately $470,000, pursuant to thetermination agreement.

 

On March 28, 2002, Insignia's U.S. subsidiary, Insignia Solutins, Inc.("Insignia U.S.") entered into an accounts receivable financingagreement with Silicon Valley Bank.  Thefinancing agreement allows Insignia U.S. to borrow an amount up to 80% ofeligible receivables not to exceed $1,200,000, with interest at the bank’sprime rate plus two percentage points. The agreement expires on March 27, 2003.  Borrowing is subject to compliance with certain covenants,including a requirement to maintain specific financial ratios.  Borrowings are secured by substantially allof the assets of Insignia U.S.  InsigniaU.S. was in compliance with these covenants at March 31, 2002, and at that timethere were no outstanding borrowings under this credit facility.

 

Insignia has granted extended payment terms from time to time andrecognizes these future payments as accounts receivable and deferredrevenue.  Deferred revenue decreased$2,360,000 in the first quarter of 2002 compared to the fourth quarter of2001.  The decrease primarily reflectedthe revenue recognition of $2,000,000 from the June 2001 agreement with Phoenix.

 

Based upon Insignia’s current forecasts and estimates, Insignia istargeting its current cash, cash equivalents and short-term investments,together with cash generated from on-going operations, to be sufficient to meetits anticipated cash needs for working capital and capital expenditures throughat least December 31, 2002.  If cashgenerated from operations is insufficient to satisfy Insignia’s liquidityrequirements, Insignia may seek additional sources of financing includingselling additional equity, obtaining convertible debt securities or utilizingits credit facility.  If additionalfunds are raised through the issuance of debt securities, these securitiescould have rights, preferences and privileges senior to holders of commonstock, and the terms of this debt could impose restrictions on Insignia’soperations.  The sale of additionalequity or convertible debt securities could result in additional dilution toInsignia’s stockholders.  Insignia maynot be able to obtain additional financing on acceptable terms, if at all.  If Insignia is unable to obtain additionalfinancing as and when needed and on acceptable terms, Insignia may be requiredto reduce the scope of its planned sales, marketing and product development efforts,which could jeopardize Insignia’s business.

 

**Additional risk factors that mayaffect future results of operations**

 

There can be no assurance that Insignia will experience growth in revenuesand net income in any particular period when compared to prior periods or thatInsignia will achieve profitability. Any quarterly or annual shortfall in net revenues and/or net income fromthe levels expected by securities analysts and shareholders is likely to resultin a substantial decline in the trading price of Insignia’s shares.

 

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Insignia’s future performance depends upon sales of products withinInsignia’s Jeode product line. During the first quarter of 2002, revenuesrelated to the services and sales of products in the Jeode product line were $3.5million, which accounted for 100% of Insignia’s total revenue in such quarter.Insignia incurred an operating loss of $1.5 million in the first quarter of2002. The Jeode platform may not achieve or sustain market acceptance orprovide desired revenue levels. At current overhead levels, Insignia requiresrevenues of more than $6.0 million per quarter to achieve an operating profit.The Jeode product line is Insignia’s sole product line and Insignia expectsthat it will continue to rely upon sales of Jeode products for the majority ofInsignia’s revenues in the future.

 

Insignia’s revenue is dependent upon its ability to license the Jeodeproduct to third parties. Licensing the Jeode product is a long and complexprocess, which usually takes six to nine months to complete. Before committingto license the product, potential customers must generally consider a widerange of issues including product benefits, infrastructure requirements, andability to work with existing systems, functionality and reliability. Theprocess of entering into a development license with a potential customertypically involves lengthy negotiations. Because of the sales cycle, it isdifficult for Insignia to predict when, or if, a particular prospect might signa license agreement. Development license fees may be delayed or reduced becauseof this process.

 

Insignia’s success depends upon the use of Insignia’s technology byInsignia’s licensees in their smart devices. Insignia’s licensees undertake alengthy process of developing systems that use Insignia’s technology. When alicensee enters into a development license with Insignia, Insignia oftenrequires the licensee to prepay some future commercial use royalties, typicallyan amount projected to cover three to six months of future usage. Until alicensee has sales of its systems incorporating Insignia’s technology, whichcreate sufficient commercial use royalties to surpass any prepayment toInsignia, Insignia does not receive any further royalties from that licensee.Insignia expects that the period of time between entering into a developmentlicense and actually recognizing commercial use royalties to be lengthy anddifficult to predict.

 

In the first quarter of 1999, Insignia signed a five year agreementwith Sun Microsystems, Inc. (“Sun”) under which Sun established Insignia as aSun Authorized Virtual Machine provider. The agreement also grants Insigniaimmediate access to the Java compatibility test suite and the Java technologysource code. The agreement includes technology sharing and compatibilityverification. In September 2001, Insignia and Sun entered into Amendment No. 3(the “Amendment”) to the Technology License and Distribution Agreement (“theDistribution Agreement”) between the two companies.  The Amendment requires Insignia to make non-refundable royaltyprepayments to Sun. Under the agreement, Insignia will pay Sun a per unitroyalty on each smart device shipped by Insignia’s customers. The Amendmentdeletes the former expiration terms and expires on June 30, 2004 with anoptional 3 year term renewal on a portion of the Sun technology (specificallypersonal and embedded Java). If the agreement with Sun terminates or expireswithout renewal, Insignia will not be able to market its Jeode product line.Any disruption in Insignia’s relationship with Sun would likely impair itssales of Jeode.

 

Insignia at times licenses software development tool products fromother companies to distribute with some of its products. These third partiesmay not be able to provide competitive products with adequate features and highquality on a timely basis or to provide sales and marketing

 

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cooperation. Further, Insignia’s products compete with productsproduced by some of its licensors, including products produced by Sun. Whenthese licenses terminate or expire, continued license rights might not beavailable to Insignia on reasonable terms. Insignia might not be able to obtainsimilar products to substitute into its tool suites.

 

If additional funds are raised through the issuance of debt securities,these securities could have rights, preferences and privileges senior toholders of common stock, and the terms of this debt could impose restrictionson Insignia's operations.  The sale ofadditional equity or convertible debt securities could result in additionaldilution to Insignia's stockholders. Insignia may not be able to obtain additional financing on acceptableterms, if at all.  If Insignia is unableto obtain additional financing as and when needed and on acceptable terms,Insignia may be required to reduce the scope of its planned sales, marketingand product development efforts, which could jeaopardize Insignia'sbusiness.  If Insignia cannot raisefunds on acceptable terms, Insignia may not have sufficient net assets tomaintain the listing of its shares on the Nasdaq National Market. Further,Insignia may not be able to develop new products or enhance its existingproducts, take advantage of future opportunities or respond to competitivepressures or unanticipated requirements. 

 

Insignia has experienced operating losses in each quarter since thesecond quarter of 1996. To achieve profitability, Insignia will have toincrease its revenue significantly. Insignia’s ability to increase revenuesdepends upon the success of its Jeode product line. Jeode may not achievemarket acceptance. If Insignia is unable to create revenues from Jeode in theform of development license fees, maintenance and support fees, commercial useroyalties and customer-funded engineering services, Insignia’s current revenueswill be insufficient to sustain its business.

 

For the fiscal year 2001, 2000 and 1999 Insignia spent 69%, 50% and81%, respectively, of its total revenues on sales and marketing. Insignia expectsto continue to incur disproportionately high sales and marketing expenses inthe future. To market Jeode effectively, Insignia must further develop saleschannels in the smart device and wireless device market. Insignia must continueto incur the expenses for a sales and marketing infrastructure before itrecognizes significant revenue from sales of the product. Because customers inthe smart device and wireless device market tend to remain with the same vendorover time, Insignia believes that it must devote significant resources to eachpotential sale. If potential customers do not design Insignia’s products intotheir systems, the resources Insignia has devoted to the sales prospect wouldbe lost. If Insignia fails to achieve and sustain significant increases in itsquarterly sales, Insignia may not be able to continue to increase itsinvestment in these areas. With increased expenses, Insignia must significantlyincrease its revenues if it is to become profitable.

 

The market for smart devices and wireless devices is fragmented and ischaracterized by technological change, evolving industry standards and rapidchanges in customer requirements. Insignia’s existing products will become lesscompetitive or obsolete if Insignia fails to introduce new products or productenhancements that anticipate the features and functionality that customersdemand. The success of Insignia’s new product introductions will depend onInsignia’s ability to:

 

- accurately anticipate industry trends and changes in technology standards;

 

26

 

- complete and introduce new product designs and features in a timely manner;

 

- continue to enhance its existing product lines;

 

- offer Insignia’s products across a spectrum of microprocessor families used in the smart devices and wireless devices market; and

 

- respond promptly to customers’ requirements and preferences.

 

The introduction of new or enhanced products also requires thatInsignia manage the transition from older products to minimize disruption incustomer ordering patterns. Insignia has had difficulty managing the transitionfrom older products in the past. For example, between 1995 and 1999, Insigniatransitioned from the SoftWindows product line to the NTRIGUE product line andbegan preparations for its Jeode product line. During this same periodInsignia’s yearly revenues dropped from a high of $55.1 million in 1995 to alow of $6.8 million in 1999. The decrease in revenues was partly becauseInsignia did not timely introduce new products, which could compensate for thedecreasing demand for our SoftWindows product line.

 

Development delays are commonplace in the software industry. Insigniahas experienced delays in the development of new products and the enhancementof existing products in the past and it is likely to experience delays in thefuture.  Insignia may not be successfulin 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.

 

Insignia’s Jeode product line is targeted for the smart device market.The market for these products is fragmented and highly competitive. This marketis also rapidly changing and there are many companies creating products thatcompete or will compete with Insignia. As the industry develops, Insigniaexpects competition to increase in the future. This competition may come fromexisting competitors or other companies that are not yet known about. If thesecompetitors develop products that are cheaper or provide better performance orfunctionality than Insignia’s Jeode product line, Insignia’s market share willdrop. Many of Insignia’s current competitors and potential competitors havegreater resources than Insignia, and Insignia might not be able to competesuccessfully against these organizations. Competition could force Insignia toreduce the prices of its products, which would result in reduced profit marginsand could harm Insignia’s ability to provide adequate service to its customers.Further, Insignia’s competitors can increase their promotions or introduce newor enhanced products that hurt Insignia’s market share.

 

Insignia obtains revenues from selling development license packages andcommercial use licenses for its Jeode product line. Competition may causeInsignia to reduce the price of these licenses, which would reduce Insignia’srevenues. The market in which Insignia competes may change so that Insigniawill have to provide alternate licensing arrangements in the future that areless profitable for Insignia.

 

**Reliance on international sales**

 

Sales from outside of the United States accounted for approximately14%, 18% and 15% of Insignia’s total revenue in 2001, 2000 and 1999,respectively.

 

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Insignia markets Jeode to manufacturers of smart devices and wirelessdevices in Europe and Asia, particularly in Japan. Economic conditions in Asiaand Europe generally and fluctuations in the value of the Japanese yen and theeuro against the U.S. dollar and British pound sterling could impair Insignia’srevenue and results of operations. International operations are subject to anumber of other special risks. These risks include:

 

- foreign government regulation;

 

- reduced protection of intellectual property rights in some countries where Insignia does 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.

 

**Risks associated with potential product defects**

 

Insignia’s software products, like all software products, may haveundetected errors or compatibility problems. This is particularly true when aproduct is first introduced or a new version is released. Despite thoroughtesting, Insignia’s products might be shipped with errors. If this were tohappen, Insignia’s products could be rejected by customers, or there might becostly delays in correcting the problems.

 

Insignia’s products are increasingly used in systems that interactdirectly with the general public, such as in transportation and medicalsystems. In systems such as these, the failure of our product could causesubstantial property damage or personal injury, which could expose Insignia toproduct liability claims. Insignia’s products are used for applications inbusiness systems where the failure of Insignia’s product could be linked tosubstantial economic loss.

 

Insignia’s agreements with its customers typically contain provisionsdesigned to limit its exposure to potential product liability and other claims.It is likely, however, that these provisions are not effective in allcircumstances and in all jurisdictions. Insignia may not have adequateinsurance against product liability risks, and renewal of Insignia’s insurancemay not be available to us on commercially reasonable terms. Further,Insignia’s errors and omissions insurance may not be adequate to cover claims.As of the date of this Form 10-Q, Insignia has not had any product liability claimsor recalls against its Jeode line of products. However, a product

 

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liability claim or claim for economic loss brought against Insignia inthe future could lead to unexpected large expenses and lost sales. Also, ifInsignia ever had to recall its product due to errors or other problems, itwould cost Insignia a great deal of time, effort and expense.

 

Insignia’s operations depend on its ability to protect its computerequipment and the information stored in its databases against damage by fire,natural disaster, power loss, telecommunications failure, unauthorizedintrusion and other catastrophic events. Insignia believes it has taken prudentmeasures to reduce the risk of interruption in its operations. However, thesemeasures might not be sufficient. As of the date of this Form 10-Q, Insigniahas not experienced any major interruptions in its operations because of acatastrophic event.

 

**Reliance on key personnel**

 

Insignia’s future performance depends to a significant degree upon thecontinued contributions of its key management, product development, sales,marketing and operations personnel. Insignia does not have agreements with anyof its key personnel that require them to work for Insignia for a specificterm, and Insignia does not maintain any key person life insurance policies.Insignia believes its future success will also depend in large part upon itsability to attract and retain highly skilled managerial, engineering, sales,marketing and operations personnel, many of whom are in great demand.Competition for qualified personnel is intense in the San Francisco bay area,where Insignia’s United States operations are headquartered, and Insignia maynot be able to attract and retain personnel.

 

**Intellectual property rights**

 

Insignia depends on its proprietary technology. Despite Insignia’sefforts to protect its proprietary rights, it may be possible for unauthorizedthird parties to copy Insignia’s products or to reverse engineer or obtain anduse information that Insignia considers proprietary. Insignia’s competitorscould independently develop technologies that are substantially equivalent orsuperior to Insignia’s technologies. Policing unauthorized use of Insignia’sproducts is difficult, and while Insignia is unable to determine the extent towhich software piracy of its products exists, software piracy can be expectedto be a persistent problem. Effective protection of intellectual propertyrights may be unavailable or limited in foreign countries.  The status of United States patentprotection in the software industry is not well defined and will evolve as theUnited States Patent and Trademark Office grants additional patents. Patentshave been granted on fundamental technologies in software, and patents mayissue that relate to fundamental technologies incorporated into Insignia’sproducts.

 

As the number of patents, copyrights, trademarks and other intellectualproperty rights in our industry increases, products based on our technology mayincreasingly become the subject of infringement claims. Third parties couldassert infringement claims against Insignia in the future. Infringement claimswith or without merit could be time consuming, result in costly litigation,cause product shipment delays or require Insignia to enter into royalty orlicensing agreements. Royalty or licensing agreements, if required, might notbe available on terms acceptable to Insignia. Insignia may initiate claims orlitigation against third parties for infringement of Insignia’s proprietaryrights or to establish the validity of its proprietary rights. Litigation todetermine the validity of any claims, whether or not the litigation is resolvedin Insignia’s favor, could result in significant expense to Insignia and divertthe efforts of its technical and 

 

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management personnel from productive tasks. If there is an adverseruling against Insignia in any litigation, Insignia may be required to paysubstantial damages, discontinue the use and sale of infringing products,expend significant resources to develop non-infringing technology or obtainlicenses to infringing technology. Insignia’s failure to develop or license asubstitute technology could prevent Insignia from selling its products.

 

**Potential dilution resulting from warrants**

 

Some Insignia security holders, have rights to be issued additionalADSs by Insignia if the registration statements covering their shares and theshares underlying their warrants are suspended for more than 60 days in any 12month period by Insignia. Insignia must issue a total of up to 317,800 ADSs ifit suspends any of the registration statements covering the shares and theshares underlying the warrants for more than 60 days. Insignia has notsuspended registration statements for more than the 60 days in any 12 monthperiod in the past.  The purchase pricethe security holders will pay per additional ADS is the nominal value, or £0.20per ADS, which is the lowest amount for which these shares may be purchasedunder English law. If Insignia issues additional ADSs under these obligations,the ownership interest of existing security holders will be diluted.

 

**Potential dilution from anti-dilution rights**

 

The investors who participated in Insignia’s four most recent privateplacements received warrants which have anti-dilution protections. This meansthat they are entitled to purchase an additional amount of ordinary shares, inthe form of ADSs, if Insignia issues ordinary shares at a price below marketprice. The anti-dilution protections, if triggered, increase the number ofshares which the investors may purchase with their warrants. The exact amountof the increase is not known until the anti-dilution protections are actuallytriggered. There are two ways the anti-dilution protections can be triggered:

 

- if Insignia sells its securities in a transaction, such as a  private placement  financing, for  a price that is lower than the ten day average price of its ADSs before the transaction, or

 

- if the warrants issued in the four private placements are exercised at a price less than the ten day average price of Insignia’s ADSs at the time of exercise.

 

When some of the warrants Insignia issued in the private placements areexercised, anti-dilution protections will likely be triggered. The amount ofthe anti-dilution adjustment is based on a formula where the lower the price ofInsignia’s ADSs as quoted on the Nasdaq Stock Market, the greater the potentialincrease in the number of shares issuable to the warrants holders due to theanti-dilution protections.  For example,if the average ten day price of Insignia’s ADSs drops to $2.09, the totalnumber of ADSs the investors could purchase with their warrants would increaseby 28,476, assuming all warrants are exercised at the same time. If the averageten-day price of our ADSs drops to $0.70, this increase would be approximately50,211 additional ADSs.

 

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Anti-dilution adjustments could accelerate and increase the magnitudeof a decline in the quoted share price of Insignia’s ADSs. Warrant holders havethe right to purchase an increasing amount of shares during a decline in theprice of our ADSs. If the warrant holders exercise their warrants and selltheir shares in the open market during this time, downward pressure is added tothe price. This can further increase the anti-dilution adjustments for theremaining warrant holders. Short sales of our shares may further the downwardpressure on the price of our ADSs. Anti-dilution adjustments and short salesmay accelerate and compound a decline in the price of our ADSs. Shareholderswill also be diluted as warrant holders gain the right to purchase anincreasingly large number of shares due to their anti-dilution protections.

 

**Risk of shareholder litigation**

 

The prices for Insignia’s ADSs have fluctuated widely in the past.During the 12 months ended May 7, 2002, the closing price of a share of ourcommon stock ranged from a high of $3.55 to a low of $1.10. Under the rules of the Nasdaq Stock Market, Insignia’sstock price must remain above $1.00 per share for continued quotation of itsshares on the Nasdaq National Market. Stock price volatility has had asubstantial effect on the market prices of securities issued by Insignia andother high technology companies, often for reasons unrelated to the operatingperformance of the specific companies. In the past, following periods ofvolatility in the market price of a company’s securities, securities class actionlitigation has often been instituted against Insignia. We may in the future bethe target of similar litigation. Regardless of the outcome, securitieslitigation may result in substantial costs and divert management attention andresources.

 

**Item3.  Quantitative and QualitativeDisclosures About Market Risk.**

 

From time to time, Insignia enters into derivative financial instrumentssuch as currency option contracts to hedge certain anticipated, but not yetcommitted, transactions expected to be denominated in foreign currencies.  Insignia does not use derivative financialinstruments for trading or speculative purposes.  Insignia’s downside risk with respect to currency optioncontracts (British pound sterling) is limited to the premium paid for the rightto exercise the option.  Insignia didnot enter into any currency option hedge contracts in the first quarter of 2002or the first quarter of 2001 and had no option hedge contracts outstanding asof March 31, 2002 or March 31, 2001.

 

Insignia’s interest expense and income is sensitive to changes in thegeneral level of U.S. interest rates. However, due to the short-term nature of Insignia’s cash investments andlow levels of debt, Insignia does not believe that Insignia has a material riskexposure.

 

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**PARTII - OTHER INFORMATION**

 

**Item6.  Exhibits and Reports on Form 8-K**

 

(a) Exhibits

The following exhibits are filed as part of this Report:

 
| **Exhibit  Number** |   | **Exhibit Title**                                                                                                      |
|---------------------|--------|------------------------------------------------------------------------------------------------------------------------|
| 10.73               |   | Accounts receivable financing agreement between  Silicon Valley Bank and Insignia Solutions Inc. dated March 28, 2002. |

 

(b) Reports on Form 8-K

 

None

 

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**SIGNATURES**

 

Pursuant to the requirements of the Securities Exchange Act of 1934,the Registrant has duly caused this Report to be signed on its behalf by theundersigned thereunto duly authorized.

 
|                      | INSIGNIA SOLUTIONS PLC  |
|---------------------------|-------------------------|
|                      | (Registrant)            |
|                      |                    |
| Date:  May  15, 2002 |                    |
|                      |                    | /s/Albert J. Wood |   |
|                      | Albert J. Wood          |
|                      | Chief Financial Officer |
|                      |                    |
|                      |                    | /s/ Richard M. Noling |   |
|                      | Richard M. Noling       |
|                      | Chief Executive Officer |
|                      |                    |
|                      |                    | /s/ Mark E. McMillan |   |
|                      | Mark E. McMillan        |
|                      | President               |
|                           |                         |  |  |  |  |  |

 

33

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