**                                                                                                                                                                                                                                                        **

** **

** **

**SECURITIES ANDEXCHANGE COMMISSION**

**Washington, D.C. 20549**

 

 

**FORM10-Q**

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

** **

**For thequarterly period ended September 30, 2001**

** **

**or,**

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

 

 

**From the transition periodfrom                     to**

 

**Commission file number 0-27012**

 

 

 (Exact nameof 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**     |   | **The  Mercury Centre, Wycombe Lane** |
|-------------------------------|--------|---------------------------------------|
| **Fremont**                   |   | **Wooburn  Green**                    |
| **California  94538**         |   | **High  Wycombe, Bucks HP10 0HH**     |
| **United  States of America** |   | **United  Kingdom**                   |
| **(510)  360-3700**           |   | **(44)  1628-539500**                 |

 

(Address and telephone number of principal executiveoffices and principal places of business)

 

 

Indicate by check mark whether theregistrant: (1) has filed all reports required to be filed by Section 13 or15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (orfor such shorter period that the registrant was required to file such reports),and (2) has been subject to such filing requirements for the past 90 days.  Yes  ý   No  o

 

Asof November 9, 2001, there were 19,500,313 Ordinary shares of £0.20 eachnominal value, outstanding.

 

 

**INSIGNIA SOLUTIONS PLC**

 

**PART 1 - FINANCIAL INFORMATION**

 

 
| **Item 1.** | **Financial Statements:** |   |  
 

 

 

 
 

Condensed  Consolidated Balance Sheet at September 30, 2001 and December 31, 2000  (Unaudited)

 

 
 

 

 

 
 

Condensed  Consolidated Statement of Operations for the three months and nine months  ended September 30, 2001 and 2000 (Unaudited)

 

 
 

 

 

 
 

Condensed  Consolidated Statement of Cash Flows for the nine months ended September 30,  2001 and 2000 (Unaudited)

 

 
 

 

 

 
 

Notes  to Unaudited Condensed Consolidated Financial Statements

 

 
 

 

 

 
**Item  2.**

**Management’s  Discussion and Analysis of Financial Conditionand 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**

 

 

 
 

 
****
**PART I - FINANCIALINFORMATION**

 

**Item 1.  FinancialStatements**

**INSIGNIA SOLUTIONS PLC**

**CONDENSED CONSOLIDATED BALANCESHEET**

**(amounts in thousands,unaudited)**

** **

** **

 

 

**September 30, 2001**

 

**December 31,**

**2000**

 

**ASSETS**

 

 

 

 

 

Current assets:

 

 

 

 

 

Cash and cash equivalents

 

$

10,526

 

$

12,051

 

Accounts receivable, net of  allowancesof $249 and  $42, respectively

 

7,890

 

3,385

 

Prepaid and other current assets

 

1,944

 

1,088

 

Total current assets

 

20,360

 

16,524

 

 

 

 

 

 

 

Property and equipment, net

 

402

 

512

 

Cash and cash equivalents held in  escrow

 

-

 

5,050

 

Restricted cash

 

250

 

250

 

Other noncurrent assets

 

100

 

-

 

 

 

$

21,112

 

$

22,336

 

**LIABILITIES  AND SHAREHOLDERS’ EQUITY**

 

 

 

 

 

Current liabilities:

 

 

 

 

 

Accounts payable

 

$

426

 

$

1,096

 

Accrued liabilities

 

1,155

 

1,833

 

Deferred revenue

 

5,613

 

898

 

Accrued royalties

 

-

 

770

 

Income taxes payable

 

404

 

550

 

Total current liabilities

 

7,598

 

5,147

 

 

 

 

 

 

 

Commitments and Contingencies  (Note 6)

 

 

 

 

 

 

 

 

 

 

 

Mandatorily redeemable warrants

 

1,440

 

1,440

 

 

 

 

 

 

 

Shareholders’ equity:

 

 

 

 

 

Ordinary shares

 

6,278

 

5,876

 

Additional paid-in capital

 

58,930

 

54,117

 

Accumulated deficit

 

(52,673

)

(43,783

)

Other accumulated comprehensive  loss

 

(461

)

(461

)

Total shareholders’ equity

 

12,074

 

15,749

 

 

 

 

 

 

 

 

 

$

21,112

 

$

22,336

 

 

Theaccompanying notes are an integral part of these consolidated financialstatements.

**INSIGNIA SOLUTIONS PLC**

**CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS**

**(amounts inthousands, except per share amounts, unaudited)**

 

 

 

 

**Three months ended**

**September 30,**

 

**Nine months ended**

**September 30,**

 

 

 

**2001**

 

**2000**

 

**2001**

 

**2000**

 

 

 

 

 

 

 

 

 

 

 

Net revenues:

 

 

 

 

 

 

 

 

 

License

 

$

1,883

 

$

2,349

 

$

5,648

 

$

6,166

 

Service

 

485

 

541

 

1,494

 

1,286

 

 

 

 

 

 

 

 

 

 

 

Total net revenues

 

2,368

 

2,890

 

7,142

 

7,452

 

 

 

 

 

 

 

 

 

 

 

Cost of net revenues:

 

 

 

 

 

 

 

 

 

License

 

818

 

1,245

 

2,792

 

2,470

 

Service

 

80

 

83

 

349

 

352

 

 

 

 

 

 

 

 

 

 

 

Total cost of net revenues

 

898

 

1,328

 

3,141

 

2,822

 

 

 

 

 

 

 

 

 

 

 

Gross margin

 

1,470

 

1,562

 

4,001

 

4,630

 

 

 

 

 

 

 

 

 

 

 

Operating expenses:

 

 

 

 

 

 

 

 

 

Sales and marketing

 

1,791

 

1,379

 

5,337

 

3,839

 

Research and development

 

1,568

 

1,495

 

4,751

 

4,503

 

General and administrative

 

1,009

 

891

 

3,208

 

2,760

 

 

 

 

 

 

 

 

 

 

 

Total operating expenses

 

4,368

 

3,765

 

13,296

 

11,102

 

 

 

 

 

 

 

 

 

 

 

Operating loss

 

(2,898

)

(2,203

)

(9,295

)

(6,472

)

 

 

 

 

 

 

 

 

 

 

Interest income (expense), net

 

80

 

20

 

419

 

(86

)

Other income, net

 

23

 

20

 

49

 

44

 

 

 

 

 

 

 

 

 

 

 

Loss before income taxes

 

(2,795

)

(2,163

)

(8,827

)

(6,514

)

 

 

 

 

 

 

 

 

 

 

Provision (benefit) for income  taxes

 

3

 

147

 

63

 

(444

)

 

 

 

 

 

 

 

 

 

 

Net loss

 

$

(2,798

)

$

(2,310

)

$

(8,890

)

$

(6,070

)

 

 

 

 

 

 

 

 

 

 

Net loss per share:

 

 

 

 

 

 

 

 

 

Basic

 

$

(0.14

)

$

(0.16

)

$

(0.46

)

$

(0.43

)

Diluted

 

$

(0.14

)

$

(0.16

)

$

(0.46

)

$

(0.43

)

 

 

 

 

 

 

 

 

 

 

Weighted average shares and share  equivalents:

 

 

 

 

 

 

 

 

 

Basic

 

19,476

 

14,251

 

19,163

 

14,180

 

Diluted

 

19,476

 

14,251

 

19,163

 

14,180

 

 

 

Theaccompanying notes are an integral part of these consolidated financialstatements.
****
 

**INSIGNIA SOLUTIONS PLC**

**CONDENSEDCONSOLIDATED STATEMENT OF CASH FLOWS**

** (amounts in thousands, unaudited)**

** **

** **

 

 

**Nine  months ended**

**September  30,**

 

 

 

**2001**

 

**2000**

 

Cash  flows from operating activities:

 

 

 

 

 

Net  loss

 

$

(8,890

)

$

(6,070

)

Adjustments  to reconcile net loss to net cash used in operating activities:

 

 

** **

 

** **

Depreciation

 

253

 

320

 

Other

 

-

 

(63

)

Net  changes in assets and liabilities:

 

 

 

 

 

Accounts  receivable, net

 

(4,505

)

(2,749

)

Prepaid  and other current assets

 

(856

)

111

 

Other  non-current assets

 

(100

)

325

 

Accounts  payable

 

(670

)

(98

)

Accrued  liabilities

 

(678

)

113

 

Accrued  royalties

 

(770

)

291

 

Deferred  revenue

 

4,715

 

(519

)

Income  taxes

 

(146

)

581

 

Net  cash used in operating activities

 

(11,647

)

(7,758

)

Cash  flows from investing activities:

 

 

 

 

 

Proceeds  from sale of property and equipment

 

-

 

3

 

Purchases  of property and equipment

 

(142

)

(218

)

Product  line sale proceeds held in escrow

 

-

 

(215

)

Product  line sale proceeds released from escrow

 

5,050

 

1,300

 

Net  cash provided by investing activities

 

4,908

 

870

 

Cash  flows from financing activities:

 

 

 

 

 

Proceeds  from issuance of shares, net

 

4,969

 

2,000

 

Proceeds  from exercise of stock options

 

245

 

934

 

Net  cash provided by financing activities

 

5,214

 

2,934

 

Net  decrease in cash and cash equivalents

 

(1,525

)

(3,954

)

Cash  and cash equivalents at beginning of the period

 

12,051

 

4,677

 

Cash  and cash equivalents at end of the period

 

$

10,526

 

$

723

 

 

Theaccompanying notes are an integral part of these consolidated financialstatements.****

**INSIGNIA SOLUTIONS PLC**

**NOTES TO UNAUDITED CONDENSEDCONSOLIDATED**

**FINANCIALSTATEMENTS**

 

 

**Note 1.  Basis ofpresentation**

 

The condensed consolidated financialstatements are unaudited.  However, inthe opinion of management, all adjustments (consisting only of normal recurringadjustments) which are necessary for a fair presentation of the financialposition and results for the interim period have been included.

 

The results of operations for the threemonths and nine months ended September 30, 2001 are not necessarily indicativeof the results to be expected for the entire fiscal year, which ends onDecember 31, 2001.

 

These unaudited condensed consolidatedfinancial statements should be read in conjunction with the financialstatements and notes thereto for the year ended December 31, 2000 included in InsigniaSolutions plc’s (“Insignia”) 2000 Annual Report and Form 10-K/A.

 

**Note 2.  Income taxes**

 

Insignia accounts for income taxes underan asset and liability approach that requires the recognition of deferred taxassets and liabilities for the expected future tax consequences of events thathave been recognized in Insignia’s financial statements or tax returns.  In estimating future tax consequences,Insignia generally considers all expected future events other than enactmentsof changes in the tax law or rates.

 

**Note 3.  Net income(loss) per share**

 

Basicnet income (loss) per share is computed using the weighted average number ofordinary shares outstanding during the period. Diluted net income (loss) per share is computed using the weightedaverage number of ordinary shares and ordinary share equivalents outstandingduring the period.  Ordinary equivalentshares consist of warrants and stock options (using the treasury stockmethod).  Ordinary equivalent shares areexcluded from the computation, if their effect is antidilutive.

 

Statement regarding computation of loss pershare  (in thousands except per sharedata, unaudited):

 

 

 

**Three months ended**

**September 30,**

 

**Nine months ended**

**September 30,**

 

 

 

**2001**

 

**2000**

 

**2001**

 

**2000**

 

 

 

 

 

 

 

 

 

 

 

Net loss

 

$

(2,798

)

$

(2,310

)

$

(8,890

)

$

(6,070

)

 

 

 

 

 

 

 

 

 

 

Calculation of basic loss per  share:

 

 

 

 

 

 

 

 

 

Weighted average number of  ordinary shares outstanding used in computation

 

19,476

    

14,251

    

19,163

    

14,180

    

 

 

 

 

 

 

 

 

 

 

Basic loss per share

 

$

(0.14

)

$

(0.16

)

$

(0.46

)

$

(0.43

)

 

 

 

 

 

 

 

 

 

 

Calculation of diluted loss per  share:

 

 

 

 

 

 

 

 

 

Weighted average number of  ordinary shares outstanding used in computation

 

19,476

    

14,251

    

19,163

    

14,180

    

Net effect of dilutive stock  options outstanding

 

-

 

-

 

-

 

-

 

 

 

 

 

 

 

 

 

 

 

 

 

19,476

 

14,251

 

19,163

 

14,180

 

 

 

 

 

 

 

 

 

 

 

Diluted loss per share

 

$

(0.14

)

$

(0.16

)

$

(0.46

)

$

(0.43

)

 

**Note 4.  Comprehensiveincome (loss)**

 

Statement of Financial Accounting Standards No. 130,“Reporting Comprehensive Income” (“FAS 130”), requires that all itemsrecognized under accounting standards as components of comprehensive earningsbe reported in an annual statement that is displayed with the same prominenceas other annual financial statements. FAS 130 also requires that an entity classify items of othercomprehensive earnings by their nature in an annual financial statement.  Comprehensive income, as defined, includesall changes in equity during a period from non-owner sources.

 

Total comprehensive loss was not different from thenet loss reported for the three and nine months ended September 30, 2001.

 

**Note 5.  Newaccounting pronouncements**

 

InSeptember 1998, the Financial Accounting Standards Board issued Statement ofFinancial Accounting Standard No. 133 “Accounting for Derivative Instrumentsand Hedging Activities” (“SFAS 133”). SFAS 133 establishes accounting andreporting standards for derivative instruments and for hedging activities.  This statement became effective for allfiscal quarters of fiscal years beginning after June 15, 1999.  In June 1999, the FASB issued Statement ofFinancial Accounting Standard No. 137 "Accounting for DerivativeInstruments – Deferral of the Effect Date of SFAS Statement No. 133” (“SFAS137”).  SFAS 137 deferred the effectivedate of SFAS 133 until June 15, 2000. Insignia adopted SFAS 133 in 2001. The adoption of SFAS 133 did not affect the results of operations.

 

 
****
**Note 6.  Commitmentsand Contingencies**

 

On October 4, 1999, Insignia filed suitagainst Citrix Systems Inc. (“Citrix”) and GraphOn Corporation (“GraphOn”) inthe Superior Court of the State of California, County of Santa Clara, relatingto the misappropriation assertions of GraphOn and Citrix’s refusal to releasefunds still remaining in escrow and breach of a Cooperation Agreement betweenInsignia and Citrix. On March 15, 2000, GraphOn filed a suit against Citrix andInsignia in the Superior Court of the State of California, County of SantaClara, alleging trade secret misappropriation and breach of contract arisingout of the same facts and circumstances set forth in Insignia’s action againstGraphOn.  The two cases wereconsolidated.

 

This case was settled out of court on April 5, 2001.  The settlement did not involve any paymenton the GraphOn claims against Insignia and the balance of an escrow account,$4.9 million, was released to Insignia on April 20, 2001.

 

In September 2001, Insignia and SunMicrosystems, Inc. (“Sun”) entered into Amendment No. 3 (the “Amendment”) tothe Technology License and Distribution Agreement (the “DistributionAgreement”) between the two companies. In addition, in June 2001, the two companies entered into an addendum(the “Addendum”) to the Distribution Agreement relating to distribution ofproducts to an Insignia customer.  TheAmendment and the Addendum each require Insignia to make non-refundable royaltyprepayments to Sun.  A total of$2,750,000 of prepaid royalties were paid to Sun under these agreements throughthe third quarter of 2001, and these agreements require additional royaltyprepayments totaling $1,150,000, $1,750,000 and $1,350,000 in the fourthquarter of 2001, the first quarter of 2002 and the second quarter of 2002,respectively.

 

**Note 7.  Segmentinformation**

 

Insigniaoperates in a single industry segment providing virtual machine technologywhich enables software applications and operating systems to be run on variouscomputer platforms.  In the thirdquarter of 2001, Phoenix Technologies, Ltd. (“Phoenix”) and Lineo, Inc.(“Lineo”) accounted for 53% and 26% of total revenues, respectively.  In the third quarter of 2000, Victor DataSystems Company, Ltd. (“VDS”), Ravisent Technologies Internet Appliance Group,Inc. (“Ravisent”), and Bsquare Corporation (“Bsquare”) accounted for 38%, 24%and 19% of total revenues, respectively. For the nine months ended September30, 2001, Phoenix accounted for 46% of total revenues.  For the nine months ended September 30,2000, Gemstar International Group Ltd., Quantum Corporation, and VDS accountedfor 24%, 20% and 19% of total revenues, respectively.  No other customer accounted for 10% or more of Insignia's totalrevenues during 2001 and 2000.
******Geographic information**
 

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

 

 

 

**Three  months ended**

**September  30,**

 

**Nine  months ended**

**September  30,**

 

 

 

**2001**

 

**2000**

 

**2001**

 

**2000**

 

Revenues  from unaffiliated customers:

 

 

 

 

 

 

 

 

 

United  States

 

$

2,304

 

$

2,890

 

$

6,787

 

$

7,421

 

International

 

64

 

-

 

355

 

31

 

Consolidated

 

$

2,368

 

$

2,890

 

$

7,142

 

$

7,452

 

Intercompany  revenues:

 

 

 

 

 

 

 

 

 

United  States

 

$

51

 

$

-

 

$

284

 

$

-

 

International

 

1,215

 

1,128

 

3,143

 

2,789

 

Consolidated

 

$

1,266

 

$

1,128

 

$

3,427

 

$

2,789

 

Operating  loss:

 

 

 

 

 

 

 

 

 

United  States

 

$

(1,704

)

$

(946

)

$

(5,160

)

$

(1,931

)

International

 

(1,194

)

(1,257

)

(4,135

)

(4,541

)

Consolidated

 

$

(2,898

)

$

(2,203

)

$

(9,295

)

$

(6,472

)

 

 

 

 

 

 

 

 

**September 30,**

 

 

 

 

 

 

 

**2001**

 

**2000**

 

Identifiable  assets:

 

 

 

 

 

 

 

 

 

United  States

 

 

 

 

 

$

16,081

 

$

4,175

 

International

 

 

 

 

 

39,408

 

24,106

 

Intercompany  items and eliminations

 

 

 

 

 

(34,377

)

(17,828

) 

Consolidated

 

 

 

 

 

$

21,112

 

$

10,453

 

Long-lived  assets:

 

 

 

 

 

 

 

 

 

United  States

 

 

 

 

 

$

442

 

$

396

 

International

 

 

 

 

 

34,687

 

23,176

 

Intercompany  items and eliminations

 

 

 

 

 

(34,377

)

(17,828

)

Consolidated

 

 

 

 

 

$

752

 

$

5,744

 

 

Allof the international revenues and substantially all of the internationalidentifiable assets relate to Insignia's operations in the United Kingdom.  Intercompany sales are accounted for atprices intended to approximate those that would be charged to unaffiliatedcustomers.

 

Revenuesfrom United States operations included export sales of $99,500 and $1,200,000for the three months ended September 30, 2001 and 2000, respectively, and$882,000 and $1,653,000 for the nine months ended September 30, 2001 and 2000,respectively.

 

 

Revenueby geographic area for the quarter ended September 30, 2001 is as follows (inthousands):

 

 

 

 

**U.S.**

 

**U.S.**

**Exports**

 

**Europe**

 

**Total**

 

 

 

 

 

 

 

 

 

 

 

Distributor

 

$

2,009

 

$

78

 

$

12

 

$

2,099

 

OEM

 

194

 

21

 

47

 

262

 

End User

 

2

 

-

 

5

 

7

 

 

 

 

 

 

 

 

 

 

 

Total

 

$

2,205

 

$

99

 

$

64

 

$

2,368

 

 

 

 

 

 

 

 

 

 

 

Percentage of total  revenue

 

93

%

4

%

3

%

100

%

 

 

Revenue by geographic area for thequarter ended September 30, 2000 is as follows (in thousands):

 

 

 

 

**U.S.**

 

**U.S.**

**Exports**

 

**Europe**

 

**Total**

 

 

 

 

 

 

 

 

 

 

 

Distributor

 

$

601

 

$

1,088

 

$

-

 

$

1,689

 

OEM

 

1,070

 

111

 

-

 

1,181

 

End User

 

20

 

-

 

-

 

20

 

 

 

 

 

 

 

 

 

 

 

Total

 

$

1,691

 

$

1,199

 

$

-

 

$

2,890

 

 

 

 

 

 

 

 

 

 

 

Percentage of total  revenue

 

59

%

41

%

0

%

100

%

 

 

There were no European countries thataccounted for more than 10% of total revenue.

 

 

**Note 8.  Privateplacement and warrants**

 

InDecember 1999, Insignia entered into agreements whereby Insignia issued1,063,515 Ordinary Shares in ADS form, bundled with warrants, at a price of$4.23 per share to Castle Creek Technology Partners LLC and four otherinvestors of whom one is a member of Insignia’s board of directors.  The bundled warrants give the investors theright to purchase a total of 319,054 ADSs at an exercise price of $5.29 perADS.  The warrants expire on December 9,2004.  Insignia received $4.5 millionless offering expenses totaling $0.4 million. The securities were issued by Insignia in reliance upon the exemptionfrom registration provided under Rule 506 of Regulation D promulgated under theSecurities Act of 1933 (the “Securities Act”).

 

During2000, Insignia issued a total of 19,994 Ordinary Shares in ADS form at variousprices, ranging from $6.281 to $16.50 to a director of Insignia, as payment fordrawdown fees under a Line of Credit arrangement entered into in March2000.  The securities were issued inreliance upon the exemption from registration provided under Section 4(2) ofthe Securities Act.

 

On November 24, 2000Insignia entered into agreements whereby Insignia issued 3,600,000 OrdinaryShares in ADS form, bundled with warrants, at a price of $5.00 per share to atotal of 23 investors, including Sun Microsystems, Bsquare, and a member ofInsignia’s board of directors.  Insigniareceived $18.0 million less offering expenses totaling $2.0 million.  The bundled warrants give the investors theright to purchase 1,800,000 ADSs at an exercise price of the lower of theaverage quoted closing sale price of Insignia’s ADSs for the ten trading daysending on the day preceding the date of the warrant holder’s intent to exerciseless a 10% discount, and $6.00.  In thesecond quarter of 2001, three investors exercised their warrants for 282,500ADSs. In the third quarter of 2001, no investors exercised their warrantrights.  The warrants expire on November24, 2003, however, subject to certain conditions, if the quoted sale price ofthe ADSs exceed $9.00 per share for any thirty consecutive trading days,Insignia may cancel the warrants upon sixty days prior written notice. Insigniaalso issued a warrant to purchase 225,000 ADSs to the placement agentexercisable at a price of $5.00 per ADS. This warrant expires on November 24, 2005.  The securities were issued by Insignia in reliance upon theexemption from registration provided under Rule 506 of Regulation D promulgatedunder the Securities Act.

 

On December 31, 2000Insignia issued a total of 251,333 Ordinary Shares in ADS form to QuantumPeripherals (Europe) SA, at a per share price of $4.23 per share under theterms of a convertible promissory note entered into on October 20, 1999.  The securities were issued in reliance uponthe exemption from registration provided under Section 4 (2) of the SecuritiesAct.

 

OnFebruary 12, 2001 Insignia entered into agreements whereby Insignia issued940,000 Ordinary Shares in ADS form, bundled with warrants, at a price of $5.00per share to a total of 4 investors, including Wind River Systems, Inc. and amember of Insignia’s board of directors. The bundled warrants gave the investors the right to purchase 470,000ADSs, at an exercise price of the lower of the average quoted closing saleprice of Insignia’s ADSs for the ten trading days ending on the day precedingthe date of the warrant holder’s intent to exercise less a 10% discount, and$6.00.  The warrants expire on February12, 2004, however, subject to certain conditions, if the quoted sale price ofthe ADSs exceed $9.00 per share for any thirty consecutive trading days,Insignia may cancel the warrants upon sixty days prior written notice.  Insignia received $4.7 million less offeringexpenses 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.

 
**DilutionAdjustments**
 

As noted above, in December 1999,Insignia issued 1,063,515 Ordinary Shares in ADS form at a price of $4.23 pershare through a private placement. Along with ADSs, Insignia also issued to the investors warrants thatentitle them to purchase a total of 319,054 ADSs at an exercise price of $5.29per ADS.  As described below, theexercise price and the number of ADSs issuable under the warrants are subjectto various adjustments.

 

Under the December 1999 privateplacement, the investors received warrants to purchase three ADSs for every 10ADSs they purchased.  The exercise priceof the warrants was set at 125% of the original per ADS purchase price, or$5.29.  However, the warrants containanti-dilution provisions which decrease this exercise price and increase thenumber of ADSs purchasable if Insignia sells or is deemed to sell any shares atbelow market 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, theinvestors may be entitled to cash payments upon the occurrence of certain MajorTransactions, as defined in the warrant agreements, including change of controlprovisions.  Cash payments aredetermined in a methodology described in the agreement.  Such methodology is impacted by marketprice.  A major transaction is definedas a merger, reorganization, or sale of all or substantially all of the assetsof Insignia in which the stockholders of Insignia immediately prior to thetransaction possess less than 50% of the voting power of the surviving entity(or its parent) immediately after the transaction.

 

Underthe December 1999 private placement, the investors were entitled to additionalwarrants to purchase ADSs at £0.20 nominal value per share if the average ofthe closing bid price of the ADSs over the ten days before an adjustment datewas less than $4.23.  The adjustmentdates commenced on March 10, 2000 and occurred on the 10th of eachmonth through March 10, 2001, inclusive. The rights for an adjustment date to occur would terminate upon releaseof at least $4.75 million of the funds held in escrow by Citrix on December 9,1999.  However, not enough of the fundsheld were released to trigger this termination.  As calculated, the average bid price of Insignia’s ADSs on allthe adjustment dates exceeded $4.23 per share and consequently no adjustmentoccurred.  The adjustment rights havenow expired.

 

Insigniaobtained a third-party valuation to allocate fair value to amounts receivedfrom the private placement between the ADSs and the warrants.  In 1999 the amount allocated to mandatorilyredeemable warrants totaled $1.440 million, of which $0.590 million wasallocated to the warrant, and $0.850 million was allocated to the additionalwarrant.  Of the remaining net proceedsreceived, $2.619 million was allocated to mandatorily redeemable capital.  The $2.619 million of mandatorily redeemablecapital was reclassed, when the registration statement for the ADSs and theADSs underlying the warrants issued in the December 1999 private placement became  effective on March 28, 2000, of which $0.340 million wasclassified as Ordinary Shares and $2.279 million was classified as additionalpaid-in capital.

 

Amountsclassified as warrants 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  September 30, 2001, the maximum cashpayout would have been $280,768 based on the estimated  Black-Scholes value ofthe warrant.

 

Limitationsin the transaction agreements preclude these investors in question fromachieving certain levels of beneficial ownership.  The securities purchase agreement, the warrants and theadditional warrants contain the restriction that Insignia may not issue, and aselling investor may not purchase, and the warrants and additional warrants maynot be exercised for any ADSs, if doing so would cause such investor tobeneficially own more than 9.9% of the total Ordinary Shares in issue asdetermined in accordance with Section 13(d) of the Securities Exchange Act of1934.  Under the additional warrants, ifsuch investors are prohibited from exercising the additional warrant as aresult of the 9.9% restriction, the selling investor may, at its option and inaddition to its other rights under the securities purchase agreement and thewarrant, retain the warrant or demand payment, in cash, from Insignia in anamount  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 couldresult in additional dilution to the holders of Insignia’s ADSs and a potentialdecrease in the price of the ADSs.

 

**Note 9.  Convertiblepromissory note**

 

On October 20, 1999, Insignia signed aconvertible promissory note in favor of Quantum Corporation (“Quantum”) for$1.0 million.  The note was convertibleat Quantum’s option to Insignia’s shares any time during the lifetime of thenote.  The initial conversion price was$4.28 per share with adjustment clauses for stock splits, reverse stock splits andcertain offerings.  As a result of theprivate placements in December 1999 (see note 8) this conversion price wasadjusted to $4.23 per share on December 9, 1999.  All unpaid principal and unpaid interest, accrued at 8% perannum, compounded quarterly, was converted to Ordinary Shares on December 31,2000.

 

**Note 10.  Line ofcredit**

 

OnMarch 20, 2000, Insignia entered into an agreement with a director and membersof his family whereby they would provide Insignia a $5.0 million line of creditwith a commitment fee of four points based upon the total amount of the lineand drawdown/termination fee of two points for drawdown or termination.  The interest rate on amounts drawn down wasat prime plus 2% until June 30, 2000 and thereafter at prime plus 4% per annumsimple interest, payable in cash at the repayment date.  Insignia drew down a total of $3.0 millionof the line of credit during 2000.  Atotal of 19,994 Ordinary Shares in ADS form were issued as payment for drawdownfees under the line of credit arrangement. On November 27, 2000 Insignia repaid this sum, along with all accruedinterest and the termination fee due.

 

**Note 11.  Relatedparty transaction**

 

During thethree months and nine months ended September 30, 2001, Insignia recognizedrevenue of $1,250,000 and $3,300,000, respectively, from Phoenix Technologies,Ltd.  During the three months and ninemonths ended September 30, 2000, Insignia recognized revenue of $25,000 and$280,000, respectively, from Phoenix Technologies Ltd.  The CEO of Phoenix Technologies Ltd. wasalso a director on Insignia’s Board of Directors from March 1997 until March2001.

 

During the three months and nine monthsended September 30, 2001 and the three months ended December 31, 2000, Insigniarecognized revenue of $90,000, $304,000 and $2.4 million, respectively, fromWind River Systems, Inc. (“Wind River”). Wind River participated in a private placement of equity in Insignia in February 2001 on the sameterms as the other three investors in the private placement (see Note 8).  Wind River paid the aggregate purchase priceof $2 million for 400,000 ordinary shares represented by ADRs and warrants topurchase 200,000 ordinary shares represented by ADRs.   In addition, a Vice President of Wind River, John C. Fogelin,was appointed to Insignia’s Board of Directors in January 2001.

 

On February 13, 2001, Insignia enteredinto an agreement with a person who is an officer and a director wherebyInsignia would provide a three-year loan for $150,000.  The interest rate on the loan is prime plus1%.  The interest accrual is due andpayable monthly in arrears on the last calendar day of each month, beginningMarch 31, 2001.  On each annualanniversary from the date of this note, beginning on February 13, 2002, apayment of one-third of the original principal balance is due and payable inits entirety.  The second and thirdpayment dates are February 13, 2003 and February 13, 2004.  In addition, on July 17, 2001, this personreceived an interest free loan of $50,000. The July 17, 2001 loan was repaid in full on September 30, 2001.

 

**Item 2.  Management’sDiscussion and Analysis of Financial Condition and Results of Operations**

 

The following discussion and analysisshould be read in conjunction with the unaudited condensed consolidated financialstatements and notes thereto included in Part I - Item 1 of this Form 10-Q andthe “Management’s Discussion and Analysis of Financial Condition and Results ofOperations” set forth in Insignia’s Form 10-K/A for the year ended December 31,2000 (the “Form 10-K/A”).

 

**Future operating results**

 

This Form 10-Q contains forward lookingstatements.  These forward lookingstatements concern matters which include, but are not limited to, the revenuemodel and market for the Jeode product line, the features, benefits andadvantages of the Jeode platform, international sales, gross margins, theavailability of licenses to third-party proprietary rights, business and salesstrategies, matters relating to proprietary rights, competition, exchange ratefluctuations 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; Insignia’s ability todeliver products on time, and market acceptance of new products or upgrades ofexisting products; the timing of, or delay in, large customer orders; continuedavailability of technology and intellectual property license rights; productlife cycles; quality control of products sold; competitive conditions in theindustry; economic conditions generally or in various geographic areas; and therisks listed from time to time in the reports that Insignia files with the U.S.Securities and Exchange Commission. There can be no assurance that Insignia will experience growth inrevenues and net income in any particular period when compared to priorperiods.  Any quarterly or annualshortfall in net revenues and/or net income from the levels expected bysecurities analysts and shareholders could result in a substantial decline inthe trading price of Insignia’s shares.

 

Insignia continues to face significantrisks associated with the successful execution of its new productstrategy.  These risks include, but arenot limited to continued technology and product development, introduction andmarket acceptance of new products, changes in the marketplace, liquidity,competition from existing and new competitors who may enter the marketplace,and retention of key personnel.  Due tothe generally long sales cycles associated with the Jeode platform, including alicensing process which usually takes as long as six to nine months tocomplete, Insignia does not currently have accurate visibility of future orderrates and demand for its products generally. There can be no assurance that Jeode platform products will achievemarket acceptance.

 

Insignia has experienced operating lossesin each quarter since the second quarter of 1996.  To achieve profitability, Insignia will have to increase itsrevenue.  Insignia’s ability to increaserevenues 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 theunaudited condensed consolidated results of operations as a percentage of totalrevenues for the three and nine month periods ended September 30, 2001 and2000.

 

 

 

 

**Three months ended**

**September 30,**

 

**Nine months ended**

**September 30,**

 

 

 

**2001**

 

**2000**

 

**2001**

 

**2000**

 

 

 

 

 

 

 

 

 

 

 

Net revenues:

 

 

 

 

 

 

 

 

 

License

 

80.0

%

81.3

%

79.1

%

82.7

%

Service

 

20.0

%

18.7

%

20.9

%

17.3

%

 

 

 

 

 

 

 

 

 

 

Total net revenues

 

100.0

%

100.0

%

100.0

%

100.0

%

 

 

 

 

 

 

 

 

 

 

Cost of net revenues:

 

 

 

 

 

 

 

 

 

License

 

34.5

%

43.1

%

39.1

%

33.2

%

Service

 

3.4

%

2.9

%

4.9

%

4.7

%

 

 

 

 

 

 

 

 

 

 

Total cost of net revenues

 

37.9

%

46.0

%

44.0

%

37.9

%

 

 

 

 

 

 

 

 

 

 

Gross margin

 

62.1

%

54.0

%

56.0

%

62.1

%

 

 

 

 

 

 

 

 

 

 

Operating expenses:

 

 

 

 

 

 

 

 

 

Sales and marketing

 

75.6

%

47.7

%

74.7

%

51.5

%

Research and development

 

66.2

%

51.7

%

66.5

%

60.5

%

General and administrative

 

42.6

%

30.8

%

44.9

%

37.0

%

 

 

 

 

 

 

 

 

 

 

Total operating expenses

 

184.4

%

130.2

%

186.1

%

149.0

%

 

 

 

 

 

 

 

 

 

 

Operating loss

 

(122.3

%)

(76.2

%)

(130.1

%)

(86.9

%)

 

 

 

 

 

 

 

 

 

 

Interest income (expense), net

 

3.4

%

0.7

%

5.8

%

(1.1

%)

Other income (expense), net

 

0.9

%

0.7

%

0.7

%

0.6

%

 

 

 

 

 

 

 

 

 

 

Loss before income taxes

 

(118.0

%)

(74.8

%)

(123.6

%)

(87.4

%)

 

 

 

 

 

 

 

 

 

 

Provision (benefit) for income  taxes

 

0.1

%

5.1

%

0.9

%

(6.0

%)

 

 

 

 

 

 

 

 

 

 

Net loss

 

(118.1

%)

(79.9

%)

(124.5

%)

(81.4

%)

 

**Overview**

 

Insignia, which commenced operations in1986, develops, markets and supports software technologies that speed theadoption of Java-based individualized computing in Internet appliances andembedded devices.

 

In January 1998, Insignia announced itsintention to launch a new product line called the JeodeÔ platform,based on Insignia’s Embedded Virtual Machine (“EVM”TM) technology.  This followed a strategic review in late1997 of Insignia’s business.  Insigniaalso explored new markets that would take advantage of Insignia’s 15 years ofemulation software development experience. The Jeode platform is Insignia’s implementation of Sun Microsystems,Inc.’s (“Sun”) Java® technology tailored for Internet appliances and embeddeddevices.  It utilizes patent-pendingintellectual property to provide these resource-constrained devices with high performance,fully-compatible Java applet and application support.   The product became available for sale in March 1999.  The Jeode platform is now the principalproduct line of Insignia and will be for the foreseeable future.  The Jeode product line revenue model isbased on original equipment manufacturers’ (“OEMs”) and channel partners’customer transactions.

 

Insignia’sprincipal 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 early 1999Management took steps to discontinue these product lines, and on October 18,1999, Insignia signed an exclusive licensing arrangement with FWB Software, LLC(“FWB”).  This arrangement allowedInsignia to focus exclusively on its Jeode platform business strategy.

 

**Revenues**

 

 

 

**Three  months ended**

**September  30,**

 

**Nine  months ended**

**September  30,**

 

 

 

 

**2001**

 

**2000**

 

**2001**

 

**2000**

 

 

**(in  thousands)**

License  revenue

 

$

1,883

 

$

2,349

 

$

5,648

 

$

6,166

 

Service  revenue

 

485

 

541

 

1,494

 

1,286

 

Total  net revenue

 

$

2,368

 

$

2,890

 

$

7,142

 

$

7,452

 

 

 

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.  Insigniaderived its SoftWindows revenues from the sale of packaged software productsand annual maintenance contracts, along with royalties received from bundlingagreements with OEMs and customer-funded engineering activities under OEMcontracts.  Revenues from the sale ofdevelopment licenses, packaged products and royalties received from OEMs areclassified as license revenue, while revenues from customer-funded engineeringactivities, training, and annual maintenance contracts are classified asservice revenue.

 

In the third quarter of 2001, totalrevenues decreased by 18% compared to total revenues for the third quarter of2000.  In the nine months ended September30, 2001, total revenues decreased by 4% compared to total revenues for thefirst nine months of 2000.  The decreasewas primarily due to current economic conditions, delayed and canceled projectsand deals with lower prepayments.  TheJeode platform is the principal product of Insignia accounting for 100% of thetotal revenue for the three and nine months ended September 30, 2001.  The Jeode platform accounted for 99% and 98%of total revenue for the three months and nine months ended September 30, 2000,respectively.  Insignia believesadoption of the Jeode platform will increase. However, due to revenue recognition rules, not all of this growth willnecessarily translate into revenue in the immediate future.

 

License revenue and service revenue accountedfor 80% and 20%, respectively, of total revenues for the three monthsended  September 30, 2001.  For the nine months ended September 30,2001, license revenue and service revenue accounted for 79% and 21%,respectively, of total revenues.  Forthe three months ended September 30, 2000, license revenue and service revenueaccounted for 81% and 19%, respectively, of total revenues.  For the nine months ended September 30,2000, license revenue and service revenue accounted for 83% and 17%,respectively, of total revenues.

 

License revenue decreased 20% in thethird quarter of 2001 compared to license revenues in the third quarter of2000.  For the nine months endedSeptember 30, 2001, license revenue decreased 8% compared to the same period in2000.  The decrease was primarily due tocurrent economic conditions, delayed and canceled projects and deals with lowerprepayments.  Jeode license revenues forboth the three months and nine months ended September 30, 2001 accounted for100% of total license revenues.  Jeodelicense revenues for the three months and nine months ended September 30, 2000accounted for 100% and 99%, respectively, of total license revenues.

 

Service revenue in the third quarter of2001 was 10% lower than service revenue in the third quarter of 2000 due todecreased Jeode engineering work. Service revenue for the nine months ended September 30, 2001 was 16%higher than service revenue for the same period in 2000. The increase wasprimarily due to increased Jeode engineering and Jeode support contracts in thefirst half of 2001.  Jeode servicerevenues accounted for 100% of total service revenues for both the three monthsand nine months ended September 30, 2001. Jeode service revenues for the three months and nine months endedSeptember 30, 2000 accounted for 96% and 93% of total service revenues,respectively.  SoftWindows servicerevenues for the three months and nine months ended September 30, 2001accounted for 0% of total service revenues. SoftWindows service revenues accounted for 4% and 7%, respectively, ofthe service revenue for the three months and nine months ended September 30,2000.

 

 

 

Sales to Distributors and OEMsrepresenting more than 10% of total revenue in each period accounted for thefollowing percentages of total revenue.

 

 

 

**Three months ended**

**September 30,**

 

**Nine months ended**

**September 30,**

 

 

 

**2001**

 

**2000**

 

**2001**

 

**2000**

 

Distributors:

 

 

 

 

 

 

 

 

 

Phoenix

 

53

%

*

 

46

%

*

 

Lineo

 

26

%

*

 

*

 

*

 

VDS

 

*

 

38

%

*

 

19

%

Bsquare

 

*

 

19

%

*

 

9

%

 

 

 

 

 

 

 

 

 

 

All Distributors:

 

89

%

58

%

70

%

34

%

 

 

 

 

 

 

 

 

 

 

OEMs:

 

 

 

 

 

 

 

 

 

Quantum Corporation

 

*

 

*

 

*

 

20

%

Gemstar International Group Ltd.

 

*

 

*

 

*

 

24

%

Ravisent

 

–

 

24

%

–

 

9

%

 

 

 

 

 

 

 

 

 

 

All OEMs:

 

11

%

41

%

30

%

63

%

 

* Less than10%

 

Sales to customersoutside the United States, derived mainly from customers in Europe and Asia,represented approximately 7% of total revenues in the three months endedSeptember 30, 2001, 41% of total revenues in the three months  ended September 30, 2000, 15% of totalrevenues in the nine months ended September 30, 2001 and 22% of total revenuesin the nine months ended September 30,  2000.  Insignia markets Jeode to Internet applianceand embedded device manufacturers in the United States, Europe and Japan.

 

**Cost of revenues and gross margin**

 

 

 

**Three months ended**

**September 30,**

 

**Nine months ended**

**September 30,**

 

 

 

**2001**

 

**2000**

 

**2001**

 

**2000**

 

 

**(in thousands, except  percentages)**

 

 

 

 

 

 

 

 

 

 

 

Cost of license revenue

 

$

818

 

$

1,245

 

$

2,792

 

$

2,470

 

Gross margin: license revenue

 

57

%

47

%

51

%

60

%

 

 

 

 

 

 

 

 

 

 

Cost of service revenue

 

80

 

83

 

349

 

352

 

Gross margin: service revenue

 

84

%

85

%

77

%

73

%

 

 

 

 

 

 

 

 

 

 

Total cost of revenues

 

$

898

 

$

1,328

 

$

3,141

 

$

2,822

 

Gross margins: total revenues

 

62

%

54

%

56

%

62

%

 

Cost of license revenue is mainlycomprised of royalties to third parties, along with the costs of documentation,duplication and packaging.  Cost ofservice revenue includes costs associated with customer-funded engineeringactivities and end-user support under maintenance contracts.

 

Insignia believes that the significantfactors affecting the Jeode platform gross margin include pricing of thedevelopment license, pricing of the unit usage and royalties to third partiessuch as Sun Microsystems, Inc. (“Sun”). In early 1999, Insignia signed a five-year agreement with Sun underwhich Sun established Insignia as an authorized Virtual Machine provider.  Under this agreement, Insignia will pay Suna per unit royalty on each Jeode platform-enabled Internet appliance orembedded device shipped by Insignia’s customers, plus a royalty on alldevelopment licenses put in place between Insignia and its customers. In thethird quarter of 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 September 30, 2001 were 57%, compared to 47% for the same period in2000.  For the nine months endedSeptember 30, 2001, license revenue gross margins were 51% compared to 60% forthe same period in 2000. The increase for the three months ended September 30,2001 over the same period in 2000 was due to deals with favorable grossmargins.  The decrease for the ninemonths ended September 30, 2001 was due primarily to a large deal with lowergross margin.

 

Gross margin for service revenue isimpacted by the level of and pricing terms of customer funded engineeringactivities, which can vary from customer to customer, from contract tocontract, and based on the level of maintenance contracts sold.  Gross margin for service revenue decreasedin the third quarter of 2001 to 84% from 85% in the same period of 2000 due toless favorable labor costs on fixed price engineering consultingcontracts.  For the nine months endedSeptember 30, 2001, service revenue gross margins were 77% compared to 73% forthe same period in 2000.  The increasewas due to Jeode customer-funded engineering activities and maintenanceagreements with favorable margins.

 

**Operating expenses**

 

 

 

**Three months ended**

**September 30,**

 

**Nine months ended**

**September 30,**

 

 

 

**2001**

 

**2000**

 

**2001**

 

**2000**

 

 

**(in thousands, except  percentages)**

 

 

 

 

 

 

 

 

 

 

 

Sales and marketing

 

$

1,791

 

$

1,379

 

$

5,337

 

$

3,839

 

Percentage of total revenues

 

76

%

48

%

75

%

52

%

 

 

 

 

 

 

 

 

 

 

Research and development

 

$

1,568

 

$

1,495

 

$

4,751

 

$

4,503

 

Percentage of total revenues

 

66

%

52

%

67

%

60

%

 

 

 

 

 

 

 

 

 

 

General and administrative

 

$

1,009

 

$

891

 

$

3,208

 

$

2,760

 

Percentage of total revenues

 

43

%

31

%

45

%

37

%

 

Sales and marketing expenses consistprimarily of personnel and related overhead costs, salesperson commissions,advertising and promotional expenses, and trade shows.  Sales and marketing expenses increased by30% in the quarter ended September 30, 2001 from the quarter ended September30, 2000, and by 39% for the nine months ended September 30, 2001 from the sameperiod of 2000.  The increase wasprimarily due to increased personnel costs, new hires, and increased legal feesrelating to patents and trademarks. 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.  Insignia has established a direct salesforce in the United States, Europe and Japan. Insignia has also developedrelationships with strategic partners to leverage the Jeode technology.

 

Research and development expenses consistprimarily of personnel costs, overhead costs relating to occupancy andequipment depreciation.  Research anddevelopment expenses rose by 5% and 6% in the three months and nine monthsended September 30, 2001, respectively, over the same periods in 2000 due toincreased personnel costs.  Research anddevelopment expenses are expected to decrease moderately in the near term. Thisexpected decrease is largely due to a head count reduction of 15 people whichoccurred early in the fourth quarter of 2001. The head count reduction was a result of deteriorating economicconditions and automation of some of the engineering testing functions.  In accordance with Statement of FinancialAccounting Standards No. 86, software development costs are expensed asincurred until technological feasibility is established, after which anyadditional costs are capitalized. In the first nine months of 2001 and 2000, nodevelopment expenditures were capitalized, as there were no amounts thatqualified for capitalization.

 

General and administrative expensesconsist primarily of personnel and related overhead costs for finance,corporate legal, information systems, human resources and general management.General and administrative expenses increased by 13% in the three months endedSeptember 30, 2001 over the same period of 2000, and by 16% for the nine monthsended September 30, 2001 from the same period of 2000. General andadministrative expenses are expected to decrease moderately in the near termdue to a headcount reduction of 4 people, which occurred early in the fourthquarter of 2001.  The three months endedboth March 31, 2001 and September 30, 2001 included a large increase in expenseas a result of adjusting a debt reserve for a debt that was considereduncollectible.  However, the debt wascollected in July 2001 and the reserve was reversed in the three months endedJune 30, 2001.  Excluding the impact ofthe reserve adjustments, general and administrative expenses increased by 1% inthe three months ended September 30, 2001 over the same period of 2000, and by9% for the nine months ended September 30, 2001 over the same period of2000.  The increase was primarily due torecruiting fees for replacement hires.

 

**Interest income(expense), net**

 

 

 

**Three months ended**

**September 30,**

 

**Nine months ended**

**September 30,**

 

 

 

**2001**

 

**2000**

 

**2001**

 

**2000**

 

 

**(in thousands, except  percentages)**

 

 

 

 

 

 

 

 

 

 

 

Interest income (expense), net

 

$

80

 

$

20

 

$

419

 

$

(86

)

Percentage of total revenues

 

3

%

1

%

6

%

(1

%)

 

Interest income (expense), net increasedfrom $20,000 in the three months ended September 30, 2000 to $80,000 in thethree months ended September 30, 2001. For the nine months ended September 30,2001, interest income (expense), net increased from an expense of $86,000 toincome of $419,000.  The increases ininterest income were a result of higher cash and cash equivalent balances, andno debt.  The three months ended March31, 2000 included a one time expense for a $300,000 commitment fee for a $5million line of credit secured in the first quarter of 2000.  The line of credit was repaid in the fourthquarter of 2000, resulting in interest income only for the nine months endedSeptember 30, 2001.

 
**Otherincome, net**
 

 

 

**Three months ended**

**September 30,**

 

**Nine months ended**

**September 30,**

 

 

 

**2001**

 

**2000**

 

**2001**

 

**2000**

 

 

**(in thousands, except  percentages)**

 

 

 

 

 

 

 

 

 

 

 

Other income, net

 

$

23

 

$

20

 

$

49

 

$

44

 

Percentage of total revenues

 

1

%

1

%

1

%

1

%

 

Otherincome, net increased from income of $20,000 in the three months endedSeptember 30, 2000 to income of $23,000 in the three months ended September 30,2001, and were primarily comprised of foreign exchange gains in bothperiods.  In the nine months endedSeptember 30, 2001, other income, net increased from income of $44,000, for thesame period last year, to income of $49,000.

 

For the nine months ended September 30,2001 approximately 95% of Insignia’s total revenues and over 47% of itsoperating expenses are denominated in United States dollars.  Most of the remaining revenues and expensesof Insignia are British pound sterling denominated and consequently Insignia isexposed to fluctuations in British pound sterling exchange rates.  To hedge against this currency exposure,Insignia has, in prior years, entered into foreign currency options and forwardexchange contracts for periods and amounts consistent with the amounts andtiming of its anticipated pound sterling denominated operating cash flowrequirements.

 

Insignia has, at times, an investmentportfolio of fixed income securities that are classified as “available for salesecurities.”  These securities, like allfixed income instruments, are subject to interest rate risk and will fall invalue if market interest rates increase. Insignia attempts to limit this exposure by investing primarily inshort-term securities.

 

**Provision (benefit) for incometaxes**

 

 

 

**Three months ended**

**September 30,**

 

**Nine months ended**

**September 30,**

 

 

 

**2001**

 

**2000**

 

**2001**

 

**2000**

 

 

**(in thousands)**

 

 

 

 

Provision (benefit) for income  taxes

 

$

3

 

$

147

 

$

63

 

$

(444

)

Effective income tax rate

 

-

 

-

 

-

 

-

 

 

Insignia’s benefit for income taxes forthe nine months ended September 30, 2000 primarily represents a tax refund fromthe U.K. government on taxes paid in the years 1995 - 1997.  Insignia’s provision for income taxes forthe three months ended September 30, 2000 and three and nine months endedSeptember 30, 2001 primarily represents Japanese sales tax withholding.  Insignia has recorded a full valuationallowance against all deferred tax assets, primarily comprised of net operatinglosses, on the basis that significant uncertainty exists with respect to theirrealization.

**Liquidityand capital resources**

** **

 

 

**September 30,**

**2001**

 

**September 30,**

**2000**

 

 

**(in thousands)**

 

 

 

 

 

 

 

Cash, cash equivalents and  restricted cash

 

$

10,776

 

$

1,093

 

Cash and cash equivalents held in  escrow

 

$

-

 

$

4,975

 

Working capital (deficit)

 

$

12,762

 

$

(4,905

) 

Net cash used in operating  activities for the nine month period

 

$

(11,647

)

$

(7,758

)

 

Insignia has transitioned its productfocus from compatibility products to its Jeode product line based on Insignia’sEVM technology.  This change in productfocus has resulted in a redirection of available resources from Insignia’shistorical revenue base towards the development and marketing effortsassociated with the Jeode platform, which was released for general availabilityin March 1999.  Cash used in operatingactivities in the third quarter of 2001 totaled $1.7 million compared to $5.5million in the second quarter of 2001. For the nine months ended September 30, 2001, cash used in operatingactivities totaled $11.6 million compared to $7.8 million for the same periodin 2000.

 

Insignia’scash, cash equivalents, restricted cash, and funds held in escrow, were $10.8million at September 30, 2001, an increase of $4.7 million from $6.1 million atSeptember 30, 2000.  Working capitalincreased to $12.8 million at September 30, 2001, from $(4.9) million atSeptember 30, 2000.  The principalsource of working capital came from a private placement funding, warrantexercises and receivable collections.

 

Alarge portion of the accounts receivable balance for the quarter endedSeptember 30, 2001 is related to one customer, Phoenix, and accounts for 66% ofthe outstanding balance.

 

In September 2001, Insignia and SunMicrosystems, Inc. (“Sun”) entered into Amendment No. 3 (the “Amendment”) tothe Technology License and Distribution Agreement (the “DistributionAgreement”) between the two companies. In addition, in June 2001, the two companies entered into an addendum(the “Addendum”) to the Distribution Agreement relating to distribution ofproducts to an Insignia customer.  TheAmendment and the Addendum each require Insignia to make non-refundable royaltyprepayments to Sun.  A total of$2,750,000 of prepaid royalties were paid to Sun under these agreements throughthe third quarter of 2001, and these agreements require additional royaltyprepayments totaling $1,150,000, $1,750,000 and $1,350,000 in the fourthquarter of 2001, the first quarter of 2002 and the second quarter of 2002,respectively.

 

Insigniahas granted extended payment terms from time to time and recognizes thesefuture payments as accounts receivable and deferred revenue.

 

Basedupon Insignia’s current forecasts and estimates, Insignia is targeting itscurrent cash, cash equivalents and short-term investments, together with cashgenerated from on-going operations, to be sufficient to meet its anticipatedcash needs for working capital and capital expenditures through at leastSeptember 30, 2002.  If cash generatedfrom operations is insufficient to satisfy Insignia’s liquidity requirements,Insignia may seek to sell additional equity or convertible debt securities orto obtain a credit facility. If additional funds are raised through theissuance of debt securities, these securities could have rights, preferencesand privileges senior to holders of common stock, and the terms of this debtcould impose restrictions on Insignia’s operations.  The sale of additional equity or convertible debt securitiescould result in additional dilution to Insignia’s stockholders.  Insignia may not be able to obtainadditional financing on acceptable terms, if at all.  If Insignia is unable to obtain additional financing as and whenneeded and on acceptable terms, Insignia may be required to reduce the scope ofits planned sales, marketing and product development efforts, which couldjeopardize Insignia’s business. 

 

**Item 3.  Quantitativeand Qualitative Disclosures About Market Risk**

 

Fromtime to time, Insignia enters into derivative financial instruments such ascurrency option contracts to hedge certain anticipated, but not yet committed,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 third quarter of 2001or the third quarter of 2000 and had no option hedge contracts outstanding asof September 30, 2001 or September 30, 2000.

 

 

**PART II - OTHER INFORMATION**

 

 

**Item 6.  Exhibits andReports on Form 8-K**

 

(a) Exhibits

The following exhibitsare filed as part of this Report:

 

Exhibit  10.70

Amendment No. 3, dated  September 28, 2001, to the Technology License and Distribution Agreement  between Sun Microsystems, Inc. and Registrant, dated March 3, 1999 **

 

 

Exhibit  10.71

Addendum, dated June  6, 2001, to the Technology License and Distribution Agreement between Sun  Microsystems, Inc. and Registrant, dated March 3, 1999 **

 

 

Exhibit  10.72 

Master Support  Agreement between Sun Microsystems, Inc. and Registrant, dated September 28,  2001 **

 

 

 

(b) Reports on Form 8-K

 

Insignia filed duringthe quarter ended June 30, 2001 a Report on Form 8-K reporting under Item – 9announcing a signed agreement with Phoenix Technologies Ltd. dated June 6,2001.

 

** Confidentialtreatment has been requested with respect to certain portions of thisagreement.  Such portions were omittedfrom this filing and filed separately with the Securities and ExchangeCommission.

**SIGNATURES**

 

Pursuant to therequirements of the Securities Exchange Act of 1934, the Registrant has dulycaused this report to be signed on its behalf by the undersigned thereunto dulyauthorized.

 

 

 

INSIGNIA SOLUTIONS PLC

 

(Registrant)

 

 

 

Date: November 14,  2001

 

 

 

 

 /s/ ALBERT J. WOOD

 

 

ALBERT J. WOOD

 

 Chief Financial Officer

 
****
**INDEX TO EXHIBITS**

 

 

**Exhibit**

**Number**

 

** **

**Exhibit  Title**

 

 

 

Exhibit 10.70

 

Amendment No. 3, dated  September 28, 2001, to the Technology License and Distribution Agreement  between Sun Microsystems, Inc. and Registrant, dated March 3, 1999 **

 

 

 

Exhibit 10.71

 

Addendum, dated June  6, 2001, to the Technology License and Distribution Agreement between Sun  Microsystems, Inc. and Registrant, dated March 3, 1999 **

 

 

 

Exhibit 10.72

 

Master Support  Agreement between Sun Microsystems, Inc. and Registrant, 

dated September 28,  2001 **

 

** Confidentialtreatment has been requested with respect to certain portions of thisagreement.  Such portions were omittedfrom this filing and filed separately with the Securities and ExchangeCommission.

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