<PAGE>
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE
ACT OF 1934 [FEE REQUIRED] FOR THE FISCAL YEAR ENDED MARCH 31, 1996 OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934 [NO FEE REQUIRED] FOR THE TRANSITION PERIOD FROM TO
Commission File Number: 1-12966
INSCI CORP.
(Exact name of registrant specified in its charter)
TWO WESTBOROUGH BUSINESS PARK,
DELAWARE WESTBOROUGH, MA 06-1302773
(State or other (Address of principal (I.R.S. Employer
jurisdiction of executive offices) Identification No.)
incorporation 01581
or organization) (Zip Code)
(508) 870-4000
(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act: NONE
Securities registered pursuant to Section 12(g) of the Act:
Title of each class
COMMON STOCK, $.01 PAR VALUE
REDEEMABLE WARRANTS
(REDEEMABLE BY COMPANY BASED ON A FORMULA, OR TWO WARRANTS CAN BE EXERCISED AT
AN AGGREGATE PRICE OF $9.00 FOR ONE SHARE OF COMMON STOCK)
Indicate by checkmark whether the registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No __
Indicate by checkmark if disclosure of delinquent filers pursuant
to Item 405 of Regulation S-K is not contained herein, and will not be
contained, to the best of registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-K
or any amendment to this Form 10-K. [X]
The aggregate market value of the voting stock held by
non-affiliates of the registrant, based upon the average of the closing bid and
asked quotations for the Common Stock on June 11, 1996, as reported by NASDAQ,
was approximately $25,097,823 as of June 11, 1996, registrant had outstanding
3,898,691 shares of Common Stock.
Part III incorporates information by reference to the registrant's definitive
proxy statement for its 1995 Annual Meeting of Stockholders to be filed with the
Commission within 120 days following March 31, 1996.
<PAGE>
INSCI Corp.
FORM 10-K
FOR THE FISCAL YEAR ENDED MARCH 31, 1996
INDEX
PART I PAGE
----
Item 1. Business...................................................... 3
Item 2. Properties.................................................... 16
Item 3. Legal Proceedings............................................. 17
Item 4. Submission of Matters to a Vote of Securities Holders......... 18
Executive Officers of the Registrant ................. Refer to Page 31
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder
Matters ...................................................... 18
Item 6. Selected Financial Data....................................... 19
Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations .................................... 19
Item 8. Financial Statements and Supplementary Data................... 25
Item 9. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosures .................................... 25
PART III
Item 10. Directors and Executive Officers of the Registrant............ 25
Item 11. Executive Compensation........................................ 25
Item 12. Security Ownership of Certain Beneficial Owners and Management 26
Item 13. Certain Relationships and Related Transactions................ 26
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on
Form 8-K ..................................................... 27
SIGNATURES............................................................. 28
EXHIBIT INDEX.......................................................... See List
<PAGE>
PART I
ITEM 1. BUSINESS
OVERVIEW
INSCI Corp. (INSCI or the "Company") develops, markets, installs and
services electronic information and document management systems designed to meet
the enterprise-wide needs of organizations which produce large quantities of
computer-generated documents and require the storage of and access to a broad
array of document types. The Company provides its customers with the ability to
electronically capture documents and computer output from a variety of sources,
to store information electronically and to access and deliver the information
either electronically or via reprints in a fashion that lowers costs, improves
quality, improves service and provides greater control to the customer. INSCI's
products focus on both the desktop imaging and document management market and
the automated document factory production market.
INSCI's software products marketed under the name, COINSERV, utilize
a customer's existing host computer and computer network to link powerful
"Server" computers, which perform automated document indexing and optical disk
storage functions. This is accomplished with the customer's existing network of
"client" computers, which are used by the customer's employees to search,
retrieve and distribute documents. COINSERV is an optical-disk based
client/server computer output to laser disk (COLD) system. The COLD market
addresses print and microfiche replacement using digital-based techniques to
replace printing and microfiche production and allowing on-line viewing of
reports that would otherwise need to be printed. This produces rapid and major
savings for users.
In fiscal year 1996, INSCI introduced the COINS-CD product aimed at
both the corporate and service bureau markets. The new product combines INSCI's
core technology with CD-Recordable media for purposes of electronic information
distribution. COINS-CD offers the user the advantage of using low-cost and
easily available CDs which can be used for distribution of large quantities of
data. Use of this type of technology also offers rapid payback for users and
service bureaus. These products are often used in conjunction with optical
disk-based products and are particularly useful for low cost - large volume
information distribution.
Also in this past fiscal year, the Company introduced Image Express,
a print-on-demand software product aimed at the automation of printing
operations in large corporations and service bureaus. This product is focused on
making printing operations far more efficient and able to address the new
challenges posed by large numbers of short print runs created by the market
trend for mass customization and the consequent need for customized printing
products aimed at individuals and market segments. The Image Express technology
was acquired by the Company from Custom Solutions Inc.
At the end of fiscal year 1996, INSCI introduced Augusta, an
advanced technology imaging and document management system through its
acquisition of certain assets of the Courtland Group, Inc. ("Courtland").
Augusta provides a complete document storage system by allowing the user to see
and store images of documents and to store and retrieve documents in mixed data
formats such as image, word process documents and spreadsheet documents.
INSCI offers numerous services including software installation,
training, software maintenance support and systems integration. INSCI's advanced
systems integration services division works with its customers to integrate
these various technologies into existing technical environments to leverage
investments in technology. INSCI's current business strategy is to develop and
provide document management solutions in a fully integrated and customized
manner that enables customers to improve their business processes and
competitive position.
MANAGEMENT CHANGES
On June 15, 1995, Dr. E. Ted Prince was appointed President and
Chief Executive Officer, replacing the former CEO, David Grace. John Gillis,
formerly President and Chief Operating Officer, became Executive Vice President
and Chief Operating Officer.
In September 1995, Dr. Prince was appointed as Chairman of the Board
of Directors of INSCI. Two members of the board, Mr. David Grace and Mr. Olin
Broadway, resigned from the board at the end of the 1995 fiscal year and were
replaced by two new directors, Mr. Frank Murphy and Mr. Leonard Gartner. Another
new director, Mr. Richard Gerstner, was subsequently appointed to the board, in
March 1996.
As of the end of fiscal year 1996, Information Management
Technologies Corporation's (Imtech) ownership of INSCI was reduced to 38% of the
outstanding common stock.
<PAGE>
FINANCIAL SUMMARY
Although the Company has reported an operating loss for the 1996 fiscal
year, the Company has been generating earnings during the last three quarters.
Included in earnings in the third quarter and fourth quarter before
non-recurring charges of $250,000 and $75,000, respectively, connected with the
settlement of litigation over a lease for office space with Marine Midland Bank
and termination of its banking relationship with Bank of New York ("BNY").
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)
Selected quarterly results of operation for the four quarters ended March 31, are as follows:
FISCAL YEAR 1995 FISCAL YEAR 1996
QUARTER ENDED QUARTER ENDED
- -----------------------------------------------------------------------------------------------------------------------------------
First Second Third Fourth First Second Third Fourth
June September December March June September December March
1994 1994 1994 1995 1995 1995 1995 1996
----------------------------------------------------- -------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Revenue $1,734 $ 1,530 $1,662 $2,262 $ 841 $2,076 $2,155 $2,841
Cost of Revenue 733 1,129 915 727 691 850 817 953
----------------------------------------------------- -------------------------------------------------
Gross Margin 1,001 401 747 1,535 150 1,226 1,338 1,888
Sales, Marketing,
Product Development and
General & Administrative 1,445 2,233 1,508 1,119 1,503 1,151 1,253 1,852
----------------------------------------------------- -------------------------------------------------
Earnings before non-
recurring charges and
interest (Losses) (444) (1,832) (761) 416 (1,353) 75 85 36
Non-Recurring Charges - (500) - - (320) 170 (189) 14
Interest (33) 14 12 15 18 14 7 (9)
----------------------------------------------------- -------------------------------------------------
Net Income(Loss) $(477) $(2,318) $ (749) $ 431 $(1,655) $ 259 $ (97) $ 41
===========================================================================================================
===================================================================================================================================
This table should be read in conjunction with the Financial Statements provided
elsewhere herein.
</TABLE>
<PAGE>
PRODUCT OVERVIEW
INSCI Corp. is a supplier of optical-disk based client/server
computer output to laser disk (COLD) systems. These are electronic printing and
digital repository systems that replace the need to carry out paper-based
printing in many situations. This market addresses print and microfiche
replacement using digital-based techniques to replace unnecessary printing and
microfiche production and allowing on-line viewing of reports that would
otherwise need to be printed. This in turn produces savings for users. INSCI's
leading product, COINSERV, is recognized as a performance leader in the
client-server segment of the market.
INSCI also has developed CD-based products (COINS-CD) for print and
microfiche replacement. These are aimed at both the corporate market for
electronic printing and viewing and at the service bureau market. These products
offer the user the advantage of using low-cost and easily available CDs which
can be used for distribution of large quantities of data. These products are
often used in conjunction with optical disk-based products particularly for
distribution purposes.
INSCI develops and markets Ultra and Augusta, imaging and document
management products. They are used for major business applications including
purchasing, law enforcement, legal, manufacturing, medical records, library and
reference. These products provide a complete document storage system by allowing
the user to scan and store images of documents and to store and retrieve
documents in mixed data formats such as image, word processed documents, and
spreadsheet documents. This allows INSCI to offer a complete suite of software
which allows a user to address all document storage needs.
INSCI also markets a print-on-demand software product, Image
Express, aimed at the market for automation of printing operations in large
corporations and service bureaus. This product targets the market for making
printing operations far more efficient and able to address the new challenges
posed by large numbers of short print runs created by the market trend for mass
customization and the subsequent need for customized printing products aimed at
individuals and market segments. Print-on-demand is a rapidly emerging market.
Increasingly it is being integrated with electronic printing COLD systems and
large mailroom systems.
INSCI provides advanced systems integration services to its
customers which allow them to integrate these various technologies and to
provide more efficient and less costly customer service, printing and mailing
operations and to increase their competitive efficiency. The goal of INSCI's
present business strategy with respect to its systems integration group is to
provide outstanding document management solutions in a fully integrated and
customized manner that enable customers to improve their business processes and
competitive position.
INSCI STRATEGY
Since its founding, INSCI has been a leader in adapting high
performance index management, data handling and data compression technologies
into the design of its industry standards compliant electronic printing and
document management systems. INSCI's operating focus has been to develop and
provide cost-effective software products and services for the high volume
electronic printing, document archive, retrieval, viewing, and distribution
requirements of large organizations. The development of strategic relationships
that will allow INSCI to market its products to specific markets or technology
segments plays an important role in the Company's plans for future growth.
The Company markets its products and services primarily to financial
and commercial institutions which produce large quantities of computer-generated
documents and require the storage of and access to such documents as an
alternative to printing them or transferring them to microfiche. INSCI's product
and service offerings are sold through a combination of direct sales by its own
sales force, referrals and strategic partnerships, sales by Value Added
Resellers ("VAR's"), distributors and by companies operating multiple service
bureaus.
INSCI's current business strategy is to develop, enhance and market
software and services solutions for electronic printing, document archival,
indexing, retrieval and distribution systems. INSCI intends to pursue this
strategy through a marketing focus that will seek to leverage these and future
strategic alliances.
PRODUCTS AND SERVICES
COINSERV
INSCI's COLD/electronic printing software product set, marketed
under the name COINSERV, utilizes a customer's existing host computer and
computer network to link powerful server computers, which perform automated
document indexing and optical disk storage functions, with the customer's
existing network of client computers, which are used by the customer's employees
to search, retrieve, and distribute documents. INSCI emphasizes sales of its
multiple user, client/server based software for management of page formatted
computer output and scanned image documents.
The COINSERV client/server product is currently installed at over
250 customer sites which includes all key vertical industry segments. The system
is supported on many UNIX platforms and provides LAN/WAN connectivity to Windows
& DOS PC's and UNIX terminals. Furthermore, COINSERV provides native terminal
connectivity to 7 mainframe and mini-computer systems. This includes TICS 3270,
AS400 5250, UNISYS A/V, UNISYS 1100/2200, and Data General MVs.
ARCHIVE DATA FORMATS: To support enterprise wide document archive
requirements, an archive system must be capable of handling diverse print output
formats. The COINSERV system accomplishes this goal. COINSERV handles a plethora
of print output line data formats including IBM mainframe formats, UNISYS
mainframe formats, UNIX print output formats, and PC file formats; intelligent
data streams including IBM Advanced Function Presentation (AFP), Xerox MetaCode,
and Xerox DJDE; and scanned documents in TIFF format. COINSERV's support for all
these line data, intelligent data streams, and image data streams is a key
competitive advantage in the COLD industry.
A technology sharing partnership between INSCI and ELIXIR
Technologies now provides a way of processing, archiving, retrieving, viewing
and distributing complex data objects that combine text, graphics, forms, fonts,
bar codes and logos. It is the Company's intention to add support for other
intelligent data streams such as Postscript and PCL to both COINSERV and
COINS-CD products.
DOCUMENT INDEXING AND ARCHIVE MANAGEMENT: The COINSERV Data and
Index Management engine is designed to handle large scale storage requirements
without experiencing performance degradation or "TOPPING-OUT" as the index
volume increases. The COINSERV index component is built with an archive view
which requires that archive data be maintained for extended periods of time
unlike transaction oriented data which may be stored for short periods of time
and then simply overlaid or purged. A true archive system must be capable of
handling large volumes of archive documents, and index records to these
documents which constantly increase.
The COINSERV system is capable of archiving, indexing, and locating
archive documents at speeds that are unparalleled in the COLD market place. In
the Company's most recent fiscal year, it extended its capability of data
archiving, indexing, and compression techniques by providing support for storing
data on other storage media besides optical (WORM) Disk. This new component, the
Hierarchical Storage Manager, allows users to stage data archives so that they
utilize the media that is most responsive to an application's data access
requirements. INSCI's strength in this area provides all COINSERV users with a
high performance archive engine, superior indexing capabilities, and
"forever-view" of archive documents without constantly "topping-out" or having
to purge archive documents. INSCI believes that archive data is a vital and
valuable corporate asset and its products are designed to provide long term data
storage and access without any compromise.
CLIENT/SERVER ARCHITECTURE: The COINSERV system is built on open
systems distributed processing principles utilizing a true client/server
architecture. As such, the system allows for seamless data access from
host-computer based legacy systems as well as state of the art LAN/WAN
environments. COINSERV users get the best of both worlds, they can take
advantage of the investments they have made through the years in their legacy
systems' hardware, software, and networks, while at the same time supporting
implementations of LAN/WAN distributed processing topologies.
INSCI's architectural design and engineering strength with regard to
multi-vendor systems connectivity has given INSCI a strong position in the COLD
market. COINSERV is supported on five UNIX server platforms including SUN
Solaris, UNISYS UNIX, and IBM AIX and provides native host terminal connectivity
from seven mainframe and mini-computer system types in addition to Windows, DOS,
and UNIX workstation access. The COINSERV product is one of the few products
that has been built on a true client/sever architecture that is capable of
retrieving archive data in the native host environment (without emulation) and
from LAN based workstations simultaneously.
COINS-CD
During last fiscal year, INSCI introduced a new product, COINS-CD,
that provides a much more cost effective approach for distributing archive data.
The new product combines INSCI's core technology with CD-R for purposes of data
distribution. This product is targeted at the $450 million per annum
micrographics service business. Based on market research and experience, INSCI
believes that most companies will switch from micrographics products and
services to CD-R products and services. INSCI recently introduced the COINS-CD
product for the Windows NT platform providing significantly increased
performance and functionality.
With the COINS-CD product, third party micrographic service centers
licensed by INSCI process computer generated magnetic tapes and record the
information on CD-ROMs. All the data and indexes are written to the CD or other
selected storage media along with the software necessary to access and view them
thus making archival and retrieval methods such as paper and microfiche
obsolete.
AUGUSTA
The Augusta imaging and information product was acquired as a result
of the acquisition of certain assets of Courtland Group, Inc. ("Courtland") by
INSCI in March 1996. INSCI Corp. is using this product within its own customer
base to provide imaging and information retrieval systems integrated with its
existing COLD and CD products. Augusta provides the following functions:
Management believes that the integration of advanced information
retrieval, document management and advanced imaging capabilities into its
COINSERV and CD products will provide it with a powerful new way of
differentiating itself in the market and that customers are demanding this new
type of product.
IMAGE EXPRESS
Image Express provides complete management of on-demand operations,
enhances and manages workflow procedures, and tracks and automatically monitors
all printing and post-processing devices. The system integrates all operations
of a production print facility including: document printing, customer
accounting, product ordering, task scheduling, and process reporting.
Image Express supports fully scaleable electronic storage providing
the flexibility to match a wide range of requirements. Image Express can be
configured to provide indexing, storage, and management of document masters or
can support production management of a customer's existing electronic library.
Currently Image Express operates on Intel based file servers and
user access is provided from any Windows compatible clients. The next generation
of Image Express will add support for UNIX servers and the Oracle database
engine.
The Image Express Product Order Entry system is designed to support
on-demand production of real-world, complicated orders such as those typically
found in fulfillment businesses. A Product Order may consist of many individual
items and sub-products. For example, a typical order may include several copies
of a book to be printed (that is an internal print request), binders, cables,
diskettes, and pre-stored or preprinted material.
Users have the ability to complete an on-line job order including
shipping instructions and billing information. Product Orders only need to be
entered into Image Express one time. Each Product Order can be accessed and
reused ensuring consistency and reducing the opportunities for errors.
The information contained in the Product Order is mapped to the
appropriate customer pricing table and the system automatically creates a
complete customer invoice. This invoice information can then be printed out on a
local printer or can be made available to the customer's internal accounting
systems.
Print requests within Image Express include finishing and paper
requirements, delivery instructions, and any special or unusual instructions.
Image Express can route print requests directly to digital production printers,
network supported print servers, local laser printers, digital plate processors
and presses, or to third party queue management systems.
The Image Express scheduling system is table driven providing the
capability to support scheduling for any type of equipment, process or event.
The algorithms can be adjusted and tuned by the system administrator allowing
for real-time schedule modifications, updates, or revisions.
Reports can be generated on the entire production cycle, improving
cost and management decisions. An option allows accounting and billing
information to be extracted in a form suitable for import into many of the
popular spreadsheet and database applications.
INSCI SYSTEMS INTEGRATION SERVICES
Utilizing INSCI's core products and technologies and the
capabilities of its consulting resources, INSCI has developed specialized
systems integration approaches and methodologies which allow it to carry out the
implementation of these advanced solutions within large and complex client
environments. Its methodologies encompass project management, project direction,
quality assurance and control, and testing disciplines that are essential for
mission critical and industrial strength solutions in large organizations with
massive data stores and critical processing time frames. These methodologies
allow INSCI to provide enterprise electronic printing, data warehousing and
viewing solutions to global problems in the customer service and data storage
area. It is these project management skills, as well as its technical, product
and architectural skills that allow INSCI to offer a unique set of solutions to
organizations that are seeking more than purely a software product which is
capable of satisfying their organizational requirements.
PRODUCT DEVELOPMENT
The market for data storage and retrieval products is highly
competitive and characterized by frequent technological change. Consequently,
INSCI must continually enhance its products and continue to develop new
products. INSCI engages in product development activities primarily intended to:
* Modify its software products to permit operation with additional computers
and operating environments
* Enhance its software products to make them easier to install, use and
maintain
* Add new features to this software product intended to simplify installation,
operation and the generations of optical applications
* Add additional features and functions
* Develop new user specific applications
* Investigate potential uses of emerging technologies to complement COINSERV's
document management function.
Over the past year in pursuit of these goals, INSCI has enhanced its
existing products, developed new products and acquired others which fit into its
overall strategic direction of the automated document factory.
INSCI Corp. utilizes its staff of development engineers and customer
support personnel to identify, design, and develop product enhancements and new
products. The company has additionally increased the amount of development it
performs by locating some work offshore where resources are less costly, thus
enabling the company to compete more effectively against many competitors with
far greater resources than it possesses.
The Company has recently completed the development of numerous
product enhancements to COINSERV and to COINS-CD that it believes will provide
leading edge functions for customers. COINSERV release 3.0 was released for
customer shipment in January 1996. COINS-CD has undergone numerous major
enhancements to render it more capable in high production environments. The
following is a summary of the new features of COINSERV Release 3.0.
HIGH PERFORMANCE COINSERV
Advanced COINSERV release 3.0 provides customers with increased
levels of archive performance that is unparalleled in the industry. COINSERV is
capable of processing over 600,000 pages of archive data per hour on mid range
UNIX archive servers attached to magnetic RAID devices. Advanced COINSERV
provides performance levels that double the performance of the previous
releases.
HIERARCHICAL STORAGE MANAGER
Advanced COINSERV Hierarchical Storage Manager ("HSM") makes it
possible for COINSERV to utilize the most responsive media for current archive
data and migrate older data to less expensive storage media. COINSERV writes the
most current data with the highest access requirement to magnetic RAID devices
and as the data ages and the access frequency for the data diminishes, the
archive documents are migrated to less expensive media such as WORM optical
disks. The COINSERV HSM component will:
o provide faster archive speeds and access to most current data
o allow migration based on report characteristics, download bundles, document
size and index values
o provide a way of deleting reports that are temporary
o provide access to documents while new documents are being archived to the
magnetic RAID sub-system
o provide independent index and data migration
SUPPORT FOR PAPER CLIPS
Advanced COINSERV release 3.0 provides users with a mechanism for
adding annotations at the page level. These annotations, often referred to as
paper clips, are used to maintain an electronic post-it at the page level.
SUPPORT FOR INTELLIGENT DATA STREAMS
Advanced COINSERV release 3.0 includes support for the leading high
performance production print data streams. This includes support for IBM
Advanced Function Presentation ("AFP"), Xerox's MetaCode, and Xerox DJDE. As a
result of this enhancement, the COINSERV product provides high speed archiving,
indexing, full fidelity retrieving, printing and faxing of AFP, MetaCode, and
DJDE.
COMMON DASHBOARD
INSCI's MS Windows based document viewer, WinCoins, displays diverse
archive data using a common dashboard. The common dashboard simplifies document
access by providing a common user interface regardless of the data stream. This
approach eliminates retrieval complexity and simplifies end user document access
and training.
ADDITION OF SUN SOLARIS
Towards the end of 1995, the COINSERV product was ported to run on
SUN Solaris UNIX servers. The addition of SUN as a COINSERV server platform
increases the marketability of the COINSERV product to the financial community.
SUPPORT FOR 12.6 AND 15 GB OPTICAL TECHNOLOGY
The COINSERV product may be installed with 12.6 GB optical devices
from LMSI or 15 GB optical devices from SONY. Both of these devices provide
unparalleled storage capacities and document retrieval performance due to more
data available under read/write head.
ENHANCED SECURITY
The Advanced COINSERV release 3.0 security component provides users
with enterprise level security management by providing security groups, user
changeable passwords, password encryption, and password expiration.
HIGH PERFORMANCE CLOSING
High Performance Closing allows customers to migrate less frequently
accessed index volumes to optical disk. This component allows high speed
migration of index volumes from magnetic disk to optical disk, thereby fully
supporting not only index volumes generated for the 5.25" optical platters but
also much larger index volumes associated with 12" optical platters. Once the
indices have been migrated from magnetic to optical, the optical volume becomes
a self contained repository that includes the data and the index information.
RETRIEVE FROM CLOSED OPTICAL DISK
The COINSERV interface for retrieving index information has been
augmented to include index searches from closed index volumes. This interface
provides end users with a simple means of accessing closed index volumes for
archive data without regard to locale or having to lead the index information to
magnetic disk. Retrieving index information that has been closed may be tailored
to a customer's needs by either providing seamless access, seamless access with
break-points, user defined optical volume access or excluding optical index
access.
DYNAMIC INDEX SELECTION
Dynamic Index Selection ("DIS") provides the infrastructure for
optimizing index searches. This component significantly improves the COINSERV
index process by eliminating unnecessary index searches and dynamically
selecting the most optimum index key field. DIS maintains statistical
information about each index volume during the data archive process and uses
this information to intelligently select the index volumes that must be
searched. Furthermore, in the event that multiple index key values have been
selected for a search, DIS intelligently selects the most optimum key to search
the index volume.
The combination of Index Closing, Retrieve from Closed Index
Volumes, and Dynamic Index Selection provides COINSERV Release 3.0 users with an
efficient and cost effective way of archiving and retrieving large volumes of
data without constantly "topping-out" or degrading performance -- the COINSERV
"forever-view" document management architecture. The combination of these
concepts fully supports on-line, near-line, and off-line data archive and
retrieve.
WINCOINS ENHANCEMENTS
Numerous enhancements have been made to the Microsoft Windows
client. The new WinCoins software is a true Microsoft Windows GUI application
that conforms and adheres to all Microsoft standards. The new client fully
supports the Microsoft Desktop, Imaging, Dynamic Data Exchange, WINSOCK, and
many other features.
OTHER ENHANCEMENTS
Other enhancements include numerous additions to the COINSERV Volume
Manger: error recovery, reporting and tracking, fax sub-system, imaging, and
advanced document indexing.
COINS-CD PRODUCT
During the past year INSCI introduced the COINS-CD product. The
COINS-CD product provides the ability to replace microfiche with inexpensive
electronic storage media that can be used on PC's. The same data that would be
written on microfiche is now written to CD-R, optical or some other electronic
storage media. At the same time, index values are extracted from the data in
preparation for rapid access to data. An electronic document viewer is also
copied to the CD so that the data may be easily retrieved on a PC with a CD
drive.
Many of the enhancements to COINSERV also benefit COINS-CD since the
core platform is the same. Additionally, other enhancements to COINS-CD are in
process. These include advanced networking and an increase in the number and
type of storage devices supported. This platform is strategic for the company
and although new, it is expected that this product will be a major contributor
to the company's growth.
MARKETING AND SALES
INSCI markets its COINSERV products principally through its own
sales force, through strategic alliances and value added resellers. Marketing
activities include trade journal advertising, distribution of sales and product
literature describing the COINSERV products, their applications and benefits,
attendance at trade shows and conferences, sponsoring or supporting seminars for
customers and prospects, and on-going communications with the established base
of customers via newsletters, new product announcements, direct mail and
telemarketing. Public relations activities include speaking at trade group
meetings, publishing of technical articles, publishing of user success stories,
and distributing of press releases about the Company and its products.
INSCI's direct sales force focuses on prospects for its products
that are particularly in high volume, high performance environments. Sales
representatives initiate contacts with prospective end user customers and make
direct sales of COINSERV products to those prospects. They also provide
assistance and make joint presentations with the Company's resellers and
strategic business alliances. Additionally, they frequently work with INSCI's
systems engineers to provide high level technical consulting services both
before and after a sale.
INSCI has developed several strategic business alliances through
which the Company generates sales. INSCI and UNISYS Corporation are parties to a
joint selling agreement originally entered into in August 1991 and expanded in
1995 to encompass UNISYS markets on a global basis. UNISYS and INSCI make joint
sales calls and conduct joint product introduction seminars to major corporate
and government organizations. Data General Corporation's System Integration
Group also entered into a reseller agreement with INSCI in early 1995 whereby
they market, install and service INSCI software products on Data General's
AViiON UNIX server series on a worldwide basis.
In 1995, INSCI began a joint marketing and technology partnership
with Elixir Technologies Corporation. Under the terms of an agreement signed in
1995, INSCI markets Elixir's intelligent data stream viewers and desktop
composition tools for use with COINSERV, and Elixir introduces INSCI to
prospects for its products.
INSCI entered into an agreement with Siemens Nixdorf Printing
Systems, L.P. ("Siemens") in May 1995. The agreement provides for Siemens to
refer customers to INSCI. Under the terms of the agreement, INSCI is to develop
a new module for the COINSERV product which will be jointly marketed by both
INSCI and Siemens.
INSCI is increasingly entering into partnerships with companies that
operate service bureaus nationwide. These companies include International
Billing Systems, First Data Investor Services and Electronic Data Systems. These
companies permit the company to increase its sales and penetration into new
areas of industry.
In May 1996, INSCI entered into a marketing alliance with Xerox
which covers the US and Canada. The company believes that this agreement will
enable it to penetrate new accounts in new industries over a period of time.
INSCI currently has agreements with a limited number of VARs. VARs
generally are organizations that sell their own computer application software
systems to special vertical markets, such as banks, health care organizations or
credit unions. VARs sell INSCI's products as part of an integrated system of
hardware and software for the VARs' customers. INSCI sells its products directly
to VARs for resale to the VARs' customers.
The Company believes that COLD and electronic printing are scarce
technologies and that it is likely to enter into additional marketing alliances
that will have the potential to generate further significant sales. In
particular it believes that companies in the imaging, workflow, information
retrieval, electronic commerce, Internet and printing areas are likely to
require COLD technology in order to meet their own objectives. It intends to
continue discussions with such companies with a view to closing further such
alliances.
CUSTOMER SUPPORT AND SERVICE
INSCI's in-house technical support personnel provide pre-sale
support to assist in product selection and configuration, installation support
assisting in technical integration of COINSERV with a customer's existing
computer system, and post-sale telephone support (included in the customer's
maintenance support agreement) assisting in the ongoing use of the COINSERV
system. INSCI's post-sale support also includes software maintenance, software
updates and technical support pursuant to renewable one-year contracts. VARs and
distributors generally handle service and support for their customers. INSCI
intends to expand this level of support both through traditional approaches and
through non-traditional ones. In this regard it has set up a Web site and
intends to use this as a medium for customer information and support.
The computer hardware utilized in COINSERV systems is generally
covered by warranties granted directly by the hardware manufacturer to the
customer, and INSCI does not assume responsibility for support or maintenance of
this equipment. INSCI has not experienced significant return claims. Maintenance
and technical support for the optical disk drive components in all INSCI systems
are provided by a third party contractor which specializes in providing service
for optical disk drives and jukeboxes.
VENDORS AND SUPPLIERS
INSCI acquires optical disk drives, including multiple disk drives
and computer hardware components, for resale as part of integrated systems
including COINSERV software. To date, INSCI has utilized 5-inch and 12-inch
optical disk drives manufactured by Panasonic, Philips Laser Magnetic Storage,
Inc. ("LMSI") and Plasmon Data Systems. There are several manufacturers of
5-inch optical disk drives (including Panasonic, Plasmon, Hewlett Packard, Sony,
and LMSI), and several manufacturers of 12-inch optical disk drives (including
LMSI, Sony and Hitachi). INSCI utilizes alternative sources of supply for
optical disk drives in order to diversify its supplier relationships. INSCI
generally purchases optical disk drives and other hardware components as needed
to meet customer demands, and does not maintain any agreements or understandings
committing its suppliers to provide any minimum quantities or to maintain fixed
prices.
COMPETITION
There are a number of suppliers offering COLD, CD-R, imaging,
information retrieval and print-on-demand systems. In each case, the company
believes that it offers advantages over the competition. In the case of COLD
systems, most systems in the market are departmentally-based and do not offer
the performance at the enterprise level characterized by COINSERV. Nor, in most
cases, do they offer the support for intelligent data streams offered by INSCI.
Few COLD systems offer imaging and information retrieval integrated with COLD,
as does INSCI. There are few print-on-demand systems in the market and INSCI is
not aware of any with the level of functionality possessed by Image Express.
INSCI is aware of a variety of competing systems offerings which use
alternative media for storing and retrieving large amounts of computer data
utilizing computer systems and technology. These alternative media include
magnetic disk, magnetic tape or digital audio tape ("DAT"). Storage utilizing
magnetic disks is significantly more expensive than optical disk storage per
megabyte of data stored and, as an erasable media, is not as reliable for
long-term archival purposes. Magnetic tape storage also is generally more
expensive than optical disk, and magnetic tapes are more easily damaged or
erased. Because magnetic tape must be processed sequentially (data is located on
the tape by viewing the tape from the beginning and stopping when the data is
found), it provides a significantly slower access time than optical disk or
magnetic disk, which can randomly access the disk to read data. DAT storage is
less expensive per megabyte of data stored than optical disk; however, DAT has
limited archival characteristics due to the risk of inadvertent damage or
erasure and sequential access remains too slow for practical use in providing
acceptable data access and retrieval functions. Besides the alternative media
forms used for storing and retrieving data, the other alternative methods for
storing and retrieving large amounts of computer data utilizing media that are
not accessible from a computer include paper and computer output
microfilm/microfiche.
Competition among companies providing document storage, indexing and
retrieval solutions is intense. Numerous competitors market computer document
storage, indexing and retrieval systems utilizing optical disk drive technology,
including IBM, Computron, DataWare Corp., TASC, Inc., FileTek Corp., DCR
Technologies Corporation, Macrosoft, Inc., and Wang, among others. The Company
believes that many of these primary competitors have substantially greater
financial resources, more personnel, greater access to related products and
broader contact with potential customers than the Company.
The principle competitive factors in the document storage, indexing
and retrieval business include performance, functionality regarding document
data types, document archival and access speed, cost, strategic alliance
relationships and "open" systems connectivity. The Company believes that its
COINSERV, COINS-CD and AUGUSTA product offerings systems compete favorably with
products offered by its primary competitors.
New functionality introduced into the product suite recently
included intelligent data stream support, hierarchical storage management,
combined data and image management, and high volume performance enhancements
provide the basis for competitive differentiation. The Company believes, for
example, that the COINSERV software optimizes the number of documents that may
be stored on an optical disk through the use of efficient data compression
technology. Moreover, the Company believes that its customers consider
COINSERV's indexing and retrieval capabilities to have a greater number of
features, and a greater ease of use, than the systems offered by the majority of
its competitors. Furthermore, the "open" systems nature of COINSERV provides
INSCI's strategic alliances and end users with the ability to integrate COINSERV
with their diverse existing network. However, no assurance can be given that
INSCI's competitors will not enhance their existing systems or that existing or
new competitors will not introduce new systems with better features and
functions than the COINSERV system.
New enhancements to be added to COINSERV will provide more
competitive strength. In particular INSCI is in the process of converting
COINSERV to run on the Windows NT platform which is increasingly being required
by customers. It believes that this will provide it with an even greater
competitive edge.
PROPRIETARY INFORMATION
INSCI does not hold any patents and currently relies upon a combination
of trademarks, contractual rights, trade secrets and copyright laws to protect
its proprietary rights in its products. INSCI seeks to protect its proprietary
rights in its COINSERV software through restrictions on disclosure and use set
forth in customer agreements and employee nondisclosure agreements.
Additionally, INSCI requires that all of its employees execute confidentiality,
trade secret and invention agreements in connection with their employment by
INSCI. Despite these precautions, it may be possible for third parties, without
authorization, to copy or duplicate INSCI's proprietary software or to obtain
and use its proprietary information. Existing copyright laws afford only limited
practical protection for computer software, and the laws of certain foreign
countries do not protect INSCI's proprietary rights in its products to the same
extent as the laws of the United States. Because of the rapid pace of
technological change in INSCI's industry, INSCI believes that the legal
protection for its products are less significant for the Company's success than
the knowledge, technical expertise and marketing skills of INSCI's personnel,
the frequency of product enhancements and the timeliness and quality of support
services provided by the Company.
EMPLOYEES
The Company employed 65 persons as of March 31, 1996, consisting of 59
full time and 6 part time employees. Of these employees, 12 became part of INSCI
on March 28, 1996 as result of the Courtland acquisition. The Company's future
success depends, in part, on its ability to retain existing and to attract new
management and technical employees. The Company has no collective bargaining
agreements and considers its relationships with its employees to be good.
ITEM 2. PROPERTIES
Effective October 1, 1994, INSCI entered into a ten year lease for
approximately 21,650 square feet of office space located in Westborough,
Massachusetts. On November 1, 1995, the Company subleased for a five year term
approximately 4,315 square feet of its Westborough office space. The Company
also entered into a lease for 3,196 square feet of office space for its
Courtland Imaging division's office in Columbia, Maryland which expires in
February 1998. The Company also subleases 1,438 square feet of floor space in
New York City for sales and administrative purposes. Management considers its
present office space adequate for the Company's foreseeable needs.
ITEM 3. LEGAL PROCEEDINGS
On September 30, 1992, the Company and Information Management
Technologies (Imtech) reached an agreement with the SEC to conclude and settle
the SEC's informal investigation of the Company and Imtech. The Company and
Imtech, without admitting or denying any of the allegations made by the SEC in
its complaint, and without a trial or final adjudication of the allegations made
in the SEC's complaint, consented to the entry of an order enjoining them from
future violations of certain provisions of the Federal securities laws and the
rules and regulations thereunder. The settlement may adversely affect the
Company and restrict the Company's ability to raise funds from persons located
in certain significant states. The impact of these restrictions may be to
prevent the Company from conducting future public offerings or private
placements.
The Securities and Exchange Commission (the "Commission") issued an
order, dated April 13, 1995, authorizing a private investigation of Imtech and
INSCI Corp., and its officers and directors during the period from March 1993
and continuing until April 13, 1995. The order of investigation inquiring into
whether the Company and its then officers and directors engaged in violations of
Rule 10b-5 of the Securities Exchange Act of 1934 (the "Exchange Act"); failed
to file annual reports and other information as required by the rules and
regulations of the Commission in violation of Section 13(a) of the Exchange Act
and Rules 12b-20, 13a-11 and 13a-13; and failed to maintain proper books and
records in violation of Section 13(b)2 of the Exchange Act or falsified or
caused to be falsified books and records of the Companies in violation of
Sections 13(b)(2)(a), Rule 13b2-1, and Rule 13b2-2 of the Exchange Act.
In July 1995, the Commission issued a subpoena to the Company for
the Company's records and a subpoena to an officer of the Company who testified
with respect to matters related to the engagement and subsequent resignation in
October 1994 of the Company's then independent certified public accountants,
Coopers and Lybrand LLP ("Coopers"). Following the resignation, the Company
filed a report on Form 8-K disclosing certain accounting questions brought to
the attention of Coopers by the Company relating to adjustments made in the
Company's financial statements for the quarter ended September 30, 1994. The
Company subsequently reviewed these questions and in the Company's opinion
concluded that such matters were accounted for in the proper periods.
The Company is currently discussing a resolution of this matter with the
Commission.
The Company is unaware of any violations with respect to annual
reports or other information disclosed by the Company during the time period
stated in the order. The Company cannot predict, however, the outcome of the
Commission's investigation and whether such investigation will result in any
type of formal enforcement action against the Company and/or any of its officers
and directors or, if so, whether any such action would have an adverse effect on
the Company. An adverse outcome may result in the payment by the Company of
potential fines or penalties, restrict the Company's ability to obtain
additional required financing, and may result in the delisting of the Company's
securities from the NASDAQ stock market. In addition, as described above, the
Company is currently under a consent order relating to a prior Commission
investigation. The Company believes that it has responded satisfactorily and are
not aware of any further pending issues with the Commission.
The Company has previously agreed to use its best efforts to file
a registration statement for shares of stock in the Company pursuant to a
conversion right granted to holders of convertible preferred stock in the
Company. The Company is in the process of preparing a registration statement for
the securities; however, the Company has not as of yet filed the registration
statement pending the outcome of the SEC private order of investigation, which
proceeding has not been finalized.
During the third quarter of fiscal 1996, INSCI experienced
non-recurring charges against earnings of $250,000 connected with the settlement
of litigation over space lease with Marine Midland Bank.
The ability of INSCI to borrow under the financing agreement was
suspended by BNY during fiscal year 1995. During March 1996, the Company and BNY
agreed to terminate and settle all claims pursuant to the financing agreement
for the sum of $75,000 which the Company paid to BNY in full settlement of all
claims of BNY under the agreement.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITIES HOLDERS
Not applicable.
<PAGE>
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS
On April 21, 1994, INSCI closed an initial public offering of the
Company's Units (the "Units"), with each Unit consisting of one share of the
Company's common stock and one redeemable common stock purchase warrant (each
warrant entitles the holder thereof to purchase one-half of one share of the
Company's common stock). Since the closing of the initial public offering, the
Company's Units traded in the over-the-counter market and were included in the
National Association of Securities Dealers Automated Quotation System ("NASDAQ")
under the symbol "INSIU". Effective December 13, 1995, the Company's Common
Stock (symbol:"INSI") and the Company's Warrants (symbol:"INSIW") began trading
separately, and trading in the Units ceased.
The Company's common stock has been traded on the NASDAQ Small Cap
Market since April 14, 1994, the effective date of the Company's initial public
offering. The table below shows the high and low bid prices for one unit and
subsequent to December 13, 1995, for one share of common stock, as reported in
NASDAQ's informational reports. These prices represent prices between dealers,
do not include retail mark-up, mark-down or commissions, and may not necessarily
represent actual transactions.
<TABLE>
<CAPTION>
COMMON STOCK UNITS-FISCAL YEAR TRADING SEPARATELY - FISCAL 1996
------------------------------ --------------------------------
(Combined Stock and Warrants (Effective December 13, 1995)
Combined as one unit)
1995 1996
---- ---- Common Stock Warrant
Unit Price Unit Price Price Price
------------------------ ------------------------ ----------- ----------- ---------------------
Quarter High Low High Low High Low High Low
- ----------------- ---- --- ---- --- ---- --- ---- ---
<S> <C> <C> <C> <C> <C> <C> <C> <C>
First $6.88 $5.50 $2.50 $1.75 - - - -
Second 5.47 1.75 1.99 1.44 - - - -
Third 1.94 .81 3.92 1.44 $4.00 $3.00 $0.75 $.44
Fourth 2.44 1.00 - - 5.13 3.63 1.32 .53
</TABLE>
On June 11, 1996, the closing bid and ask prices of the common stock
were $5.88 and $6.25, respectively. On June 11, 1996 there were 104 holders of
record of the Company's common stock, excluding stockholders whose shares were
held in nominee name. The closing bid and ask price of warrants were both $0.875
as of May 31, 1996. The number of holders of record for warrants were 91.
The Company currently intends to retain its earnings (when realized)
to finance future growth and therefore does not anticipate paying any cash
dividends on its common stock for the foreseeable future.
<PAGE>
ITEM 6. SELECTED FINANCIAL DATA
(in thousands, except per share amounts)
<TABLE>
<CAPTION>
YEAR ENDED MARCH 31, 1996 1995 1994 1993 1992
------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C>
Total revenue $7,913 $7,188 $8,187 $5,869 $2,680
Net loss ($1,452) ($3,113) ($2,968) ($2,899) ($3,720)
Preferred stock dividend (27) (253) - - -
------- ------- ------- ------- -------
Net loss applicable to common shares ($1,479) ($3,366) ($2,968) ($2,899) ($3,720)
======= ======= ======= ======= =======
Net loss per common share ($.40) ($1.04) ($1.55) ($1.54) ($2.19)
Weighted average common
shares outstanding 3,655 3,242 1,913 1,878 1,701
Total assets $5,193 $5,299 $5,242 $3,929 $3,021
Long-term obligations $44 $ 32 $648 $894 $562
8% Redeemable Preferred Stock - $1,634 - - -
</TABLE>
This table should be read in conjunction with the Financial Statements provided
elsewhere herein.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
GENERAL
The Company was incorporated on December 20, 1989 as a wholly owned
subsidiary of Imtech. Effective December 1, 1989, the Company consummated an
acquisition (the "Acquisition") of certain assets from Acctex for a purchase
price paid by delivery to Acctex of 144,865 shares of Imtech's Class A Common
Stock which were contributed by Imtech to the Company and valued at $335,000,
and the assumption of capital lease liabilities valued at $73,000. Assets
purchased from Acctex included computer software, customer support and
maintenance agreements and certain trade names. Prior to the Acquisition, Acctex
marketed its single user stand-alone software document indexing, storage and
retrieval software primarily to end users and distributors. Following the
Acquisition, the Company engaged in substantial efforts to expand the size and
geographical coverage of its direct sales force and its network of distributors.
The Company also engaged in efforts to enhance the acquired software with
additional functions and features and marketed the stand-alone single user
software under the COINSERV trademark. Imtech provided working capital for
operations through periodic advances to the Company.
At the end of fiscal 1991, the Company revised its business
objectives by changing its primary focus to a strategy of developing and
marketing more complex client/server software that is designed to be integrated
into a customer's existing local or wide area network and to receive computer
generated documents directly from the customer's existing host computer. During
this period, the Company also undertook to develop significant additional
software functions, to develop additional COINSERV versions that operate
compatibly with the computer operating systems and equipment of additional
vendors of computer servers and optical disk drives. The Company believed it was
in its best long-term interest to adopt a strategy of focusing on the
development and sale of client/server software in order to serve a larger
potential market for document storage, indexing and retrieval software that can
be used concurrently by multiple computer operators connected to the COINSERV
server through a customer's existing local or wide area network.
On April 21, 1994, the Company received net proceeds of
approximately $7,159,000 from an initial public offering of its equity
securities. The Company used the proceeds of its public offering to enhance the
COINSERV software and develop new products, hire software developers, system
engineers, and customer support personnel and significantly increase marketing
spending. The following discussion should be read in conjunction with the
"Selected Financial Data" above and the financial statements and notes thereto
contained elsewhere in this document.
On March 28, 1996 the Company acquired certain assets from a
non-affiliated company known as Courtland Group, Inc. ("Courtland"). The
purchase of assets transaction involved the payment by the Company to or on
behalf of Courtland of the sum of $679,000 in cash, common stock, and a note
payable, plus assumption of debt, plus assumption of $96,000 in accrued
liabilities.
COMPARISON OF RESULTS OF OPERATIONS
The following table sets forth, for the periods indicated, the
percentage relationship that certain items of the Company's results of
operations bear to revenue.
FISCAL YEAR ENDED MARCH 31,
---------------------------
1996 1995 1994
---- ---- ----
Revenue 100% 100% 100%
Cost of revenue 42 49 53
Expenses 73 87 71
Non-recurring charges. 4 7 -
Write-off of registration cost - - 4
--- --- ---
Loss from operations (19) (43) (28)
Interest income - net 1 - (8)
--- --- ---
Net loss (18%) (43%) (36%)
=== === ===
COMPARISON OF FISCAL YEARS ENDED MARCH 31, 1996 VERSUS MARCH 31, 1995
REVENUE. The following chart compares INSCI's revenue for fiscal 1996 versus
fiscal 1995: (in thousands)
FISCAL YEAR ENDED MARCH 31,
---------------------------
1996 1995 % CHANGE
---- ---- --------
Software $4,099 $3,939 4%
Hardware 884 996 (11)
------ ------
Total product revenue 4,983 4,935 1
------ ------
Services 1,172 763 54
Maintenance 1,758 1,490 18
------ ------
Total services revenue 2,930 2,253 30
------ ------
Total revenue $7,913 $7,188 10%
====== ======
INSCI sells, installs and supports imaging, print-on-demand, and
data management and archival storage software products. Sales to end users
generally include software, optical storage hardware, systems integration and
consulting services, installation, and training. Post-installation maintenance
and customer support is available under the terms of a separate contract at an
additional charge. INSCI also sells software products directly to VARs and
distributors. Revenue is net of discounts and allowances given to third party
VARs and distributors. INSCI reported revenue of $7,913,000 in fiscal 1996, an
increase of $725,000, or 10%, from revenue of $7,188,000 for fiscal 1995.
Product revenues were $4,983,000 for fiscal 1996 compared to $4,935,000 for
fiscal 1995, an increase of $48,000 or 1%.
Services revenue, which includes charges for systems integration
and consulting, custom applications, installation, training, and maintenance,
totaled $2,930,000 in fiscal 1996, an increase of $677,000 (30%) over service
revenue of $2,253,000 in fiscal 1995. This increase is primarily attributable to
the growth of the systems integration and consulting revenues which increased to
$683,000 in fiscal 1996 from $32,000 in fiscal 1995, due to the emphasis the
Company started placing in fiscal 1996 on providing customers with a broader
range of services complementary to their complete document management system
needs.
COST OF REVENUE. Total cost of revenue for fiscal 1996 was
$3,311,000 or 42% of sales, compared to $3,504,000, or 49% of sales, for fiscal
1995.
Cost of revenue for product sales increased to $1,784,000 or 36% of
product revenue in fiscal 1996 as compared to $1,387,000 or 28% of sales in
fiscal 1995. Costs associated with product sales include the costs of hardware
and software products purchased from third parties for resale, and amortization
of capitalized software development and capitalized purchased software costs.
Costs of product revenue varies depending upon the mix of software and hardware
included in total system revenue. The increase in cost of product revenue is
primarily due to the increase in the level of charges pertaining to the
amortization of capitalized software development which increased to $760,000 in
fiscal 1996 from $218,000 in fiscal 1995 as a result of the commencement in
April 1995 of amortization of the development costs for the COINSERV 2.2
product. This increase was partially offset by an improvement in margin on
hardware sales due to lower discounting.
Costs associated with service revenues reflect principally the costs
of systems integration, consulting, and customer support personnel, and the cost
of third-party services and hardware maintenance subcontracts. These decreased
to $1,527,000 or 52% of services revenue in fiscal 1996 from $2,117,000 or 94%
in fiscal 1995. The decrease in costs reflects the change in the mix of support
staff levels in fiscal 1996, and $162,000 less in costs associated with hardware
maintenance due to the exclusive use of third party contracted services for all
of fiscal 1996, and less of services provided by outside contractors and
companies.
SALES AND MARKETING. Sales and marketing expenses were $2,459,000,
or 31% of revenue, for fiscal 1996, as compared to $3,070,000 or 43% of revenue,
for fiscal 1995. This decrease was attributable to a change in compensation
programs and lower travel expenses, and reduced spending on consultants.
PRODUCT DEVELOPMENT. Product development expenses increased to
$1,878,000 (before capitalization of software development expenses of $120,000,
resulting in net expenses of $1,758,000) or 24% of revenue in fiscal 1996
compared to $2,185,000 (before capitalization of software development expenses
of $821,000 resulting in net expense of $1,364,000) or 30% of revenue in fiscal
1995. While there was only a small change in total spending, the level of
capitalization of software development costs dropped $701,000 as a greater
proportion of the development staff's time was devoted to sustaining engineering
tasks. In addition, during fiscal 1996 the Company commenced a program to reduce
its cost of product development by having selected product development performed
under a fixed price contract basis by a programming company in Sri Lanka.
GENERAL AND ADMINISTRATIVE. General and administrative expenses were
$1,542,000, or 20% of revenue, for fiscal 1996, as compared to $1,871,000, or
26% of revenue, for fiscal 1995. The decrease is primarily due to lower
compensation related costs, and a reduction in facilities expense.
NON-RECURRING CHARGES. The Company paid $250,000 in fiscal 1996 to
Marine Midland Bank ("Marine") in full settlement of all claims with respect to
a dispute over a 1993 sublease of office space from Marine. In addition, in
fiscal 1996, the Company recorded a charge of $75,000 for a fee paid to Bank of
New York Financial Corp. ("BNY") in April 1996 to terminate, at the Company's
request, the Company's credit facility with BNY. The Company incurred $500,000
of expense in fiscal 1995 in conjunction with its move from White Plains, NY to
its new headquarters in Westborough, MA. These expenses included the costs of
relocating employees and equipment, and employee severance and replacement
costs.
INTEREST INCOME/EXPENSE. Interest income was $70,000 in fiscal 1996
partially offset by $42,000 in connection with the 10% subordinated notes.
Interest income net of $8,000 for fiscal 1995 represents interest income of
$64,000 offset by interest expense consisting of charges of $45,000 on
intercompany advances from Imtech, and $11,000 of interest charges from
borrowings under its external credit facility.
NET LOSS. The net loss for fiscal 1996 was $1,452,000 or 18% of
revenue compared to a net loss of $3,113,000 or 43% of revenue for fiscal 1995.
The decrease in the net loss principally resulted from increased system
integration and maintenance revenues, and lower compensation related expense due
to lower sales staffing levels and lower commission and bonus expenses.
COMPARISON OF FISCAL YEARS ENDED MARCH 31, 1995 VERSUS MARCH 31,1994
REVENUE.
The following chart compares INSCI's revenue for fiscal 1995 to
revenue for fiscal 1994: (in thousands)
FISCAL YEAR ENDED MARCH 31,
---------------------------
1995 1994
------ ------
Software $3,939 $3,791
Hardware 996 2,771
------ ------
Total Product Revenue 4,935 6,562
------ ------
Services 763 584
Maintenance 1,490 1,041
------ ------
Total Service Revenue 2,253 1,625
------ ------
Total Revenue $7,188 $8,187
====== ======
INSCI sells, installs and supports document and data management and
archival storage software products. Sales to end users generally include
software, optical storage hardware, installation, and training.
Post-installation maintenance and customer support is available under the terms
of a separate contract at an additional charge. INSCI also sells software
products directly to VARs and distributors. Revenue is net of discounts and
allowances given to third party VARs and distributors. INSCI reported revenue of
$7,188,000 in fiscal 1995, a decrease of $999,000, or 12%, from revenue of
$8,187,000 for fiscal 1994. Product revenues were $4,935,000 for fiscal 1995
compared to $6,562,000 for fiscal 1994, a decrease of $1,627,000 or 25%.
Starting in fiscal 1995 the Company no longer sells computer systems but rather
only optical storage devices for use in conjunction with its software products.
This resulted in a decrease in hardware revenue in fiscal 1995 to $996,000 as
compared to $2,771,000 in fiscal 1994 - a decrease of $1,775 ,000.
Services revenue, which includes charges for custom applications,
installation, training, consulting, and maintenance, totaled $2,253,000 in
fiscal 1995, an increase of $628,000 (39%) over service sales of $1,625,000 in
fiscal 1994. This increase is primarily attributable to the growth of the
Company's installed base and a corresponding increase in revenue from
maintenance contracts which increased to $1,490,000 in fiscal 1995 as compared
to $1,042,000 in fiscal 1994.
COST OF REVENUE. Total cost of revenue for fiscal 1995 was
$3,504,000 or 49% of sales, compared to $4,338,000, or 53% of sales, for fiscal
1994. Costs associated with product sales include the costs of hardware and
software purchased for resale, and amortization of capitalized software
development. Costs of product revenue varies depending upon the mix of software
and hardware included in total system revenue. The decrease in cost of product
revenue reflects the higher proportion of high profit margin software product
revenue in fiscal 1995 than in fiscal 1994 and the $1,775,000 decrease in low
profit margin hardware sales.
Costs associated with services revenues reflect principally the
costs of customer support personnel, and the cost of third-party services and
hardware maintenance subcontracts. These increased to $2,117 ,000 or 94% of
services revenue in fiscal 1995 from $1,462,000 or 89% in fiscal 1994. The
increase in costs reflects the expansion of the customer support staff in fiscal
1995 to meet the needs of the increased customer base, and the use of a greater
amount of services provided by outside contractors and companies.
SALES AND MARKETING. Sales and marketing expenses were $3,070,000,
or 43% of revenue, for fiscal 1995, as compared to $2,541,000 or 31% of revenue,
for fiscal 1994. This increase was attributable to increased compensation and
travel expenses, and increased spending on marketing programs and consultants.
PRODUCT DEVELOPMENT. Product development expenses increased to
$2,185,000 (before capitalization of software development expenses of $821,000)
or 30% of revenue in fiscal 1995 compared to $1,445,000 (before capitalization
of software development expenses of $298,000) or 18% of revenue in fiscal 1994.
This increase was primarily due to increased compensation, supplies and
consultant expenses as a result of the expansion of the Company's development
activities subsequent to the completion of the Company's IPO in April 1994.
GENERAL AND ADMINISTRATIVE. General and administrative expenses were
$1,871,000, or 26% of revenue, for fiscal 1995, as compared to $2,145,000, or
26% of revenue, for fiscal 1994. The decrease is primarily due to lower
consulting costs, lower management charges from Imtech, and $275,000 less
provision for bad debts.
NON-RECURRING CHARGE. The Company incurred $500,000 of expense in
fiscal 1995 in conjunction with its move from White Plains, NY to its new
headquarters in Westborough, MA. These expenses included the costs of relocating
employees and equipment, and employee severance and replacement costs.
INTEREST INCOME/EXPENSE. Interest income-net of $8,000 for fiscal
1995 represents interest income of $64,000 offset by interest expense consisting
of charges of $45,000 on intercompany advances from Imtech, and $11,000 of
interest charges from borrowings under its external credit facility. The
decrease from interest expense-net of $654,000 in fiscal 1994 is due to the
receipt of approximately $7,159,000 in net proceeds from the Company's IPO in
April 1994.
NET LOSS. The net loss for fiscal 1995 was $3,113,000 or 43% of
revenue compared to a net loss of $2,968,000 or 36% of revenue for fiscal 1994.
The increase in the net loss principally resulted from increased spending on
sales and marketing programs, and relocation costs.
LIQUIDITY AND CAPITAL RESOURCES
The Company's cash flows are summarized below for the periods
indicated: (in thousands)
FISCAL YEAR ENDED MARCH 31,
1996 1995
---- ----
Cash provided by (used in)
Operating activities $ (524) $(1,478)
Investing activities (750) (1,555)
Financing activities 105 4,638
------- ------
Increase(decrease) in cash $(1,169) $1,605
======= ======
The Company used $524,000 in operations in fiscal year 1996
reflecting the impact of the Company's net loss and growth in accounts
receivable offset in part by higher non-cash expenses such as depreciation and
amortization, plus the increase in accounts payable and accrued liabilities. The
Company used $750,000 in its investing activities due to purchases of equipment,
additions to capitalized software development costs and purchased software, and
the acquisition of the assets of Courtland Group, Inc.. Financing activities
generated $105,000 reflecting the sale of additional common and preferred stock,
net of the redemption in full of the outstanding preferred stock held by Imtech.
Working capital at March 31, 1996 was $60,000 compared to working
capital of $883,000 at March 31, 1995. This reflects the draw-down of cash
balances at March 31, 1995 to fund the Company's activities during fiscal year
1996, and the absence of any significant net funds from financing activities
during the year.
Prior to April 21, 1994, Imtech provided working capital advances to
the Company. As of March 31, 1994, the outstanding balance of advances from
Imtech to the Company was approximately $6,461,000. Of the proceeds of the IPO,
the Company used $2,327,000 to partially repay the principal portion of such
indebtedness. The remaining unpaid balance at April 21, 1994 of approximately
$4,134,000 was converted into 41,343 shares of the Company's preferred stock.
Effective December 15, 1994 Imtech converted 25,000 shares of the
Company's preferred stock into 500,000 shares of the Company's common stock. On
June 15, 1995, the Company completed a private placement of 90-Day Subordinated
Notes (the "Notes") which were repayable in cash or in shares of the Company's
10% Convertible Redeemable Preferred Stock ("10% Preferred Stock"). A total of
$1,200,000 of Notes were sold with net proceeds to the Company of approximately
$950,000. Utilizing the net proceeds of the offering, the Company paid
$1,000,000 to Imtech to redeem the outstanding balance of 16,343 shares of its
8% preferred stock, par value $100 per share, issued in April 1994, and to
satisfy approximately $195,000 of net accrued dividends.
On April 21, 1994, the Company received net proceeds of
approximately $7,159,000 (before repayment of $2,327,000 of intercompany
advances to Imtech) from its IPO of 1,250,000 units ("Units"). Each Unit
consisted of one share of he Company's common stock and one redeemable common
stock purchase warrant. Each warrant entitles the holder thereof to purchase
one-half of one share of common stock. Two warrants may be exercised at an
aggregate exercise price of $9.00, subject to adjustment under certain
circumstances, at any time after the warrants became separately transferable,
until 48 months from the date of the offering. The warrants are redeemable by
the Company at $.05 per warrant upon 30 day's notice mailed within 20
consecutive trading days. The Company has used the proceeds of the IPO to
enhance the COINSERV software product and to develop other new software
products, to purchase additional computer equipment, to expand its
administrative staff, to increase marketing efforts and promotional
expenditures, and for working capital and general corporate purposes.
In February 1994, the Company and Imtech completed a financing
arrangement (the "agreement") with BNY Financial Corp. ("BNY") for a three-year
credit facility which replaced the previous facility the companies had with
Congress Financial Corp. The ability of INSCI to borrow under the financing
arrangement was suspended by BNY during fiscal year 1995. In March 1996, Company
and BNY agreed to terminate and settle all claims pursuant to the financing
agreement for the sum of $75,000 which the Company paid to BNY in full
settlement of all claims of BNY under the agreement. For a period of sixty (60)
days from the termination, BNY will maintain a limited lien of up to $50,000 to
guaranty and indemnify BNY against any customer payments that may be returned.
BNY released its claim on all other pledged tangible and intangible assets of
the Company except for the $50,000 indemnification as provided in the
termination agreement. The Company is presently seeking to establish a credit
facility with another financial institution.
On June 15, 1995, the Company completed a private placement of
90-Day Subordinated Notes (the "Notes") which were repayable in cash or in
shares of the Company's 10% Convertible Redeemable Preferred Stock ("10%
Preferred Stock"). A total of $1,200,000 of Notes were sold with net proceeds to
the Company of approximately $950,000. Utilizing the net proceeds of the
offering, the Company paid $1,000,000 to Imtech to redeem the outstanding
balance of 16,343 shares of its preferred stock, par value $100 per share, and
to satisfy approximately $186,000 of net accrued dividends.
In October 1995, the Company notified all holders of the Notes that
it was exchanging shares of the Company's 10% Convertible Preferred Stock in the
amount of one share for each $1.00 of principal and accrued interest balances
due on the Notes. Effective October 15, 1995 the Company exchanged 1,240,000
shares of the Company's 10% Preferred Stock in the amount of one share for each
$1.00 of principal and accrued interest due on the Notes for the principal of
its 90-Day Subordinated Notes and the accrued interest payable thereon. The
Convertible Preferred Stock is convertible at the option of the holders into the
Company's Common Stock as per the schedule included in the terms of the
Convertible Preferred Stock Placement. In accordance with the terms, a total of
79,050 shares of preferred shares of preferred stock have been surrendered and
converted into 39,260 shares of the Company's common stock during the fiscal
year ended March 31, 1996.
The Company has no fixed capital commitments.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The information required by this Item is incorporated by reference
to the Table of Contents to Financial Statements and Schedules which appears on
page 30 hereof.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURES
None.
<PAGE>
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information required by this item will be included in the
Company's Proxy Statement with respect to its 1996 Annual Meeting of
Stockholders to be filed with the Commission within 120 days following March 31,
1996 under the captions "Election of Directors," and "Directors and Executive
Officers of the Registrant" and is incorporated herein by this reference as if
set forth in full herein.
ITEM 11. EXECUTIVE COMPENSATION
The information required by this item will be included in the
Company's Proxy Statement with respect to its 1996 Annual Meeting of
Stockholders to be filed with the Commission within 120 days following March 31,
1996 under the captions "Summary Compensation Table," "Option Grants in Last
Fiscal Year," "Aggregate Option Exercises in Last Fiscal Year and Fiscal Year
End Option Values," and "Directors' Compensation" and is incorporated herein by
this reference as if set forth in full herein.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by this item will be included in the
Company's Proxy Statement with respect to its 1996 Annual Meeting of
Stockholders to be filed with the Commission within 120 days following March 31,
1996 under the caption "Security Ownership of Certain Beneficial Owners" and is
incorporated herein by this reference as if set forth in full herein.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this item will be included in the
Company's Proxy Statement with respect to its 1996 Annual Meeting of
Stockholders to be filed with the Commission within 120 days following March 31,
1996 under the caption "Certain Relationships and Related Transactions" and is
incorporated herein by this reference as if set forth in full herein.
<PAGE>
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) Financial Statements. Incorporated by reference to the list of
Financial Statements on page 30 of this Report on Form 10-K.
(b) Financial Statements Schedules. Incorporated by reference to the
list of Financial Statement Schedules on page 30 of this Report
on Form 10-K.
(c.) Exhibits: Incorporated by reference to the Index of Exhibits
appearing at the end of this Report on Form 10-K. Also
incorporated by reference all exhibits filed on the Company's
Registration Statement on Form S-1.
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the
Securities Exchange Act of 1934, the Registrant has duly caused this Report to
be signed on its behalf by the undersigned, thereunto duly authorized.
INSCI CORP.
By:
--------------------------------
Dr. E. Ted Prince,
President & Chief Executive Officer
Dated June 30, 1996
<PAGE>
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that each person whose signature
appears below constitutes and Dr. E. Ted Prince as his attorney-in-fact, with
the power of substitution, for him in any and all capacities, to sign any
attached amendments to this Report on Form 10-K, and to file the same, with
exhibits thereto and other documents in connection therewith, with the
Securities and Exchange Commission, hereby ratifying and confirming all that
said attorney-in-fact, or his substitute or substitutes, may do or cause to be
done by virtue hereof.
Pursuant to the requirements of the Securities Exchange Act of 1934,
this Report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
SIGNATURE TITLE DATE
--------- ----- ----
President & Chief Executive
Officer, Director, Acting
Chief Financial and Chief
/S/ Dr. E. TED PRINCE Accounting Officer June 30, 1996
- ------------------------
Dr. E. Ted Prince
Executive Vice President
& Chief Operating Officer,
/S/ JOHN L. GILLIS Director June 30, 1996
- ------------------------
John L. Gillis
/S/ LEONARD GARTNER Director June 30, 1996
- ------------------------
Leonard Gartner
/S/ RICHARD T. GERSTNER Director June 30, 1996
- ------------------------
Richard T. Gerstner
/S/ FRANCIS X. MURPHY Director June 30, 1996
- ------------------------
Francis X. Murphy
/S/ ROBERT H. OXENBERG Director June 30, 1996
- ------------------------
Robert H. Oxenberg
Vice President-Finance &
Administration, Chief Financial
- ------------------------ and Accounting Officer
John E. Steinkrauss(1)
- ------------------------ Director
Olin H. Broadway, Jr. (2)
- ------------------------ Director
David W. Grace (3)
(1) Mr. Steinkrauss resigned as Chief Financial Officer in May 1996. Mr.
Steinkrauss did not have any disagreement with the Company related to its
operations, policies, or practices.
(2) Mr. Broadway resigned as director in September 1995. Mr. Broadway did not
have any disagreement with the Company related to its operation, policies,
or practices.
(3) Mr. Grace resigned as director in September 1995. Mr. Grace did not have any
disagreement with the Company related to its operations, policies, or
practices.
<PAGE>
TABLE OF CONTENTS TO FINANCIAL STATEMENTS AND SCHEDULES
Financial Statements Page
- -------------------- ----
Report of Independent Accountants F-1
Report of Independent Certified Public Accountants F-2
Balance Sheets as of March 31, 1996 and 1995 F-3
Statements of Operations for the Years Ended F-4
March 31, 1996, 1995, and 1994
Statements of Stockholders' Equity (Deficiency) for the Years F-5
Ended March 31, 1996, 1995, and 1994
Statements of Cash Flows for the Years Ended March 31, 1996, F-6 & 7
1995, and 1994
Notes to Financial Statements F-8
Financial Statement Schedules
- -----------------------------
Schedule
--------
II - Valuation and Qualifying Accounts F-26
Schedules not listed above have been omitted because they are not
applicable or are not required or the information required to be set forth
therein is included in the Financial Statements or Notes thereto.
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Stockholders and
Board of Directors of
INSCI Corp.
We have audited the accompanying balance sheets of INSCI Corp. as of March
31, 1996 and 1995, and the related statements of operations, stockholders'
equity (deficiency), and cash flows for the years then ended. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of INSCI Corp. as of March 31,
1996 and 1995, and the results of its operations and its cash flows for the
years then ended in conformity with generally accepted accounting principles.
We have also audited Schedule II for the years ended March 31, 1996 and
1995. In our opinion, this schedule presents fairly the information required to
be set forth therein.
As discussed in Note M to the financial statements, the U.S. Securities and
Exchange Commission ("SEC") has issued an order, dated April 13, 1995, directing
a private investigation of INSCI Corp. and Information Management Technologies
Corporation. The ultimate outcome of the investigation cannot presently be
determined, and no provision for any liability or impairment of asset carrying
value that may result has been made in the financial statements.
/s/ Mahoney Cohen Rashba & Pokart, CPA, PC
MAHONEY COHEN RASHBA & POKART, CPA, PC
New York, New York
May 10, 1996, except for Notes R(2) and R(3)
as to which the dates are June 28, 1996 and
June 26, 1996, respectively
<PAGE>
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
BOARD OF DIRECTORS
INSCI CORP.
We have audited the accompanying statements of operations, stockholders'
equity (deficiency), and cash flows for the year ended March 31, 1994 of INSCI
Corp., (a Delaware corporation). These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe our audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the results of its operations and its cash flow for
the year ended March 31, 1994, in conformity with generally accepted accounting
principles.
We have also audited Schedule II for the year ended March 31, 1994. In our
opinion, this schedule presents fairly the information required to be set forth
therein.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. The Company has sustained substantial
losses in recent years including a loss for the year ended March 31, 1994 of
approximately $3,000,000 and has experienced deficiency in cash flows from
operations for all periods presented in the accompanying financial statements.
In addition, the Company has a deficiency in working capital of approximately
$6,200,000 and a deficiency in stockholders' equity of approximately $4,700,000
as of March 31,1994. We have been informed by management that the Company has
continued to sustain losses and experienced deficiency in cash flows from
operations subsequent to March 31, 1994. Further, we have been informed by
management that the Company expects to continue to incur losses through the year
ended March 31, 1995. These matters raise substantial doubt about the Company's
ability to continue as a going concern. The Company's continuation as a going
concern is dependent on the attainment of profitable operations and generating
of sufficient cash flows to support operations and to meet its obligations on a
timely basis, including meeting the covenants and restrictions of its financing
agreements. In view of these matters, recoverability of a major portion of the
recorded asset amounts at March 31, 1994, is dependent upon the attainment of
profitable operations and the ability to generate cash flows sufficient to
support future operations of the Company. The financial statements do not
include any adjustments relating to the recoverability and classification of
recorded asset amounts and classification of liabilities that might be necessary
should the Company be unable to continue in existence.
GRANT THORNTON LLP
New York, New York
June 28, 1994
<PAGE>
<TABLE>
<CAPTION>
INSCI CORP.
BALANCE SHEETS
(in thousands, except share amounts)
ASSETS MARCH 31,
1996 1995
-------- --------
<S> <C> <C>
Current assets:
Cash and cash equivalents (Notes B-2 and B-9) $ 436 $ 1,605
Accounts receivable, net of allowance for doubtful accounts
of $100 in 1996 and 1995 (Note B-9) 2,102 1,158
Inventory (Note B-3) 12 37
Prepaid expenses and other current assets 140 115
-------- --------
Total current assets 2,690 2,915
Property and equipment, net (Notes B-6 and D) 833 1,031
Other assets:
Capitalized software development costs, net of
accumulated amortization of $536 in 1996 and $284 in 1995 (Note B-4) 633 1,231
Purchased software, net of accumulated
amortization of $42 in 1996 and $0 in 1995 (Notes B-4 and Q) 961 75
Other 76 47
-------- --------
Total other assets 1,670 1,353
-------- --------
Total Assets $ 5,193 $ 5,299
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Note payable- current portion (Note H) $ 48 $ -
Accounts payable 661 345
Accrued and other liabilities 1,064 736
Customer deposits (Note B-1) 257 210
Dividends payable - preferred stock (Notes K and L) - 168
Deferred maintenance revenue (Note B-1) 574 541
Capital lease obligations - current portion (Note F) 26 32
-------- --------
Total current liabilities 2,630 2,032
Long term debt:
Note payable - less current portion (Note H) 44 -
Capital lease obligations - less current portion (Note F) - 32
-------- --------
Total long term debt 44 32
8% Redeemable preferred stock, $100.00 par value: 50,000 shares
authorized; 16,343 shares issued and outstanding in 1995 (Notes K and L) - 1,634
Commitments and contingencies (Notes E,F,K,L,M,O, and Q)
Stockholders' equity (Notes B-8,G,I,J,K,L,M,N,O and P):
10% Convertible Redeemable preferred stock, $.01 par value: authorized 12 -
10,000,000 shares: 1,160,950 shares issued and outstanding in 1996
Liquidation preference of $1,161 (Notes K and L)
Common stock, $.01 par value: authorized 40,000,000 shares;
issued and outstanding 3,864,011 in 1996 and 3,640,002 in 1995 38 36
Additional paid-in capital 17,326 14,943
Accumulated deficit (14,857) (13,378)
-------- --------
Total stockholders' equity 2,519 1,601
-------- --------
Total Liabilities and Stockholders' Equity $ 5,193 $ 5,799
======== ========
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS.
<PAGE>
INSCI CORP.
STATEMENTS OF OPERATIONS
(in thousands, except per share amounts)
YEARS ENDED MARCH 31,
1996 1995 1994
------- -------- -------
Revenue
Product $ 4,983 $ 4,935 $ 6,562
Services 2,930 2,253 1,625
------- -------- -------
Total revenue 7,913 7,188 8,187
Cost of revenue
Product 1,784 1,387 *
Services 1,527 2,117 *
------- -------- -------
Total cost of revenue 3,311 3,504 4,338
------- -------- -------
Gross margin 4,602 3,684 3,849
Expenses
Sales and marketing 2,459 3,070 2,541
Product development 1,758 1,364 1,147
General and administrative 1,542 1,871 2,145
Non-recurring charges (Note C ) 325 500 -
Write-off of registration costs (Note N ) - - 330
------- -------- -------
Total expenses 6,084 6,805 6,163
------- -------- -------
Loss from operations (1,482) (3,121) (2,314)
Interest income (expense):
Interest income 70 64 20
Interest expense - third party (40) (11) (87)
Interest expense - related party - (45) (587)
------- -------- -------
30 8 (654)
------- -------- -------
Net loss (1,452) (3,113) (2,968)
Preferred stock dividend (27) (253) -
------- -------- -------
Net loss applicable to common shares $(1,479) $ (3,366) $(2,968)
======= ======== =======
Net loss per common share (Note B-8) $ (0.40) $ (1.04) $ (1.55)
======= ======== =======
Weighted average common
shares outstanding (Notes B-8 ) 3,655 3,242 1,913
======= ======== =======
* Segregation within Cost of revenue for products and services not available
in 1994
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS
<PAGE>
INSCI CORP.
STATEMENTS OF STOCKHOLDERS' EQUITY
(DEFICIENCY)
Years ended March 31, 1996, 1995, and 1994
(in thousands, except share amounts)
<TABLE>
<CAPTION>
Common Stock Preferred Stock Additional
No. of No. of Paid-in Accumulated
Shares Amount Shares Amount Capital Deficit Total
----------- ------ ----------- ------ --------- ----------- -----
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE, MARCH 31, 1993 5,670,002 $ 57 - - $ 5,263 $ (7,044) $(1,724)
1 for 3 reverse stock split (3,780,000) (38) - - 38 - -
Net loss - - - - - (2,968) (2,968)
--------- ---- --------- --- ------- -------- -------
BALANCE, MARCH 31, 1994 1,890,002 19 - - 5,301 (10,012) (4,692)
Issuance of 1,250,000 units,
net of issuance costs of $1,591 1,250,000 12 - - 7,147 - 7,159
8% Preferred stock dividends - - - - - (253) (253)
8% Preferred stock conversion to
common stock at $5.00 per share 500,000 5 - - 2,495 - 2,500
Net loss - - - - - (3,113) (3,113)
--------- ---- --------- --- ------- -------- -------
BALANCE, MARCH 31, 1995 3,640,002 36 - - 14,943 (13,378) 1,601
Preferred stock dividends - - - - - (27) (27)
Redemption of 8% preferred stock - - - - 820 - 820
Conversion of subordinated notes
to 10% preferred stock - - 1,240,000 $12 964 - 976
10% Preferred stock conversion to
common stock 39,260 - (79,050) - - - -
Common stock issued as dividend
on 10% preferred stock 16,082 - - - - - -
Common stock issued for purchase
of assets of Courtland Group, Inc. 89,681 1 - - 255 - 256
Acquisition cost/stock options issued
stock options issued at less than
fair market value - - - - 138 - 138
Sale of common stock 75,054 1 - - 199 - 200
Exercise of stock options 3,932 - - - 7 - 7
Net loss - - - - - (1,452) (1,452)
--------- ---- --------- --- ------- -------- -------
BALANCE, MARCH 31, 1996 3,864,011 $ 38 1,160,950 $12 $17,326 $(14,857) $ 2,519
========= ==== ========= === ======= ======== =======
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS.
<PAGE>
<TABLE>
<CAPTION>
INSCI CORP.
STATEMENTS OF CASH FLOWS
(in thousands)
YEARS ENDED MARCH 31,
1996 1995 1994
-------- -------- --------
<S> <C> <C> <C>
Cash flows from operating activities:
Net loss ($1,452) ($3,113) ($2,968)
Reconciliation of net loss to net cash used in operating activities:
Interest on note exchanged for preferred stock 40
Depreciation and amortization 454 402 182
Amortization of software costs 760 218 427
Provision for doubtful accounts - (89) 194
Provision for loss on loan to officer - 150 -
Write-off of registration costs - - 330
Changes in assets and liabilities:
Accounts receivable (944) 1,487 (1,671)
Inventory 25 386 445
Prepaid expenses and other current assets (25) 52 (3)
Accounts payable 276 (958) 241
Accrued and other liabilities 317 138 287
Customer deposits 47 54 (323)
Deferred maintenance revenue (22) (205) 462
-------- -------- -------
Net cash used in operating activities (524) (1,478) (2,397)
Cash flows from investing activities:
Additions to capitalized software development costs (120) (821) (299)
Additions to purchased software costs (114) - -
Capital expenditures (245) (646) (298)
Purchase of certain assets of Courtland Group, Inc. (242) - -
Other assets (29) (88) (8)
-------- -------- -------
Net cash used in investing activities (750) (1,555) (605)
Cash flows from financing activities:
Proceeds from sale of common stock 200 8,750 -
Proceeds from exercise of stock options 7 - -
Proceeds from sale of 90-day Subordinated Notes 1,200 - -
Payment of financing costs (250) (1,084) (507)
Redemption of preferred stock and dividends (1,000) - -
Payment of preferred stock dividends - (85) -
Advances from (repayments to ) Imtech - (2,327) 3,932
Repayment of revolving credit facility - (587) (306)
Repayment of current portion of long-term debt - - (65)
Payment of capital lease obligations (52) (29) (52)
-------- -------- -------
Net cash provided by financing activities 105 4,638 3,002
-------- -------- -------
Net change in cash and cash equivalents (1,169) 1,605 -
Cash and cash equivalents at beginning of year 1,605 - -
-------- -------- -------
Cash and cash equivalents at end of year $ 436 $ 1,605 $ -
======== ======== =======
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS.
<PAGE>
<TABLE>
<CAPTION>
INSCI CORP.
STATEMENTS OF CASH FLOWS (CONTINUED)
(in thousands)
YEARS ENDED MARCH 31,
1996 1995 1994
-------- -------- -------
<S> <C> <C> <C>
Supplemental disclosures of cash flow information:
Cash paid during the year for:
Interest $ - $ 56 $ 74
======== ======== ======
Income taxes $ - $ - $ -
======== ======== ======
Supplemental disclosure of financing information:
Conversion of advances from parent to preferred stock $ - $ 4,134 $ -
======== ======== ======
Accrued preferred stock dividends $ - $ 168 $ -
======== ======== ======
Conversion of note payable to preferred stock $ 1,240 $ - $ -
======== ======== ======
Supplemental information on non cash investing and financing activities:
In April 1994, Imtech and the Company exchanged $4,134,000 of intercompany indebtedness for 41,343 shares of the
Company's 8% redeemable preferred stock. (Notes I and L-2)
In December 1994, Imtech converted 25,000 shares of the Company's 8% redeemable preferred stock into 500,000 shares
of the Company's common stock. (Notes J and L-2)
During fiscal year 1995, the Company converted $2,500,000 of the 8% redeemable preferred stock to common stock.
In June 1995, the Company redeemed in full the outstanding balance of $1,634,000 of 8% redeemable preferred stock
held by Imtech and the $186,000 of preferred stock dividends payable thereon, for the sum of $1,000,000. The
difference of $820,000 was recorded as additional paid-in capital. (Notes J and L-2)
In November 1995, the Company issued 40,000 shares of its 10% preferred stock in payment of the interest due on its
90-day Subordinated Notes. (Note K)
During fiscal year 1996, the Company issued 16,082 shares of its common stock in payment of the dividend due on its
10% preferred stock. (Notes K and L-6)
In fiscal year 1996 the Company issued common stock with a value of $138,000 in connection with the acquisition of
certain assets from Courtland Group, Inc. and software from Custom Solutions, Inc.
In March 1996, the Company issued 89,681 shares of common stock and issued a note payable, at no interest, ratably
over a two year term in conjunction with its purchase of the assets of Courtland Group, Inc. (Note L-5 and R)
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS.
<PAGE>
INSCI CORP.
NOTES TO FINANCIAL STATEMENTS
MARCH 31, 1996, 1995 AND 1994
NOTE A - ORGANIZATION OF THE COMPANY
INSCI Corp. was incorporated in 1989. Until January 1996, the Company
was a majority-owned subsidiary of Information Management Technologies
Corporation ("Imtech"). As of March 31, 1996, Imtech owns approximately 38% of
the Company's outstanding common stock. The Company develops, markets and
supports client/server electronic printing and document management software
utilizing optical disk and CD storage technology to store, index, archive,
retrieve, and distribute computer generated documents and scanned images
including statements, reports, invoices and transaction data. The Company also
provides an extensive range of systems integration and consulting services based
upon its expertise in integrated output management, electronic printing,
print-on-demand, data storage, data warehousing and data mining.
NOTE B - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
A summary of the significant accounting policies consistently applied
in the preparation of the accompanying financial statements follows:
1. Revenue Recognition
Revenue from the sale of INSCI's multi-user system installations which
require significant customization is recognized upon customer acceptance,
when there are no longer significant obligations to be fulfilled and when
collectibility is probable and imminent. Stand-alone version installations
do not require significant obligations after delivery of the hardware and
software. Revenue on such sales is recognized upon shipment and remaining
obligations, if any, are accrued. The Company's software license agreement
does not (i) entitle the buyer to any right of return or exchange, or (ii)
grant the customer any right to product upgrades or enhancements.
Software maintenance revenue is recognized ratably over the contract
period, generally one year. During the fourth quarter of 1994, the Company
became aware that maintenance billings of approximately $485,000 had not
been billed for maintenance and support services that had been provided to
customers in prior periods. As a result the Company retroactively billed
the customers in accordance with their maintenance contracts. The Company
has arranged with a third party provider to perform all customer support
obligations under its hardware maintenance contracts. Consequently, the
Company recognizes hardware maintenance revenue upon commencement of the
contract period.
Services revenue from consulting and systems integration is recognized
upon performance of the services where the customer contract is of a time
and material nature and there are no significant remaining obligations, and
upon acceptance of the completed project where the contract is of a fixed
price nature.
Advance payments required from customers under contractual agreements,
which have not been fulfilled, are classified as customer deposits.
2. Cash and Cash Equivalents
Cash and cash equivalents consist of highly liquid investments with
insignificant interest rate risk and original maturities of three months or
less. They are carried at cost which approximates market value.
3. Inventory
Inventory, consisting primarily of computer hardware products purchased
from third parties, is stated at the lower of cost or market. Cost is
determined by the specific identification method.
4. Intangible Assets
A. Capitalized Software Costs
The Company capitalizes the qualifying costs of developing its software
products. Capitalization of costs requires that technological feasibility
has been established. Development costs incurred prior to the establishment
of technological feasibility are expensed as incurred. When the software is
fully documented and available for unrestricted sale, capitalization of
development costs ceases, and amortization commences based on either a
straight-line basis for a period of months (presently 24 months) or the
ratio of current gross revenues to the total current and anticipated future
gross revenues, whichever is greater. The establishment of technological
feasibility and the ongoing assessment of recoverability of capitalized
software development costs require considerable judgment by management with
respect to certain external factors, including, but not limited to,
technological feasibility, anticipated future gross revenues, estimated
economic life and changes in software and hardware technologies.
Realization of capitalized software costs is subject to the Company's
ability to market its software products in the future and generate cash
flows sufficient to support future operations. Capitalized software costs
totaled $120,000, $821,000, and $299,000 during the years ended March 31,
1996, 1995 and 1994, respectively. Amortization of capitalized software
costs totaled $718,000, $218,000 and $427,000 during the years ended March
31, 1996, 1995 and 1994, respectively, and is included in cost of revenue
in the accompanying Statements of Operations.
B. Purchased Software
The Company capitalizes as Purchased Software the costs associated with
software products either purchased from other companies for resale or
developed by other companies under contract with the Company. The cost of
the software is presently amortized over a period of two years. The
amortization period is re-evaluated quarterly with respect to certain
external factors, including, but not limited to, technological feasibility,
anticipated future gross revenues, estimated economic life and changes in
software and hardware technologies. Purchased software costs totaled
$593,000, and $75,000 during the years ended March 31, 1996 and 1995,
respectively. Amortization of purchased software costs totaled $42,000,
during the year ended March 31, 1996, and is included in cost of revenue in
the accompanying Statements of Operations.
5. Income Taxes
The Company's results of operations were reported as part of Imtech's
consolidated group for Federal income tax purposes up to and including the
year ended March 31, 1994. Effective for fiscal 1995 and subsequent years
the Company has filed separate tax returns and income tax, if any, was
calculated on a separate company basis.
6. Property and Equipment
Property and equipment are recorded at cost. Depreciation is provided
on the straight-line method over the estimated useful lives of the related
assets. Property leased under capital leases is amortized over the lesser
of its useful life or the lease term. Upon retirement or sale, the cost of
the assets disposed of and the related accumulated depreciation and
amortization are removed from the accounts and any resulting gain or loss
is included in the determination of net income. The estimated useful lives
are as follows:
Furniture and fixtures................. 5-7 years
Equipment.............................. 3-5 years
Leasehold improvements................. Life of lease
7. Management Charges
Prior to INSCI's relocation to White Plains, New York in August 1993,
Imtech provided a variety of administrative services to the Company,
including accounting, personnel, data processing, employee relations and
other administrative services. In addition, the Company received the
benefit of other corporate overhead costs which principally relate to
office space, insurance coverage, telephone services, use of equipment, and
other various overhead costs related to the management of the Company.
Management charges were allocated to the Company based on factors
determined by management of the Company to be appropriate for the
particular item, including estimated time commitments of managerial
personnel, sales volume, number of employees and square footage of space
occupied. In the third quarter of fiscal 1995, effective with the Company's
move to Westborough, Massachusetts and the hiring of its own financial and
administrative staff, the charge by Imtech was discontinued. Management
charges, which are included in general and administrative expenses,
amounted to $92,000 and $156,000 for the years ended March 31, 1995 and
1994, respectively.
8. Loss Per Share
The computation of income (loss) per common and common equivalent share
has been calculated on the basis of the weighted average number of common
shares outstanding during the period. The effect on loss per share of
outstanding options and warrants is antidilutive and has not been included
in the calculation of weighted average shares outstanding.
9. Concentrations of Credit Risk
Financial instruments which potentially expose the Company to
concentrations of credit risk consist primarily of cash and accounts
receivable. The Company places its temporary cash investments in high grade
overnite investments with one financial institution. The Company has not
experienced any losses on these investments to date.
The Company has not experienced significant losses relating to
receivables. The Company performs ongoing credit evaluations of its
customers and maintains reserves for potential credit risks as determined
by management. Accounts receivable consists of geographically and industry
dispersed customers.
The Company maintains its cash balances in one financial institution.
These balances are insured by the Federal Deposit Insurance Corporation up
to $100,000 per institution. At March 31, 1996, the uninsured amounts held
at this financial institution were approximately $336,000.
10. Impairment of Long-Lived Assets
In the event that facts and circumstances indicate that the cost of an
asset may be impaired, an evaluation of recoverability would be performed.
If an evaluation is required, the estimated future undiscounted cash flows
associated with the asset would be compared to the asset's carrying amount
to determine if a write-down to market or discounted cash flow value is
required.
11. Fair Value of Financial Instruments
Financial assets for which carrying values approximate fair value
include cash, and trade and other receivables. Financial liabilities for
which carrying values approximate fair value include trade and other
payables, accrued expenses and liabilities as well as notes payable.
The Company estimates that the carrying values approximate fair value
due to the short maturity or market rates of interest. However,
considerable judgment is required in interpreting market data to develop
estimates of fair value. Therefore, the estimates are not necessarily
indicative of the amounts which could be realized or would be paid in a
current market exchange. The effect of using different market assumptions
and/or estimation methodologies may be material to the estimated fair value
amount.
12. Use of Estimates
The preparation of financial statements require management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of assets and liabilities at the date of the
financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those
estimates.
13. Reclassifications
The financial statements for the fiscal year ended March 31, 1994 have
been reclassified to conform with the Company's current presentation. The
primary changes have been the reclassification of development expenses from
cost of revenue to expenses, and the reclassification of selling, general
and administrative expenses into separate captions for reporting.
NOTE C - NON-RECURRING CHARGES
The Company paid $250,000 in fiscal 1996 to Marine Midland Bank
("Marine") in full settlement of all claims with respect to a dispute over a
1993 sublease of office space from Marine. In addition, in fiscal 1996, the
Company recorded a charge of $75,000 for fees paid to Bank of New York Financial
Corp. ("BNY") in April 1996 to terminate, at the Company's request, the
Company's credit facility with BNY. The Company incurred $500,000 of expenses in
fiscal 1995 in conjunction with its move from White Plains, NY to its new
headquarters in Westborough, MA. These expenses included the cost of relocating
employees and equipment, and employee severance and replacement cost.
NOTE D - PROPERTY AND EQUIPMENT
Property and equipment consist of the following (in thousands):
MARCH 31,
---------
1996 1995
---- ----
Furniture and fixtures $ 265 $ 265
Leasehold improvements 101 -
Computer and Telephone 1,313 1,159
------ -----
1,679 1,424
Less accumulated depreciation and amortization (846) (393)
------ -----
$ 833 $1,031
====== ======
Depreciation and amortization expense was $454,000, $402,000 and $182,000
for fiscal years 1996, 1995 and 1994, respectively.
NOTE E - RELATED PARTY TRANSACTIONS
(1) Effective October 1992, the Company signed a three-year consulting
agreement with Robert Oxenberg, pursuant to which Mr. Oxenberg provided
consulting services to the Company. At the time of this consulting agreement,
Mr. Oxenberg was a director of the Company. Mr. Oxenberg resigned as a director
of the Company in November 1993. This consulting agreement was terminated in
November 1993. In February 1995, Mr. Oxenberg was granted 25,000 options at
$1.13. Mr. Oxenberg was granted a ten-year option to acquire 10,000 shares of
Common Stock at an exercise price of $7.00 per share. The option was granted
under the Company's 1992 Stock Option Plan. Mr. Oxenberg was subsequently
re-elected as a director in September 1994 and is currently a director of
Imtech. In June 1995, the Company paid $35,000 to Mr. Oxenberg as remuneration
for his efforts on behalf of the Company to secure additional financing. In
September 1995, the Company signed an agreement with Mr. Oxenberg to assist
INSCI to approach potential investment sources. Mr. Oxenberg was paid a retainer
of 10,000 stock options at $1.66. Additionally, success fees are paid to Mr.
Oxenberg when INSCI enters into a binding arrangement with investors. Success
fees are 3.5% of funds raised and 25,000 shares of stock for each $1 million
raised.
(2) In April 1994, the Company loaned John L. Gillis, presently the
Company's Executive Vice President and Chief Operating Officer, and his wife,
the amount of $150,000 to purchase a residence in Westborough, Massachusetts.
The loan carries interest at the prime rate, and all unpaid principal plus all
accrued and unpaid interest is due ninety days (subject to extension by the
Company) following the closing of the loan. Repayment of the loan has been
extended through November 30, 1997, and in May 1996, the Company and Mr. Gillis
reached an agreement on a schedule of payments which anticipates repaying the
loan principal and interest in full during the course of the next two fiscal
years. The loan is collateralized by a pledge of Mr. Gillis' Imtech Class A
Common Stock, Imtech and certain INSCI stock options and 500 INSCI Units. This
collateral has a present market value materially less than the outstanding
balance of the loan. The Company established an allowance for loan loss as the
underlying collateral had minimal value. The outstanding loan balance as of
March 31, 1996 is $143,619, and is offset by an allowance for loan losses by the
same amount. During March 1996, Mr. Gillis paid down the loan through a
combination of cash payments and surrender of stock options for $30,665.
Interest paid by Mr. Gillis was $24,284.
(3) In June 1995, the Company engaged Dr. Prince as a consultant prior
to Dr. Prince's employment by the Company. A total of $11,538 was paid to Dr.
Prince for consulting services rendered to the Company prior to his employment.
In conjunction with Dr. Prince's employment the Company paid an additional
$25,000 to Dr. Prince and $25,000 to Perth Ventures for consulting fees. In June
1995, the Company commenced an interim office sharing arrangement on a
month-to-month basis from Perth Ventures at a monthly charge of $2,000 per
month. Dr. Prince, who is President, Chief Executive Officer and Chairman of the
Board of Directors of the Company, is 100% owner in and is President of Perth
Ventures. Dr. Prince is also an investor in one $25,000 unit of the Company's
10% convertible preferred stock.
(4) In June 1995, the Company engaged Emerging Technology Ventures,
Inc. ("ETVI") to manage its acquisition activities for a one year period. Mr.
Francis X. Murphy ("Mr. Murphy"), who is President of ETVI, became a director of
the Company in September 1995. ETVI is paid a monthly retainer of $6,000. This
agreement was subsequently amended in October 1995 to include management of the
Company's strategic alliance activities, and the agreement was extended until
October 1996. ETVI was granted an incentive stock option to acquire 400,000
shares of the Company's common stock at an exercise price of $2.31 per share.
These options are only exercisable to the extent that transactions which are
contemplated in the amended agreement are completed in accordance with the terms
of the agreement. For completed transactions ETVI will receive a commission,
which is offset against cumulative retainer fees paid and a portion of the stock
options granted will vest immediately. As a result of the company acquiring
certain assets from the Courtland Group, Inc., ETVI received a fee of $33,750
which was offset against the retainer and had 43,537 options vested from the
400,000 options described above. In addition, in connection with the acquisition
of the Image Express software from Customs Solution, Inc., ETVI had an
additional 25,000 options vested. The aggregate options vested were valued at
$138,000 and have been recorded as part of the acquisition cost.
(5) In June 1995, the Company engaged Gartner and Associates as
financial consultants to advise the Company. Mr. Leonard Gartner ("Mr.
Gartner"), principal of Gartner and Associates, became a director of the Company
in September 1995. Gartner and Associates was paid a monthly retainer of $4,500
plus expenses during fiscal year 1996. Pursuant to an April 1996 amendment to
the agreement, Gartner and Associates will be paid a monthly retainer of $6,000
plus expenses during fiscal year 1997, and will also receive a grant of 40,000
incentive stock options at an exercise price of $4.06. 10,000 of these options
vested immediately and the remainder vest at the rate of 7,500 options per
quarter during fiscal year 1997.
(6) In September 1995, Mr. Gartner and Mr. Murphy purchased 100,000
shares and 10,000 shares, respectively, of the Company's common stock from
Imtech. These are restricted shares with cost free registration rights.
(7) In September 1995, the Company entered into an agreement with
Technology Providers Ltd. ("TPL") of Sri Lanka under which TPL will provide
computer programming services for certain software products under development
and for selected customer application projects. TPL is owned by family members
of Mr. Krishan A. Canekeratne who is the Company's Senior Vice President of
Development. Mr. Canekeratne has no direct ownership interest in TPL. In the
opinion of management, the fees paid under this agreement are at fair market
value rates.
(8) In September 1995, the Company granted to its present and former
directors the following stock options at an exercise price of $1.44 per
share: one year options to purchase 10,000 shares each were granted to Messrs.
Grace and Broadway, former directors of the Company, and options vesting over
three years to purchase 100,000 shares each to Messrs. Gartner, Murphy and
Oxenberg, the non-officer directors elected to the Board of Directors at the
Annual Shareholders Meeting in September. In March 1996, the Company granted an
incentive stock option vesting over three years to purchase 100,000 shares at an
exercise price of $4.38 to Mr. Richard Gerstner, who joined the Board of
Directors.
NOTE F - LEASE COMMITMENTS
For financial reporting purposes, an equipment lease has been capitalized.
The related asset and obligation have been recorded at present value using the
18% rate implicit in the lease. The lease is non-cancelable and expires in
August 1996. The cost of equipment under the capital lease amounted to $123,000
at March 31, 1996 and March 31, 1995, with related accumulated depreciation of
$94,000, and $24,000, respectively.
The following is a schedule of the present value of future minimum lease
payments under the capital lease as of March 31, 1996 (in thousands):
Payments-year ended March 31, 1997........................ $ 27
Amount representing interest.............................. 1
-----
Total capital lease obligations........................... 26
Current portion of capital lease obligations.............. 26
-----
Present value of long-term obligations under capital lease $ 0
=====
The Company entered into a ten-year lease for its Massachusetts
headquarters office in October 1994. The Company also entered into a
noncancelable lease for office space for its Courtland Imaging division's office
in Maryland which expires in February 1998. As of March 31, 1996, future minimum
annual rental payments under these operating leases are as follows (in
thousands):
Year ending:
March 31, 1997...............................$ 306
March 31, 1998...............................$ 305
March 31, 1999...............................$ 263
March 31, 2000...............................$ 283
March 31, 2001...............................$ 307
Thereafter ..................................$1,149
Total rent expense, including amounts allocated from Imtech for office
space in prior fiscal years, was approximately $268,000, $343,000 and $259,000
for the years ended March 31, 1996, 1995 and 1994, respectively.
NOTE G - REVOLVING CREDIT FACILITY
In February 1994, the Company and Imtech completed a financing
arrangement with BNY Financial Corp. ("BNY") for a three-year shared credit
facility. Under the BNY facility, the Company and Imtech were entitled to borrow
up to the lesser of $4,500,000 or 85% of their respective eligible accounts
receivable and BNY provides management and collection services with respect to
such accounts receivable.
The ability of INSCI to borrow under the financing arrangement was
suspended by BNY during fiscal year 1995. In March 1996, the Company and BNY
agreed to terminate and settle all claims pursuant to the financing agreement
for the sum of $75,000.
NOTE H - NOTE PAYABLE
On March 28, 1996, the Company issued a non-interest bearing, unsecured
note for $100,000, subject to any rights of offset by the Company for one year.
This note is payable in twenty-four equal installments commencing April 27,
1996, and is part of the consideration paid for the purchase of the assets of
the Courtland Group, Inc. (see Note Q). The Company has recorded the note at its
net present value.
NOTE I - INCOME TAXES
The Company's results of operations were reported as part of Imtech's
consolidated group for Federal income tax purposes up to and including the year
ended March 31, 1994. At March 31, 1994, Imtech and the Company, on a
consolidated basis, had net operating loss ("NOL") carryforwards for Federal
income tax purposes of approximately $18,000,000 which are available to offset
future taxable income and expire at various dates through the year 2009, of
which approximately $10,000,000 is attributable to the Company. Following
completion of the Company's initial public offering, the Company is no longer
able to be included in Imtech's consolidated tax return and, therefore, the NOL
carryforward of Imtech is not available to the Company. At March 31, 1996, the
Company had available NOL carryforwards of approximately $14,500,000 resulting
from operating losses during fiscal years 1996 and 1995. The NOL carryforwards
for tax reporting purposes expire in various amounts through the year 2011. The
Company believes that an "Ownership Change" occurred in fiscal year 1996 within
the meaning of Section 382 of the IRS Code. Under an ownership change, the
Company will be permitted to utilize NOL carryforwards (available on the date of
such change) in any year thereafter to reduce its income to the extent that the
amount of such income does not exceed the product of (the "Section 382 limit")
the fair market value of the Company's outstanding equity at the time of the
ownership change and long term tax exempt rate published by the IRS.
The Company's Section 382 limits in 1997 and beyond will be
approximately $900,000 per year and accordingly, the Company will not be able to
utilize its full NOL benefits. The Company has fully reserved the tax benefits
of these operating losses because the likelihood of realization of the tax
benefits cannot be determined
NOTE J - INTERCOMPANY ADVANCES
As of March 31, 1994, the outstanding balance of the intercompany
indebtedness owed by the Company to Imtech was approximately $6,461,000. Using a
portion of the IPO proceeds in fiscal 1995 the company applied $2,327,000 to
partially repay the principal portion of such indebtedness. The remaining unpaid
balance at April 21, 1994 of $4,134,000 was converted into 41,343 shares of the
Company's preferred stock. Effective December 15, 1994, Imtech converted 25,000
shares of the Company's preferred stock into 500,000 shares of Common Stock,
leaving 16,343 shares of preferred stock outstanding. Effective June 15, 1995,
the Company redeemed in full the remaining 16,343 of outstanding preferred
stock. The Boards of Directors of the Company and Imtech each has adopted a
policy that neither company will make further advances to the other.
NOTE K - PREFERRED STOCK
In April 1995, the Board of Directors increased the number of authorized
shares of preferred stock from 5,000,000 shares to 10,000,000 shares.
A. 8% Redeemable Convertible Preferred Stock
The Company had 50,000 shares of authorized Redeemable Convertible
Preferred Stock with a par value of $100.00 per share. Under the terms of the
preferred stock, the Company was required to pay quarterly cumulative dividends
in the amount of eight percent of par value, to the extent of the Company's
available cash flow and the extent that the Company's working capital ratio
(current assets to current liabilities) had not reduced below .8 to 1 and the
Company had positive stockholders' equity. Available cash flow is defined as the
Company's net income, less a reserve for reasonably estimated capital
expenditures. Commencing June 30, 1995, to the extent that there was available
cash flow remaining after the cumulative quarterly dividends had been paid and
to the extent that the Company's working capital ratio was not reduced below .8
to 1 and the Company had positive stockholders' equity, the Company will redeem
the preferred stock over a period of six years in equal quarterly redemption. To
the extent the available cash flow was not sufficient to redeem the preferred
stock over this six-year period, then the Company will continue to redeem the
preferred stock thereafter on a quarterly basis out of available cash flow until
the preferred stock is fully redeemed. Additionally, the holders of the
preferred stock may convert the preferred stock into common stock at a
conversion rate of 14.29 shares of common stock for each share of preferred
stock. On June 15, 1995, the Company fully redeemed all outstanding shares of
the 8% Redeemable Convertible Preferred Stock. (See Note K-B)
B. 10% Convertible Preferred Stock
On June 15, 1995, the Company completed a private placement of 90-Day
Subordinated Notes (the "Notes") which were repayable in cash or in shares of
the Company's 10% Convertible Redeemable Preferred Stock ("10% Preferred
Stock"). A total of $1,200,000 of Notes were sold with net proceeds to the
Company of approximately $950,000. Utilizing the net proceeds of the offering,
the Company paid $1,000,000 to Imtech to redeem the outstanding balance of
16,343 shares of its 8% Redeemable Convertible Preferred Stock and to satisfy
approximately $186,000 of net accrued dividends.
In October 1995, the Company notified all holders of the Notes that it
was exchanging shares of the Company's 10% Convertible Preferred Stock in the
amount of one share for each $1.00 of principal and accrued interest balances
due on the Notes. Effective October 15, 1995 the Company exchanged 1,240,000
shares of the Company's 10% Preferred Stock in the amount of one share for each
$1.00 of principal and accrued interest due on the Notes for the principal of
its 90-Day Subordinated Notes and the accrued interest payable thereon. The
Convertible Preferred Stock is convertible at the option of the holders into the
Company's common stock. The holder is able to convert an amount equal to the
greater of either $.10, or 50% of the average closing bid price of the common
stock during the 20 days immediately preceding the date that the conversion
notice is given. Conversions are scheduled to occur four (4) times annually
through May 1, 1998, however, can be accelerated due to a change in control.
Dividends are payable semi-annually on April 15 and October 15 of each year
based on amounts accrued as of March 31 and September 30, respectively. Holders
have cost free piggyback registration rights until June 15, 1998. D. H. Blair &
Co., an investments firm, has an option to acquire $295,750 of 10% convertible
preferred stock as well as convert such shares based on the same price and terms
as current holders.
In accordance with the terms of the conversion, a total of 79,050
shares of preferred stock have been surrendered and converted into 39,260 shares
of the Company's common stock during the fiscal year ended March 31, 1996.
NOTE L - STOCKHOLDERS' EQUITY
(1) In November 1993, the Company effected a 1-for-3 reverse common
stock split. The Company did not change the number of authorized shares or the
par value of the stock. All information in the financial statements gives
retroactive effect to the 1-for-3 reverse common stock split.
(2) On April 21, 1994, the Company received net proceeds of
approximately $7,159,000 (before repayment of $2,327,000 of advances to Imtech
from its initial public offering ("IPO") of 1,250,000 units ("Units"). Each Unit
consists of one share of the Company's common stock and one redeemable common
stock purchase warrant. Each warrant entitles the holder thereof to purchase
one-half of one share of common stock. Two warrants may be exercised at an
aggregate exercise price of $9.00, subject to adjustment under certain
circumstances, at any time after the warrants become separately transferable,
until 48 months from the date of the offering. The warrants are redeemable by
the Company at $.05 per warrant upon 30 days notice mailed within 20 days after
the closing bid price of the common stock has equaled or exceeded $11.25 for a
period of 20 consecutive trading days. Immediately following the completion of
the offering, Imtech owned approximately 58% of the Company's outstanding common
stock and 100% of the Company's 41,343 shares of outstanding 8% Redeemable
Preferred Stock. Effective December 15, 1994, Imtech converted 25,000 shares of
the Company's 8% Redeemable Preferred Stock into 500,000 shares of the Company's
common stock. Effective June 15, 1995, the Company redeemed in full the 16,343
outstanding shares of its 8% Redeemable Preferred Stock.
(3) At the September 1995 annual meeting, the shareholders approved an
increase in the number of authorized shares of common stock from 10,000,000
shares to 40,000,000 shares.
(4) In March 1996, the Company sold 75,054 shares of restricted common
stock to two investors for the sum of $200,000.
(5) In March 1996, the Company issued 89,681 shares of common stock as
part of the acquisition costs of the assets of Courtland Group, Inc.
(6) During fiscal year 1996, in accordance with the terms of its 10%
Redeemable Preferred Stock a total of 79,050 shares of 10% Redeemable Preferred
Stock were surrendered and converted into 39,260 shares of the Company's common
stock. In addition, during the fiscal year ended March 31, 1996, the Company
issued 16,082 shares of common stock in lieu of paying cash dividends on its 10%
preferred stock.
NOTE M - COMMITMENTS AND CONTINGENCIES
SEC Investigation
The Securities and Exchange Commission (the "Commission") issued an
order, dated April 13, 1995, authorizing a private investigation of Information
Management Technologies Corp. and INSCI Corp., and its officers and directors
during the period from March 1993 and continuing until April 13, 1995. The order
of investigation inquiring into whether the Company and its then former officers
and former directors as well as one current officer and two current directors
engaged in violations of Rule 10b-5 of the Securities Exchange Act of 1934 (the
"Exchange Act"); failed to file annual reports and other information as required
by the rules and regulations of the Commission in violation of Section 13(a) of
the Exchange Act and Rules 12b-20, 13a-11 and 13a-13; and failed to maintain
proper books and records in violation of Section 13(b)2 of the Exchange Act or
falsified or caused to be falsified books and records of the Companies in
violation of Sections 13(b)(2)(a), Rule 13b2-1, and Rule 13b2-2 of the Exchange
Act.
In July 1995, the Commission issued a subpoena to the Company for the
Company's records and a subpoena to an officer of the Company who testified with
respect to matters related to the engagement and subsequent resignation in
October 1994 of the Company's then independent certified public accountants,
Coopers and Lybrand LLP ("Coopers"). Following the resignation, the Company
filed a report on Form 8-K disclosing certain accounting questions brought to
the attention of Coopers by the Company relating to adjustments made in the
Company's financial statements for the quarter ended September 30, 1994. The
Company subsequently reviewed these questions and in the Company's opinion
concluded that such matters were accounted for in the proper periods. Management
believes that it has responded satisfactorily and are not aware of any further
pending issues with the Commission.
The Company is unaware of any violations with respect to annual reports or
other information disclosed by the Company during the time period stated in the
order. The Company cannot predict, however, the outcome of the Commission's
investigation and whether such investigation will result in any type of formal
enforcement action against the Company and/or any of its officers and directors
or, if so, whether any such action would have an adverse effect on the Company.
An adverse outcome may result in the payment by the Company of potential fines
or penalties, restrict the Company's ability to obtain additional required
financing, and may result in the delisting of the Company's securities from the
NASDAQ stock market. In addition, as described above, the Company is currently
under a consent order relating to a prior Commission investigation. If the
Company is found to have violated the existing Commission consent order, the
Company and/or its officers and directors may be subject to sanctions for civil
and criminal contempt and fines and/or penalties.
Registration Rights
The Company has granted to the holders of certain warrants and shares of
the Company's common stock demand and "piggyback" registration rights with
respect to the shares of common stock issued, or issuable, thereunder.
Compliance with these registration rights may involve substantial expense to the
Company.
Agreement With Underwriters
The Company granted three-year warrants to the Underwriters of its April
1994 IPO to purchase up to 125,000 Units at an exercise price of $7.70 per unit,
and had granted registration rights relating to the underlying securities. In
addition, the Company has agreed to indemnify the Underwriter against certain
civil liabilities, including liabilities under the Securities Act of 1933, as
amended. In May 1996, the Underwriters surrendered these warrants and waived and
terminated any and all anti-dilution rights with respect to the number of shares
to be issued pursuant to these warrants, in exchange for new warrants, which
expire on April 15, 1998 and have no anti-dilution rights, to purchase 187,500
shares of common stock at an exercise price of $3.50 per share. The Company has
granted cost-free registration rights relating to the underlying shares of
common stock.
Employment Agreements
Effective June 15, 1995, the Company entered into an employment agreement
for a period of three years with Dr. E. Ted Prince ("Dr. Prince"), the Company's
Chairman of the Board of Directors, President and Chief Executive Officer. Dr.
Prince's employment agreement, as amended, provides for a base salary of
$200,000 per annum to be paid through the term of the agreement, annual
incentive bonuses based upon attainment of defined profitability criteria,
250,000 vested stock options to purchase 250,000 shares of common stock at an
exercise price of $2.00 per share, and 950,000 vested stock options to purchase
950,000 shares of common stock at an exercise price of $1.66 per share. With
respect to the latter options, if the employment of Dr. Prince is terminated for
any reason during the thirty-six month period of the employment agreement, then
he must return to the Company a pro-rata portion of the 950,000 options. The
portion to be returned would be determined based upon the number of months
remaining in the agreement after his termination date as a percent of the
original term of thirty-six months. In the event of a change of control of the
Company through merger or acquisition, the provisions with respect to return of
the stock options would be waived. Dr. Prince achieved a $100,000 management
incentive bonus during fiscal year 1996.
In conjunction with Dr. Prince's employment the Company paid consulting
fees of $25,000 to Dr. Prince, and $25,000 to Perth Ventures, Inc. ("Perth
Ventures"). Dr. Prince is President of and has a 100% ownership interest in
Perth Ventures. The agreement also provides for payment of relocation expenses
and a relocation loan if Mr. Prince decides to relocate to Massachusetts. Under
the terms of the agreement, Dr. Prince is permitted to continue to work as an
independent consultant for Perth Ventures. If the employment of Dr. Prince is
terminated for any reason other than voluntary resignation or termination for
cause (as defined in the agreement) at any time through June 14, 1998, he will
be paid as a severance benefit the salary and benefits due over the remaining
term of his employment contract.
The Company has employment agreements with its other executive officers
which also include annual incentive bonuses based upon attainment of defined
profitability criteria and other performance related objectives. If an executive
officer's employment is terminated for any reason other than voluntary
resignation or for cause (as defined in the agreements) then a severance benefit
will be paid. The severance benefit varies from officer to officer, but is not
greater in any instance than twelve month's salary and benefits. Exclusive of
Dr. Prince, certain key members of management have been granted stock options as
part of their compensation package. Mr. John L. Gillis and Mr. Krishan
Canekeratne have 341,000 and 350,000 options, respectively.
NOTE N - REGISTRATION COSTS
In November 1992, Imtech filed a registration statement with respect to an
initial public offering of shares of its common stock. As a result of the
restructuring of the customer support staff, completion of development of
enhancements to improve ease of installation and customer support and
negotiations to achieve a firm underwriting for the said initial public
offering, the Company delayed the completion of the offering. Costs of $330,000
incurred in connection with that registration statement were charged to expense
during the second quarter of fiscal 1994.
Completion of this offering was postponed by management to the first
quarter of the fiscal year ending March 31, 1995. Costs incurred in connection
with this registration statement totaled approximately $507,000 during the year
ended March 31, 1994. Such costs were deferred as of March 31, 1994. These costs
and other costs totaling $1,084,000, incurred subsequent to March 31, 1994 in
connection with the public offering, were deducted in April 1994 from the
proceeds received from the public offering by a charge to additional paid-in
capital.
NOTE O - STOCK OPTION PLANS
1992 Stock Option Plan
The 1992 Stock Option Plan (the "Plan") was adopted by the directors and
approved by the stockholders of the Company in October 1992, and amended
effective September 1995. The Plan is intended as an incentive to attract and
retain for the benefit of Company key employees (including officers)
substantially responsible for management and growth of the Company and to
encourage a sense of proprietorship in such persons. The Plan was amended in
September 1995 at the annual meeting to increase the number of shares authorized
under the Plan from 1,000,000 to 4,000,000 shares.
The exercise price of each option is determined by the Compensation
Committee (the "Committee"), in its discretion, at the time of grant, provided
that such exercise price shall not be lower than fair market value at the time
of grant in the case of options that are intended to constitute incentive stock
options. The aggregate fair market value (determined as of the time the option
is granted) of the common stock with respect to which incentive stock options
are exercisable for the first time by any optionee during any calendar year
shall not exceed $100,000 in the case of incentive options.
There were 395,804 stock options exercisable at March 31, 1996. At March
31, 1996 there were 922,065 stock options outstanding and 3,074,003 available
for grant. The Company has reserved 3,996,068 shares of common stock for future
issuance.
1992 Directors Option Plan
The Directors Option Plan (the "Directors Plan") was adopted by the Board
of Directors and approved by the Company's stockholders in October 1992, and
amended effective September 1995. The purpose of the Directors Plan is to make
service on the Board more attractive to present and prospective directors. The
Plan was amended in September 1995 to increase the number of shares authorized
under the Plan from 100,000 to 1,000,000 shares.
The Directors Plan is administered by a committee made up of at least two
members of the Board of Directors. The exercise price per share of any option
granted under the Directors Plan shall not be less than the fair market value of
such shares on the date of grant. Eligible directors include all members of the
Board of Directors who are not also employees of the Company or any parent or
subsidiary of the Company. Options expire five years from the date of grant,
subject to earlier termination in accordance with the terms of the Directors
Plan. All rights to exercise options terminate 90 days following the date the
optionee ceases to serve as a director of the Company with certain exceptions.
There were 45,000 stock options exercisable at March 31, 1996. At March 31,
1996 there were 95,000 stock options outstanding and 905,000 available for
grant. The Company has reserved 1,000,000 shares of common stock for future
issuance.
On January 16, 1996, the Company filed with the Securities and Exchange
Commission two Form S-8 Registration Statements, registering the 4,000,000 and
the 1,000,000 common shares reserved respectively for issuance under the
Company's 1992 Stock Option Plan and the Company's 1992 Directors Option Plan.
The following is a summary of option activity under the 1992 Stock Option Plan
and the 1992 Directors Option Plan:
<TABLE>
<CAPTION>
1992 STOCK OPTION PLAN 1992 DIRECTORS OPTION PLAN
------------------------- --------------------------
Number Price Number Price
of shares per share of shares per share
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Outstanding at April 1, 1993 0 - 25,000 $6.00
Granted 305,650 $6.00 10,000 7.00
--------- -------
Outstanding at March 31, 1994 305,650 6.00 35,000 6.00-7.00
Granted 0 - 50,000 1.13
Canceled [a] (60,348) 6.00 (10,000) 6.00
--------- -------
Outstanding at March 31, 1995 245,302 6.00 75,000 1.13-7.00
Granted 962,500 .94-6.00 20,000 1.44-4.38
Canceled (281,805) .94-6.00 - -
Exercised (3,932) 1.50-1.94 - -
--------- -------
Outstanding at March 31, 1996 922,065 $ .94-6.00 95,000 $1.13-7.00
========= =======
</TABLE>
Note [a] - This amount of cancellation has been adjusted downward from 79,150 as
previously reported during fiscal 1995 to 60,438 options,, a reduction of 18,802
options resulting from recomputation of the vesting formula.
1992 Advisory Committee Plan
The 1992 Advisory Committee Plan was adopted by the Board of Directors and
approved by the Company's stockholders in October 1992. In May 1993, the
Advisory Committee and the Advisory Committee Plan were terminated, and 30,000
options to purchase the Company's common stock at an exercise price of $18.00
were vested for all Advisory Committee members as of the date of termination of
the Committee.
Other Stock Options
During 1996, the Company granted non-qualified stock options to new and
continuing Directors and officers of the Company as outlined in Note E and R.
The aggregate stock options granted during fiscal year 1996 is 3,000,000. At
March 31, 1996 there were 2,991,000 options outstanding with exercise prices
ranging from $1.44 to $4.38. There were 493,537 stock options exercisable at
March 31, 1996. The stock options are for a term up to five years and have
vesting schedules based on different criteria including time qualifications and
performance standards. The shares underlying the stock options are restricted
and are unregulated. The Company plans to register the underlying shares at no
cost to the option holders. There were 493,537 stock options exercisable at
March 31, 1996.
NOTE P - SEGMENT AND CUSTOMER INFORMATION
The Company is active in only one business segment: developing, marketing
and supporting imaging, document and data management, and archival software
products and related services. For the year ended March 31, 1996, sales made to
UNISYS and to customer leads furnished by UNISYS accounted for approximately 21%
of the Company's total sales. Amounts due from UNISYS were approximately 23% of
the accounts receivable balance at March 31, 1996. For the year ended March 31,
1995, UNISYS accounted for approximately 33% of the Company's total sales and
12% of accounts receivable balance. Revenues from sales to Imtech were
insignificant, and are accounted for at prices which approximate arm's-length
transactions.
NOTE Q: ACQUISITION
On March 28, 1996, the Company acquired certain assets from the
Courtland Group, Inc., ("Courtland") for $679,000, in cash, a note and common
stock, plus the assumption of $96,000 in liabilities. Courtland, based in
Columbia, Maryland, develops and sells advanced information retrieval, document
management and advanced imaging software products. The acquisition was accounted
for under the purchase method of accounting. Proforma unaudited results of
operations for this acquisition are presented below for the fiscal year ended
March 31, 1996.
Proforma Results of Operations (Unaudited)
AS REPORTED PROFORMA
---------------------- -------------------------
INSCI (as
reported) (C) Courtland Adjustments ProForma
--------- ------------- ----------- --------
Revenue $ 7,913 $ 767 $ - $ 8,680
Cost of Revenue 3,311 407 - 3,718
------- ------ -------- --------
Gross Margin 4,602 360 - 4,962
Expenses 6,084 460 [A] 400 6,944
------- ------ -------- --------
Loss from Operations (1,482) (100) (400) (1,982)
Interest Income-net 30 - (B) (4) 26
Income Tax Benefit - 36 (36) -
------- ------ -------- --------
Net loss $(1,452) $ (64) $ (440) $ (1,956)
Preferred Stock Dividend (27) - - (27)
------- ------ --------
Net Loss Applicable to
Common Shares $(1,479) $ (64) $ (440) (1,983)
======= ====== ======== ========
Net Loss Per Common Stock $ (0.53)
========
Weighted Average Common
Shares Outstanding 3,745
========
A. This adjustment reflects software amortization.
B. This adjustment reflects interest expense on the note payable to George
Trigilio, Sr.
C. Courtland's activity is for the period from May 1, 1995 to March 31, 1996.
The Company paid, on closing, to Courtland, the sum of $150,000 and
issued 58,968 shares of common stock. Additionally, the Company further issued
30,713 shares of its common stock and issued an interest free promissory note of
$100,000 to George Trigilio, Sr. The Company also granted cost-free registration
rights for the aggregate of 89,681 shares of common stock issued as a part of
the purchase price. The Company also assumed certain agreements and leases in
connection with the acquisition.
The Company entered into an aggregate of seven employment and/or
consulting agreements with seven former employees and/or shareholders of
Courtland, wherein the Company agreed to issue up to an aggregate of $267,221 in
shares of common stock of the Company valued at the ten-day average closing
price for the ten (10) trading days prior to the close of its 1997 fiscal year,
subject to the Company achieving a minimum of $1,500,000 in sales from the
Courtland products. The consulting agreements provide that, in the event a
minimum of $1,500,000 in sales is not achieved within a one-year period, no
shares of common stock will be issued. In the event that greater than $2,000,000
are achieved the Company will issue an additional $194,815 in shares of common
stock, valued as stated herein.
The Company further entered into an employment agreement with George
Trigilio, Jr., to employ him as an Executive Vice President of the Company with
a minimum annual salary of $100,000 as well as incentive bonuses conditioned
upon his performance. In addition, he was granted 300,000 stock options to
purchase 300,000 shares of the Company's common stock at an exercise price of
$4.38 per share, contingent upon the Company obtaining certain defined sales
goals of Courtland products. In addition, he will also be entitled to receive
$227,778 in shares of the Company's common stock upon the Company attaining
$1,500,000 in sales of Courtland products, and an additional $135,186 in shares
of common stock, upon the Company attaining $2,000,000 in sales of Courtland
products. The price of a share will be determined based upon the ten- day
average closing price for the ten (10) trading days prior to the close of the
Company's 1997 fiscal year.
NOTE R - SUBSEQUENT EVENTS
(1) On April 30, 1996 the Company entered into an agreement with
Norcross & Company ("Norcross") as a representative of the underwriting group
that processed the Company's initial public offering in April 1994. The
agreement provided that Norcross, as representative of the selling group, would
exchange all issued and outstanding common stock purchase warrants issued upon
completion of the Company's initial public offering, in exchange for 187,500
Warrants to purchase at 187,500 shares of the Company's Common Stock at $3.50
per share. The Warrants expire on April 15, 1998.
The Company granted piggy-back registration rights to the Warrant
Holders for the underlying shares of Common Stock to be issued pursuant to the
exercise of the Warrants.
(2) The Company is at the current time negotiating with a broker-dealer
and has received a proposed agreement with respect to an offering under a
Regulation D Exemption of the Securities Act for convertible preferred stock of
a minimum of $3,000,000 and a maximum of $5,000,000. The proposed terms involve
a 30% discount to the trading market average of common stock as quoted on NASDAQ
over a ten-day period with a minimum of a six-month lock-up period for any
shares converted into common stock. The maximum conversion price per share
subject to the 30% discount is $11.50 per share.
The Company has received a check in the sum of $1,000,000 from an
investor and intends to deposit the check in an Escrow Account. The funds will
be utilized toward the minimum $3,000,000 of the proposed offering.
(3) The Company is also discussing with another brokerage firm a
proposed private offering and has received a proposed agreement with respect to
an offering of convertible preferred stock for a minimum sum of $3,000,000 at
$4.00 per unit, each unit consisting of a share of preferred stock convertible
into one share of common stock in the event the average price is $6.00 per share
for a period 20 out of 30 consecutive trading days. The unit will also contain a
warrant to purchase an additional share of common stock for a period of three
years at $5.50 per share.
The Company has not executed any definitive agreement with any of the
brokerage firms.
<PAGE>
<TABLE>
<CAPTION>
INSCI Corp.
SCHEDULE II
VALUATION AND QUALIFYING ACCOUNTS
YEARS ENDED MARCH 31, 1996, 1995 AND 1994
COLUMN A COLUMN B COLUMN C COLUMN D COLUMN E
- -------- -------- -------- -------- --------
ADDITIONS
BALANCE AT CHARGED TO BALANCE AT
BEGINNING COST AND DEDUCTIONS END OF
DESCRIPTION OF YEAR EXPENSES DESCRIBE YEAR
- -------- ---------- ---------- ---------- -----------
<S> <C> <C> <C> <C>
ALLOWANCE FOR DOUBTFUL ACCOUNTS
Year ended March 31, 1994......... $ 279,000 $ 194,000 $ (234,000) (a) $ 239,000
Year ended March 31, 1995......... 239,000 - (139,000) (b) 100,000
Year ended March 31, 1996......... 100,000 - - 100,000
RESERVE FOR RETURNS AND ALLOWANCES
Year ended March 31, 1994......... $ - $ - $ - $ -
Year ended March 31, 1995......... - 50,000 (c) - 50,000
Year ended March 31, 1996......... 50,000 73,120 (d) (50,000) (e) 73,120
ALLOWANCE FOR LOSS ON LOAN
Year ended March 31, 1994......... $ - $ - $ - $ -
Year ended March 31, 1995......... - 150,000 (f) - 150,000
Year ended March 31, 1996......... 150,000 - (6,381) 143,619
ACCUMULATION AMORTIZATION OF
CAPITALIZED SOFTWARE DEVELOPMENT
COST
Year ended March 31, 1994......... $ 821,000 $ 427,000 $ - $ 1,248,000
Year ended March 31, 1995......... 1,248,000 218,000 (1,182,000) (g) 284,000
Year ended March 31, 1996......... 284,000 718,000 (466,000) (g) 536,000
ACCUMULATION AMORTIZATION OF
PURCHASED SOFTWARE COSTS
Year ended March 31, 1994......... $ - $ - $ - $ -
Year ended March 31, 1995......... - - - -
Year ended March 31, 1996......... - 42,000 - $ 42,000
<FN>
(a) Amounts written off.
(b) Includes $8,000 written off, $50,000 reclassified to reserve for returns and allowances and an $81,000
reversal of previous additions.
(c) Includes $50,000 reclassified from allowance for doubtful accounts.
(d) Includes $73,120 to establish reserve for possible allowances.
(e) Includes $50,000 reversal of previous additions.
(f) Includes $150,000 to reserve for probable loss on loan to officer
(g) Reflects the removal of fully amortized capitalized software no longer in use.
</TABLE>
<PAGE>
INSCI CORP.
EXECUTIVE OFFICERS OF THE REGISTRANT
BOARD OF DIRECTORS
Dr. E. Ted Prince John L. Gillis
Chairman of the Board Executive Vice President
President & Chief Executive Officer & Chief Operating Officer
Acting Chief Financial & Accounting Officer
Leonard Gartner(1)(2) Francis X. Murphy(1)(2)
Richard T. Gerstner Robert H. Oxenberg(2)
(1) Member of the Audit Committee
(2) Member of the Compensation Committee
EXECUTIVE OFFICERS
Dr. E. Ted Prince Krishan A. Canekeratne
Chairman of the Board Senior Vice President,
President & Chief Executive Officer Development
Acting Chief Financial & Accounting Officer
John L. Gillis Clair P. Tremarche
Executive Vice President Vice President, Finance
& Chief Operating Officer & Administration
AUDITORS: TRANSFER AGENT:
Mahoney Cohen Rashba & Pokart, CPA, PC First Union National
111 West 40th Street Bank of North Carolina
New York, NY Two First Union Center
Charlotte, NC
<PAGE>
INSCI Corp.
INDEX OF EXHIBITS
The following Exhibits are filed as part of, or incorporated by reference into,
this Report on Form 10-K, as indicated below (footnote explanations are at end
of Index):
<TABLE>
<CAPTION>
SEQUENTIAL
EXHIBIT NO. DESCRIPTION OF EXHIBIT PAGE NUMBER
- ----------- ---------------------------------------------------------------- -----------
<C> <S> <C>
3.1 Certificate of Incorporation of the Company.
3.2 Bylaws of the Company.
3.3 Amendments to Certificate of Incorporation of the Company Creating Preferred Stock.
10.1 1992 Stock Option Plan.
10.2 1992 Directors Option Plan.
10.3 1992 Advisory Committee Plan.
10.4 Accounts Financing Agreement between the Registrant and Congress Financial Corporation,
and related documents.
10.5 Form of 1991 Option.
10.6 Form of 1992 Warrants.
10.7 Form of 1992 Convertible Subordinated Note.
10.8 Form of 1992 Contingent Warrants.
10.9 Form of 1993 Warrant - Version A.
10.10 Form of 1993 Release Agreement.
10.11 Form of Management Agreement between the Registrant and Imtech.
10.12 Form of Tax Sharing Agreement between the Registrant and Imtech.
10.13 Form of Indemnification Agreement with the Registrant's Directors.
10.14 Marketing Association Solution Alliance Agreement between UNISYS Corporation and Registrant.
10.16 Data General Value Added Reseller Discount Purchase Agreement.
10.17 Data General Optical Systems and Software Agreement.
10.18 Distribution Agreement between Fiserv CIR, Inc. and Registrant.
10.19 Lease Agreement relating to the Company's White Plains, New York headquarters.
10.20 Forms of Customer License Agreements used by the Company.
10.21 Forms of Employee Confidentiality Agreements used by the Company.
10.22 Nondisclosure and Noncompetition Agreement between the Registrant, Imtech
and Mason Grigsby.
10.23 Form of 1993 Warrant - Version B.
10.24 Employment Agreement between the Company and John L. Gillis.
10.25 Employment Agreement between the Company and Kris Canekeratne.
10.26 Form of 1993 Exchange Agreement and Investor Suitability Representations.
10.27 Form of 1993 Conversion Agreement.
10.28 Waivers by Congress Financial Corporation.
10.29 Form of Investor's Warrant Agreement.
10.30 Form of Representative's Warrant Agreement.
10.31 License Agreement between Bull HN Information Systems, Inc. and Registrant.
10.33 Loan Agreement between BNY Financial Corporation and Registrant.
10.34 Preferred Stock Subscription Agreement between the Company and Imtech relating to
Preferred Stock.
10.35 Business Partner Agreement between International Business Machines Corporation and Registrant.
10.36 Waiver by BNY Financial Corporation.
10.37 Stock Escrow Agreement Registrant, Imtech and First Union National Bank of North
Carolina (as Escrow Agent).
10.39 Promissory Note to the Company from John L. Gillis and Sandra Gillis.
10.40 Stock pledge agreement by John L. Gillis and Sandra Gillis in favor of the Registrant.
10.41 Amendment to Loan Agreement between BNY Financial Corporation and Registrant.
10.42 Lease agreement relating to the Company's Westborough, MA headquarters.
10.43 Employment agreement with Jack Steinkrauss.
10.44 First amendment to employment agreement with John Gillis.
10.45 First amendment to employment with Kris Canekeratne.
10.46 Agreement for system purchase by The Northern Trust Company.
10.47 Preferred stock conversion agreement.
10.48 Technology and Reseller Agreement with Elixir Technologies, Inc.
10.49 Private Placement Term Sheet and Exhibits for offering of 90-day 10% Subordinated
Notes. Repayable in Cash or in Shares of the Company's Proposed 10% Convertible Preferred Stock.
10.50 First Amendment to Private Placement Term Sheet and Exhibits.
10.51 Employment agreement with Edward J. Prince.
10.52 Release by BNY Financial Corporation of the Company's guarantee of the obligations of Imtech
under the shared credit facility agreement.
10.53* Employment Contract with George Trigilio, Jr.
10.54* Certificate of Amendment to Certificate of Incorporation.
10.55* Amendment to Employment Contract for Dr. E. Ted Prince, CEO.
27* Financial data schedule year ended March 31, 1996.
*/ Filed with this Report.
</TABLE>
<PAGE>
EXHIBIT 10.53*
AGREEMENT made this 28th day of March 1996, by and between INSCI CORP.,
having its principal place of business at Two Westborough Business Park,
Westborough, Massachusetts 01581 (hereinafter referred to as "EMPLOYER") and
GEORGE J. TRIGILIO, Jr., residing at 4305 Temora Manor lane, Ellicott City
Maryland 21042 (hereinafter referred to as "EMPLOYEE").
WITNESSETH:
-----------
WHEREAS, the EMPLOYER is engaged in the business of marketing and
development of COLD and related technology.
WHEREAS, the EMPLOYER is desirous of employing EMPLOYEE; and
WHEREAS, in the opinion of the Board of Directors of EMPLOYER, the success
of the business operations of the EMPLOYER is contingent upon the performance of
the EMPLOYEE and in order to insure and provide for the terms and conditions of
EMPLOYEE's employment;
NOW, THEREFORE, IN CONSIDERATION OF THE MUTUAL COVENANTS AND CONDITIONS
HEREINAFTER SET FORTH, THE PARTIES AGREE AS FOLLOWS:
FIRST: All prior understandings and/or Agreements between the parties are
hereby deemed superseded and incorporated into the provisions of this
Agreement.
SECOND: The EMPLOYER does hereby employ, engage and hire the EMPLOYEE as
Executive Vice President of EMPLOYER for a period commencing March 29, 1996,
and terminating March 31, 1998.
THIRD: The EMPLOYEE agrees that he will at all times faithfully,
industriously and to the best of his ability, experience and talent, perform all
of the duties that may be required of and from him pursuant to the expressed
and implicit term hereof.
FOURTH: The EMPLOYER shall pay to the EMPLOYEE and the EMPLOYEE agrees to
accept from the EMPLOYER in full payment for the EMPLOYEE's services hereunder,
compensation at the annual minimum rate of $100,000 per year, as well as yearly
vacation of three weeks. Additionally, EMPLOYEE shall be further entitled to
commissions, bonuses, stock options and car allowance which is annexed hereto as
Exhibit "1" to the within Agreement and made a part hereof.
FIFTH: On or about April 1, 1997, the Company shall pay EMPLOYEE a Stock
Award, as per Exhibit I annexed hereto, in the form of shares of Common Stock of
the Company ("Stock Award") which shares the Company will use its best efforts
to register with the U.S. Securities and Exchange Commission within 120 days of
the date hereof (the share price will be computed at the 10-day average closing
price of the Company's fiscal year ended 3/31/97), provided that a minimum of
$1.5 million in sales is earned by the Company. EMPLOYEE understands and agrees
that, in the event a minimum of $1.5 million in sales as defined in Exhibit I is
not earned by the Company for the period ending 3/31/97, then and in that
event, EMPLOYEE will not be entitled to receive any Stock Award. In the further
event that a minimum of $2.0 million in sales is earned by the Company from
sales, then in that event, Company shall pay EMPLOYEE an additional Stock Award
in the form of shares of Common Stock in the Company. In the further event that
sales described hereinabove are greater than $1.5 million but less than $2.0
million, then in that event, the Company will pay EMPLOYEE an additional amount
in accordance with Exhibit I pro rated in the form of shares of Common Stock in
the Company. EMPLOYEE agrees that in no event will more than 15% of gross amount
of said shares be sold in any quarterly period for a period of two (2) years
from the date of issuance.
SIXTH: The EMPLOYEE shall devote all of his working time, attention,
knowledge and skill solely and exclusively to the business and interest of the
EMPLOYER and the EMPLOYER shall be entitled to all benefits, emoluments, profits
or other issues arising from or incidental to any or all work, services and
advice of the EMPLOYEE and the EMPLOYEE expressly agrees that he will not during
the term hereof, be interested directly or indirectly, in any form, fashion or
manner, as a partner, officer, director, stockholder, advisor, or employee in
any other business similar to the business of the EMPLOYER. Nothing herein
contained shall, however, limit the rights of the EMPLOYEE to own up to 5% of
the capital stock or other securities of any corporation whose stock or
securities are publicly owned or traded regularly on a public exchange or in the
over-the-counter market nor shall anything herein contained be deemed to prevent
the EMPLOYEE from investing, or limiting the EMPLOYEE's rights to invest, in
other businesses not allied with the business of the EMPLOYER as long as
EMPLOYEE continues to devote all of his working time, attention, knowledge and
skill solely and exclusively to the business and interest of the EMPLOYER.
SEVENTH: During the course of EMPLOYEE's employment under the terms and
conditions of this contract, and for two (2) years thereafter, the EMPLOYEE
further specifically agrees that he will not, at any time, in any fashion,
form or manner, either directly or indirectly, divulge, disclose or communicate
to any person, firm or corporation, in any manner whatsoever, any proprietary
information of any kind, nature or description concerning any matters affecting
or relating to the business of the EMPLOYER, including, without limiting the
generality of the foregoing, any of its customers, its manner of operations, its
plans, processes, programs, or other data of any kind, nature or description
without regard to whether any or all of the foregoing matters shall be deemed
confidential, material or important. The parties hereto stipulate that as
between them the same are important, material, confidential and gravely affect
the effective and successful conduct of the business of the EMPLOYER and its
good will, and that any breach of the terms of this paragraph is a material
breach thereof, except where the EMPLOYEE shall be acting on behalf of the
EMPLOYER. EMPLOYEE understands and agrees that in the event the EMPLOYEE
violates the terms and conditions as stated in the within paragraph, that he
will be subject to an injunction and damages, and understands and agrees that
EMPLOYER's only immediate remedy to prevent further or continued damages will
be a petition for injunctive relief.
EMPLOYEE further understands and agrees that EMPLOYER, in entering into the
within agreement, is relying upon EMPLOYEE's representation and warranty that
all trade secrets and other proprietary information of EMPLOYER will be kept
strictly confidential by EMPLOYEE and not utilized by EMPLOYEE in any manner
whatsoever other than on EMPLOYER's behalf and during the course of EMPLOYEE's
employment with EMPLOYER. EMPLOYEE agrees that the software designated, Augusta
and Ultra and any other software related products are proprietary property of
EMPLOYER and that EMPLOYEE will in no event directly or indirectly disclose or
utilize said information in competition with EMPLOYER, and that in addition for
a period of 18 months from the term of the within Agreement will not compete
directly or indirectly with EMPLOYER with respect to EMPLOYER's software
products and any confidential or proprietary information obtained by EMPLOYEE
during the course of his employ with EMPLOYER.
EIGHTH: It is expressly understood and agreed that the terms of this
Agreement, except for Paragraph Sixth, shall terminate prior to March 31, 1998,
upon the happening of the following events:
(a) Automatically and without notice upon the death of the EMPLOYEE; it is
also agreed that EMPLOYEE will be entitled to three months' base salary as
severance pay plus any earned and unpaid base salary, bonus, Stock Award, and
commission override through the date of death plus any accrued and unused
vacation, all of which shall be payable to EMPLOYEE's estate.:
(b) Persistent absenteeism on the part of the EMPLOYEE, however, such
absenteeism is not to include absenteeism as a result of ill health;
(c) Deliberate and willful failure to perform normal services and duties
required of EMPLOYEE pursuant hereto except if the performance of such duties or
services would result in a breach of EMPLOYEE's fiduciary responsibility or
violate local, state or federal law.
(d) Conviction of a felony involving moral turpitude;
(e) Total or partial disability of the EMPLOYEE for a period of four (4)
consecutive months so that he is prevented from performing a substantial part of
his duties;/ it being further understood and agreed that any proceeds received
by EMPLOYER from a policy of disability benefits insurance or any other proceeds
received from any Federal, State or Municipal agency of government will be a
credit to the amount of compensation paid to EMPLOYEE by EMPLOYER; it is also
agreed that EMPLOYEE will be entitled to any earned and unpaid base salary,
bonus, Stock Award, and commission override through date of termination, plus
any accrued and unused vacation;
(f) Fraudulent misconduct of the EMPLOYEE, and
(g) In the event that EMPLOYEE demonstrates gross professional incompetence
in performing the tasks and jobs assigned to him by the EMPLOYER, then in that
event, EMPLOYER will afford written notice to EMPLOYEE of EMPLOYEE's such
non-performance, and thereafter, EMPLOYEE will have thirty (30) days to cure any
timely claim of unsatisfactory performance. In the further event that EMPLOYEE
does not cure the claim of unsatisfactory performance, then in that event,
EMPLOYER will pay three months' severance pay to EMPLOYEE in full satisfaction
of its obligation under the within Employment Agreement, except that EMPLOYEE
will nonetheless be entitled to receive all shares of stock as provided for
herein based upon the attainment of minimum sales objectives, as defined herein.
NINTH: EMPLOYER agrees that EMPLOYEE will be entitled to such fringe
benefits as are afforded to key employees of EMPLOYER during the term of the
agreement. Such as Exhibit II attached hereto.
TENTH: This Agreement contains the total and entire agreement between the
parties and shall, as of the effective date hereof, supersede any and all other
agreements between the parties. The parties acknowledge and agree that neither
of them has made any representations that are not specifically set forth herein,
and each of the parties hereto acknowledges that he or it has relied upon his or
its own judgment in entering into the same.
ELEVENTH: Attorneys' Fees
In the event of any action or proceeding brought by either party against
the other under this Agreement, the prevailing party shall be entitled to
recover its expenses and costs, including attorney's fees and expert witness
fees in such action or proceeding, and including costs of appeal, if any, in
such amount as the court may adjudge reasonable.
TWELFTH: The parties hereto do further agree that no waiver or modification
of this Agreement or of any convenant, condition or limitation herein contained,
shall be valid, unless in writing and duly executed by the party to be charged
therewith and that no evidence of any proceedings or litigation between either
of the parties arising out of or affecting this Agreement or the rights and
obligations of any party hereunder shall be valid and binding unless such waiver
or modification is in writing, duly executed, and the parties further agree that
the provisions of this paragraph may not be waived except as herein set forth.
THIRTEENTH: The parties hereto agree that it is their intention and
covenant that this Agreement and the performance hereunder shall be construed in
accordance with and under the laws of the State of Massachusetts and that the
terms hereof may be enforced in any court of competent jurisdiction in an action
for specific performance which may be instituted under this Agreement.
FOURTEENTH: The parties agree that in the event of any dispute and/or
controversy arising out of this Agreement, that they will submit to and be bound
by the rules and regulations of the American Arbitration Association which is to
be held in the State of Massachusetts, except in the case in an action for
injunction which may be brought by EMPLOYER in an appropriate Court or court as
warranted.
FIFTEENTH: EMPLOYEE warrants and represents to EMPLOYER that EMPLOYEE has
had sufficient and adequate opportunity to consult with EMPLOYEE's counsel
concerning the within agreement and is aware that EMPLOYER is relying upon the
within representation concerning entering into the agreement herein.
SIXTEENTH: All notices required or permitted to be given by either party
hereunder shall be in writing and mailed by registered mail, return receipt
requested and by regular mail to the other party addressed as follows:
If to EMPLOYER at:
INSCI CORP.
Two Westborough Business Park
Westborough, MA 01581
If to EMPLOYEE at:
INSCI CORP.
5300 Dorsey Hall Drive - 150
Ellicott City, Maryland 21042
Any notice mailed as provided above shall be deemed completed on the date
of receipt, or five (5) days from the postmark on said postal receipt.
IN WITNESS WHEREOF, the parties have hereunto set their hands and seals the
day, month and year first above written.
Employer:
INSCI CORP.
By: ________________(SEAL)
E. Ted Prince
President
Employee:
________________(SEAL)
George J. Trigilio, Jr.
EMPLOYER agrees to provide a quarterly statement to EMPLOYEE of all
commissions due and stock options granted, based upon the amount of options
earned as per the annexed Exhibit.
EMPLOYEE acknowledges that he has been provided with a copy of the Stock
Option Plan of EMPLOYER and agrees to be bound by all terms and conditions as
set forth in the S-8 Registration Statement filed by EMPLOYER with respect to
said Stock Option Plans and the underlying sales in connection with said Plan.
Employer:
INSCI CORP.
By: /s/ E. Ted Prince (SEAL)
-----------------------
E. Ted Prince
President
Employee:
By: /s/ George J. Trigilio, Jr.(SEAL)
-----------------------
George J. Trigilio, Jr.
<PAGE>
EXHIBIT I
Salary -
- --------
$100,000 per annum plus car allowance of $450, per month
Commission Override -
- ---------------------
o 1% of sales up to $1,500,000
o Plus 2.5% of sales between $1,500,001 and $2,000,000
o Plus 5% of sales over $2,000,000
Profit Performance Incentive -
- ------------------------------
15% of profit contribution which is defined as Operating Income
One Time Incentive Bonus -
- --------------------------
o $10,000 upon receipt of a acceptance with the Air Force (new contract
$500,000 minimum)
o $50,000 (inclusive of $10,000 Air Force bonus) for attainment of $1,500,000
in net revenue
o plus $25,000 for attainment of $2,000,000 in net revenue
o plus $25,000 for attainment of $2,500,000 in net revenue
Incentive Stock Options (The option price = close price as of date of the
Agreement -
- --------------------------------------------------------------------------
An aggregate amount of 300,000 options vested as follows:
o 25,000 upon receipt of an Air Force signed contract of $500,000 or greater
o 25,000 upon of a acceptance of the above referenced Air Force project
o 100,000 (inclusive of the two 25,000 options that may have vested above) upon
attainment of $1,000,000 sales
o 150,000 upon attainment of $1,500,000 sales
o 50,000 upon attainment of $2,000,000 sales
One Time Stock Award -
- -----------------------
o $227,778 payable in the form of INSCI common stock upon attainment of
$1,500,000 sales
o $135,186 payable in the form of INSCI common stock upon attainment of
$2,000,000 sales
o The stock price for calculating the number of shares is the 10 day average
closing price that precedes the end of INSCI's fiscal year ended 3/31/97.
Sales is defined as gross sales inclusive of a maximum of 10% in third party
expense e.g. $1,500,000 sales with $150,000 or less in third party expense. Any
excess above 10% in third party expense is treated as an offset for all
calculations e.g. $1,750,000 with $200,000 in third party expense results in an
adjusted sales attainment of $1,725,000 ($1,750,000 less $25,000 which is the
difference between actual $200,000 in third party expense and the maximum
$175,000 (10%).
Sales include the sale of all Courtland products into Courtland channels and
INSCI channels as well as sales of all INSCI products into Courtland channels.
<PAGE>
EXHIBIT II
INSCI CORP.
BENEFITS SUMMARY
Health Insurance - Guardian Insurance Company:
Employee contribution: Medical Dental
Family (biweekly) $133.34 $13.80
Single (biweekly) $ 29.81 $ 3.75
100% Company paid:
Life insurance (annual salary to maximum of $50,000)
Short-term disability insurance
Long-term disability insurance
Sick days - six per year
Holidays - eleven paid holidays per year
Vacation - accrues at the rate of two weeks during first three years of service,
then three weeks for four to five years of service, and four weeks after five
years
401K Plan - eligible at start of next calendar quarter, Putnam Fund,
no Company matching
Section 125 Cafeteria Plan - ensures advantageous income tax treatment for
health insurance premiums, non-covered health expenses and childcare
expenses
Stock Option Plan - participation by everyone in the Incentive stock option
plan
Automatic Deposit - payroll deposited directly at your bank every other week
<PAGE>
INSCI
BENEFIT EXPLANATION
"JUNE 1, 1995 EFFECTIVE DATE"
LIFE/AD&D INSURANCE GUARDIAN LIFE
- ------------------- --------------
Any Eligible Employee 1x annual earnings; maximum $50,000
MEDICAL INSURANCE GUARDIAN LIFE
- ------------------- --------------
(PPC)
INSYSTEM OUTSYSTEM
-------- ---------
Hospital Expenses
Inpatient 100% Ded./80%
Emergency Room 100% Ded./80%
Doctors Services
Inpatient 100% Ded./80%
Office Visits $10 Copay Ded./80%
X-Ray & Lab Expenses 100% Ded./80%
Preventive Care $10 Copay Ded./80%
Prescriptions $5 Generic/Brand
Pre-admission Review Included Included
ALL OTHER ELIGIBLE EXPENSES
- ---------------------------
Deductible (cal. yr.)
Individual None $300
Family (limit) None $650
Coinsurance 100% 80%
Out-of-Pocket Maximum
(including deductible)
Individual Copayments $ 800
Family (limit) Copayments $2,150
Maximum Unlimited
Pre-existing Condition
Currently Insured Employees Full Transfer Wording
New Hires. 3/12
DENTAL INSURANCE
- ----------------
See Guardian Brochure
<PAGE>
INSCI
BENEFIT EXPLANATION
"JUNE 1, 1995 EFFECTIVE DATE"
SHORT TERM DISABILITY INSURANCE PHOENIX/HOME LIFE
- ------------------------------- -----------------
Benefit Weekly 60% to max. $1,500
Commences:
Accident 8th Day
Illness 8th Day
Duration 13 Weeks
Partial Disability Coverage Included
LONG TERM DISABILITY INSURANCE PHOENIX/HOME LIFE
- ------------------------------ -----------------
Benefit Monthly 60% to max. $7,500
Elimination Period 90 Days
Duration (ADEA #1) To age 65
Definition of Disability Unable to perform the duties of your
regular occupation. Total disability
never required.
Residual Disability Coverage Included
Social Security Offset Full Family
Mental & Nervous Limitation 2 Years
Alcoholism/Drug Abuse Limitation 2 Years
Pre-existing Condition
Currently Insured Employees Full Transfer Wording
New Hires 3/12
Survivor Benefit 3 Months
<PAGE>
INSCI CORP.
1996 HOLIDAY SCHEDULE
New Year's 1/1/96
President's Day 2/19/96
Memorial Day 5/27/96
Independence Day 7/4/96
July 4th - day after 7/5/96
Labor Day 9/2/96
Thanksgiving Day 11/28/96
Thanksgiving (day after) 11/29/96
Christmas 12/25/96
Everyone also receives two "floating" holidays in addition to the above. Your
supervisor must approve these in advance of your taking them.
12/4/95
INSERT NEW EXHIBIT 10.53
EMPLOYMENT CONTRACT WITH GEORGE TRIGILIO, JR.
<PAGE>
EXHIBIT 10.54*
INSCI CORP.
CERTIFICATE OF AMENDMENT TO
CERTIFICATE OF INCORPORATION
Pursuant to the General Corporation Law of the State of Delaware,
INSCI Corp., a corporation organized and existing under the laws of the State of
Delaware (the ``Corporation''), does hereby certify that:
FIRST, that the Board of Directors of the Corporation duly adopted
resolutions setting forth proposed amendments to the Certificate of
Incorporation of the Corporation, declaring said amendments to be advisable and
calling for the shareholders of the Corporation to consider said amendments. The
resolutions setting forth the proposed amendments are as follows:
RESOLVED, that it is in the best interest of the Corporation to amend
the Certificate of Incorporation of the Corporation, subject to the Approval of
the stockholders of the Corporation, by deleting Article II of the Corporation's
Certificate of Incorporation in its entirety and inserting in lieu thereof the
following:
ARTICLE II
The Registered Agent in charge hereof is Vanguard Corporation
Services, Ltd., and the Registered Office of this Corporation in the State
of Delaware is to be located at 15 East North Street, Dover, Delaware,
19901, in the County of Kent.
RESOLVED, that it is in the best interest of the Corporation to amend
the Certificate of Incorporation of the Corporation, subject to the
approval of the stockholders of the Corporation, by deleting Article IV of
the Corporation's Certificate of Incorporation in its entirety and
inserting in lieu thereof the following:
ARTICLE IV
CAPITAL STOCK
A. TOTAL CAPITALIZATION. The total number of shares of capital stock
that the Corporation is authorized to issue is Fifty Million (50,000,000)
divided into two casses as follows:
(i) Forty Million (40,000,000) shares of common stock, having a par
value of $.01 per share (the ``Common Stock''), and
(ii) Ten Million (10,000,000) shares of Preferred Stock having a par
value of $.01 per share (the ``Preferred Stock'').
B. COMMON STOCK. Each share of Common Stock shall be identical in all
respects and for all purposes and be entitled to one vote per share in all
proceedings in which action may or is required to be taken by the
shareholders of the Corporation; participate equally in all dividends
payable with respect to the Common Stock, as, if and when declared by the
Board of Directors of the Corporation, subject to any dividend preferences
of the Preferred Stock then outstanding; and share ratably in all assets of
the Corporation in the event of any voluntary or involuntary liquidation,
or winding up of the affairs of the Corporation or upon any distribution of
the assets of the Corporation, subject to any liquidation preferences of
the Preferred Stock then outstanding.
C. THE PREFERRED STOCK. The Board of Directors is authorized, subject
to limitations prescribed by law and the provisions of this Certificate of
Incorporation, to provide for the issuance of shares of the Preferred Stock
in series, and by filing a certificate pursuant to the applicable law of
the State of Delaware, to establish from time to time, the number of shares
to be included in each series and to fix the designation, powers,
preferences and rights of the shares of each such series and the
qualification, limitations or restrictions thereof.
The authority of the Board of Directors with respect to each series of
Preferred Stock shall include, but not limited to, the right to determine
and designate any and all of the following:
(1) The number of shares constituting that series and the distinctive
designation of that series; and
(2) The dividend rate of the shares of that series, whether dividends
shall be cumulative, and, if so, from which date or dates, and the relative
rights or priority, if any, of payment of dividends on shares of that
series, and
(3) Whether that series shall have voting rights, in addition to the
voting rights provided by law, and, if so, the terms of such voting rights;
and
(4) Whether that series shall have conversion privileges, and, if so,
the terms and conditions of such conversion, including provision for
adjustment of the conversion rate in such events as the Board of Directors
shall determine; and
(5) Whether or not the shares of that series shall be redeemable, and,
if so, the terms and conditions of such redemption, including the date or
dates upon or after which they shall be redeemable, and the amounts per
share payable in the case of redemption, which amount may vary under
different conditions and at different redemption dates; and
(6) Whether that series shall have a sinking fund for the redemption
or purchase of the share of that series, and, if so, the terms and amounts
of such sinking fund; and
(7) The rights of the shares of that series in the event of voluntary
or involuntary liquidation, dissolution or winding up of the Corporation,
and the relative rights of priority, if any, of payment of shares of that
series; and
(8) Any other relative rights, preferences and limitations of that
series.
Dividends on outstanding shares of Preferred Stock shall be paid or
declared and set apart for payment before any dividend shall be paid or
declared and set apart on the Common Shares with respect to the same
dividend.
If upon any voluntary or involuntary liquidation, dissolution or
winding up of the Corporation, the assets available for distribution in
holders of shares of Preferred Stock of all series shall be insufficient to
pay such holders the full preferential amount to which they are entitled,
then such assets shall be distributed ratably among the shares of all
series of Preferred Stock in accordance with respective preferential
amounts (including unpaid cumulative dividends, if any) payable with
respect thereto.
SECOND, a majority of the stock holders of the Corporation voted in
favor of the amendment by written consent in accordance with Section 228 of
the General Corporation Law of the State of Delaware, with written notice
having been given pursuant to Section 228(d).
THIRD, said amendments to the Certificate of Incorporation were duly
adopted in accordance with the provisions of Section 242 of the General
Corporation Law of the State of Delaware.
<PAGE>
IN WITNESS WHEREOF, the Corporation has caused this certificate to be
signed by its President and its Assistant Secretary, on this 25th day of
October, 1995.
INSCI CORP.
By:
/s/ E. Ted Prince
President E. TED PRINCE
By:
/s/ John E. Steinkrauss
Assistant Secretary JOHN E. STEINKRAUSS
[CORPORATE SEAL]
<PAGE>
EXHIBIT 10.55*
AMENDMENT TO EMPLOYMENT CONTRACT
AMENDMENT to Employment Contract dated June 16, 1995, by and between INSCI
CORP., hereinafter referred to as ``EMPLOYER'', and E. Ted Prince,
hereinafter referred to as ``EMPLOYEE''.
WHEREAS, the parties have entered into an Employment Agreement on June 16,
1995; and
WHEREAS, the parties are desirous of amending and modifying said Employment
Agreement;
WHEREAS, the parties are further desirous of defining their rights and
responsibilities with respect to said Agreement;
NOW, THEREFORE FOR ONE DOLLAR AND OTHER GOOD
AND VALUABLE CONSIDERATION, THE PARTIES AGREE
AS FOLLOWS:
FIRST: That the Employment Agreement dated June 16, 1995 is ratified,
adopted and confirmed, except that Paragraph numbered FOURTH is modified as
follows:
a. That the balance of 700,000 options to purchase 700,000 shares of the
common stock $.01 par value of INSCI are to be deemed cancelled, and in lieu
thereof, INSCI agrees that EMPLOYEE will be granted 950,000 options to purchase
950,000 shares of common stock $.01 par value at $1.66 per share.
It is further understood and agreed that the 950,000 stock options granted
herein are to be vested as of August 25, 1995, subject to EMPLOYEE continuing as
President of EMPLOYER, with the further understanding and agreement that in the
event that the EMPLOYEE is terminated for cause during the employment term, and/
or voluntarily elects to terminate and/or cancel the Employment Agreement, then
and in that event, should a termination of the Employment Agreement occur,
EMPLOYEE understands and agrees that he will surrender his right and interest to
the 950,000 stock options on a pro-rata basis over the 36-month term of the
Employment Contract. For every month remaining of the 36-month period that
EMPLOYEE is not employed by EMPLOYER, EMPLOYEE will surrender 26,389 stock
options to EMPLOYER. Title to all vested stock options will remain as the
property of EMPLOYEE.
EMPLOYER warrants and represents that it has taken the necessary action to
obtain the ratification and adoption of the within Amendment and has obtained
the approval of the Board of Directors of EMPLOYER with respect to said
Amendment.
EMPLOYER and EMPLOYEE agree to all other terms and conditions as stated in
the annexed copy of the Employment Agreement by and between EMPLOYER and
EMPLOYEE which will remain in full force and effect.
IN WITNESS WHEREOF, the parties have hereunto set their hands and seals
this 25th day of August, 1995.
INSCI CORP.
By:
E. TED PRINCE
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM
THE ANNUAL 10-K FOR INSCI'S 1996 FISCAL YEAR
</LEGEND>
<CIK> 0000878612
<NAME> m7rpwrt@
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> MAR-31-1996
<PERIOD-END> MAR-31-1996
<CASH> 436
<SECURITIES> 0
<RECEIVABLES> 2202
<ALLOWANCES> 100
<INVENTORY> 0
<CURRENT-ASSETS> 2690
<PP&E> 1679
<DEPRECIATION> 846
<TOTAL-ASSETS> 5193
<CURRENT-LIABILITIES> 2630
<BONDS> 0
0
12
<COMMON> 38
<OTHER-SE> 2469
<TOTAL-LIABILITY-AND-EQUITY> 5193
<SALES> 7193
<TOTAL-REVENUES> 7913
<CGS> 3311
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 5759
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> (30)
<INCOME-PRETAX> (1482)
<INCOME-TAX> 0
<INCOME-CONTINUING> (1452)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (1452)
<EPS-PRIMARY> (0.40)
<EPS-DILUTED> (0.40)
</TABLE>
