<PAGE>
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
---------------------------------
FORM 10-QSB
[X] Quarterly Report under Section 13 or 15d of the Securities Exchange
Act of 1934 for the quarterly period ended: June 30, 1996
[ ] Transition report pursuant to Section 13 or 15d of the Securities
Exchange Act of 1934 For the Transition period from -----------------
to ----------------------
Commission file number: 1-12966
INSCI CORP
(Exact name of registrant as specified in its charter)
Delaware 06-1302773
- --------------------------------------- -----------------------------------
(State of incorporation) (IRS employer identification number)
Two Westborough Business Park
Westborough, MA 01581
(Address of principal executive offices)
Issuer's telephone number, including area code: (508) 870-4000
Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the past 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 ---
State the number of shares outstanding of each of the issuer's classes of common
equity, as of the latest practicable date:
Title of Each Class Outstanding at June 30, 1996
- ------------------- ----------------------------
Common stock, par value $.01 3,955,701
Transitional Small Business Disclosure Format (check one)
Yes X No ---
<PAGE>
INSCI CORP
INDEX
PART I FINANCIAL INFORMATION Page
Item 1. Condensed Financial Statements
Condensed Balance Sheet as of June 30, 1996 3
Condensed Statements of Operations for the Three Months 4
Ended June 30, 1996 and June 30, 1995
Condensed Statements of Cash Flows for the Three Months 5
Ended June 30, 1996 and June 30, 1995
Notes to Condensed Financial Statements 6
Item 2. Management's Discussion and Analysis or Plan of Operation 7
PART II OTHER INFORMATION
Item 1. Legal Proceedings 10
Item 2. Changes in Securities 11
Item 5. Other Events 13
Item 6. Exhibits and Reports on Form 8-K 13
Signature 14
<PAGE>
INSCI Corp
CONDENSED BALANCE SHEET
(in thousands)
(unaudited)
ASSETS June 30,
1996
----
Current assets:
Cash and cash equivalents $ 219
Accounts receivable, net 2,108
Prepaid expenses/other 167
-------
Total current assets 2,494
Property & equipment 1,722
Less: accumulated depreciation (963)
-------
Total equipment, net 759
Capitalized software development costs,
net of accumulated amortization of 674 630
Purchased software, net of accumulated amortization of 127 916
Other assets 87
-------
Total assets $ 4,886
=======
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Note payable $ 37
Accounts payable 640
Accrued liabilities 810
Customer deposits 27
Unearned maintenance revenue 606
Current portion - capital lease obligation 16
-------
Total current liabilities 2,136
Note payable 44
Stockholders' equity:
Common stock 38
Preferred stock 12
Additional paid-in capital 17,447
Accumulated deficit (14,791)
-------
Total stockholders' equity 2,706
-------
Total liabilities and stockholders' equity $ 4,886
=======
See accompanying notes
<PAGE>
INSCI Corp
CONDENSED STATEMENTS OF OPERATIONS
(in thousands, except per share amounts)
(unaudited)
Three months ended
June 30,
1996 1995
---- ----
Revenue
Product $ 1,499 $ 342
Maintenance 469 412
Services 968 87
------- -------
Total revenue 2,936 841
Cost of revenue
Product 388 294
Maintenance 359 263
Services 324 134
------- -------
Total cost of revenue 1,071 691
------- -------
Gross margin 1,865 150
Expenses
Sales and marketing 878 589
Product development 445 396
General and administrative 452 518
Non-recurring - 320
------- -------
Total expenses 1,775 1,823
------- -------
Income (loss) from operations 90 (1,673)
Interest income 8 18
Interest expense (3) -
-------- -------
Interest income (expense) 5 18
-------- -------
Net income (loss) 95 (1,655)
Preferred stock dividend (29) (32)
------- -------
Net income (loss) applicable to common shares $ 66 $(1,687)
======= =======
Net income (loss) per common share $ 0.02 (0.46)
======= =======
Weighted average common shares outstanding 3,883 3,640
======= =======
See accompanying notes
<PAGE>
INSCI Corp
STATEMENTS OF CASH FLOWS
(in thousands)
(unaudited)
Three months ended June 30
1996 1995
---- ----
Cash flows from operating activities:
Net income (loss) $ 95 $(1,655)
Reconciliation of net income (loss) to net cash
used in operating activities:
Depreciation and amortization 117 292
Amortization of deferred software costs 223 189
Changes in assets and liabilities:
Accounts receivable (6) 617
Inventory 12 (43)
Prepaid expenses and other current assets (27) 62
Note payable (11) -
Accounts payable (21) 24
Accrued and other liabilities (254) 102
Customer deposits (230) 4
Deferred maintenance revenue 32 11
----- -------
Net cash used in operating activities (70) (397)
Cash flows from investing activities:
Additions to capitalized software development costs (175) (43)
Capital expenditures (43) (38)
Other assets (11) (3)
----- -------
Net cash used in investing activities (229) (84)
Cash flows from financing activities:
Proceeds from exercise of stock options 92 -
Proceeds from sale of preferred stock - 1,200
Payment of preferred stock issuance costs - (264)
Redemption of preferred stock and dividends - (1,000)
Payment of capital lease obligations (10) (9)
----- -------
Net cash provided by financing activities 82 (73)
----- -------
Net change in cash and cash equivalents (217) (554)
Cash and cash equivalents at beginning of year 436 1,605
----- -------
Cash and cash equivalents at end of year $ 219 $ 1,051
===== =======
See accompanying notes
<PAGE>
INSCI CORP.
NOTES TO CONDENSED FINANCIAL STATEMENTS
(unaudited)
BASIS OF PRESENTATION
The financial statements included herein have been prepared by INSCI
Corp (the "Company" or "INSCI"), without audit, pursuant to the rules and
regulations of the Securities and Exchange Commission (the "SEC"). Certain
information and footnote disclosures normally included in financial statements
prepared in accordance with generally accepted accounting principles have been
condensed or omitted pursuant to such rules and regulations. However, the
Company believes that the disclosures contained herein are adequate to make the
information presented not misleading. The financial statements should be read in
conjunction with the financial statements and notes thereto included in the
Company's annual reports on Form 10-K, filed on July 1, 1996, for the fiscal
year ended March 31, 1996, and with the Company's definitive proxy statement for
its 1996 Annual Meeting of Stockholders filed with the SEC on July 29, 1996.
In the opinion of the management of the Company, the accompanying
unaudited financial statements reflect all adjustments (of a normal and
recurring nature) which are necessary to present fairly the financial position
of the Company as of June 30, 1996 and the results of operations and cash flows
for the three months ended June 30, 1996 and 1995.
The computation of income (loss) per common and common equivalent
shares has been calculated on the basis of the weighted average number of common
shares outstanding during each period. When dilutive, stock options and warrants
are included as share equivalents using the modified treasury stock method.
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR
PLAN OF OPERATION
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 total revenue.
Three months ended
June 30,
------------------
1996 1995
---- ----
% %
--- ---
Revenue:
Product 51% 41%
Maintenance 16 49
Services 33 10
--- ---
Total revenue 100 100
Cost of sales:
Product 13 35
Maintenance 12 31
Services 11 16
--- ---
Total cost of sales 36 82
--- ---
Gross profit 64 18
Expenses:
Sales and marketing 30 70
Product development 15 47
General and administrative 16 62
Non-recurring 0 38
--- ---
Total expenses 61 217
--- ---
Income (Loss) from operations 3 (199)
Interest income (expense): ---
Interest income 0 2
Interest expense 0 0
--- -
Total interest income (expense) 0 2
--- -
Net income (loss) 3% (197%)
=== ===
THREE MONTHS ENDED JUNE 30, 1996 AS COMPARED
TO THE THREE MONTHS ENDED JUNE 30, 1995:
REVENUE
INSCI sells, installs and supports imaging, print-on-demand, 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 value added resellers and
distributors.
Total revenue was $2,936,000 for the first quarter of fiscal year 1997
compared to $841,000 in the first quarter of fiscal 1996. Revenue is net of
discounts and allowances. Product revenue increased to $1,499,000 in the first
quarter of fiscal 1997, an increase of $1,157,000 (338%) compared to the first
quarter of fiscal year 1996. This increase was attributable to an increase in
the size of average sales orders reflecting emphasis on selling to key accounts
and larger customers.
Maintenance revenue increased to $469,000 compared to $412,000 in the
first quarter of fiscal year 1996. This is due to the increased size of the
customer installed base in fiscal 1997.
Services revenue, which includes charges for consulting, systems
integration services, custom applications, installation and training, increased
to $968,000 in the first quarter of fiscal year 1997, an $881,000 increase from
service revenues of $87,000 for the first quarter of fiscal 1996. This increase
is directly attributable to the increase in revenue from the Company's
consulting and systems integration activities.
GROSS PROFIT
Gross profits for the three month periods ended June 30, 1996 and 1995
were $1,865,000 (64%) and $150,000 (18%), respectively. Cost of revenue for the
first quarter of fiscal 1997 was $1,071,000 or 36% of revenue, compared to
$691,000, or 82% of revenue, for the first quarter of fiscal 1996.
Costs associated with product revenue include the costs of hardware and
software products purchased for resale, and charges for the amortization of
capitalized software development costs. Cost of product revenue varies depending
upon the mix of software and hardware products including individual system
orders. Cost of revenue for product revenue increased to $388,000, or 26% of
product revenue in the first quarter of fiscal 1997 from $294,000, or 86% of
product revenue in the first quarter of fiscal 1996. Cost of product revenue
includes software amortization charges of $223,000 for the first fiscal quarter
of 1997, as compared to $189,000 for the comparable period last year.
Costs associated with maintenance and services revenue include the
costs of systems integration, consulting, customer support personnel, the cost
of third-party services and hardware maintenance subcontracts. Total combined
cost of revenue for maintenance and services were $683,000 for the first fiscal
quarter of 1997 and increased by $286,000 from the comparable period last year.
This increase primarily reflects the incremental costs associated with the
$938,000 increase in maintenance and services revenues for the period. Due to
the increase in these revenues combined with improved cost utilization, total
cost of revenue for maintenance and services, as a percent of sales, decreased
to 48% of sales for the first fiscal quarter of 1997 as compared to 80% for the
comparable period last year.
SALES AND MARKETING
Sales and marketing expenses for the first fiscal quarter 1997 were
$878,000 or 30% of total revenue compared to $589,000 or 70% of total revenue in
the first quarter of fiscal 1996. This increase was primarily attributable to
higher levels of sales commissions associated with the increase in sales for the
period, combined with the additions of sales and marketing expenses from
Courtland, which was acquired in March, 1996.
PRODUCT DEVELOPMENT
Product development expenses totaled to $620,000 during the first
quarter of fiscal 1997, (before capitalization of software development expenses
of $175,000, resulting in net expenses of $445,000, or 15% of revenues), as
compared to an expense of $439,000 (before capitalization of software
development expenses of $43,000, resulting in net expenses of $396,000, or 47%
of revenues) for the comparable period last year. The increase in development
expenses for the period reflects a higher level of development efforts for new
products combined with ongoing development expenditures from the March, 1996
Courtland acquisition.
GENERAL AND ADMINISTRATIVE
General and administrative expenses were $452,000 for the first quarter
of fiscal 1997 compared to $518,000 in fiscal 1996. This decrease primarily
resulted from lower legal expenses in the first quarter of 1997 as compared to
one time legal expense incurred in 1996 relating to the private placement of
subordinated notes.
NON-RECURRING
The Company had recorded a charge of $320,000 in the first quarter of
fiscal year 1996 for expenses to be incurred pursuant to a restructure plan.
Subsequently, it was determined that in order to support the Company's planned
growth in the systems integration and consulting area, the Company would need to
retain some of the facility space and the equipment that it had previously
planned to dispose of. As a result of this change and the resultant lower level
of expenses incurred, the Company reversed $61,000 of the restructure charge
previously accrued in the first quarter. The restructure plan was completed in
November 1995.
INTEREST INCOME
Interest income was $5,000 in the first quarter of fiscal 1997 compared
to $18,000 in fiscal 1996.
NET INCOME (LOSS)
The net income was $95,000 in the first quarter of fiscal 1997 compared
to a net loss of $1,655,000 for the first quarter of fiscal 1996. This
$1,750,000 improvement in net income for the period is the result of sales
growth combined with more effective utilization of costs and expenses.
LIQUIDITY AND CAPITAL RESOURCES
The Company's cash flows are summarized below for the periods
indicated:
Three months ended
June 30
-------
1996 1995
---- ----
Cash provided by (used in):
Operating activities $ (70,000) $(397,000)
Investing activities (229,000) (84,000)
Financing activities 82,000 (73,000)
------- ---------
Decrease in cash $(217,000) $(554,000)
========= =========
The Company generated net negative cash flows of ($70,000) from
operations in the first three months of fiscal year 1997. The Company also had a
negative cash flow of ($229,000) in its investing activities. Financing
activities generated a cash flow of $82,000. Working capital at June 30, 1996
was $360,000 compared to $60,000 at June 30, 1995.
In March, 1996 the Company acquired certain assets from the Courtland
Group, Inc. ("Courtland"), plus the assumption of $96,000 in liabilities, for
$150,000 in cash, 89,681 shares of common stock and a note of $100,000.
Courtland, based in Columbia, Maryland, develops and sells advanced information
retrieval, document management and advanced imaging software products.
The Company presently has no material commitments for capital
expenditures.
PART II OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
On September 30, 1992, the Company and 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 SEC issued an order, dated April 13, 1995, authorizing a private
investigation of Imtech and INSCI, 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 SEC 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 SEC 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 SEC.
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
SEC'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 SEC
investigation. The Company believes that it has responded satisfactorily and is
not aware of any further pending issues with the SEC.
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.
ITEM 2. CHANGES IN SECURITIES
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 187,500 shares of the Company's common stock at $3.50 per share. The
warrants expire on April 15, 1998.
The Company granted piggyback registration rights to the warrant
holders for the underlying shares of common stock to be issued pursuant to the
exercise of the warrants.
The exchange agreement further provided that Norcross waive all
anti-dilution rights that were granted pursuant to the issuance of the original
common stock purchase warrants, in exchange for the new common stock purchase
warrants that do not contain anti-dilution provisions.
On August 8, 1996, the Company completed the minimum amount of
$1,000,000 of a Regulation D offering with Amerivet/Dymally Securities, Inc., as
a placement agent. The maximum amount of the offering is $1,350,000, and the
offering period will expire August 31, 1996, and may be extended for 30 day
periods thereafter, but in no event, later than November 1, 1996.
The offering is a minimum of 1,000,000 shares and a maximum of
1,350,000 shares of 10% Preferred Stock $.01 par value at $1.00 per share for a
minimum of $1,000,000 and a maximum of $1,350,000. The 10% Preferred Stock may
be converted at the option of the holder during a three (3) year period
commencing from the acceptance of the subscription by the Company (the
"Anniversary Date"), however, the 10% Preferred Stock may not be converted for a
period of six (6) months from the Anniversary Date, and thereafter is
convertible at a 30 % discount to the current market price of the Common Stock
of INSCI at the time of the conversion. The Preferred Stock will be
automatically converted into shares of Common Stock by the Company three (3)
years from the Anniversary Date. The conversion price per share will be ten (10)
prior trading day market average between the closing bid and the closing asked
price as quoted on the NASDAQ, at the time of conversion, and the conversion
price will be limited to a maximum of $8.00 per share taking into consideration
the 30% discount to market. The holder will receive the benefit of any increase
in the market price in excess of $11.43 per share.
The 10% Preferred Stock dividends, at the option of INSCI, will be
payable at the Company's discretion either by an annual Common Stock dividend of
10% in stock payable on a semi-annual basis, or an 8% annual cash dividend
payable on a semi-annual basis, subject to the Company's discretion.
The holder upon conversion will be entitled to receive shares of Common
Stock in INSCI which shares have been granted cost free rights of registration
to the holder.
The Common Stock upon conversion and registration will be subject to a
sale restriction, in that a maximum of 10% of the converted shares may be sold a
month. Subsequent to conversions and registration, if the trading volume of
INSCI Common Stock on the NASDAQ exceeds 40,000 shares per day for a minimum of
thirty (30) consecutive trading days, the 10% monthly sales restriction will no
longer apply.
ITEM 5. OTHER EVENTS
The Company hired Richard Gerstner, a Director of the Company, in June
of 1996 to serve as a consultant to the Company. The Company on July 17, 1996
awarded 400,000 options to purchase 400,000 shares of the Company's Common Stock
at $6.25 per share to Richard Gerstner, a Director of the Company. These options
are performance based and only exercisable to the extent that transactions are
completed in accordance with the terms of a definitive agreement between Mr.
Gerstner and the Company. Mr. Gerstner will receive 100,000 stock options for
each reseller agreement executed by the Company that provides an additional
$1,000,000 in revenue in an eighteen (18) month period from the date of
execution of the agreement. Additionally, in the event the Company acquires a
company as a result of Mr. Gerstner's efforts, he will receive up to 300,000
stock options and in the event of a minority investment, up to 200,000 stock
options. All options are to be for a period of three years from the date of
grant. Mr. Gerstner will receive the sum of $2,500 per month for a period of
twelve months for services to be performed on behalf of the Company. The
Compensation Committee and the Board of Directors approved the within incentive
program for Mr. Gerstner. Mr. Gerstner did not participate and/or vote as a
member of the Board of Directors.
On July 29, 1996, Roger Kuhn joined the Company as Vice-President and
Chief Financial Officer. Mr. Kuhn served as Chief Financial Officer for Momentum
Software Corporation and Acuity Imaging, Inc. for more than five years prior to
joining the Company. Mr. Kuhn holds a Bachelors of Science Degree in Accounting
and a Master of Business Administration in Finance from Fairleigh Dickinson
University.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
The reports on Form 8-K to be included in addition to the 10-K and
Proxy Statement filed by the Company (incorporated by reference)
(A) EXHIBITS. None filed with this report.
(B) REPORTS ON FORM 8-K.
A report on Form 8-K, dated March 28, 1996, was filed on April 5,
1996 by the Company regarding the appointment of a new director
A report on Form 8-K, dated March 28, 1996, was filed on April 12,
1996, by the Company regarding the acquisition of Courtland
A report on Form 8-K, dated April 10, 1996, was filed on April 15,
1996 by the Company regarding the settlement with Bank of New York
A report on Form 8-K, dated April 29, 1996, was filed on May 6,
1996 by the Company regarding the resignation of the Chief Financial
Officer
A report on Form 8-K, dated April 30, 1996, was filed on May 16,
1996 by the Company regarding the warrant exchange with Norcross
A report on Form 8-K/A, dated June 11, 1996, was filed on June 11,
1996 by the Company regarding the audited financial statements of
Courtland.
<PAGE>
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this Report to be signed on its behalf by the
undersigned thereunto duly authorized.
INSCI CORP
August 14, 1996 By: /S/ ROGER C. KUHN
--------------------------------
Roger C. Kuhn
Vice President and Chief Financial Officer
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED
FROM THE QUARTERLY 10Q FOR INSCI'S 1997 FISCAL YEAR
</LEGEND>
<CIK> 0000878612
<NAME> m7rpwrt@
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> MAR-31-1997
<PERIOD-END> JUN-30-1996
<CASH> 219
<SECURITIES> 0
<RECEIVABLES> 2208
<ALLOWANCES> 100
<INVENTORY> 0
<CURRENT-ASSETS> 2494
<PP&E> 1722
<DEPRECIATION> 963
<TOTAL-ASSETS> 4886
<CURRENT-LIABILITIES> 2136
<BONDS> 0
0
12
<COMMON> 38
<OTHER-SE> 2656
<TOTAL-LIABILITY-AND-EQUITY> 4886
<SALES> 2936
<TOTAL-REVENUES> 2936
<CGS> 1071
<TOTAL-COSTS> 1071
<OTHER-EXPENSES> 1775
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> (5)
<INCOME-PRETAX> 95
<INCOME-TAX> 0
<INCOME-CONTINUING> 95
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 95
<EPS-PRIMARY> .02
<EPS-DILUTED> .02
</TABLE>
