<PAGE>
================================================================================
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-KSB
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIIES
EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED: COMMISSION FILE NUMBER
MARCH 31, 1997 1-12966
================================================================================
INSCI CORP
================================================================================
(Exact name of registrant specified in its charter)
<TABLE>
DELAWARE TWO WESTBOROUGH BUSINESS PARK, WESTBOROUGH, MA 06-1302773
-------- ---------------------------------------------- ----------
<S> <C> <C>
(State or other jurisdiction of (Address of Principal executive offices) (I.R.S. Employer Identification No.)
incorporation or organization)
</TABLE>
01581
-----
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-KSB or any
amendment to this Form 10-KSB. 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 12, 1997, as reported by NASDAQ, was
approximately $14,626,848. As of June 12, 1997, registrant had outstanding
4,327,470 shares of Common Stock
Revenues for the fiscal year ended March 31, 1997 were $11,381,000.
Part III incorporates information by reference to the registrant's definitive
proxy statement for its 1997 Annual Meeting of Stockholders to be filed with the
Commission within 120 days following March 31, 1997.
================================================================================
<PAGE>
INSCI CORP
FORM 10-KSB
FOR THE FISCAL YEAR ENDED MARCH 31, 1997
INDEX
PART I PAGE
Item 1. Business ...................................................... 3
Item 2. Properties .................................................... 14
Item 3. Legal Proceedings ............................................. 14
Item 4. Submission of Matters to a Vote of Securities Holders.......... 15
Executive Officers of the Registrant................ Refer to Page 27
PART II
Item 5. Market for Registrant's Common Equity and Related
Stockholder Matters ........................................... 16
Item 6. Management's Discussion and Analysis of Financial Condition
and Results of Operations...................................... 16
Item 7. Financial Statements........................................... 22
Item 8. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosures...................................... 22
PART III
Item 9. Directors and Executive Officers of the Registrant............. 23
Item 10. Executive Compensation......................................... 23
Item 11. Security Ownership of Certain Beneficial Owners and
Management .................................................... 23
Item 12. Certain Relationships and Related Transactions................. 23
Item 13. Exhibits and Reports on Form 8-K............................... 23
SIGNATURES............................................................... 24
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.
During fiscal 1997, the Company announced the addition of six new
products to its offerings; WebCOINS, an Internet product, COINSflow, a workflow
product, Advanced COINSCAN, an imaging product, Advanced COINSERV, a data
archive and retrieval product, COINS Demander, a database interface, and Setup
Expert, an application set up interface. The Company also announced a Windows NT
product that is scheduled for release in June, 1997. These additions to INSCI's
product offerings were funded by an increase in the Company's gross expenditures
for software products developed and purchased by 59% in fiscal 1997. The
Company's product development program has been directed toward creating a suite
of complementary products to meet customer and marketplace requirements for a
more complete electronic document management solution.
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. Mr.
Richard Gerstner, was appointed to the board in March 1996. In September of 1996
at the Company's annual meeting for Shareholders Messrs. Prince, Gartner,
Gerstner, Murphy and Oxenberg were elected by Shareholders to serve as directors
of the Company for the ensuing year.
In March 1996, Mr. George Trigilio, Jr. was appointed Executive Vice
President and Imaging Division Director. Mr. John E. Steinkrauss resigned as the
Company's Chief Financial Officer and Vice President of Finance and
Administration in May 1996. Mr. Roger C. Kuhn was appointed Vice-President and
Chief Financial Officer of the Company in July 1996.
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 also develops and markets imaging, document management and
workflow products. These products provide a complete document storage system by
allowing the user to scan and store images of documents and to store, retrieve
and manage the distribution of 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 provides advanced systems integration services to its customers
which allow them to integrate its various products and services 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 300
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 PDF 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 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.
ADVANCED COINSCAN
Advanced COINScan converts paper documents into electronic images, then
compresses, indexes, and moves them into COINSERV for storage and retrieval.
Documents can be searched through their indices and subsequently retrieved,
displayed, printed and faxed. Product features include optical character
recognition and bar code reading, high volume batch scanning and compatibility
with Windows '95, Windows 3.1 and Windows for Workgroups.
COINSFLOW
COINSflow is a customer-focused, service-oriented workflow system
designed on a case management basis. Users access the system's various functions
through the representation of a simulated office scene. Using a flow charting
concept, business processes can be built from a library of pre-defined tasks
customized to a particular business. The software's advanced search facility and
case-tracking allow inquiries to be answered quickly.
WEBCOINS
WebCOINS provides access to COINSERV databases of archived documents
through Internet browsers. WebCOINS delivers archived documents in PDF format,
which can be read and displayed by browsers such as Microsoft Internet Explorer
and Netscape Navigator.
COINSERV FOR WINDOWS NT
COINSERV for Windows NT is a high-speed, high volume document
archive/retrieval system designed to maximize the processing power of Windows
NT. It incorporates many of the features of Advanced COINSERV. This software
provides high-performance archive and retrieval functionality combined with the
ease of use of the Windows NT environment.
COINS DEMANDER
COINS Demander provides a quick-reference interface to the COINSERV
document database. Reports to be viewed are specified in a single dialog box.
These reports remain indexed and can be immediately recalled from a PC without
the intermediate step of accessing the main retrieval system.
SETUP EXPERT
Setup Expert is a graphical interface that leads a user through the
steps to create an application definition file. The purpose of this software is
to simplify the process of setting up or modifying a data archive or retrieval
application.
MONARCH DATA MINING
Monarch Data Mining provides a Windows based report mining and analysis
tool so that COINSERV archival document information can be manipulated into
field oriented data on a PC. This product analyzes documents stored in COINSERV
so that information with specified characteristics can be retrieved.
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:
- provide faster archive speeds and access to most current data - allow
migration based on report characteristics, download bundles, document
size and index values
- provide a way of deleting reports that are temporary
- provide access to documents while new documents are being archived to
the magnetic RAID sub- system - 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
Manager: 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. During fiscal 1997, the Company announced new sales
alliances with Xerox Corporation, Storage Technology Corporation, Moore
Corporation, as well as others. In addition, Unisys Corporation, an existing
reseller of the Company's products, announced a program to dedicate additional
resources to selling and marketing INSCI's products.
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 OCE (formerly 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 permit the company to
increase its sales and penetration into new areas of industry.
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 Var's 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. (ALMSI@)
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.
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.
Many of the Company's 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 74 persons as of March 31, 1997. 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. Management considers its present office space adequate for the
Company's foreseeable needs.
In June 1995, the Company commenced an interim office sharing
arrangement on a month-to- month basis from Perth Ventures, Inc. at a monthly
charge of $2,000. Dr. Prince, who is President, Chief Executive Officer and
Chairman of the Board of Director's of the Company is 100% owner in and is
President of Perth Ventures, Inc. See "Certain Relationships and Related
Transactions"
ITEM 3. LEGAL PROCEEDINGS
On September 30, 1992, the Company and Information Management
Technologies Corporation ("IMTECH"), the Company's former majority shareholder,
reached an agreement with the Securities and Exchange Commission ("Commission")
to conclude and settle the Commission's informal investigation of the Company
and IMTECH. The Company and IMTECH, without admitting or denying any of the
allegations made by the Commission in its complaint, and without trial or final
adjudication of the allegations made in the Commission'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 and
IMTECH from conducting future public offerings or private security placements.
The Company and IMTECH may be subject to contempt of court or other sanctions if
the Company or IMTECH, at any time in the future, engage in actions that are
deemed to violate the consent judgment and the injunctions.
The Securities and Exchange Commission ("Commission") issued an order,
dated April 13, 1995, authorizing a private investigation of Imtech (INSCI's
former majority shareholder) 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 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.
On September 10, 1996 the Company was informed by the Commission that
the staff inquiry relating to these matters had been terminated and that no
enforcement action had been recommended at this time.
The Company has 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 and to certain
Stockholders and Option and Warrant Holders. The Company has filed a preliminary
registration statement with the SEC on Form S-1 and is in the process of
amending this registration statement. The Company may be subject to damages for
violations of its registration rights agreements.
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.
FISCAL 1996 FISCAL 1997
----------------------------------------- ---------------
COMMON STOCK UNITS TRADING SEPARATELY
(Stock and Warrants (Effective December 13, 1995)
combined as one unit,
Unit Price Common Stock Price
--------------------- -----------------------------------
Quarter High Low High Low High Low
- -------
First $2.50 $1.75 -- -- $6.75 $4.75
Second 1.99 1.44 -- -- 7.50 4.75
Third 3.92 1.44 $4.00 $3.00 6.25 4.38
Fourth -- -- 5.13 3.63 5.00 3.13
Warrant Price
-----------------------------------
Quarter High Low High Low
- -------
First -- -- $1.25 $0.81
Second -- -- 1.81 0.63
Third $0.75 $0.44 1.38 0.56
Fourth 1.32 0.53 0.81 0.25
On June 12, 1997, the closing bid and ask prices of the common stock
were $3.13 and $3.63, respectively. The closing bid and ask price of warrants
were $.41 and $.56 as of June 12, 1997. As of May 29, 1997, the Company had 130
holders of record of its common stock.
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.
ITEM 6. 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 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 $96,000 in accrued liabilities.
On September 12, 1996 the Company completed a private placement
financing under Regulation "D". Proceeds from this offering, before underwriting
commissions and expenses, totaled $5,000,000. On September 20, 1996 the Company
completed a private placement financing under Regulation "D" for the sum of
$1,350,000, before underwriting commissions and expenses.
On March 3, 1997 the Company acquired certain assets and business from
non-affiliated entities, known as Action Computer Supplies Holdings PLC
("Action") and DSI Data Systems International, Ltd. ("DSI") , both United
Kingdom -based companies. On March 31, 1997 the Company also purchased the
assets of a company known as Philippines Business Automation Systems, Inc.
("PBAS"), a corporation organized under the laws of the Republic of the
Philippines. The acquisition cost of Action, DSI and PBAS totaled approximately
$170,000 and is not considered significant by the Company.
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
-----------------------
1997 1996
---- ----
% %
Revenue 100 100
--- ---
Gross margin 59 58
--- ---
Expenses
Sales and marketing 32 31
Product development 19 22
General and administrative 17 20
Non-recurring charges -- 4
--- ---
Total expenses 68 77
--- ---
Loss from operations (9) (19)
Interest income (expense) net 1 1
--- ---
Net loss (8) (18)
=== ===
COMPARISON OF FISCAL YEARS ENDED MARCH 31, 1997 VERSUS MARCH 31, 1996
REVENUE. The following chart compares INSCI's revenue for fiscal 1997
versus fiscal 1996: (in thousands)
FISCAL YEAR ENDED MARCH 31,
------------------------------------
1997 1996 % CHANGE
------- ------ --------
Software $ 5,236 $4,099 28%
Hardware 501 884 (43)
------- ------
Total product revenue 5,737 4,983 15
------- ------
Services 3,522 1,172 200
Maintenance 2,122 1,758 21
------- ------
Total services revenue 5,644 2,930 93
------- ------
Total revenue $11,381 $7,913 44%
======= ======
INSCI develops, sells, installs and supports imaging, print-on-demand,
data archive and retrieval and workflow software products. Sales to end users
generally include software, 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 VAR's, distributors and through
sales alliances with companies including Unisys Corporation, Moore Corporation,
Storage Technology Corporation and Xerox Corporation. Revenue is net of
discounts and allowances given to third party VARs and distributors.
Revenues for fiscal 1997 totaled $11,381,000 and increased by $3,468,000
or 44% over revenues of $7,913,000 for fiscal 1996. Product revenues were
$5,737,000 for fiscal 1997 as compared to $4,983,000 for fiscal 1996. During
fiscal 1997, the Company focused on transitioning its revenues to securing more
large sized customer orders through a combination of enterprise level software
packages, an increase in the number of product offerings that could be sold to
each customer, and by providing additional levels of consulting and systems
integration services. As a result, the number of large customer orders, in
excess of $75,000, increased by 50% in fiscal 1997, as compared to fiscal 1996.
This increase in the number of large orders was the primary factor resulting in
the 44 % increase in the Company's total revenues for fiscal 1997. The Company
plans to continue emphasis of the 1997 programs into 1998. In addition, in
fiscal 1998, the Company intends to increase the proportion of revenues
generated from its strategic sales partners and to introduce its Windows NT
based product.
Services revenue, which includes systems integration and consulting,
custom applications, installation, training, and maintenance, totaled $5,644,000
in fiscal 1997, an increase of $2,714,000 or 93% over service revenue of
$2,930,000 in fiscal 1996. This increase is primarily attributable to the growth
of the systems integration and consulting revenues which increased to
$3,522,000, or 200%, as compared to $1,172,000 for fiscal 1996. This increase
reflects the Company's emphasis of providing expanded levels of product related
services for its customers.
COST OF REVENUE. Total cost of revenue for fiscal 1997 was $4,626,000 or
41% of revenue, compared to $3,311,000 or 42% of revenue, for fiscal 1996.
Cost of revenue for product sales was $1,634,000 or 28% of product
revenue for fiscal 1997 compared to $1,784,000 or 36% of product revenue in
fiscal 1996. 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 systems revenue. The decrease of cost of product revenue as a
percent of product revenue primarily reflects planned reductions in hardware
sales, which have high product costs as compared to software product costs,
combined with other changes in software product mix.
Costs associated with service revenues principally reflect the costs of
systems integration, consulting, and customer support personnel, and the cost of
third-party services and hardware maintenance subcontracts. Cost of services
revenues was $2,992,000 or 53% of services revenues for fiscal 1997 compared to
$1,527,000 or 52% for fiscal 1996, respectively. The 1% increase in the cost of
these revenues reflects additions of consulting personnel for anticipated future
growth in consulting revenues.
SALES AND MARKETING. Sales and marketing expenses were $3,693,000 or 32%
of revenues as compared to $2,459,000, or 31% of revenue, for fiscal 1996. The
increase in sales and marketing expenses for fiscal 1997 reflects the full year
impact of the sales resources of the Courtland Group, the assets of which the
Company acquired in March 1996, combined with increases in sales commissions
related to the increased revenues for fiscal 1997. The Company also added
resources to establish a sales and technology center located in the Philippines
to support Far East business activity. The Company intends to add additional
sales and marketing resources in fiscal 1998 related to the introduction of its
Windows NT product combined with added support of its strategic sales partners
and for increased international sales activity.
PRODUCT DEVELOPMENT. Total gross expenditures during fiscal 1997 for
product development and purchased software were $3,167,000 (before
capitalization of developed and purchased software of $997,000, resulting in net
expense of $2,170,000, or 19% of revenues) compared to total fiscal 1996
expenditures of $1,992,000 (before capitalization of developed and purchased
software of $234,000, resulting in net expense of $1,758,000 or 22% of
revenues). The increase in fiscal 1997 gross expenditures of $1,175,000 was for
programs to enhance current product offerings combined with expenditures for new
products. The Company's product development program has been directed toward
adding products that are complementary to each other in order to provide
customers with increased functionality in the format of a suite of products.
During fiscal 1997, the Company announced the addition of six new products to
its offerings; WebCOINS, an Internet product, COINSflow, a workflow product,
Advanced COINSCAN, an imaging product, Advanced COINSERV, a data archive and
retrieval product, COINS Demander, a database interface, and Setup Expert, an
application set up interface. In addition, the Company is developing a Windows
NT product that is scheduled for release in early fiscal 1998. The Company
continued its programs to reduce the cost of product development by having
selected development performed under a fixed price contract basis by a
programming company in Sri Lanka, combined with establishing operations in the
Philippines for the purpose of product development and customer support. The
Company plans to increase its expenditures for product development in fiscal
1998 in order to add additional products to its product suite and to enhance
existing products.
GENERAL AND ADMINISTRATIVE. General and administrative expenses were
$1,943,000 or 17% of revenue for fiscal 1997 and increased by $401,000 as
compared to $1,542,000, or 20% of revenue, for fiscal 1996. The increase
reflects additions in corporate insurance expense, investor relations ,
professional services and expenses for activities related to potential
acquisitions.
NON-RECURRING CHARGES. During fiscal 1996, the Company paid $250,000 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.
INTEREST INCOME/EXPENSE. Interest income in fiscal 1997 was $127,000,
partially offset by $12,000 in interest expense for net interest income of
$115,000. Interest income in fiscal 1996 was $70,000 partially offset by $40,000
in interest expense for net interest income of $30,000. The increase in interest
income in fiscal 1997 primarily reflects interest earned on funds received from
two regulation D security offerings completed by the Company in September and
November, 1996. The decrease in interest expense for fiscal 1997 reflects the
elimination of interest expense related to a 10% subordinated note that was
converted to preferred stock in fiscal 1996.
NET LOSS. During fiscal 1997 as compared to fiscal 1996, the Company's
revenues grew at 44% as compared to an expense growth of 28%. As a result, the
net loss for fiscal 1997 was $936,000 or 8% of revenue compared to a net loss of
$1,452,000 or 18% of revenue for fiscal 1996.
LIQUIDITY AND CAPITAL RESOURCES
As of March 31, 1997 the Company had $5,068,000 of cash and cash
equivalents and working capital of $4,724,000 in comparison to $436,000 of cash
and cash equivalents and working capital of $60,000 as of March 31, 1996.
Accounts receivable were $2,491,000 with weighted days outstanding of 38 as of
March 31, 1997 compared to receivables of $2,102,000 with weighted days
outstanding of 29, as of March 31, 1996. The Company targets collections of 45
days. Amounts below this number represent favorable receivable mix and
collection performance.
The Company's cash flows are summarized below for the periods indicated:
(in thousands)
FISCAL YEAR ENDED MARCH 31,
1997 1996
---- ----
Cash provided by (used in)
Operating activities $ 422 $ (524)
Investing activities (1,505) (750)
Financing activities 5,715 105
------- -------
Increase(decrease) in cash and cash equivalents $ 4,632 $(1,169)
======= =======
Cash and cash equivalents at end of period $ 5,068 $ 436
------- -------
The Company generated $422,000 in cash from operating activities in
fiscal 1997, primarily reflecting the impact of non-cash expenses for
depreciation and amortization that were in excess of the Company's net loss. The
Company used $1,505,000 for investment activities, primarily for additions to
capitalized and purchased software and capital expenditures.
Financing activities during fiscal 1997 generated $5,715,000, primarily
from the completion of two convertible preferred stock offerings that provided
net cash of $5,480,000. The Company anticipates using the proceeds for working
capital and other general corporate purposes, including acquisitions. The
Company is actively in the process of identifying and negotiating with potential
acquisition candidates. The Company anticipates that the cost of any
acquisition, if completed, will be paid for by a combination of cash and the
issuance of the Company's common stock. In the event acquisitions are completed,
the Company's cash resources and liquidity may be materially reduced.
As of March 31, 1997, the Company had securities outstanding which, if
all securities become vested and are in the money, provide potential sources of
future financing as outlined below:
Potential
Securities Shares Proceeds
- ------------- ---------- -----------
Warrants, IPO related 851,772 6,399,066
10% Convertible Preferred Stock,
placement agent 112,000 560,000
Warrants, 8% Convertible Preferred Stock 1,466,667 7,400,002
Stock options 4,081,307 10,214,000
-----------
Total $24,573,068
===========
As of March 31, 1997, securities that are vested and in the money
provide potential future financing resources of $3,807,000. There can be no
assurance that the Company will obtain any such proceeds from the exercise of
the above securities.
On March 28, 1997 the Company completed a credit facility with Silicon
Valley Bank ("SVB") for a working capital line of $1,500,000 and an equipment
financing line of $250,000. The terms of the line provide for working capital
advances up to seventy five percent of the Company's eligible domestic accounts
receivable under ninety days from invoice date. Collateral for the line, which
is secured by a lien, is comprised of all Company assets except fixed assets
financed elsewhere.
In order to borrow against the bank line, the Company is required to
meet certain covenants. which include that the Company not exceed $150,000 loss
for the quarter ended March 31, 1997, maintenance of tangible net worth of
$5,000,000, minimum quick ratio of 2.0:1 and debt service coverage. As of March
31, 1997, the Company could not borrow against the line due to its fourth
quarter loss being in excess of the loss covenant. The Company, at its option,
may terminate the line with SVB without penalty. The Company had no borrowings
against the credit facility with SVB during fiscal 1997.
The Company anticipates that its working capital and sources of capital,
such as a new credit facility, will be adequate to fund the Company's currently
proposed activities for at least the next twelve months. The Company anticipates
using financing vehicles such as bank debt, leasing and other sources of
funding, including additional equity offerings, to fund its operations. There
can be no assurance that the Company will be successful in obtaining funds from
any such sources. If additional funds are raised by issuing equity securities,
dilution to the Company's stockholders may result. If additional funds are not
available, the Company may be required to delay execution of its business plan.
CONVERTIBLE PREFERRED STOCK The Company issued $1,200,000 of ten percent
(10%) Convertible Preferred Stock in connection with a Private Placement of
90-Day Subordinated Notes in June 1995 (convertible into shares of Common Stock
at a fifty percent [50%] discount to market on a schedule of conversion basis);
$1,350,000 of ten percent (10%) Convertible Preferred Stock (convertible at
thirty percent [30%] discount to market at time of conversion) in September
1996; and in November 1996, 1,333,334 Units, of eight percent (8%) Convertible
Preferred Stock and Warrants exercisable over a period of three (3) years into
shares of Common Stock. In two of these Private Placement Offerings, the Holders
can convert their shares of Preferred Stock at a discount to market, and in the
third Offering, Units of eight percent (8%) Preferred Stock and Warrants into
shares of Common Stock.
In all three Private Placement Offerings, the Company agreed to use its
best efforts to register the underlying shares of Common Stock on a cost-free
basis to the Holders of Convertible Preferred Stock. While the Company has filed
a Registration Statement on Form S-1 with the Securities and Exchange Commission
("SEC") for all of the underlying shares with respect to all three (3) Private
Placements Offerings, Holders may assert a claim against the Company for the
delay in filing the Registration Statement, based upon the Company's agreement
to file the Registration Statement within specific prescribed periods of time
from the closing date of each placement.
Additionally, as the Convertible Preferred Stock in two (2) of the
Placements is based upon a discount to the trading market price at the time of
conversion and, while the Company believes it has sufficient authorized shares
of Common Stock to be issued to Holders of Preferred Stock that convert their
Preferred Shares into shares of Common Stock, it is possible that the Company
may require Shareholder approval to increase the number of authorized shares of
Common Stock in the event of a substantial decline in the market trading price
of Common Stock. In that event, as the Company could require substantially
additional shares of Common Stock to be authorized in order to meet its
obligations to the Holders of Preferred Stock, Shareholders may experience
substantial dilution as a result of the conversion by the Holders of Preferred
Stock, as in the 1995 Placement referred to herein, there is a minimum
conversion price of $.10 per share, and in the 1996 Placement, there is no
minimum conversion price. ( See Note J to the Financial Statements).
"SAFE HARBOR" STATEMENT UNDER THE PRIVATE SECURITIES LITIGATION REFORM ACT:
With the exception of historical information, the matters discussed in
this report are "forward looking statements" as the term is defined in Section
21E of the Securities Exchange Act of 1934. While the Company believes that its
strategic plan is on target and the business outlook remains strong, several
important factors, many of which are beyond the control of the Company, have
been identified which could cause results to differ materially from historical,
planned, implied or predicted results of the Company. While the Company has
achieved an operating income in some past quarters, INSCI historically has been
unable to generate sales volumes necessary to achieve profitability on a
sustained basis. INSCI has experienced, and may in the future experience,
significant quarter to quarter fluctuations in revenues and the results of
operations. Such fluctuations may result in volatility in the market price of
the Company's Common Stock.
Quarterly revenues and results of operations may fluctuate as the result
of a variety of factors, including the lengthy sales cycle for the Company's
products, the proportion of revenues attributable to software license fees
versus services, the amount of revenue generated by alliances with other
companies selling INSCI's products, demand for the Company's products, the size
and timing of individual license transactions, the introduction of new products
and product enhancements by the Company or its competitors, changes in customer
budgets, competitive conditions in the industry and general economic conditions.
Additionally, the sale of the Company's products generally involves a
significant commitment of capital by its customers and may be delayed due to
time consuming authorization procedures within an organization. Other factors
affecting the Company's operating results include INSCI's ability to design and
introduce on a timely basis new products which compete effectively on the basis
of price and performance and which address customer requirements, product
obsolescence, technological changes, competition and competitive pressures on
price, the ability to hire and retain qualified personnel and general economic
conditions affecting the investment by potential customers in peripheral
computer devices. There is no assurance that the company can sustain its sales
volume going forward or that it will be able to achieve a profit in the
marketing of its products.
ITEM 7. FINANCIAL STATEMENTS
The information required by this Item is incorporated by reference to
the Table of Contents to Financial Statements and appears on page 26 hereof.
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURES
The Company, on December 30, 1996, by a resolution of its Board of
Directors, changed accounting firms from Mahoney Cohen Rashba & Pokart, CPA, PC
to Pannell Kerr Forster PC. The Company did not have any disagreements with its
former accounting firm.
PART III
ITEM 9. 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 1997 Annual Meeting of Stockholders to be
filed with the Commission within 120 days following March 31, 1997 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 10. EXECUTIVE COMPENSATION
The information required by this item will be included in the Company's
Proxy Statement with respect to its 1997 Annual Meeting of Stockholders to be
filed with the Commission within 120 days following March 31, 1997 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 11. 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 1997 Annual Meeting of Stockholders to be
filed with the Commission within 120 days following March 31, 1997 under the
caption "Security Ownership of Certain Beneficial Owners" and is incorporated
herein by this reference as if set forth in full herein.
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this item will be included in the Company's
Proxy Statement with respect to its 1997 Annual Meeting of Stockholders to be
filed with the Commission within 120 days following March 31, 1997 under the
caption "Certain Relationships and Related Transactions" and is incorporated
herein by this reference as if set forth in full herein.
ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K
Exhibits: Incorporated by reference to the Index of Exhibits appearing
at the end of this Report on Form 10-KSB. Also incorporated by reference all
exhibits filed on the Company's Registration Statement on Form S-1.
Reports: There were no Form 8-K's filed in the fourth quarter of the
fiscal year ended March 31, 1997.
<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 25, 1997
<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-KSB, 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.
<TABLE>
SIGNATURE TITLE DATE
--------- ----- ----
<S> <C> <C>
/s/ DR. E. TED PRINCE President & Chief Executive Officer, June 25, 1997
- ------------------------ and Director
Dr. E. Ted Prince
/s/ JOHN L. GILLIS Executive Vice President June 25, 1997
- ------------------------ & Chief Operating Officer
John L. Gillis
/s/ LEONARD GARTNER Director June 25, 1997
- ------------------------
Leonard Gartner
/s/ RICHARD T. GERSTNER Director June 25, 1997
- ------------------------
Richard T. Gerstner
/s/ FRANCIS X. MURPHY Director June 25, 1997
- ------------------------
Francis X. Murphy
/s/ ROBERT H. OXENBERG Director June 25, 1997
- ------------------------
Robert H. Oxenberg
/s/ ROGER C. KUHN Vice President-Finance & Administration June 25, 1997
- ------------------------ Chief Financial and Accounting Officer
Roger C. Kuhn
</TABLE>
<PAGE>
TABLE OF CONTENTS TO FINANCIAL STATEMENTS
Financial Statements Page
- -------------------- ----
Independent Auditor's Report F-1
Report of Independent Accountants F-2
Balance Sheet as of March 31, 1997 F-3
Statements of Operations for the Years Ended F-4
March 31, 1997 and 1996
Statements of Stockholders' Equity for the Years F-5
Ended March 31, 1997 and 1996
Statements of Cash Flows for the Years Ended March 31, 1997 F-6
and 1996
Notes to Financial Statements F-8
<PAGE>
INSCI CORP
EXECUTIVE OFFICERS OF THE REGISTRANT
BOARD OF DIRECTORS
Dr. E. Ted Prince
Chairman of the Board
President & Chief Executive 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, Development
President & Chief Executive Officer
John L. Gillis Roger C. Kuhn
Executive Vice President Vice President, Finance &
& Chief Operating Officer Administration & Chief Financial
& Accounting Officer
AUDITORS: TRANSFER AGENT:
Pannell Kerr Forster PC First Union National Bank
420 Lexington Avenue 1525 West W. T. Harris Blvd. -3C3
New York, NY Charlotte, NC 28288
<PAGE>
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):
Sequential
Page Number
EXHIBIT NO. DESCRIPTION OF EXHIBIT
3.1 Certificate of Incorporation of the Company.
3.2 Bylaws of the Company.
3.3 Amendment to Certificate of Incorporation of the Company
Creating Preferred Stock.
3.4 Certificate of Amendment to the Certificate of Incorporation.
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 Warrant3/4Version 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 Associate 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 between 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 agreement 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 Amendment to Employment Contract for Dr. E. Ted Prince, CEO.
10.55 Warrant Exchange Agreement with Norcross & Company
10.56 Asset Purchase Agreement between the Company and Courtland
Group, Inc.
10.57* 10% Convertible Preferred Stock Private Placement Term Sheet and
Exhibits
10.58* Unit Private Placement Term Sheet and Exhibits
10.59 Credit Line Agreement between the Company and Silicon Valley
Bank
16.1 Letter regarding change in certifying accountants
- ----------
*/ Intended to be filed as an amendment pursuant to Regulation S-T Rule 202
<PAGE>
INDEPENDENT AUDITOR'S REPORT
To the Stockholders and
Board of Directors of
INSCI Corp
We have audited the accompanying balance sheet of INSCI Corp as of March
31, 1997 and the related statements of operations, stockholders' equity, and
cash flows for the year 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 audit.
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 that 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 financial position of INSCI Corp as of
March 31, 1997 and the results of its operations and its cash flows for the year
then ended in conformity with generally accepted accounting principles.
Pannell Kerr Forster PC
New York, New York
June 6, 1997
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Stockholders and
Board of Directors of
INSCI Corp
We have audited the accompanying statements of operations, stockholders'
equity (deficiency), and cash flows for the year ended March 31, 1996 of INSCI
Corp. 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 audit.
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 that 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 operations and cash flows of
INSCI Corp for the year ended March 31, 1996, in conformity with generally
accepted accounting principles.
As described in Note B (11) to the financial statements, the Company
changed its method of accounting for the beneficial conversion feature of
convertible preferred stock in 1996 to comply with the Securities and Exchange
Commission staff's position of retroactive application of this accounting
practice.
Our previous report on the 1996 financial statements, dated 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, included an explanatory paragraph that described
the uncertain outcome of an investigation by the Securities and Exchange
Commission. As explained in Note L to the financial statements, that
investigation had been terminated on September 10, 1996.
MAHONEY COHEN & COMPANY, CPA, P.C.
New York, New York
May 10, 1996, except for Notes B(11) and
M ("Stock Based Compensation") as to which
the date is June 18, 1997 and Note L as to which
the date is September 10, 1996
<PAGE>
INSCI CORP
BALANCE SHEET
MARCH 31, 1997
(in thousands, except share amounts)
<TABLE>
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents (Notes B-2, B-7 and B-9 ) $ 5,068
Accounts receivable, net of allowance for doubtful accounts of $100 (Notes B-7 and B-9) 2,491
Inventory (Note B-3) 47
Prepaid expenses and other current assets 157
-------
Total current assets 7,763
Property and equipment, net (Notes B-5 and D) 707
Other assets:
Capitalized software development costs,
net of accumulated amortization of $1,123 (Note B-4) 661
Purchased software, net of accumulated amortization of $384 (Note B-4) 1,101
Other 259
-------
Total other assets 2,021
-------
Total assets $10,491
=======
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Note payable (Note H) $ 48
Accounts payable 828
Accrued compensation 344
Accrued vacation 207
Accrued commissions 252
Accrued and other liabilities 523
Deferred maintenance revenue (Note B-1) 837
-------
Total current liabilities 3,039
Commitments and contingencies (Notes E,F,J,K,L, and M )
Stockholders' equity (Notes B-11,J,K,L,M and O)
Convertible preferred stock, $.01 par value, authorized 10,000,000 shares, issued:
10% Convertible redeemable preferred stock, 954,282 shares issued
and outstanding, liquidation preference of $954 10
10% Convertible preferred stock, 1,350,000 shares issued and outstanding, liquidation
preference $1,350 14
8% Convertible redeemable preferred stock, 1,386,891 shares issued and outstanding,
no liquidation preference 13
Common stock, $.01 par value: authorized 40,000,000 shares: issued and outstanding
4,224,110 shares 42
Additional paid-in capital 25,152
Accumulated deficit (17,779)
-------
Total stockholders' equity 7,452
-------
Total liabilities and stockholders' equity $10,491
=======
</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,
--------------------------
1997 1996
------- -------
Revenue (Notes B-1 and N)
Product $ 5,737 $ 4,983
Services 5,644 2,930
------- -------
Total revenue 11,381 7,913
------- -------
Cost of revenue (Note B-4)
Product 1,634 1,784
Services 2,992 1,527
------- -------
Total cost of revenue 4,626 3,311
------- -------
Gross margin 6,755 4,602
------- -------
Expenses
Sales and marketing 3,693 2,459
Product development 2,170 1,758
General and administrative 1,943 1,542
Non-recurring charges (Note C ) - 325
------- -------
Total expenses 7,806 6,084
------- -------
Loss from operations (1,051) (1,482)
------- -------
Interest income (expense)
Interest income 127 70
Interest expense (12) (40)
------- -------
Interest income (expense) net 115 30
------- -------
Net loss (936) (1,452)
Preferred stock dividend (Notes B-11 and J) (1,543) (470)
------- -------
Net loss applicable to common shares $(2,479) $(1,922)
======= =======
Net loss per common share (Notes B-6 and B-11)) $ (0.62) $ (0.53)
======= =======
Weighted average common
shares outstanding (Note B-6 ) 4,022 3,655
======= =======
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS.
<PAGE>
<TABLE>
<CAPTION>
INSCI CORP
STATEMENTS OF STOCKHOLDERS' EQUITY
Years ended March 31, 1997 and 1996
(in thousands, except share amounts)
Common Stock Preferred Stock Additional
------------------------------------------------------ Paid-in Accumulated
No. of Shares Amount No. of Shares Amount Capital (Deficit) Total
------------- ------ ------------- ------ ------- --------- -----
<S> <C> <C> <C> <C> <C> <C> <C>
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 -- -- -- 443 (443) --
Common stock issued for purchase of
assets of Courtland Group, Inc. 89,681 1 -- -- 255 -- 256
Acquisition cost/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 17,769 (15,300) 2,519
10% Convertible preferred stock issued -- -- 1,350,000 14 1,245 -- 1,259
Common stock issued as underwriting
fees related to 10% Convertible
preferred stock 30,000 -- -- -- -- -- --
8% Convertible redeemable preferred
stock issued -- -- 1,333,334 13 4,206 -- 4,219
10% preferred stock conversion to
common stock 84,337 1 (206,668) (2) 2 -- 1
Common stock issued as dividend
on 10% preferred stocks 70,093 1 -- -- 1,314 (1,314) 1
Common stock accrued as dividend
on 10% preferred stocks -- -- -- -- 33 (33) --
Preferred stock issued as dividend
on 8% convertible redeemable
preferred stock -- -- 53,557 -- 196 (196) --
Common stock issued for purchase of
assets 27,500 -- -- -- 110 -- 110
Exercise of stock warrants 37,188 1 -- -- 110 -- 111
Exercise of stock options 110,981 1 -- -- 167 -- 168
Net loss -- -- -- -- -- (936) (936)
------------------------------------------------------------------------------------
BALANCE, MARCH 31, 1997 4,224,110 $42 3,691,173 $37 $25,152 $(17,779) $7,452
====================================================================================
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS.
<PAGE>
INSCI CORP
STATEMENTS OF CASH FLOWS
YEARS ENDED MARCH 31,
---------------------
1997 1996
---- ----
Cash flows from operating activities:
Net loss $ (936) $ (1,452)
Reconciliation of net loss to net cash provided by
(used in) operating activities:
Interest on note exchanged for preferred stock -- 40
Depreciation and amortization 511 454
Amortization of software costs 929 760
Changes in assets and liabilities, net of effects
from acquisitions:
Accounts receivable (389) (944)
Inventory (35) 25
Prepaid expenses and other current assets (17) (25)
Accounts payable 167 276
Accrued liabilities 156 317
Customer deposits (227) 47
Deferred maintenance revenue 263 (22)
-------- ---------
Net cash provided by (used in) operating activities 422 (524)
-------- ---------
Cash flows from investing activities:
Additions to capitalized software development costs (615) (120)
Additions to purchased software costs (382) (114)
Capital expenditures (385) (245)
Purchase of certain assets of Courtland Group, Inc. -- (242)
Other assets (123) (29)
-------- ---------
Net cash used in investing activities (1,505) (750)
-------- ---------
Cash flows from financing activities:
Proceeds from sale of common stock -- 200
Proceeds from exercise of stock options 168 7
Proceeds from exercise of stock warrants 111 --
Proceeds from sale of preferred stock 6,350 --
Payment of stock issuance costs (870) --
Payment of note payable (44) --
Proceeds from sale of 90 day subordinated notes -- 1,200
Payment of financing costs -- (250)
Redemption of preferred stock and dividends -- (1,000)
Payment of capital lease obligations -- (52)
-------- ---------
Net cash provided by financing activities 5,715 105
-------- ---------
Net change in cash and cash equivalents 4,632 (1,169)
Cash and cash equivalents at beginning of year 436 1,605
-------- ---------
Cash and cash equivalents at end of year $ 5,068 $ 436
======== =========
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS.
<PAGE>
INSCI CORP
STATEMENTS OF CASH FLOWS
(continued)
SUPPLEMENTAL DISCLOSURE OF NON CASH FINANCING AND INVESTING ACTIVITIES:
During fiscal year 1997, preferred stock dividends were accrued in the amount of
$33,000
During fiscal years 1997 and 1996, the Company issued 154,430 and 16,082 shares
respectively of its common stock in payment of dividends due and conversions of
its 10% preferred stock (Notes J and K)
Dividends were accreted on beneficial conversion features of preferred stock and
amounted to $443,000 and $1,132,000 in fiscal 1996 and 1997 respectively (Notes
B-11 and J)
During fiscal year 1997, the Company issued 53,557 shares of its 8% Convertible
Redeemable Preferred Stock in payment of the dividends due on this stock. (Notes
J and K)
During fiscal year 1997, the Company acquired certain assets in exchange for
27,500 shares of its common stock (Note O)
During fiscal 1996, the Company converted a $1,240,000 note payable to preferred
stock
During fiscal year 1996, the Company issued common stock with a value of
$138,000 in connection with the acquisition of certain assets from the Courtland
Group, Inc. and software of Custom Solutions, Inc. (Note O)
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 the Courtland Group, Inc. (Note K-7)
In November 1995, the Company issued 40,000 shares of its 10% preferred stock in
payment of the interest due on 90-day Subordinated Notes (Note K)
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
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS.
<PAGE>
INSCI CORP
NOTES TO FINANCIAL STATEMENTS
MARCH 31, 1997
NOTE A - ORGANIZATION OF THE COMPANY
INSCI Corp (the "Company") was incorporated in 1989. Until January 1996,
the Company was a majority-owned subsidiary of Information Management
Technologies Corporation ("Imtech"). As of March 31, 1997, Imtech owns
approximately 19% 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
The Company recognizes revenue in accordance with the provisions of
American Institute of Certified Public Accountants Statement of Position No.
91-1, Software Revenue Recognition. Product revenues from the sale of software
licenses are recognized upon shipment if collection is probable and remaining
vendor obligations are insignificant. 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. The Company has arranged with third party providers
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 short duration
for a fixed price.
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 and software 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 Development 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 and is computed on a product-by-product
basis, based on either a straight-line basis over the economic life of the
product 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
$615,000 and $120,000 during the years ended March 31, 1997 and 1996,
respectively. Amortization of capitalized software costs totaled $587,000 and
$718,000 during the years ended March 31, 1997 and 1996, 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
amortized on the same basis as capitalized software costs. 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 $482,000 and $928,000 during the
years ended March 31, 1997 and 1996, respectively. Amortization of purchased
software costs totaled $342,000 and $42,000 during the years ended March 31,
1997 and 1996, respectively, and is included in cost of revenue in the
accompanying Statements of Operations.
5. 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.
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
6. Loss Per Share
The computation of loss per common and common equivalent share has been
calculated on the basis of the weighted average number of common shares
outstanding during the year. The effect on loss per share of outstanding
options, warrants and convertible securities is antidilutive and has not been
included in the calculation of weighted average shares outstanding.
In early 1997 the Financial Accounting Standards Board issued Statement of
Financial Accounting Standard (SFAS) No. 128, Earnings per Share. The Statement
is effective for financial statements for periods after December 15, 1997, and
changes the method in which earnings per share will be determined. Adoption of
this Statement by the Company will not have a material impact on earnings per
share.
7. 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 maintains its cash balances in one financial institution. These
balances are insured by the Federal Deposit Insurance Corporation up to
$100,000. At March 31, 1997, the uninsured amounts held at these financial
institutions were approximately $4,885,000. 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.
8. 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. No such
write-downs were required in fiscal 1997 and 1996.
9. 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 a note 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.
10. Use of Estimates
The preparation of financial statements requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those estimates.
11. Convertible Preferred Stock
The beneficial conversion feature of convertible preferred stock (see Note
J) is accounted for as a dividend to preferred shareholders and amortized over
the period from the date of issue through the date the security is first
convertible. This policy conforms to the accounting for these transactions
announced by the SEC Staff in March, 1997.
The fiscal 1996 preferred dividends have been adjusted to comply with the
Staff's position of retroactive application of this accounting practice. As a
result, fiscal 1996 dividends have been increased from $27,000 to $470,000 and
net loss per common share has been increased from ($.40) to ($.53).
12. Accounting for Stock Options and Warrants
All stock options and warrants that have been granted by the Company have
been at or above fair market value of the Company's common stock at the time of
grant. As a result, no compensation expense or other accounting relating to the
Company's stock options and warrants has been required to be recorded within the
financial statements of the Company.
The foregoing accounting is in accordance with Accounting Principles Board
Opinion No. 25 (APB Opinion No. 25) and related interpretations. The Company
adopted the disclosure provisions of Statement of Financial Accounting Standards
No. 123, "Accounting for Stock-Based Compensation, " (SFAS 123) in fiscal 1997.
The Company has included in Note M the impact of the fair value of employee
stock-based compensation plans on net loss and loss per share on a pro forma
basis for awards granted since April, 1995 pursuant to SFAS 123.
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.
NOTE D - PROPERTY AND EQUIPMENT
Property and equipment at March 31, 1997 consist of the following (in
thousands):
Furniture and fixtures $ 269
Leasehold improvements 105
Equipment 1,690
-----
2,064
Less accumulated depreciation and amortization (1,357)
-------
$ 707
=======
Depreciation and amortization expense was $511,000 and $454,000 for fiscal
years 1997 and 1996, respectively.
NOTE E - RELATED PARTY TRANSACTIONS
(1) In February 1995, Mr. Robert Oxenberg, a director of the Company, was
granted 25,000 options at $1.13 per share. In September, 1995 Mr. Oxenberg was
also granted a ten-year option to acquire 10,000 shares of Common Stock at an
exercise price of $7.00 per share. During fiscal 1996 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 per share.
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. 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. During fiscal 1996 the Company established an allowance for
loan loss as the underlying collateral had minimal value. During fiscal 1997,
Mr. Gillis paid down the loan in the amount of $55,860 through a combination of
cash payments and surrender of stock options. Interest paid by Mr. Gillis was
$9,522 during fiscal 1997 and $24,284 during fiscal 1996. The outstanding loan
balance as of March 31, 1997 is $87,759, and is offset by an allowance for loan
losses by the same amount.
(3) In June 1995, the Company commenced an interim office sharing
arrangement on a month-to-month basis with 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. 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 during fiscal 1996. Dr. Prince is also an investor in one $25,000 unit of
the Company's 10% convertible preferred stock.
(4) The Company engaged Emerging Technology Ventures, Inc. ("ETVI") to
manage its acquisition and strategic alliance activities. 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. 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 until October, 1997 and includes an
updated exercise price of $5.09 per share under specific circumstances. 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. in March, 1996 ETVI received a fee
of $33,750 which was offset against the retainer and 43,537 options vested from
the 400,000 options described above. In connection with the acquisition of the
Image Express software from Customs Solution, Inc. during fiscal 1996, 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. As a result of
the Company acquiring certain assets from Action Computer Supplies Holdings PLC
(See Note O), ETVI received a success fee in fiscal 1997 of $25,000 which was
offset against the retainer and had an additional 14,262 options vested at $5.09
per share.
(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 has been paid a monthly retainer of $6,000
plus expenses during fiscal year 1997, and also received a grant of 40,000
incentive stock options at an exercise price of $4.06 per share. All the 40,000
options vested during fiscal year 1997. During fiscal 1997 Gartner and
Associates was paid, in addition to the $6,000 monthly retainer fee,
approximately $61,000 in fees related to the additional assignments regarding
the preparation of the Company's Form S-1 filed with the Securities and Exchange
Commission and for services performed in connection with acquisition activities
of the Company.
(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.
(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. During fiscal 1997, additional
agreements to provide computer programming services were entered into with TPL.
Payments to TPL totaled $647,000 in fiscal 1996 and $652,000 in fiscal 1997. 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. The Company has issued approximately
$944,000 in purchase orders for services to be performed by TPL in fiscal 1998.
(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 per share to Mr. Richard Gerstner, who joined the Board
of Directors. In June 1996, the Company granted Mr. Gerstner 400,000 stock
options at $6.25 per share. Options under this grant vest when earned based upon
signing new customers to reseller agreements and ensuring the annual
continuation of such agreements. No options under this grant are currently
vested.
NOTE F - LEASE COMMITMENTS
The Company's lease for its Massachusetts headquarters expires in
September, 2004. 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, 1997, future minimum rental payments under these operating
leases are as follows (in thousands):
Year ending:
March 31, 1998............................. $ 313
March 31, 1999............................. $ 263
March 31, 2000............................. $ 283
March 31, 2001............................. $ 307
March 31, 2002............................. $ 317
Thereafter................................. $ 832
-------
$ 2,315
-------
Total rent expense, was approximately $291,000 and $268,000 for the years
ended March 31, 1997 and 1996, respectively.
NOTE G - REVOLVING CREDIT FACILITY
On March 28, 1997 the Company completed a credit facility with Silicon
Valley Bank ("SVB") for a working capital line of $1,500,000 and an equipment
financing line of $250,000. The terms of the line provide for working capital
advances up to seventy five percent of the Company's eligible domestic accounts
receivable under ninety days from invoice date. The advance rate is capped at
sixty percent until quarterly profitability of $75,000 is attained. Collateral
for the line, which is secured by a lien, is comprised of all Company assets
except fixed assets financed elsewhere. The rate of interest to be paid to SVB
is the prime rate plus one percent which will be reduced by 1/2% upon the
Company attaining quarterly income, before provision for dividends on preferred
stock.
In order to borrow against the bank line, the Company is required to meet
certain covenants which include that the Company not exceed $150,000 loss for
the quarter ended March 31, 1997, maintenance of tangible net worth of
$5,000,000, minimum quick ratio of 2.0:1 and debt service coverage. As of March
31, 1997, the Company could not borrow against the line due to its fourth
quarter loss being in excess of the loss covenant. Under the terms of the line,
consent is required from SVB in order for the Company to pay cash dividends. No
such consent is required for stock dividends. The Company, at its option, may
terminate the line with SVB without penalty. The Company had no borrowings
against the credit facility with SVB during fiscal 1997.
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. The Company recorded the note at its net present value
of $91,406. On March 31, 1997 the outstanding portion of this note totaled
$47,656.
NOTE I - INCOME TAXES
At March 31, 1997, the Company had available NOL carryforwards of
approximately $13,500,000 resulting from accumulated operating losses through
fiscal 1997. The NOL carryforwards for tax reporting purposes expire in various
amounts through the year 2012. The Company believes that an "Ownership Change"
occurred in January 1996 within the meaning of Section 382 of the IRS Code.
Under an ownership change, the Company will be permitted to utilize
approximately $13,000,000 in 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 fiscal 1998 and beyond will be
approximately $900,000 per year, and accordingly, the Company will not be able
to utilize its full NOL benefits. From January 1996 through March 31, 1997, the
Company has NOL carryforwards of approximately $500,000 which are available to
offset future income and expire in 2011 and 2012. 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 - PREFERRED STOCK
A. 8% Convertible Redeemable Preferred Stock
On November 11, 1996, the Company completed 1,333,334 Units of a
Regulation "D" Private Placement Offering of 8% Convertible Redeemable Preferred
Stock. Proceeds from this offering, before underwriting commissions and
expenses, totaled $5,000,000. Each Unit consists of one share of 8% Preferred
Stock and one Warrant to purchase one share of Common Stock for $5.00 per share
for a period of three years expiring on October 1, 1999. The 8% Convertible
Preferred Stock and Warrants contain limited anti-dilution protection and
adjustment rights granted to purchasers of the Units.
Additionally, the Company paid to J. Michael Reisert & Co., Inc., the
placement agent, a commission of 8% per Unit, or the sum of $400,000, on the
completion of the minimum offering, in addition to approximately $87,500 in
expenses, as well as granting 133,333 Warrants to purchase 133,333 Units
comprised of 133,333 shares of 8% Preferred Stock, convertible into shares of
Common Stock and 133,333 warrants to purchase shares of Common Stock at $5.50
per share for a period of three years from the date of closing of the minimum
offering.
The Company granted, as a part of the terms of the Placement, cost-free
registration rights with respect to the underlying shares for the Convertible
Preferred Stock, the Unit Warrants and the Warrants granted to the Placement
Agent. In the event that the Company is unable to obtain an effective
registration for the underlying shares, as provided in the Placement Agreement,
the terms of placement involve the imposition of a penalty in an adjustment of
the $3.75 Unit price paid by the holders in the placement, of 2% per month after
nine months from the date of closing with a maximum of 10%.
B. 10% Convertible Preferred Stock
On September 20, 1996 the Company completed a Private Placement financing
under Regulation "D" for the sum of $1,350,000. The Company issued 1,350,000
shares of 10% Convertible Preferred Stock to accredited investors at $1.00 per
share. Each 10% convertible share of Preferred Stock is convertible into a share
of Common Stock of the Company for a period of three years, at a 30% discount
(the beneficial conversion feature) to the trading market of the Company's
Common Stock. The conversion price will be limited to a maximum of $8.00 per
share. The 10% Preferred Stock is automatically converted into shares of Common
Stock at the expiration of the three year term. The Preferred Stock may not be
converted for a period of six months from completion of the offering. In the
event that conversions occur at market prices for the Company's stock that are
substantially below the current market price, it is possible for material
dilution to other holders of the Company's stock and may require the Company to
seek shareholder approval for the authorization and issue of additional common
shares. The Company has granted cost-free registration rights to the holders of
the Preferred Stock who have converted into Common Stock. None of the preferred
stock had been converted as of March 31, 1997.
The Company entered into an agreement with Amerivet/Dymally Securities,
Inc. to act as Placement Agent for the 10% Convertible Preferred Stock and paid
as compensation to the Placement Agent 30,000 shares of restricted Common Stock
with cost-free registration rights in addition to $23,000 in commissions and
112,000 warrants to purchase 112,000 shares of Common Stock at $5.00 per share
for a period of 3 years expiring October 1999. Additionally, the Company paid to
the Placement Agent's counsel the sum of $28,500 for legal fees and expenses.
C. 10% Convertible Redeemable 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% 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 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%
(the beneficial conversion feature) of the average closing bid price of the
common stock during the 20 days immediately preceding the date that the
conversion notice is given. In the event that conversions occur at market prices
for the Company's stock that are substantially below the current market price,
it is possible for material dilution to other holders of the Company's stock and
may require the Company to seek shareholder approval for the authorization and
issue of additional common shares. 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. The Company has agreed to use its best efforts in registering these
shares on a timely basis. An investment 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. This option expires in April, 1998.
In accordance with the terms of the conversion, a total of 206,668 shares
of preferred stock have been surrendered and converted into 84,337 shares of the
Company's common stock during the fiscal year ended March 31, 1997.
D. 8% Redeemable Convertible Preferred Stock
The Company had 50,000 shares of authorized Redeemable Convertible
Preferred Stock with a par value of $100 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. (Note J-C)
NOTE K - STOCKHOLDERS' EQUITY
(1) 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.
(2) During fiscal year 1997, a total of 206,668 shares of 10% Convertible
Redeemable Preferred Stock were surrendered and converted into 84,337 shares of
the Company's common stock. In addition, during the fiscal year ended March 31,
1997, the Company issued 60,288 shares of common stock in lieu of paying cash
dividends on its 10% Convertible Redeemable Preferred Stock. During fiscal year
1996, a total of 79,050 shares of 10% Convertible 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.
(3) During fiscal year 1997, in accordance with the terms of its 10%
Convertible Preferred Stock, the Company issued 9,805 shares of common stock in
lieu of paying cash dividends on its 10% Convertible Preferred Stock.
(4) During fiscal year 1997, in accordance with the terms of its 8%
Convertible Redeemable Preferred Stock, the Company issued 53,557 shares of 8%
Convertible Redeemable Preferred Stock in lieu of paying cash dividends on this
preferred stock.
(5) In March 1997 the Company issued 27,500 shares of common stock in
conjunction with the acquisition of certain assets (Note O).
(6) In March 1996, the Company sold 75,054 shares of restricted common
stock to two investors for the sum of $200,000.
(7) 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.
(8) 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
granted cost-free registration rights to the underlying common stock shares of
these warrants and has included these underlying common stock shares in a
current Form S-1 Registration Statement that has previously been filed and is in
the process of being amended with the Securities and Exchange Commission.
(9) The following is a summary of the Company's stock warrant activity:
WARRANTS OUTSTANDING Number Price Expiration
of Shares of Shares Date
Initial public offering 625,000 $9.00 Apr. 1998
Underwriters, initial public offering 125,000 $7.70 Apr. 1998
1994 warrants 39,272 $3.00 Apr. 1998
---------
Balance, March 31, 1996 789,272
---------
Fiscal 1997 activity:
Issued
Underwriters exchange, initial public
offering 187,500 $3.50 Apr. 1998
10% Convertible Preferred Stock,
placement agent 112,000 $5.00 Oct. 1999
8% Convertible Preferred Stock 1,333,334 $5.00 Oct. 1999
8% Convertible Preferred Stock,
placement agent 133,333 $5.50 Sep. 1999
---------
Total issued 1,766,167
---------
Canceled (125,000) $7.70 Apr. 1998
---------
Exercised 0
=========
Balance (and exercisable),
March 31, 1997 2,430,439
=========
NOTE L - COMMITMENTS AND CONTINGENCIES
SEC Investigation
On September 30, 1992, the Company and Information Management Technologies
Corporation ("IMTECH"), the Company's former majority shareholder, reached an
agreement with the Securities and Exchange Commission ("Commission") to conclude
and settle the Commission's informal investigation of the Company and IMTECH.
The Company and IMTECH, without admitting or denying any of the allegations made
by the Commission in its complaint, and without trial or final adjudication of
the allegations made in the Commission'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 and IMTECH from conducting future
public offerings or private security placements. The Company and IMTECH may be
subject to contempt of court or other sanctions if the Company or IMTECH, at any
time in the future, engage in actions that are deemed to violate the consent
judgment and the injunctions.
The Securities and Exchange Commission ("Commission") issued an order,
dated April 13, 1995, authorizing a private investigation of IMTECH (INSCI's
former majority shareholder) 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 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.
On September 10, 1996 the Company was informed by the Commission that the
staff inquiry relating to these matters had been terminated and that no
enforcement action had been recommended at this time.
Registration Rights
The Company has previously filed and is in the process of amending a Form
S-1 Registration Statement with the Securities and Exchange Commission for
15,923,220 shares of common stock, of which 4,000,000 are reserved for
acquisitions, 2,605,411 for selling shareholders and the balance of 9,317,809
for rights granted to unit holders, convertible preferred stockholders, and
warrants and options issued by the Company. The registration includes
"piggyback" registration rights with respect to the shares of common stock that
the Company has granted to the holders of certain warrants and shares of the
Company's stock. Compliance with these registration rights may involve
substantial expense to the Company and may subject the Company to damages for
the violation of its registration rights agreements.
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. In May, 1997, Dr. Prince was granted a
management incentive bonus in the form of a 75,000 stock option grant at $3.75
per share related to achievements in fiscal 1997. For fiscal 1996, a management
incentive bonus of $100,000 was earned.
In conjunction with Dr. Prince's employment, in June, 1995, 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 320,942 and 350,000 options, respectively.
In connection with the purchase of certain assets of the Courtland Group,
Inc., on March 28, 1996 the Company 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. The Company entered into an aggregate of seven
employment and/or consulting agreements with seven former employees and/ or
shareholders of Courtland.
NOTE M - STOCK OPTION PLANS
The following is a summary of the Company's stock option activity:
<TABLE>
<CAPTION>
1992 STOCK OPTION PLAN 1992 DIRECTORS OPTION PLAN
Number Weighted Average Number Weighted Average
of Shares Exercise Price of Shares Exercise Price
--------- ---------------- --------- ----------------
<S> <C> <C> <C> <C>
Outstanding at March 31, 1995 245,302 $6.00 75,000 $2.88
Granted 962,500 2.16 20,000 1.44
Canceled (281,805) 3.49 --
Exercised (3,932) 1.66 --
------- ---------
Outstanding at March 31, 1996 922,065 2.78 95,000 2.58
Granted 77,000 6.25 --
Canceled (310,184) 3.33 (18,333) 3.79
Exercised (79,316) 1.60 (31,667) 1.28
------- ---------
Outstanding at March 31, 1997 609,565 3.17 45,000 3.01
------- ---------
<CAPTION>
1997 EQUITY INCENTIVE PLAN OTHER STOCK OPTIONS
Number Weighted Average Number Weighted Average
of Shares Exercise Price of Shares Exercise Price
--------- ---------------- --------- ----------------
<S> <C> <C> <C> <C>
Outstanding at March 31, 1995 -- $ --
Granted -- -- 3,000,000 $2.12
Canceled -- -- (9,924) 1.66
Exercised -- -- --
------- ---------
Outstanding at March 31, 1996 -- 2,990,076 2.12
Granted 225,800 5.43 440,000 6.14
Canceled (5,000) 5.43 (224,134) 4.15
Exercised -- -- --
------- ---------
Outstanding at March 31, 1997 220,800 5.43 3,205,942 2.53
------- ---------
</TABLE>
<PAGE>
The following table summarizes information about stock options outstanding and
exercisable at March 31, 1997.
<TABLE>
<CAPTION>
1992 STOCK 1992 DIRECTORS 1997 EQUITY OTHER STOCK
OPTION PLAN OPTION PLAN INCENTIVE PLAN OPTIONS
----------- ----------- -------------- -------
<S> <C> <C> <C> <C>
Outstanding
Option Price Range $1.50 - 6.56 $1.13 - 7.00 $3.75 - 6.25 $1.44 - 6.25
Number of Shares 609,565 45,000 220,800 3,205,942
Weighted Average Life 8.4 2.4 9.5 3.6
Weighted Average Exercise Price $3.17 $3.01 $5.43 $2.53
Exercisable
Number of Shares 238,037 31,667 -- 1,373,465
Weighted Average Exercise Price $3.22 $3.68 -- $2.10
</TABLE>
Employee Stock Option Plans
On July 29, 1996 the Company adopted the 1997 Equity Incentive Plan (97
Plan) authorizing 3,000,000 shares of common stock to replace the remaining and
ungranted shares under the 1992 Stock Option Plan that was terminated. The 97
Plan permits the Company to provide its employees with incentive compensation
opportunities which are highly motivational.
Directors and Other Stock Options
The Directors Option Plan (the "Directors Plan") was adopted by the Board
of Directors 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 to 1,000,000. On July 29, 1996 the Directors Plan
was amended so that each new director receive 100,000 stock options upon being
appointed to the Board of Directors. In addition, the current change of control
provision was modified to reflect immediate vesting.
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.
During fiscal 1996, the Company granted aggregate stock options of
3,000,000 shares to new and continuing Directors and officers of the Company.
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
unregistered. The Company has included the underlying shares in its preliminary
Form S-1 Registration Statement that has been filed with the Securities and
Exchange Commission and is in the process of being amended.
Stock Based Compensation
The Company applies APB Opinion No. 25 and related interpretations in
accounting for its stock option plans and, accordingly, no compensation cost has
been recognized because stock options granted under the plans were at exercise
prices which were equal to or greater than the market value at date of grant.
Had compensation expense been determined as provided in SFAS 123 for stock
options using the Black-Sholes option pricing model, the pro forma effect would
have been:
Fiscal 1997 Fiscal 1996
----------- -----------
Net loss applicable to common shares -
as reported $ (2,479,000) $ (1,922,000)
Net loss applicable to common shares -
pro forma (4,162,000) (3,036,000)
Net loss per common share - as reported (.62) (.53)
Net loss per common share - pro forma (1.03) (.83)
The fair value of each option grant is calculated using the following weighted
average assumptions:
Fiscal 1997 Fiscal 1996
----------- -----------
Expected life (years) 5 5
Interest rate 6.01% 5.86%
Volatility 82% 88%
Dividend yield 0 0
NOTE N - 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, 1997 sales made to
UNISYS and to customer leads furnished by UNISYS accounted for approximately 13%
of the Company's total revenues and revenues to OCE Printing Systems accounted
for approximately 11% of the Company's total revenues. Amounts due from
customers as a percent of the Company's accounts receivable balance as of March
31, 1997 were, in approximate percentages, UNISYS 16%, Employees Insurance of
Wausau 17% and First Data Investor Service 16%. 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 revenues. Amounts due from UNISYS
were approximately 23% of the accounts receivable balance at March 31, 1996.
NOTE O- ACQUISITIONS
On March 3, 1997 the Company acquired certain assets and business from
non-affiliated entities, known as Action Computer Supplies Holdings PLC
("Action") and DSI Data Systems International, Ltd. ("DSI") , both United
Kingdom -based companies. On March 31, 1997 the Company also purchased the
assets of a company known as Philippines Business Automation Systems, Inc.
("PBAS"), a corporation organized under the laws of the Republic of the
Philippines. The acquisition cost of Action, DSI and PBAS totaled approximately
$170,000 and is not considered significant by the Company.
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.
<PAGE>
PROFORMA RESULTS OF OPERATIONS (UNAUDITED)
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)
Prefered Stock Dividend (470) -- -- (470)
------- ----- --------- -------
Net Loss Applicable
to Common Shares $(1,922) $ (64) $ (440) (2,426)
======= ===== ========= =======
Net Loss Per Common Stock $ (0.65)
=======
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 an 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.
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM
THE ANNUAL 10-KSB FOR INSCI'S 1996 FISCAL YEAR
</LEGEND>
<CIK> 0000878612
<NAME> m7rpwrt@
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> MAR-31-1997
<PERIOD-END> MAR-31-1997
<CASH> 5068
<SECURITIES> 0
<RECEIVABLES> 2591
<ALLOWANCES> 100
<INVENTORY> 47
<CURRENT-ASSETS> 7763
<PP&E> 2064
<DEPRECIATION> 1357
<TOTAL-ASSETS> 10491
<CURRENT-LIABILITIES> 3039
<BONDS> 0
0
37
<COMMON> 42
<OTHER-SE> 7373
<TOTAL-LIABILITY-AND-EQUITY> 10491
<SALES> 11381
<TOTAL-REVENUES> 11381
<CGS> 4626
<TOTAL-COSTS> 4626
<OTHER-EXPENSES> 7806
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> (115)
<INCOME-PRETAX> (936)
<INCOME-TAX> 0
<INCOME-CONTINUING> (936)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (936)
<EPS-PRIMARY> (0.62)
<EPS-DILUTED> (0.62)
</TABLE>
