<PAGE>
As filed with the Securities and Exchange Commission on October 1,1997
Registration No. 333-22187
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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
--------------------------
AMENDMENT NO. 2
TO
FORM S-1
REGISTRATION STATEMENT
UNDER THE SECURITIES ACT OF 1933
--------------------------
INSCI CORP.
(Exact name of registrant as specified in its charter)
Delaware 7373 06-1302773
(Jurisdiction of (Primary Standard Industrial (I.R.S. Employer I.D.
incorporation) Classification Code Number) Number)
Two Westborough Business Park
Westborough, Massachusetts 01581
(508)-870-4000
(Name, address, including zip code, and telephone number,
including area code, of Registrant's Principal
Executive Office)
--------------------------
Joseph A. Baratta, Esq.
Baratta & Goldstein
597 Fifth Avenue
New York, New York 10017
(212)-750-9700
(Name, address, including zip code, and telephone number, including area code,
of Agent for Service)
Approximate date of commencement of proposed sale by the selling shareholders
to the public: From time to time after the effective date
of this registration statement.
If any of the securities being registered on this Form are offered on a
delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box. [X]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, check the following box and
list the Securities Act registration statement number of earlier effective
registration statement for the same offering. [ ]
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of earlier effective registration statement for
the same offering. [ ]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [ ]
--------------------------
<PAGE>
<TABLE>
CALCULATION OF REGISTRATION FEE
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<CAPTION>
PROPOSED MAXIMUM
TITLE OF EACH CLASS OF PROPOSED MAXIMUM OFFERING PRICE AMOUNT OF
SECURITIES TO BE AMOUNT TO BE PER AGGREGATE
REGISTERED REGISTERED SHARE OFFERING PRICE REGISTRATION FEE
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<S> <C> <C> <C> <C>
Common Stock par value, $.01 per share(1) 6,860,565 $ 2.50 (2) $17,151,413 $ 5,914.28
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Common Stock par value, $.01 per share,
issuable upon conversion of 10% Convertible
Redeemable Preferred Stock(3) 934,299 $ 2.50 (4) $ 2,335,748 $ 805.43
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Common Stock par value, $.01 per share,
issuable upon conversion of 10%
Convertible Preferred Stock(5) 762,755 $ 2.50 (4) $ 1,906,888 $ 657.55
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Common Stock par value, $.01 per share,
issuable upon conversion of Units(6) 2,522,657 $ 2.50 (4) $ 6,306,643 $ 2,174.70
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Common Stock, par value $.01 per share,
issuable upon exercise of Options 3,007,942 $ 4.37 (4) $ 7,519,855 $ 2,593.05
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Common Stock, par value $.01 per share,
issuable upon exercise of Initial
Public Offering Warrants 625,000 $ 9.00 (8) $ 5,625,000 $ 1,939.66
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Common Stock, par value $.01 per share,
issuable upon exercise of reissued
underwriter warrants 187,500 $ 2.50 (4) $ 468,750 $ 161.64
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Common Stock, par value $.01 per share,
issuable upon exercise of 1994 warrants 2,605 $ 2.50 (4) $ 6,513 $ 2.25
- -----------------------------------------------------------------------------------------------------------------------------
Common Stock par value, $.01 issuable
upon exercise of Options 400,000 $ 6.25 (7) $ 2,500,000 $ 862.07
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Common Stock, par value, $.01 per share
issuable upon exercise of warrants 133,334 $ 5.50 (8) $ 733,337 $ 252.87
- -----------------------------------------------------------------------------------------------------------------------------
Common Stock, par value, $.01 per share
issuable upon exercise of warrants 1,333,334 $ 5.00 (8) $ 6,666,670 $ 2,298.85
=============================================================================================================================
TOTAL REGISTRATION FEE $17,662.35(9)
=============================================================================================================================
</TABLE>
(1) Includes 4,000,000 shares of Common Stock par value $.01 per share ("Common
Stock") reserved by INSCI Corp. ("INSCI or the "Company") for acquisition
purposes; 2,860,565 shares of Common Stock issued by the Company to selling
stockholders.
(2) Estimated solely for the purpose of determining the amount of the
registration fee pursuant to Rule 457(c) under the Securities Act of 1933.
(3) Represents 934,299 shares of Common Stock underlying 10% Convertible
Redeemable Preferred Stock ("10% Convertible Redeemable Stock") and dividends to
be issued on the 10% Convertible Redeemable Stock (assuming an average market
price of $2.50 a share for conversion purposes);
(4) Estimated solely for the purpose of determining the amount of the
registration fee pursuant to Rule 457(g) under the Securities Act of 1933.
(5) Represents 762,755 shares of Common Stock underlying 10% Convertible
Preferred Stock and dividends to be issued on the 10% Convertible Preferred
Stock (assuming an average market price of $2.50 a share for conversion
purposes);
(6) Represents 2,522,657 shares of Common Stock underlying 8% Convertible
Redeemable Preferred Stock derived from 8% Units). Includes shares of Common
Stock underlying dividends to be issued on shares of 8% Preferred Stock which
underlie the Units;
(7) Exercise price of options.
(8) Exercise price of warrants.
(9) No additional registration fee is required as the average of the bid
and asked prices of the securities to be offered has decreased from the original
filing of this Registration Statement.
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DAY OR DATE AS
MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL FILE A
FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION STATEMENT
SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF THE
SECURITIES ACT OF 1933 UNTIL THE REGISTRATION STATEMENT SHALL BECOME EFFECTIVE
AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(A) MAY DETERMINE.
<PAGE>
Information contained herein is subject to completion or amendment. A
registration statement relating to these securities has been filed with the
Securities and Exchange Commission. These securities may not be sold nor may
offers to buy be accepted prior to the time the registration statement becomes
effective. This prospectus shall not constitute an offer to sell or the
solicitation of an offer to buy nor shall there be any sale of these securities
in any state in which such offer, solicitation or sale would be unlawful prior
to registration or qualification under securities laws of any such State.
Subject to Completion, Dated October , 1997
PROSPECTUS
{INSCI CORP. LOGO}
16,769,991 SHARES COMMON STOCK
This Prospectus relates to the subsequent resale or offer for sale by
Selling Stockholders (as hereinafter defined) of up to 16,769,991 shares (the
"Shares") of Common Stock, par value $.01 per share ("Common Stock"), of INSCI
Corp. ("INSCI" or the "Company"), a Delaware corporation including 2,860,565
shares of Common Stock currently owned by the Selling Stockholders; 4,000,000
shares of Common Stock reserved by the Company for acquisitions, 934,299* shares
of Common Stock issuable upon conversion of the Company's 10% Convertible
Redeemable Preferred Stock; 762,755* shares of Common Stock underlying 10%
Convertible Preferred Stock: 3,989,325* shares of Common Stock underlying the
Company's Units (each unit comprised of one share of 8% Redeemable Preferred
Stock which is convertible into a share of Common and Stock and a three year
Warrant to purchase one share of Common Stock at $5.00 per share (the placement
agents warrants are exercisable at $5.50 per share)); 815,105 shares of
Common Stock issuable upon the exercise of Warrants; and 3,407,942 shares of
Common Stock which may be issued upon the exercise of Options granted by the
Company. The distribution of the Shares may be effected in one or more
transactions through one or more transactions through one or more brokers or
dealers, through privately negotiated transactions or otherwise at market prices
prevailing at the time of sale or at prices otherwise negotiated.
Upon any sale of the Shares covered by this Prospectus, Selling
Stockholders and any participating brokers or dealers may be deemed to be
underwriters as that term is defined in the Securities Act of 1933, as amended
(the "Act"), and commissions or discounts or any profits realized on the sale of
such Shares received by Selling Stockholders and such brokers or dealers may be
deemed to be underwriting commissions or discounts within the meaning of the
Act.
A majority of the present officers and directors of the Company are
participating in the offering as selling shareholders (Potentially 3,165,942
shares of common stock provided all officers and directors become vested in and
exercise options, warrants and convertible securities) and may potentially sell
all or significantly all of their current holdings in the Company (see Risk
Factors).
There is currently issued and outstanding 4,436,107 shares of common
stock. The registration of 16,769,991 additional shares of Common Stock being
registered for resale may have a negative effect and result in a dilution of the
total number of issued and outstanding shares of Common Stock prior to the
registration.
Provided all selling shareholders offer for sale the shares being
registered for their account and that all the shars underlying the options,
warrants and convertible securities are vested and exercised by the selling
shareholders, then in that event, the current issued and outstanding 4,436,107
shares of common stock (including 2,860,565 shares being registered herein) will
sustain a substantial dilution of approximately 75% and a potential adverse
effect to the market price of the common stock as a result of the registration
of 16,769,991 shares of common stock.
The Common Stock and Warrants of the Company are listed on the NASDAQ(SM)
Small Cap Market under the symbols "INSI" for the Common Stock and "INSIW" for
the Warrants. The Common Stock and Warrants are also listed on the Boston Stock
Exchange under the symbols "INI" and "INIW" respectively. On September 4, 1997,
the last sale price of the Common Stock as reported by NASDAQ(SM) was $ 2.13 per
share of Common Stock, on August 27, 1997 the last sale price of the warrants
as reported by NASDAQ(SM) was $.28 per Warrant.
The expenses of this offering will be paid by the Company.
FOR INFORMATION CONCERNING CERTAIN FACTORS THAT SHOULD BE CONSIDERED
BY PROSPECTIVE INVESTORS, SEE "RISK FACTORS".
--------------------------
THE SECURITIES OFFERED HEREBY ARE SPECULATIVE AND INVOLVE
A HIGH DEGREE OF RISK AND SUBSTANTIAL IMMEDIATE DILUTION
UPON EXERCISE OF OPTIONS AND WARRANTS.
SEE "RISK FACTORS".
--------------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY
THE SECURITIES AND EXCHANGE COMMISSION NOR HAS THE COMMISSION
PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS.
ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
The Company will not receive any proceeds from the sale of Common Stock
under the Offering by Selling Stockholders. In the event a warrant or option
holder elects to exercise then in that event the Company will receive proceeds.
The date of this Prospectus is October , 1997
- ----------
*Number of underlying shares based upon assumed market price of $2.50 per share
of the Company's Common Stock. The actual number of shares may vary depending
upon the market price at time of conversion.
<PAGE>
- --------------------------------------------------------------------------------
PROSPECTUS SUMMARY
The following summary is qualified in its entirety by the more detailed
information and financial statements appearing elsewhere in this Prospectus,
including information under "Risk Factors". The Common Stock offered hereby
involves a high degree of risk.
OVERVIEW OF THE COMPANY
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 (ending March 31), 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
released 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.
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<PAGE>
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THE OFFERING
Common Stock being registered ........................ 16,769,991 (1) shares
of Common Stock $.01
par value per share
Common Stocks outstanding and
to be outstanding after this registration............. 4,436,107(2)
Common Stock to be Outstanding
after the registration assuming the exercise of all
options and warrants and the conversion of all
shares of Preferred Stock issued into common stock. 18,345,533(1),(3) shares
Use of Proceeds....................................... INSCI Corp. will not
receive any proceeds
from the sale of
Common Stock pursuant
to the offering unless
options and warrants are
exercised. In that
event, proceeds received
will be used for working
capital, general
corporate purposes and
acquisitions.
NASDAQ(SM) Small Cap Market Symbols................... INSI, Common Stock,
INSIW, Warrants
Boston Stock Exchange Symbols......................... INI, Common Stock,
INIW, Warrants
- ----------
(1) Assumes the exercise of all options, and warrants and the conversion of all
Preferred Stock. Also assumes dividends issued on 10% Preferred Stock, with an
assumed market price of Common Stock at $2.50, and dividends issued on 8%
Preferred Stock with a market price of $3.75.
(2) Includes 2,860,565 shares previously issued and being registered herein, and
does not assume the exercise of any options and warrants or the conversion of
any Preferred Stock.
(3) Does not include 868,365 shares of Common Stock underlying Stock Options
with exercise prices between $.94 and $6.00 granted by the Company as of
July 31, 1997.
RISK FACTORS
See "Risk Factors" for a description of certain risks relevant to an
investment in the Common Stock.
<PAGE>
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SUMMARY FINANCIAL DATA
The summary historical financial data presented below for each of the five
fiscal years ended March 31, have been derived from audited Financial
Statements. The summary historical data presented below for the three months
ended June 30, 1996, and June 30, 1997, were derived from INSCI Corp.'s
Unaudited Condensed Financial Statements which contain all accruals and
adjustments (consisting only of normal recurring adjustments) which management
considers necessary for a fair presentation of the financial information for
such periods. The results of operations for the three months ended June 30,
1997, are not necessarily indicative of the operating results that may be
expected of the full fiscal year. This financial data should be read in
conjunction with "Management's Discussion and Analysis of Financial Condition
and Results of Operations", the Financial Statements and Notes thereto, the
Unaudited Condensed Financial Statements and Notes thereto and the other
financial information included elsewhere in this Prospectus.
<TABLE>
<CAPTION>
TWELVE MONTHS ENDED THREE MONTHS ENDED
MARCH 31, (UNAUDITED)
-------------------- ------------------------------------------------
FISCAL FISCAL FISCAL FISCAL FISCAL JUNE 30, JUNE 30,
In thousands, except per share amounts 1993 1994 1995 1996 1997 1996 1997
- ------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Net Revenue $5,869 $8,187 $7,188 $7,913 $11,381 $2,936 $1,803
Gross Margin $2,210 $3,849 $3,684 $4,602 $ 6,755 $1,865 $ 721
Net Income (loss) $(2,899) $(2,968) $(3,113) $(1,452) $ (936) $ 95 $(1,163)
Net Income (loss)
Per Share $(1.54) $(1.55) $(1.04) $(0.53) $(0.62) $(0.03) $ (0.33)
Total Assets $3,929 $5,242 $5,299 $5,193 $10,491 $4,886 $ 8,780
Working Capital $(2,697) $(6,190) $883 $60 $ 4,724 $ 358 $ 3,409
Long Term Debt $894 $648 $32 $44 - $ 44 -
Preferred Stock 0 0 $1,634 $12 $37 $ 12 $ 36
</TABLE>
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OFFICERS AND DIRECTORS PARTICIPATING AS SELLING SHAREHOLDERS
A majority of the present officers and directors of the Company are
participating as selling shareholders in the offering and may potentiallly sell
all or significantly all of their current holdings in the Company.
POTENTIAL NEGATIVE EFFECT OF REGISTRATION OF 16,769,991 SHARES OF COMMON STOCK
There are currently 4,436,107 (Including 2,860,565 shares of common stock
being registered herein) shares of the Company's Common Stock issued and
outstanding. The registration of 16,769,991 shares of Common Stock for resale
may potentially have a negative effect on the trading market price of the shares
of Common Stock issued and outstanding prior to the registration and may result
in substantial dilution, provided all selling shareholders offer for sale the
shares being registered for their account and that all the shares underlying the
options, warrants and convertible securities are vested and exercised by the
selling shareholders, then in that event, the currently issued and outstanding
4,436,107 shares of common stock will sustain a substantial dilution of
approximately 75% and a potential adverse effect to the market price of the
common stock as a result of the registration of 16,769,991 shares of common
stock.
<PAGE>
DIVIDEND OBLIGATIONS OF THE COMPANY
The Company is currently obligated to pay dividends on its 10% Convertible
Redeemable Preferred Stock, 10% Convertible Preferred Stock and 8% Redeemable
Preferred Stock. At the option of the Company dividends may be paid in cash or
in kind. The Company is currently unable to make payment of its dividend
obligations out of corporate funds. See "Dividend Policy" on page .
RISK FACTORS
Prospective investors should review carefully and consider the factors
described under "Risk Factors".
The securities offered hereby are highly speculative in nature and involve a
high degree of risk. Therefore, each prospective investor should consider very
carefully certain risks and speculative factors inherent in and affecting the
business of the Company prior to the purchase of any of its common stock as well
as all of the other matters set forth herein. The Company refers each
prospective investor to the 10-KSB Report filed for the fiscal year ended March
31, 1997 and to Form 10-QSB for the fiscal quarter that ended June 30, 1997, as
well as the Form 8-K Reports all of which are incorporated by reference herein.
Certain of these risks and speculative factors are as follows:
1. HISTORICAL INABILITY TO ACHIEVE PROFITABILITY; FACTORS AFFECTING OPERATING
RESULTS
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 a
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.
While the Company has achieved an operating income in some quarters, INSCI
historically has been unable to generate sales volumes necessary to achieve
profitability on a sustained basis. INSCI's operating results are affected by a
wide variety of factors, including many of which are beyond the control of the
Company. The principal factors are the organization and management of INSCI's
sales force and its distribution partners, market acceptance of INSCI's
products, customer demand for INSCI's products and services, the level of orders
which are received and can be shipped in a quarter, and product performance and
reliability. Other factors 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, and
general economic conditions affecting the investment by potential customers in
peripheral computer devices. Many of these factors are beyond the control of the
Company. 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.
For the Company's first fiscal quarter ended June 30, 1997, the Company
sustained a loss of $1,163,000 and a loss of $.33 per share as compared to a
profit of $95,000 for the quarter ended June 30, 1996, with a loss of $.03 per
share. There is no assurance that the Company will be able to achieve the sales
and revenue required to operate profitably and not continue to experience losses
even though the Company is in the process of implementing cost reductions.
2. POTENTIAL NEGATIVE AFFECT BY THE REGISTRATION OF SHARES FOR OFFICERS AND
DIRECTORS AS PARTICIPATING SELLING SHAREHOLDERS
The Company is registering 16,769,991 shares of Common Stock of which
3,165,942 shares are issued and/or issuable upon vesting and exercise, to a
majority of the present Officers and Directors, as a result of options and/or
warrants granted to them. Resultantly, the sale or potential sale upon vesting
and exercise by Officers and Directors as Selling Shareholders of all or
significantly all of the shares owned by them may potentially have a negative
affect on the trading market of the Company's Common Stock. (See Selling
Shareholders.)
3. COMPANY'S OBLIGATION TO FILE A REGISTRATION STATEMENT FOR SHARES OF COMMON
STOCK UNDERLYING 10% CONVERTIBLE REDEEMABLE PREFERRED STOCK.
The Company sold $1,200,000 in 10% Convertible Redeemable Preferred Stock
("10% Redeemable Preferred Stock") in a private placement offering in June 1995.
As a part of the Offering, the Company agreed to file a registration statement
with the Securities and Exchange Commission (the "Commission") to register the
shares of Common Stock underlying the 10% Redeemable Preferred Stock within
ninety (90) days after the closing of the private placement. (The underlying
shares of Common Stock and dividends issued on the 10% Redeemable Preferred
Stock are included in the within registration.) The 10% Redeemable Preferred
Stock is convertible at the option of the holder into shares of Common Stock at
the greater of $.10 per share or 50% of the average closing bid price of the
Common Stock during the twenty (20) trading days preceding the date that a
conversion notice may first be given (See Conversion schedule in "Description of
10% Redeemable Convertible Preferred Stock"). The Company has also granted cost
free registration rights for additional shares of Common Stock to stock and
warrant holders and is in default in its agreement to file a registration
statement for the shares of Common Stock. The Company may be liable in damages
for violations of its registration rights agreement.
4. ACCUMULATED DEFICIT; PREFERRED STOCK DIVIDED OBLIGATION
INSCI has incurred significant losses since its commencement of business in
1989. Its accumulated deficit from inception until June 30, 1997 was
approximately $19,185,000. During the fiscal year ended March 31, 1996, it
sustained a loss of approximately $1,452,000. During the first quarter ended
June 30, 1996, the Company had a net income of $95,000. During the second
quarter ended September 30, 1996, the Company sustained a loss of $878,000.
During the quarter ended December 31, 1996 the Company had a net income of
$98,000. For the fiscal year ended March 31, 1997, the Company sustained a loss
of $936,000. For the quarter ended June 30, 1997, the Company sustained a loss
of $1,163,000. As a result of the completion of the Company's 1995 10%
Convertible Redeemable Preferred Stock Private Placement Offering, the 1996 10%
Convertible Preferred Stock Private Placement and the Company's 1996 Private
Placement of Units of 8% Convertible Preferred Stock and warrants, the Company
will be required to provide dividends of approximately $628,000 per annum in
cash or in stock at the option of the Company. The Company has obligations
through 1999 to pay dividends on shares of Preferred Stock in the event that
holders do not exercise their right of conversion.
5. NEED FOR ADDITIONAL WORKING CAPITAL, INABILITY TO BORROW UNDER EXISTING
CREDIT FACILITY
The Company believes that it will require substantial funds for working
capital and additional future product development. There can be no assurance
that the Company will be able to raise additional funds on terms favorable to
the Company or at all, or that such funds, if raised, will be sufficient to
permit the Company to conduct its operations as currently contemplated. The
Company's completion of the 10% Convertible Redeemable Preferred Stock Private
Placement in September 1996 and the 8% Unit Private Placement Offering in
November 1996 for an aggregate of $6,350,000 of which approximately $3,000,000
was intended for acquisitions of other companies.
The Company has established a bank line for working capital and equipment
financing totaling $1,750,000 with Silicon Valley Bank. This line contains
standard banking covenants relating to financial ratios and profitability that
must be obtained by the Company in order for it to utilize this loan. As of June
30, 1997, the Company was not in compliance with the profitability covenant of
no loss for the quarter and was not able to borrow against this bank line. There
can be no assurances that in the future the Company will meet these covenants
and accordingly, that this bank line will be available to the Company as a
source of working capital.
6. POTENTIAL ADVERSE MARKET PRICE IMPACT FROM SHARES ELIGIBLE FOR FUTURE SALE.
The registration of 16,769,991 total shares of common stock for resale may
adversely affect the trading market price of the Common Stock and warrants and
result in a significant dilution of approximately 75% of the total number of
issued and outstanding shares of common stock outstanding prior to the
registration. The Company presently has an aggregate of 4,436,107 shares of
Common Stock outstanding and approximately 9,909,426 (not including 868,365
shares of Common Stock underlying incentive stock options) shares reserved for
issuance (hereinafter collectively, "Reserved Securities") upon the exercise of
outstanding options, warrants and rights and upon the conversion of other
outstanding convertible securities. Of the 4,436,107 shares of Common Stock
issued and outstanding, 1,575,542 are free trading without restriction under the
1933 Act and the remaining 2,860,565 shares of Common Stock are "restricted
securities" as defined by Rule 144 promulgated under the 1933 Act. The Company
is currently registering 2,860,565 shares of restricted Common Stock, 3,407,942
shares of Common Stock underlying options, 934,299 shares of Common Stock
underlying shares of 10% Convertible Redeemable Preferred Stock, 762,755 shares
of Common Stock underlying shares of 10% Convertible Preferred Stock, 3,989,325
shares of Common Stock underlying units which are comprised of shares of 8%
Preferred Stock and Warrants, and 815,105 shares of Common Stock underlying
Warrants, Reserved Securities which are issuable by the Company upon the
exercise or conversion of outstanding options, warrants, rights and other
convertible securities. The Company has agreed to register shares of Common
Stock underlying conversion of Preferred Shares subscribed to by Selling
Shareholders under the Company's 1995 10% Convertible Redeemable Preferred Stock
Placement, the 1996 10% Convertible Preferred Stock Placement, the 1996 8% Unit
Placement and for other registration commitments by the Company (the number of
shares underlying the 10% Convertible Redeemable, 10% Convertible Preferred
Stock and 8% Units are based upon certain assumptions and subject to change. See
"Notes to Selling Shareholders.").
7. REGISTRATION OF 4,000,000 SHARES OF COMMON STOCK FOR ACQUISITIONS
Included in the within Registration Statement is 4,000,000 shares of its
Common Stock, $.01 par value, intended to be used by the Company in its
acquisition program. See "New Business Strategy". There is no assurance that the
Company will be able to acquire or attract acquisition candidates that are
compatible with the Company's business, or that the Company will receive
adequate value for the acquisition of a company. Consequently, there may be
further dilution to existing shareholders, as a result of an acquisition by the
Company.
8. DIVIDENDS ON COMMON STOCK NOT LIKELY.
No dividends have been declared or paid by the Company, and the Company does
not presently intend to declare or pay cash dividends on its Common Stock in the
foreseeable future. Any earnings that may be generated, of which no assurance
can be given, will be used in the foreseeable future to finance the growth of
the Company. Under the terms of the Company's existing credit facility with
Silicon Valley Bank ("SVB"), consent is required from SVB in order for the
Company to pay cash dividends. No such consent is required for dividends paid in
the form of the Company's stock.
9. SUBSTANTIAL DILUTION.
Investors may experience substantial dilution upon the exercise of
outstanding options and warrants, which were granted under the private placement
offerings, Stock Option Plans, in addition to other options granted to
directors, officers, employees and consultants to the Company. Additionally,
payment of dividends on the Preferred Stock in shares of Preferred Stock and/or
Common Stock (depending upon the terms of the security) may result in dilution
to the holders of Common Stock. Such dilution will reduce the net tangible book
value per share and earnings per share attributable to then outstanding shares
of Common Stock. The shares of Preferred Stock have mandatory conversion rights.
The Company has previously funded operations through the sale of equity
securities. In the event of additional sales of equity securities by the
Company, holders may experience additional dilution.
10. "PENNY STOCK" RULES.
If the Company fails to maintain NASDAQ(SM) Small Cap Market listing for its
securities, and no other exclusion from the definition of a "penny stock" under
the Exchange Act is available, then any broker engaging in a transaction in the
Company's securities would be required to provide any customer with a risk
disclosure document and the compensation of the Broker-Dealer in the transaction
and monthly account statements showing the market values of the Company's
securities held in the customer's accounts. The bid and offer quotations and
compensation information must be provided prior to effecting the transaction and
must be contained on the customer's confirmation. If brokers become subject to
the "penny stock" rules when engaging in transactions in the Company's
securities, they would become less willing to engage in such transactions,
thereby making it more difficult for purchasers in this offering to dispose of
their shares. The NASDAQ(SM) organization has effected changes in trading
requirements and should the Company not stay in compliance with these
requirements it may affect the Company's ability to maintain its qualification
for trading status of its Common Stock and warrants.
11. NEW BUSINESS STRATEGY.
The Company's strategy is directed toward creating a suite of complementary
products to meet customer and marketplace requirements for a more complete
electronic document management solution. In this regard, 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 the release of a Windows NT product in
June, 1997.
The Company intends to continue the development and marketing of its CD-ROM
products. Additionally, the Company intends to enhance its industry position by
offering expanded systems integration and consulting services and to continue
its development program to maintain the technology leadership of its COINSERV
products. With the implementation of its new business strategy, the Company is
subject to all of the risks inherent in a new business enterprise. These
include, but are not limited to, unanticipated problems relating to development,
product introduction and acceptance, marketing and competition. The introduction
of the new products will involve significant risk to the Company, and while the
Company believes that it can achieve profitability under current market
conditions and current resources available to the Company no assurance can be
given that such Products will be successful or ever result in the achievement of
profits or positive cash flow. Further, the implementation of INSCI's new
business strategy is likely to impact the Company's attention on its current
business and will require a substantial commitment of time and resources. The
Company may need additional funds. There can be no assurance that the Company
will obtain such additional funds on terms acceptable to the Company, or at all,
or that the Company will be successful in the implementation of the
aforementioned strategies.
12. TECHNOLOGICAL CHANGES AND INDUSTRY CONSIDERATIONS
The market for products such as COINSERV and related systems integration and
consulting services and INSCI's new COINS CD-ROM products are characterized by
rapidly changing technology, extensive competition, technological complexity and
evolving industry standards. Therefore, the performance of INSCI will depend on
the success of its existing products as well as its ability to develop and
market new products and services or enhance its existing products to accommodate
the latest technological advances and customer requirements. INSCI is
continually developing additional enhancements to COINSERV and has introduced
new software products during fiscal 1998 (year ended March 31, 1998) to further
enhance COINSERV, make it substantially easier to install and support, provide
additional functions and improve its ease of use. INSCI's business may be
adversely affected if INSCI incurs delays in developing new products or
enhancements to its existing products or if any new products or enhancements
that are developed or acquired do not gain sufficient and timely market
acceptance. There can be no assurance that the Company's existing or future
product or service offerings will be successful or profitable.
The Company must continue to insure its products are compatible with
products offered by third party vendors, including "server" platforms for
COINSERV's client/server software and optical disk storage devices. INSCI has no
contractual agreements with any such third party vendors, and there can be no
assurance that INSCI will be able to modify COINSERV to be compatible with new
products which may be introduced. In addition, there can be no assurance that
products or technologies developed by others will not render INSCI's products or
technologies noncompetitive or obsolete.
The ability to provide these products for a competitive price will be
subject to numerous potential technological alternative solutions that may be
provided by competitive companies. In light of rapidly developing technological
solutions in the computer industry, no assurance can be given that the Company's
proposed new business strategy will be successful.
INSCI's products currently do not provide a broad choice of imaging
functions. The Company believes that the successful development or acquisition
of these capabilities may be essential to the Company's future success. The
Company is presently exploring alternatives to obtain an imaging product that
will compliment its existing product line. See "New Business Strategy".
The Company believes that the imaging industry is rapidly consolidating. The
Company in order to maintain its industry position and continue its growth is
presently conducting an active search for suitable acquisition candidates under
the strategy of broadening its product line, increasing sales volume and
expanding its distribution channels. However, there can be no assurances that
the company will find a suitable acquisition candidate, or that the company will
be able to obtain sufficient funds on acceptable terms to the Company or be able
to purchase a company or companies from the proceeds raised by the Company in
the recently completed private placement offerings or for purposes of
acquisitions.
13. FOREIGN BUSINESS OPERATIONS
The Company currently has a contractual relation with Technology Providers
Ltd., a Sri Lankan vendor, to develop software with respect to its NT Product
line. Technology Providers Ltd. is owned by family members of Mr. Krishan
Canekeratne who is the Company's Senior Vice President of Development. (See
"Certain Relationships and Related Transactions"). INSCI has established a
business operation in the Philippines known as Philippine Business Automation
Systems (PBAS) and acquired a company known as Action Computer Supplies Holdings
PLC in the United Kingdom. Future funding requirements for the Philippine and
United Kingdom acquisitions are expected to be offset by revenues generated from
these operations and net expenditures for these operations are not expected to
be material. While the Company has achieved cost savings with its Sri Lanka
vendor, and anticipates cost savings with the formation of its Philippine
wholly-owned subsidiary, there can be no assurances that the Company's foreign
operations will continue to maintain cost savings or will not be subject to
political instability in a particular country. Additionally, although the risk
of exposure to currency fluctuations to date have been insignificant, there can
be no assurance that fluctuations in the currency exchange rates in the future
will not have a material adverse impact on the Company's business, operating
results and financial condition.
14. DEPENDENCE UPON PROPRIETARY TECHNOLOGY.
INSCI's business depends upon its proprietary software technology. INSCI
does not hold any patents on any portions of its products at this time but does
not anticipate applying for any patents as new products are developed. In order
to protect its propriety rights, INSCI relies primarily upon a combination of
copyright, trade secret and service mark protection, together with
confidentiality and nondisclosure agreements signed by employees, independent
contractors and other third parties. There can be no assurance, however, that
the steps taken by INSCI to protect its proprietary rights will be adequate to
deter misappropriation of INSCI's technology or independent development by third
parties of similar technology. INSCI does not believe that its products and
proprietary rights infringe upon the rights of any third party. There can be no
assurance, however, that third parties will not assert infringement claims
against INSCI in the future.
15. SUBSTANTIAL DEPENDENCE UPON OUTSIDE SALES LEADS.
The Company depends upon introductions to potential customers provided by
companies with which the Company maintains strategic alliances for a significant
percentage of its sales. Although the Company does generate sales leads directly
from its own internal sale force, it is more efficient to generate sales
prospects through the increased use of strategic partners and value added
resellers, due to their access to a greater number of potential sales leads than
the Company can generate internally. As a result, the Company has substantial
dependence upon outside sales leads. Although the Company has written agreements
with UNISYS, Xerox Corporation, Storage Technology Corporation, Moore
Corporation and, OCE (formerly Siemen Nixdorf Printing Systems) and the
Company's principal Value Added Resellers (VARs), which generally provide for
discounts, commissions or referral fees for sales of products and services
generated by them or by referral to their customers, such agreements do not
require customer introductions or provide for minimum required purchases of
INSCI's products. If any of the companies with which the Company maintains
strategic alliances at any time decide not to refer potential customers to the
Company, the Company may suffer reduced sales and increased operating losses. In
addition, there can be no assurance that the Company will be able to maintain
its strategic alliances on current terms, or at all. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations
- -Comparison of Results of Operations" and "Business - Marketing and Sales"
contained herein.
16. INTENSE COMPETITION.
Competition among companies providing document archival, indexing and
retrieval solutions is intense. Several companys' market products that compete
directly with INSCI's products and many other companies offer products which
potential customers may consider to be acceptable alternatives to INSCI's
products and services. Several larger competitors with substantially more
resources and capital market computer document storage and retrieval systems
utilizing optical disk drive technology. Other competitors offer alternative
methods for storing and retrieving computer generated documents, including
computer output microfilm/microfiche ("COM") services or solutions in
competition with the Company's proposed COINS CD-ROM products and services.
INSCI expects that the developing need for cost-effective solutions for
indexing, storing and retrieving historical computer data will attract new
competitors and newly developed competitive products. Newly developed products
could be more effective and cost efficient than the Company's current product or
products that it may develop in the future. Many of the Company's existing
competitors have, and future competitors may have, substantially more
engineering, sales and marketing capabilities, substantially greater financial,
technological and personnel resources than the Company, and broader product
lines. The principal competitive factors in the optical disk computer output
storage and retrieval market are aesthetic presentations, functionality,
document access speed, cost, strategic alliance relationships and "open" systems
connectivity. There is no assurance that the Company's competitors will not
enhance their existing products or new competitors will not introduce new
systems or technologies with better features and functions than the COINSERV
system or the COINS CD-ROM products. Additionally, alliances between major
suppliers of data stream software may be formed to create new standards that may
obsolete the Company's products.
17. DEPENDENCE UPON KEY SUPPLIERS.
Optical disk storage devices necessary for the use of INSCI's software
systems currently are available from a number of third party vendors. INSCI does
not intend to manufacture optical disk drive systems or optical disks. An
extended interruption of the supply of optical disk drive systems or optical
disks or extended performance problems could have an adverse effect on the
Company. In addition to optical disk storage devices, INSCI also relies on third
party vendors to provide certain industry standard communication protocols.
INSCI does not currently have any fixed commitments from any suppliers to
provide equipment.
18. ATTRACTION AND RETENTION OF KEY PERSONNEL.
The Company's future performance depends in significant part upon the
continued service of its key technical, sales and senior management personnel.
The loss of the services of one or more of the Company's executive officers of
other key employees could have a material adverse effect on the Company's
business, results of operations and financial condition. The Company is a party
to employment agreements with certain executive officers and key employees. The
Company also maintains key-person life insurance in the sum of $1,000,000 each
on the life of Dr. E. Ted Prince, the Company's Chief Executive Officer and
President, Mr. John Gillis the Company's Executive Vice President of Field
Operations and Chief Operating Officer and Krishan Canekeratne the Company's
Chief Technology Officer and Senior Vice President. The Company's future success
also depends on its continuing ability to attract and retain highly qualified
technical, sales and managerial personnel. While the Company has a college
recruiting and contract recruiting program to attract qualified personnel,
competition for such personnel is intense, and there can be no assurance that
the Company can retain its key technical, sales and managerial employees or that
it can attract, assimilate or retain other highly qualified technical, sales and
managerial personnel in the future.
19. CHANGE IN CONTROL PROVISIONS.
INSCI's Bylaws and the Delaware General Corporation Law contain provisions
that may have the effect of making more difficult or delaying attempts by others
to obtain control of INSCI, even when these attempts may be in the interests of
stockholders. The Delaware General Corporation Law also imposes conditions on
certain business combinations with "interested stockholders" (as defined by
Delaware law). The Company has provided a provision in certain agreements with
key personnel that in an event of a change of control and a termination of those
employment agreements without cause that each key employee will be entitled to
receive a minimum of one year severance payment and the immediate vesting of all
stock options. Additionally, the Company has provided for certain directors,
that in the event of a change in control, there will be an immediate vesting of
all outstanding options granted under the 1992 directors stock option plan.
20. LACK OF PRODUCT LIABILITY INSURANCE
The Company develops, markets, installs and services electronic information
and document management systems. Any failure by the Company's products may
result in claims against the Company. Due to the high cost of product liability
insurance, the Company does not maintain insurance to protect against claims
associated with the use of its products. Any claim whether or not successful may
result in the Company's expenditure of substantial funds in litigation.
Additionally any claim may require managements time and company resource, and
may have a materially adverse impact to the Company.
21. LIMITED ANTI-DILUTION PROTECTION
Holders of 8% Preferred Stock and/or Warrants, have anti-dilution protection
and adjustment right with respect to : (i) any subdivision of the outstanding
shares of Common Stock of the Company into a greater number of shares of Common
Stock; (ii) any declaration of a dividend or any other distribution by the
Company upon its Common Stock payable in shares of Common Stock; (iii) any
capital reorganization or reclassification of the capital stock of the company;
or (iv) any consolidation or merger of the Company with another entity.
Investors who convert 8% Preferred Stock will incur dilution in the event the
Company issues Common Stock below $3.75 per share, and investors who have
exercised Warrants will also incur dilution in the event the Company issues
Common Stock at below $5.00 per share. In the event that any of the events are
triggered with respect to the anti-dilution rights there may be an adjustment
with respect to the 8% Preferred Stock and/or warrants issued which may result
in a substantial dilution to shareholders.
22. POTENTIAL INSUFFICIENT NUMBER OF SHARES OF COMMON STOCK
In addition to the 1,466,668 Units (each unit comprised of one share of 8%
Preferred Stock, which earns dividends of 8% per annum and a warrant convertible
into a share of Common Stock; each share of 8% Preferred Stock and warrant is
convertible into one share of Common Stock respectively.)issued under the
Company's 1996 Private Placement completed in November 1996, the Company also
issued 1,350,000 shares of 10% Convertible Preferred Stock under another Private
Placement completed in 1996. Each share of 10% Convertible Preferred Stock is to
be converted by the holder into shares of Common Stock at a 30% discount to the
average market price of such Common Stock for the ten trading days prior to
conversion (regardless of the market price for shares of Common Stock).
Additionally, in June 1995, the Company issued $1,200,000 of 10% Convertible
Redeemable Preferred Stock , which is able to be converted over a period of time
at the greater of $.10 per share or 50% of the average closing bid price of the
Common Stock during the 20 days preceding the day of conversion. In the event
that the trading share price of the Company's Common Stock declines for the
period of the time provided for in the Convertible Redeemable Preferred Stock
Placement, then in that event shareholders may experience additional dilution as
a result of the decline in the trading price of the Common Stock.
Additionally, if the price of the Company's Common Stock falls below $.20
per share, the Conversion of 10% Convertible Redeemable Preferred Stock may
result in an insufficient amount of underlying shares of Common Stock which
would require the Company to seek shareholder approval for an increase in its
Common Stock capitalization.
23. LIMITED NUMBER OF SHARES TRADING ON THE NASDAQ SMALL CAP MARKET
The thirty day average number of shares of the Company's Common Stock
trading on the NASDAQ Small Cap market is approximately 8,700 shares per day.
Upon completion of this registration of 16,769,991 shares, a substantial number
of shares will be available for sale on the trading market, and may result in an
adverse impact on the trading market price of the Company's Common Stock. There
can be no assurance that the trading market will be able to absorb the number of
shares offered for sales by participants in the registration statement.
USE OF PROCEEDS
The Company will not receive any proceeds upon filing of this registration.
In the event any option or warrant holder elects to exercise, then in that event
the Company will receive proceeds. In the event proceeds are received, they will
be used for working capital, and general corporate purposes.
INSCI has agreed to pay all fees and expenses related to this offering and
to provide to selling stockholders a cost free registration for shares owed by
Selling Stockholders and for the shares underlying preferred stock options and
warrants. The Company has also agreed to maintain an effective registration for
a period of three years.
DIVIDEND POLICY
INSCI has never declared or paid any cash dividends on its Common Stock and
does not expect to pay cash dividends on its Common Stock in the foreseeable
future. The Company under certain circumstances may be required to pay cash
dividends on its Preferred Stock. See "Dividends" and "Description of Securities
- - Preferred Stock". The Company is restricted from paying cash dividends in the
terms of its line of credit with Silicon Valley Bank. The Company has paid
cumulative stock dividends through June 30, 1997 on each class of its Preferred
Stock as follows:
Dividends Shares
Paid Issued
--------- ------
10% Convertible Redeemable Preferred Stock $105,000 49,000
10% Convertible Preferred Stock 113,000 32,755
8% Convertible Preferred Stock $300,000 86,284
DIVIDENDS
O COMMON STOCK
No dividends have been declared or paid by the Company since its inception.
INSCI intends to retain all earnings when realized to finance future growth and
therefore does not anticipate paying any cash dividends on its Common Stock for
the foreseeable future. All dividends must be paid on preferred stock prior to
paying any dividends on common stock.
O 10% CONVERTIBLE REDEEMABLE PREFERRED STOCK
The 10% Convertible Redeemable Preferred Stock ("10% Convertible Redeemable
Stock") issued under the Company's 1995 Private Placement will accrue cumulative
dividends at a rate equal to 10% per annum of the issued price of $1.00 per
share (the "Issue Price"), payable semi-annually out of the funds legally
available therefore on April 15 and October 15 in each year with respect to
dividends accrued as of March 31 and September 30 in each such year (each a
"Dividend Payment Date"). At the option of the Company, dividends may be paid in
cash or in-kind. Dividends in-kind shall be paid by delivery of that number of
shares of Common Stock determined by dividing the amount of the aggregate
dividend accrued and payable by an amount (not less than $.10) equal to 50% of
the average closing bid price of the shares of Common Stock during the twenty
(20) trading days immediately preceding a dividend payment date.
O 10% CONVERTIBLE PREFERRED STOCK
The 10% Convertible Preferred Stock ("10% Preferred Stock") issued under the
Company's Private Placement Offering which closed in September 1996 will pay a
stock dividend of 10% per annum payable on a semi-annual basis, or in the
alternative, the Company may elect to make payment of the dividend as an annual
8% cash dividend. If the Company elects to make dividends payable in cash they
will be payable semi-annually out of funds legally available therefore on June
30 and December 31 in each year. Dividends payable in-kind shall be paid by
delivery of the number of shares of Common Stock determined by the average of
the trading market price of the shares of Common Stock during the ten (10)
trading days immediately preceding a dividend payment date.
O 8% CONVERTIBLE REDEEMABLE PREFERRED STOCK
The 8% Convertible Redeemable Preferred Stock ("8% Preferred Stock") issued
in the Company's Unit Private Placement which closed in November 1996 will pay
dividends of 8% per annum on a quarterly basis and are cumulative. Dividends can
be paid in cash or 8% Preferred Stock at the option of the Company. The 8%
Preferred Stock payable as dividends is to be valued at the lesser of $3.75
(three dollars seventy-five cents) or the average bid price for Common Stock for
twenty (20) consecutive trading days prior to the end of the quarter. In the
event that the average bid price for Common Stock during any sixty (60) day
period commencing August 1, 1998 is $2.75 (two dollars seventy-five cents) or
less, holders of a majority of outstanding 8% Preferred Stock can elect to have
dividends paid in cash for the balance of the life of the 8% Preferred Stock
(the "Cash Election"). If the Company fails to honor the Cash Election, the
Company must pay dividends in shares of 8% Preferred Stock (valued at the lesser
of $3.75 or the average bid price for Common Stock for twenty (20) consecutive
trading days prior to the end of the quarter) and a majority of holders of 8%
Preferred Stock shall have the right to designate one (1) Board Member and the
Company shall immediately appoint a designee and use its best efforts to cause
the election of the designee for so long as twenty-five (25%) percent of the 8%
Preferred Stock remains outstanding. In the further event the average bid price
for Common Stock during the last thirty (30) day period of any quarter
commencing with the thirty (30) day period beginning September 1, 1998 is $3.75
(three dollars seventy-five cents) or less, annual dividends on 8% Preferred
Stock will be automatically readjusted to eleven (11%) percent per annum for the
balance of the period that any 8% Preferred Stock is outstanding.
CAPITALIZATION
The following table sets forth the actual capitalization of the Company as
of June 30, 1997. This table should be read in conjunction with the Financial
Statements and Notes thereto appearing elsewhere in this Prospectus.
AT JUNE 30,
1997
(IN THOUSANDS)
--------------
NOTES PAYABLE
Current 36
--
36
==
STOCKHOLDERS' EQUITY
10% Convertible redeemable preferred 8
stock, $.01 par value authorized
10,000,0000 shares, 1,240,000
issued, 797,474 outstanding
10% Convertible preferred stock, 14
$.01 par value authorized 10,000,0000
shares, 1,350,000 issues and outstanding
8% Convertible redeemable preferred 14
stock, $.01 par value authorized
10,000,000 shares, 1,333,333 shares issued
and 1,419,617 outstanding
Common Stock, $.01 par value 43
authorized 40,000,000 shares, issued
and outstanding 4,369,688(1)
Additional paid in capital 25,405
Accumulated deficit (19,185)
------
Total stockholders' equity 6,335
------
Total capitalization 6,335
- ----------
(1) Excludes an aggregate of 868,365 shares of Common Stock reserved for
issuance upon the exercise of options outstanding as of July 31, 1997.
DILUTION
Dilution is not applicable.
SELECTED FINANCIAL DATA
The following Selected Financial Data should be read in conjunction with the
Financial Statements and the Notes thereto and "Management's Discussion and
Analysis of Financial Condition and Results of Operation" included elsewhere in
this Prospectus. The Selected Financial Data presented below under "Statement of
Operations Data" and "Balance Sheet Data" as of and for the fiscal year
ended March 31, 1997 are derived from the Financial Statements of INSCI Corp.
which have been audited by Pannell Kerr Forster P.C., independent auditors. The
Financial Statements for each of the years ending March 31, 1996 and 1995 are
derived from the Financial Statements of INSCI Corp., which have been audited by
Mahoney Cohen & Company, CPA, P.C., independent certified public
accountants. The Financial Data for each of the fiscal years ended March 31,
1994 and 1993 and is derived from, and is qualified by reference to, Financial
Statements audited by Grant Thornton, independent certified public accountants.
The information set forth below should be read in conjunction with such
Financial Statements and Notes thereto. The Selected Financial Data presented
below for the three months ended June 30, 1997 and 1996, are derived from the
unaudited Financial Statements of the Company. The unaudited Financial
Statements have been prepared on the same basis as the audited Financial
Statements and, in the opinion of Management, contain all adjustments,
consisting only of normal recurring adjustments, necessary for a fair
presentation of the Company's financial position and its results of operations
for such periods.
<TABLE>
<CAPTION>
TWELVE MONTHS ENDED THREE MONTHS ENDED
MARCH 31, (UNAUDITED)
--------------------------------------------------------------------------------------
JUNE 30, JUNE 30,
In thousands, except per share amounts 1993 1994 1995 1996 1997 1996(1)(2) 1997
------- ------- ------- ------- ------- --------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenue $ 5,869 $ 8,187 $ 7,188 $ 7,913 $11,381 $ 2,936 $ 1,803
Cost of revenue 2,762 4,338 3,504 3,311 4,626 1,071 1,082
Write down of software development costs 897 -- -- -- -- -- --
Product development 745 1,147 1,364 1,758 2,170 445 478
Selling, general and administrative costs(3) 4,036 4,686 5,441 4,326 5,636 1,330 1,452
Write-off of registration costs -- 330 --
Operating income (loss) (2,571) (2,314) (3,121) (1,482) (1,051) 90 (1,209)
Interest income (expense), net (328) (654) 8 30 115 5 46
Net loss ($2,899) ($2,968) ($3,113) ($1,452) ($936) $95 ($1,163)
Preferred stock dividend - - (253) (470) (1,543) (199) (244)
Net income (loss) applicable to
common stock (2,899) (2,968) (3,366) (1,922) (2,479) (104) (1,407)
Net loss per common share ($1.54) ($1.55) ($1.04) ($.53) ($0.62) ($0.03) ($0.33)
Weighted average common shares outstanding 1,878 1,913 3,242 3,655 4,022 3,883 4,284
BALANCE SHEET DATA:
Working capital (deficiency) ($2697) ($6,190) 883 60 (4,724) 358 3,409
Total assets(4) 3,929 5,242 5,299 5,193 10,491 4,886 8,780
Long-term indebtedness 894 648 32 44 -- -- --
Stockholders' equity (deficiency)(4) (1,724) (4,692) 1,601 2,519 7,452 2,706 6,299
</TABLE>
(1) Reflects impact of Courtland Acquisition which is not material on operating
data of year ended March 31, 1997. Refer to Note D for Proforma information
for Courtland for year ended March 31, 1996.
(2) Increases in revenues for year end March 31, 1997 are discussed in
management's discussion and analysis (MD&A).
(3) Includes non-recurring charges of $325,000 for year ended March 31, 1996 and
$500,000 for year ended March 31, 1995. Charges for 1995 are
for expenses related to moving the company's headquarters from White Plains,
N.Y. to Westborough, MA. Refer to MD&A.
(4) The increase in assets and stockholder's equity for the year ended March 31,
1997 is primarily due to additional equity funds raised by the company
during the fiscal year. Refer to MD&A and Note J.
<PAGE>
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.
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.
<PAGE>
COMPARISON OF RESULTS OF OPERATIONS
The following table sets forth, for the periods indicated, the percentage
relationship that certain items of the Company's results of operations bear to
total revenue.
Three months ended
June 30,
1997 1996
---- ----
Revenue % %
- -
Product 42 51
Services 58 49
--- ---
Total revenue 100 100
Cost of revenue
Product 23 13
Services 37 23
--- ---
Total cost of revenue 60 36
--- ---
Gross margin 40 64
Expenses
Sales and marketing 55 30
Product development 27 15
General and administrative 25 16
--- ---
Total expenses 107 61
Income (loss) from operations (67) 3
Interest income (expense) 2 -
--- ---
Net income (loss) (65) 3
=== ===
<PAGE>
THREE MONTHS ENDED JUNE 30, 1997 AS COMPARED
TO THE THREE MONTHS ENDED JUNE 30, 1996:
REVENUE
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 sells its products through a combination of a direct sales force and
indirectly through VAR's, distributors and 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.
Total revenue for the quarter ended June 30,1997 (the "current quarter") was
$1,803,000 and decreased by 39% compared to revenue of $2,936,000 for the
quarter ended June 30, 1996. Product revenue was $758,000 for the June 30, 1997
quarter and decreased by 49% compared to the same quarter last year. The decline
in revenue for the quarter, primarily in the product revenue segment, reflects
the transition the Company is making towards selling more of its products
through new and existing indirect sales channels. During the June, 1997 quarter,
the Company's sales and technical personnel spent a higher than usual amount of
their time supporting the Company's indirect sales channel and training the
channel on the six new products that the Company has introduced during the last
six months. This channel support and training time resulted in less time for
closing direct sales accounts, with the impact of lower revenues for the current
quarter. The Company believes that the investment made in its indirect sales
channels will potentially help the Company's future revenues to grow as a result
of greater sales coverage afforded by the indirect channel as compared to the
Company's limited direct sales force. The Company can not, however, predict with
any degree of certainty, when and by what amount revenues may increase as a
result of increased indirect channel support.
Services revenue, which includes systems integration and maintenance
revenues, was $1,045,000 for the quarter ended June 30, 1997 and decreased by
27% compared to revenue of 1,437,000 for the same quarter last year. This
decrease reflects systems integration revenues of $519,000 for the current
quarter which decreased by 46% compared to revenue of $968,000 for the same
quarter of last year. Last's year's quarter included a major systems integration
contract with one customer, which was not replaced with a similar contract in
the current quarter. The Company's on-going sales activities include efforts to
secure major systems integration contracts. Maintenance revenue for the current
quarter was $526,000 and increased by 12% compared to revenue of $469,000 for
the same quarter last year. The increase in maintenance revenue reflects the
growth of the Company's installed base of customers, most of which renew their
maintenance contracts on a yearly basis.
GROSS MARGIN AND COST OF REVENUE
Gross margin for the quarter ended June 30, 1997 was $721,000 and decreased
by 61% compared to gross margin of $1,865,000 for the same quarter last year.
This decrease primarily reflects the lower revenues in the current quarter
compared to the same quarter last year.
Cost of product revenue as a percentage of product revenue was 54% in the
current quarter as compared to 26% for the same quarter last year. Cost of
services revenue was 64% in the current quarter as compared to 48% for the same
quarter last year. The increase in cost of revenues in the current quarter for
both product and services revenues reflects the relatively fixed nature of
several of the costs associated with these revenue categories including
amortization of capitalized software expenses and the non-variable
organizational infrastructure of the services organization. It is expected that
increases in future product and services revenues, should they occur, would
result in percentage cost relationships that would be approximately the same as
last year.
SALES AND MARKETING
Sales and marketing expenses for the quarter ended June 30, 1997 were
$1,008,000 and increased by $130,000, or 15%, compared to expenses of $878,000
for the quarter ended June 30, 1996. The expense increase reflects marketing
programs associated with the introduction of the Company's six new products
combined with the establishment of a sales and technical support function in the
Philippines to support the Company's planned sales activities in the Far East.
PRODUCT DEVELOPMENT
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. As a result, 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 released a new Windows NT product
in June, 1997.
The additions to INSCI's product offerings, along with enhancements to
existing products, have been funded by the increase in the Company's gross
expenditures for software products. Gross product development expenses for the
quarter ended June 30, 1997, were $825,000, before capitalization of software
expenses of $347,000, for net quarterly product development expense of $478,000.
Gross product development expenses for the quarter ended June 30, 1996, were
$620,000, before capitalization of software expenses of $175,000, for net
quarterly product development expense of $445,000. The increase in gross
development expenses in the current quarter versus the same quarter last year
was $205,000.
GENERAL AND ADMINISTRATIVE
General and administrative expenses were $444,000 for the quarter ended June
30, 1997 and decreased by $8,000 compared to $452,000 for the same quarter last
year. There were no significant changes within general and administrative
expenses for the current quarter versus last year.
INTEREST INCOME (EXPENSE)
Interest income for the quarter ended June 30, 1997 was $47,000 compared to
$8,000 for the same quarter last year. The increase in interest income in the
current quarter reflects interest earned on funds received from two regulation D
security offerings completed by the Company in September and November, 1996.
Interest expense was insignificant for the current and last year's quarters.
NET LOSS
Net loss for the quarter ended June 30, 1997 was $1,163,000 compared to net
income of $95,000 for the quarter ended June 30, 1996. The current quarter's
loss is the result of the decrease in revenues along with increases in costs of
sales and expenses, as previously stated herein.
COMPARISON OF RESULTS OF OPERATIONS OF FISCAL YEARS 1997, 1996, 1995
The following table sets forth, for the periods indicated, the percentage
relationship that certain items of the Company's results of operations bear to
revenue.
FISCAL YEAR ENDED MARCH 31,
--------------------------
1997 1996 1995
---- ---- ----
Revenue 100% 100% 100%
Cost of revenue 41 42 49
Expenses 68 73 87
Non-recurring charges. - 4 7
--- --- ---
Loss from operations (9) (19) (43)
Interest income - net 1 1 -
--- --- ---
Net loss (8%) (18%) (43%)
=== === ===
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.
COMPARISON OF FISCAL YEARS ENDED MARCH 31, 1996 VERSUS MARCH 31, 1995
REVENUE. The following chart compares INSCI's revenue for fiscal 1996 versus
fiscal 1995: (in thousands)
FISCAL YEAR ENDED MARCH 31,
1996 1995 % Change
---------- ------- ------------
Software $4,099 $3,939 4%
Hardware 884 996 (11)
------ ------
Total product revenue 4,983 4,935 1
------ ------
Services 1,172 763 54
Maintenance 1,758 1,490 18
----- -----
Total services revenue 2,930 2,253 30
----- -----
Total revenue $7,913 $7,188 10%
====== ======
INSCI sells, installs and supports imaging, print-on-demand, and data
management and archival storage software products. Sales to end users generally
include software, optical storage hardware, systems integration and consulting
services, installation, and training. Post-installation maintenance and customer
support is available under the terms of a separate contract at an additional
charge. INSCI also sells software products directly to VARS and distributors.
Revenue is net of discounts and allowances given to third party VARS and
distributors. INSCI reported revenue of $7,913,000 in fiscal 1996, an increase
of $725,000, or 10%, from revenue of $7,188,000 for fiscal 1995. Product
revenues were $4,983,000 for fiscal 1996 compared to $4,935,000 for fiscal 1995,
an increase of $48,000 or 1%.
Services revenue, which includes charges for systems integration and
consulting, custom applications, installation, training, and maintenance,
totaled $2,930,000 in fiscal 1996, an increase of $677,000 (30%) over service
revenue of $2,253,000 in fiscal 1995. This increase is primarily attributable to
the growth of the systems integration and consulting revenues which increased to
$683,000 in fiscal 1996 from $32,000 in fiscal 1995, due to the emphasis the
Company started placing in fiscal 1996 on providing customers with a broader
range of services complementary to their complete document management system
needs.
COST OF REVENUE. Total cost of revenue for fiscal 1996 was $3,311,000 or 42%
of sales, compared to $3,504,000, or 49% of sales, for fiscal 1995.
Cost of revenue for product sales increased to $1,784,000 or 36% of product
revenue in fiscal 1996 as compared to $1,387,000 or 28% of sales in fiscal 1995.
Costs associated with product sales include the costs of hardware and software
products purchased from third parties for resale, and amortization of
capitalized software development and capitalized purchased software costs. Costs
of product revenue varies depending upon the mix of software and hardware
included in total system revenue. The increase in cost of product revenue is
primarily due to the increase in the level of charges pertaining to the
amortization of capitalized software development which increased to $760,000 in
fiscal 1996 from $218,000 in fiscal 1995 as a result of the commencement in
April 1995 of amortization of the development costs for the COINSERV 2.2
product. This increase was partially offset by an improvement in margin on
hardware sales due to lower discounting.
Costs associated with service revenues reflect principally the costs of
systems integration, consulting, and customer support personnel, and the cost of
third-party services and hardware maintenance subcontracts. These decreased to
$1,527,000 or 52% of services revenue in fiscal 1996 from $2,117,000 or 94% in
fiscal 1995. The decrease in costs reflects the change in the mix of support
staff levels in fiscal 1996, and $162,000 less in costs associated with hardware
maintenance due to the exclusive use of third party contracted services for all
of fiscal 1996, and less of services provided by outside contractors and
companies.
SALES AND MARKETING. Sales and marketing expenses were $2,459,000, or 31% of
revenue, for fiscal 1996, as compared to $3,070,000 or 43% of revenue, for
fiscal 1995. This decrease was attributable to a change in compensation programs
and lower travel expenses, and reduced spending on consultants.
PRODUCT DEVELOPMENT. Product development expenses increased to $1,878,000
(before capitalization of software development expenses of $120,000, resulting
in net expenses of $1,758,000) or 24% of revenue in fiscal 1996 compared to
$2,185,000 (before capitalization of software development expenses of $821,000
resulting in net expense of $1,364,000) or 30% of revenue in fiscal 1995. While
there was only a small change in total spending, the level of capitalization of
software development costs dropped $701,000 as a greater proportion of the
development staff's time was devoted to sustaining engineering tasks. In
addition, during fiscal 1996 the Company commenced a program to reduce its cost
of product development by having selected product development performed under a
fixed price contract basis by a programming company in Sri Lanka.
GENERAL AND ADMINISTRATIVE. General and administrative expenses were
$1,542,000, or 20% of revenue, for fiscal 1996, as compared to $1,871,000, or
26% of revenue, for fiscal 1995. The decrease is primarily due to lower
compensation related costs, and a reduction in facilities expense.
NON-RECURRING CHARGES. The Company paid $250,000 in fiscal 1996 to Marine
Midland Bank ("Marine") in full settlement of all claims with respect to a
dispute over a 1993 sublease of office space from Marine. In addition, in fiscal
1996, the Company recorded a charge of $75,000 for a fee paid to Bank of New
York Financial Corp. ("BNY") in April 1996 to terminate, at the Company's
request, the Company's credit facility with BNY. The Company incurred $500,000
of expense in fiscal 1995 in conjunction with its move from White Plains, NY to
its new headquarters in Westborough, MA. These expenses included the costs of
relocating employees and equipment, and employee severance and replacement
costs.
INTEREST INCOME/EXPENSE. Interest income was $70,000 in fiscal 1996
partially offset by $40,000 in connection with interest on the 10% subordinated
notes. Interest income-net of $8,000 for fiscal 1995 represents interest income
of $64,000 offset by interest expense consisting of charges of $45,000 on
intercompany advances from IMTECH, and $11,000 of interest charges from
borrowings under its external credit facility.
NET LOSS. The net loss for fiscal 1996 was $1,452,000 or 18% of revenue
compared to a net loss of $3,113,000 or 43% of revenue for fiscal 1995. The
decrease in the net loss principally resulted from increased system integration
and maintenance revenues, and lower compensation related expense due to lower
sales staffing levels and lower commission and bonus expenses.
LIQUIDITY AND CAPITAL RESOURCES
As of June 30, 1997 the Company had $3,712,000 of cash and cash equivalents
and working capital of $3,409,000 in comparison to $219,000 of cash and cash
equivalents and working capital of $358,000 as of June 30, 1996. The present
cash reserves of the Company are believed to be sufficient to meet the
foreseeable needs of the Company. Accounts receivable were $1,978,000 with
weighted days outstanding of 56 as of June 30, 1997 compared to receivables of
$2,108,000 with weighted days outstanding of 34, as of June 30, 1996. The
Company targets collections of 45 days. Amounts below this number represent
favorable receivable mix and collection performance. The increase to 56 days for
the current quarter reflects extended payment terms that the Company has
provided to a number of its customers.
<PAGE>
The Company's cash flows are summarized below for the periods indicated: (in
thousands)
QUARTER ENDED JUNE 30,
1997 1996
---- ----
Cash provided by (used in)
Operating activities $ (978) $ (70)
Investing activities (388) (229)
Financing activities 10 82
------- -----
Increase(decrease) in cash and cash equivalents $(1,356) $(217)
======= =====
Cash and cash equivalents at end of period $ 3,712 $ 219
The Company used cash of $978,000 in operating activities for the quarter
ended June 30, 1997, primarily as the result of its net loss. Net cash used in
investing activities was $388,000 for the current quarter, primarily from
additions to capitalized software, which increased as a result of the Company's
expanded product development program. Cash generated from financing activities
was minimal for the quarter, and reflected the exercise of Company stock
options.
On March 28, 1997 the Company obtained 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. As of June 30, 1997, the Company could not borrow against the
line due to its first quarter loss being in excess of the loss covenant. The
Company, at its option, may terminate the line with SVB without penalty. During
June, 1997, the Company received a receivable financing proposal from SVB that
has covenants which the Company currently meets and under which the Company
could borrow up to $2,000,000 or up to 75% of eligible accounts receivable. The
Company is reviewing this financing proposal and has made no commitment to
proceed with this proposal at this time. This is no assurance that the Company
will have a continued availability of the accounts receivable working capital
financing line or that the terms of any future financing agreements will be
favorable to the Company.
CHANGE IN ACCOUNTANTS
Effective December 30, 1996, by a resolution of the Company's Board of
Directors, the Company resolved to change auditing firms from Mahoney Cohen &
Company, CPA, P.C. to Pannell Kerr Forster PC. There were no disagreements with
the Company's former auditors in any matter of accounting principles, practices,
financial statement disclosures or auditing scope or procedures in connection
with audits by the Company's former auditors.
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.
QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)
Selected quarterly results of operation for the four quarters ended March 31,
are as follows:
<TABLE>
<CAPTION>
FISCAL YEAR 1996
QUARTER ENDED
--------------------------------------
First Second Third Fourth
June September December March
1995 1995 1995 1996
----- --------- -------- ------
<S> <C> <C> <C> <C>
Revenue $841 $2,076 $2,155 $2,841
Cost of Revenue 691 850 817 953
------- ------ ------ ------
Gross Margin 150 1,226 1,338 1,888
Sales, Marketing,
Product Development
and General &
Administrative 1,503 1,151 1,253 1,852
------- ------ ------ ------
Earnings (loss) (1,353) 75 85 36
before non-
recurring charges
and interest
Non-Recurring
Charges (320) 170 (189) 14
Interest 18 14 7 (9)
------- ------ ------ ------
Net Income(Loss) $(1,655) $ 259 $ (97) $ 41
======= ====== ====== ======
<CAPTION>
FISCAL YEAR 1997 FISCAL YEAR 1998
QUARTER ENDED QUARTER ENDED
------------------------------------------ ----------------
First Second Third Fourth First
June September December March June
1996 1996 1996 1997 1997
------- -------- -------- ------- --------
<S> <C> <C> <C> <C> <C>
Revenue $ 2,936 $ 2,085 $ 3,360 $ 3,001 $ 1,803
Cost of Revenue 1,071 1,085 1,179 1,290 1,082
------- -------- -------- ------- --------
Gross Margin 1,865 1,000 2,181 1,711 721
Sales, Marketing,
Product
Development and
General &
Administrative 1,775 1,891 2,123 2,019 1,930
------- -------- -------- ------- --------
Earnings (loss)
before interest 90 (891) 58 (308) (1,209)
Interest 5 13 40 55 46
------- -------- -------- ------- --------
Net Income(Loss) $ 95 $ (878) $ 98 $ (253) $ (1,163)
======= ======== ======== ======= ========
- -------------------------------------------
</TABLE>
This table should be read in conjunction with the Financial Statements provided
elsewhere herein.
<PAGE>
PRODUCT OVERVIEW
INSCI Corp. is a supplier of optical-disk based client/server computer
output to laser disk (COLD) systems. These are electronic printing and digital
repository systems that replace the need to carry out paper-based printing in
many situations. This market addresses print and microfiche replacement using
digital-based techniques to replace unnecessary printing and microfiche
production and allowing on-line viewing of reports that would otherwise need to
be printed. This in turn produces savings for users. INSCI's leading product,
COINSERV, is recognized as a performance leader in the client-server segment of
the market.
INSCI also has developed CD-based products (COINS-CD) for print and
microfiche replacement. These are aimed at both the corporate market for
electronic printing and viewing and at the service bureau market. These products
offer the user the advantage of using low-cost and easily available CDS which
can be used for distribution of large quantities of data. These products are
often used in conjunction with optical disk-based products particularly for
distribution purposes.
INSCI develops and markets imaging, document management and work flow
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 Company's 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:
o Modify its software products to permit operation with additional computers
and operating environments
o Enhance its software products to make them easier to install, use and
maintain
o Add new features to this software product intended to simplify installation,
operation and the generations of optical applications
o Add additional features and functions
o Develop new user specific applications
o Investigate potential uses of emerging technologies to complement COINSERV's
document management function.
Over the past year in pursuit of these goals, INSCI has enhanced its
existing products, developed new products and acquired others which fit into its
overall strategic direction of the automated document factory.
INSCI Corp. utilizes its staff of development engineers and customer support
personnel to identify, design, and develop product enhancements and new
products. The company has additionally increased the amount of development it
performs by locating some work offshore where resources are less costly, thus
enabling the company to compete more effectively against many competitors with
far greater resources than it possesses.
The Company has recently completed the development of numerous product
enhancements to COINSERV and to COINS-CD that it believes will provide leading
edge functions for customers. COINSERV release 3.0 was released for customer
shipment in January 1996. COINS-CD has undergone numerous major enhancements to
render it more capable in high production environments. The following is a
summary of the new features of COINSERV Release 3.0.
HIGH PERFORMANCE COINSERV
Advanced COINSERV release 3.0 provides customers with increased levels of
archive performance that is unparalleled in the industry. COINSERV is capable of
processing over 600,000 pages of archive data per hour on mid range UNIX archive
servers attached to magnetic RAID devices. Advanced COINSERV provides
performance levels that double the performance of the previous releases.
HIERARCHICAL STORAGE MANAGER
Advanced COINSERV Hierarchical Storage Manager ("HSM") makes it possible for
COINSERV to utilize the most responsive media for current archive data and
migrate older data to less expensive storage media. COINSERV writes the most
current data with the highest access requirement to magnetic RAID devices and as
the data ages and the access frequency for the data diminishes, the archive
documents are migrated to less expensive media such as WORM optical disks. The
COINSERV HSM component will:
o provide faster archive speeds and access to most current data
o allow migration based on report characteristics, download bundles, document
size and index values
o provide a way of deleting reports that are temporary
o provide access to documents while new documents are being archived to the
magnetic RAID sub-system
o provide independent index and data migration
SUPPORT FOR PAPER CLIPS
Advanced COINSERV release 3.0 provides users with a mechanism for adding
annotations at the page level. These annotations, often referred to as paper
clips, are used to maintain an electronic post-it at the page level.
SUPPORT FOR INTELLIGENT DATA STREAMS
Advanced COINSERV release 3.0 includes support for the leading high
performance production print data streams. This includes support for IBM
Advanced Function Presentation ("AFP"), Xerox's MetaCode, and Xerox DJDE. As a
result of this enhancement, the COINSERV product provides high speed archiving,
indexing, full fidelity retrieving, printing and faxing of AFP, MetaCode, and
DJDE.
COMMON DASHBOARD
INSCI's MS Windows based document viewer, WinCoins, displays diverse archive
data using a common dashboard. The common dashboard simplifies document access
by providing a common user interface regardless of the data stream. This
approach eliminates retrieval complexity and simplifies end user document access
and training.
ADDITION OF SUN SOLARIS
Towards the end of 1995, the COINSERV product was ported to run on SUN
Solaris UNIX servers. The addition of SUN as a COINSERV server platform
increases the marketability of the COINSERV product to the financial community.
SUPPORT FOR 12.6 AND 15 GB OPTICAL TECHNOLOGY
The COINSERV product may be installed with 12.6 GB optical devices from LMSI
or 15 GB optical devices from SONY. Both of these devices provide unparalleled
storage capacities and document retrieval performance due to more data available
under read/write head.
ENHANCED SECURITY
The Advanced COINSERV release 3.0 security component provides users with
enterprise level security management by providing security groups, user
changeable passwords, password encryption, and password expiration.
HIGH PERFORMANCE CLOSING
High Performance Closing allows customers to migrate less frequently
accessed index volumes to optical disk. This component allows high speed
migration of index volumes from magnetic disk to optical disk, thereby fully
supporting not only index volumes generated for the 5.25" optical platters but
also much larger index volumes associated with 12" optical platters. Once the
indices have been migrated from magnetic to optical, the optical volume becomes
a self contained repository that includes the data and the index information.
RETRIEVE FROM CLOSED OPTICAL DISK
The COINSERV interface for retrieving index information has been augmented
to include index searches from closed index volumes. This interface provides end
users with a simple means of accessing closed index volumes for archive data
without regard to locale or having to lead the index information to magnetic
disk. Retrieving index information that has been closed may be tailored to a
customer's needs by either providing seamless access, seamless access with
break-points, user defined optical volume access or excluding optical index
access.
DYNAMIC INDEX SELECTION
Dynamic Index Selection ("DIS") provides the infrastructure for optimizing
index searches. This component significantly improves the COINSERV index process
by eliminating unnecessary index searches and dynamically selecting the most
optimum index key field. DIS maintains statistical information about each index
volume during the data archive process and uses this information to
intelligently select the index volumes that must be searched. Furthermore, in
the event that multiple index key values have been selected for a search, DIS
intelligently selects the most optimum key to search the index volume.
The combination of Index Closing, Retrieve from Closed Index Volumes, and
Dynamic Index Selection provides COINSERV Release 3.0 users with an efficient
and cost effective way of archiving and retrieving large volumes of data without
constantly "topping-out" or degrading performance -- the COINSERV "forever-view"
document management architecture. The combination of these concepts fully
supports on-line, near-line, and off-line data archive and retrieve.
WINCOINS ENHANCEMENTS
Numerous enhancements have been made to the Microsoft Windows client. The
new WinCoins software is a true Microsoft Windows GUI application that conforms
and adheres to all Microsoft standards. The new client fully supports the
Microsoft Desktop, Imaging, Dynamic Data Exchange, WINSOCK, and many other
features.
OTHER ENHANCEMENTS
Other enhancements include numerous additions to the COINSERV Volume Manger:
error recovery, reporting and tracking, fax sub-system, imaging, and advanced
document indexing.
COINS-CD PRODUCT
During the past year INSCI introduced the COINS-CD product. The COINS-CD
product provides the ability to replace microfiche with inexpensive electronic
storage media that can be used on PC's. The same data that would be written on
microfiche is now written to CD-R, optical or some other electronic storage
media. At the same time, index values are extracted from the data in preparation
for rapid access to data. An electronic document viewer is also copied to the CD
so that the data may be easily retrieved on a PC with a CD drive.
Many of the enhancements to COINSERV also benefit COINS-CD since the core
platform is the same. Additionally, other enhancements to COINS-CD are in
process. These include advanced networking and an increase in the number and
type of storage devices supported. This platform is strategic for the company
and although new, it is expected that this product will be a major contributor
to the company's growth.
MARKETING AND SALES
INSCI markets its COINSERV products principally through its own sales force,
through strategic alliances and value added resellers. Marketing activities
include trade journal advertising, distribution of sales and product literature
describing the COINSERV products, their applications and benefits, attendance at
trade shows and conferences, sponsoring or supporting seminars for customers and
prospects, and on-going communications with the established base of customers
via newsletters, new product announcements, direct mail and telemarketing.
Public relations activities include speaking at trade group meetings, publishing
of technical articles, publishing of user success stories, and distributing of
press releases about the Company and its products.
INSCI's direct sales force focuses on prospects for its products that are
particularly in high volume, high performance environments. Sales
representatives initiate contacts with prospective end user customers and make
direct sales of COINSERV products to those prospects. They also provide
assistance and make joint presentations with the Company's resellers and
strategic business alliances. Additionally, they frequently work with INSCI's
systems engineers to provide high level technical consulting services both
before and after a sale.
INSCI has developed several strategic business alliances through which the
Company generates sales. 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 OCE.
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 VARs' customers. INSCI sells its products directly to VARs
for resale to the VARs' customers.
The Company believes that COLD and electronic printing are scarce
technologies and that it is likely to enter into additional marketing alliances
that will have the potential to generate further significant sales. In
particular it believes that companies in the imaging, workflow, information
retrieval, electronic commerce, Internet and printing areas are likely to
require COLD technology in order to meet their own objectives. It intends to
continue discussions with such companies with a view to closing further such
alliances.
CUSTOMER SUPPORT AND SERVICE
INSCI's in-house technical support personnel provide pre-sale support to
assist in product selection and configuration, installation support assisting in
technical integration of COINSERV with a customer's existing computer system,
and post-sale telephone support (included in the customer's maintenance support
agreement) assisting in the ongoing use of the COINSERV system. INSCI's post-
sale support also includes software maintenance, software updates and technical
support pursuant to renewable one-year contracts. VARs and distributors
generally handle service and support for their customers. INSCI intends to
expand this level of support both through traditional approaches and through
non-traditional ones. In this regard it has set up a Web site and intends to use
this as a medium for customer information and support.
The computer hardware utilized in COINSERV systems is generally covered by
warranties granted directly by the hardware manufacturer to the customer, and
INSCI does not assume responsibility for support or maintenance of this
equipment. INSCI has not experienced significant return claims. Maintenance and
technical support for the optical disk drive components in all INSCI systems are
provided by a third party contractor which specializes in providing service for
optical disk drives and jukeboxes.
VENDORS AND SUPPLIERS
INSCI acquires optical disk drives, including multiple disk drives and
computer hardware components, for resale as part of integrated systems including
COINSERV software. To date, INSCI has utilized 5-inch and 12-inch optical disk
drives manufactured by Panasonic, Philips Laser Magnetic Storage Inc. ("ALMSIA")
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 (incuding 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 77 persons as of June 30, 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.
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."
LEGAL PROCEEDINGS
The Commission issued an order, dated April 13, 1995, authorizing a private
investigation of IMTECH and INSCI Corp., and its officers and directors during
the period from March 1993 and continuing until April 13, 1995. The order of
investigation inquiring into whether the Company and its then officers and
directors engaged in violations of Rule 10b-5 of the Securities Exchange Act of
1934 (the "Exchange Act"); failed to file annual reports and other information
as required by the rules and regulations of the Commission in violation of
Section 13(a) of the Exchange Act and Rules 12b-20, 13a-11 and 13a-13; and
failed to maintain proper books and records in violation of Section 13(b)2 of
the Exchange Act or falsified or caused to be falsified books and records of the
Companies in violation of Sections 13(b)(2)(a), Rule 13b2-1, and Rule 13b2-2 of
the Exchange Act.
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.
<PAGE>
MANAGEMENT
DIRECTORS AND EXECUTIVE OFFICERS
The following table sets forth the name, age and position of each of the
directors and executive officers of INSCI Corp. Each director of INSCI Corp.
will hold office until the next annual meeting of stockholders of INSCI Corp. or
until his or her successor has been elected and qualified. Officers of INSCI
Corp. are elected by the Board of Directors of INSCI Corp. and serve at the
discretion of the Board of Directors.
NAME Age Current Position With Company
Dr. E. Ted Prince [a] 50 Chairman, Chief Executive Officer,
President and Director
Robert Oxenberg 46 Director
Leonard Gartner 55 Director
Francis X. Murphy 49 Director
Richard T. Gerstner 57 Director
Andre Daniel-Dreyfus [b] 57 Director
Mitchell Klein [b] 47 Director
Krishan Canekeratne 31 Chief Technology Officer and Senior
Vice-President
John L. Gillis 44 Executive Vice-President of Field Operations
and Chief Operating Officer
Roger C. Kuhn 54 Vice President of Finance and Chief Financial
Officer
[a] Dr. Prince held both the Chief Accounting and Financial Officer positions on
an interim basis from May 10, 1996 through July 29, 1996.
[b] Appointed as a director of the Company in June 1997.
DIRECTORS AND EXECUTIVE OFFICERS
The directors of the Company are elected each year at the annual meeting of
shareholders for terms of one year and until their successors are elected and
qualified. The executive officers of the Company are appointed by the Board of
Directors to serve until their successors are appointed and qualified.
CURRENT DIRECTORS OF INSCI
DR. E. TED PRINCE, was appointed President and Chief Executive Officer of
the Company in June 1995. He was elected Chairman of the Board of Directors in
August of 1995 and appointed and served as Chief Financial and Accounting
Officer on an interim basis in May 1996 through July 1996. Dr. Prince has been
President of several software companies, including Computer Power Corporation,
and is also President of Perth Ventures, Inc., a New York City based investment
banking firm specializing in the emerging technology sector. Dr. Prince serves
as a member of the Board of Directors of Thinking Tools Inc. which is a public
company. Dr. Prince also is an author and publisher of an industry newsletter,
"The Technology Fundamentalist." Dr. Prince also serves as a Director for
several software companies and has a degree in Political Science from The
University of New South Wales (Australia) and a Master and Ph.D. degree from
Monash University in Australia.
ROBERT H. OXENBERG, served as a Director of the Company from April 1992 to
November 1993. Mr. Oxenberg was reappointed to the Board to fill a vacancy in
September 1994. Mr. Oxenberg was appointed Chief Executive Officer of
Information Management Technologies Corporation ("IMTECH"), the Company's former
majority shareholder, in March 1995 and resigned April 1996 as CEO and has
served as a director since April 1992. Mr. Oxenberg is a consultant based in
Aspen, Colorado. From August 1984 to July 1991, he served as Manager of
Corporate Investments for the Anschutz Corporation, a Denver based privately
held corporation.
LEONARD GARTNER, has been the principal of Gartner and Company, an
accounting firm, for the past five years. His firm specializes in structuring
debt and equity instruments, advising clients on the financial and tax aspects
of acquisitions, stock option plans and stock issuance matters. Mr. Gartner was
elected as a Director of INSCI in September 1995. Mr. Gartner also serves as a
member of the Company's Audit and Compensation Committees.
FRANCIS X. MURPHY, was elected a Director of the Company in September 1995.
He is the founder of Emerging Technology Ventures, Inc. and has served as
President and Chief Executive Officer from its inception in September 1994. From
February 1994 through September 1994 Mr. Murphy was the President and Chief
Operating Officer of Cryo-Cell International, Inc., a Research and Development
stage medical products public company. From 1991 through 1994, he served as
President and Chief Operating Officer of Creative Socio-Medics Corp., a wholly
owned subsidiary of Advanced Computer Techniques, a provider of technology to
the health care industry. He holds both a Bachelors of Arts and Masters of
Business Administration in Corporate Finance from Adelphi University.
RICHARD GERSTNER, was appointed a Director of the Company in March of 1996.
In addition to serving as a Director of INSCI Corp., Mr. Gerstner serves as a
Director for the Lyme Disease Foundation. Mr. Gerstner is currently the
President and CEO of C Voice Inc. Prior to joining C Voice Inc. he served as
President and Chief Executive Officer of Telular Corporation, a manufacturer of
fixed wireless telecommunications equipment. Mr. Gerstner is a graduate of
Villanova University with a Bachelors of Science Degree in Chemical Engineering
and holds a Masters of Science in Industrial Engineering from Stanford
University.
ANDRE DANIEL-DREYFUS, age 57, was appointed a Director of the Company in
June, 1997. From 1989 to the present, Mr. Dreyfus has been Senior Vice
President, Corporate Finance, at Fechtor Detwiler & Co. Inc. an investment
banking firm. From 1979 to 1989 Mr. Dreyfus was Vice President at McTeague &
Company, a private investment banking firm. Mr. Dreyfus holds a Bachelors of
Arts and Master of Arts from Yale University.
MITCHELL KLEIN, age 47, was appointed a Director of the Company in June,
1997. Mr. Klein is currently the President of Mitchell Capital, Inc., an
investment management company formed in June, 1994. Since March of 1994, he has
also been Managing Director of Brill Securities, Inc. members of the NYSE, SIPC.
Mr. Klein has over fifteen years of computer industry experience. He has served
in various senior management positions with Digital Equipment Corporation for
nine years, after having been President of his own software development and
consulting firm. Mr. Klein is a graduate of the State University of New York at
Albany and holds a Masters of Arts from the University of Michigan at Ann Arbor.
CURRENT EXECUTIVE OFFICERS OF INSCI
In addition to Dr. Prince, the following INSCI employees are executive
officers of the Company.
KRISHAN CANEKERATNE, was elected Chief Technology Officer and Senior Vice
President of the Company in June 1995. He joined the Company in December 1989 as
Project Manager/Senior Programmer and was promoted to Director of Software in
September 1991, Vice President in November 1992 and Senior Vice President in
November 1993. Prior to joining the Company, Mr. Canekeratne worked for the
Independent Election Corporation of America.
JOHN L. GILLIS, is Executive Vice President-Field Operations and Chief
Operating Officer of the Company. Mr. Gillis has served as President of the
Company from July 1994 through June 1995. He has served as a director of the
Company October 1993 through September 1996. From August 1992 through November
1993, Mr. Gillis served as Senior Vice President. Mr. Gillis joined the Company
as Vice President Sales in November 1990.
ROGER C. KUHN, joined the Company and was appointed Vice President Finance
and Chief Financial Officer on July 29, 1996. Mr. Kuhn has been Chief Financial
Officer for Momentum Software Corporation and Acuity Imaging Inc. He was Vice
President and Controller of Computervision Corporation. Mr. Kuhn holds a
Bachelors of Science in Accounting and Masters of Business Administration in
Finance from Fairleigh Dickinson University.
COMPENSATION OF DIRECTORS AND EXECUTIVE OFFICERS
The following table sets forth the compensation for each of the last three
(3) fiscal years earned by the Chief Executive Officer and each of the most
highly compensated executive officers whose individual remuneration exceeded
$100,000 for the fiscal year ended March 31, 1997 (the "Named Executives"). The
Company's compensation policies are discussed in "The Compensation Committee"
Report as discussed within this document.
<PAGE>
SUMMARY ANNUAL COMPENSATION TABLE
<TABLE>
<CAPTION>
ANNUAL COMPENSATION
------------------------------------------------
LONG TERM
COMPENSATION
PRINCIPAL OTHER OPTIONS
NAME POSITION YEAR SALARY BONUS COMPENSATION GRANTED **
- ----- -------- ---- ------ ----- ------------ ----------
<S> <C> <C> <C> <C> <C> <C>
DR. E. TED PRINCE President and 1997 $200,000 - $31,596 (1) 75,000
Chief Executive 1996 157,692 $100,000 72,983 (1) 1,200,000
Officer 1995 - - -
JOHN L. GILLIS Executive Vice 1997 165,000 110,330 90,707 (2)
President 1996 150,447 55,000 54,539 (2) 350,000
Chief Operating 1995 149,154 30,000 157,659 (2)
Officer
KRISHAN CANEKERATNE Senior Vice 1997 123,884 83,690 6,000 (3)
President 1996 118,461 52,454 5,538 (3) 350,000
Development 1995 107,384 60,000 46,280 (3)
GEORGE TRIGILIO, JR. Executive Vice 1997 98,846 - 7,715 (4)
President 1996 - - - 300,000
Imaging Division 1995 - - -
ROGER KUHN Executive Vice 1997 82,212 36,250 3,923 (5) 100,000
President 1996 - - -
Chief Financial 1995 - - -
Officer
*DAVID GRACE Acting Chief 1997 - (6) - -(6)
Executive 1996 - - - 10,000
Officer 1995 17,000 - -
*JOHN STEINKRAUSS Chief Financial 1997 21,578 - 808 (7)
Officer
Vice President 1996 123,536 11,000 18,615 (7) 125,000
Finance
& Administration 1995 88,845 - 20,961 (7)
*GERARD DORSEY Chief 1997 (8) - (8)
Executive 1996 - - -
Officer 1995 144,000 - -
</TABLE>
* Indicates resignation
** The Company does not have a restricted stock award program
(1) In fiscal year 1997, Dr. Prince was paid a $6,000 living allowance, $8,247
for an automobile lease, $2,204 for garage rental and $15,145 for apartment
rental. Other compensation in 1996 represents $25,000 paid directly as a
signing bonus and $25,000 paid indirectly as a consulting fee through Perth
Ventures. The remaining $22,983 is comprised of $4,269 living allowance,
$6,098 payment for an automobile lease, $1,560 for garage rental, $10,686
for apartment rental and $370 for an automobile allowance.
(2) In fiscal year 1997, Mr. Gillis received an automobile allowance of $6,741
and $83,966 stemming from the surrender of 19,134 stock options as payment
against a $150,000 loan made to Mr. Gillis in April 1994. Other
compensation for 1996 of $54,539 includes, $21,003 which represents 1995
calendar year imputed interest relative to the loan and $27,810 from the
surrender of 9,924 stock options to pay down the loan. The remaining $5,726
was an automobile allowance. In 1995, Mr. Gillis was paid an automobile
allowance of $5,140 and housing allowance of $900 and the Company included
$150,000 which represented the loan made to Mr. Gillis in April 1994.
Please refer to the Company's 1996 Annual Report 10-K for additional
information relative to Mr. Gillis' loan under Related Party Transactions
on page F-13.
(3) In fiscal years 1997 and 1996, Mr. Canekeratne was paid an automobile
allowance in the amount of $6,000 and $5,538 respectively. The amounts for
1995 represent a automobile allowance of $3,000, housing allowance of
$13,280 and a relocation allowance of $30,000.
(4) Other compensation for fiscal year 1997 of $7,715 includes commission paid
to Mr. Trigilio of $2,377 and an automobile allowance of $5,338.
(5) In fiscal year 1997, Mr. Kuhn received an automobile allowance of $3,923.
(6) Mr. Grace is a past Director and was Chief Executive Officer for an interim
period. Mr. Grace was not paid a salary.
(7) In fiscal year 1997, Mr. Steinkrauss was paid an automobile allowance of
$808. Amounts for 1996 represent $5,538 for an automobile allowance and
$13,077 in relocation costs. For 1995, Mr. Steinkrauss received an
automobile allowance of $4,038 and a relocation allowance of $16,923.
(8) All compensation to Mr. Dorsey was paid by Information Management
Technology Corporation (IMTECH), the Company's former majority stockholder.
Mr. Dorsey resigned as an officer and director of the Company and IMTECH in
September 1994.
<PAGE>
OPTION/SAR GRANTS IN LAST FISCAL YEAR
The following table provides information concerning options granted to
officers and directors during the Fiscal Year ended March 31, 1997 and reflects
the potential value of such options assuming 5% and 10% annual stock
appreciation.
OPTION GRANTS DURING FISCAL 1997
<TABLE>
<CAPTION>
PERCENT OF
TOTAL SHARES POTENTIAL REALIZABLE VALUE AT
UNDERLYING ASSUMED ANNUAL RATES
OPTIONS GRANTED OF STOCK PRICE APPRECIATION
TO EMPLOYEES IN EXERCISE EXPIRATION FOR OPTION TERM
NAME NUMBER FISCAL YEAR PRICE DATE 5% 10%
- ---- ------ --------------- ----- ---- -- --
<S> <C> <C> <C> <C> <C> <C>
E. Ted Prince 75,000 20% $3.75 May 7, 07 $177,000 $448,000
Roger Kuhn 100,000 26% $6.18 July 29, 06 $388,000 $985,000
</TABLE>
OPTION EXERCISES AND HOLDINGS
The following table sets forth information concerning the exercise of
options during the last fiscal year and unexercised options held as of the end
of the fiscal year with respect to each of the Named Directors and Executives:
Aggregate Option Exercises In Last Fiscal Year
And Fiscal Year End Option Values
<TABLE>
<CAPTION>
Shares Number of Shares Value of Unexercised
Acquired Value Underlying Options In-the-Money Options
On Exercise Realized At March 31, 1997 At March 31, 1997 (2)
-------------- -------- ------------------ ------------------------------
(#) ($) (1)
--- --------
Name Exercisable Unexercisable Exercisable Unexercisable
- ---- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C>
E. Ted Prince - - 751,391 448,609 1,673,255 1,049,745
Richard Gerstner - - 33,333 466,667 - -
Francis Murphy - - 116,132 383,868 201,161 170,668
John Gillis - - 120,942 200,000 283,004 468,000
Krishan Canekeratne - - 150,000 200,000 351,000 468,000
Roger Kuhn - - - 100,000 - -
George Trigilio, Jr. - - 95,000 - - -
Robert Oxenberg - - 80,000 75,000 156,566 194,584
Leonard Gartner - - 73,333 66,667 85,333 170,668
John Steinkrauss - - - - - -
David Grace - - - - - -
Olin Broadway 5,000 16,550 - 5,000 - 12,800
(1) Calculated by multiplying the number of shares underlying options by the
difference between the closing price of the Common Stock as reported by
NASDAQ on the date of exercise and the exercise price of the options.
(2) Calculated by multiplying the number of shares underlying options by the
difference between the closing price of the Common Stock as reported by
NASDAQ on March 31, 1997 and the exercise price of the options.
</TABLE>
REMUNERATION ON NON-MANAGEMENT DIRECTORS
Each member of the Board of Directors who is not an officer or employee of
the Company is entitled to participate in the Directors Option Plan (See
"Directors Option Plan"), and to receive reimbursement for travel and other
expenses directly related to his activities as a director. The Company does not
pay inside or outside Directors on a per meeting basis for attendance at Board
of Director meetings or related Committee meetings. However, each outside
Director may be compensated pursuant to a written agreement with the Company to
provide specific types of professional services such as financial, accounting or
tax advice covering compensation plans, acquisitions and debt/equity placements.
See Certain Relationships and Related Transactions.
With respect the Audit Committee, the Company subsequent to the end of
fiscal year 1996, retained a financial consultant, Mr. B. Nicholas Harvey to be
a member of the Committee on a retainer basis at $1,500 per quarter plus 15,000
stock options vesting over three (3) years, 10,000 of which stock options have
been granted with the remaining 5,000 stock options vesting over the next two
(2) years. He is the only non-Director member on any of the Company's
Committees.
COMPENSATION PLANS:
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 and President. 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
achievement 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 the return of the stock options would be waived. Dr.
Prince achieved a $100,000 management incentive bonus during fiscal year 1996
and a stock option grant of 75,000 shares at an exercise price of $3.75 relating
to his fiscal 1997 performance.
Mr. George Trigilio, Jr. became employed by the Company at the end of fiscal
year 1996 as a result of the acquisition of the Courtland Group, Inc. Mr.
Trigilio has an employment agreement with the Company providing an annual salary
of $100,000 as well as incentive bonuses conditioned upon his performance.
The Company has employment agreements with its other executive officers
which also includes annual incentive bonuses 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
321,000 and 350,000 options, respectively.
Mr. Roger C. Kuhn the Company's Chief Financial Officer and Vice-President
has an employment agreement at a base salary of $125,000 and a potential annual
incentive of $25,000 based on performance objectives. In addition, Mr. Kuhn was
granted 100,000 stock options upon signing the agreement.
In December of 1996 the Board of Directors amended the employment agreements
of Messrs. Canekeratne. Gillis and Kuhn to provide for a one-year severance or
payment of the balance of compensation under their Employment Agreements and
vesting of all stock options, whichever is less, in the event of a change of
control of the Company, and a termination of their employment without cause.
DIRECTORS AND OTHER STOCK OPTIONS
The Directors Option Plan (the "Directors Plan") was adopted by the Board of
Directors in 1992 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.
At March 31, 1997 there were 45,000 Directors options outstanding and 955,000
options available for future grant.
During fiscal 1996, the Company, with shareholder approval, 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.
THE 1997 EQUITY INCENTIVE PLAN
The 1997 Equity Incentive Plan is the successor plan to the Company's 1992
Stock Option Plan (the Plan) which was terminated by shareholder ratification at
the Company's annual meting in September 1996. Under the 1992 Plan, 4,000,000
shares of common stock $.01 par value were authorized and reserved for issuance
in the form of incentive stock option and non-qualified stock options. Of these,
609,565 stock options had been granted as of March 31, 1997. These stock options
are currently outstanding to employees of the Company and other key persons and,
as such, will remain in effect according to their terms and conditions
(including vesting requirements) as provided for in the 1992 Plan and individual
stock option agreements. The remaining 3,390,435 authorized and reserved shares
of common stock are no longer subject to issuance under the 1992 Plan.
The Company, with shareholder approval, has reserved 3,000,000 shares for
future use under the new 1997 Equity Incentive Plan (the 1997 Plan). These new
shares, in effect, replace the shares remaining and not granted under the
terminated 1992 Plan. As of July 31, 1997, there were 258,800 options granted
under the 1997 Plan. The 1997 Plan is administered by the Compensation Committee
of the Board of Directors (the Committee) consisting of two or more non-employee
directors of the Company who are not eligible to receive grants or awards under
the 1997 Plan. The plan provides for the granting of equity incentive awards to
employees in the form of incentive stock options, non-qualified stock options,
stock appreciation rights, stock appreciation awards, restricted stock awards,
deferred stock awards, and other performance-related or non-restricted stock
awards. The new plan permits the Company to provide its employees with incentive
compensation opportunities which are highly motivational and which afford the
most favorable tax and accounting treatments to the Company. The Committee
believes that the flexibility of the incentive award vehicles provided for by
the 1997 Plan will enhance the effectiveness and cost efficiency of the
Company's management incentive program in the best interest of shareholders.
The Committee, subject to the provisions of the 1997 Plan will designate
participants, determine the terms and provisions of each award, interpret the
provisions of the plan and supervise the administration of the plan. The
Committee may, in its sole discretion, delegate certain administrative
responsibilities related to the 1997 Plan to Company employees or outside
consultants, as appropriate. The exercise price of any stock option granted
under the 1997 Plan shall not be less than the fair market value of the common
stock of the Company on the date of grant. The Committee shall determine any
service requirements and/or performance requirements pertaining to any stock
awards under the 1997 Plan.
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
The following table sets forth, to the best knowledge of the Company, as of
March 31, 1997, certain information with respect to (1) beneficial owners of
more than five percent (5%) of the outstanding Common Stock of the Company, (2)
beneficial ownership of shares of the Company's Class Stock by each director and
named executive; and (3) beneficial ownership of shares of Common Stock of the
Company by all directors and officers as a group.
<TABLE>
<CAPTION>
NAME OF BENEFICIAL OWNER SHARES OF OPTIONS/ TOTAL % OF COMMON
COMMON OTHER BENEFICIAL STOCK
STOCK OWNERSHIP OUTSTANDING
- ---------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Information Management Technologies Corp. 599,667 - 599,667 14%
130 Cedar Street-4th Floor
New York, NY 10006
CEDE, Depository Trust Co. 1,037,808 - 1,037,808 25%
PO Box 20
New York, NY 10274
Dr. E. Ted Prince, CEO 5,789 751,391 757,180 15%
2 Westborough Business Park
Westborough, MA 01581
Francis X. Murphy, Director 10,000 116,132 126,132 3%
342 Madison Avenue
New York, NY 10173
John L. Gillis, COO - 120,942 120,942 3%
2 Westborough Business Park
Westborough, MA 01581
Roger Kuhn, CFO - - - -
2 Westborough Business Park
Westborough, MA 01581
Krishan Canekeratne, Senior Vice President 700 150,000 150,700 3%
2 Westborough Business Park
Westborough, MA 01581
George Trigilio, Jr., Executive Vice President - 95,000 95,000 2%
5300 Dorsey Hill, Suite 150
Elicott City, MD 21042
Robert H. Oxenberg, Director 7,047 80,000 87,047 2%
PO Box 12381
Aspen, CO 81612
Leonard Gartner, Director 100,000 133,333 233,333 5%
140 East 56th Street
New York, NY 10022
Richard Gerstner, Director - 33,333 33,333 1%
106 Saddle Hill Road
Stamford, CT 06903
All Directors and Executive Officers as a Group 123,536 1,480,131 1,603,667 28%
(1) Unless otherwise noted, all shares are beneficially owned and the sole voting and investment power is held by the
persons/entities indicated.
(2) Based upon the aggregate of all shares of Common Stock issued and outstanding as of March 31, 1997 in addition to shares
issuable upon exercise of options or warrants currently exercisable or becoming exercisable within 60 days followings the date
of this report and which are held by the individuals named on the table.
</TABLE>
SELLING SHAREHOLDERS
The following table sets forth the number of shares of Common Stock
beneficially owned and/or shares of Common Stock underlying the Company's: 10%
Convertible Redeemable Preferred Stock, 10% Convertible Preferred Stock and 8%
Convertible Redeemable Preferred Stock and Warrants. The number of underlying
shares of Common Stock attributed to holders of the Company's 10% Convertible
Redeemable Preferred Stock, 10% Convertible Preferred Stock and 8% Convertible
Redeemable Preferred Stock and Warrants is based upon certain assumptions, the
actual number of underlying shares of Common Stock a selling shareholder may own
upon conversion is subject to change. The assumptions upon which the underlying
shares are based are more fully explained in the notes accompanying this table.
<TABLE>
<CAPTION>
OWNED PRIOR TO OFFERING
Number of
Common Shares of
Stock Common Stock
Common Stock Underlying Underlying 8% Number of Number
Number of Underlying Shares of 10% Convertible Shares to Shares to
Shares of Number of Shares of 10% Convertible Redeemable be Sold be Owned
Common Stock Restricted Convertible Preferred Preferred Pursuant after Offering
Owned Prior Shares of Redeemable Stock Stock and to this by Selling
Name of Selling to the Common Preferred Owned Warrants Prospectus Shareholders
Shareholder Offering Stock (1) Stock (2) (3) (4) Warrants Options (5) (6)
- --------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Bijan Ahmadi 18,134 18,134
Gary L. Alderman 6,800 6,800
Robert W. Allen 16,320 16,320
Anschutz Family
Foundation 14,521 14,521
Fred Anschutz (7) 521 521
Antelope Company 70,070 68,202 138,272
Ronald Arison 18,134 18,134
E.H. Arnold 8,160 8,160
Gary P. Arnold 10,880 10,880
Robert E. Atkins 5,440 5,440
Luis R. Barreras 18,134 18,134
John C. &
Elizabeth C. Barrott 27,200 27,200
Keith E. Becker 72,352 72,352
Robert J. &
June G. Becker 19,040 19,040
John A. Bernardi 13,862 13,862
D.H. Blair &
Co. Inc (24) 12,000 16,020 16,020 12,000
Alvin R. Bonnette
f/b/o Alvin R.
Bonnette 18,134 18,134
Alex E. Booth, Jr. 7,254 7,254
Leo Borenstein (24) 10,000 10,000
Hugh C. Braly 5,645 31,826 37,471
Olin Broadway (8) 5,000 5,000
Willard D. Campbell
Trust 18,134 18,134
Krishan Canekeratne (9) 700 350,000 350,000 700
Howard A. Caplan 13,600 13,600
Case Holding
Company, Inc. 18,134 18,134
Chinh & Debra Chang 29,014 29,014
Malcom G. Chase III 37,300 37,300
O. Beirne Chisolm 39,894 39,894
P/S Plan (William
Donovan & Betty
White Trustees) 17,680 17,680
Clayton Motor
Co., Inc. 8,160 8,160
Lorelei A. Cole 3,631 3,631
Courtland Group Inc. 28,968 28,968
M. Jenkins
Cromwell, Jr. 6,250 6,250
Lauren A. Daman 17,270 17,270
Thomas C. DeFazio 10,880 10,880
Ronald S. Dungan 14,085 14,085
DSI Data Systems
International Ltd 25,000 25,000
Peter Einselen 20,000 20,000
Norton A. Elder 2,308 10,101 12,409
Norton A. Elder IRA 4,927 4,927
Lloyd B. Embry 13,600 13,600
Emerging Technologies,
Ventures Inc. (10) 400,000 400,000
Thomas Farkas 100,000 692,915 792,915
Thomas P. Farkas 97,983 80,806 178,789
Todd M. Feldman 8,160 8,160
S. Marcus Finkle 145,068 145,068
Denis Fortin 35,360 35,360
Gerald Franz 40,000 40,000
Keith M. Ganzer 8,160 8,160
B. Kent Garlinghouse 8,160 8,160
Leonard Gartner (11) 100,000 140,000 240,000
Generation Capital
Associates 36,266 36,266
Richard Gerstner (12) 500,000 500,000
John Gillis (13) 320,942 320,942
Eddie V. Gray 8,160 8,160
Neil & Verna
Greenwood (7) 521 521
Thomas T.
Grimmett PA DBPT 10,880 10,880
Edward P. Grindstaff 8,160 8,160
Raquel Grunwald 5,733 10,101 15,834
Louis Gurman 100,000 100,000
Salem M. Habal 18,134 18,134
Brian F. Hanley
Revocable Trust 18,134 18,134
Harrison Option
Fund, L.P. 21,760 21,760
Chester T. Houghton 14,468 20,201 34,669
Ernest J. Horky 18,134 18,134
Greg Hunsinger 10,880 10,880
Michael P. Ilaria 15,085 15,085
Information Management
Technologies
Corporation (14) 629,667 629,667
INITIAL PUBLIC
OFFERING (15) 625,000 625,000
Hyman Indowsky
(Dean Witter Cust) 7,254 7,254
Intergroup Corporation 20,000 20,000
James Jacques 7,235 20,201 27,436
L. James Jacqus 5,000 5,000
Dean R. Johnson (17) 37,500 37,500
David A. Kadish 5,440 5,440
Robert D. Katchke 8,160 8,160
Harold A. Kayser 7,235 10,101 17,336
Albert Kern 1,042 7,254 8,296
Kinder Investments 45,000 45,000
David Kohane 578 17,460 18,038
Ferdinand Kollar 5,440 5,440
Petro A. Kotsis 5,440 5,440
Richard A. Kraemer 10,880 10,880
Andy H. Krantz 20,000 20,000
Robert Krantz 20,000 20,000
Ron Krinick 130,095 40,404 34,920 205,419
Russ Kuhn 18,134 18,134
Lancer Partners LP 150,000 544,000 694,000
Lancer Offshore, Inc. 50,000 190,400 240,400
Lark & Co.
f/b/o Arkansas
Teachers Retirement
System 544,000 544,000
The Larson Family Trust 36,266 36,266
David S. Lawi 27,200 27,200
A. F. Lehmkuhl 6,800 6,800
Brian F. Leonard 6,800 6,800
Lawrence Levitt 5,979 5,979
Lawrence D. Levitt &
Cinda S. Levitt Co 1,256 1,256
Ttees Lawrence D.
Levitt Living Trust
Robert F. Little TTEE
Robert F. Little Inc. 2,079 2,079
R.F. Little Inc.
Pension Fund 11,863 18,182 30,045
Robert F. Little 5,500 63,376 63,376 5,500
Susan R. Little 24,480 24,480
John D. Lium 7,254 7,254
James C. Lanshe (17) 37,500 37,500
Connie Loewenthal 13,600 13,600
Bruce T. Loewy 18,134 18,134
Vincent L. Marino 10,880 10,880
Harry Markovitz
(18) (24) 130,100 112,000 242,100
James Martin 180,000 180,000
Maureen McCluskey 7,813 1,801 22,734 24,535 7,813
J.W. McInroy 5,440 5,440
David B. McKee 14,504 14,504
McKeown & Franz Inc.
Pension Plan 13,600 13,600
Richard P. McKibben
Trust, 18,134 18,134
Martha McKibben
Successor
Trustee 41,706 41,706
Abdon J. Medina 18,134 18,134
Louis G. Miller 24,480 24,480
Gerald J. Millstein 19,946 19,946
Ray E. Moody 18,134 18,134
Bohdon Moroz 18,134 18,134
Francis X. Murphy (19) 10,000 100,000 110,000
N. Dean Nasser 18,134 18,134
Charles A. Newton 9,520 9,520
Norcross (17) 75,000 75,000
Rachel Novoseller 14,468 20,201 34,669
Nathaniel Orme 8,160 8,160
Fred Ostad 5,440 5,440
Howard Oxenberg 1,801 22,734 24,535
Robert Oxenberg (20) 4,167 2,880 36,372 155,000 194,252 4,167
Garry Pace 37,754 37,754
John Palazzola 10,880 10,880
Robert Paul 36,176 36,176
Glen Peruche (24) 4,000 4,000
Pitt & Co. f/b/o
Missouri State 544,000 544,000
Robert Perfilio 4,000 4,000
Michael Pizitz 7,429 15,786 23,215
Douglas L. Polson (7) 521 521 1,042
E. Ted Prince (21) 7,746 10,101 1,200,000 1,217,847
Joseph F. Regan 32,640 32,640
J. Michael
Reisert Inc. (16) 15,000 362,666 377,666
Kalman Renov (24) 33,440 33,440
Sue Anschutz Rodgers 4,603 31,826 36,429
Beth Ross (7) 521 521
Daniel Ruscitti 5,000 5,000
Jeffrey L. &
Barbara A. Sadar 5,440 5,440
Charles L. Sample 451 451
Santa Fe Financial Corp 20,000 36,266 56,266
Peter & Irene Santulli 4,080 4,080
Sarco & Company 45,070 68,202 113,272
Charles R. Schaller 18,134 18,134
Charles T. Schiro 17,460 17,460
James F. Schofield 40,800 40,800
Christopher Schreiber 7,254 7,254
Thomas L. Schroeder
SEP IRA 10,880 10,880
Sol B. Schwartz 18,134 18,134
Helen Scott (7) 521 521
Gary Segal 18,129 18,129
Barbara D. & Leonard J.
Seigel JTE 18,134 18,134
Alvin Sherman 580 580
Sherman Strategic
Partners 54,868 54,868
Shore Yoshuv Institute 8,424 8,424
Shor Yeshiva
Institutional 30,000 122,556 40,404 162,960 30,000
Shor Yeshov 50,000 50,000
Howard Smith 13,755 13,755
Phillip P. Smith 18,134 18,134
Judith F. Sook 13,568 20,201 33,769
Mary Elizabeth Strazel 2,083 2,083
Robert F. Stazel 12,039 8,081 20,120
Al Sorensen IRA 10,880 10,880
Alan Stahler (24) 33,440 33,440
Michael Supra 18,134 18,134
Garland S. Sydnor, Jr. 16,320 16,320
Steven J. Szafara 7,344 7,344
Regina & Kamal Taslimi JT 18,134 18,134
Taglich Brothers 3,462 3,462
Michael Taglich 21,069 21,069
Robert Taglich 20,469 20,469
Thomas James
& Associates (17) 37,500 37,500
Thuemling Industrial
Products 10,880 10,880
Morton L. Topfer 36,268 36,268
Claire Tremarche (22) 30,000 30,000
George J. Trigilio, Sr. 30,713 30,713
George Trigilio,
Jr. (23) 95,000 95,000
Tyson Apparel Inc. 23,210 23,210
Richard A. Unverferth 13,600 13,600
Venturetec L.P. 7,202 90,932 98,134
Boston Safe Deposit
Trust Co. 300,000 300,000
Wallace Electric Co. 36,266 36,266
William & Elizabeth
Wieck JTWROS 10,880 10,880
John I. Williams, Jr. 18,134 18,134
Kenton E. Wood (24) 9,600 9,600
Xiaoman Wu 7,254 7,254
Seymour H. Zisook 12,240 12,240
TOTAL 60,180 2,860,565 934,299 762,755 3,989,325 815,105 3,407,942 12,769,991 60,180
</TABLE>
<PAGE>
NOTES TO SELLING SHAREHOLDERS
(1) Includes restricted shares of the Company's issued and outstanding Common
Stock $.01 par value ("Common Stock").
(2) Includes shares of Common Stock underlying 10% Convertible Redeemable
Preferred Stock issued in the Company's 1995 Private Placement. Additionally,
includes prospective dividends of Common Stock at 10% per annum (payable
semi-annually) through May 1, 1998 (See "Dividends"). Note that certain
subscribers to the 1995 10% Convertible Redeemable Preferred Stock Private
Placement have elected automatic conversion of their shares of Preferred Stock
into shares of Common Stock (see Conversion schedule in "Description of 10%
Convertible Redeemable Preferred Stock") while certain other subscribers have
not elected to have automatic conversions into shares of Common Stock take place
(3) Includes shares of Common Stock underlying shares of 10% Convertible
Preferred Stock issued under the Company's 1996 10% Convertible Preferred Stock
Private Placement. Assumes dividends issued in Common Stock of 10% per annum
paid on a semi-annual basis for a period of three (3) years from the date of
subscription under the Private Placement. Additionally, assumes a conversion of
10% Preferred Stock by all holders at the time of mandatory conversion (three
(3) years from acceptance of subscription under the Private Placement by the
Company) at a 30% discount based upon an assumed market price of $2.50 per share
of Common Stock.
(4) Includes shares of Common Stock underlying Units issued under the Company's
1996 Unit Private Placement. Each Unit consists of one share of 8% Preferred
Stock and one redeemable Common Stock warrant exercisable for three (3) years to
purchase one share of Common Stock at $5.00 per share. Assumes, no conversions
of Preferred stock for a period of three (3) years with cumulative dividends of
8% Preferred Stock issued at 8% per annum paid quarterly. Further, assumes that
the Company elects to pay dividends in the form of 8% Preferred Stock as opposed
to cash dividends, and that the market price of the Company's Common Stock does
not fall below $3.75 a share for a thirty (30) day period commencing September
1, 1998.
(5) Includes: restricted shares of Common Stock; shares of Common Stock
underlying 10% Convertible Redeemable Preferred Stock and dividends issued on
the 10% Convertible Redeemable Preferred Stock; shares of Common Stock
underlying 10% Convertible Preferred Stock and dividends issued on 10%
Convertible Preferred Stock; shares of Common Stock underlying Units comprised
of 8% Convertible Redeemable Preferred Stock and dividends of 8% Preferred Stock
issued on 8% Convertible Redeemable Preferred Stock and shares of Common Stock
underlying Unit Warrants; shares of Common Stock underlying warrants and shares
of Common Stock underlying stock options.
(6) Assumes the sale of all of the shares of Common Stock covered by this
Prospectus.
(7) Includes 1994 Warrants which were originally comprised of 1991 stock options
issued under the Company's 1991 Private Placement and shares of Common Stock and
warrants (the "1992 Warrants") issued in the Company's 1992 Private Placement.
(8) Includes vested stock options that have an exercise price of $1.44 per
share.
(9) Includes 350,000 stock options to purchase 350,000 shares of Common Stock
exercisable at $1.66 per share, of which 116,667 stock options are vested. Mr.
Canekeratne is the Company's Senior Vice-President of Development.
(10) Includes 400,000 incentive stock options exercisable at $2.31 per share, of
which 82,799 stock options are vested. Mr. Francis X. Murphy is a director of
the Company and a member of the Compensation Committee and is the principal
shareholder of Emerging Technologies Ventures, Inc. Mr. Murphy also owns 10,000
shares of restricted Common Stock and 100,000 stock options exercisable at $1.44
per share, of which 33,333 have vested.
(11) Includes 40,000 stock options exercisable at $4.06 per share, and 100,000
stock options exercisable at $1.44 per share. Of the 140,000 stock options,
73,333 are vested. Mr. Gartner serves as a director of the Company, and a member
of the Audit Committee. Does not include options to purchase 30,000 shares of
Common Stock granted by Information Management Technology Corporation. Said
options are exercisable at $3.50 a share through August 29, 1999.
(12) Includes 500,000 stock options, 100,000 exercisable at $4.38 per share and
400,000 stock options exercisable at $6.25 per share, of which 33,333 have
vested. Mr. Gerstener serves as a director to the Company.
(13) Includes 320,942 options to purchase Common Stock at $1.66 per share, of
which 120,942 stock options are vested. Mr. Gillis is a former director of INSCI
and presently serves as the Company's Executive Vice President and Chief
Operating Officer.
(14) Includes 30,000 shares of Common Stock of which options to purchase at
$3.50 a share through August 29, 1999 have been granted to Mr. Leonard Gartner.
(15) Includes shares of Common Stock underlying 1,250,000 stock purchase
warrants issued under the Company's 1994 Initial Public Offering ("IPO"). Under
the IPO, each warrant is convertible into one half (1/2) a share of Common
Stock.
(16) Includes shares of Common Stock underlying 133,334 Units paid as
commissions as a placement agent under the Company's 1996 Unit Private
Placement. Each Unit is comprised of one share of 8% Preferred Stock which at
the option of the Company can receive dividends of cash or 8% Preferred Stock.
Assumes the Company elects to pay dividends in 8% Preferred Stock, which
dividends are 8% per annum payable quarterly and are cumulative. Also assumes
the exercise of 133,334 warrants (included in the Units) to purchase 133,334
shares of Common Stock at an exercise price of $5.50 per share (as opposed to
the $5.00 warrants exercise price for subscribers under the 1996 Unit Placement)
of Common Stock. The warrants are for a period of three (3) years and expiring
1999.
(17) Includes shares of Common Stock underlying warrants originally issued as
underwriter warrants in connection with the Company's 1994 IPO. The underwriter
warrants were exchanged by the Company in 1996 for new warrants. The Company, on
February 14, 1997, has conditionally agreed with Norcross & Co., as
representative of holders of 150,000 common stock purchase warrants to purchase
150,000 shares of the Company's common stock, to exchange and cancel the
warrants for the issuance of 70,000 shares of fully-paid, non-assessable common
stock with registration rights. The agreement is subject to the execution of the
final documents and the cancellation of the common stock purchase warrants. The
balance of 37,500 warrants will not be affected by the agreement.
(18) Includes 100,000 shares of restricted Common Stock; 30,000 shares of
restricted Common Stock issued as selling commission to Amerivet/Dymally
Securities, Inc. in connection with the Company's 10% Convertible Preferred
Stock Private Placement ("10% Private Placement") in 1996, subsequently
transferred to Mr. Harry Markovitz, a licensed broker. Also includes 112,000
stock options to purchase shares of Common Stock at $5.00 per share expiring
September 1999 originally issued to Amerivet/Dymally Securities, Inc. as selling
commissions for the 10% Private Placement and subsequently assigned to Mr.
Markovitz.
(19) Includes 10,000 shares of restricted Common Stock and 100,000 stock options
exercisable at $1.44 per share. Mr. Francis X. Murphy serves as a director of
the Company. Mr. Murphy may also be deemed to be a beneficial owner of shares of
Common Stock owned by Emerging Technology Ventures, Inc.
(20) Includes 5,000 stock options exercisable at $18.00 per share, of which all
have vested; 5,000 stock options exercisable at $6.00 per share, of which all
are vested; 10,000 stock options exercisable at $7.00 per share, of which 6,667
have vested; 10,000 stock options exercisable at $1.66 per share, which have
vested; 100,000 stock options exercisable at $1.44 per share, of which 33,333
are vested; and 25,000 stock options exercisable at $1.13 per share, of which
8,333 have vested. Mr. Oxenberg serves as a director of the Company and is a
member of the Company's Compensation Committee.
(21) Includes 1,200,000 stock options to purchase 1,200,000 shares of Common
Stock exercisable at $1.66 per share, of which 751,391 are vested. Dr. Prince is
the Company's President, Chief Executive Officer and Chairman of the Board.
(22) Includes 10,000 stock options exercisable at $2.75, of which 3,333 are
vested. Also includes 20,000 stock options exercisable at $1.66 per share, of
which 6,667 are vested.
(23) Includes 95,000 incentive stock options exercisable at $4.38 per share, of
which 31,667 are vested. Mr. Trigilio is an Executive Vice President of the
Company's Imaging Division.
(24) Includes 236,600 shares of Common Stock based upon an assumed conversion of
10% Convertible Redeemable Preferred Stock. Holders own a 3 year option to
purchase 10% Convertible Redeemable Preferred Stock. The option to purchase this
Preferred Stock has not been exercised to date.
<PAGE>
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Effective October 1992, the Company signed a three-year consulting agreement
with Robert Oxenberg, pursuant to which Mr. Oxenberg provided consulting
services to the Company. At the time of this consulting agreement, Mr. Oxenberg
was a director of the Company. Mr. Oxenberg resigned as a director of the
Company in November 1993. This consulting agreement was terminated in November
1993. In February 1995, Mr. Oxenberg was granted 25,000 options at $1.13. Mr.
Oxenberg was granted a ten-year option to acquire 10,000 shares of Common Stock
at an exercise price of $7.00 per share. The option was granted under the
Company's 1992 Stock Option Plan. Mr. Oxenberg was subsequently re-elected as a
director in September 1994 and is currently a director of IMTECH. In June 1995,
the Company paid $35,000 to Mr. Oxenberg as remuneration for his efforts on
behalf of the Company to secure additional financing. In September 1995, the
Company signed an agreement with Mr. Oxenberg to assist INSCI to approach
potential investment sources. Mr. Oxenberg was paid a retainer of 10,000 stock
options at $1.66 (the underlying shares of Common Stock included in the within
registration). 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.
The Company has agreed to make a payment of 3.5% of the gross amount of
capital funds raised successfully by Robert Oxenberg, a director of the Company.
While Mr. Oxenberg has agreed not to participate in any discussions concerning
the Company's agreement to accept any investment in the Company arranged by Mr.
Oxenberg, it must be noted that the payment of a success fee will reduce the
proceeds obtained by the Company.
In April 1994, the Company loaned John L. Gillis, presently the Company's
Executive Vice President and Chief Operating Officer, and his wife, the amount
of $150,000 to purchase a residence in Westborough, Massachusetts. The loan
carries interest at the prime rate, and all unpaid principal plus all accrued
and unpaid interest is due ninety days (subject to extension by the Company)
following the closing of the loan. Repayment of the loan has been extended
through November 30, 1997, and in May 1996, the Company and Mr. Gillis reached
an agreement on a schedule of payments which anticipates repaying the loan
principal and interest in full during the course of the next two fiscal years.
The loan is collateralized by a pledge of Mr. Gillis' IMTECH Class A Common
Stock, IMTECH and certain INSCI stock options and 500 INSCI Units. The
collateral has a present market value materially less than the outstanding
balance of the loan. The Company established an allowance for loan loss as the
underlying collateral had minimal value. The outstanding loan balance as of
March 31, 1996 is $87,759, and is offset by an allowance for loan losses by the
same amount.
In June 1995, prior to Dr. E. Ted Prince's employment by the Company, the
Company engaged Dr. Prince as a consultant. 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 Inc. ("Perth Ventures") for
consulting fees. In June 1995, the Company commenced an interim office sharing
arrangement on a month-to-month basis from Perth Ventures at a monthly charge of
$2,000 per month. Dr. Prince, who is President, Chief Executive Officer and
Chairman of the Board of Directors of the Company, is 100% owner in and is
President of Perth Ventures. Dr. Prince is also an investor in one $25,000 unit
of the Company's 10% convertible preferred stock.
In June 1995, the Company engaged Emerging Technology Ventures, Inc.
("ETVI") to manage its acquisition activities for a one year period. Mr. Francis
X. Murphy ("Mr. Murphy"), who is President of ETVI, became a director of the
Company in September 1995. ETVI is paid a monthly retainer of $6,000. This
agreement was subsequently amended in October 1995 to include management of the
Company's strategic alliance activities, and the agreement was extended until
October 1996. ETVI was granted an incentive stock option to acquire 400,000
shares of the Company's common stock at an exercise price of $2.31 per share
(the underlying shares of Common Stock are included in the within registration).
These options are only exercisable to the extent that transactions which are
contemplated in the amended agreement are completed in accordance with the terms
of the agreement. For completed transactions ETVI will receive a commission,
which is offset against cumulative retainer fees paid and a portion of the stock
options granted will vest immediately. As a result of the company acquiring
certain assets from the Courtland Group, Inc., ETVI received a fee of $33,750
which was offset against the retainer and had 43,537 stock options vested from
the 400,000 options described above. In addition, in connection with the
acquisition of the Image Express software from Customs Solution, Inc., ETVI had
an additional 25,000 stock options vested.
The arrangement with ETVI provides that Mr. Murphy is to receive a success
fee of 25,000 options at $2.31 per share upon arranging a strategic alliance for
the Company and 2% of the revenues received by the Company. Mr. Murphy is the
principal stockholder of ETVI and is only paid a success fee as the result of
completing a strategic alliance agreement and/or merger by the Company.
In June 1995, the Company engaged Gartner and Associates as financial
consultants to advise the Company. Mr. Leonard Gartner ("Mr. Gartner"),
principal of Gartner and Associates, became a director of the Company in
September 1995. Gartner and Associates was paid a monthly retainer of $4,500
plus expenses during fiscal year 1996. Pursuant to an April 1996 amendment to
the agreement, Gartner and Associates will be paid a monthly retainer of $6,000
plus expenses during fiscal year 1997, and will also receive a grant of 40,000
incentive stock options at an exercise price of $4.06. 10,000 of these options
vested immediately and the remainder vest at the rate of 7,500 options per
quarter during fiscal year 1997.
In September 1995, Mr. Gartner and Mr. Murphy purchased 100,000 shares and
10,000 shares, respectively, of the Company's common stock from IMTECH. These
are restricted shares with cost free registration rights and are included in the
within registration.
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. Payments to TPL were $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 September 1995, the Company granted to its present and former directors
the following stock options at an exercise price of $1.44 per share: one year
options to purchase 10,000 shares each were granted to Messrs. Grace and
Broadway, former directors of the Company, and options vesting over three years
to purchase 100,000 shares each to Messrs. Gartner, Murphy and Oxenberg, the
non-officer directors elected to the Board of Directors at the Annual
Shareholders Meeting in September. In March 1996, the Company granted an
incentive stock option vesting over three years to purchase 100,000 shares at an
exercise price of $4.38 to Mr. Richard Gerstner, who joined the Board of
Directors (the underlying shares of Common Stock are included in the within
registration).
Mr. Richard Gerstner, in July, 1997, entered into an agreement with the
Company wherein Mr. Gerstner will receive 2% of the gross revenues received by
the Company as a result of Mr. Gerstner arranging for a distributorship
agreement for the Company, in addition to $100,000 stock options at $2.52 per
share. The Company also agreed to pay Mr. Gerstner 2% in kind of any capital
investments made as a result of Mr. Gerstner's efforts with respect to any
merger and/or acquisition of the Company arranged by Mr. Gerstner.
All of the grants of stock and options awarded by the Company were ratified
by stockholders at the Company's annual meeting of stockholders.
PLAN OF DISTRIBUTION
The Shares covered by this Prospectus are being registered by the Company
for the respective accounts of the Selling Stockholders. The Company will pay
all expenses of registering the Shares. Although, the Company will receive
proceeds upon exercise of options or warrants by the Selling Stockholders, the
Company will not receive any of the proceeds from sales by the Selling
Stockholders. The Company understands that none of such Shares will be offered
through underwriters.
The Shares may be sold from time to time Selling Stockholders either through
one or more brokers or dealers on the NASDAQSM Small Cap Market, through
privately negotiated transactions or otherwise, at market prices prevailing at
the time of sale or at prices otherwise negotiated. In connection therewith, the
Selling Stockholders and participating brokers or dealers may be deemed to be
"underwriters" within the meaning of the Act, and commissions or discounts or
any profit realized on the sale of Shares received by the Selling Stockholders
or any such broker or dealer may be deemed to be underwriting commissions or
discounts within the meaning of the Act. As of the date of this Prospectus, the
Company understands that the Selling Stockholders do not have any agreement,
arrangement or understanding with any brokers or dealers concerning the
distribution of their respective Shares.
DESCRIPTION OF STOCK
COMMON STOCK
The Company is authorized to issue 40,000,000 shares of Common Stock, $.01
par value, of which 4,436,107 are outstanding as of August 8, 1997. The
following summary description of the capital stock of the Company is qualified
in its entirety by reference to the Certificate of Incorporation ("Certificate
of Incorporation"), and the By-Laws (the "By-Laws"), copies of which are
enumerated as exhibits to the Registration Statement of which this Prospectus is
a part.
The holders of Common Stock are entitled to one vote per share on all
matters to be voted on by stockholders and are entitled to receive such
dividends, if any, as may be declared from time to time by the Board of
Directors from funds legally available therefore, subject to any dividend
preferences of the Company's Preferred Stock then outstanding. See "Dividend
Policy". Holders of Common Stock are not entitled to cumulative voting rights.
Therefore, the holders of a majority of the shares eligible to vote in any
election of Directors can elect all of the Directors then standing for election.
The holders of Common Stock have no pre-emptive or other subscriptive rights,
and there are no conversion rights or redemption or sinking fund provisions with
respect to Common Stock. All shares of Common Stock currently issued and
outstanding, and the Common Stock to be issued upon conversion of shares of
Preferred Stock will be, fully paid and non-assessable. No cash dividends have
been paid to holders of the Common Stock since the inception of the Company and
no dividends are anticipated to be declared or paid in the foreseeable future.
See "Dividend Policy".
WARRANTS
Each Warrant provides that each holder will be entitled to purchase one half
of a share of the Company's Common Stock at an aggregate exercise price per
share of $9.00, subject to adjustment in certain circumstances, for 48 months
from April 14, 1994, at which time the Warrants will expire. The Warrants are
redeemable in whole and not in part by the Company upon 30 days' notice at a
price of $.05 per Warrant if the closing bid price of the Company's Common stock
equals or exceeds $11.25 for any 20 consecutive trading days ending not more
than 20 days prior to the date the notice of redemption is mailed to Warrant
holders. In the event the Company gives notice of its intention to redeem the
Warrants, a holder would be forced to either exercise his Warrants within 30
days of the notice of redemption or accept the redemption price. The holders of
warrants will have exercise rights until the close of business on the date fixed
for the redemption thereof.
The Warrants issued are under a Warrant Agreement between the Company and
first Union National Bank of North Carolina as "Warrant Agent." The shares of
the Company's Common Stock underlying the Warrants, when issued upon exercise
thereof and payment of the purchase price, will be fully paid and nonassessable,
and the Company will pay any transfer tax incurred as a result of the issuance
of Common Stock to the holder upon exercise.
The Warrants contain provisions that protect holders against dilution by
adjustment of the exercise price in certain events such as stock dividends and
distributions, stock splits, recapitalization, mergers, and consolidations. The
Company will not be required to issue fractional shares upon the exercise of a
Warrant. If a fractional share of Common Stock would be issuable upon the
exercise of any Warrant, the Company will pay to the holder in lieu thereof, an
amount in cash equal to the market value of the Common Stock multiplied by such
fraction. The market value of the Common Stock shall mean (i) if the Common
Stock is traded in the over-the-counter market and not in the NASDAQ national
market system, nor on any other national securities exchange, the average of the
per share closing bid prices of the Common Stock for 30 consecutive trading days
immediately preceding the date in question, as reported by NASDAQ or an
equivalent generally accepted reporting service, or (ii) if the Common Stock is
traded on the NASDAQ national market system or a national securities exchange,
the average for 30 days consecutive trading days immediately preceding the date
in question of the daily per share closing prices of the Common Stock. The
holder of a Warrant will not possess any rights as a stockholder of the Company
until such holder exercises the Warrant.
PREFERRED STOCK
General
The Company is authorized to issue up to 10,000,000 shares of Preferred
Stock having a par value of $.01 per share, of which 3,567,091 shares are
outstanding.
The Company's Board of Directors is authorized subject to limitations
prescribed by law and the provisions of the Certificate of Incorporation to
provided for the issuance of shares of Preferred Stock in series, and by filing
a Certificate pursuant to the applicable State law of the State of Delaware, to
establish from time to time, the number of shares to be included in each such
series and affix the designation, powers, preferences and rights of the shares
of each such series and the qualifications, limitations or restrictions thereof.
The authority of the Board of Directors with respect to each series of
Preferred Stock shall include, but not be limited to, the right to determine and
designate any and all of the following: (i) the number of shares constituting
that series and distinctive designation of that series; (ii) the dividend rate
of the shares of that series, whether dividends shall be cumulative, and, if so,
from which date or dates, and the relative right or priority, if any, of payment
of dividends on shares of that series; and (iii) whether that series shall have
voting rights, in addition to the voting rights provided by law, and if so, the
terms of such voting rights; and (iv) whether that series shall have conversion
privileges, and if so, the terms and conditions of such conversion, including
provision for adjustment of the conversion rate in such events as the Board of
Directors shall determine; and (v) whether or not the shares of that series
shall be redeemable, and if so, the terms and conditions of such redemption,
including the date or dates upon or after which they shall be redeemable, in the
amount per share payable in the case of redemption, which amount may vary under
different conditions and at different redemption dates; and (vi) whether that
series shall have a sinking fund for the redemption or purchase of the shares of
that series, and, if so, the term and amount of such sinking fund; and (vii) the
rights of the shares of that series in the event of a voluntary or involuntary
liquidation, dissolution or winding up of the Corporation and the relative
rights of priority, if any, of payment of shares in that series; and (viii) any
other relative rights, preferences and limitations of that series.
Dividends on outstanding shares of Preferred Stock shall be paid or declared
and set apart for payment before any dividend shall be paid or declared set
apart for payment on the Common Stock with respect to the same dividend.
If upon any voluntary or involuntary liquidation, dissolution or winding up
of the Corporation the assets available for distribution to holders of shares of
Preferred Stock of all series shall be insufficient to pay such holders the full
preferential amount to which they are entitled, then such assets shall be
distributed ratably among the shares of all series of Preferred Stock in
accordance with respective preferential amounts (including unpaid cumulative
dividends, if any) payable with respect thereto.
10% CONVERTIBLE REDEEMABLE PREFERRED STOCK
Holders of the 10% Convertible Redeemable Preferred Stock ("10% Convertible
Redeemable Stock") will not be entitled to vote except as otherwise required by
the Delaware General Corporation Law. The 10% Convertible Redeemable Stock will
accrue cumulative dividends at a rate equal to 10% per annum of the issue price
of $1.00 per share (the "Issue Price"), payable semi-annually out of funds
legally available therefore on April 15 and October 15 each year with respect to
dividends accrued as of March 31 and September 30 in each such year (each a
"Dividend Payment Date"). At the option of the Company, dividends may be paid in
cash or in-kind. Dividends in-kind shall be paid by delivery of any number of
shares of Common Stock determined by dividing the amount of the aggregate
dividend accrued and payable by an amount (not less than $.10) equal to 50% of
the average closing bid price of the shares of Common Stock during the twenty
trading days immediately preceding a Dividend Payment Date.
The 10% Convertible Redeemable Stock may be redeemed by the Company, in
whole or in part, at any time during the period of eighteen (18) months
immediately following the date of issue at a redemption price equal to a $1.25
per share plus payment of all accrued and unpaid dividends thereon. Each share
of 10% Convertible Redeemable Stock shall be convertible, from time to time, at
the option of the holder, to the extent of the actual percentage of shares of
10% Convertible Redeemable Stock initially required by such holder as determined
from the schedule set forth below into shares of Common Stock at a conversion
rate per share determined by dividing the Issue Price by the Conversion Price
then in effect. Dividends will accrue on and will be paid through the date of
receipt by the holders notice of conversion, subject of the right of the Company
to pay such dividends and shares of Common Stock, should the Company choose to
redeem the 10% Convertible Redeemable Stock as defined above. Alternatively, a
holder may convert accrued dividends together with the shares of 10% Convertible
Redeemable Stock to be converted. The conversion price shall be an amount equal
to the greater of (I) $.10 or (ii) 50% of the average closing bid price of the
Common Stock during the twenty trading days immediately preceding the date that
a conversion notice may first be given. A conversion notice may be given at any
time during the thirty (30) day commencing on and immediately following each
date set forth below, with respect to that percentage of the share of 10%
Convertible Stock initially required by the holders set opposite each such date.
Percentage of the Shares of the 10% Convertible
First Date (of 30 days) Redeemable Stock Initially Purchases With
on which a Holder May Respect to Which notice of Conversion May be
Give Notice of Conversion Given
- -----------------------------------------------------------------------------
November 1, 1995 5%
February 1, 1996 5%
May 1, 1996 5%
August 1, 1996 5%
November 1, 1996 5%
February 1, 1997 10%
May 1, 1997 10%
August 1, 1997 10%
November 1, 1997 10%
February 1, 1998 15%
May 1, 1998 20%
Upon any default by the Company in the payment of dividends, with sole
remedy shall be acceleration on the conversion privileges so that 100% of the
shares of the 10% Convertible Redeemable Stock then held by holders shall become
immediately convertible. In the event the Company shall seek protection from
creditors through bankruptcy, the shares of 10% Convertible Redeemable Stock
shall be convertible into the greater of (i) the number of shares of Common
Stock determined so that all holders of shares of 10% Convertible Redeemable
Stock shall receive, upon conversion, a number of shares of Common Stock which,
when added to shares of Common Stock previously issued upon conversion or as
payment for dividends, shall equal to 51% of the shares of the Company's Common
Stock issued and outstanding immediately following such conversion, or (ii) that
number of shares of Common Stock determined by multiplying the shares of 10%
Convertible Redeemable Stock owned by each holder by the quotient of the issue
price divided by the Conversion Price then in effect.
The 10% Convertible Redeemable Stock shall carry a liquidation preference in
the amount of the issue price upon the liquidation and winding up of the Company
for any reason, each holder of shares of 10% Convertible Redeemable Stock shall
receive, prior to any dissolution with respect to the Common Stock a liquidation
distribution in the amount of the number of shares of 10% Convertible Redeemable
Stock owned by such holder multiplied by the issue price, plus the amount of all
accrued but unpaid dividends paid thereon subject to the rights and preferences
of the Company's other classes of Preferred Stock.
10% CONVERTIBLE PREFERRED STOCK
Presently 1,350,000 of 10% Convertible Preferred Stock ("10% Preferred
Stock") are outstanding.
The 10% Preferred Stock may be converted at the option of the holder during
a three (3) year period. commencing from the inception of the subscription by
the Company (the "Anniversary Date"), however, the 10% Preferred Stock may not
be converted for a period of six (6) months from the Anniversary Date, and
thereafter is convertible at a 30% discount to the current market price of the
Common Stock of INSCI at the time of conversion. The Preferred Stock will be
automatically converted into shares of Common Stock by the Company three (3)
years from the Anniversary Date. The conversion price per share will be the ten
(10) prior trading day market average between the closing bid and the closing
asked price as quoted on the NASDAQ, at the time of conversion, and the
conversion price will be limited to a maximum of $8.00 per share taking into
consideration the 30% discount to market.
The 10% Preferred Stock dividends, at the option of INSCI, will be payable
at the Company's discretion either by an annual Common Stock dividend of 10% in
Common Stock payable on a semi-annual basis, or a 8% cash dividend payable on a
semi-annual basis, subject to the Company's discretion.
The Common Stock upon conversion and registration will be subject to a sale
restriction, in that a maximum of 10% of the converted shares may be sold a
month. Subsequent to conversion and registration, if the trading volume of the
Company's Common Stock on the NASDAQ exceeds 40,000 shares per day for a minimum
of thirty (30) consecutive trading days, the 10% monthly sales restriction will
no longer apply.
The holders of the 10% Preferred Stock will not be entitled to vote except
as otherwise required by the Delaware General Corporation Law.
The 10% Preferred Stock shall carry a liquidation preference in the amount
of the issued price. Upon the liquidation and winding up of the Company for any
reason, each holder of the shares of 10% Preferred Stock shall receive, prior to
any distribution in respect of the Common Stock, a liquidation distribution in
the amount of number of shares of 10% Preferred Stock owned by such holder
multiplied by the issued price, subject to and in conjunction with the rights of
the Company's other classes of Preferred Stock.
8% CONVERTIBLE REDEEMABLE PREFERRED STOCK
The Company presently has outstanding 1,333,333 shares of its 8% Convertible
Redeemable Preferred Stock ("8% Preferred Stock").
Each share of 8% Preferred Stock converts into one share of Common Stock at
the option of the holder.
Except as expressly provided by the General Corporation Business Law ("GCL")
of the State of Delaware, and the Corporation's amended Certificate of
Incorporation, the 8% Preferred Stock shall have no voting rights or pre-emptive
rights.
If the Corporation shall be voluntarily or involuntarily liquidated,
dissolved or wound up, at any time when any 8% Preferred Stock shall be
outstanding, the Eligible Holders of the then outstanding 8% Preferred Stock
shall receive a preference on liquidation at least pari passu with any existing
and future issues of preferred stock that has the highest preference regarding
distributions. The preference shall be $3.75 per share of 8% Preferred Stock.
Eligible Holders of the 8% Preferred Stock shall have a preference in
distribution of the Corporation's property available for distribution to the
holders of the Corporation's Common Stock $.01 par value per share (the "Common
Stock") equal to a pro-rata amount of said distribution in proportion to the
Eligible Holder's ownership of 8% Preferred Stock, together with an amount equal
to all unpaid dividends accrued thereon, if any, to the date of payment of such
distribution, whether or not declared by the Board, provided however, that the
amalgamation of the Corporation with any Corporation or corporations, the sale
or transfer by the Corporation of all or subsequently all of its property, or
any reduction of the authorized or issued capital of the Corporation of any
class, whether now or hereafter authorized, shall be deemed to be a liquidation
of the Corporation.
Subject to the provisions hereof, all amounts to be paid as preferential
distributions to the Eligible Holders of 8% Preferred Stock shall be paid or set
apart for payment before the payment or setting apart for payment of any amount
for, or the distribution of any of the Corporation's property to the holders of
Common Stock or to the holders of any preferred stock inferior in preference to
the 8% Preferred Stock, whether now or hereafter authorized, in connection with
such liquidation, dissolution or winding up.
If the Company's Common Stock trades at or above $7.50 per share for twenty
out of thirty consecutive trading days and the Company then has an effective
registration statement under the Securities Act of 1933, as amended ("1933 Act")
with respect to all shares of Common Stock underlying the 8% Preferred Stock,
the Company has the right, upon thirty days prior written notice to all holders
of record of the 8% Preferred Stock, to redeem all, but not less than all, of
the 8% Preferred Stock for cash at $3.75 per share of 8% Preferred Stock. At any
time after October 1, 1999, any shares of 8% Preferred Stock that have not
otherwise converted can be redeemed at the option of the Company, upon thirty
days prior written notice to all then holders of record of the 8% Preferred
Stock, for cash at $3.75 per share of 8% Preferred Stock. On October 1, 2001,
any outstanding 8% Preferred Stock shall automatically convert into shares and
Common Stock at the lesser of $3.75 per share or the average bid price for the
Common Stock for twenty (20) consecutive trading days ending five (5) business
days prior to October 1, 2001.
For so long as an Investor owns 8% Preferred Stock and/or Warrants, the
Investor shall have anti-dilution protection and adjustment right with respect
to : (i) any subdivision of the outstanding shares of Common Stock of the
Company into a greater number of shares of Common Stock; (ii) any declaration of
a dividend or any other distribution by the Company upon its Common Stock
payable in shares of Common Stock; (iii) any capital reorganization or
reclassification of the capital stock of the Company; or (iv) any consolidation
or merger of the Company with another entity. (See Limited Anti-Dilution
Examples herein). There will be no adjustment in the event that the Company pays
a dividend in cash to its holders of Common Stock; provided, however, that the
Company gives all holders of the 8% Preferred Stock written notice at least (30)
days prior to the record date for the cash dividend that the Company intends to
declare a cash dividend.
The 8% Preferred Stock, nor the Common Stock issuable upon the conversion of
the 8% Preferred Stock, may be offered, sold or resold unless the shares are
registered under the 1933 Act or an exemption from the registration requirements
of the 1933 Act is available.
The Common Stock underlying the 8% Preferred Stock and Warrants cannot be
sold for a period of six (6) months subsequent, and thereafter, only in
compliance with the 1933 Act and applicable state securities laws.
VALIDITY OF SHARES
The validity of the securities being offered hereby is being passed upon
Baratta & Goldstein, 597 Fifth Avenue, New York, New York 10017.
EXPERTS
The financial statements of INSCI Corp for the year ended March 31, 1997,
included in this Prospectus and elsewhere in the Registration Statement have
been audited by Pannell Kerr Forster PC, independent public accountants, as
indicated in their report with respect thereto, and are included herein in
reliance upon the authority of said firm as experts in giving said report.
The financial statements of INSCI Corp as of March 31, 1996, and for the
years ended March 31, 1996 and March 31, 1995 included in this Prospectus and
elsewhere in the Registration Statement have been audited by Mahoney Cohen &
Company, CPA, P.C., independent public accountants, as indicated in their report
with respect thereto, and are included herein in reliance upon the authority of
said firm as experts in giving said report.
----------------------
ADDITIONAL INFORMATION
The Company is subject to the information requirements of the Securities and
Exchange Act of 1934 (the "1934 Act") and in accordance therewith files reports
and other information with the Securities and Exchange Commission
("Commission"). Such reports and other information can be inspected and copied
at the Public Reference facilities maintained by the Commission, 450 Fifth
Street, N.W., Washington, DC 20549, as well as the Regional Offices of the
Commission at CITICORP Center 500 West Madison Street, Chicago, Illinois 60661
and 7 World Trade Center, Suite 1300, New York, New York 10048, and copies can
be obtained from the Public Reference Section of the Commission at 450 Fifth
Street, N.W., Washington, D.C. 20549, at prescribed rates. Reports and other
information concerning the Company can also be inspected at the offices of the
NASDAQ, 1735 "K" Street, N.W., Washington, D.C. 20006-1500, on which the
Company's Common Stock is listed.
The Company has filed with the Commission a Registration Statement on Form
S-1 (the "Registration Statement") under the Act with respect to the Common
Stock to which this Prospectus relates. This Prospectus does not contain all of
the information set forth in the Registration Statement and the Exhibits
thereto. For further information with respect to the Company and the Common
Stock offered hereby, reference is made to the Registration Statement, including
the exhibits thereto, which may be obtained, together with other information
about the Company, from the Public Reference Section of the Commission at 450
Fifth Street, N.W., Washington, D.C. 20549. Copies of such material can also be
obtained from the Public Reference Section of the Commission at prescribed
rates.
----------------------
DOCUMENTS INCORPORATED BY REFERENCE
There is hereby incorporated in this Prospectus by reference the Company's
Annual Report on Form 10-KSB for the year ended March 31, 1997, Forms 10-QSB for
the fiscal quarter ended June 30, 1997, and the Company's current reports on
Forms 8-K Reports filed heretofore with the Securities and Exchange Commission
pursuant to the 1934 Act, to which reference is hereby made.
All documents subsequently filed by the Company pursuant to Section 13(a),
13(c), 14 and 15(d) of the Exchange Act prior to the filing of a post-effective
amendment to the Registration Statement which indicates that all securities
offered by this prospectus have been sold or which deregisters all securities
then remaining unsold shall be deemed to incorporated by reference in this
prospectus and to be a part hereof from the date of filing such documents. Any
statement contained in a document incorporated by reference herein shall be
deemed to be modified or superseded for the purposes hereof to the extent that
statements contained herein (or in any other subsequently filed document which
also is incorporated by reference herein) modifies or supersedes such statement.
Any such statement so modified or superseded shall be deemed to constitute a
part hereof, except as so modified or superseded.
The Company hereby undertakes to provide without charge to each person,
including any beneficial owner to whom a copy of the Prospectus has been
delivered on written or oral request of such person, a copy of any or all of the
documents referred to above which have been or may be incorporated in this
Prospectus by reference, other than exhibits to such documents, unless such
exhibits are specifically incorporated by reference into such documents.
Requests for such copies should be directed to the offices of the Company,
(508-870-4000) Two Westborough Business Plaza, Westborough, Massachusetts 01581,
Attn: Roger Kuhn, Chief Financial Officer.
No dealer, sales representative or other person has been authorized to give
any information or to make any representations in connection with this offering
other than those contained in the Prospectus and, if given or made, such
information or representations must not be relied upon as having been authorized
by the Company or any underwriter. This Prospectus does not constitute an offer
to sell, or a solicitation of any offer to buy, any securities other than the
registered securities to which it relates or any offer to, or the solicitation
of, any person in any jurisdiction where such an offer or solicitation would be
unlawful. Neither the delivery of this Prospectus nor any sale made hereunder
shall under any circumstances, create any implication that there has been no
change in the affairs of the Company since the date hereof or that the
information contained herein is correct as of any time subsequent to the date
hereof.
INDEMNIFICATION
The General Corporation Law of the State of Delaware grants each corporation
organized hereunder the power to indemnify its officers and directors against
liability under certain circumstances. The Company's Certificate of
Incorporation provides that the Company shall, to the full extent permitted by
law, indemnify all directors, officers, employees and agents of the Company. The
Company's Certificate of Incorporation also contains a provision eliminating the
liability of directors of the Company to the Company or its stockholders for
monetary damages, except under certain circumstances.
The Company also has a policy insuring its directors and officers against
certain liabilities, including liabilities under the Act.
Insofar as indemnification for liabilities arising under the Act may be
permitted to directors, officers or persons controlling the registrant pursuant
to the foregoing provisions, the registrant has been informed that in the
opinion of the Commission such indemnification is against public policy as
expresses in the Act and is therefore unenforceable.
<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 and March 31, 1996 F-3
Statements of Operations for the Years Ended F-4
March 31, 1997, 1996 and 1995
Statements of Stockholders' Equity for the Years F-5
Ended March 31, 1997, 1996 and 1995
Statements of Cash Flows for the Years Ended March 31, 1997, F-6
1996 and 1995
Notes to Financial Statements F-7
Balance Sheet as of June 30, 1997 F-8
Statements of Operations (Unaudited) for the Three Months
Ended June 30, 1997 and 1996 F-9
Statements of Cash Flows (Unaudited) for the Three Months
Ended June 30, 1997 and 1996 F-10
Notes to Financial Statements F-11
<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 balance sheet of INSCI Corp as of March 31,
1996 and the related statements of operations, stockholders' equity
(deficiency), and cash flows for the years ended March 31, 1996 and 1995. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of INSCI Corp at March 31, 1996
and the results of its operations and its cash flows for the years ended March
31, 1996 and 1995 in conformity with generally accepted accounting principles.
We have also audited Schedule II for the years ended March 31, 1996 and
1995. In our opinion, this schedule presents fairly the information required to
be set forth therein.
As 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 SHEETS
(in thousands, except share amounts)
<TABLE>
<CAPTION>
MARCH 31, MARCH 31,
1997 1996
---- ----
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents (Notes B-2, B-7 and B-9 ) $ 5,068 $ 436
Accounts receivable, net of allowance for doubtful accounts of $100
for 1997 and 1996. (Notes B-7 and B-9) 2,491 2,102
Inventory (Note B-3) 47 12
Prepaid expenses and other current assets 157 140
------- -------
Total current assets 7,763 2,690
Property and equipment, net (Notes B-5 and D) 707 833
Other assets:
Capitalized software development costs,
net of accumulated amortization of $1,123 in 1997 and $536 in 1996 (Note B-4) 661 633
Purchased software, net of accumulated amortization of $384 in 1997 and $42 in 1996. (Note B-4) 1,101 961
Other 259 76
------- -------
Total other assets 2,021 1,670
------- -------
Total assets $10,491 $ 5,193
======= =======
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Note payable (Note H) $ 48 $ 48
Accounts payable 828 661
Accrued compensation 344 445
Accrued vacation 207 119
Accrued commissions 252 189
Accrued and other liabilities 523 594
Deferred maintenance revenue (Note B-1) 837 574
------- -------
Total current liabilities 3,039 $ 2,630
Commitments and contingencies (Notes E,F,J,K,L, and M )
Long term debt:
Note payable - less current portion 44
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 in 1997, 1,160,950 in 1996; liquidation preference of $954
in 1997, $1,161 in 1996. 10 12
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 in 1997 and 3,864,011 in 1996. 42 38
Additional paid-in capital 25,152 17,326
Accumulated deficit (17,779) (14,857)
------- ------
Total stockholders' equity 7,452 2,519
------- ------
Total liabilities and stockholders' equity $10,491 $5,193
======= ======
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS.
<PAGE>
INSCI CORP
STATEMENTS OF OPERATIONS
(in thousands, except per share amounts)
<TABLE>
<CAPTION>
YEARS ENDED MARCH 31,
-------------------------------------------
1997 1996 1995
------- ------- -------
Revenue (Notes B-1 and N)
<S> <C> <C> <C>
Product $ 5,737 $ 4,983 $ 4,935
Services 5,644 2,930 2,253
------- ------- -------
Total revenue 11,381 7,913 7,188
------- ------- -------
Cost of revenue (Note B-4)
Product 1,634 1,784 1,387
Services 2,992 1,527 2,117
------- ------- -------
Total cost of revenue 4,626 3,311 3,504
------- ------- -------
Gross margin 6,755 4,602 3,684
------- ------- -------
Expenses
Sales and marketing 3,693 2,459 3,070
Product development 2,170 1,758 1,364
General and administrative 1,943 1,542 1,871
Non-recurring charges (Note C ) - 325 500
------- ------- -------
Total expenses 7,806 6,084 6,805
------- ------- -------
Loss from operations (1,051) (1,482) (3,121)
------- ------- -------
Interest income (expense)
Interest income 127 70 64
Interest expense (12) (40) (56)
------- ------- -------
Interest income (expense) net 115 30 8
------- ------- -------
Net loss (936) (1,452) (3,113)
Preferred stock dividend (Notes B-11 and J) (1,543) (470) (253)
------- ------- -------
Net loss applicable to common shares $(2,479) $(1,922) $(3,366)
======= ======= =======
Net loss per common share (Notes B-6 and B-11)) $ (0.62) $ (0.53) $ (1.04)
======= ======= =======
Weighted average common
shares outstanding (Note B-6 ) 4,022 3,655 3,242
======= ======= =======
</TABLE>
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, 1996 and 1995
(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, 1994 1,890,002 $19 -- -- $ 5,301 $(10,012) $(4,692)
Issuance of 1,250,000 units, net of
issuance costs of $1,591 1,250,000 12 -- -- 7,147 -- 7,159
8% Preferred stock dividends -- -- -- -- -- (253) (253)
8% Preferred stock conversion to
common stock at $5.00 per share 500,000 5 -- -- 2,495 -- 2,500
Net loss -- -- -- -- -- (3,113) (3,113)
-------------------------------------------------------------------------------------
BALANCE, MARCH 31, 1995 3,640,002 36 -- -- 14,943 (13,378) 1,601
Preferred stock dividends -- -- -- -- -- (27) (27)
Redemption of 8% preferred stock -- -- -- -- 820 -- 820
Conversion of subordinated notes
to 10% preferred stock -- -- 1,240,000 $12 964 -- 976
10% Preferred stock conversion to
common stock 39,260 -- (79,050) -- -- -- --
Common stock issued as dividend
on 10% preferred stock 16,082 -- -- -- 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
<TABLE>
<CAPTION>
YEARS ENDED MARCH 31,
------------------------------
1997 1996 1995
---- ---- ----
Cash flows from operating activities:
<S> <C> <C> <C>
Net loss $ (936) $ (1,452) $ (3,113)
Reconciliation of net loss to net cash provided by
(used in) operating activities:
Interest on note exchanged for preferred stock -- 40 --
Depreciation and amortization 511 454 402
Amortization of software costs 929 760 218
Provision for doubtful accounts -- -- (89)
Provision for loss on loan to officer -- -- 150
Changes in assets and liabilities, net of effects
from acquisitions:
Accounts receivable (389) (944) 1,487
Inventory (35) 25 386
Prepaid expenses and other current assets (17) (25) 52
Accounts payable 167 276 (958)
Accrued liabilities 156 317 138
Customer deposits (227) 47 54
Deferred maintenance revenue 263 (22) (205)
-------- --------- ---------
Net cash provided by (used in) operating activities 422 (524) (1,478)
-------- --------- ---------
Cash flows from investing activities:
Additions to capitalized software development costs (615) (120) (821)
Additions to purchased software costs (382) (114) --
Capital expenditures (385) (245) (646)
Purchase of certain assets of Courtland Group, Inc. -- (242) --
Other assets (123) (29) (88)
-------- --------- ---------
Net cash used in investing activities (1,505) (750) (1,555)
-------- --------- ---------
Cash flows from financing activities:
Proceeds from sale of common stock -- 200 8,750
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) (1,084)
Redemption of preferred stock and dividends -- (1,000) (85)
Repayments to IMTECH -- -- (2,327)
Repayment of revolving credit facility -- -- (587)
Payment of capital lease obligations -- (52) (29)
-------- --------- ---------
Net cash provided by financing activities 5,715 105 4,638
-------- --------- ---------
Net change in cash and cash equivalents 4,632 (1,169) 1,605
Cash and cash equivalents at beginning of year 436 1,605 --
-------- --------- ---------
Cash and cash equivalents at end of year $ 5,068 $ 436 $ 1,605
======== ========= =========
</TABLE>
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, the Company's former majority
shareholder, 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
During fiscal year 1995, the Company converted $2,500,000 of the 8% redeemable
preferred stock to common stock.
In December 1994, Imtech converted 25,000 shares of the Company's 8% redeemable
preferred stock into 500,000 shares of the Company's common stock.
In April 1994, Imtech and the Company exchanged $4,134,000 of intercompany
indebtedness for 41,343 shares of the Company's 8% redeemable preferred stock.
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. During fiscal 1997 Gartner and Associates
was paid, in addition to the $6,000 monthly retainer fee, approximately $61,000
in consulting and advisory fees related to 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. Additionally, Mr. Gartner was granted 40,000 stock options at an
exercise price of $4.06 for additional services rendered in his capacity as a
member of the Company's audit and compensation committees.
(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.
A value was not assigned to the registration rights associated with the
Company's common shares issued in the acquisition of Courtland. The Company
believes such costs would not be significant.
<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 consideration paid and allocation of purchase price is summarized as
follows:
Courtland Acquisition:
Consideration:
Common stock issued to:
Sellers at market value $255,503
Consultant - market value 89,904 $345,407
--------
Note payable - at present value 91,406
Forgiveness of note receivable 40,210
Cash paid to/for:
Sellers 150,000
Professional fees 51,748 201,748
-------- --------
Total $678,771
========
Allocation:
Computer equipment - replacement cost, used $ 10,585
Purchased software - value of software purchased 764,047
Liabilities assumed - principally accrued expenses (95,861)
--------
Total $678,771
========
<PAGE>
PART I FINANCIAL INFORMATION
INSCI CORP
BALANCE SHEET
(in thousands)
(unaudited)
ASSETS JUNE 30,
1997
--------
Current assets:
Cash and cash equivalents $ 3,712
Accounts receivable, net 1,978
Inventory 47
Prepaid expenses and other 153
-------
Total current assets 5,890
Property & equipment 2,118
Less: accumulated depreciation (1,448)
-------
Total equipment, net 670
Capitalized software development costs,
net of accumulated amortization of $1,258 697
Purchased software, net of accumulated amortization of $384 1,277
Other assets 246
-------
Total assets $ 8,780
=======
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Note payable $ 36
Accounts payable 570
Accrued compensation 136
Accrued vacation 228
Accrued commissions 151
Accrued and other liabilities 631
Deferred maintenance revenue 729
-------
Total current liabilities 2,481
Stockholders' equity :
Common stock 43
Preferred stock 36
Additional paid-in capital 25,405
Accumulated deficit (19,185)
-------
Total stockholders' equity 6,299
-------
Total liabilities and stockholders' equity $ 8,780
=======
See accompanying notes
<PAGE>
INSCI CORP
STATEMENTS OF OPERATIONS
(in thousands, except per share amounts)
(unaudited)
THREE MONTHS ENDED
JUNE 30,
1997 1996
------- -------
Revenue
Product $ 758 $ 1,499
Services 1,045 1,437
------- -------
Total revenue 1,803 2,936
------- -------
Cost of revenue
Product 411 388
Services 671 683
------- -------
Total cost of revenue 1,082 1,071
------- -------
Gross margin 721 1,865
------- -------
Expenses
Sales and marketing 1,008 878
Product development 478 445
General and administrative 444 452
------- -------
Total expenses 1,930 1,775
------- -------
Income (loss) from operations (1,209) 90
Interest income (expense)
Interest income 47 8
Interest expense (1) (3)
------- -------
Interest income (expense) net 46 5
------- -------
Net income (loss) (1,163) 95
======= =======
Preferred stock dividends (see accompanying note) (244) (199)
------- -------
Net (loss) applicable to common shares $(1,407) $ (104)
======= =======
Net (loss) per common share $ (0.33) $ (0.03)
======= =======
Weighted average common shares outstanding 4,284 3,883
======= =======
See accompanying notes
<PAGE>
INSCI CORP
STATEMENTS OF CASH FLOWS
(in thousands)
(unaudited)
THREE MONTHS ENDED
JUNE 30,
1997 1996
------- -------
Cash flows from operating activities:
Net income (loss) $(1,163) $ 95
Reconciliation of net loss to net cash
used in operating activities:
Depreciation and amortization 91 117
Amortization of deferred software costs 135 223
Changes in assets and liabilities:
Accounts receivable 513 (6)
Inventory - 12
Prepaid expenses and other assets 4 (27)
Note payable (12) (11)
Accounts payable (258) (21)
Accrued and other liabilities (174) (254)
Customer deposits (6) (230)
Deferred maintenance revenue (108) 32
------- -------
Net cash used in operating activities (978) (70)
Cash flows from investing activities:
Additions to capitalized software development costs (347) (175)
Capital expenditures (54) (43)
Other Assets 13 (11)
------- -------
Net cash used in investing activities (388) (229)
Cash flows from financing activities:
Proceeds from exercise of stock options 10 92
Payment of capital lease obligations - (10)
------- -------
Net cash provided by (used in) financing activities 10 82
------- -------
Net change in cash and cash equivalents (1,356) (217)
Cash and cash equivalents at beginning of year 5,068 436
------- -------
Cash and cash equivalents at end of period $ 3,712 $ 219
======= =======
See accompanying notes
<PAGE>
INSCI CORP
NOTES TO FINANCIAL STATEMENTS
(UNAUDITED)
BASIS OF PRESENTATION
The financial statements included herein have been prepared by INSCI Corp
(the "Company" or "INSCI"), without audit, pursuant to the rules and regulations
of the Securities and Exchange Commission (the "Commission"). Certain
information and footnote disclosures normally included in financial statements
prepared in accordance with generally accepted accounting principles have been
condensed or omitted pursuant to such rules and regulations. However, the
Company believes that the disclosures contained herein are adequate to make the
information presented not misleading. The financial statements should be read in
conjunction with the financial statements and notes thereto included in the
Company's annual report on Form 10-KSB, filed on June 27, 1997, for the fiscal
year ended March 31, 1997, and with the Company's definitive proxy statement for
its 1997 Annual Meeting of Stockholders filed with the Commission on July 29,
1997.
In the opinion of the management of the Company, the accompanying unaudited
financial statements reflect all adjustments (of a normal and recurring nature)
which are necessary to present fairly the financial position of the Company as
of June 30, 1997 and the results of operations and cash flows for the quarters
ended June 30, 1997 and 1996.
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 period. 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.
PREFERRED STOCK DIVIDENDS
The beneficial conversion feature of the Company's convertible preferred
stock 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.
Preferred dividends for the quarter ended June 30, 1996 have been adjusted
to comply with the Staff `s position of retroactive application of this
accounting practice. As a result, dividends for the quarter ended June 30, 1996
have been increased from $29,000 to $199,000 and net income per common share of
$.02 has been reduced to a net loss per common share of ($.03).
CONTINGENCIES
Registration Rights. The Company has 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.
Convertible Preferred Stock. The Company has two oustanding issues of
convertible preferred stock that entitle the holders to convert this preferred
stock into shares of the Company's common stock, at a discount to the market
price of the common stock at the time of conversion. In the event that
conversions occur at market prices for the Company's common stock that are
substantially below the current market price, it is possible for material
dilution to other holders of the Company's common stock and may require the
Company to seek shareholder approval for the authorization and issue of
additional common shares.
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. This consent order expires on September 30, 1997. 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. 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.
CREDIT FACILITY
On March 28, 1997 the Company obtained 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. As of June 30, 1997, the Company could not borrow against the
line due to its first quarter loss being in excess of the loss covenant. The
Company, at its option, may terminate the line with SVB without penalty. During
June, 1997, the Company received a receivable financing proposal from SVB that
has covenants which the Company currently meets and under which the Company
could borrow up to $2,000,000 or up to 75% of eligible accounts receivable. The
Company is reviewing this financing proposal and has made no commitment to
proceed with this proposal at this time.
NEW PRONOUNCEMENTS
Effective December 31, 1996, the Company will be required to adopt Statement
of Financial Accounting Standards No. 128, "Earnings per Share." The impact of
this pronouncement is not expected to have a material impact on the Company's
presentation on net income/(loss) per share.
Effective March 31, 1998, the Company will be required to adopt Statement of
Financial Accounting Standards No. 129, "Capital Structure." The impact of the
adoption of this pronouncement is not expected to be material to the Company's
financial position or results of operations.
<PAGE>
No dealer, sales person or other individual has been authorized to give any
information or to make any representations other than those contained or
incorporated by reference in this Prospectus in the accompany Prospectus
Supplement in connection with the offer contained in this Prospectus or the
accompanying Prospectus Supplement and, if given or made, such information or
representations must not be relied upon as having been authorized by the Company
or by any agent or dealer. Neither the delivery of the Prospectus and the
accompanying Prospectus Supplement, nor any sale made hereunder shall, under any
circumstances, create any implication that there has been no change in the
affairs of the Company since the dates as of which information is given in this
Prospectus and in the accompanying Prospectus Supplement. This Prospectus and
the accompanying Prospectus Supplement do not constitute an offer or
solicitation by anyone in any state in which such offer or solicitation is not
authorized or which the person making such offer or solicitation is not
qualified to do so or to any person to whom it is unlawful to make such offer or
solicitation.
Table of Contents
Prospectus Summary ........................................................ 4
Risk Factors .............................................................. 7
Use of Proceeds ........................................................... 14
Dividend Policy ........................................................... 14
Capitalization Table ...................................................... 15
Selected Financial Data ................................................... 16
Management's Discussion and Analysis of Financial Condition and Results
of Operations ........................................................... 17
Business .................................................................. 25
Management ................................................................ 38
Principal Holders ......................................................... 46
Selling Stockholders ...................................................... 47
Certain Relationships and Related Transactions ............................ 54
Plan of Distribution....................................................... 55
Description of Stock (Common Stock) ....................................... 55
Validity of Shares ........................................................ 60
Additional Information .................................................... 60
Documents Incorporated by Reference ....................................... 60
Indemnification ........................................................... 61
Index to Financial Statements.............................................. 62
16,769,991 SHARES OF
COMMON STOCK
($.01 PAR VALUE)
{CORP. LOGO}
INSCI CORP.
----------
PROSPECTUS
----------
October , 1997
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
Item 13. Other Expenses of Issuance and Distribution.(1)
Registration Fee............................................. $ 25,748
Legal Fees and Disbursements................................. $ 70,000
Accounting Fees.............................................. $ 45,000
Miscellaneous................................................ $ 6,000
--------
Total............................................... $146,748
Item 14. Indemnification of Directors and Officers.
Section 145 of the Delaware general Corporation Law (the "DGCL") makes
provision for the indemnification of officers and directors of corporations in
terms sufficiently broad to indemnify the officers and directors of the
registrant under certain circumstances from liabilities (including reimbursement
of expenses incurred) arising under the Securities Act of 1933, as amended (the
"Act").
As permitted by the DGCL, the registrant's Certificate of Incorporation (the
"Charter") provides that, to the fullest extent permitted by the DGCL, no
director shall be liable to the registrant or to its stockholders of monetary
damages for breach of his fiduciary duty as a director. Delaware law does not
permit the elimination of liability (i) for any breach of the director's duty of
loyalty to the registrant or its stockholders, (ii) for acts or omissions not in
good faith or which involve intentional misconduct or a knowing violation of
law, (iii) in respect of certain unlawful dividend payment or stock redemptions
or repurchases, or (iv) for any transaction from which the director derives an
improper personal benefit. The effect of this provision in the Charter is to
eliminate the rights of the registrant and its stockholders (through
stockholders' derivative suits on behalf of the registrant) to recover monetary
damages against a director for breach of fiduciary duty as a director thereof
)including breaches resulting from negligent or grossly negligent behavior)
except in the situations described in clauses (i)-(iv), inclusive, above. These
provisions will not alter the liability of directors under federal securities
laws.
The registrant's Bylaws (the "Bylaws") provide that the registrant may
indemnify any person who was or is a party of is threatened to be made a party
to any threatened, pending or completed action, suit or proceeding, whether
civil, criminal, administrative or investigative (other than an action by or in
the right of the registrant) by reason of the fact that he is or was director,
officer, employee or agent of the registrant or is or was serving at the request
of the registrant as a director, officer, employee or agent of any other
corporation or enterprise, against expenses (including attorneys' fees),
judgments, fines and amounts paid in settlement actually and reasonably incurred
by such person in connection with such action, suit or proceeding if such person
acted in good faith and in a manner he reasonably believed to be in or not
opposed to the best interests of the registrant, and with respect to any
criminal action or proceeding, had no reasonable cause to believe such person's
conduct was unlawful
- --------
(1) All of the items except the Registration Fee are estimated. All of the
expenses of this offering are being borne by the Company.
Item 15. Recent Sales of Unregistered Securities
The registrant has not issued or sold securities within the past three years
pursuant to offerings that were not registered under the Securities Act of 1933,
as amended (the "Securities Act"), except as follows:
The following sales were made in reliance upon the exemptions from
registration under the 1933 Act pursuant to Sections 3(b) and 4(2) thereof and
regulation D promulgated thereunder:
(i) In April of 1995, the Registrant completed a private placement offering
in which it issued $1,240,000 90-Day 10% Subordinated Notes repaid in the form
of the Registrant's 10% Convertible Redeemable Preferred Stock. Additionally,
D.H. Blair and Company received a three (3) year option to purchase $297,500
90-Day 10% Subordinated Notes as a fee under the placement offering. See the
"Selling Shareholder Table" for a complete listing of holders of 10% Convertible
Redeemable Preferred Stock and the estimated amount of underlying shares of the
Registrant's Common Stock.
(ii) In September of 1996, the Registrant completed a private placement
offering in which it issued 1,350,000 shares of 10% Convertible Preferred Stock.
Additionally, 30,000 shares of Common Stock and 112,000 options for a period of
three (3) years from the completion of the placement were issued to
Amerivett/Dymally Securities Inc. as selling commissions. See the "Selling
Shareholder Table" for a complete listing of holders of 10% Convertible
Preferred Stock and the estimated amount of underlying shares of the
Registrant's Common Stock.
(iii) In November of 1996, the Registrant completed a private placement
offering of Units. The Registrant issued 1,333,334 Units. Additionally, the
Registrant issued 133,334 Units to J. Michael Reisert Securities Inc. See the
"Selling Shareholder Table" for a complete listing of holders of Units and the
estimated amount of underlying shares of the Registrant's Common Stock.
Item 16. Exhibits
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.
4.1** Form of Warrant issued in the Company's 8% Unit Private
Placement
5.1 Opinion of Baratta & Goldstein as to legality.
10.1/ 1992 Stock Option Plan.
10.2/ 1992 Directors Option Plan.
10.3/ 1992 Advisory Committee Plan.
10.4/ Accounts Financing Agreement between the Registrant and
Congress Financial
Corporation, and related documents.
10.5/ Form of 1991 Option.
10.6/ Form of 1992 Warrants.
10.7/ Form of 1992 Convertible Subordinated Note.
10.8/ Form of 1992 Contingent Warrants.
10.9/ Form of 1993 Warrant 3/4 Version A.
10.10/ Form of 1993 Release Agreement.
10.11/ Form of Management Agreement between the Registrant and Imtech.
10.12/ Form of Tax Sharing Agreement between the Registrant and Imtech.
10.13/ Form of Indemnification Agreement with the Registrant's
Directors.
10.14/ Marketing 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/ Certificate of Amendment to the Certificate of Incorporation.
10.55/ Amendment to Employment Contract for Dr. E. Ted Prince, CEO.
23.1* Consent of Pannell Kerr Forster PC.
23.2* Consent of Mahoney Cohen & Company, CPA, P.C.
24.1* Power of Attorney.
27.1* Financial Data Schedule Year Ended March 31, 1996.
27.2* Financial Data Schedule Quarter Ended June 30, 1997.
/ Previously Filed; Incorporated by Reference.
* Filed with this Registration Statement.
Item 17. Undertakings.
The undersigned registrant hereby undertakes:
(1) To file, during any period in which offers or sales are being
made, a post-effective amendment to this registration statement;
(i) To include any prospectus required by Section 10(a)(3) of the
Securities Act of 1933;
(ii) To reflect in the prospectus any facts or events arising after
the effective date of the registration statement (or the most recent
post-effective amendment thereof) which, individual or in the aggregate,
represent a fundamental change in the information set forth in the registration
statement. Not withstanding the foregoing, any increase or decrease in volume of
securities offered (if the total dollar value of securities offered would not
exceed that which was registered) and any deviation from the low or high end of
the estimated maximum offering range may be reflected in the form of prospectus
filed with the Commission pursuant to Rule 424(b) if, in the aggregate, the
changes in volume and price represent no more than a 20 percent change in the
maximum aggregate offering price set forth in the "Calculation of Registration
Fee" table in the effective registration statement.
(iii) To include any material information with respect tot the plan
of distribution not previously disclosed in the registration statement or any
material change to such information in the registration statement;
(2) That, for the purpose of determining any liability under the
Securities Act of 1933, each such post-effective amendment shall be deemed to be
a new registration statement relating to the securities offered therein, and
the offering of such securities at that time shall be deemed to be the initial
bona fide offering thereof.
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the registrant
has duly caused this S-1 Registration Statement to be signed on its behalf by
the undersigned, thereunto duly authorized, in the City of Westborough,
Commonwealth of Massachusetts, on October 1, 1997.
INSCI Corp.
----------------------------------------
(Registrant)
By: /s/ Dr. E. Ted Prince
----------------------------------------
Dr. E. Ted Prince, President, Chief
Executive Officer and Director
(Signature and Title)
Pursuant to the requirements of the Securities Act of 1933, this
registration statement has been signed by the following persons in the
capacities and on the dates indicated:
SIGNATURE TITLE DATE
--------- ----- ----
/s/ Dr. E. Ted Prince Chairman, President October 1, 1997
- ------------------------------ and Director
/s/ Leonard Gartner Director October 1, 1997
- ------------------------------
/s/ Richard Gerstner Director October 1, 1997
- ------------------------------
/s/ Robert Oxenberg Director October 1, 1997
- ------------------------------
/s/ Francis X. Murphy Director October 1, 1997
- ------------------------------
/s/ Andre Daniel-Dreyfus Director October 1, 1997
- ------------------------------
/s/ John Gillis Executive Vice President October 1, 1997
- ------------------------------
/s/ Roger Kuhn Vice President and Chief October 1, 1997
- ------------------------------ Financial Officer
<PAGE>
EXHIBIT INDEX
EXHIBIT NO. DESCRIPTION
- ----------- -----------
5.1 Opinion of Counsel
16.0 Schedule II, Valuation and Qualifying Accounts
16.1 Independent Auditors Report
23.1 Consent of Pannell Kerr Forster PC
23.2 Consent of Mahoney Cohen & Company, CPA, P.C.
24.1 Power of Attorney
27.1 Financial Data Schedule
Year Ended March 31, 1997
27.2 Financial Data Schedule
Quarter Ended June 30, 1997
<PAGE>
Exhibit 5.1
Baratta & Goldstein
Attorneys at Law
597 Fifth Avenue
New York, N.Y. 10017
Joseph P. Baratta Tel. 212-750-9700 Of Counsel:
Howard J. Goldstein Fax. 212-750-8297 Margaret M. Stanton
Louis R. Aidala E-mail: [email protected] Linda Maryanov
Joan Palermo Samuel M. Greenfield
Joseph A. Baratta*
*Admitted in NY and NJ
October 1, 1997
Gentlemen:
We have acted as counsel for INSCI Corp., a Delaware corporation (herein
called the "Company") in connection with the proposed sale by selling
stockholders of 2,860,565 shares of common stock par value $.01 and 9,909,426
underlying shares of Common Stock with respect to warrants, options and
convertible securities issued by the Company and in addition to the registration
of 4,000,000 shares of common stock reserved for future acquisitions.
As counsel for the Company, we have examined the minute books of the
Company together with copies of its Certificate of Incorporation, as amended,
By-Laws and Board of Directors Resolutions. We have also examined the proposed
Registration Statement on Form S-1 as amended by Amendments No. 1 and No. 2 on
Form S-1 as filed with the Securities and Exchange Commission, and the exhibits
to said Registration Statement. Based on the foregoing and our examination of
such other documents as we have deemed pertinent, we are of the opinion that:
1. The Company is a corporation duly organized and validly existing
and in good standing under and by virtue of the laws of the State of
Delaware.
2. The authorized capital stock of the Company consists of
50,000,000 shares divided into two classes as follows: forty million
(40,000,000) shares of common stock par value $.01 per share, and
ten million (10,000,000) shares of preferred stock, par value $.01
per share and there is presently outstanding and issued 4,436,107
shares of common stock fully paid and non-assessable: The 2,860,565
shares of common stock, par value $.01, which are the subject of the
Registration Statement have been authorized and validly issued and
are fully paid non-assessable shares to common stock of the Company.
3. The 934,299 shares of common stock underlying the Company's 10%
convertible redeemable preferred stock, the 762,755 shares of common
stock underlying the Company's 10% convertible preferred stock, the
3,989,325 shares of common stock underlying the Company's units, the
815,105 shares of common stock issuable upon exercise of warrants
and the 3,407,942 options to purchase shares of common stock (an
aggregate of 9,909,426 shares of common stock) have been duly
authorized and reserved and are legally valid and binding
obligations of the Company authorized in accordance with their terms
of exercise and upon the conversion payable to the Company by the
holders of the warrants and options will result in the issuance of
fully paid and non-assessable common stock by the Company.
4. The 4,000,000 shares of common stock, par value $.01 which are
reserved for acquisition have been authorized.
<PAGE>
We hereby consent to being named in the Prospectus forming Part I of the
aforesaid Registration Statement under the caption "Legal Opinions" and to the
filing of this opinion as an exhibit to the Registration Statement.
Very truly yours,
BARATTA & GOLDSTEIN
By: /s/ Joseph A. Baratta
-------------------------------
Joseph A. Baratta
<PAGE>
EXHIBIT 16.0
<TABLE>
<CAPTION>
INSCI Corp
SCHEDULE II
VALUATION AND QUALIFYING ACCOUNTS
YEARS ENDED MARCH 31, 1997, 1996 AND 1995
COLUMN A COLUMN B COLUMN C COLUMN D COLUMN E
- -------- -------- -------- -------- --------
ADDITIONS
BALANCE AT CHARGED TO BALANCE AT
BEGINNING COST AND DEDUCTIONS END OF
DESCRIPTION OF YEAR EXPENSES DESCRIBE YEAR
- -------- ---------- ---------- ---------- -----------
<S> <C> <C> <C> <C>
ALLOWANCE FOR DOUBTFUL ACCOUNTS
Year ended March 31, 1995......... $ 239,000 $ - $ (139,000) (a) $ 100,000
Year ended March 31, 1996......... 100,000 - - 100,000
Year ended March 31, 1997......... 100,000 - - 100,000
RESERVE FOR RETURNS AND ALLOWANCES
Year ended March 31, 1995......... $ - $ 50,000 (b) $ - $ 50,000
Year ended March 31, 1996......... 50,000 73,120 (c) (50,000) (d) 73,120
Year ended March 31, 1997......... 73,120 - (73,120) (e) -
ALLOWANCE FOR LOSS ON LOAN
Year ended March 31, 1995......... $ - $ 150,000 (f) $ - $ 150,000
Year ended March 31, 1996......... 150,000 - (6,381) (g) 143,619
Year ended March 31, 1997......... 143,619 - (55,860) (g) 87,759
ACCUMULATION AMORTIZATION OF
CAPITALIZED SOFTWARE DEVELOPMENT
COST
Year ended March 31, 1995......... $1,248,000 $ 218,000 $(1,182,000) (h) $ 284,000
Year ended March 31, 1996......... 284,000 718,000 (466,000) (h) 536,000
Year ended March 31, 1997......... 536,000 586,695 - 1,122,695
ACCUMULATION AMORTIZATION OF
PURCHASED SOFTWARE COSTS
Year ended March 31, 1995......... $ - $ - $ - $ -
Year ended March 31, 1996......... - 42,000 - $ 42,000
Year ended March 31, 1997......... 42,000 341,867 - 383,867
(a) Includes $8,000 written off, $50,000 reclassified to reserve for returns and allowances and an $81,000
reversal of previous additions.
(b) Includes $50,000 reclassified from allowance for doubtful accounts.
(c) Includes $73,120 to establish reserve for possible allowances.
(d) Includes $50,000 reversal of previous additions.
(e) Includes $73,120 reversal of previous additions.
(f) Includes $150,000 to reserve for probable loss on loan to officer.
(g) Reflects the paydown of officer's loan.
(h) Reflects the removal of fully amortized capitalized software no longer in use.
</TABLE>
<PAGE>
EXHIBIT 16.1
INDEPENDENT AUDITORS' REPORT
Our audit was made for the purpose of forming an opinion on the basic financial
statements as of March 31, 1997 and for the year ended March 31, 1997 taken as a
whole. The schedule listed in the accompanying index at Item 16 is the
responsibility of the Company's management and is presented for purposes of
complying with the Securities and Exchange Commission's rules and are not part
of the basic financial statements. This schedule has been subjected to the
auditing procedures applied in the audit of the basic financial statements and,
in our opinion, fairly states in all material respects the financial data
required to be set forth therein in relation to the basic financial statements
taken as a whole.
PANNELL KERR FORSTER PC
New York, NY
June 6, 1997
<PAGE>
EXHIBIT 23.1
CONSENT OF INDEPENDENT AUDITORS
We consent to the inclusion in this registration statement on Form S-1 (File No.
333-22187) of our reports dated June 6, 1997, on our audit of the financial
statements and schedule of INSCI Corp. We also consent to the reference to our
firm under the caption "Experts".
Pannell Kerr Forster PC
New York, NY
October 1, 1997
<PAGE>
EXHIBIT 23.2
CONSENT OF INDEPENDENT ACCOUNTANTS
The Board of Directors
INSCI Corp
We hereby consent to the inclusion in this registration statement on Form S-1
Amendment No. 2 to the use of our report dated 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, relating to the financial
statements of INSCI Corp and to the reference to our firm under the caption
"Experts" in the Prospectus.
Mahoney Cohen & Company, CPA, P.C.
New York, New York
October 1, 1997
<PAGE>
EXHIBIT 24.1
POWER OF ATTORNEY
We the undersigned directors and/or officers of INSCI, Corp. (The
"Company"), hereby severally constitute and appoint Dr. E. Ted Prince, Chief
Executive Officer and President of the Company, individually, with full powers
of substitution and re-substitution, our true and lawful attorney, with full
powers to him, to sign for us, in or names and in the capacities indicated
below, the Registration Statement on Form S-1 filed with the Securities and
Exchange Commission, and any and all amendments to said Registration Statement
(including post-effective amendments), and any registration statement filed
pursuant to Rule 462(b) under the Securities Act of 1933, as amended, in
connection with the registration under the Securities Act of 1933, as amended,
of equity securities of the Company, and to file or cause to be filed the same,
with all exhibits thereto and other documents in connection therewith, with the
Securities and Exchange Commission, granting unto said attorney, full power and
authority to do and perform each and every act and thing requisite and necessary
to be done in connection therewith, as fully to all intents and purposes as each
of them might or could do in person, and hereby ratifying and confirming all
that said attorney, or his substitute or substitutes, shall do or cause to be
done by virtue of this Power of Attorney.
WITNESS our hands on this 1st day of October, 1997.
SIGNATURE TITLE(S)
- --------- --------
/s/ Leonard Gartner
- ------------------------------------ Director
/s/ Richard Gerstner
- ------------------------------------ Director
/s/ Francis X. Murphy
- ------------------------------------ Director
/s/ Robert Oxenberg
- ------------------------------------ Director
/s/ Andre Daniel-Dreyfus
- ------------------------------------ Director
/s/ John Gillis
- ------------------------------------ Chief Operating Officer
/s/ Roger Kuhn
- ------------------------------------ Vice President and Chief
Financial Officer
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM
THE ANNUAL 10-KSB FOR INSCI'S 1997 FISCAL YEAR
</LEGEND>
<CIK> 0000878612
<NAME> m7rpwrt@
<S> <C>
<PERIOD-TYPE> 12-MOS
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0
37
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</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED
FROM THE FIRST QUARTER 10-QSB FOR INSCI'S 1998 FISCAL YEAR
</LEGEND>
<CIK> 0000878612
<NAME> m7rpwrt@
<S> <C>
<PERIOD-TYPE> 3-MOS
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<PERIOD-END> JUN-30-1997
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0
36
<COMMON> 43
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</TABLE>
