<PAGE>
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-KSB
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIIES
EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED: COMMISSION FILE NUMBER
MARCH 31, 1999 1-12966
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INSCI CORP
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(Exact name of registrant specified in its charter)
DELAWARE TWO WESTBOROUGH BUSINESS PARK, WESTBOROUGH, MA 06-1302773
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(State or other (Address of Principal executive offices) (I.R.S. Employer
jurisdiction of Identification
incorporation No.)
or organization)
01581
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Zip Code
(508) 870-4000
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(Registrant's Telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act: NONE
Securities registered pursuant to Section 12(g) of the Act:
Title of each class
COMMON STOCK, $.01 PAR VALUE
REDEEMABLE WARRANTS
(REDEEMABLE BY COMPANY BASED ON A FORMULA, OR TWO WARRANTS CAN BE EXERCISED
AT AN AGGREGATE PRICE OF $9.00 FOR ONE SHARE OF COMMON STOCK)
Check whether the issuer (1) filed all reports required to be filed
by Section 13 or 15(d) of the Exchange Act during the preceding 12 months (or
for such shorter period that the registrant was required to file such reports),
and (2) has been subject to such filing requirements for the past 90 days.
Yes X No
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Check if there is no disclosure of delinquent filers in response to Item
405 of Regulation S-B is contained in this form, and no disclosure will be
contained, to the best of registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-KSB
or any amendment to this Form 10-KSB. X
---
Revenues for the fiscal year ended March 31, 1999 were $12,406,000.
The aggregate market value of the voting stock held by non-affiliates of
the registrant, based upon the average of the closing bid and asked quotations
for the Common Stock on June 17, 1999, as reported by NASDAQ, was approximately
$30,020,000. As of June 17, 1999, registrant had outstanding 8,556,316 shares of
Common Stock.
Part III incorporates information by reference to the registrant's definitive
proxy statement for its 1999 Annual Meeting of Stockholders to be filed with the
Commission within 120 days following March 31, 1999.
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INSCI CORP
FORM 10-KSB
FOR THE FISCAL YEAR ENDED MARCH 31, 1999
INDEX
PART I
PAGE
----
Item 1 Description of Business ....................................... 3
Item 2 Description of Properties ..................................... 9
Item 3 Legal Proceedings ............................................. 9
Item 4 Submission of Matters to a Vote of Securities Holders ......... 10
PART II
Item 5. Market for Registrant's Common Equity and Related
Stockholder Matters ......................................... 10
Item 6 Management's Discussion and Analysis or Plan of Operations .... 10
Item 7 Financial Statements .......................................... 17
Item 8. Changes In and Disagreements with Accountants on
Accounting and Financial Disclosures ........................ 17
PART III
Item 9. Directors, Executive Officers, Promoters and Control
Persons; Compliance With Section 16(a) of the Exchange Act .. 17
Item 10 Executive Compensation ........................................ 18
Item 11. Security Ownership of Certain Beneficial Owners and
Management .................................................. 18
Item 12 Certain Relationships and Related Transactions ................ 18
Item 13 Exhibits and Reports on Form 8-K .............................. 18
SIGNATURES ................................................................ 20
EXHIBIT INDEX.............................................................. 21
<PAGE>
PART I
ITEM 1. DESCRIPTION OF BUSINESS
OVERVIEW
INSCI Corp (INSCI or the Company) develops, markets and services a family
of integrated software solutions designed for use in various business
applications encompassing enterprise level customer service, electronic
commerce, workflow management, internet printing and reprinting, and electronic
bill presentment and payment functionality.
These software solutions are designed to provide customers with the
ability to electronically store and manage high volumes of transaction documents
and reports, and to rapidly access these documents for reference, printing or
delivery via the internet or other electronic means. The use of INSCI software
products typically enables the customer to increase productivity and operational
efficiencies, reduce and/or eliminate document warehousing and handling costs,
increase the level of customer service, generate additional revenue sources or
gain other competitive advantages. These products are based on open
client/server architecture capable of integrating with most computing platforms,
data output formats, hardware storage devices and complementary e-commerce,
electronic bill presentment, and on-line retailing technologies.
The Company has established strategic relationships with many leading
technology and service providers including Unisys, Xerox, Fuji Xerox, Moore
North America, Storage Technology, First Data Investor Services, Swets Document
Systems, Geneva Digital, and Media Knowledge Decisions (MKD). The primary
markets for INSCI products are financial services (including banking and credit
card issuers), insurance, telecommunications, utilities, healthcare and
government. INSCI markets its products worldwide through direct and reseller
channels.
During fiscal 1999, the Company implemented several key strategic business
initiatives. The Company's management believes that the investments made in
these areas are vital to attaining sustainable long-term competitive advantages.
Among these initiatives were:
o enhancements and upgrades to the COINSERV software suite, with special
emphasis on dual Unix and Windows NT platform upgrades, additional WebCOINS
Internet functionality, COINS-CD enhancements, and additional COINSflow
workflow functionality,
o increased focus on improved quality assurance standards and customer
satisfaction,
o expansion of direct and indirect sales channels in the US and other
geographies,
o strengthening of technology and marketing partner alliances, including
extended marketing agreements with Xerox, Unisys and Moore North America and
a new alliance with Media Knowledge Decisions,
o entry into new high-growth markets including e-commerce, electronic bill
presentment and payment, and on-line retailing,
o expansion of consulting and integration services,
o and an emphasis on employee motivation, training and retention.
INSCI's products typically are found in those areas of an organization
where the electronic availability of customer-facing documents, source documents
and reports is necessary to support the business function. Customer-facing
documents vary by industry but generally include invoices, statements, purchase
orders, policies, and transaction confirmation documents that are produced in
high volume. Source documents may include new account applications, signature
cards, purchase orders, signed bills of lading, insurance claim forms and other
similar documents. These types of documents require electronic indexing and
storage to enable rapid retrieval and viewing for customer support functions,
for adherence to regulatory requirements, for data analysis and report
generation, for inclusion in Enterprise Resource Planning (ERP) implementations,
and for e-commerce applications.
Electronic commerce is rapidly becoming a critical business requirement.
New capabilities such as electronic bill presentment, customer access to
statements and bills, and integrated invoicing and marketing extend the value of
conventional printing and distribution of customer-facing documents. INSCI's
software provides the core digital document repository and Web-based access and
delivery capabilities that are required for electronic commerce applications.
This constitutes the "digital back office" for e-commerce.
INSCI also offers numerous services including consulting, systems
integration, software installation, training, software maintenance and technical
support. INSCI's advanced systems integration services division works with
customers to integrate technologies into their business environments to more
effectively leverage current and future investments in technology.
MANAGEMENT CHANGES
On July 27, 1998, Mr. Darryl R. Dobin was appointed President and Chief
Operating Officer of the Company. As of March 31, 1999, Mr. John L. Gillis,
Executive Vice President, resigned from the Company.
On June 18, 1998, Messrs. Richard Gerstner, Leonard Gartner and Mitchell
Klein resigned from the Board of Directors. Their resignations were not as a
result of a disagreement with the Company's operations, policies or practices
but rather a difference of opinion with respect to the exercise of their
business judgment concerning the extension and renewal of the employment
agreement of the Company's Chief Executive Officer, Dr. E. Ted Prince. Following
their resignations, the Board appointed three new independent Directors, Thomas
Farkas, Robert F. Little and John A. Lopiano.
On September 10, 1998, at the Company's Annual Meeting of Stockholders, E.
Ted Prince, Andre Daniel-Dreyfus, Darryl R. Dobin, Thomas Farkas, Robert F.
Little, John A. Lopiano and Francis X. Murphy were elected by Shareholders to
serve as directors of the Company for the ensuing year.
SOFTWARE PRODUCTS AND SERVICES
THE INSCI COINSERV SUITE
INSCI's COINSERV (Computer Output Information Server) family of
integrated, client/server based software solutions enable customers to store,
manage, access and distribute high volumes of transaction documents and reports.
This software utilizes optical disk, CD, automated tape libraries to index,
archive, retrieve and distribute computer-generated documents and scanned images
including transaction documents and data. Documents are stored in a Digital
Document Repository (DDR) and can be rapidly retrieved for on-demand viewing,
printing, Internet distribution, CD distribution and re-purposed for interactive
Internet presentment and other e-commerce functions. The COINSERV product suite
enables organizations to use existing print applications as the gateway for
implementing digital document repositories, preserving their investment in
legacy applications as well as establishing the required infrastructure for
e-commerce applicability.
COINSERV products are currently installed at over 500 customer sites
worldwide. These systems are used in a wide range of vertical industry segments
and deployed in departmental and enterprise-wide configurations. COINSERV
systems support a wide variety of diverse data formats including IBM mainframe
formats; UNISYS mainframe formats; UNIX and PC print output formats; intelligent
data streams such as IBM Advanced Function Presentation (AFP), Xerox Metacode
and DJDE, PCL, and Adobe PDF; and scanned documents in TIFF format. The COINSERV
software suite encompasses the following products:
COINSERV FOR WINDOWS NT
COINSERV for Windows NT is a high volume, high-speed document archive and
retrieval system that uses magnetic disk, RAID storage, and high-density,
low-cost optical discs in a client-server environment based on Microsoft Windows
NT server. It is designed to maximize the processing power of the Windows NT
Server through the use of its architectural features and a design that supports
and utilizes multiprocessor enterprise-class systems. The system utilizes the
graphical user interface and monitoring capabilities of the Windows NT
environment to provide an easy-to-use administrative interface and lights-out
operation. COINSERV for Windows NT incorporates the comprehensive document
archival and retrieval capabilities of the Company's UNIX-based product but
utilizes a completely new, open architecture that supports Microsoft
environments. The product runs on PC based hardware running Microsoft Windows NT
Server 4.0 and can be accessed from Windows PCs and Web browsers on any
platform. COINSERV for Windows NT was awarded Product of the Year by Imaging &
Document Solutions magazine in January of 1999.
WEBCOINS
WebCOINS provides access to COINSERV digital document repositories through
standard Web browsers. WebCOINS delivers archived documents in formats that are
widely used within the industry. For plain-text documents it uses HTML, which is
directly displayable by browsers such as Microsoft Internet Explorer or Netscape
Navigator/Communicator. For intelligent data streams, it uses Adobe PDF format
which is displayable in the browser through the use of the Adobe Acrobat Reader,
a widely used free component and de facto industry standard. WebCOINS provides
an Internet distribution capability for the deployment of e-commerce and
customer self-service applications.
ADVANCED COINSERV FOR UNIX
INSCI's flagship digital document repository product, Advanced COINSERV is
a UNIX-based system that provides high-volume archiving and retrieval of
transaction documents generated from computer output or scanned images. As a key
component of the COINSERV suite, it is the digital document hub for LAN/WAN,
Internet, and API access, for document distribution via CD-R, for workflow-based
electronic messaging, and for production reprints to high speed printing
devices. Advanced COINSERV uses magnetic disk, RAID storage, and high-density,
low-cost optical discs in a client-server environment. A wide variety of devices
can be used to access the digital document repository including Windows PCs and
Web browsers on any platform. Advanced COINSERV has received a constant stream
of enhancements and extensions to maintain its competitive position.
WINCOINS32
WinCOINS32 is dedicated client software for accessing COINSERV document
repositories from a 32-bit workstation running Microsoft Windows 95 or Windows
NT. Access to the entire document repository is enabled through an easy-to-use
interface for displaying, printing, faxing, or exporting documents at any
workstation. WinCOINS32 offers API-level embedded viewing technology for
interpreting, displaying and printing native intelligent data streams at the
workstation. The WinCOINS32 software supports standard data streams such as AFP,
Metacode, DJDE, PCL, PDF, line data and TIFF images.
ADVANCED COINSCAN
Advanced COINScan is a multi-featured image capture solution for scanning,
indexing and processing images that are stored in COINSERV digital document
repositories. The scanning component enables source document scanning from a
wide variety of industry-standard scanners. The product is scaleable and
configurable to meet the volume and indexing needs of many different
document-imaging profiles. Advanced COINScan incorporates broad functionality
including batch imaging, image enhancement, optical character recognition (OCR),
intelligent character recognition (ICR), bar code recognition (BCR), and upload
to COINSERV document repository systems or other storage systems.
COINSFLOW
COINSflow is a customer-focused, service-oriented workflow system designed
to facilitate and improve business processes through automated routing,
tracking, notification and action assignment. This workflow software builds,
executes and analyzes business processes in a highly graphical environment,
bringing together customer information from disparate sources and presenting it
as a case folder which may be tracked and accessed throughout a customer's
organization. Users can build business processes, using a graphical
flow-charting concept, from a library of pre-defined tasks customized to a
particular business. The case server also performs unattended tasks that are
part of a workflow process and requires no user interface. Whether used for
business process implementation or for document-oriented activities, COINSflow
provides integrated work process management functionality for the user
organization.
COINSPDF
COINSPDF is a form overlay option that allows customers to create Adobe
PDF-based form overlays from any original document source and to use those form
overlays with their archived plain-text documents. When retrieving from the
document repository, COINSPDF provides presentation and display of the retrieved
documents with all of the visual attributes that Adobe PDF offers. Customers can
provide an archived document display to their users, with the ability to alter
the appearance and re-purpose documents where appropriate. With the growing need
to display documents for customer service or other purposes, COINSPDF enables
deployment of user-focused displays and printing.
MONARCH FOR COINSERV
Monarch for COINSERV is data mining software that provides
workstation-based report mining and analysis. This tool is a private-label
version of Datawatch's Monarch product. Monarch for COINSERV enables users to
identify, extract, and analyze the contents of documents from the COINSERV
digital document repository. This software can be used to manipulate document
information into field-oriented data on a PC workstation, generate calculated
fields, provide graphic representations of the analyzed data, and export results
to other desktop tools such as spreadsheets and databases. For situations where
report data is regularly transcribed and used to analyze or summarize results,
Monarch for COINSERV is a way of accessing and extracting knowledge from the
corporate "memory" contained in the document repository.
COINS-CD
COINS-CD is Windows NT-based software for CD-R distribution of archived
documents. This product combines INSCI's core technology with CD-R functionality
to enable document and data distribution to remote users, external customers,
non-networked users, or anyone who needs specific access to documents
independent of a central document repository. COINS-CD processes computer
generated output, either from magnetic tapes, file transfer, or extracted from
the main COINSERV document repository. COINS-CD performs the same reading,
extracting, and indexing that the COINSERV products perform and then records the
information on CD-R. Varied means of distribution is becoming an important part
of any document repository strategy, and COINS-CD provides a solution of
fulfilling this requirement.
SETUP EXPERT
Setup Expert is a graphical interface that leads a user through the steps
to create an application definition file for COINSERV systems. This software
provides a point and click approach that can be used to simplify the process of
setting up or modifying a document archive and retrieval application. Setup
Expert allows a systems administrator or analyst to graphically set up document
parameters, define key and secondary filter indexes, establish directory paths
to source files, and define page types and overlays associated with each page
type. This software can be used with line-data type files and documents but does
not support intelligent print data streams.
INSCI CUSTOMER 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 that allow it to carry out the implementation of
advanced solutions within large and complex client environments. These
methodologies encompass project direction and management, quality assurance and
control, and testing disciplines that are essential for mission-critical
solutions in large organizations with massive data stores and critical
processing time frames. Based upon expertise in integrated output management,
electronic printing, imaging, document management, on-demand printing, data
storage, and data mining, INSCI provides services and solutions to global
problems in the customer service and data storage areas. With these project
management, technical, product and architectural skills, INSCI is able to offer
a unique set of solutions and capabilities to organizations that are seeking
more than a software product to satisfy their organizational and business
requirements.
INSCI STRATEGIC ALLIANCES
INSCI has developed several strategic business alliances through which the
Company extends its marketing efforts and generates sales. In the course of
fiscal 1999, the Company announced new and/or expanded marketing and sales
alliances with Xerox Corporation, Moore North America, Fuji Xerox and others. In
addition, Unisys Corporation, an existing reseller of the Company's products,
implemented a program to dedicate additional resources to selling and marketing
INSCI products. In November 1998, Xerox Corporation and INSCI jointly announced
an expanded marketing alliance. INSCI was the only partner added to this program
in all of 1998. INSCI also is a Participating Sponsor of Xerox's DocuWorld
initiative, which provides a worldwide forum for select companies to present
information regarding their document automation products in conjunction with
Xerox Corporation.
INSCI currently has agreements with a limited number of value added
resellers ("VAR's"). VAR's generally are organizations that sell their own
computer application software systems to special vertical markets, such as
banks, health care organizations or credit unions. VARs sell INSCI's products as
part of an integrated system of hardware and software for the VAR's customers.
INSCI sells its products directly to VARs for resale to the VARs' customers.
The Company believes that its digital document repository, imaging,
workflow and Web-based technologies and products are essential to comprehensive
customer solutions, as well as a mandatory infrastructure requirement for
e-commerce applications. INSCI believes that companies in the information
retrieval, e-commerce, electronic bill presentment and payment (EBPP),
enterprise resource planning (ERP), and on-line retailing are likely to require
high-volume digital archival and retrieval technology in order to meet their own
objectives. The Company intends to continue discussions with such companies with
a view to forming alliances that will expand its market presence and generate
further sales.
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
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.
MARKETING AND SALES
INSCI markets its COINSERV products through its own sales force in
combination with 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 March 1998, Xerox
Corporation selected the Company as one of seven participants in Xerox's
Docuworld initiative, which provides a worldwide forum for selected companies to
present information regarding their networked digital printing products in
conjunction with Xerox Corporation.
The Company believes that COLD and electronic printing are emerging
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-sales 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-sales 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 the Company 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. 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 has reduced it sales of third party hardware in order to focus on
sales of its own software and services products, which generate higher gross
margins. Typically, the hardware that hosts INSCI's software products is either
owned or purchased directly by INSCI's customers. Accordingly, sales of third
party hardware are not material and INSCI has no material dependence on third
party hardware suppliers in order to attain its revenues.
COMPETITION
There are a number of suppliers offering COLD, CD-R, document management,
report management, workflow management, imaging, information retrieval,
electronic bill presentment and e-commerce products. In many cases, the Company
believes that its products and services offer advantages over the competition.
These advantages include:
o a comprehensive product portfolio encompassing enterprise archive and
retrieval, Web-based functionality, scanning and imaging, workflow, CD,
document and data mining, report generation and management, and a dual
platform strategy with both NT and Unix product suites
o high volume throughput and enterprise-level scalability
o support for multiple intelligent data streams and other data formats
o open systems connectivity
o high speed document archival and access
o comprehensive systems integration and support services
o strategic alliances and partnership relationships with major corporate
partners
The Company believes that its market positioning, strategic alliances and
product functionality allow it to compete favorably with products offered by its
primary competitors. However, competition among companies providing these
products is intense and 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.
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 73 persons as of March 31, 1999. The Company's future
success depends, in part, on its ability to retain existing and to attract new
management and technical employees. The Company has no collective bargaining
agreements and considers its relationships with its employees to be good.
ITEM 2. DESCRIPTION OF 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
amended its Westborough lease on March 15, 1999 to include additional office
space of 2,997 square feet. Management considers its present office space
adequate for the Company's foreseeable needs.
ITEM 3. LEGAL PROCEEDINGS
To the best of the Company's knowledge, there are no material legal
proceedings pending against the Company or any of its property, nor was any such
proceeding terminated during the fourth quarter ended March 31, 1999.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITIES HOLDERS
No matters were submitted to a vote of Shareholders of INSCI Corp during
the fourth quarter of the fiscal year ended March 31, 1999.
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS
On April 21, 1994, INSCI closed an initial public offering of the
Company's Units (the "Units"), with each Unit consisting of one share of the
Company's common stock and one redeemable common stock purchase warrant (each
warrant entitles the holder thereof to purchase one-half of one share of the
Company's common stock). Since the closing of the initial public offering, the
Company's Units traded in the over-the-counter market and were included in the
National Association of Securities Dealers Automated Quotation System ("NASDAQ")
under the symbol "INSIU". Effective December 13, 1995, the Company's Common
Stock (symbol:"INSI") and the Company's Warrants (symbol:"INSIW") began trading
separately, and trading in the Units ceased.
The Company's common stock has been traded on the NASDAQ Small Cap Market
since April 14, 1994, the effective date of the Company's initial public
offering. The table below shows the high and low bid prices as reported in
NASDAQ's informational reports. These prices represent prices between dealers,
do not include retail mark-up, mark-down or commissions, and may not necessarily
represent actual transactions.
FISCAL 1998 FISCAL 1999
Common Stock Price
Quarter High Low High Low
- ------- ---- --- ---- ---
First $3.44 $2.13 1.56 0.75
Second 2.69 2.13 1.31 0.56
Third 2.50 1.00 0.94 0.56
Fourth 1.81 1.00 3.38 1.19
Warrant Price
Quarter High Low High Low
- ------- ---- --- ---- ---
First $0.56 $0.25 - -
Second 0.31 0.13 - -
Third 0.13 0.06 - -
Fourth - -
On June 17, 1999, the closing bid and ask prices of the common stock were
$4.44 and $4.50. The Company's warrants were deleted from the NASDAQ Small Cap
Market on January 30, 1998 due to the lack of market makers registered to trade
these warrants. As of June 22, 1999, the Company had 121 holders of record of
its common stock.
The Company currently intends to retain its earnings (when realized) to
finance future growth and therefore does not anticipate paying any cash
dividends on its common stock for the foreseeable future.
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATIONS
GENERAL
The Company was incorporated on December 20, 1989 as a wholly owned
subsidiary of Information Management Technologies Corporation ("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.
The following discussion should be read in conjunction with the financial
statements and notes thereto contained elsewhere in this document.
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 companies
located in the United Kingdom. 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. During fiscal 1999,
the Company closed its Philippine operation and the key employees of this
operation were employed by the Company's strategic sales partner, Unisys
Corporation in the Philippines, in order to provide continuity of services for
the Company's products.
RESULTS OF OPERATIONS, OVERVIEW
During fiscal 1998 and 1999, the Company's operations were focused in four
areas; (1) expanded development of its Windows NT and Web based products (2)
enhancements of the functionality and performance of its Unix based products,
(3) expansion of indirect sales channels, and (4) expansion of its consulting
and integration services. The Company's management believes that the financial
investments made in these four areas are vital to attaining sustainable long
term competitive advantage. Investments in these areas in fiscal 1998 and 1999
contributed to the Company's operating loss for these periods.
COMPARISON OF RESULTS OF OPERATIONS, FISCAL YEARS ENDED MARCH 31, 1999 VERSUS
MARCH 31, 1998
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,
---------------------------
1999 1998
------- --------
% %
Revenue 100 100
--- ---
Gross margin 64 53
Expenses
Sales and marketing 34 40
Product development 18 20
General and administrative 17 19
Non-recurring charges 0 1
--- ---
Total expenses 69 80
--- ---
Loss from operations -5 -27
Interest income (expense) net 1 1
--- ---
Net loss -4 -26
=== ===
REVENUE. INSCI develops, sells, installs and supports electronic document
repository software with integrated internet, imaging, workflow,
print-on-demand, electronic distribution and archive (COLD) software for the
enterprise level (high volume production) market. INSCI's software products
enable customers to improve their services through electronic access to
documents (e.g. invoices, statements, reports, etc.); provide financial savings
through elimination of paper and microfiche; and provide the foundation for the
digital document "back office" for electronic commerce applications. 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, Xerox Corporation and Moore Corporation. Revenue
is net of discounts and allowances given to third party VAR's and distributors.
The following table compares INSCI's revenue for fiscal 1999 versus fiscal 1998
(in thousands):
FISCAL YEAR ENDED MARCH 31,
---------------------------
1999 1998 % CHANGE
------- ------ --------
Software $ 5,770 $4,451 30
Hardware 222 153 45
------- ------
Total product revenue 5,992 4,604 30
------- ------
Services 3,586 2,787 29
Maintenance 2,828 2,414 17
------- ------
Total services revenue 6,414 5,201 23
======= ======
Total revenue $12,406 $9,805 27
======= ======
The following table compares total revenues by quarter for fiscal 1998 and 1999:
TOTAL REVENUES BY QUARTER
($000)
FISCAL 1998 FISCAL 1999
-------------------------------- ---------------------------------
Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4
1,803 1,897 2,788 3,317 3,213 2,296 3,725 3,172
Revenues for fiscal 1999 totaled $12,406,000 and increased by 27% as
compared to revenues of $9,805,000 for fiscal 1998. The increase in sales in
fiscal 1999 was largely driven by market acceptance of the Company's new
COINSERV(TM) for Windows NT and Web-based products. Sales increased through both
the Company's direct and indirect sales channels, which include such strategic
partners as Xerox, Unisys and Fuji Xerox. Revenues from indirect sales channels
grew by 44% in fiscal 1999. The Company expects that to the extent that future
revenue growth occurs, it will result primarily from increases from the
Company's indirect sales channels.
Product revenue was $5,992,000 for fiscal 1999 and increased by 30%
compared to product revenue of $4,604,000 for fiscal 1998. The increase in
product revenues reflects increases from the Company's new NT and Web based
products combined with increased revenues from the Company's indirect sales
channels. Service revenues, which include systems integration and customer
support services, totaled $6,414,000 for fiscal 1999, and increased by 23%
compared to revenues of $5,201,000 for fiscal 1998. This increase reflects
growth in systems integration services related to the Company's product revenues
combined with increased maintenance and support services related to the
Company's growing installed base of customers. To the degree that the Company's
revenues grow over the next several quarters, it is expected that product
revenues will grow at a faster rate than service revenues, as the result of the
Company's new products and increased revenues through indirect sales channels.
The Company's management believes that the enterprise level volume
archival capabilities its NT and Web based products provide favorable
performance differentiation from competitors' products. This differentiation,
combined with the investment the Company has made in expanding its indirect
sales channels, will potentially help the Company's future revenues to grow as a
result of greater sales coverage and a product family that addresses the fastest
growing segment of the Company's market. However, the long sales cycle
associated with the Company's products and market combined with the large dollar
value of many customer orders can result in quarter-to-quarter revenue
volatility.
COST OF REVENUE. Total cost of revenue for fiscal 1999 was $4,475,000 or
36% of revenue, compared to $4,621,000 or 47% of revenue, for fiscal 1998. The
decrease in the cost of revenue percentage for fiscal 1999 is the result of an
increased mix of product revenues, which inherently have a lower cost of revenue
than services revenues.
Cost of revenue for product sales was $1,288,000 or 21% of product revenue
for fiscal 1999 compared to $1,991,000 or 43% of product revenue in fiscal 1998.
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 in the product cost of revenue
percentage is primarily the result of decreases in amortization of capitalized
software, which totaled $884,000 for fiscal 1999 compared to $1,215,000 for
fiscal 1998. Amortization charges were lower in fiscal 1999 due to decreases
related to the Company's Unix based products, which are maturing and have
decreasing amounts to be amortized. It is expected that amortization for fiscal
2000 will increase due to increased charges for the Company's newer NT and Web
based products, which have been under development during the last two years To
the degree that the Company's product revenues grow in future periods, cost of
revenue as a percentage of product revenue is expected to decrease as increased
revenues are available to absorb amortization costs.
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 $3,187,000 or 50% of services revenues for fiscal 1999 compared to
$2,630,000 or 51% for fiscal 1998, respectively. The decline in the service cost
of revenue percent for fiscal 1999 reflects increased productivity for the
departments that provide maintenance and systems integration services. It is
expected that costs of services as a percent of revenues will remain at
approximately the same percentage levels relative to any future revenue growth.
SALES AND MARKETING. Sales and marketing expenses were $4,187,000 or 34%
of revenues for fiscal 1999 compared to $3,935,000, or 40% of revenue, for
fiscal 1998. Expenses increased for fiscal 1999 primarily as the result of
increased sales commissions associated with the year's revenue growth. Selling
and marketing expenses decreased as a percent of revenue in fiscal 1999 as the
result of increased selling efficiencies, primarily from higher revenues from
the Company's indirect sales channels. The Company expects that future
expenditures for sales and marketing expenses as a percentage of revenues will
decrease in the event of increases in the growth rate of the Company's revenues.
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. This development program includes development of new NT and Web based
products combined with enhancement of existing Unix based products. During
fiscal 1999, the Company released significant enhancements to its Windows NT
suite of products, which combine an electronic digital document repository with
internet access and integrated imaging and workflow. This software can archive
and retrieve high volumes of documents operating on the NT platform. During
fiscal 1998, 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 document archive and
retrieval product; and Setup Expert, an application set up interface.
The additions to INSCI's product offerings, along with enhancements to
existing products, have been funded by the Company's gross expenditures for
software products. Gross product development expenses for fiscal 1999 were
$3,615,000, before capitalization of software expenses of $1,398,000, for net
product development expenses of $2,217,000. Gross product development expenses
for fiscal 1998 were $3,574,000, before capitalization of software expenses of
$1,616,000, for net product development expenses of $1,958,000. The increase in
net product development expenditures for fiscal 1999 reflects a decrease in
capitalized software expenses from the prior year's activities, which included
concentrated development of several new products in parallel. The Company
continues its programs to reduce product development expense rates by having
selected development performed under a fixed price contract basis by a
programming company in Sri Lanka. The Company plans to continue and possibly
increase its expenditures for product development in fiscal 2000 in order to
maintain product leadership in the markets served.
GENERAL AND ADMINISTRATIVE. General and administrative expenses were
$2,055,000 or 17% of revenue for fiscal 1999 compared to $1,861,000, or 19% of
revenue, for fiscal 1998. The increased expenses for fiscal 1999 primarily
reflect the establishment of an computer information systems function to support
the Company's internal computer and technological infrastructure combined with a
shareholder relations program to increase stock market awareness of the Company
and to foster shareholder liquidity.
NON-RECURRING CHARGES. During fiscal 1998, the Company established a plan
and provided charges in the amount of $139,000 to discontinue activities of its
Philippines operations, which provided sales and technical support intended to
expand Far East revenues. This action was taken as the result of lower revenue
opportunities in the region as the result of the Asian economic crisis. The
Company is providing continued support of Far East revenue opportunities through
increased utilization of its regional indirect sales channels. In this regard,
key employees of the Company's former Philippine operation have been employed by
the Company's strategic sales partner, Unisys Corporation in the Philippines.
INTEREST INCOME/EXPENSE. Interest income in fiscal 1999 was $77,000
compared to interest income in fiscal 1998 of $169,000, partially offset by
$3,000 in interest expense for net interest income of $166,000. The decrease in
interest income in fiscal 1999 reflects lower average cash balances and
corresponding interest income for fiscal 1999.
NET LOSS. Net loss for fiscal 1999 was $451,000 compared to a net loss of
$2,543,000 for fiscal 1998. The decrease in net loss is primarily the result of
increased revenues for fiscal 1999.
YEAR 2000 COMPUTER SOFTWARE CONVERSION
Many computer systems will experience problems handling dates beyond the
year 1999. Therefore, some computer hardware and software will need to be
modified prior to the year 2000 in order to remain functional. The Company has
assessed both internal readiness of its computer systems and the compliance of
its computer software sold to customers for its ability to process the year
2000. The Company believes that it is materially ready to process year 2000
requirements and that the remaining minor changes scheduled to be completed over
the next four months will be successfully implemented as part of the Company's
normal maintenance update of internal systems. The majority of the costs
associated with implementing the Company's year 2000 compliance program have
already been recognized and have not been material in terms of the Company's
financial operating results. Costs associated with implementing the final
portions of the Company's program over the next four months are not expected to
be material. The Company believes there is little risk associated with year 2000
issues relative to its internal operations or computer software sold. There can
be no assurance, however, that there will not be a delay in, or increased costs
associated with the implementation of such changes. The Company's inability to
implement such changes could have an adverse effect on future results of
operations.
FORWARD LOOKING COMMENTS
During fiscal 1998, the Company's revenues were impacted by reduced demand
for its Unix based software products during the first and second fiscal
quarters. To offset this reduced demand and to participate in the rapidly
growing Windows NT based market, the Company introduced a Windows NT based
product in October, 1997. In addition, during fiscal 1998, a significant portion
of the Company's sales and technical resources were directed toward increased
support of the Company's indirect sales channels, at the cost of reducing the
Company's direct sales activities. The Company believes that opportunities to
increase future revenues are best served by supporting these sales channels due
to the existing customer relationships that these channels have and the
relatively large number of sales personnel that the channels can direct to
selling the Company's products, as compared to much lower sales coverage of the
Company's internal direct sales force. The increase in revenues for fiscal 1999
compared to fiscal 1998 reflects the positive impact on revenues of the
Company's new products and increased revenues through indirect channels. The
Company is not able to predict, however, when and to what degree future revenue
increases from its NT based products or increased use of sales channels may
occur. In addition, the long sales cycle associated with the Company's products
and market combined with the large dollar value of many customer orders, which
may or may not be received in a given quarter, can result in quarter-to-quarter
revenue volatility.
LIQUIDITY AND CAPITAL RESOURCES
As of March 31, 1999 the Company had $1,867,000 of cash and cash
equivalents and working capital of $1,251,000 in comparison to $2,596,000 of
cash and cash equivalents and working capital of $2,116,000 as of March 31,
1998. The Company also has a working capital bank line of credit for $1,500,000
which it has not utilized. The present cash reserves and bank line of credit of
the Company are believed to be sufficient to meet the foreseeable needs of the
Company. Accounts receivable were $2,988,000 with weighted days outstanding of
32 as of March 31, 1999 compared to receivables of $2,904,000 with weighted days
outstanding of 34, as of March 31, 1998. The Company targets average collections
at 45 days. Amounts below this number represent favorable receivable mix and
collection performance.
The Company's cash flows are summarized below for the periods indicated (in
thousands):
FISCAL YEAR ENDED MARCH 31,
1999 1998
------- -------
Cash provided by (used in)
Operating activities $ 900 $ (590)
Investing activities (1,744) (1,984)
Financing activities 115 102
------- -------
Increase(decrease) in cash and cash equivalents $ (729) $(2,472)
======= =======
Cash and cash equivalents at end of year $ 1,867 $ 2,596
The Company generated cash of $900,000 in operating activities for fiscal
1999, primarily as the result of a decrease in loss from operations as compared
to the prior year. Net cash used in investing activities was $1,744,000, from
additions of $1,398,000 to purchased and capitalized software as a result of the
Company's expanded product development program, combined with capital
expenditures of $346,000. Cash generated from financing activities was $115,000,
and reflects proceeds from the issuance of common stock.
On August 7, 1998, the Company and Silicon Valley Bank ("SVB") finalized a
bank line of credit Agreement ("Agreement"). The terms of this Agreement provide
for a $1,500,000 working capital credit facility for a term of one year. The
terms further provide for working capital advances up to seventy five percent of
the Company's eligible domestic accounts receivable under ninety days from
invoice date. Collateral for the line, which is secured by a lien, is comprised
of all Company assets. The rate of interest to be paid to SVB is prime plus one
percent. In order to borrow against the line, the Company is required to meet
certain covenants which include minimum tangible net worth of $2 million and a
quick ratio of 1:50 to 1. The Company, at its option, may terminate the credit
facility with SVB without penalty. The Company had no borrowings against the
credit facility with SVB during fiscal 1999. In May, 1999, the Company and SVB
commenced the process of extending the existing bank line of credit for fiscal
2000. The Company expects to complete a new line of credit with SVB within the
next sixty days.
As of March 31, 1999, the Company had securities outstanding which, if all
securities become vested and are in the money, provide potential sources of
future financing as outlined below:
Potential
Securities Shares Proceeds
- ------------------------------------------------- -------- -----------
Warrants, IPO related 689,182 $ 5,869,660
10% Convertible Preferred Stock, placement agent 112,000 560,000
Warrants, 8% Convertible Preferred Stock 1,466,667 7,400,002
Stock options 6,160,967 9,476,828
--------- ---------
Total 8,428,816 $23,306,490
========= ===========
As of March 31, 1999, securities that are vested and in the money provide
potential future financing resources of $5,084,000. There can be no assurance
that the Company will obtain any future proceeds from the exercise of the above
securities.
The Company anticipates that its working capital and sources of capital,
such as a new credit facility, will be adequate to fund the Company's currently
proposed activities for at least the next twelve months. The Company anticipates
using financing vehicles such as bank debt, leasing and other sources of
funding, including additional equity offerings, to fund its operations. There
can be no assurances that the Company will be successful in obtaining funds from
any such sources. If additional funds are raised by issuing equity securities,
dilution to the Company's stockholders may result. If additional funds are not
available, the Company may be required to delay execution of its business plan.
"SAFE HARBOR" STATEMENT UNDER THE PRIVATE SECURITIES LITIGATION REFORM
ACT:
With the exception of historical information, the matters discussed in
this report are "forward looking statements" as the term is defined in Section
21E of the Securities Exchange Act of 1934. While the Company believes that its
strategic plan is on target and the business outlook remains strong, several
important factors, many of which are beyond the control of the Company, have
been identified which could cause results to differ materially from historical,
planned, implied or predicted results of the Company. While the Company has
achieved an operating income in some past quarters, INSCI historically has been
unable to generate sales volumes necessary to achieve profitability on a
sustained basis. INSCI has experienced, and may in the future experience,
significant quarter to quarter fluctuations in revenues and the results of
operations. Such fluctuations may result in volatility in the market price of
the Company's Common Stock.
Quarterly revenues and results of operations may fluctuate as the result
of a variety of factors, including the lengthy sales cycle for the Company's
products, the proportion of revenues attributable to software license fees
versus services, the amount of revenue generated by alliances with other
companies selling INSCI's products, demand for the Company's products, the size
and timing of individual license transactions, the introduction of new products
and product enhancements by the Company or its competitors, changes in customer
budgets, competitive conditions in the industry and general economic conditions.
Additionally, the sale of the Company's products generally involves a
significant commitment of capital by its customers and may be delayed due to
time consuming authorization procedures within an organization. Other factors
affecting the Company's operating results include INSCI's ability to design and
introduce on a timely basis new products which compete effectively on the basis
of price and performance and which address customer requirements, product
obsolescence, technological changes, competition and competitive pressures on
price, the ability to hire and retain qualified personnel and general economic
conditions affecting the investment by potential customers in peripheral
computer devices. There is no assurance that the Company can maintain or
increase its sales volume going forward or that it will be able to achieve a
profit in the marketing of its products.
ITEM 7. FINANCIAL STATEMENTS
The information required by this Item is incorporated by reference to the
Table of Contents to Financial Statements and appears on page F-1 hereof.
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURES
None
PART III
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS;
COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT
The information required by this item will be included in the Company's
Proxy Statement with respect to its 1999 Annual Meeting of Stockholders to be
filed with the Commission within 120 days following March 31, 1999 under the
captions "Election of Directors," and "Directors and Executive Officers of the
Registrant" and is incorporated herein by this reference as if set forth in full
herein.
ITEM 10. EXECUTIVE COMPENSATION
The information required by this item will be included in the Company's
Proxy Statement with respect to its 1999 Annual Meeting of Stockholders to be
filed with the Commission within 120 days following March 31, 1999 under the
captions "Summary Compensation Table," "Option Grants in Last Fiscal Year,"
"Aggregate Option Exercises in Last Fiscal Year and Fiscal Year End Option
Values," and "Directors' Compensation" and is incorporated herein by this
reference as if set forth in full herein.
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by this item will be included in the Company's
Proxy Statement with respect to its 1999 Annual Meeting of Stockholders to be
filed with the Commission within 120 days following March 31, 1999 under the
caption "Security Ownership of Certain Beneficial Owners" and is incorporated
herein by this reference as if set forth in full herein.
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this item will be included in the Company's
Proxy Statement with respect to its 1999 Annual Meeting of Stockholders to be
filed with the Commission within 120 days following March 31, 1999 under the
caption "Certain Relationships and Related Transactions" and is incorporated
herein by this reference as if set forth in full herein.
ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K
Exhibits: Incorporated by reference to the Index of Exhibits appearing at
the end of this Report on Form 10-KSB. Also incorporated by reference all
exhibits filed on the Company's Registration Statement on Form S-1.
Reports: There were no Form 8-K's filed in the fourth quarter of the
fiscal year ended March 31, 1999.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this Report to be signed on
its behalf by the undersigned, thereunto duly authorized.
INSCI CORP.
By: /s/ E. TED PRINCE
-------------------------------------------------------
Dr. E. Ted Prince, Chief Executive Officer
Dated: June 28, 1999
<PAGE>
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that each person whose signature appears
below constitutes and Dr. E. Ted Prince as his attorney-in-fact, with the power
of substitution, for him in any and all capacities, to sign any attached
amendments to this Report on Form 10-KSB, and to file the same, with exhibits
thereto and other documents in connection therewith, with the Securities and
Exchange Commission, hereby ratifying and confirming all that said
attorney-in-fact, or his substitute or substitutes, may do or cause to be done
by virtue hereof.
Pursuant to the requirements of the Securities Exchange Act of 1934, this
Report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
SIGNATURE TITLE DATE
--------- ----- ----
/s/ E. TED PRINCE Chief Executive Officer June 28, 1999
- ------------------------- and Director
Dr. E. Ted Prince
/s/ DARRYL R. DOBIN President and Chief Operating June 28, 1999
- ------------------------- Officer and Director
Darryl R. Dobin
/s/ ANDRE DANIEL-DREYFUS Director June 28, 1999
- -------------------------
Andre Daniel-Dreyfus
/s/ THOMAS FARKAS Director June 28, 1999
- -------------------------
Thomas Farkas
/s/ ROBERT F. LITTLE Director June 28, 1999
- -------------------------
Robert F. Little
/s/ JOHN A. LOPIANO Director June 28, 1999
- -------------------------
John A. Lopiano
/s/ FRANCIS X. MURPHY Director June 28, 1999
- -------------------------
Francis X. Murphy
/s/ ROGER C. KUHN Vice President-Finance & June 28, 1999
- ------------------------- Administration Chief Financial
Roger C. Kuhn and Accounting Officer
<PAGE>
INSCI CORP
EXECUTIVE OFFICERS OF THE REGISTRANT
BOARD OF DIRECTORS
Dr. E. Ted Prince
Chairman of the Board
& Chief Executive Officer
Darryl R. Dobin
President and Chief Operating Officer
Andre Daniel-Dreyfus 1
Thomas Farkas 1
Robert F. Little 2
John A. Lopiano 2
Francis X. Murphy 2
1 Member of the Audit Committee
2 Member of the Compensation Committee
EXECUTIVE OFFICERS
Dr. E. Ted Prince
Chairman of the Board
& Chief Executive Officer
Darryl R. Dobin Roger C. Kuhn
President & Chief Operating Officer Vice President,
Finance & Administration &
Chief Financial &
Accounting Officer
AUDITORS: TRANSFER AGENT:
Pannell Kerr Forster PC First Union National Bank
420 Lexington Avenue 1525 West W. T. Harris Blvd. - 3C3
New York, NY 10170 Charlotte, NC 28288
<PAGE>
INDEX OF EXHIBITS
The following Exhibits are filed as part of, or incorporated by reference into,
this Report on Form 10-KSB, as indicated below (footnote explanations are at end
of Index):
Sequential
Page Number
- -----------
EXHIBIT NO. DESCRIPTION OF EXHIBIT
- ----------- ----------------------
3.1 Certificate of Incorporation of the Company.
3.2 Bylaws of the Company.
3.3 Amendment to Certificate of Incorporation of the Company Creating
Preferred Stock.
3.4 Certificate of Amendment to the Certificate of Incorporation.
10.1 1992 Stock Option Plan.
10.2 1992 Directors Option Plan.
10.3 1992 Advisory Committee Plan.
10.4 Accounts Financing Agreement between the Registrant and Congress
Financial Corporation, and related documents.
10.5 Form of 1991 Option.
10.6 Form of 1992 Warrants.
10.7 Form of 1992 Convertible Subordinated Note.
10.8 Form of 1992 Contingent Warrants.
10.9 Form of 1993 Warrant3/4Version A.
10.10 Form of 1993 Release Agreement.
10.11 Form of Management Agreement between the Registrant and Imtech.
10.12 Form of Tax Sharing Agreement between the Registrant and Imtech.
10.13 Form of Indemnification Agreement with the Registrant's Directors.
10.14 Marketing Associate Solution Alliance Agreement between UNISYS
Corporation and Registrant.
10.16 Data General Value Added Reseller Discount Purchase Agreement.
10.17 Data General Optical Systems and Software Agreement.
10.18 Distribution Agreement between Fiserv CIR, Inc. and Registrant.
10.19 Lease Agreement relating to the Company's White Plains, New York
headquarters.
10.20 Forms of Customer License Agreements used by the Company.
10.21 Forms of Employee Confidentiality Agreements used by the Company.
10.22 Nondisclosure and Noncompetition Agreement between the Registrant,
Imtech and Mason Grigsby.
10.23 Form of 1993 Warrant - Version B.
10.24 Employment Agreement between the Company and John L. Gillis.
10.25 Employment Agreement between the Company and Kris Canekeratne.
10.26 Form of 1993 Exchange Agreement and Investor Suitability
Representations.
10.27 Form of 1993 Conversion Agreement.
10.28 Waivers by Congress Financial Corporation.
10.29 Form of Investor's Warrant Agreement.
10.30 Form of Representative's Warrant Agreement.
10.31 License Agreement between Bull HN Information Systems, Inc. and
Registrant.
10.33 Loan Agreement between BNY Financial Corporation and Registrant.
10.34 Preferred Stock Subscription Agreement between the Company and Imtech
relating to Preferred Stock.
10.35 Business Partner Agreement between International Business Machines
Corporation and Registrant.
10.36 Waiver by BNY Financial Corporation.
10.37 Stock Escrow Agreement between Registrant, Imtech and First Union
National Bank of North Carolina (as Escrow Agent
10.39 Promissory Note to the Company from John L. Gillis and Sandra Gillis.
10.40 Stock pledge agreement by John L. Gillis and Sandra Gillis in favor of
the Registrant.
10.41 Amendment to Loan Agreement between BNY Financial Corporation and
Registrant.
10.42 Lease agreement relating to the Company's Westborough, MA
headquarters.
10.43 Employment agreement with Jack Steinkrauss.
10.44 First amendment to employment agreement with John Gillis.
10.45 First amendment to employment agreement with Kris Canekeratne.
10.46 Agreement for system purchase by The Northern Trust Company.
10.47 Preferred stock conversion agreement.
10.48 Technology and Reseller Agreement with Elixir Technologies, Inc.
10.49 Private Placement Term Sheet and Exhibits for offering of 90-Day 10%
Subordinated Notes. Repayable in Cash or in Shares of the Company's
Proposed 10% Convertible Preferred Stock.
10.50 First Amendment to Private Placement Term Sheet and Exhibits.
10.51 Employment agreement with Edward J. Prince.
10.52 Release by BNY Financial Corporation of the Company's guarantee of the
obligations of Imtech under the shared credit facility agreement.
10.53 Employment Contract with George Trigilio, Jr.
10.54 Amendment to Employment Contract for Dr. E. Ted Prince, CEO.
10.55 Warrant Exchange Agreement with Norcross & Company
10.56 Asset Purchase Agreement between the Company and Courtland Group, Inc.
10.57 10% Convertible Preferred Stock Private Placement Term Sheet and
Exhibits
10.58 Unit Private Placement Term Sheet and Exhibits
10.59 Credit Line Agreement between the Company and Silicon Valley Bank
10.60* Amendment to Employment Agreement with Dr. E. Ted Prince, CEO
13.1 Form 10-QSB for the quarter ended June 30, 1998
13.2 Form 10-QSB for the quarter ended September 30, 1998
13.3 Form 10-QSB for the quarter ended December 31, 1998
16.1 Letter regarding change in certifying accountants
21.1 Subsidiaries of the Registrant
27.1* Financial Data Schedule
* Annexed hereto
<PAGE>
TABLE OF CONTENTS TO FINANCIAL STATEMENTS
Financial Statements
- --------------------
Page
----
Independent Auditor's Report F-2
Balance Sheet as of March 31, 1999 F-3
Statements of Operations for the Years Ended
March 31, 1999 and 1998 F-4
Statements of Stockholders' Equity for the Years
Ended March 31, 1999 and 1998 F-5
Statements of Cash Flows for the Years Ended
March 31, 1999 and 1998 F-6
Notes to Financial Statements F-8
<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, 1999 and the related statements of operations, stockholders' equity, and
cash flows for each of the two years in the period ended March 31, 1999. 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 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 audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of INSCI Corp as of March 31,
1999 and the results of its operations and its cash flows for each of the two
years in the period ended March 31, 1999 in conformity with generally accepted
accounting principles.
/s/ Pannell Kerr Forster PC
New York, New York
May 18, 1999
<PAGE>
<TABLE>
INSCI CORP
BALANCE SHEET
MARCH 31, 1999
(in thousands, except share amounts)
<S> <C>
ASSETS
Current assets:
Cash and cash equivalents (Notes B-3 and B-9) $ 1,867
Accounts receivable, net of allowance for doubtful accounts of $100 (Note B-9) 2,988
Inventory (Note B-4) 43
Prepaid expenses and other current assets 175
--------
Total current assets 5,073
Property and equipment, net (Notes B-6 and D) 679
Capitalized software development costs,
net of accumulated amortization of $554 (Note B-5) 898
Purchased software, net of accumulated amortization of $610 (Note B-5) 1,693
Other 286
--------
Total assets $ 8,629
========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable 1,146
Accrued expenses:
Compensation 475
Vacation 282
Commissions 216
Other 451
Deferred maintenance revenue (Note B-2) 1,252
--------
Total current liabilities 3,822
--------
Commitments and contingencies (Notes E,F,G,I,J and K)
Stockholders' equity (Notes B-12,I, J,K and L)
Convertible preferred stock, $.01 par value, authorized 10,000,000
shares:
10% Convertible redeemable preferred stock, 103,335 shares issued
and outstanding, liquidating preference of $103 1
8% Convertible redeemable preferred stock, 2,148,363 shares issued and outstanding,
no liquidation preference 21
Common stock, $.01 par value: authorized 40,000,000 shares: issued and outstanding
7,715,052 shares 77
Additional paid-in capital 27,034
Accumulated deficit (22,326)
--------
Total stockholders' equity 4,807
--------
Total liabilities and stockholders' equity $ 8,629
========
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS.
</TABLE>
<PAGE>
INSCI CORP
STATEMENTS OF OPERATIONS
(in thousands, except per share amounts)
YEARS ENDED MARCH 31,
---------------------
1999 1998
-------- -------
Revenue (Notes B-2 and M)
Product $ 5,992 $ 4,604
Services 6,414 5,201
-------- -------
Total revenue 12,406 9,805
-------- -------
Cost of revenue (Note B-5)
Product 1,288 1,991
Services 3,187 2,630
-------- -------
Total cost of revenue 4,475 4,621
-------- -------
Gross margin 7,931 5,184
-------- -------
Expenses
Sales and marketing 4,187 3,935
Product development (Note B-5) 2,217 1,958
General and administrative 2,055 1,861
Non-recurring charges (Note C) -- 139
-------- -------
Total expenses 8,459 7,893
-------- -------
Loss from operations (528) (2,709)
-------- -------
Interest income (expense)
Interest income 77 169
Interest expense -- (3)
-------- -------
Interest income (expense) net 77 166
-------- -------
Net loss (451) (2,543)
Preferred stock dividend (Notes B-12 and I) (706) (847)
-------- -------
Net loss applicable to common shares $ (1,157) $(3,390)
======== =======
Net loss per common share - basic (Note B-8) $ (0.16) $ (0.73)
======== =======
Weighted average common
shares outstanding (Note B-8) 7,235 4,615
======== =======
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS.
<PAGE>
<TABLE>
INSCI CORP
STATEMENTS OF STOCKHOLDERS' EQUITY
Years ended March 31, 1999 and 1998
(in thousands, except share amounts)
<CAPTION>
Common Stock Preferred Stock Additional
------------------- ---------------- Paid-in Accumulated
Shares Amount Shares Amount Capital (Deficit) Total
------ ------ ------ ------ ------- --------- -----
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE, MARCH 31, 1997 4,224,110 $42 3,691,173 $37 $25,152 ($17,779) $7,452
10% Preferred stock conversion to common stock 590,325 6 (702,345) (7) 1 -- --
8% Preferred stock conversion to common stock 53,520 1 (49,999) (1) -- -- --
Common stock issued as dividend
on 10% preferred stocks 157,254 2 -- -- 394 (396) --
Common stock accrued as dividend
on 10% preferred stock -- -- -- -- 26 (26) --
Preferred stock issued as dividend on 8%
convertible redeemable preferred stock -- -- 251,943 3 422 (425) --
Issuance of shares 149,588 1 -- -- 112 -- 113
Exercise of stock options 30,333 -- -- -- 38 -- 38
Net loss -- -- -- -- -- (2,543) (2,543)
------------------------------------------------------------------------------
BALANCE, MARCH 31, 1998 5,205,130 52 3,190,772 32 26,145 (21,169) 5,060
10% Preferred stock conversion to common stock 2,269,843 23 (1,498,602) (15) (8) -- --
8% Preferred stock conversion to common stock 125 (125) -- -- -- -- --
Common stock issued as dividend
on 10% preferred stocks 62,364 -- -- -- 54 (54) --
Preferred stock issued as dividend on 8%
convertible redeemable preferred stock -- -- 559,653 5 647 (652) --
Issuance of shares 70,000 1 -- -- (1) -- --
Stock options issued for services -- -- -- -- 83 -- 83
Exercise of stock options 95,000 1 -- -- 110 -- 111
Exercise of stock warrants 12,590 -- -- -- 4 -- 4
Net loss -- -- -- -- -- (451) (451)
------------------------------------------------------------------------------
BALANCE, MARCH 31, 1999 7,715,052 $77 2,251,698 $22 $27,034 ($22,326) $4,807
==============================================================================
</TABLE>
<PAGE>
<TABLE>
INSCI CORP
STATEMENTS OF CASH FLOWS
(in thousands)
<CAPTION>
YEARS ENDED MARCH 31,
1999 1998
<S> <C> <C>
Cash flows from operating activities:
Net loss $ (451) $(2,543)
Reconciliation of net loss to net cash provided by
(used in) operating activities:
Depreciation and amortization 392 405
Amortization of software costs 884 1,215
Non-recurring charges -- 139
Stock options issued for services 83 --
Changes in assets and liabilities:
Accounts receivable (84) (413)
Inventory (42) 46
Prepaid expenses and other current assets (22) 4
Accounts payable 265 53
Accrued expenses (319) 348
Deferred maintenance revenue 338 77
Other assets (144) 79
------ -------
Net cash provided by (used in) operating activities 900 (590)
------ -------
Cash flows from investing activities:
Additions to capitalized software development costs (492) (567)
Additions to purchased software (906) (1,049)
Capital expenditures (346) (368)
------ -------
Net cash (used in) investing activities (1,744) (1,984)
------ -------
Cash flows from financing activities:
Proceeds from issuance of common stock 115 150
Payment of note payable -- (48)
------ -------
Net cash provided by financing activities 115 102
------ -------
Net change in cash and cash equivalents (729) (2,472)
Cash and cash equivalents at beginning of year 2,596 5,068
------ -------
Cash and cash equivalents at end of year $1,867 $2,596
====== ======
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS.
</TABLE>
<PAGE>
INSCI CORP
STATEMENTS OF CASH FLOWS
(continued)
SUPPLEMENTAL DISCLOSURE OF NON CASH FINANCING AND INVESTING ACTIVITIES:
During fiscal years 1999 and 1998, the Company issued 2,332,332 and 801,099
shares, respectively, of its common stock in payment of dividends due and
conversions of its preferred stocks (Notes I and J)
Dividends were accreted on beneficial conversion features of preferred stock and
amounted to $8,000 and $235,000 in fiscal 1999 and 1998 respectively (Notes B-12
and I)
During fiscal years 1999 and 1998, the Company issued 559,653 and 251,943 shares
of its 8% Convertible Redeemable Preferred Stock in payment of the dividends due
on this stock. (Notes I and J)
During fiscal year 1999, the Company issued 70,000 shares of its common stock in
exchange for cancellation of 150,000 common stock warrants. (Note J)
During fiscal 1998, preferred stock dividends were accrued in the amount of
$26,000.
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS.
<PAGE>
INSCI CORP
NOTES TO FINANCIAL STATEMENTS
MARCH 31, 1999
NOTE A - BUSINESS
The Company develops, markets and services a family of integrated software
solutions designed for use in various business applications encompassing
enterprise level customer service, electronic commerce, workflow management,
internet printing and reprinting, and electronic bill presentment and payment
functionality. These software solutions are designed to provide customers with
the ability to electronically store and manage very high volumes of transaction
documents and reports, and to rapidly access these documents for reference,
printing or delivery via the internet or other electronic means.
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. Basis of presentation
The accompanying financial statements include the operations of the Company
and its wholly owned subsidiary; INSCI (UK) Limited, a product development
center located in the United Kingdom. During fiscal 1998, the Company's Board of
Directors approved the closing of the Company's Philippine subsidiary. Neither
subsidiary is financially significant to the consolidated results of the
Company. All intercompany transactions and balances have been eliminated in the
preparation of the financial statements.
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.
2. Revenue Recognition
Statement of Position 97-2, Software Revenue Recognition ("SOP 97-2"), was
issued in October 1997 by the American Institute of Certified Public Accountants
("AICPA") and was amended by Statement of Position 98-4 ("SOP 98-4"). SOP 97-2
provides revised and expanded guidance of software revenue recognition and
applies to all entities that earn revenue from licensing, selling, or otherwise
marketing computer software. The Company adopted SOP 97-2 and SOP 98-4 in fiscal
1999. Based on its interpretation of SOP 97-2 and SOP 98-4, the Company believes
its current revenue recognition policies and practices are consistent with SOP
97-2 and SOP 98-4. Additionally, the AICPA issued SOP 98-9 in December 1998,
which provides certain amendments to SOP 97-2, and is effective for transactions
entered into during fiscal 2000. Adoption of SOP 97-2 and SOP 98-4 did not have
a material impact on the Company's financial position or results of operations.
The Company believes that the adoption of SOP 98-9 will not have a material
impact on its financial position or results of operations.
Product revenues from the sale of software licenses are recognized when
evidence of a license agreement exists, the product has been shipped, the fees
are fixed and determinable, collectibility is probable and vendor specific
objective evidence exists to allocate the total fee to elements of the
arrangements. 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.
3. 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.
4. 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.
5. 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 development 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
development costs totaled $492,000 and $567,000 during the years ended March 31,
1999 and 1998, respectively. Amortization of capitalized software development
costs totaled $304,000 and $517,000 during the years ended March 31, 1999 and
1998, 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 (see Note E-4). 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 $906,000 and $1,049,000
during the years ended March 31, 1999 and 1998, respectively. Amortization of
purchased software costs totaled $580,000 and $698,000 during the years ended
March 31, 1999 and 1998, respectively, and is included in cost of revenue in the
accompanying statements of operations.
6. Property and Equipment
Property and equipment are recorded at cost. Depreciation is provided on
the straight-line method over the estimated useful lives of the related assets.
Upon retirement or sale, the cost of the assets disposed of and the related
accumulated depreciation and amortization are removed from the accounts and any
resulting gain or loss is included in the determination of net income. The
estimated useful lives are as follows:
Furniture and fixtures..... 5-7 years
Equipment.................. 3-5 years
Leasehold improvements..... Life of lease
7. Translation into US dollars
The assets and liabilities of the Company's subsidiaries are translated
into US dollars at exchange rates in effect at the balance sheet date for
monetary items and at historical rates for non-monetary items. Revenue and
expense accounts are translated at the average exchange rate in effect during
each month. The cumulative foreign currency translation adjustment at March 31,
1999 and March 31, 1998 was not material.
In June 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 130 (SFAS 130) "Reporting Comprehensive
Income". SFAS 130 requires a company to report comprehensive income and its
components in a full set of financial statements. Comprehensive income is the
change in equity during a period from transactions and other events and
circumstances from nonowner sources, such as foreign currency translation
adjustments. The Company has not reported the income (loss) resulting from
foreign currency translation adjustments as comprehensive income as the effects
are not material to the financial statements. Accordingly, there is no material
difference between the Company's net loss reported and the comprehensive loss
for SFAS 130.
8. Loss Per Share
Basic net loss per common share is computed by dividing net loss
applicable to common shares by the weighted average number of common shares
outstanding during the year. For fiscal years 1999 and 1998, diluted loss per
share is the same as basic loss per share since the inclusion of stock options,
warrants and convertible securities would be antidilutive.
9. Concentrations of Credit Risk
Financial instruments which potentially expose the Company to
concentrations of credit risk consist primarily of cash and accounts receivable.
The Company 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, 1999, the uninsured amounts held at these financial
institutions were approximately $1,728,000. The Company has not experienced any
losses on these investments to date.
The Company has not experienced significant losses relating to collection
of accounts receivable. 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.
10. Impairment of Long-Lived Assets
In the event that facts and circumstances indicate that the cost of an
asset may be impaired, an evaluation of recoverability would be performed. If an
evaluation is required, the estimated future undiscounted cash flows associated
with the asset would be compared to the asset's carrying amount to determine if
a write-down to market value is required. No such write-downs were required in
fiscal 1999 and 1998.
11. Fair Value of Financial Instruments
Financial assets for which carrying values approximate fair value include
cash and cash equivalents and accounts receivable. Financial liabilities for
which carrying values approximate fair value include accounts payable and
accrued expenses.
The Company estimates that the carrying values approximate fair value due
to the short maturity or market rates of interest. However, considerable
judgment is required in interpreting market data to develop estimates of fair
value. Therefore, the estimates are not necessarily indicative of the amounts
which could be realized or would be paid in a current market exchange. The
effect of using different market assumptions and/or estimation methodologies may
be material to the estimated fair value amount.
12. Convertible Preferred Stock
The beneficial conversion feature of convertible preferred stock (see Note
I) 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.
13. Accounting for Stock Options and Warrants
All stock options and warrants that have been granted by the Company to
employees 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 issued has been required to be recorded
within the financial statements of the Company. The Company has issued stock
options for services performed by outside organizations and has recorded a
charge of $83,000 to the Company's operating results for fiscal 1999
representing the estimated fair value of these activities.
The foregoing accounting is in accordance with Accounting Principles Board
Opinion No. 25 (APB Opinion No. 25) and related interpretations. The Company has
adopted the disclosure provisions of Statement of Financial Accounting Standards
No. 123, "Accounting for Stock-Based Compensation, " (SFAS 123). The Company has
included in Note L the impact of the fair value of employee stock-based
compensation plans on net loss and net loss per share on a pro forma basis for
awards granted pursuant to SFAS 123.
14. Advertising Costs
The Company expenses advertising as incurred. Advertising expense totaled
approximately $127,000 and $115,000 in fiscal 1999 and 1998, respectively.
15. Recently Issued Accounting Pronouncements
In February 1998, the Accounting Standards Executive Committee issued
Statement of Position 98-1 ("SOP 98-1"), "Accounting for the Costs of Computer
Software Developed or Obtained for Internal Use." SOP 98-1 establishes the
accounting for costs of software products developed or purchased for internal
use, including when such costs should be capitalized. The Company does not
expect SOP 98-1, which will be effective in fiscal 2000 to have a material
effect on its financial position or results of operations.
Statement of Position 98-5 ("SOP 98-5") "Reporting on the Costs of
Start-Up Activities" was issued in April 1998. SOP 98-5 requires the costs of
start-up activities, including organization costs, to be expensed as incurred.
SOP 98-5 is effective for financial statements for fiscal years beginning after
December 15, 1998. The Company will adopt SOP 98-5 in fiscal 2000.
NOTE C - NON-RECURRING CHARGES
During fiscal 1998, the Company's Board of Directors approved closing its
Philippine subsidiary. As a result, the accompanying Statement of Operations for
the year ended March 31, 1998 reflects a write-off of approximately $69,000
representing the subsidiary's net assets at March 31, 1998 and an accrual for
estimated closing costs of $70,000. Included in the Company's fiscal 1998
Statement of Operations is $139,000 in revenue and $246,000 in loss from
operations relating to the Philippine subsidiary. During fiscal 1999, the
Company closed its Philippine operations.
NOTE D - PROPERTY AND EQUIPMENT
Property and equipment at March 31, 1999 consist of the following (in
thousands):
Furniture and fixtures $ 119
Leasehold improvements 144
Equipment 1,361
-----
1,624
Less accumulated depreciation and amortization (945)
-----
$679
====
Depreciation and amortization expense was $392,000 and $405,000 for fiscal years
1999 and 1998, respectively.
NOTE E - RELATED PARTY TRANSACTIONS
(1) In April, 1994, the Company loaned John L. Gillis, the Company's
former Executive Vice President and Chief Operating Officer, and his wife, the
amount of $150,000 to purchase a residence in Westborough, Massachusetts. During
fiscal 1996 the Company established an allowance for loan loss as the underlying
collateral had minimal value. However, Mr. Gillis has been repaying this loan
through a surrender of a combination of stock options, salary and bonuses.
During fiscal 1999 and 1998, the loan was repaid by $29,190 and $16,119
respectively. Interest on the loan was $5,384 and $7,434 during fiscal 1999 and
1998 respectively. The outstanding loan balance after fiscal 1999 payments was
$47,834, which was offset by an allowance for loan losses of the same amount.
The loan balance was cancelled by the Company on March 31, 1999, upon Mr.
Gillis's resignation from the Company and in accordance with a separation
agreement between Mr. Gillis and the Company.
(2) 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, is also a director of the Company.
ETVI is paid a monthly retainer of $6,000. In addition, during fiscal years 1999
and 1998, ETVI was paid an additional $39,000 and $26,000 respectively in
connection with consulting services performed for the Company on behalf of the
Company's Executive Committee. In October, 1995, ETVI was granted an incentive
stock option to acquire 400,000 shares of the Company's Common Stock at an
exercise price of $2.31 per share. These options are only exercisable to the
extent that transactions 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 concurrent with the date of the completed transaction. The
arrangement with ETVI also provides that a portion of the stock options granted
will vest upon arranging strategic sales alliances for the Company and that ETVI
will receive 2% of the revenues generated from these alliances. During fiscal
1999, as the result of establishing strategic alliances, 125,000 options were
vested. The fair value of the 125,000 options vested were estimated to be
approximately $50,000. During fiscal 1998, ETVI had 50,000 options vest as the
result of strategic alliances established. The fair value of the 50,000 options
vested were estimated to be approximately $20,000. Amounts earned related to the
2% of revenues from strategic alliances in during fiscal 1999 and 1998 were
$9,633 and $2,967, respectively. At March 31, 1999, remaining unvested options
outstanding totaled 167,201.
(3) The Company had engaged Gartner and Associates as financial
consultants to advise the Company. Mr. Leonard Gartner ("Mr. Gartner"),
principal of Gartner and Associates, is a former director of the Company. During
fiscal 1999, Gartner and Associates was paid $18,000. During fiscal 1998,
Gartner and Associates was paid a monthly retainer of $6,000 per month and, in
addition, approximately $22,000 in fees related to additional assignments for
the preparation of the Company's annual report and Form S-1 Registration
Statement.
(4) The Company collectively has entered into an agreement with
Technology Providers (Ltd. of Sri Lanka and Incorporated of USA) ("TPL") under
which TPL will provide computer programming services for certain software
products under development and for selected customer application projects.
Services rendered by TPL totaled $1,369,000 in fiscal 1999 and $1,078,000 in
fiscal 1998. TPL is owned by family members of Mr. Krishan A. Canekeratne, a
former Senior Vice President of Development for the Company who resigned in
fiscal 1999. Mr. Canekeratne had no direct ownership interest in TPL during his
employment with the Company. In the opinion of management, the fees paid under
this agreement are at fair market value rates. The Company has issued
approximately $1,114,000 in purchase orders for services to be performed by TPL
in fiscal 2000. At March 31, 1999, amounts due to TPL approximated $460,000.
(5) During fiscal 1998, Richard Gerstner ("Mr. Gerstner") a former
director of the Company was paid fees in the amount of $11,500 for consulting
work performed for the Company.
(6) During fiscal 1999 and fiscal 1998, Mitchell Capital, Inc., whose
principal shareholder is Mitchell Klein, a former director of the Company, was
paid consulting fees in the amount of $15,000 and $22,000, respectively, for
work performed for the Company.
NOTE F - LEASE COMMITMENTS
The Company's lease for its Massachusetts headquarters expires in
September, 2004. The Company subleases a portion of this space under an
agreement which expires in November, 2000. Annual sublease rental income
approximates $60,000. As of March 31, 1999, future minimum rent to be paid under
this operating lease is as follows (in thousands):
Year ending:
March 31, 2000 ................................. $349
March 31, 2001 ................................. 337
March 31, 2002 ................................. 316
March 31, 2003 ................................. 326
March 31, 2004 ................................. 335
Thereafter ..................................... 170
------
$1,833
======
Total rent expense, net of approximately $60,000 of sublease rental income, was
approximately $267,000 and $344,000 for the years ended March 31, 1999 and 1998,
respectively.
NOTE G - REVOLVING CREDIT FACILITY
On August 7, 1998, the Company and Silicon Valley Bank ("SVB") finalized a
bank line of credit Agreement ("Agreement"). The terms of this Agreement provide
for a $1,500,000 working capital credit facility for a term of one year. The
terms further provide for working capital advances up to seventy five percent of
the Company's eligible domestic accounts receivable under ninety days from
invoice date. Collateral for the line, which is secured by a lien, is comprised
of all Company assets. The rate of interest to be paid to SVB is prime plus one
percent. In order to borrow against the line, the Company is required to meet
certain covenants which include minimum tangible net worth of $2 million and a
quick ratio of 1:50 to 1. The Company, at its option, may terminate the credit
facility with SVB without penalty. To date, the Company has not utilized any
portion of this credit facility.
NOTE H - INCOME TAXES
At March 31, 1999, the Company had available net operating loss ("NOL")
carryforwards of approximately $14,600,000 resulting from accumulated operating
losses through fiscal 1999. The NOL carryforwards for tax reporting purposes
expire in various amounts through the year 2019. 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 1999 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, 1999, the
Company has NOL carryforwards of approximately $1,600,000 which are available to
offset future income and expire in 2011 through 2019. 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 I - PREFERRED STOCK
1. 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. Each 8% convertible share
of preferred stock is convertible into one share of common stock.
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.
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
lessor of $3.75 or the average bid price for Common Stock for twenty consecutive
trading days prior to the end of the quarter (see Note J-4). In the event that
the average bid price for Common Stock during any sixty day period commencing
August 1, 1998 is $2.75 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 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 and a majority of holders of 8% Preferred Stock shall have the right to
designate one 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 percent of the 8% Preferred Stock remains outstanding. While the
average bid price for the Company's Common Stock was below $2.75 for sixty
consecutive trading days subsequent to August 1, 1998, holders of the 8%
Preferred Stock have not yet elected to designate a member to the Board of
Directors. In the further event the average bid price for Common Stock during
the last thirty day period of any quarter commencing with the thirty day period
beginning September 1, 1998 is $3.75 or less, annual dividends on 8% Preferred
Stock will be automatically readjusted to eleven percent per annum for the
balance of the period that any 8% Preferred Stock is outstanding. Based upon the
Company's stock price being less than $3.75 for the period required, dividends
have been adjusted to eleven percent per annum commencing with the quarter ended
December 31, 1998.
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
Redeemable Preferred Stock, the Unit Warrants and the Warrants granted to the
Placement Agent. The terms of the Placement involve the imposition of a penalty
if the underlying shares are not timely registered equal to a reduction in the
conversion price of the $3.75 Unit of 2% per month after nine months from the
date of closing with a maximum of 10%. The registration of the underlying shares
for this Placement was completed in the Company's Form S-1 Registration
Statement that was declared effective on October 6, 1997. An adjustment of 8% of
the Unit conversion price is in effect as a result of this provision. During
fiscal 1999 and 1998, shareholders of this preferred stock converted 125
preferred shares into 125 shares of common stock and 49,995 preferred shares
into 53,520 shares of common stock, respectively.
2. 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.
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. The underlying shares of Common Stock convertible
under this Preferred Stock were included in the Company's S-1 Registration
Statement declared effective on October 6, 1997. During fiscal 1998, individuals
who were employees of an investment firm that assisted in this offering
exercised their rights to acquire shares of the Company's common stock at a
price equal to the conversion features of the preferred stock. As a result,
these individuals acquired 149,588 shares of common stock for $113,750.
Dividends can be paid in cash or common stock. Dividends paid in common
stock are determined based upon a discount to the average trading price of the
Company's common stock during the twenty trading days immediately preceding the
payment date (see Note J-2).
In accordance with the terms of the conversion, a total of 448,602 shares
of preferred stock have been surrendered and converted into 892,339 shares of
the Company's Common Stock during the fiscal year ended March 31, 1999. During
the fiscal year ended March 31, 1998, 402,345 shares of preferred stock were
surrendered and converted into 415,954 shares of the Company's Common Stock.
3. 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 INSCI Corp trading market of the
Company's Common Stock. The Company has granted cost-free registration rights to
the holders of the Preferred Stock who have converted into Common Stock. The
underlying shares of Common Stock convertible under this Preferred Stock were
included in the Company's S-1 Registration Statement declared effective on
October 6, 1997. Three hundred thousand shares of the preferred stock have been
converted into 174,371 shares of common stock as of March 31, 1998. The
remaining 1,050,000 shares of preferred stock were converted into 1,377,504
shares of common stock during fiscal 1999.
Dividends were paid in the form of common stock determined by the average
of the trading market price of the Company's common shares during ten trading
days immediately preceding the dividend payment date (see Note J-3).
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.
NOTE J- STOCKHOLDERS' EQUITY
(1) As of March 31, 1999, 7,715,052 shares of the Company's common stock
were outstanding. As of March 31, 1998, 5,205,130 shares of the Company's common
stock were outstanding. The increase in shares during fiscal 1999 primarily
resulted from conversions on the Company's 10% Convertible Redeemable Preferred
Stock and 10% Convertible Preferred Stock.
(2) During fiscal year 1999, a total of 448,602 shares of 10% Convertible
Redeemable Preferred Stock were surrendered and converted into 892,339 shares of
the Company's Common Stock. In addition, during the fiscal year ended March 31,
1999, the Company issued 33,068 shares of Common Stock in lieu of paying cash
dividends on its 10% Convertible Redeemable Preferred Stock. During fiscal year
1998, a total of 402,345 shares of 10% Convertible Redeemable Preferred Stock
were surrendered and converted into 415,954 shares of the Company's Common
Stock. In addition, during the fiscal year ended March 31, 1998, the Company
issued 98,038 shares of Common Stock in lieu of paying cash dividends on its 10%
Convertible Redeemable Preferred Stock.
(3) During fiscal year 1999, in accordance with the terms of its 10%
Convertible Preferred Stock, the Company issued 29,296 shares of Common Stock in
lieu of paying cash dividends on its 10% Convertible Preferred Stock. During
fiscal 1999, 1,050,000 shares of this Preferred Stock were surrendered and
converted into 1,377,504 shares of the Company's Common Stock. During fiscal
year 1998, the Company issued 59,216 shares of Common Stock in lieu of paying
cash dividends on its 10% Convertible Preferred Stock. During fiscal 1998,
300,000 shares of this Preferred Stock were surrendered and converted into
174,371 shares of the Company's Common Stock.
(4) During fiscal year 1999, in accordance with the terms of its 8%
Convertible Redeemable Preferred Stock, the Company issued 559,653 shares of 8%
Convertible Redeemable Preferred Stock in lieu of paying cash dividends on this
preferred stock. During fiscal 1999, 125 shares of this Preferred Stock were
surrendered and converted into 125 shares of the Company's Common Stock. During
fiscal year 1998, the Company issued 251,943 shares of 8% Convertible Redeemable
Preferred Stock in lieu of paying cash dividends on this preferred stock. During
fiscal 1998, 49,999 shares of this Preferred Stock were surrendered and
converted into 53,520 shares of the Company's Common Stock.
(5) During fiscal 1999, options were exercised to purchase 95,000 shares
of common stock for $110,605. During fiscal 1998, the Company issued 149,588
shares of Common Stock for $113,750 and options were exercised to purchase
30,333 shares of common stock for $37,663.
(6) The Company granted 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 May 1996,
the Underwriters surrendered these warrants in exchange for new warrants 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 the Form S-1 Registration Statement that was declared effective on October 6,
1997. During fiscal 1998, the Company entered into an exchange agreement whereby
70,000 shares of common stock would be issued in exchange for the cancellation
of 150,000 warrants. The 70,000 shares were issued in fiscal 1999. The remaining
37,500 warrants expire December 1999.
(7) On April 21, 1994, the Company received net proceeds of approximately
$7,159,000 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. During 1998, the Company
extended the terms of the warrants until December 31, 1999, with all terms and
conditions of the warrants remaining the same.
(8) The following is a summary of the Company's stock warrant activity:
Weighted
Number Average Expiration
of Shares Price Date
--------- --------- ----------
Balance March 31, 1997 2,430,439 $ 5.89 Sep-Dec 99
Fiscal 1998 activity 0
---------
Balance March 31, 1998 2,430,439 $ 5.89 Sep-Dec 99
Fiscal 1999 activity:
Cancelled (150,000) $ 3.50
Exercised (12,590) $ 0.35
---------
Balance March 31, 1999 2,267,849 $ 6.07 Sep-Dec 99
=========
NOTE K - COMMITMENTS AND CONTINGENCIES
Legal Proceedings
To the best of the Company's knowledge, there are no material legal
proceedings pending against the Company or any of its property, nor was any such
proceeding terminated during the fourth quarter ended March 31, 1999.
Employment Agreements
During 1998 the Company's Compensation Committee recommended to the Board
of Directors that the employment agreement of Dr. E. Ted Prince ("Dr. Prince")
the Company's Chairman of the Board of Directors and Chief Executive Officer
should be amended to provide for an extension and increase in compensation. The
Board of Directors subsequently approved the proposed amendment. Effective April
1, 1999, Dr. Prince's employment agreement provided for an extension of the term
of Dr. Prince's employment through September 30, 2001, and further provided for
salary compensation at an annual rate of $250,000 per annum with an incentive
bonus of up to 40% of base compensation based upon performance targets
established by the Board of Directors. Additionally, the amendment provided for
the immediate vesting of 200,000 stock options to purchase 200,000 shares of
Common Stock at $.95 per share. Further, an additional 300,000 stock options
were granted to Dr. Prince to purchase 300,000 shares at $1.75 per share vesting
over a 2-year period. The stock options granted to Dr. Prince are for a term of
ten (10) years and expire April 1, 2009. Additionally, the amendment also
provided that the exercise period of 950,000 options stock options previously
granted to Dr. Prince at $1.66 per share and 250,000 options at $2.00 per share,
would be extended until June 16, 2005.
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 six month's salary and benefits. Exclusive of Dr.
Prince, key members of management have been granted stock options as part of
their compensation package.
Employee Benefit Plan
The Company maintains a defined contribution plan for the benefit of its
eligible employees pursuant to Section 401(K) of the Internal Revenue Code.
Contributions to the Plan by the Company will be made at its sole discretion.
Participants may also make contributions to the Plan. The Company did not make
any contributions to the Plan for fiscal years 1999 and 1998.
NOTE L - 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, 1997 609,565 $3.17 45,000 $3.01
Granted -- -- 200,000 2.25
Cancelled (249,432) 5.03 (15,000) 6.67
Exercised (5,333) 1.77 (25,000) 1.13
-------- ---------
Outstanding at March 31, 1998 354,800 1.75 205,000 2.23
Granted -- -- 460,000 1.04
Cancelled (121,667) 1.88 (33,333) 2.25
Exercised (20,000) 1.66 (5,000) 1.44
-------- ---------
Outstanding at March 31, 1999 213,133 1.69 626,667 1.36
-------- ---------
</TABLE>
<TABLE>
<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, 1997 220,800 $5.43 3,205,942 $2.53
Granted 1,390,082 2.62 200,000 2.39
Cancelled (555,299) 4.41 (550,939) 5.39
Exercised -- -- -- --
-------- ---------
Outstanding at March 31, 1998 1,055,583 2.26 2,855,003 1.95
Granted 2,326,499 1.15 196,000 1.04
Cancelled (941,918) 2.06 (100,000) 2.52
Exercised (25,000) 0.75 (45,000) 1.14
--------- ---------
Outstanding at March 31, 1999 2,415,164 1.27 2,906,003 1.79
--------- ---------
</TABLE>
The following table summarizes information about stock options outstanding and
exercisable at March 31, 1999.
<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 - 3.00 $.89 - 2.25 $.75 - 3.75 $.93 - 5.00
Number of Shares 213,133 626,667 2,415,164 2,906,003
Weighted Average Life 6.3 7.7 9.4 6.4
Weighted Average Exercise Price $1.69 $1.36 $1.27 $1.79
Exercisable
- -----------
Number of Shares 213,133 100,000 324,499 2,589,136
Weighted Average Exercise Price $1.69 $2.25 $1.39 $1.78
</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. On August 26, 1998, the Company
adopted a plan that allowed employees, at their election, to exchange existing
outstanding stock options for reissued stock options at an exercise price of
$1.22 per share. These options vest over a two year period. On August 26, 1998,
the market price of the Company's common stock was $1.19. A total of
approximately 743,000 options were exchanged and are included in the "granted"
and "cancelled" columns for fiscal 1999 in the tables for the 1992 and 1997
Plans. On October 7, 1997, the Company adopted a plan that allowed employees, at
their election, to exchange existing outstanding stock options for reissued
stock options at an exercise price of $2.25 per share, provided that these
options could not be exercised for a period of three years or until the ten day
average market price of the Company's Common Stock was $4.50 per share or
higher. On October 7, 1997, the market price of the Company's common stock was
$2.13. A total of approximately 650,000 options were exchanged and are included
in the "granted" and "cancelled" columns for fiscal 1998 in the tables for the
1992 and 1997 Plans.
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 has 1,000,000 authorized shares and provides
that each new director receive 100,000 stock options upon being appointed to the
Board of Directors. For each three years of service thereafter they are eligible
for an additional 100,000 options. In addition, Board members who participate on
committees are entitled to receive 20,000 options annually.
During fiscal 1999, the Company issued an aggregate of 400,000 options to
new board members or board members that reached their three year term and 60,000
options to various Board members for their participation on committees.
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 two years following the date the
optionee ceases to serve as a director of the Company with certain exceptions.
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 1999 Fiscal 1998
----------- -----------
Net loss applicable to common shares - as reported $(1,157,000) $(3,390,000)
Net loss applicable to common shares - pro forma (3,157,000) (5,220,000)
Net loss per common share - as reported (.16) (.73)
Net loss per common share - pro forma (.44) (1.13)
The fair value of each option grant is calculated using the following weighted
average assumptions:
Fiscal 1999 Fiscal 1998
----------- -----------
Expected life (years) 5 5
Interest rate 5.08% 6.92%
Volatility 117% 77%
Dividend yield 0 0
NOTE M - SEGMENT AND CUSTOMER INFORMATION
For the year ended March 31, 1999 sales made to UNISYS and to customer
leads furnished by UNISYS accounted for approximately 20% of the Company's total
revenues. Amounts due from these customers were approximately 20% of the
Company's accounts receivable balance as of March 31, 1999. For the year ended
March 31, 1998 sales made to UNISYS and to customer leads furnished by UNISYS
accounted for approximately 18% of the Company's total revenues. Amounts due
from customers as a percent of the Company's accounts receivable balance as of
March 31, 1998 were, in approximate percentages, Lason Inc. 17% and Putnam Trust
Company, 11%.
The Company adopted Statement of Financial Accounting Standards No. 131,
"Disclosures about Segments of an Enterprise and Related Information" ("SFAS
131") in the fiscal year ended March 31, 1999. SFAS 131 establishes standards
for reporting information regarding operating segments in annual financial
statements and requires selected information for those segments to be presented
in interim financial reports issued to stockholders. SFAS 131 also establishes
standards for related disclosures about products and services, and geographic
areas. Operating segments are identified as components of an enterprise about
which separate discrete financial information is available for evaluation by the
chief operating decision maker or decision making group, in making decisions how
to allocate resources and assess performance. To date, the Company has viewed
its operations as principally one segment, the developing marketing and
supporting imaging, document and data management, and archival products and
related services.
Revenue was derived from customers in the following geographic areas (in
thousands)
Year ended March 31
-------------------
1999 1998
---- ----
North America $10,796 $8,478
Europe 1,131 1,007
Other 479 320
------- ------
Total $12,406 $9,805
======= ======
<PAGE>
Exhibit 10.60
AMENDMENT TO EMPLOYMENT AGREEMENT
AMENDMENT to Employment Agreement dated September 11, 1998 made this 17th
day of March, 1999, by and between INSCI Corp. (hereinafter referred to as
"EMPLOYER"), having its principal place of business at Two Westborough Business
Park, Westborough, MA 05181 and E. TED PRINCE residing at 10 West 74th Street,
Apartment 2F, New York, New York 10023, (hereinafter referred to "EMPLOYEE").
W I T N E S S E T H:
WHEREAS, EMPLOYER and EMPLOYEE have heretofore entered an Employment
Agreement (the "Agreement") dated September 11, 1998; and
WHEREAS, EMPLOYER presently employs EMPLOYEE as Chief Executive Officer
and desires to extend such employment; and
WHEREAS, the Compensation Committee of EMPLOYER has provided its
recommendations to the Board of EMPLOYER; and
WHEREAS, in the opinion of the Board of Directors of EMPLOYER, the success
of the business operations of the EMPLOYER is contingent upon the performance of
EMPLOYEE.
NOW, THEREFORE, IN CONSIDERATION OF THE MUTUAL COVENANTS AND
PROMISES AND OTHER GOOD AND VALUABLE CONSIDERATION, THE
RECEIPT OF WHICH IS HEREBY ACKNOWLEDGED, IT IS MUTUALLY
AGREED AS FOLLOWS:
FIRST: The Agreement dated September 11, 1998 is affirmed as valid and binding,
and amended only by the terms of the within Amendment. The within Amendment is
an Addendum to the Agreement and made a part of said Agreement.
SECOND: Paragraph SECOND of the Agreement is amended so as to extend the
expiration term of EMPLOYEE's employment, under the Agreement, to September 30,
2001. In the event that EMPLOYER does not intend to renew or extend EMPLOYEE's
employment, then in that event, EMPLOYER agrees to provide EMPLOYEE ninety (90)
days written notice of intent not to renew prior to September 30, 2001, and
EMPLOYEE will be entitled to receive the severance compensation as provided for
in Paragraph SEVENTH (g) of the Agreement.
THIRD: Paragraph FOURTH of the Agreement is amended as follows:
The Agreement is hereby amended so as to state that EMPLOYER shall pay to
EMPLOYEE, and EMPLOYEE agrees to accept, effective April 1, 1999, as salary
compensation for services hereunder, the annual rate of $250,000 per annum or
the sum of $20,833.33 per month for the term of the within Amendment. It is
understood and agreed that as per paragraph FOURTH of the September 11, 1998
Agreement, EMPLOYEE will be immediately vested with 200,000 stock options to
purchase 200,000 shares of the common stock of the Company at $.95 per share
(the fair market value as of July 17, 1998), and that said options will be for a
term of ten (10) years or until April 1, 2009.
Additionally, it is further agreed that, upon execution of the within
Amendment, EMPLOYER grants to EMPLOYEE 300,000 additional stock options at $1.75
per share (at or above the fair market value at January 15, 1999), vesting 50%
per year (150,000 stock options on September 30, 2000 and the balance of 150,000
stock options on September 30, 2001 commencing the date of the within Amendment,
and that the aforesaid 300,000 stock options will expire ten (10) years from the
date hereof, or on April 1, 2009.
Furthermore, EMPLOYER and EMPLOYEE agree that EMPLOYEE will be entitled to
receive an incentive compensation bonus of up to a maximum of 40% of EMPLOYEE's
base salary ($250,000) to be awarded to EMPLOYEE based upon performance targets
established by the Board during each fiscal year of the term of the within
Amendment. EMPLOYER agrees to provide written notification of the performance
targets to EMPLOYEE within thirty (30) days from the date of the within
Amendment.
Additionally, Paragraph FOURTH is further amended so as to state that the
terms of the existing fully vested stock options granted to EMPLOYEE, consisting
of 950,000 stock options at $1.66 per share and 250,000 stock options at $2.00
per share, be extended until June 16, 2005.
FOURTH: The within Amendment was approved by the Compensation Committee and
ratified, adopted and confirmed by a unanimous Consent Resolution of the Board
of Directors of EMPLOYER.
FIFTH: EMPLOYEE warrants and represents to EMPLOYER that EMPLOYEE has had
sufficient and adequate opportunity to consult with EMPLOYEE's counsel
concerning the within Agreement and is aware that EMPLOYER is relying upon the
within representation concerning entering into the Agreement herein.
SIXTH: EMPLOYER warrants and represents that it will take the necessary action
to file the appropriate disclosure report concerning the within Amendment with
the Securities and Exchange Commission.
SEVENTH: All notices required or permitted to be given by either party hereunder
shall be in writing and mailed by registered mail, return receipt requested and
by regular mail, to the other party addressed as follows:
If to EMPLOYER at:
INSCI Corp.
Two Westborough Business Park
Westborough, MA 01581
If to EMPLOYEE at:
10 West 74th Street
Apt. 2F
New York, NY 10023
Any notice mailed, as provided above, shall be deemed completed on the date of
receipt, or five (5) days from the postmark on said postal receipt.
IN WITNESS WHEREOF, the parties have hereunto set their hands and seals
the day, month and year first above written.
INSCI CORP. (EMPLOYER)
BY:
---------------------------------
/s/ E. Ted Prince
E. TED PRINCE (EMPLOYEE)
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE ANNUAL
10-KSB FOR INSCI'S 1999 FISCAL YEAR
</LEGEND>
<CIK> 0000878612
<NAME> m7rpwrt@
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> MAR-31-1999
<PERIOD-END> MAR-31-1999
<CASH> 1867
<SECURITIES> 0
<RECEIVABLES> 3088
<ALLOWANCES> 100
<INVENTORY> 43
<CURRENT-ASSETS> 5073
<PP&E> 1624
<DEPRECIATION> 945
<TOTAL-ASSETS> 8629
<CURRENT-LIABILITIES> 3822
<BONDS> 0
0
22
<COMMON> 77
<OTHER-SE> 4708
<TOTAL-LIABILITY-AND-EQUITY> 8629
<SALES> 12406
<TOTAL-REVENUES> 12406
<CGS> 4475
<TOTAL-COSTS> 4475
<OTHER-EXPENSES> 8459
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> (77)
<INCOME-PRETAX> (451)
<INCOME-TAX> 0
<INCOME-CONTINUING> (451)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (451)
<EPS-BASIC> (0.16)
<EPS-DILUTED> (0.16)
</TABLE>
