<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, 2000 1-12966
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INSCI-STATEMENTS.COM, CORP.
FORMERLY INSCI CORP.
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(Exact name of registrant specified in its charter)
DELAWARE TWO WESTBOROUGH BUSINESS PARK, WESTBOROUGH, MA 06-1302773
-------- ---------------------------------------------- ----------
(State or other (Address of Principal executive offices) (I.R.S. Employer
jurisdiction of Identification
incorporation No.)
or organization)
01581
Zip Code
(508) 870-4000
(Registrant's Telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act: NONE
Securities registered pursuant to Section 12(g) of the Act:
Title of each class
COMMON STOCK, $.01 PAR VALUE
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 _____
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, 2000 were $11,020,000.
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 23, 2000, as reported by NASDAQ, was
approximately $49,933,000. As of June 23, 2000, registrant had outstanding
12,681,497 shares of Common Stock.
Part III incorporates information by reference to the registrant's definitive
proxy statement for its 2000 Annual Meeting of Stockholders to be filed with the
Commission within 120 days following March 31, 2000.
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INSCI-STATEMENTS.COM, CORP.
FORM 10-KSB
FOR THE FISCAL YEAR ENDED MARCH 31, 2000
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 ....... 9
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder
Matters ..................................................... 9
Item 6. Management's Discussion and Analysis or Plan of Operations ... 10
Item 7. Financial Statements ......................................... 16
Item 8. Changes In and Disagreements with Accountants on Accounting
and Financial Disclosures .................................... 16
PART III
Item 9. Directors, Executive Officers, Promoters and Control Persons;
Compliance With Section 16(a) of the Exchange Act ............ 16
Item 10. Executive Compensation ....................................... 16
Item 11. Security Ownership of Certain Beneficial Owners and Management 17
Item 12. Certain Relationships and Related Transactions ............... 17
Item 13. Exhibits and Reports on Form 8-K ............................. 17
SIGNATURES .............................................................. 18
EXHIBIT INDEX ........................................................... 21
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PART I
ITEM 1. DESCRIPTION OF BUSINESS
OVERVIEW
Certain statements contained in this Annual Report on Form 10-KSB,
including, without limitation, statements containing the words "believes,"
"anticipates," "estimates," "expects," and words of similar import, constitute
forward looking statements within the meaning of the Private Securities
Litigation Reform Act of 1995. Readers are referred to the "Risk Factors"
section of the "Management Discussion and Analysis of Financial Condition and
Results of Operations" incorporated by reference and contained herein, which
identify important risk factors that could cause actual results to differ
materially from those contained in the forward looking statements.
insci-statements.com, corp. (insci) (together with its subsidiaries
"insci" or the "Company") (Nasdaq: INSI) is a provider of Internet-based and
on-site enterprise software and services solutions for electronic statement
presentment (ESP), digital document storage, workflow and electronic commerce.
Our solutions incorporate enhanced Internet and electronic commerce capabilities
for managing and securely distributing large volumes of high-value business
transaction documents and reports in on-site enterprise systems environments or
via our wholly-owned business-to-business Internet Application Service Provider
(ASP), InfiniteSpace.com, Corp. (Infinite).
insci was incorporated in Delaware in December 1989 and is
headquartered in Westborough, Massachusetts. The mailing address for the
Company's headquarters is 2 Westborough Business Park, Westborough MA. Its
telephone number at that location is 508-870-4000. Insci can also be reached at
its Web site http://www.insci.com.
During fiscal 2000, we implemented several key strategic business
initiatives. Our management believes that the investments made in these areas
are vital to attaining sustainable long-term competitive advantages. Among these
initiatives were:
o Repositioned the company as a leader in the electronic statement presentment
(ESP) market, forecast by industry analysts to have rapid growth.
o Launched a new, wholly-owned subsidiary, InfiniteSpace.com, Corp., to offer
ESP services on an outsourced basis as an application service provider to a
new and fast-growing ESP market segment.
o Acquired Internet Broadcasting Corporation, Inc., a technology leader in the
secure distribution of electronic documents.
o Expanded international sales especially in Latin America and Asia.
During fiscal 2000 we separated our two principal businesses, both
operationally and financially, and established our business-to-business,
electronic statement presentment application service provider,
InfiniteSpace.com, Corp., as a separate wholly-owned subsidiary. Located in
Westborough, MA, The initial focus of Infinite is on providing electronic
statement presentment services to the financial services industry, a sector
where we currently do approximately 60% of our business. Infinite will also
introduce a range of innovative new ASP based products for the rapidly emerging
electronic statement/bill presentment market to service the business-to-business
needs of other industries.
insci's software products 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 our 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.
Our 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. Our software and ASP products provide 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.
We also offer numerous services including consulting, systems
integration, software installation, training, software maintenance and technical
support. Our 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.
Our strategic relationships include Unisys, Xerox, Fuji/Xerox, Moore
North America, Moore Emerging Technologies, and PFPC (formerly First Data
Investor Services Group). Through marketing efforts with our partners and our
direct sales force, we have a presence in most major corporate sectors. ESP+ is
used in the banking, financial services, telecommunications, insurance,
utilities, manufacturing, healthcare, and government industries and is adaptable
to many other industry environments.
INFINITESPACE.COM
Last fall we announced plans to offer our ESP+ products to customers
wishing to use them on an outsourced basis. We believe this ASP delivery method
has great potential for the small to medium enterprises that do not have the
resources or desire to purchase, install and operate our ESP+ software. In
January 2000, we formed InfiniteSpace.com as a wholly-owned subsidiary to
concentrate exclusively on the ASP business.
Infinite's Internet-based services are designed to provide a rapid and
cost effective means for financial services companies -- particularly mutual
funds, credit card companies, securities broker/dealers, 401(k) and variable
annuity providers, and banks -- as well as health care providers and other
businesses to outsource comprehensive Web-based document management and
distribution capabilities. Benefits include significantly reduced cost of
ownership, faster time to market with products and services, minimal
infrastructure support requirements, and improved customer service. Our service
employs sophisticated security, scalability to accommodate high volume usage,
capabilities to ensure uninterrupted operations, and open system architecture
for easy integration with a customer's existing computing, printing, database,
and portal resources.
We intend to sell our products and services through new distribution
partnerships with back office recordkeepers, and print/mail outsourcing
providers as well as by leveraging insci's existing reseller relationships.
Infinite charges customers for services on the basis of transactions processed
creating a highly valuable recurring revenue stream. Providing services on a
per-transaction basis, allows resellers and customers to enter the market
without having to make large up-front investments in technology and personnel.
Since its founding, Infinite has opened its Galaxy2 data center housed in a new
state-of-the-art facility in Waltham, MA. The center is built on fully redundant
servers, routers and switching equipment, includes two levels of hardware load
balancing and also features:
o HVAC temperature control and separate cooling zones for constant climate
o Seismically braced racks for earthquake protection
o State-of-the-art smoke detection and fire suppression systems
o Fully redundant power and backup generators
o 24 hour by 7 day secured access
o Motion sensors, video camera surveillance, and security breach alarms
Infinite has also recruited and hired a full management team with extensive
experience in building technology service businesses
Additionally, Infinite has announced the signing of its first two distribution
partners -- Standard Register and Bell & Howell.
Infinite believes that its unique service offerings, combined with the high
volume opportunities in the Electronic Bill Payment and Presentment ("EBPP") and
ESP markets, will allow it to become a leading application service provider for
high-end, Internet-based electronic statement presentment and electronic bill
presentment and payment services.
MANAGEMENT CHANGES
On November 9, 1999, at our Annual Meeting of Stockholders, E. Ted
Prince, 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.
On December 22, 1999, Leonard S. Simon was appointed to the Board of
Directors.
As of December 22, 1999, Darryl R. Dobin resigned as President and
Chief Operating Officer and as a director of the company.
On December 28, 1999, John C. Pemble was appointed President and Chief
Operating Officer of the company.
On June 1, 2000, Yaron I. Eitan was appointed to the Board of
Directors. This appointment expands the board to seven members.
SOFTWARE PRODUCTS AND SERVICES
o THE INSCI-STATEMENTS.COM ESP+ SOLUTIONS SUITE
Our ESP+ family of integrated, client/server based software solutions
enables customers to store, manage, access and distribute high volumes of
transaction documents and reports. This software utilizes magnetic and optical
disk, CD and 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 deep archive 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 ESP+ Solutions 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.
Our core product technology ESP+archive(TM), formerly known as
COINSERV(TM), is based on client-server architecture that is highly scalable
with versions for Windows(R) NT and such UNIX platforms as IBM AIX, Sun(R)
Solaris(TM), HP HP/UX, SCO UnixWare and Unisys SVR4. COINSERV for Windows NT,
the earlier version of ESP+archive, was selected as Product of the Year over
competing products in the COLD (Computer Output to Laser Disk)/Enterprise Report
Management (ERM) category by Imaging and Document Solutions Magazine in its
January '99 issue. ESP+archive provides the software platform of our portal
services business. insci's products are rated in the top of their class by
research and analyst groups such as Doculabs, Gartner Group, IMerge Consulting
and others.
ESP+ 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. ESP+ 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, Adobe PDF, and XML; and scanned documents in TIFF format. The ESP+
Solutions Suite encompasses the following products:
o ESP+ARCHIVE FOR WINDOWS NT AND UNIX - DEEP DOCUMENT ARCHIVE
Both in its award-winning production NT version and in the time-proven
UNIX platform, the ESP+archive system provides high-performance ingestion,
indexing, storage management, and retrieval for high volumes of computer
produced statements, confirms, bills, invoices and reports. This includes
handling diverse data streams such as standard ASCII and EBCDIC formats, IBM(R)
Advanced Function Presentation(R) (AFP), Xerox Metacode(TM) and DJDE, Adobe(R)
Portable Document Format (PDF) and XML. It also provides rapid application
deployment through productivity tools like ESP+designer(TM) for document
definition setup and ESP+forms(TM) for the development of PDF-based form
overlays for plain text documents.
o ESP+IMAGE - IMAGE CAPTURE AND PROCESSING
ESP+image(TM) provides high-volume and high-throughput document image
capture, indexing and image processing, either centrally or distributed, in
preparation for document image storage in the ESP+archive. ESP+image enables the
digital document archive with common storage, indexing and retrieval of images
along with existing computer produced output.
o ESP+FLOW - BUSINESS PROCESS AND DOCUMENT WORKFLOW
ESP+flow(TM) provides workflow activation of business documents and
business processes. Whether triggered by documents stored in the repository or
by a business activity (or combination of activities), ESP+flow supports the
design and flow of business processes and their requirements to link to the
necessary underlying supporting information.
o ESP+WEB - WEB ACCESS CLIENT
In addition to the standard ESP+archive Windows desktop client
interface, today's businesses require Web-based access to their digital
documents. ESP+web provides that capability in an easy-to-use Web interface that
uses the same search and presentation concepts as the Windows client, with no
proprietary plug-ins or database connections required by the end user.
o ESP+DESKTOP -WINDOWS ACCESS CLIENT
ESP+desktop is our standard 32-bit Windows client access solution. It
provides access to all of the features of the ESP+archive, including support for
viewing and printing intelligent data stream documents and scanned images.
ESP+desktop also provides an API for integration with 3rd party applications.
ESP+desktop software will run on Microsoft Windows 98, Windows NT Workstation
and Windows NT Server.
o ESP+DIRECT - AUTOMATED INTERNET E-MAIL NOTIFICATION & DELIVERY
ESP+direct automates the distribution of e-mail, faxing and printing of
documents contained in ESP+archive. Triggered either by the arrival of these
documents or through ad-hoc requests, automatic distribution supports today's
emerging e-business initiatives.
o ESP+CD - DOCUMENT PACKAGING AND DISTRIBUTION ON CD
ESP+CD allows creation and distribution of custom self-contained CDs
with their own digital document repositories and all necessary search, retrieval
and viewing components. CD content may be automatically extracted or requested
on an ad-hoc basis from the main ESP+archive, or archived directly from other
sources. There are still many situations in which Internet and Web distribution
do not fulfill the distribution requirement, and ESP+CD provides a viable
production solution for these applications.
o ESP+LINK FOR ERP - ARCHIVE INTEGRATION WITH SAP R/3
ESP+link for ERP provides SAP-certified compliance with SAP's
ArchiveLink interface. As an R/3 system grows, its database becomes overloaded
with archive information needing an outlet. The ESP+link module allows
businesses to additionally leverage the use of their ESP+archive system to
satisfy this requirement with a robust and scaleable repository for storage of
SAP R/3 objects.
o ESP+ANALYZER - DOCUMENT DATA MINING & REPORT GENERATION
ESP+analyzer lets businesses unlock the knowledge contained in their
stored documents. It provides a means of extracting lines, columns and fields
from text-based documents to build ad-hoc reports, tables, graphs, or to export
data for other applications.
o APITOOLKIT - API ACCESS FOR CUSTOM APPLICATIONS
APItoolkit allows businesses to build their own applications and
interfaces that make use of the document repository and its contents, while
sparing them from re-engineering the underlying technologies for searching and
viewing. When standard access isn't enough, or tight integration to another
application is required, this API provides the additional functionality to
incorporate that access into critical applications.
PROFESSIONAL SERVICES GROUP
Utilizing our core products and technologies and the capabilities of
our consulting resources, we have developed specialized systems integration
approaches and methodologies that allow us 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, we provide services and solutions to global problems
in the customer service and data storage areas. With these project management,
technical, product and architectural skills, we are 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.
STRATEGIC ALLIANCES
We have developed several strategic business alliances through which we
extend our marketing efforts and generate sales. In the course of fiscal 2000,
Unisys Corporation, an existing reseller of our products, implemented a program
to bundle products with their ClearPath HMP Enterprise servers. In September
1999, Xerox Corporation signed an agreement to resell insci's family of
products. We also participated in 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.
For fiscal 2000, we received in excess of ten percent of our total
revenues from both Unisys Corporation and Xerox Corp. A decline in revenues from
these sales partners in future periods could materially effect our revenues and
operating results.
We currently have agreements with a limited number of value added
resellers ("VARs"). VARs generally are organizations that sell their own
computer application software systems to special vertical markets, such as
banks, health care organizations or credit unions. VARs sell our products as
part of an integrated system of hardware and software for the VARs' customers.
We sell our products directly to VARs for resale to the VARs' customers.
PRODUCT DEVELOPMENT
The market for data storage and retrieval products is highly
competitive and characterized by frequent technological change. Consequently, we
must continually enhance our products and continue to develop new products. We
utilize our staff of development engineers and customer support personnel to
identify, design, and develop product enhancements and new products. We have
additionally increased the amount of development we perform by locating some
work offshore where resources are less costly, thus enabling us to compete more
effectively against many competitors with far greater resources than we possess.
MARKETING AND SALES
We market our products through our own sales force in combination with
strategic alliances and VAR's. Marketing activities include trade journal
advertising, distribution of sales and product literature describing our
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 our products.
Our direct sales force focuses on prospects for our products that are
in high volume, high performance environments. Sales representatives initiate
contacts with prospective end user customers and make direct sales of our
products to those prospects. They also provide assistance and make joint
presentations with our resellers and strategic business alliances. Additionally,
they frequently work with our systems engineers to provide high level technical
consulting services both before and after a sale.
We are likely to enter into additional marketing alliances that will
have the potential to generate further significant sales. In particular we
believe that companies in the imaging, workflow, information retrieval,
electronic commerce, Internet and printing areas are likely to require our
products in order to meet their own objectives. We intend to continue
discussions with such companies with a view to closing further such alliances.
VENDORS AND SUPPLIERS
We have reduced our sales of third party hardware in order to focus on
sales of our own software and services products, which generate higher gross
margins. Typically, the hardware that hosts our software products is either
owned or purchased directly by our customers. Accordingly, sales of third party
hardware are minimal and we have no material dependence on third party hardware
suppliers in order to attain our revenues.
COMPETITION
There are a number of suppliers offering electronic document archiving,
document management, report management, workflow management, imaging,
information retrieval, electronic bill presentment and e-commerce products. In
many cases, we believe that our 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
We believe that our market positioning, strategic alliances and product
functionality allow us to compete favorably with products offered by our primary
competitors. However, competition among companies providing these products is
intense and many of our primary competitors have substantially greater financial
resources, more personnel, greater access to related products and broader
contact with potential customers than we have.
PROPRIETARY INFORMATION
We do not hold any patents and currently rely upon a combination of
trademarks, contractual rights, trade secrets and copyright laws to protect our
proprietary rights in our products. We seek to protect our proprietary rights in
our products through restrictions on disclosure and use set forth in customer
agreements and employee nondisclosure agreements. Additionally, we require that
all of our employees execute confidentiality, trade secret and invention
agreements in connection with their employment by us. Despite these precautions,
it may be possible for third parties, without authorization, to copy or
duplicate our proprietary software or to obtain and use our proprietary
information. Existing copyright laws afford only limited practical protection
for computer software, and the laws of certain foreign countries do not protect
our proprietary rights in our products to the same extent as the laws of the
United States. Because of the rapid pace of technological change in our
industry, we believe that the legal protection for our products is less
significant for our success than the knowledge, technical expertise and
marketing skills of our personnel, the frequency of product enhancements and the
timeliness and quality of support services we provide.
EMPLOYEES
We employed 85 persons as of March 31, 2000. Our future success
depends, in part, on our ability to retain existing and to attract new
management and technical employees. We have no collective bargaining agreements
and consider our relationships with our employees to be good.
ITEM 2. DESCRIPTION OF PROPERTIES
Effective October 1, 1994, we entered into a ten-year lease for
approximately 21,650 square feet of office space located in Westborough,
Massachusetts. On November 1, 1995, we subleased for a five-year term
approximately 4,315 square feet of our Westborough office space. We amended our
Westborough lease on March 15, 1999 to include additional office space of 2,997
square feet. The lease was further amended on March 15, 2000 to include an
additional 4,798 square feet of office space to be utilized by our wholly owned
subsidiary, InfiniteSpace.com, Corp.
Pursuant to the acquisition of Internet Broadcasting Company, Inc., we
are obligated on the remaining term of a three-year lease that expires January
2001. This lease is for approximately 2,700 square feet of office space located
in Pompano Beach, Florida.
Management considers our present office space adequate for our
foreseeable needs.
ITEM 3. LEGAL PROCEEDINGS
None
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITIES HOLDERS
No matters were submitted to a vote of security holders during the
fourth quarter of the fiscal year covered by this report.
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS
Our Common Stock has been traded on the NASDAQ Small Cap Market since
April 14, 1994, the effective date of our initial public offering. The trading
symbol for our Common Stock is "INSI". 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 1999 FISCAL 2000
COMMON STOCK PRICE
Quarter High Low High Low
First $1.56 $0.75 $4.81 $2.19
Second 1.31 0.56 6.00 3.81
Third 0.94 0.56 5.25 3.25
Fourth 3.38 1.19 8.63 4.63
On June 23, 2000, the closing bid and ask prices of the common stock
were $3.88 and $4.00. Our 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 23, 2000, we had 147 holders of record of our common stock.
No dividends have been declared on our Common Stock for the two most
recent fiscal years. We currently intend to retain our earnings (when realized)
to finance future growth and therefore do not anticipate paying any cash
dividends on our common stock for the foreseeable future. Additionally, our
current credit facility with Silicon Valley Bank contains a covenant that
prevents us from declaring a cash dividend on our Common Stock without Silicon
Valley's consent.
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, we 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, we engaged in substantial efforts to
expand the size and geographical coverage of its direct sales force and its
network of distributors. We 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.
On April 21, 1994, we received net proceeds of approximately $7,159,000
from an initial public offering of our equity securities. We used the proceeds
of our 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, we 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, we 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 we completed a private
placement financing under Regulation "D" for the sum of $1,350,000, before
underwriting commissions and expenses.
On March 3, 1997, we 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 we 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. During
fiscal 1999, we closed our 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
our products.
On December 10, 1999, we acquired all of the common stock of Internet
Broadcasting Company, Inc. (IBC) in exchange for 1,000,000 shares of our Common
Stock. This acquisition was accounted for as a pooling of interests, and
accordingly all prior period consolidated financial data has been restated to
include the results of operations, financial position and cash flows of IBC.
On December 17, 1999, we completed a private placement financing under
Regulation "D. Proceeds from this offering, before commissions and expenses,
totaled $2,400,000.
On May 24, 2000, we acquired all of the common stock of Lognet 2000,
Inc. (formerly Lognet, Inc.) in exchange for 2,500,000 restricted shares of our
common stock resulting in a total purchase price of $8.4 million. This
acquisition was accounted for under the purchase accounting method.
RESULTS OF OPERATIONS, OVERVIEW
The following discussion should be read in conjunction with the
financial statements and notes thereto contained elsewhere in this document.
Revenues were $11.0 million for fiscal 2000 versus $12.6 million for
fiscal 1999. Lower revenues were primarily the result of the industry wide
impact of customers and prospects postponing major software purchases as they
addressed Y2K concerns.
Consolidated net loss for fiscal 2000 was $9.5 million, which includes
non-cash charges of $3.9 million. These non-cash charges are comprised of $1.1
million for valuation of options and warrants issued for services, $2.8 million
relating to the write-down of capitalized software. The net loss also includes
$1,181,000 for losses incurred by the Internet Broadcasting Company prior to its
acquisition by insci. Consolidated loss also includes $1.3 million of start-up
expenses for our newly formed subsidiary, InfiniteSpace.com. Consolidated net
loss for fiscal 1999 was $1.6 million which includes $1.2 million for losses
incurred by IBC prior to its acquisition by insci. Please refer to the following
summary table.
YEARS ENDED MARCH 31 (in $ thousands) 2000 1999
---- ----
REVENUE
Insci $ 10,854 $12,406
IBC 166 212
Infinite - -
-------- -------
$ 11,020 $12,618
======== =======
NET (LOSS)
Insci, major segments:
Operating loss before non-cash charges $ (2,650) $ (368)
Non-cash charges for options and warrants (1,114) (83)
Software capitalization write-down (2,758) -
-------- -------
Total insci (6,522) (451)
IBC (1,664) (1,152)
Infinite (1,280) -
-------- -------
Net loss $ (9,466) $(1,603)
======== =======
COMPARISON OF RESULTS OF OPERATIONS, FISCAL YEARS ENDED MARCH 31, 2000 VERSUS
MARCH 31, 1999
The following table sets forth, for the periods indicated, the
percentage relationship that certain items of our results of operations bear to
revenue:
FISCAL YEAR ENDED MARCH 31,
2000 1999
--------- ---------
% %
Revenue 100 100
Cost of revenue 43 36
------ ------
Gross margin 57 64
------ ------
Expenses
Sales and marketing 36 33
Product development 31 21
General and administrative 44 23
Non-recurring expenses:
Software capitalization write-off 25 -
Acquisition related expenses 6 -
------ ------
Total expenses 142 77
------ ------
Loss from operations (85) (13)
Interest / other income (expense) (1) -
------ ------
Net loss (86) (13)
====== ======
REVENUE. We develop, sell, install and support electronic document
repository software with integrated Internet, imaging, workflow,
print-on-demand, electronic distribution and archive software for the enterprise
level (high volume production) market. 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. We sell our products
through a combination of a direct sales force and indirectly through VARs,
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 VARs and distributors.
The following table compares total revenues by quarter for fiscal 1999 and 2000:
TOTAL REVENUES BY QUARTER
($000)
FISCAL 1999 FISCAL 2000
----------------------------------------------------------------------
Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4
3,222 2,462 3,729 3,205 2,455 3,870 3,116 1,579
The following table compares insci's revenue for fiscal 2000 versus fiscal 1999
(in thousands):
FISCAL YEAR ENDED MARCH 31,
REVENUES 2000 1999 % CHANGE
-------- ------- ------- --------
Product revenue 4,746 5,992 (21)%
------- -------
Professional services 3,138 3,798 (17)
Maintenance services 3,136 2,828 11
------- -------
Total services revenue 6,274 6,626 (5)
------- -------
Total revenue $11,020 $12,618 (13)
======= =======
Revenues for fiscal 2000 totaled $11,020,000 and decreased by 13% as
compared to revenues of $12,618,000 for fiscal 1999. This decrease in revenue
was due principally to the continuing effects of the industry-wide slowdown in
software sales as customers and prospects focused on remaining Year 2000 ("Y2K")
issues. While the current year was impacted by Y2K, we expect revenues to
increase in future quarters as customer concerns over Y2K issues diminish.
Product revenue was $4,746,000 for fiscal 2000 and decreased by 21%
compared to product revenue of $5,992,000 for fiscal 1999. As previously noted,
this decrease was primarily the result of the Y2K impact on the software
industry during this last year. Service revenues, which include professional
services and customer support maintenance services, totaled $6,274,000 for
fiscal 2000, and decreased by 5% compared to revenues of $6,626,000 for fiscal
1999. The decrease of 17% in professional services relates to the decrease in
product revenue, as our professional services are typically provided with the
installation of our software products. Maintenance revenue increased by 11% over
last year related to the increase in our installed base of customers.
For fiscal 2000, we received in excess of ten percent of our total
revenues from both Unisys Corporation and Xerox Corp. A decline in revenues from
these sales partners in future periods could materially effect our revenues and
operating results.
We believe that the performance capabilities of our software and
application provider services provide favorable performance differentiation from
competitors' products. This differentiation, combined with the investment we
have made in the acquisition of IBC, combined with the establishment of our
wholly owned subsidiary, InfiniteSpace.com will potentially help our future
revenues to grow. However, the long sales cycle associated with our 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 2000 was $4,747,000
or 43% of revenue, compared to $4,475,000 or 36% of revenue, for fiscal 1999.
The increase in the cost of revenue percentage for fiscal 2000 is the result of
an increased mix of services revenues, which inherently have a higher cost of
revenue than product revenues.
Cost of revenue for product sales was $1,747,000 or 37% of product
revenue for fiscal 2000 compared to $1,288,000 or 21% of product revenue in
fiscal 1999. Costs associated with product revenues include the costs of
hardware and software products purchased from third parties for resale, and
amortization of capitalized software development expenses and capitalized
purchased software costs. Costs of product revenue vary depending upon the mix
of software and hardware included in total systems revenue. The increase in the
product cost of revenue percentage for fiscal 2000 is primarily the result of
increased software amortization costs, which totaled $1,149,000 for fiscal 2000
compared to $884,000 for fiscal 1999. Amortization charges were higher in fiscal
2000 due to increases related to our NT and Web based products, which is where
the majority of our development efforts have been spent during the current year.
During fiscal 2000, we also wrote down $2,758,000 of capitalized software (see
Non-recurring expenses in the Statements of Operations). As a result of this
write-down, amortization charges for future periods will decrease substantially
as will cost of revenue as a percentage of product revenue.
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 service
revenues was $3,000,000 or 48% of service revenues for fiscal 2000 compared to
$3,187,000 or 48% of service revenues for fiscal 1999. 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 $4,011,000 or
36% of revenues for fiscal 2000 compared to $4,187,000, or 33% of revenue, for
fiscal 1999. Expenses decreased for fiscal 2000 primarily as the result of
decreased sales commissions associated with this year's revenue decline. To the
extent that future revenues grow, we expect growth in revenues to exceed the
growth of sales and marketing expenses, and therefore, for sales and marketing
expenses as a percentage of revenues to decrease.
PRODUCT DEVELOPMENT. Our 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 with primary focus on the electronic bill presentment (EBP) market.
This development program includes development of new NT and Web based products
combined with enhancements of existing Unix based products. During fiscal 2000,
we released significant enhancements to our Windows NT and Web based suite of
products, which combine an electronic digital document repository with internet
access and integrated imaging and workflow.
The additions to our product offerings, along with enhancements to
existing products, have been funded by our gross expenditures for software
products. Gross product development expenses for fiscal 2000 were $4,509,000,
before capitalization of software expenses of $1,158,000, for net product
development expenses of $3,351,000. Gross product development expenses for
fiscal 1999 were $4,108,000, before capitalization of software expenses of
$1,398,000, for net product development expenses of $2,710,000. Gross product
expenditures increased for fiscal 2000 as the result of expenditures related to
products for the EBP market. We plan to continue and possibly increase our
expenditures for product development in fiscal 2001 in order to maintain product
leadership in the markets served.
GENERAL AND ADMINISTRATIVE. General and administrative expenses were
$4,815,000 or 44% of revenue for fiscal 2000 compared to $2,847,000, or 23% of
revenue, for fiscal 1999. The increased expenses for fiscal 2000 reflect
non-cash charges of $1,114,000 related to options and warrants issued to pay for
professional, investment banking and investor relations services. The increase
in G&A expenses also reflect start-up and management infrastructure expenses
associated with the establishment of our ASP subsidiary, InfiniteSpace.com.
NON-RECURRING EXPENSES. During fiscal 2000, we redirected the focus of
our business to address the electronic statement presentment market. This
redirection required substantial modifications, integration and revisions to
versions of developed and purchased software previously capitalized, thus making
these versions obsolete. As a result of these factors, during fiscal 2000 we
wrote-down $2,758,000 of capitalized software development and capitalized
purchased software costs. Acquisition related expenses of $712,000 were
primarily for investment banking, legal and accounting expenses associated with
our acquisition of IBC.
INTEREST EXPENSE. Interest expense for fiscal 2000 was $112,000, offset
by interest income of $63,000 for net interest expense of $49,000. Interest
expense in fiscal 1999 was $79,000, offset by interest income of $77,000 for net
interest expense of $2,000. The increase in interest expense in fiscal 2000
reflects the borrowings from the bank line of credit and the additional capital
lease obligations entered into in fiscal 2000.
NET LOSS. Net loss for fiscal 2000 was $9,466,000 compared to a net
loss of $1,603,000 for fiscal 1999. The increase in net loss for fiscal 2000
reflects lower revenues, start up expenses for Infinite, operating losses for
IBC prior to our acquisition of that company, and non-cash charges for options
and warrants issued as payment for services.
FORWARD LOOKING COMMENTS
We believe that opportunities to increase future revenues are best
served by supporting investments that address the rapidly expanding market for
Internet based statement/bill presentment services and digital document storage,
workflow, and electronic commerce. We are addressing this market by separating
our two principal businesses, on-site software solutions and portal based
solutions, both operationally and financially, through the establishment of our
business-to-business, electronic statements presentment Internet portal as a
separate wholly-owned subsidiary named InfiniteSpace.com. We have also continued
to increase our expenditures for product development with the objective of
continuing to provide leading products to the markets that we serve. We are not
able to predict, however, when and to what degree future revenue increases from
our Internet based products may occur. In addition, the long sales cycle
associated with our 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, 2000 we had $1,911,000 of cash and cash equivalents and
a working deficit of $60,000 in comparison to $1,892,000 of cash and cash
equivalents and working capital of $534,000 as of March 31, 1999. We also have a
working capital bank line of credit for $1,500,000 and have utilized $460,000 of
this amount as of March 31, 2000. Accounts receivable were $2,567,000 with
weighted days outstanding of 65 as of March 31, 2000 compared to receivables of
$3,004,000 with weighted days outstanding of 32, as of March 31, 1999. We target
average collections at 45 days. Collection days above this amount reflect a mix
of extended payment terms and late payments in our March 31, 2000 accounts
receivables balance.
Our cash flows are summarized below for the periods indicated (in thousands):
FISCAL YEAR ENDED MARCH 31,
2000 1999
---- ----
Cash provided by (used in)
Operating activities $(3,458) $ (83)
Investing activities (2,140) (1,751)
Financing activities 5,617 1,062
------- -------
Increase (decrease) in cash and cash equivalents $ 19 $ (772)
======= =======
Cash and cash equivalents at end of year $ 1,911 $ 1,892
We used cash of $3,458,000 in operating activities for fiscal 2000,
primarily as the result of an increase in our loss partially offset by non-cash
charges for depreciation, amortization, write-down of capitalized software and
stock options issued for services. Net cash used in investing activities was
$2,140,000, from additions to purchased and capitalized software combined with
capital expenditures activity. Cash generated from financing activities was
$5,617,000 and reflects proceeds from the issuance of common stock combined with
the exercise of options and warrants.
On July 16, 1999, we executed an Agreement ("Agreement") with Silicon
Valley Bank ("SVB") to renew our bank line of credit. 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 our 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, we are required to meet certain
covenants which include minimum tangible net worth of $1,500,000 for the period
ending March 31, 2000 and a quick ratio, excluding deferred maintenance revenue,
of 1.50 to 1. The company, at its option, may terminate the credit facility with
SVB without penalty. We had borrowings of $460,000 and $0 against this credit
facility with SVB during fiscal 2000 and 1999, respectively.
As of March 31, 2000, we 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 530,936 $ 2,189,525
Stock options 6,279,005 15,940,525
--------- -----------
Total 6,809,941 $18,130,050
========= ===========
As of March 31, 2000, securities that are vested and in the money
provide potential future financing resources of $7,443,000. There can be no
assurance that we will obtain any future proceeds from the exercise of the above
securities.
On May 24, 2000, we acquired all of the issued and outstanding common
stock from the Stockholders of a company known as, Lognet 2000, Inc. ("Lognet"),
formerly known as Lognet, Inc. Lognet assets included $2.8 million of cash at
the time of acquisition. We anticipate using financing vehicles such as bank
debt, leasing and other sources of funding, including additional equity
offerings, to fund our future operations. We anticipate that our working
capital, cash secured by the Lognet acquisition and other sources of capital,
such as additional equity offerings and a new credit facility, will be adequate
to fund our currently proposed activities for at least the next twelve months.
There can be no assurances, however, that we will be successful in obtaining
funds from any such sources. If additional funds are raised by issuing equity
securities, dilution to our stockholders may result. If additional funds are not
available, we may be required to delay execution of our 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 we believe that our strategic
plan is on target and the business outlook remains strong, several important
factors, many of which are beyond our control, have been identified which could
cause results to differ materially from historical, planned, implied or
predicted results. While we have achieved an operating income in some past
quarters, we historically have been unable to generate sales volumes necessary
to achieve profitability on a sustained basis. We have 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 our Common Stock.
Quarterly revenues and results of operations may fluctuate as the
result of a variety of factors, including the lengthy sales cycle for our
products, the proportion of revenues attributable to software license fees
versus services, the amount of revenue generated by alliances with other
companies selling our products, demand for our products, the size and timing of
individual license transactions, the introduction of new products and product
enhancements by us or our competitors, changes in customer budgets, competitive
conditions in the industry and general economic conditions. Additionally, the
sale of our products generally involves a significant commitment of capital by
our customers and may be delayed due to time consuming authorization procedures
within an organization. Other factors affecting our operating results include
our 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 we can
maintain or increase our sales volume going forward or that we will be able to
achieve a profit in the marketing of our products.
ITEM 7. FINANCIAL STATEMENTS
The information required by this Item is incorporated by reference to
the Table of Contents to Consolidated Financial Statements and appears on page
F-1 hereof.
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURES
Effective March 13, 2000, by a resolution of our Board of Directors, we
resolved to change auditing firms from Pannell Kerr Forster PC to Arthur
Andersen LLP. There were no disagreements with our former auditors in any matter
of accounting principles, practices, financial statement disclosures or auditing
scope or procedures in connection with audits by our former auditors.
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 our Proxy
Statement with respect to our 2000 Annual Meeting of Stockholders to be filed
with the Commission within 120 days following March 31, 2000 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 our Proxy
Statement with respect to our 2000 Annual Meeting of Stockholders to be filed
with the Commission within 120 days following March 31, 2000 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 our Proxy
Statement with respect to our 2000 Annual Meeting of Stockholders to be filed
with the Commission within 120 days following March 31, 2000 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 our Proxy
Statement with respect to our 2000 Annual Meeting of Stockholders to be filed
with the Commission within 120 days following March 31, 2000 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
Reports: A Current Report of Form 8-K was filed by the Company on
January 4, 2000 regarding a Private Placement under Regulation D whereby the
Company raised $2,400,000 before costs and expenses..
A Current Report of Form 8-K was filed by the Company on
January 4, 2000 which reported a change in management with the appointment of
Leonard S. Simon to the Board of Directors and the appointment of John Pemble as
President and Chief Operating Officer of the Company and the resignation of
Darryl Dobin as a Director and Officer of the Company.
A Current Report of Form 8-KA was filed by the Company on
January 12, 2000 containing supplemental financial statements for the
acquisition of the Internet Broadcasting Company, Inc. originally reported on
Form 8-k filed December 27, 1999.
A Current Report of Form 8-K, was filed by the Company on
January 12, 2000 regarding the expiration of warrants issued in the Company's
1994 Initial Public Offering and Warrants that were issued in the Company's 1996
Unit Private Placement under Regulation D.
A Current Report of Form 8-K was filed by the Company on March
17, 2000 concerning a change in accountants whereby the company resolved to
change accounting firms and retain Arthur Andersen & Co.
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this Report to be signed on
its behalf by the undersigned, thereunto duly authorized.
INSCI-STATEMENTS.COM, CORP.
By: /s/ E. TED PRINCE
------------------------------------------
Dr. E. Ted Prince, Chief Executive Officer
Dated: June 29, 2000
<PAGE>
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that each person whose signature
appears below constitutes 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
Chief Executive Officer
/s/ E. TED PRINCE and Director June 29, 2000
------------------------
Dr. E. Ted Prince
President and Chief
/s/ JOHN C. PEMBLE Operating Officer June 29, 2000
------------------------
John C. Pemble
/s/ THOMAS FARKAS Director June 29, 2000
------------------------
Thomas Farkas
/s/ ROBERT F. LITTLE Director June 29, 2000
------------------------
Robert F. Little
/s/ JOHN A. LOPIANO Director June 29, 2000
------------------------
John A. Lopiano
/s/ FRANCIS X. MURPHY Director June 29, 2000
------------------------
Francis X. Murphy
/s/ LEONARD S. SIMON Director June 29, 2000
------------------------
Leonard S. Simon
Vice President-Finance &
Administration Chief Financial
/s/ ROGER C. KUHN and Accounting Officer June 29, 2000
------------------------
Roger C. Kuhn
<PAGE>
INSCI-STATEMENTS.COM, CORP.
EXECUTIVE OFFICERS OF THE REGISTRANT
BOARD OF DIRECTORS
Dr. E. Ted Prince
Chairman of the Board
& Chief Executive Officer
Thomas Farkas
Robert F. Little (1)
John A. Lopiano (2)
Francis X. Murphy (2)
Leonard S. Simon (1)
(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
John C. Pemble Roger C. Kuhn
President & Chief Operating Officer Vice President, Finance &
Administration & Chief Financial
& Accounting Officer
AUDITORS: TRANSFER AGENT:
Arthur Andersen LLP First Union National Bank
225 Franklin Street 1525 West W. T. Harris Blvd. - 3C3
Boston, MA 02110 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.
3.5 Certificate of Amendment to Certificate of Incorporation changing
the Company name to insci-statements.com, corp.
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 E. Ted Prince, CEO
10.61 Acquisition Agreement between The Internet Broadcasting Company,
Inc. and insci-statements.com, corp.
10.62 Regulation D Share Purchase Agreement, Form of Warrant and
Registration Agreement with The Tailwind Fund, Ltd.
10.63 Rights Agreement
13.1 Form 10-QSB for the quarter ended June 30, 1999
13.2 Form 10-QSB for the quarter ended September 30, 1999
13.3 Form 10-QSB for the quarter ended December 31, 1999
16.1 Letter regarding change in certifying accountants
16.2 Pannell Kerr Forster P.C. Letter regarding change in certifying
accountants.
21.1* Subsidiaries of the Company
27.1* Financial Data Schedule
* Annexed hereto
<PAGE>
TABLE OF CONTENTS TO CONSOLIDATED FINANCIAL STATEMENTS
Consolidated Financial Statements
Page
Independent Auditor's Reports F-2
Consolidated Balance Sheet as of March 31, 2000 F-4
Consolidated Statements of Operations for the Years Ended
March 31, 2000 and 1999 F-5
Statements of Consolidated Stockholders' Equity for the Years Ended
March 31, 2000 and 1999 F-6
Statements of Consolidated Cash Flows for the Years Ended
March 31, 2000 and 1999 F-7
Notes to Consolidated Financial Statements F-9
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Stockholders and Board of Directors of insci-statements.com, corp.:
We have audited the accompanying consolidated balance sheet of
insci-statements.com, corp. and subsidiaries as of March 31, 2000, and the
related consolidated statements of operations, stockholders' equity and cash
flows for the year then ended. These financial statements are the responsibility
of the company's management. Our responsibility is to express an opinion on
these financial statements based on our audit.
We conducted our audit in accordance with auditing standards generally accepted
in the United States. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audit provides a reasonable basis for our
opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of insci-statements.com, corp. and
subsidiaries as of March 31, 2000, and the results of their operations and their
cash flows for the year ended March 31, 2000, in conformity with accounting
principles generally accepted in the United States.
/s/ Arthur Andersen LLP
Boston, Massachusetts
May 5, 2000 (except with respect to the matter discussed in Note 15
as to which the date is May 24, 2000)
<PAGE>
Independent Auditor's Report
To the Stockholders and
Board of Directors of
insci-statements.com, corp.
We have audited the accompanying consolidated statements of operations,
stockholders' equity and cash flows of insci-statements.com, corp. (formerly
INSCI Corp.) for the year ended March 31, 1999. These financial statements are
the responsibility of the Company's management. Our responsibility is to express
an opinion of these financial statements based on our audit. We did not audit
the financial statements of The Internet Broadcasting Company, Inc., which
statements reflect net loss constituting approximately 72% of the total net loss
for the year ended March 31, 1999. Those statements were audited by other
auditors whose report has been furnished to us, and our opinion, insofar as it
relates to the amounts included for The Internet Broadcasting Company, Inc. is
based solely on the report of the other auditors.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit and the report of other auditors provide a reasonable
basis for our opinion.
In our opinion, based upon our audit and the report of the other
auditors, the consolidated financial statements referred to above present
fairly, in all material respects, the results of operations and cash flows of
insci-statements.com, corp. for the year ended March 31, 1999, in conformity
with generally accepted accounting principles.
The 1999 consolidated financial statements give retroactive effect to
the merger of insci-statements.com, corp. and The Internet Broadcasting Company,
Inc. on December 10, 1999, which has been accounted for as a pooling of
interests as described in Note 2 to the consolidated financial statements.
/s/ Pannell Kerr Forster PC
New York, New York
May 18, 1999, except for the merger as discussed in note 2 as to which the
date is December 10, 1999
<PAGE>
INSCI-STATEMENTS.COM, CORP.
CONSOLIDATED BALANCE SHEET
MARCH 31, 2000
(in thousands, except share amounts)
ASSETS
Current assets:
Cash and cash equivalents $ 1,911
Accounts receivable, net of allowance for doubtful
accounts of $100 2,567
Inventory 4
Prepaid expenses and other current assets 35
--------
Total current assets 4,517
Property and equipment, net 1,822
Deposits 255
Other 591
--------
Total assets $ 7,185
========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Bank line of credit $ 460
Accounts payable 1,082
Accrued expenses:
Compensation 126
Vacation 317
Incentive 344
Other 409
Other current liabilities 309
Current portion of capital lease obligations 384
Deferred revenue 1,146
--------
Total current liabilities 4,577
--------
Capital lease obligations, net of current portion 409
Commitments and contingencies
Stockholders' equity
Convertible preferred stock, $.01 par value, authorized
10,000,000 shares:
8% Convertible redeemable preferred stock, 944,167 shares
issued and outstanding, no liquidation preference 9
Common stock, $.01 par value: authorized 40,000,000 shares:
issued and outstanding 12,914,720 shares 129
Additional paid-in capital 38,656
Deferred compensation (938)
Accumulated deficit (35,657)
--------
Total stockholders' equity 2,199
--------
Total liabilities and stockholders' equity $ 7,185
========
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED
FINANCIAL STATEMENTS.
<PAGE>
INSCI-STATEMENTS.COM, CORP.
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share amounts)
YEARS ENDED MARCH 31,
2000 1999
(AS RESTATED)*
-------- --------
Revenue
Product $ 4,746 $ 5,992
Services 6,274 6,626
-------- --------
Total revenue 11,020 12,618
-------- --------
Cost of revenue
Product 1,747 1,288
Services 3,000 3,187
-------- --------
Total cost of revenue 4,747 4,475
-------- --------
Gross margin 6,273 8,143
-------- --------
Expenses
Sales and marketing 4,011 4,187
Product development 3,351 2,710
General and administrative 4,815 2,847
Non-recurring expenses:
Software capitalization write-down 2,758 --
Acquisition-related expenses 712 --
-------- --------
15,647 9,744
-------- --------
Loss from operations (9,374) (1,601)
Interest income (expense) (49) (2)
Other income (expense) (43) --
-------- --------
Net loss (9,466) (1,603)
Preferred stock dividend (Note 2) (1,567) (706)
-------- --------
Net loss applicable to common shares $(11,033) $ (2,309)
======== ========
Net loss per common share - basic and diluted $ (1.11) $ (0.32)
======== ========
Weighted average common
shares outstanding - basic and diluted 9,967 7,280
======== ========
* Previously reported results have been restated to reflect the pooling of
interests described in Note 2.
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED
FINANCIAL STATEMENTS.
<PAGE>
<TABLE>
INSCI-STATEMENTS.COM, CORP.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
Years ended March 31, 2000 and 1999
(in thousands, except share amounts)
<CAPTION>
Preferred Stock Common Stock Additional Deferred
----------------- ----------------- Paid-in Compen- Accumulated
Shares Amount Shares Amount Capital sation Deficit Total
<S> <C> <C> <C> <C> <C> <C> <C> <C>
BALANCE, MARCH 31, 1998 AS RESTATED 3,418,665 $ 34 5,375,522 $ 54 $ 27,144 $ - $ (22,596) $4,636
10% Preferred stock conversion to
common stock (1,498,602) (15) 2,269,843 23 (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 IBC preferred shares 77,292 1 - - 270 - - 271
Issuance of common 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 - - - - - - (1,603) (1,603)
----------------------------------------------------------------------------------------
BALANCE, MARCH 31, 1999 2,556,883 25 7,885,444 79 28,303 - (24,905) 3,502
10% Preferred stock conversion to
common stock (103,335) (1) 60,927 1 - - - -
8% Preferred stock conversion to
common stock (1,344,077) (14) 1,461,077 14 - - - -
Preferred stock issued as dividend
on 8% convertible redeemable
preferred stock 139,881 2 - - 522 - (524) -
Issuance of shares to Tailwind Fund,
net of issuance costs - - 802,676 8 2,177 - - 2,185
Stock options issued for services - - - - 1,145 - - 1,145
Deferred compensation - - - - 938 (938) - -
Stock issued for services - - 25,000 - 103 - - 103
Stock issued for software rights - - 150,000 2 738 - - 740
Exercise of stock options - - 1,699,988 17 2,554 - - 2,571
Issuance of IBC preferred shares 181,423 2 - - 633 - - 635
IBC Preferred stock conversion to
common stock (486,608) (5) 425,782 4 1 - - -
Preferred stock dividend - - 260,916 3 1,040 - (1,043) -
Conversion of convertible debt to
common stock - - 142,910 1 502 - - 503
Adjustment for pooling of interests - - - - - - 281 281
Net loss - - - - - - (9,466) (9,466)
----------------------------------------------------------------------------------------
BALANCE, MARCH 31, 2000 944,167 $9 12,914,720 $129 $38,656 ($938) ($35,657) $2,199
========================================================================================
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED FINANCIAL STATEMENTS.
</TABLE>
<PAGE>
insci-statements.com, corp.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
Years ended March 31,
2000 1999
(as restated)*
-------- --------
Cash flows from operating activities:
Net loss $ (9,466) $ (1,603)
Adjustment for pooling of interests 281 --
-------- --------
Adjusted net loss (9,185) (1,603)
Reconciliation of net loss to net cash
provided by (used in) operating activities:
Depreciation and amortization 686 428
Amortization of software costs 991 884
Write-down of capitalized software costs 2,758 --
Amortization of other assets 210 --
Stock options issued for services 1,145 83
Stock issued for services 103 --
Changes in assets and liabilities:
Accounts receivable 437 (92)
Inventory 39 (42)
Prepaid expenses and other current assets 162 (22)
Deposits and other assets (20) (144)
Accounts payable (444) 297
Accrued expenses and other current
liabilities (234) (210)
Deferred revenue (106) 338
-------- --------
Net cash used in operating activities (3,458) (83)
-------- --------
Cash flows from investing activities:
Additions to capitalized software
development costs (540) (492)
Additions to purchased software (618) (906)
Capital expenditures (982) (353)
-------- --------
Net cash used in investing activities (2,140) (1,751)
-------- --------
Cash flows from financing activities:
Proceeds from line of credit, net of
repayments 410 50
Proceeds from issuance of common stock to
Tailwind Fund, net of issuance costs 2,185 --
Proceeds from issuance of preferred stock 635 271
Proceeds from exercise of options and
warrants 2,571 115
Proceeds from (repayments of) convertible
debt (151) 654
Repayment of capital lease obligations (33) (28)
-------- --------
Net cash provided by financing activities 5,617 1,062
-------- --------
Net change in cash and cash equivalents 19 (772)
Cash and cash equivalents at beginning of year 1,892 2,664
-------- --------
Cash and cash equivalents at end of year $ 1,911 $ 1,892
======== ========
Supplemental disclosure of cash flow information
Cash paid for interest $ 112 $ 47
Cash paid for income taxes $ - $ -
* Previously reported results have been restated to reflect the pooling of
interests described in Note 2.
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED
FINANCIAL STATEMENTS.
<PAGE>
INSCI-STATEMENTS.COM, CORP.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(continued)
SUPPLEMENTAL DISCLOSURE OF NON CASH FINANCING AND INVESTING ACTIVITIES:
During fiscal years 2000 and 1999, the Company issued 1,522,004 and
2,332,332 shares, respectively, of its common stock for the conversion of its
preferred stocks.
Dividends were accreted on beneficial conversion features of preferred
stock and amounted to $8,000 in fiscal 1999.
During fiscal years 2000 and 1999, the Company issued 139,881 and
559,653 shares of its 8% Convertible Redeemable Preferred Stock in payment of
the dividends due on this stock.
During fiscal year 1999, the Company issued 70,000 shares of its common
stock in exchange for cancellation of 150,000 common stock warrants.
During fiscal year 2000, the Company issued 1,000,000 shares of its
common stock to acquire all of the common shares of Internet Broadcasting
Company, Inc.
During fiscal year 2000, the Company issued 150,000 shares of its
common stock in exchange for software program rights. These shares had a fair
market value of $740,000.
During fiscal year 2000, the Company issued 280,936 warrants to The
Tailwind Fund to purchase shares of its common stock at an exercise price of
$4.30 per share.
During fiscal year 2000 and 1999, the Company acquired property and
equipment under capital leases with a value of $763,000 and $31,000,
respectively.
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED
FINANCIAL STATEMENTS.
<PAGE>
INSCI-STATEMENTS.COM, CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2000
NOTE 1- BUSINESS
insci-statements.com, corp. is a provider of Internet-based and on-site
enterprise software and services solutions for electronic statement presentment,
digital document storage, workflow and electronic commerce. Our solutions
incorporate enhanced Internet and electronic commerce capabilities for managing
and securely distributing large volumes of high-value business transaction
documents and reports in on-site enterprise systems environments or via our
business-to-business Internet application service provider, InfiniteSpace.com,
Corp.
At the Annual Meeting of Stockholders on November 9, 1999, the name of the
company was changed from INSCI Corp. to insci-statements.com, corp.
On December 10, 1999 we acquired privately-held Internet Broadcasting
Company (IBC) of Pompano Beach, FL. IBC is a developer and provider of
proprietary technology for the secure delivery of financial documents via the
Internet. The acquisition of IBC provides insci with a key product set necessary
for us to address the electronic statement presentment market.
On January 12, 2000, we separated our two principal businesses, both
operationally and financially, and established our business-to-business,
electronic statement presentment application service provider,
InfiniteSpace.com, Corp. (Infinite), as a separate wholly-owned subsidiary.
Located in Westborough, MA, Infinite is initially focusing on providing
electronic statement presentment services to the financial services industry, a
sector where we currently do approximately 60% of our business. Infinite will
also introduce a range of innovative new ASP based products for the rapidly
emerging electronic statement/bill presentment market to service the
business-to-business needs of other industries.
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
A summary of the significant accounting policies consistently applied in
the preparation of the accompanying financial statements follows:
BASIS OF PRESENTATION
The consolidated financial statements include the accounts of
insci-statements.com corp. and all majority- owned subsidiaries (the "Company"
or "insci"). In the Notes to Consolidated Financial Statements, all dollar
amounts in tabulations are in thousands of dollars unless otherwise indicated.
Merger: On December 10, 1999, we completed a merger (the "Merger") with
Internet Broadcasting Company, Inc. ("IBC") by issuing 1,000,000 shares of insci
common stock for all the common stock of IBC. Each share of IBC common stock was
exchanged for 0.2188 shares of insci common stock. The Merger was accounted for
as a pooling of interests and, accordingly, all prior period consolidated
financial statements of insci have been restated to include the results of
operations, financial position and cash flows of IBC.
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.
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 , Deferral of the
Effective Date of a Provision of SOP 97-2, Software Revenue Recognition ("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. We adopted SOP 97-2 and SOP
98-4 in fiscal 1999. We believe our current revenue recognition policies and
practices are consistent with SOP 97-2 and SOP 98-4. The AICPA issued SOP 98-9,
Modification of SOP 97-2, Software Revenue Recognition, With Respect to Certain
Transactions, in December 1998, which provides certain amendments to SOP 97-2,
and is effective for transactions entered into during fiscal 2000. We adopted
SOP 98-9 for fiscal 2000. Adoption of SOP 97-2, SOP 98-4 and SOP 98-9 did not
have a material impact on our 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. Our 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. We have arranged with third party providers to
perform all customer support obligations under our hardware maintenance
contracts. Consequently, we recognize 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 that
have not been fulfilled are classified as customer deposits, which is included
in other current liabilities in the accompanying consolidated balance sheet.
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.
ACQUISITIONS
On December 10, 1999, insci completed the acquisition of The Internet
Broadcasting Company, Inc. ("IBC") in a stock for stock merger. insci issued
1,000,000 shares of its common stock in exchange for all outstanding common
stock of IBC. Additionally, all vested and unvested IBC stock options were
exchanged for equivalent insci stock options. IBC, a privately held company
located in Pompano Beach, Florida, is a developer and provider of proprietary
technology for the secure delivery of financial documents. The acquisition was
accounted for as a pooling of interests and, accordingly, the financial
statements for periods prior to the combination have been restated to include
the accounts and results of operation of IBC. The statement of stockholders
equity reflects the accounts of insci as if the additional common stock had been
issued during all periods presented. These financial statements, including the
notes thereto, should be read in conjunction with the historical financial
statements of insci and IBC included in insci's fiscal 1999 annual report of
Form 10-KSB and the Form 8-K filing dated January 12, 2000.
The balance sheet of insci as of March 31, 2000 has been combined with the
balance sheet of IBC as of March 31, 2000 and the balance sheet of Infinite as
of March 31, 2000. The statements of operations of insci for the years ended
March 31, 2000 and 1999 have been combined with IBC's statements of operations
for the years ended March 31, 2000 and June 30, 1999 and Infinite's statement of
operations for the period ended March 31, 2000. An adjustment has been made to
accumulated deficit in fiscal 2000 to conform the fiscal year end of IBC to
March 31, 2000. Information concerning common stock, employee stock plans and
per share data has been restated on an equivalent share basis.
We incurred approximately $712,000 of expenses related to this
acquisition, which are included in non-recurring expenses in the accompanying
consolidated statements of operations
As a result of the acquisition, 486,608 shares of IBC preferred stock were
converted into 686,698 shares of insci common stock. The IBC preferred stock
contained a beneficial conversion feature that resulted in an additional
issuance of 260,916 shares of insci common stock which were valued at $4.00 per
share. As such, we recorded a special preferred dividend of $1,043,000 during
fiscal 2000.
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.
INTANGIBLE ASSETS
a. Capitalized Software Development Costs
We capitalize the qualifying costs of developing software products in
accordance with Statement of Financial Accounting Standards No. 86, Accounting
for the Costs of Computer Software to be Sold, Leased, or Otherwise Marketed.
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 our
ability to market our software products in the future and generate cash flows
sufficient to support future operations. Capitalized software development costs
totaled $540,000 and $492,000 during the years ended March 31, 2000 and 1999,
respectively. Amortization of capitalized software development costs totaled
$325,000 and $304,000 during the years ended March 31, 2000 and 1999,
respectively, and is included in cost of revenue in the accompanying
consolidated statements of operations.
b. Purchased Software
We capitalize as purchased software the costs associated with software
products either purchased from other companies for resale or developed by other
companies under contract with us (see Note 5). 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 $618,000 and $906,000 during the
years ended March 31, 2000 and 1999, respectively. Amortization of purchased
software costs totaled $666,000 and $580,000 during the years ended March 31,
2000 and 1999, respectively, and is included in cost of revenue in the
accompanying consolidated statements of operations.
During fiscal 2000, we redirected the focus of our business to address the
electronic statement presentment market. This redirection requires substantial
modifications, integration and revisions to versions of developed and purchased
software previously capitalized, thus making these versions obsolete. As a
result of these factors, we wrote-down $1,113,000 of capitalized software
development costs and $1,645,000 of capitalized purchased software during fiscal
2000, which are included in non-recurring expenses in the accompanying
consolidated financial statements.
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
Software .............................. 1.5-3 years
Leasehold improvements................. Life of lease
FOREIGN CURRENCY TRANSLATION
Foreign currencies are translated in accordance with Statement of Financial
Accounting Standards (SFAS) No. 52, Foreign Currency Translation. Under this
standard, assets and liabilities of our foreign subsidiary are translated into
United States dollars at current exchange rates. Income and expense items are
translated at average rates of exchange prevailing during the year.
Gains and losses arising from the translation of the foreign subsidiary's
financial statements are not material at March 31, 2000 and March 31, 1999.
COMPREHENSIVE INCOME
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. We have 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 net loss reported and the comprehensive loss for SFAS
130.
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 2000 and 1999, 7,879,108 and
11,901,131 stock options, warrants and convertible securities were excluded
because their effect would be antidilutive.
CONCENTRATIONS OF CREDIT RISK
Financial instruments that potentially expose the company to concentrations
of credit risk consist primarily of cash and accounts receivable. We maintain
our cash balances primarily in one financial institution. Our balances are
insured by the Federal Deposit Insurance Corporation up to $100,000. At March
31, 2000, the uninsured amounts held were approximately $1,639,000. We have not
experienced any losses on these investments to date.
We have not experienced significant losses relating to collection of
accounts receivable. We perform ongoing credit evaluations of our customers and
maintain reserves for potential credit risks as determined by management.
Accounts receivable consists of geographically and industry dispersed customers.
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. We recorded an impairment of
capitalized software development costs and purchased software during fiscal
2000. See INTANGIBLE ASSETS. No such write-downs were required in fiscal 1999.
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.
CONVERTIBLE PREFERRED STOCK
The beneficial conversion feature of convertible preferred stock (see Note
9) 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.
ACCOUNTING FOR STOCK OPTIONS AND WARRANTS
Statement of Financial Accounting Standards (SFAS) No. 123, Accounting for
Stock-Based Compensation, requires that stock awards granted subsequent to
January 1, 1995 be recognized as compensation expense based on their fair value
at the date of grant. Alternatively, a company may use Accounting Principles
Board Opinion (APB) No. 25, Accounting for Stock Issued to Employees, and
disclose pro forma income amounts which would have resulted from recognizing
such awards at their fair value. We have elected to account for stock-based
compensation expense under APB No. 25 and make the required pro forma
disclosures for compensation. Stock options and warrants granted to
non-employees are valued using the Black-Scholes option pricing model (See Note
12).
ADVERTISING COSTS
In accordance with Statement of Position 93-7, Reporting on Advertising
Costs, advertising costs are expensed as incurred. Advertising expense totaled
approximately $74,000 and $127,000 in fiscal 2000 and 1999, respectively.
RECLASSIFICATION
Certain items in the fiscal 1999 financial statements have been
reclassified to conform to the fiscal 2000 financial statement presentation.
RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
In June 1998, the Financial Accounting Standards Board (FASB) issued SFAS
No. 133, Accounting for Derivative Instruments and Hedging Activities. SFAS No.
133 establishes accounting and reporting standards for derivative instruments,
including certain derivative instruments embedded in other contracts
(collectively referred to as derivatives), and for hedging activities. As
issued, SFAS No. 133 is effective for all fiscal quarters of all fiscal years
beginning after June 15, 1999, with earlier application encouraged. In May 1999,
the FASB delayed the effective date of SFAS No. 133 for one year, to fiscal
years beginning after June 15, 2000. We do not currently nor do we intend in the
future to issue or purchase derivative instruments and, therefore, do not expect
the adoption of SFAS No. 133 to have any impact on our financial position or
results of operations.
In December 1999, the Securities and Exchange Commission released Staff
Accounting Bulletin (SAB) No. 101, Revenue Recognition in Financial Statements.
SAB 101 provides interpretative guidance on the recognition, presentation and
disclosure of revenue. SAB 101 must be applied to financial statements no later
than the fourth quarter of fiscal 2001. We do not believe that the application
of SAB 101 will have a material effect on our financial position or results of
operations.
In March 2000, the FASB issued Interpretation No. 44, Accounting for
Certain Transactions Involving Stock Compensation - An Interpretation of APB
Opinion No. 25. The interpretation clarifies the application of Accounting
Principles Board (APB) Opinion No. 25 in certain situations, as defined. The
interpretation is effective July 1, 2000, but covers certain events occurring
during the period after December 15, 1998, but before the effective date. To the
extent that events covered by this interpretation occur during the period after
December 15, 1998, but before the effective date, the effects of applying this
interpretation would be recognized on a prospective basis from the effective
date. We do not anticipate that the adoption of this interpretation will have a
material effect on our financial position or results of operations.
NOTE 3 - PROPERTY AND EQUIPMENT
Property and equipment at March 31, 2000, including equipment acquired under
capital leases, consist of the following (in thousands):
Furniture and fixtures $ 178
Equipment 1,662
Software 653
Leasehold improvements 189
------
2,682
Less accumulated depreciation and amortization 860
------
$1,822
======
Depreciation and amortization expense was $686,000 and $428,000 for fiscal years
2000 and 1999, respectively. The net book value of equipment under capital
leases at March 31, 2000 was $651,000.
NOTE 4 - CAPITAL LEASE OBLIGATIONS
We lease certain furniture and equipment that are accounted for as capital
leases. Future minimum lease payments under the capital leases together with the
present value of the net minimum lease payments are as follows (in thousands):
Year ending March 31, 2001 $ 445
Year ending March 31, 2002 439
-----
Total minimum lease payments 884
Less: amount representing interest 91
-----
Present value of minimum lease payments 793
Current portion 384
-----
Long-term portion $ 409
=====
NOTE 5 - RELATED PARTY TRANSACTIONS
(1) In April 1994, we loaned John L. Gillis, our 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 we
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, the loan
was repaid by $29,190. Interest on the loan was $5,384 during fiscal 1999. 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 on March 31, 1999, upon Mr. Gillis's resignation and in accordance
with a separation agreement between Mr. Gillis and the company.
(2) We engaged Emerging Technology Ventures, Inc. ("ETVI") to manage our
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 year 1999, ETVI
was paid an additional $39,000 in connection with consulting services performed
for us on behalf of our Executive Committee. In October 1995, ETVI was granted a
stock option to acquire 400,000 shares of our Common Stock at an exercise price
of $2.31 per share. In July 1998 an amendment to the stock option agreement
revised the exercise price for future vesting options to be based upon fair
market value at the time a strategic alliance or acquisition is completed. 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 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 2000, no
options were vested. During fiscal 1999, as the result of establishing strategic
alliances, 125,000 options were vested. The fair value of the 125,000 options
vested was estimated to be approximately $50,000 which is included in sales and
marketing expenses in the accompanying consolidated statements of operations.
The amount earned, related to the 2% of revenues from strategic alliances during
fiscal 1999 was $9,633. At March 31, 2000, remaining unvested options
outstanding totaling 167,201 were valued at $876,000 using the Black-Scholes
option pricing model. This amount is included in Deferred Compensation on the
accompanying consolidated balance sheet.
(3) We 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 2000 and
1999, Gartner and Associates was paid $0 and $18,000, respectively.
(4) We have 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
$1,116,404 in fiscal 2000 and $1,369,000 in fiscal 1999. 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 insci. In the
opinion of management, the fees paid under this agreement are at fair market
value rates. We have issued approximately $700,000 in purchase orders for
services to be performed by TPL in fiscal 2001. Amounts due to TPL approximated
$240,000 at March 31, 2000.
(5) During fiscal 2000 and 1999, Mitchell Capital, Inc., whose principal
shareholder is Mitchell Klein, a former director of the company, was paid
consulting fees in the amount of $0 and $15,000, respectively for work performed
for us.
NOTE 6 - LEASE COMMITMENTS
The lease for our Massachusetts headquarters expires in September 2004. We
sublease a portion of this space under an agreement that expires in November
2000. The lease for our Florida subsidiary expires in January 2001. Annual
sublease rental income approximates $60,000. As of March 31, 2000, future
minimum rent to be paid under these operating leases is as follows (in
thousands):
Year ending:
March 31, 2001........................................$ 503
March 31, 2002........................................ 484
March 31, 2003........................................ 495
March 31, 2004........................................ 504
Thereafter............................................ 254
-------
$ 2,240
=======
Total rent expense, net of approximately $60,000 of sublease rental income,
was approximately $486,000 and $315,000 for the years ended March 31, 2000 and
1999, respectively.
NOTE 7 - REVOLVING CREDIT FACILITY
On August 7, 1998, insci and Silicon Valley Bank ("SVB") finalized a bank
line of credit Agreement ("Agreement"). The agreement was renegotiated effective
June 30, 1999. 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 and LC-backed international accounts receivable under ninety days from
invoice date with a 25% concentration limit. 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 $1.5 million for the quarter ended March 31, 2000 and a
quick ratio of 1.50 to 1 at each quarter end or 1.00 to 1 intra-quarterly. We
may, at our option, terminate the credit facility with SVB without penalty. As
of March 31, 2000, $460,000 of borrowings under this credit facility were
outstanding. The effective interest rate was 10%. We were in compliance or have
obtained waivers for all covenants.
NOTE 8 - INCOME TAXES
At March 31, 2000, we had available net operating loss ("NOL")
carryforwards of approximately $24,900,000 resulting from accumulated operating
losses through fiscal 2000. The NOL carryforwards for tax return purposes expire
in various amounts through the year 2020. We believe that an "Ownership Change"
occurred in January 1996 within the meaning of Section 382 of the Internal
Revenue Code. Under an ownership change, we 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 our 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 our outstanding equity at the time of the ownership
change and the long-term tax exempt rate published by the IRS.
In addition, the NOLs inherited through the Internet Broadcasting Company
acquisition will also be limited due to the ownership change, which occurred on
the acquisition date. The amount of the NOL, which will be subject to the
Section 382 limit, will be approximately $2,200,000.
A full valuation allowance of $13,960,000 has been established against
these NOLs because the likelihood of realization of the tax benefits cannot be
determined.
NOTE 9 - PREFERRED STOCK
8% CONVERTIBLE REDEEMABLE PREFERRED STOCK
On November 11, 1996, we completed 1,333,334 Units of a Regulation "D"
Private Placement Offering of 8% Convertible Redeemable Preferred Stock (8%
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 Redeemable Preferred Stock and Warrants contain limited
anti-dilution protection and adjustment rights granted to purchasers of the
Units. Each share of 8% preferred stock is convertible, at the option of the
holder, into one share of common stock.
Additionally, we 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 our option. 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. 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 could elect to have
dividends paid in cash for the balance of the life of the Preferred Stock (the
"Cash Election"). If we fail to honor the Cash Election, we 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 we shall immediately
appoint a designee and use our 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 our 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 our
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 8% Preferred Stock is redeemable through September 30, 1999 if our
common stock trades at or above $7.50 per share for twenty out of thirty
consecutive trading days and we then have an effective registration statement
under the Securities Act of 1933, as amended, with respect to all shares of
common stock underlying the 8% Preferred Stock, we have the right, upon thirty
days prior written notice to all holders of record of the 8% Preferred Stock, to
redeem all, but not less than all, of the 8% Preferred Stock for cash at $3.75
per share of 8% Preferred Stock. At any time after October 1, 1999, any shares
of 8% Preferred Stock that have not otherwise converted can be redeemed at our
option, upon thirty days prior written notice to all then holders of record of
the 8% Preferred Stock, for cash at $3.75 per share of 8% Preferred Stock. On
October 1, 2001, any outstanding 8% Preferred Stock shall automatically convert
into shares of common stock at the lesser of $3.75 per share or the average bid
price for the common stock for twenty consecutive trading days ending five
business days prior to October 1, 2001.
We 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 our 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 2000
and 1999, shareholders of this preferred stock converted 1,344,077 preferred
shares into 1,461,077 shares of common stock and 125 preferred shares into 125
shares of common stock, respectively.
10% CONVERTIBLE REDEEMABLE PREFERRED STOCK
On June 15, 1995, we completed a private placement of 90-Day Subordinated
Notes (the "Notes") which were repayable in cash or in shares of our 10%
Convertible Redeemable Preferred Stock ("10% Preferred Stock"). A total of
$1,200,000 of Notes was sold with net proceeds to us of approximately $950,000.
In October 1995, we notified all holders of the Notes that we were
exchanging shares of our 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 we exchanged 1,240,000 shares of our 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 our 90-Day Subordinated Notes and the accrued
interest payable thereon. The Preferred Stock is convertible at the option of
the holders into our Common Stock. The underlying shares of Common Stock
convertible under this Preferred Stock were included in our S-1 Registration
Statement declared effective on October 6, 1997.
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 our
common stock during the twenty trading days immediately preceding the payment
date.
In accordance with the terms of the conversion, a total of 448,602 shares
of preferred stock were surrendered and converted into 892,339 shares of our
Common Stock during the fiscal year ended March 31, 1999. The remaining 103,335
shares of preferred stock were converted into 60,927 shares of common stock
during fiscal 2000. All shares have been converted as of March 31, 2000.
10% CONVERTIBLE PREFERRED STOCK
On September 20, 1996, we completed a Private Placement financing under
Regulation "D" for the sum of $1,350,000. We 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 our Common
Stock for a period of three years, at a 30% discount (the beneficial conversion
feature) to the trading market of our Common Stock. We have 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. The remaining 1,050,000 shares of
preferred stock outstanding 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 our common shares during ten trading days
immediately preceding the dividend payment date.
We 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 expired in October 1999.
NOTE 10 - STOCKHOLDERS' EQUITY
(a) As of March 31, 2000, 12,914,720 shares of our common stock were
outstanding. As of March 31, 1999, 7,885,444 shares of our common stock were
outstanding. The increase in shares during fiscal 2000 primarily resulted from
the exercise of stock options, conversions of the Company's 8% Preferred Stock,
and the issuance of shares to the Tail Wind Fund.
(b) On December 17, 1999, we entered into an equity transaction with the
Tail Wind Fund, Ltd. ("Tail Wind"), wherein we received the sum of $2,185,000,
net of issuance costs, as a result of the sale of 802,676 shares of Common Stock
at $2.99 per share. Additionally, we issued 280,936 Warrants to purchase 280,936
shares of Common Stock at $4.30 per share. The Warrants are exercisable for a
period of five (5) years.
(c) During fiscal year 2000, a total of 103,335 shares of 10% Convertible
Redeemable Preferred Stock were surrendered and converted into 60,927 shares of
our Common Stock. 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 our Common Stock. In addition, during the fiscal year ended
March 31, 1999, we issued 33,068 shares of Common Stock in lieu of paying cash
dividends on our 10% Convertible Redeemable Preferred Stock.
(d) During fiscal year 1999, in accordance with the terms of our 10%
Convertible Preferred Stock, we issued 29,296 shares of Common Stock in lieu of
paying cash dividends on our 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 our Common Stock.
(e) During fiscal year 2000, in accordance with the terms of our 8%
Convertible Redeemable Preferred Stock, we issued 139,881 shares of 8%
Convertible Redeemable Preferred Stock in lieu of paying cash dividends on this
preferred stock. During fiscal 2000, 1,344,077 shares of this Preferred Stock
were surrendered and converted into 1,461,077 shares of our Common Stock. During
fiscal year 1999, we 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 our Common Stock.
(f) During fiscal 2000, options were exercised to purchase 1,699,988 shares
of common stock for $2,571,202. During fiscal 1999 options were exercised to
purchase 95,000 shares of common stock for $110,605.
(g) We granted warrants to the Underwriters of our 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.
We granted cost-free registration rights to the underlying Common Stock shares
of these warrants and have included these underlying Common Stock shares in the
Form S-1 Registration Statement that was declared effective on October 6, 1997.
During fiscal 1998, we 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 expired December 1999.
(h) On April 21, 1994, we received net proceeds of approximately $7,159,000
from our initial public offering ("IPO") of 1,250,000 units ("Units"). Each Unit
consists of one share of our 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 us 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, we extended the terms of the warrants, with all terms
and conditions of the warrants remaining the same. The warrants expired on
December 31, 1999.
(i) As a result of the acquisition of IBC, 486,608 shares of IBC preferred
stock were converted into 686,698 shares of insci common stock. The IBC
preferred stock contained a beneficial conversion feature that resulted in an
additional issuance of 260,916 shares of insci common stock which were valued at
$4.00 per share. As such, we recorded a special preferred dividend of $1,043,000
during fiscal 2000.
(j) The following is a summary of the Company's stock warrant activity:
Number Weighted Expiration
of Shares Average Price Date
Balance March 31, 1998 2,430,439 $5.89 Sep-Dec 99
Fiscal 1999 activity:
Issued 74,295 $7.05
Cancelled (150,000) $3.50
Exercised (12,590) $0.35
----------
Balance March 31, 1999 2,342,144 $6.11 Sep-Dec 10
Fiscal 2000 activity:
Issued 530,936 $4.12
Expired (2,342,144) $6.11
----------
Balance March 31, 2000 530,936 $4.12 Oct 03-Dec 04
==========
NOTE 11 - COMMITMENTS AND CONTINGENCIES
LEGAL PROCEEDINGS
To the best of our knowledge, there are no material legal proceedings
pending against us or any of our property, nor was any such proceeding
terminated during the fourth quarter ended March 31, 2000.
EMPLOYMENT AGREEMENTS
During 1998 our Compensation Committee recommended to the Board of
Directors that the employment agreement of Dr. E. Ted Prince ("Dr. Prince") our
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. 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 previously granted 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 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. On the date of the amendment the fair market value
of our common stock was below the exercise price of these options. As such, no
compensation expense was recorded.
We have employment agreements with our 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
We maintain a defined contribution plan for the benefit of our eligible
employees pursuant to Section 401(K) of the Internal Revenue Code. Contributions
to the Plan by the company will be made at our sole discretion. Participants may
also make contributions to the Plan. We did not make any contributions to the
Plan for fiscal years 2000 and 1999.
NOTE 12 - STOCK OPTION PLANS
EMPLOYEE STOCK OPTION PLANS
On July 29, 1996 we 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 us to provide our employees with incentive compensation
opportunities that are highly motivational. On August 26, 1998, we 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 our common stock was $1.19. 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.
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.
During fiscal 2000, we issued 100,000 options to a new board member and
20,000 options to that Board member for participation on committees. During
fiscal 1999, we 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.
The following is a summary of 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, 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
Granted - - 120,000 3.78
Cancelled - - (33,333) 2.25
Exercised (164,333) 1.69 (51,667) 1.29
========= =========
Outstanding at March 31, 2000 48,800 1.68 661,667 1.76
========= =========
<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, 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
Granted 1,801,527 4.32 325,000 4.47
Cancelled (388,502) 1.20 (6,666) 2.25
Exercised (559,621) 1.17 (924,367) 1.70
========= =========
Outstanding at March 31, 2000 3,268,568 2.98 2,299,970 2.15
========= =========
<CAPTION>
IBC LONG-TERM INCENTIVE PLAN
Number Weighted Average
of Shares Exercise Price
<S> <C> <C>
Outstanding at March 31, 1998 163,972 4.61
Granted 181,617 8.28
Canceled (37,457) 4.61
Exercised - -
---------
Outstanding at March 31, 1999 308,132 6.76
Granted - -
Cancelled (308,132) 6.76
Exercised - -
---------
Outstanding at March 31, 2000 - -
=========
</TABLE>
Options available for grant under the 1997 Equity Incentive Plan at March
31, 2000 and 1999 are 146,811 and 1,559,836, respectively. Options available for
grant under the 1992 Directors Option Plan at March 31, 2000 and 1999 are
224,999 and 311,666, respectively. No options are available for grant under the
1992 Stock Option Plan.
The following table summarizes information about stock options outstanding and
exercisable at March 31, 2000.
<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 $1.66 - 2.13 $.89 - 3.78 $.75 - 7.74 $1.04 - 5.09
Number of Shares 48,800 661,667 3,268,568 2,299,970
Weighted Average Life 5.3 7.5 9.1 5.3
Weighted Average Exercise Price $1.68 $1.76 $2.98 $2.15
Exercisable
Number of Shares 48,800 235,000 811,629 2,126,102
Weighted Average Exercise Price $1.68 $1.67 $1.62 $2.14
</TABLE>
STOCK BASED COMPENSATION
All stock options and warrants that have been granted to employees and
directors have been at or above fair market value of our Common Stock at the
time of grant. As a result, no compensation expense or other accounting relating
to our stock options issued has been required to be recorded within our
financial statements. The foregoing accounting is in accordance with Accounting
Principles Board Opinion No. 25 (APB Opinion No. 25) and related
interpretations. We have adopted the disclosure provisions of Statement of
Financial Accounting Standards No. 123, Accounting for Stock-Based Compensation,
(SFAS 123). We have included below 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. 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 2000 Fiscal 1999
Net loss applicable to common shares - as
reported $(11,033,000) $(2,309,000)
Net loss applicable to common shares -
pro forma (13,191,000) (4,309,000)
Net loss per common share - as reported (1.11) (.32)
Net loss per common share - pro forma (1.32) (.59)
The fair value of each option grant is calculated using the following weighted
average assumptions:
Fiscal 2000 Fiscal 1999
Expected life (years) 5 5
Interest rate 6.21% 5.08%
Volatility 79% 117%
Dividend yield 0 0
The weighted average fair value of options granted during fiscal 2000 and 1999
was $2.85 and $0.94, respectively.
We have issued stock options and warrants for services performed by outside
organizations. The values of these options have been determined as provided in
SFAS 123 for stock options using the Black-Scholes option pricing model
resulting in charges to our operating results of $1,114,000 for fiscal 2000.
Charges to our operating results for fiscal 1999 were $83,000 representing the
estimated fair value of these activities.
NOTE 13 - SEGMENT AND CUSTOMER INFORMATION
For the year ended March 31, 2000 sales made to one major customer and to
leads furnished by that customer accounted for approximately 26% of our total
revenues. Amounts due from this customer were approximately 25% of our accounts
receivable balance as of March 31, 2000. For the year ended March 31, 1999 sales
made to the same customer and to the leads furnished by that customer accounted
for approximately 20% of our total revenues. Amounts due from the customer were
approximately 20% of our accounts receivable balance as of March 31, 1999.
We 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.
The financial position and results of operations previously reported by
insci and IBC and the combined amounts presented in the accompanying
consolidated financial statements are summarized as follows (in thousands):
Years ended March 31,
2000 1999
REVENUE
insci $ 10,854 $ 12,406
IBC 166 212
Infinite - -
-------- --------
$ 11,020 $ 12,618
======== ========
NET (LOSS)
insci $ (6,522) $ (451)
IBC (1,664) (1,152)
Infinite (1,280) -
-------- --------
$ (9,466) $ (1,603)
======== ========
TOTAL ASSETS
insci $ 6,009
IBC -
Infinite 1,176
--------
$ 7,185
========
Revenue was derived from customers in the following geographic areas
(in thousands)
Year ended March 31
-------------------
2000 1999
North America $ 8,367 $11,008
Europe 1,358 1,131
Other 1,295 479
------- -------
Total $11,020 $12,618
======= =======
NOTE 14 - QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)
During the fourth quarter of fiscal 2000, the Company determined that it
would utilize the Black-Scholes option pricing model to value the amount of
compensation expense to be recorded in connection with options granted to
non-employees as proscribed under Emerging Issues Task Force (EITF) Issue No.
96-18 - Accounting for Equity Instruments That Are Issued to Other Than
Employees for Acquiring or in Conjunction with Selling, Goods or Services. These
options had been initially valued during the first three quarters using the cash
value as defined in the non-employee agreements. This change resulted in an
incremental non-cash charge of approximately $988,000 during fiscal 2000.
Further, as required in connection with the pooling of interest transaction
consummated in the third quarter of fiscal 2000 (as discussed in Note 2) the
Company recognized certain adjustments to previously reported amounts. These
related to conformity of reporting periods of the two companies and the impact
of a non-cash preferred stock dividend by IBC (see Note 2).
The impact of these changes did not effect the Company's net worth. The
Company's previously reported results have been adjusted to include these
non-cash changes and are presented in the tables that follow:
THREE MONTHS ENDED
JUNE 30, 1999
(UNAUDITED)
------------------------
PREVIOUSLY AS
REPORTED* ADJUSTED
------------------------
Operating loss (1,004) (1,336)
Net loss (1,047) (1,379)
Preferred stock dividends (160) (160)
Net loss applicable to
common shares (1,207) (1,539)
Basic and diluted loss
per share (0.15) (0.19)
THREE MONTHS ENDED SIX MONTHS ENDED
SEPTEMBER 30, 1999 SEPTEMBER 30, 1999
(UNAUDITED) (UNAUDITED)
------------------------ ------------------------
PREVIOUSLY AS PREVIOUSLY AS
REPORTED* ADJUSTED REPORTED ADJUSTED
------------------------ ------------------------
Operating loss (6) (299) (1,016) (1,641)
Net loss (19) (312) (1,066) (1,691)
Preferred stock dividends (143) (143) (303) (303)
Net loss applicable to
common shares (162) (455) (1,369) (1,994)
Basic and diluted loss
per share (0.02) (0.05) (0.16) (0.23)
THREE MONTHS ENDED NINE MONTHS ENDED
DECEMBER 31, 1999 DECEMBER 31, 1999
(UNAUDITED) (UNAUDITED)
------------------------- ------------------------
PREVIOUSLY AS PREVIOUSLY AS
REPORTED ADJUSTED REPORTED ADJUSTED
------------------------ ------------------------
Operating loss (920) (1,084) (1,936) (2,725)
Net loss (1,600) (1,764) (2,666) (3,455)
Preferred stock dividends (125) (1,168) (428) (1,471)
Net loss applicable to
common shares (1,725) (2,932) (3,094) (4,926)
Basic and diluted loss
per share (0.16) (0.29) (0.32) (0.54)
* Previously reported results have been adjusted to reflect the pooling of
interests described in Note 2.
NOTE 15 - SUBSEQUENT EVENTS
On May 24, 2000, we acquired all of the issued and outstanding common
stock from the stockholders of a company known as Lognet 2000, Inc. ("Lognet"),
formerly known as Lognet, Inc. The shareholders of Lognet exchanged all of the
issued and outstanding stock in Lognet for a pro rata aggregate of 2,500,000
restricted shares of the common stock of insci, resulting in a total purchase
price of approximately $8.4 million. As of May 24, 2000, Lognet had net
liabilities of $1.0 million and $3.0 million of cash and cash equivalents. A
significant portion of the purchase price is deemed to be in-process research
and development. We are in the process of obtaining an independent appraisal of
the amount of in-process research and development and will take a charge to
operations when this appraisal has been completed. The acquisition will be
accounted for under the purchase method of accounting.
The company and/or any of its officers, directors, affiliates or
associates did not have any material or other business relationship with Lognet
or any of its stockholders.
We issued 2,500,000 shares of our common stock $.01 par value from our
authorized, but unissued, common stock in exchange for all of the shares of
Lognet. The former stockholders of Lognet were granted registration rights for
their shares in insci, and we agreed to use our best efforts to register the
exchange shares by September 15, 2000. We did not utilize any bank borrowings
with respect to the exchange price for the Lognet shares of common stock.
Lognet is in the business of the PC-to-host and print connectivity
industries. It provides hardware and software solutions that enable
organizations to extract greater value from their centralized architecture data
systems. Lognet has print protocol conversion, emulation technologies, and
expertise in legacy data integration. Additionally, Lognet is also in the
business of electronic bill presentment and payment (EBPP). EBPP is an
electronic process for delivery of bills and bill-related documents over the
Internet to consumer and business customers, and is creating an e-billing
solution that enables billers to extract and convert legacy-billing data and
distribute it over the Internet.
The company, in acquiring all of the shares of common stock of Lognet will
use the Lognet technology in the development of portal-based electronic
statement presentment services and our ESP and on-site software solutions
business.
The Board of Directors of insci, as a part of the exchange agreement,
appointed Yaron I. Eitan, as a member of the company's Board of Directors. Mr.
Eitan is the founder and principal of Lognet and has also been an investor in
Selway Partners LLC, a management company, engaged in advising technology
companies.
