<PAGE>
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 8-K/A
AMENDMENT NO. 1 TO FORM 8-K DATED DECEMBER 27, 1999
CURRENT REPORT
Pursuant to Section 13 or 15(d) of the
Securities and Exchange Act of 1934
Date of Report (Date of earliest event reported) DECEMBER 27, 1999
-----------------
INSCI-STATEMENTS.COM, CORP.
----------------------------------------------------
Exact name of Registrant as specified in its Charter)
DELAWARE
---------------------------------------------
(State of other jurisdiction of incorporation)
1-12966 06-1302773
- ------------------- ------------------------------
Commission File No. I.R.S. Employer Identification
TWO WESTBOROUGH BUSINESS PARK,
WESTBOROUGH, MA 01581
- ------------------------------------- ---------------
Address of principal executive offices Zip Code
(508) 870-4000
- --------------
Registrant's telephone number,
including area code
<PAGE>
ITEM 7. FINANCIAL STATEMENTS AND EXHIBITS.
The Registrant ("Company") supplements its Form 8-K Report filed on
December 27, 1999 with respect to the acquisition of all of the issued and
outstanding Common Stock by the Company of Internet Broadcasting Company, Inc.
("IBC"). The Company, supplementally submits the Financial Statements of IBC as
of June 30, 1999 and June 30, 1998 and related consolidated statements of
operations, changes in stockholders' equity (deficit) and cash flows for the
years then ended and for the period from August 23, 1996 (inception) to June 30,
1999, and the related pro forma and supplemental financial statements.
EXHIBITS
(1) Financial Statements of IBC (as stated above).
(2) Pro forma financial information as of September 30, 1999 and for
the years ended March 31, 1999 and 1998 and for the six months
ended September 30, 1999.
(3) Supplemental financial statements of INSCI as of March 31, 1999
and September 30, 1999 and for the years ended March 31, 1999 and
1998 and for the six months ended September 30, 1999 and 1998.
(4) Copy of Stock Purchase Agreement by and between the Company and
Stockholders of IBC.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the Registrant has duly caused this Report to be signed on its behalf by the
undersigned hereunto duly authorized.
Dated: Westborough, MA
January 12, 2000
INSCI-STATEMENTS.COM, CORP.
--------------------------------
(Registrant)
ROGER KUHN
--------------------------------
Chief Financial Officer
<PAGE>
Exhibit 1
THE INTERNET BROADCASTING COMPANY, INC.
AND SUBSIDIARY
(A DEVELOPMENT STAGE COMPANY)
FINANCIAL STATEMENTS
JUNE 30, 1999
<PAGE>
THE INTERNET BROADCASTING COMPANY, INC. AND SUBSIDIARY
(A DEVELOPMENT STAGE COMPANY)
TABLE OF CONTENTS
JUNE 30, 1999
PAGE
----
INDEPENDENT AUDITOR'S REPORT 1
FINANCIAL STATEMENTS
Consolidated Balance Sheets 2 - 3
Consolidated Statements of Operations 4
Consolidated Statements of Changes in Stockholders' Equity (Deficit) 5
Consolidated Statements of Cash Flows 6 - 7
Notes to Financial Statements 8 - 22
<PAGE>
INDEPENDENT AUDITOR'S REPORT
To the Board of Directors
The Internet Broadcasting Company, Inc.
and Subsidiary
Pompano Beach, Florida
We have audited the accompanying consolidated balance sheets of The Internet
Broadcasting Company, Inc. (formerly The Capital Internet Group, Inc) and
Subsidiary (a Development Stage Company), as of June 30, 1999 and 1998 and the
related consolidated statements of operations, changes in stockholders' equity
(deficit), and cash flows for the years then ended and for the period from
August 23, 1996, (Inception) to June 30, 1999. These financial statements are
the responsibility of the Company's management. Our responsibility is to express
an opinion on the financial statements based on our audit.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the consolidated financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of The Internet Broadcasting
Company, Inc. and Subsidiary at June 30, 1999 and 1998 and the results of its
operations and its cash flows for the years then ended and from August 23, 1996,
(Inception) to June 30, 1999, in conformity with generally accepted accounting
principles.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As discussed in Note 13 to the
financial statements, the Company's significant operating losses, working
capital deficiency and negative net worth raise substantial doubt about its
ability to continue as a going concern. The financial statements do not include
any adjustment that might result from the outcome of this uncertainty.
Boca Raton, Florida
October 24, 1999
<PAGE>
THE INTERNET BROADCASTING COMPANY, INC. AND SUBSIDIARY
(A DEVELOPMENT STAGE COMPANY)
CONSOLIDATED BALANCE SHEETS
ASSETS
JUNE 30,
-------------------
1999 1998
-------- --------
CURRENT ASSETS
Cash $ 547 $ 68,463
Cash - Escrow 24,552
Accounts Receivable, Net of Allowance
for Doubtful Accounts of $0 and $4,467 15,660 7,564
Advances to Officers 14,065
Prepaid Expenses 2,833 2,809
Due from Broker-Dealer 5,599 5,327
Subscriptions Receivable 17,000
-------- --------
Total Current Assets 63,256 101,163
-------- --------
PROPERTY AND EQUIPMENT, NET 84,155 74,803
-------- --------
OTHER ASSETS
Deposits 4,798 4,586
Organization Costs, Net 4,917 7,944
-------- --------
9,715 12,530
-------- --------
$157,126 $188,496
======== ========
The Accompanying Notes are an
Integral Part of These Financial Statements
<PAGE>
THE INTERNET BROADCASTING COMPANY, INC. AND SUBSIDIARY
(A DEVELOPMENT STAGE COMPANY)
CONSOLIDATED BALANCE SHEETS (CONTINUED)
<TABLE>
<CAPTION>
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
JUNE 30,
---------------------------------
1999 1998
------------ ------------
CURRENT LIABILITIES
<S> <C> <C>
Line of Credit - Bank $ 50,000 $
Accounts Payable 380,361 348,116
Accrued Payroll 271,558 151,333
Accrued Liabilities - Other 36,920 48,831
Current Portion of Capital Lease Obligations 35,026 20,581
Loans from Stockholders 2,000 2,000
Convertible Debt 378,000 10,000
Deposit on Sale of Subsidiary 5,000
------------ ------------
Total Current Liabilities 1,158,865 580,861
------------ ------------
Convertible Debt 276,000
Capital Lease Obligations, Net of Current Portion 27,919 39,923
------------ ------------
303,919 39,923
------------ ------------
STOCKHOLDERS' EQUITY (DEFICIT)
Preferred Stock, Par Value $.01 Per Share; 720,000
Shares Series A Convertible Authorized, 300,898
and - 0 - Issued and Outstanding, respectively 3,009
Common Stock, Par Value $.01 Per Share;
10,000,000 Shares Authorized, 763,524
Issued and Outstanding 7,635 7,635
Additional Paid-in Capital 1,232,880 182,765
Subscribed/Paid for and Not Issued - 4,286 and
228,463 Shares of Preferred Stock, Respectively 15,000 799,620
Paid for and Not Issued - 15,000 and
5,000 Shares of Common Stock, Respectively 15,000 5,000
Deficit Accumulated During the Development Stage (2,579,182) (1,427,308)
------------ ------------
(1,305,658) (432,288)
------------ ------------
$ 157,126 $ 188,496
============ ============
The Accompanying Notes are an Integral Part of These Financial Statements
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
THE INTERNET BROADCASTING COMPANY, INC. AND SUBSIDIARY
(A DEVELOPMENT STAGE COMPANY)
CONSOLIDATED STATEMENTS OF OPERATIONS
FROM
AUGUST 23, 1996
YEAR ENDED JUNE 30, (INCEPTION) THRU
1999 1998 JUNE 30, 1999
----------- ----------- ----------------
<S> <C> <C> <C>
REVENUE $ 211,610 $ 8,641 $ 227,373
----------- ----------- -----------
OPERATING EXPENSES
Compensation 458,742 305,664 855,459
Contract Labor 141,235 27,830 177,965
Advertising 30,234 62,322 98,591
Licenses and Fees 4,196 3,939 13,532
Programming Fees 201,795 592,982 794,777
Rent 39,160 29,052 75,790
Other 373,157 194,396 591,147
----------- ----------- -----------
Total Operating Expenses 1,248,519 1,216,185 2,607,261
----------- ----------- -----------
Loss from Operations (1,036,909) (1,207,544) (2,379,888)
----------- ----------- -----------
OTHER INCOME (EXPENSE)
Interest Expense (78,813) (6,674) (85,698)
Depreciation and Amortization (36,481) (22,905) (61,270)
Offering Costs (53,042)
Other 329 324 716
----------- ----------- -----------
Total Other (Expense) (114,965) (29,255) (199,294)
----------- ----------- -----------
Net (Loss) $(1,151,874) $(1,236,799) $(2,579,182)
=========== =========== ===========
</TABLE>
The Accompanying Notes are an
Integral Part of These Financial Statements
<PAGE>
<TABLE>
THE INTERNET BROADCASTING COMPANY, INC. AND SUBSIDIARY
(A DEVELOPMENT STAGE COMPANY)
CONSOLIDATED STATEMENTS OF CHANGES IN
STOCKHOLDERS' EQUITY (DEFICIT)
<CAPTION>
Preferred Deficit
Stock Common Accumulated
Additional Subscribed/ Stock Paid During the
Preferred Stock Common Stock Paid-In Paid For and For and Not Development
Shares Amount Shares Amount Capital Not Issued Issued Stage Total
------- -------- ------- -------- --------- ---------- --------- ------------ -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Balance, July 1, 1997 $ 724,000 $ 7,240 $ 151,160 $ $ $ (190,509) $ (32,109)
Issuance for:
Cash 39,524 395 31,605 782,620 5,000 819,620
Subscription
Receivable 17,000 17,000
Net (Loss) (1,236,799) (1,236,799)
------- -------- ------- -------- --------- ---------- --------- ------------ -----------
Balance, June 30, 1998 763,524 7,635 182,765 799,620 5,000 (1,427,308) (432,288)
Issuance for:
Cash 77,292 773 269,731 (2,000) 10,000 278,504
Subscription Paid
in prior year 223,606 2,236 780,384 (782,620)
Net (Loss) (1,151,874) (1,151,874)
------- -------- ------- -------- --------- ---------- --------- ------------ -----------
Balance
June 30, 1999 300,898 $ 3,009 763,524 $ 7,635 $1,232,880 $ 15,000 $ 15,000 $ (2,579,182) $(1,305,658)
======= ======== ======= ======== ========== =========== ========= ============ ===========
The Accompanying Notes are an Integral Part of These Financial Statements
</TABLE>
<PAGE>
<TABLE>
THE INTERNET BROADCASTING COMPANY, INC. AND SUBSIDIARY
(A DEVELOPMENT STAGE COMPANY)
CONSOLIDATED STATEMENTS OF CASH FLOWS
<CAPTION>
FROM
AUGUST 23, 1996
YEAR ENDED JUNE 30, (INCEPTION) THRU
1999 1998 June 30, 1999
---- ---- -------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net (Loss) $(1,151,874) $(1,236,799) $(2,579,182)
Adjustments to Reconcile Net (Loss) to
Net Cash Used in Operating Activities
Amortization 3,027 1,557 4,584
Depreciation 33,454 21,348 56,686
Loss on Disposition of Property and Equipment 512 512
Issuance of Commons Stock for Services
and Incentives 93,400
Issuance of Stock Options for Services
and Incentives 2,000
Changes in Assets and Liabilities:
(Increase) in:
Cash-Escrow (24,552) (24,552)
Accounts Receivable (8,096) (7,373) (15,660)
Prepaid Expenses (24) (1,662) (2,834)
Due from Broker-Dealer (272) (5,327) (5,599)
Increase in:
Accounts Payable and Accrued Liabilities 140,559 479,567 686,839
----------- ----------- -----------
Cash Flows Used in Operating Activities (1,007,778) (748,177) (1,783,806)
----------- ----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES
Increase in Deposits (212) (1,823) (4,798)
Acquisition of Property and Equipment (11,970) (14,157) (44,972)
Increase in Organization Costs (1,470) (9,501)
Proceeds from Disposition of Property
and Equipment 1,226 1,226
Deposit on Sale of Subsidiary 5,000 5,000
----------- ----------- -----------
Cash Flows Used in Investing Activities (7,182) (16,224) (53,045)
----------- ----------- -----------
The Accompanying Notes are an Integral Part of These Financial Statements
</TABLE>
<PAGE>
<TABLE>
THE INTERNET BROADCASTING COMPANY, INC. AND SUBSIDIARY
(A DEVELOPMENT STAGE COMPANY)
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
<CAPTION>
FROM
AUGUST 23, 1996
YEAR ENDED JUNE 30, (INCEPTION) THRU
1999 1998 June 30, 1999
---- ---- -------------
CASH FLOWS FROM FINANCING ACTIVITIES
<S> <C> <C> <C>
Proceeds from Line of Credit $ 50,000 $ $ 50,000
Proceeds from Convertible Loans 654,000 10,000 664,000
Proceeds from Preferred Stock Subscriptions 15,000 782,620 797,620
Issuance of Preferred Stock 253,504 253,504
Issuance of Common Stock 17,000 37,000 119,000
Payments on Capital Lease Obligations (28,395) (6,145) (34,661)
Proceeds (Repayments) of Stockholder Loans (2,000) 2,000
Advances to Officers (14,065) (14,065)
--------- --------- ---------
Cash Flows Provided by Financing Activities 947,044 821,475 1,837,398
--------- --------- ---------
Increase (Decrease) in Cash (67,916) 57,074 547
--------- --------- ---------
Cash:
Beginning 68,463 11,389
--------- --------- ---------
Ending $ 547 $ 68,463 $ 547
========= ========= =========
SUPPLEMENTAL DISCLOSURE OF CASH
FLOW INFORMATION:
Cash Payments for Interest $ 46,894 $ 6,674 $ 53,779
========= ========= =========
SUPPLEMENTAL SCHEDULE OF NON-CASH
INVESTING AND FINANCING ACTIVITIES:
Issuance of Common Stock for
Subscription Receivable $ 17,000
========
Property and Equipment Financed by
Capital Leases $ 30,835 $ 61,279 $ 97,605
========= ========= =========
Issuance of Common Stock for Services
and Incentives $ 93,400
=========
Issuance of Stock Options for
Services and Incentives $ 2,000
=========
Conversion of Loan to Common Stock
Paid for Not Issued $ 10,000 $ 10,000
========= =========
The Accompanying Notes are an Integral Part of These Financial Statements
</TABLE>
<PAGE>
THE INTERNET BROADCASTING COMPANY, INC. AND SUBSIDIARY
(A Development Stage Company)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1: ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
ORGANIZATION AND NATURE OF BUSINESS
The Internet Broadcasting Company, Inc. (formerly The Capital Internet Group,
Inc.) (IBC), the parent company, was incorporated in Delaware in August 1996.
IBC was established to engage in specialized consulting to the financial
services industry primarily in the United States. IBC is currently using a
proprietary software application, InterEngine, to offer paperless brokerage
statements and trade confirmations to mutual fund investors via the Internet
using e-mail. The individual mutual funds compensate IBC for this service. The
Company also has provided Internet related consulting services and had
established the Mutual Fund Channel, which allowed Internet users to receive
mutual fund information.
CIG Securities, Inc. (CIG) is a wholly owned subsidiary of IBC and was
incorporated in Florida in October 1996. CIG is a registered NASD member
broker-dealer (Note 14).
Unless the context otherwise requires, all references herein to the Company
shall mean IBC and its wholly owned subsidiary.
The Company is in the development stage, planned principal operations have
commenced, but there has not been significant revenue therefrom.
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF CONSOLIDATION
The accompanying consolidated financial statements include the accounts of IBC
and it's subsidiary. Intercompany accounts and transactions have been eliminated
in consolidation.
REVENUE RECOGNITION
Revenue was earned by the Company for broadcasting mutual fund information over
the Internet to users. The Company recognized programming set up fees when
programming was completed. The Company recognized broadcasting fees as they were
earned.
Consulting and other revenue is recognized on the accrual basis as earned.
CASH AND CASH EQUIVALENTS
For purposes of the statements of cash flows, the Company considers all highly
liquid investments purchased with an original maturity of three months or less
to be cash equivalents.
ORGANIZATION COSTS
Organization costs, consisting of legal fees and related professional fees
required in establishing the entities, have been deferred and are being
amortized over a sixty month period beginning upon the commencement of
operations.
PROPERTY AND EQUIPMENT
Property and equipment is recorded at cost. Property and equipment under capital
leases are stated at the lower of the present value of the minimum lease
payments at the beginning of the lease term or the fair value at the inception
of the lease. Depreciation is computed using an accelerated method over the
estimated useful lives of the related assets. Amortization of assets acquired
under capital leases are included in depreciation expense.
ADVERTISING
The Company expenses advertising costs as they are incurred.
STOCK BASED COMPENSATION
As permitted under Statement of Financial Accounting Standards (SFAS) No. 123,
Accounting for Stock Based Compensation, the Company has elected not to adopt
the fair value based method of accounting for its stock based compensation plan
but to account for such compensation using the intrinsic value method under the
provisions of Accounting Principles Board (APB) Opinion No. 25 (Note 7).
ACCOUNTING ESTIMATES
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make certain 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 revenue and expenses during the reporting
period. Actual results could differ from those estimates.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The Company's financial instruments include cash and cash equivalents, notes
payable, convertible debt and capital lease obligations. The carrying amount of
these financial instruments have been estimated by management to approximate
fair value.
NOTE 2: PROPERTY AND EQUIPMENT
Property and equipment, including equipment acquired under capital leases,
consists of:
1999 1998
---- ----
Furniture and fixtures $ 37,804 $ 30,514
Equipment 83,486 52,650
Software 16,928 12,249
Leasehold improvements 2,415 2,415
-------- --------
140,633 97,828
Less: Accumulated depreciation
and amortization 56,478 23,025
-------- --------
$ 84,155 $ 74,803
======== ========
NOTE 3: CAPITAL LEASE OBLIGATIONS
The Company leases certain furniture and equipment, which are accounted for as
capital leases. The following is a schedule by years of the future minimum lease
payments under the capital leases together with the present value of the net
minimum lease payments.
Year Ending June 30, 2000 $ 42,763
2001 27,834
2002 2,645
--------
Total minimum lease payments 73,242
Less: Amount representing interest 10,297
--------
Present value of minimum lease payments 62,945
Current portion 35,026
--------
Long-term portion $ 27,919
========
Equipment held under capital leases have a book value of $97,605 and $66,770 as
of June 30, 1999 and 1998, respectively. Accumulated amortization related to
this equipment was $36,946 and $13,962 as of June 30, 1999 and 1998,
respectively.
NOTE 4: LINE OF CREDIT
On August 11, 1997, the Company entered into a $50,000 line-of-credit agreement
with a bank. Advances on the credit line are payable on demand. Interest on the
outstanding balance is due monthly at prime plus 2.75%. The credit line is
collateralized by accounts receivable, equipment and general intangibles. The
balance due on the line of credit at June 30, 1999 and 1998 was $50,000 and $0,
respectively.
NOTE 5: CONVERTIBLE DEBT
Convertible debt at June 30, 1999 consists of:
10% Convertible Note, due on demand, convertible at anytime
into Series A Preferred Stock at an initial
conversion price of $3.50 per share plus unpaid interest. $ 378,000
=========
10% Convertible Senior Promissory Notes, due in 2004,
convertible into common stock (1) automatically at an
adjusted conversion price based upon the lesser of the
value of the Company on the change of control of the
Company (sale, merger or reorganization) or $8,000,000,
in both cases less 20% (2) the closing of a qualified
sale, as defined, relating to a public offering or series
of private placements with aggregate proceeds in excess
of $3,000,000, or (3) voluntarily into shares of common
stock by dividing the aggregate principal amount and
accrued interest through the conversion date by the
conversion price, adjusted by capital transaction
(splits) in effect at the time of conversion. The initial
conversion price is $2.33. $ 276,000
=========
NOTE 6: CAPITAL STRUCTURE
PREFERRED STOCK
In November, 1996, the Board of Directors was authorized to issue up to
1,000,000 shares of Preferred Stock, par value $.01 per share in various series
and to fix any rights, preferences, privileges or restrictions, etc.
In May 1998, the Board of Directors authorized the issuance of Series A
Preferred Stock consisting of 720,000 authorized shares of which a total of
300,898 shares were issued and 4,286 were paid for but not issued at June 30,
1999 (June 30, 1998 - 223,606 paid for but not issued and 4,857 subscribed for
but unpaid). The Series A Preferred Stock calls for non-cumulative dividends of
$.30 per annum and liquidation preferences of $3.50 per share plus all unpaid
dividends. During the first three years, upon a change in control transaction,
Series A preferred stockholders are to receive $3.50 per share, plus accrued and
unpaid dividends, together with an amount which will provide the holders of the
Series A Preferred Stock with a cumulative return at the rate of 35% per annum.
No dividends have been paid on preferred stock.
The Series A Preferred Stock is voluntarily convertible to common stock based
upon a 1.5 to 1 conversion, at a conversion price of $2.33 per share of common
stock, and automatically converts to common stock in the event of a public
offering with an offering price of $3.00 per share or above and gross proceeds
of $7.5 million or more or upon change of control.
Holders of Series A Preferred Stock have one vote for each share.
The Company has reserved 108,000 shares of preferred stock for issuance related
to convertible debt.
COMMON STOCK
The Company has ten million shares of common stock authorized. Common stock has
one vote per share for the election of directors and all other matters submitted
to a vote of stockholders. Shares of common stock do not have cumulative voting,
preemptive, redemption or conversion rights.
The Company has reserved 1,748,006 and 1,411,250 shares of common stock for
issuance related to unexpired options and warrants at June 30, 1999 and 1998,
respectively. At June 30, 1999, the Company has reserved 15,000 shares of common
stock paid for but unissued. In addition, the Company has reserved 364,598
shares of restricted common stock to be issued to the Company's officers (Notes
8 and 9).
NOTE 7: STOCK OPTIONS
On August 23, 1996, the six founders of the Company were each granted options to
purchase 50,000 shares of common stock at a price of $4.75 per share. These
Options were exercisable in whole or in part at any time through and until
August 23, 2010. These options were repurchased in 1998 and replaced by stock
warrants issued under warrant agreements (Note 9). There are no specific
restrictions on the exercise of the options granted to these founders other than
good judgment and commitment to the Company's long-term success. In the
Company's view, unless a valuable, growing company is created, the options will
be worthless. In addition, using an option-pricing model similar to that
indicated below, the fair value of these options were insignificant.
In November, 1996, the Board of Directors and shareholders approved the 1996
Stock Option Plan (the "Plan") with 600,000 shares of common stock reserved for
the grant of qualified incentive options or non-qualified options to employees
and directors of the Company. Option prices must provide for an exercise price
of not less than 100% for qualified options (75% for non-qualified options) of
the fair market value of the common stock on the date the options are granted
unless the eligible employee owns more than 10% of the Company's common stock
for which the exercise price must be at least 110% of such fair market value.
Options to purchase 60,000 shares of common stock at $.01 per share were granted
to employees in April 1997. Such options vest in six-month equal increments
until October 1999 and expire in six-month equal increments through April 2000.
These options were repurchased and replaced by options issued under the 1998
Long-Term Incentive Plan. Under the intrinsic value method, the options were
valued at $1.00 per share and no compensation expense related to these options
was recorded since the exercise price equals the intrinsic value.
In June 1998, the Board of Directors and shareholders approved the Capital
Internet Group, Inc. Long-Term Incentive Plan (the "1998 Long-Term Incentive
Plan") (the "Plan") with 2,100,000 shares of common stock reserved for the grant
of qualified incentive options, non-qualified options or stock appreciation
rights to employees, officers, or non-employee Directors of the Company or a
related company. Option prices shall be established by the Plan Committee except
that the exercise price of incentive stock options shall not be less than 100%
of the fair market value of a share of common stock as of the date of the grant.
Pursuant to the Plan, the Company granted incentive stock options to its full
time employees for the purchase of common stock at $1.00 per share:
MAXIMUM
DATE OF GRANT SHARES TERM IN YEARS
------------- ------ -------------
June, 1998 742,045 10
The exercise price as set by management approximated the fair value of the
Company's stock based upon transactions occurring around the date of the grant.
The options vest upon grant and at annual increments in accordance with each
individual employee's agreement.
A summary of the status of the Company's stock options as of June 30, 1999 and
1998 and the changes during the year ended June 30, 1999 and 1998 is presented
below:
1999 1998
----------------- ---------------------
WEIGHTED WEIGHTED
AVERAGE AVERAGE
EXERCISE EXERCISE
FIXED OPTIONS SHARES PRICE SHARES PRICE
------------- ------ ----- ------ -----
Outstanding at Beginning of Year 7,143 $ 1.73 1,460,000 $ 1.73
Granted 457,143 1.73
Exercised
Forfeited (7,143) (1,910,000) 1.73
------ ---------
Outstanding at June 30 - 7,143
====== =========
Exercisable at June 30 7,143
Weighted Average Fair Value of
Options Granted During the Period $ 0.02
1999 1998
----------------- ---------------------
WEIGHTED WEIGHTED
AVERAGE AVERAGE
EXERCISE EXERCISE
INCENTIVE STOCK OPTIONS SHARES PRICE SHARES PRICE
----------------------- ------ ----- ------ -----
Outstanding at Beginning of Year 742,045 $ 1.00 $
Granted 554,400 2.33 742,045 1.00
Exercised
Forfeited (164,000) 1.00 $
--------- ---------
Outstanding at June 30 1,132,445 742,045
========= =========
Exercisable at June 30 1,132,445 742,045
Weighted Average Fair Value of
Options Granted During the
Period 2.33 $ 1.00
1999 1998
----------------- ---------------------
WEIGHTED WEIGHTED
AVERAGE AVERAGE
EXERCISE EXERCISE
NON QUALIFIED STOCK OPTIONS SHARES PRICE SHARES PRICE
--------------------------- ------ ----- ------ -----
Outstanding at Beginning of Year -
Granted 275,407 .77
Exercised
Forfeited
------- ------
Outstanding at June 30 275,407 -
======= ======
Exercisable at June 30 275,407
Weighted Average Fair Value of
Options Granted During the Period .77
The following table summarizes information about incentive and non qualified
stock options outstanding at June 30, 1999:
OUTSTANDING OPTIONS EXERCISABLE OPTIONS
---------------------- -----------------------
WEIGHTED
NUMBER AVERAGE NUMBER WEIGHTED
RANGE OF OUTSTANDING REMAINING EXERCISABLE AVERAGE
EXERCISE AT JUNE 30, CONTRACTUAL AT JUNE 30, EXERCISE
PRICES 1999 LIFE 1999 PRICE
- -------- ----------- ---------- ----------- ---------
Incentive Stock Options
$1.00 578,045 9.8 578,045 $ 1.65
$2.33 554,400 554,400
Non Qualified Stock Options
$.01 - $2.33 275,407 10.0 275,407 $ .77
--------- =--------
$.01 - $2.33 1,407,852 1,407,852
========= =========
The fair value of each option is estimated on the grant date using an option
pricing model with the following weighted average assumptions for the grants and
a 0% dividend yield, a risk free interest of 6.58% and expected lives in years
as follows.
EXPECTED
SHARES LIVES (YEARS)
------ -------------
1,132,445 9.8
275,407 10.7
If the Company had used the fair value based method of accounting for its
employee stock options, as prescribed by SFAS No. 123, compensation cost
included in accumulated deficit for the year ended June 30, 1999 and 1998 would
not have been significant.
NOTE 8: COMMITMENTS
OPERATING LEASES
The Company, on February 1, 1998, entered into a three-year lease for office
space located in Pompano Beach, Florida for the corporate office. The lease
provides for an initial monthly base rent of $3,136 which increases by four
percent on each lease anniversary date and other common area changes. The lease
expires January 31, 2001 and has two three-year renewal options.
The Company also leases office equipment under various operating leases with
monthly lease payments totaling $819. These leases expire from March 2001 to
October 2001.
The total minimum lease commitment at June 30, 1999 is as follows:.
Year Ending June 30, 2000 $ 49,617
2001 31,641
2002 703
--------
$ 81,961
========
Office and equipment rent expense for the years ended June 30, 1999 and 1998,
were $48,232 and $32,008, respectively.
EMPLOYMENT CONTRACTS
The Company entered into a "Stock Option and Employment Agreement" with Brad
Levine, a prior President and now the Vice President of the Company, on October
5, 1996. The Agreement provides for a basic minimum weekly salary of $2,000. The
second component of the agreement is the issuance of options to purchase one
million shares of common stock at a price of $1.00 per share. These options were
repurchased by the Company during the year ended June 30, 1998 and replaced with
454,545 incentive stock options to purchase common stock at $1.00 per share,
178,607 non-qualified stock options to purchase common stock at prices ranging
from $.01 to $1.00 per share, and 314,598 shares of restricted common stock
(Note 9) unissued at June 30, 1999. The Agreement obligates Mr. Levine to
provide his services for ten years on an "as needed basis" to carry out the
Company's business plans. In the event Mr. Levine's services with the Company
are terminated for any reason all options granted to Mr. Levine will be
exercisable until June 10, 2008. In addition, all non-qualified stock options
granted to Mr. Levine will be exercisable until December 31, 2010. The
restrictions on the unissued common stock end June 11, 2003. None of the options
have been exercised.
The Company, prior to June 30, 1999, entered into "Stock Option and Employment
Agreements" with three other officers, two of which had resigned prior to June
30, 1999. These agreements provide for a base minimum bi-weekly salary
aggregating $6,154. The second component of the agreements is the issuance of
options to purchase 330,000 shares each of common stock at a price of $1.00 per
share. The options were repurchased by the Company and replaced with 122,500
incentive stock options for the remaining officer and 62,500 non-qualified stock
options to purchase common stock at prices ranging from $.01 to $1.00 per share
for the former officers. These options expire at various dates through December
1, 2008. In the event services with the Company are terminated for any reason
all options granted to the remaining officer will be exercisable until June 11,
2008. None of the options have been exercised.
The Company, in February 1999, entered into a consulting agreement with an
individual to become its President and Chief Executive Officer. The agreement
provides, among other incentives, for monthly compensation of $16,667 and the
issuance of up to 210,000 incentive stock options to purchase shares at $2.33
per share which vest at various monthly and annual intervals through 2002. The
agreement also provides for an escrow arrangement for accrued but unpaid
compensation. At June 30, 1999 the balance in the cash escrow amounted to
$24,552.
NOTE 9: STOCK WARRANTS/RESTRICTED STOCK
STOCK WARRANTS
During the year ended June 30, 1999, the Company issued warrants to purchase
common stock as incentive for individuals to invest in the Company or for
providing services. At June 30, 1999, warrants to purchase common stock were
outstanding as follows:
# OF SHARES
ACQUIRED EXERCISE EXPIRATION
DESCRIPTION UPON EXERCISE PRICE DATE
----------- ------------- ----- ----
10 % Convertible Notes 75,600 $ 2.33 8/31-12/15/08
Directors 201,000 1.00 12/31/10
Director 25,000 2.33 1/1/10
Investment Advisors and
Consultant 37,854 2.33 10/1/09
------
339,454
=======
In connection with the issuance of the 10% convertible notes, non-detachable
warrants were received which entitled the holder of the note to purchase shares
of stock at $1.00 per share on a 5 to 1 basis of principle amount to warrant
right.
Shares issued to Directors were issued at an amount greater than the fair market
value of the common stock on the date the warrants were issued. The value of
these warrants at the date of issuance as determined by the Board of Director,
was not significant.
The value of warrants issued to a Director, investment advisors and consultants
with an exercise price of $2.33 were determined by the Board of Directors to be
of insignificant value.
RESTRICTED STOCK
In June, 1998, the Company authorized the issuance of 314,598 shares of
restricted stock to Bradley Levine, a Company Vice President, to replace options
issued pursuant to the 1996 stock option plan and repurchased by the Company.
The restrictions, which expire June 11, 2003, relate to the inability to sell,
transfer or encumber the shares except upon death, disability or change in
control of the Company. This stock was unissued as of June 30, 1999.
In October 1998, the Company authorized the issuance of 50,000 shares of
restricted stock (with the same restrictions as those authorized in June 1998)
to another Company Vice President, to replace options issued pursuant to the
1996 stock option plan and repurchased by the Company. The restrictions on this
stock expire on October 26, 2003. This stock was unissued as of June 30, 1999.
Because of the restrictions, no value has been ascribed to the above
authorizations of restricted stock issuance.
NOTE 10: INCOME TAXES
For tax purposes, the Company was in the development stage related to book
publishing until June 1997. The deficit accumulated during the development stage
of approximately $188,000 is capitalized for income tax purposes as accumulated
start-up costs and is being amortized over a 60-month period beginning in July
1997. In addition, for tax purposes, the Company was in the development stage
for the Mutual Fund Channel from July 1997 to April 1998. The deficit
accumulated during the Mutual Fund Channel development stage of approximately
$589,000 is capitalized for income tax purposes as accumulated start-up costs.
However, no election to amortize these costs was made.
The significant components of the Company's net deferred income taxes as of June
30, 1999 and 1998 are approximately as follows:
1999 1998
---- ----
Deferred tax assets:
Deferred compensation $ 49,000 $ 55,000
Net operating loss carryforwards 547,000 365,000
Accumulated start-up costs 42,000 56,000
--------- ---------
638,000 476,000
Valuation allowance (638,000) (476,000)
--------- ---------
Total deferred tax assets - -
========= =========
The Company has incurred net losses since inception. At June 30, 1999 and 1998,
the Company had approximately $1,455,000 and $386,000, respectively, in net
operating loss carryforwards for U.S. federal income tax purposes that expire in
various amounts through 2019. Realization of the resulting deferred tax assets,
and the Company's other net deferred tax assets, is not reasonably assured;
therefore, they are fully reserved with a valuation allowance.
The change in the valuation allowance for the years ended June 30, 1999 and 1998
were an increase of approximately $162,000 and $405,000, respectively, resulting
primarily from net operating losses generated during the period. The difference
between the benefit for income taxes and the amount which results from applying
the federal statutory rate of 34% is primarily due to the increase in the
valuation allowance, resulting in no tax benefit reported in any of those
periods.
NOTE 11: CIG SECURITIES, INC.
The following is a condensed balance sheet of CIG, included in the accompanying
consolidated balance sheet at June 30, 1999 and 1998, respectively, operations
were insignificant (Note 14).
1999 1998
---- ----
Cash $ 74 $ 2,710
Due From Broker Dealer 5,599 5,327
Organization Costs 4,671 6,229
Other 185 1,047
-------- -------
$ 10,529 $15,313
======== =======
Accounts Payable $ $ 578
Equity 10,529 14,735
-------- -------
$ 10,529 $15,313
======== =======
NOTE 12: GOING CONCERN
As shown in the accompanying consolidated financial statements, the Company
incurred a net loss of $2,579,182 during the period from August 23, 1996
(inception) to June 30, 1999, and as of that date, the Company's current
liabilities exceeded its current assets by $1,095,609 and its total liabilities
exceeded its total assets by $1,305,658. Those factors create an uncertainty
about the Company's ability to continue as a going concern. Management of the
Company is developing a plan to obtain additional funds through issuance of
additional equity or a combination of debt and equity and through a sale/merger
of the Company with a public company who would assume its liabilities as part of
the sale/merger agreement. The ability of the Company to continue as a going
concern is dependent on management's ability to continue to obtain equity
financing (Note 14). The company has also entered into financial advising and
investment banking service contracts in an effort to obtain additional
financing. The financial statements do not include any adjustments that might be
necessary to reflect the possible future effects on the recoverability and
classifications of assets or the amount and classification of liabilities that
may result from the outcome of this uncertainty.
NOTE 13: CONTINGENCY
During 1997 and 1998 the Company, d/b/a as the Mutual Fund Channel, entered into
various contracts related to the providing of financial data and information for
mutual fund companies. During 1998, under a contract with an original amount of
$28,552, the Company offered a customer, in lieu of a refund, the utilization of
the companies broadcast capabilities at a reduced rate. The customer indicated
that they did not want to utilize the broadcast capabilities and requested a
refund. It is the opinion of management that all agreements were honored and
that no amounts are due as refunds to any customers.
NOTE 14: SUBSEQUENT EVENTS
STOCK SALES
During the period July 1999 through October 1999, the Company sold 181,424
shares of Convertible Series A Preferred Stock for $634,984 to investors. Each
five dollar investment entitled the investor to receive one warrant, for a total
of 127,000 warrants. The warrants are exercisable at a price of $.50 and $1.00
for a period of 10 years from the date of the grant.
CONVERTIBLE DEBT
During the period July 1999 through October 1999, the Company sold $5,000 of 10%
Convertible Senior Promissory Notes.
SALE OF SUBSIDIARY
The Company entered into a stock purchase agreement to sell all of its shares of
CIG for $35,000 as of June 30, 1999 a deposit of $5,000 has been received,
however, the closing date has not been set.
LETTER OF INTENT
On September 28, 1999, the Company signed a letter of intent to be acquired by
INSCI Corp. (INSCI) for 1,000,000 shares of INSCI common stock and 250,000 three
year warrants to purchase INSCI common stock at an exercise price equal to $6.00
each.
<PAGE>
Exhibit 2
UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL INFORMATION
The following unaudited pro forma condensed combined financial information for
insci-statements.com, corp (insci) consists of the Unaudited Pro Forma Condensed
Combined Statement of Operations for the years ended March 31, 1999 and 1998 and
for the six months ended September 30, 1999 and the unaudited Pro Forma
Condensed Combined Balance Sheet as of September 30, 1999.
On December 10, 1999, insci entered into a merger agreement to acquire 100% of
the outstanding common stock of The Internet Broadcasting Company, Inc ("IBC")
in exchange for 1,000,000 shares of insci common stock. The unaudited Pro Forma
Condensed Combined Statements of Operations gives effect to the IBC acquisition
as if it had taken place April 1, 1997. The Unaudited Pro Forma Condensed
Combined Balance Sheet gives effect to the IBC acquisition as if it had taken
place on September 30, 1999.
For pro forma purposes, (i) insci's unaudited balance sheet at September 30,
1999 has been combined with IBC's audited balance sheet at June 30, 1999, and
(ii) insci's unaudited statement of operations for the six months ended
September 30, 1999 has been combined with IBC's unaudited statement of
operations for the same period and (iii) insci's audited statements of
operations for the years ended March 31, 1999 and 1998 have been combined with
IBC's audited statement of operations for the years ended June 30, 1999 and
1998. The pro forma financial information is presented for illustrative purposes
only and therefore is not necessarily indicative of what the actual financial
results would have been had the transaction taken place on April 1, 1997 or
September 30, 1999 and does not purport to indicate the results of future
operations.
The IBC acquisition will be accounted for using the pooling-of-interest method
of accounting. The pro forma financial information has been prepared on the
basis of assumptions described in the notes.
The pro forma financial information should be read in conjunction with the
related notes included in this filing and the audited financial statements and
notes of insci, incorporated by reference herein and the audited financial
statements and notes of IBC included elsewhere in this filing.
<PAGE>
INSCI-STATEMENTS.COM, CORP
UNAUDITED PRO FORMA CONDENSED COMBINED BALANCE SHEET
SEPTEMBER 30, 1999
(in thousands)
INSCI IBC PRO FORMA TOTAL
ASSETS ADJUSTMENTS
Current assets:
Cash and cash equivalents $ 1,264 $ 25 $ 1,289
Accounts receivable, net 4,276 16 4,292
Inventory 29 - 29
Prepaid expenses and other 254 22 276
-------- ------ ----- -------
Total current assets 5,823 63 - 5,886
Property & equipment, net 691 84 775
Capitalized software development
costs, net 1,035 - 1,035
Purchased software, net 1,726 - 1,726
Other assets 825 10 835
-------- ------ ----- -------
Total assets $ 10,100 $ 157 - $10,257
======== ====== ===== =======
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Line of Credit- Bank $ - $ 50 $ 50
Accounts payable 761 380 1,141
Accrued expenses: -
Compensation 433 272 705
Vacation 253 - 253
Commissions 268 - 268
Other 795 44 839
Current Portion of Capital
Lease Obligations - 35 35
Convertible Debt - 378 (378) (A) -
Deferred maintenance revenue 1,330 - 1,330
-------- ------ ----- -------
Total current liabilities 3,840 1,159 (378) 4,621
-------- ------ ----- -------
Convertible Debt - 276 (276) (A) -
Capital Lease Obligations,
Net of Current Portion - 28 28
-------- ------ ----- -------
- 304 (276) 28
-------- ------ ----- -------
Stockholders' equity :
Common stock 96 8 2 (A,B,C) 106
Preferred stock 14 3 (3) (B) 14
Additional paid-in capital 29,312 1,262 655 (C) 31,229
Accumulated deficit (23,162) (2,579) - (25,741)
-------- ------ ----- -------
Total stockholders' equity 6,260 (1,306) 654 5,608
-------- ------ ----- -------
Total liabilities and
stockholders' equity $ 10,100 $ 157 $ - $10,257
======== ====== ===== =======
SEE NOTES TO UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL INFORMATION
(A) Assumes the conversion of $378,000 and $276,000 of convertible debt into
652,971 shares of IBC Common Stock just prior to the merger.
(B) Assumes the conversion of 300,000 shares of preferred stock into 3,137,530
shares of IBC Common Stock just prior to the merger.
(C) Reflects the conversion of shares of IBC common stock in exchange for
1,000,000 shares of insci $.01 par value common stock.
<PAGE>
INSCI-STATEMENTS.COM, CORP
UNAUDITED PRO FORMA CONDENSED COMBINED STATEMENT OF OPERATIONS
FOR THE YEAR ENDED MARCH 31, 1999
(in thousands, except per share amounts)
PRO FORMA
INSCI IBC ADJUSTMENTS TOTAL
----- --- ----------- -----
Revenue
Product $ 5,992 $ - $ - $ 5,992
Services 6,414 212 6,626
-------- -------- ----- -------
Total revenue 12,406 212 - 12,618
-------- -------- ----- -------
Cost of revenue
Product 1,288 1,288
Services 3,187 3,187
-------- -------- ----- -------
Total cost of revenue 4,475 - - 4,475
-------- -------- ----- -------
Gross margin 7,931 212 - 8,143
-------- -------- ----- -------
Expenses
Sales and marketing 4,187 4,187
Product development 2,217 493 2,710
General and administrative 2,055 792 2,847
-------- -------- ----- -------
Total expenses 8,459 1,285 - 9,744
-------- -------- ----- -------
Income (loss) from operations (528) (1,073) - (1,601)
-------- -------- ----- -------
Other income (expense)
Interest income 77 77
Interest expense - (79) (79)
Other - - (375)(D) (375)
-------- -------- ----- -------
Total other income
(expense) 77 (79) (375) (377)
-------- -------- ----- -------
Net income (loss) (451) (1,152) (375) (1,978)
======== ======== ===== =======
Preferred stock dividends (706) - - (706)
Net income (loss) applicable
to common shares $ (1,157) $ (1,152) $(375) $(2,684)
======== ======== ===== =======
Basic earnings (loss) per
common share $ (0.16) $(144.00) $ (0.33)
======== ======== =======
Diluted earnings (loss) per share $ (0.16) $(144.00) $(0.33)
======== ======== =======
Weighted average common
shares outstanding 7,235 8 992 (E) 8,235
======== ======== ===== ======
SEE NOTES TO UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL INFORMATION
(D)Represents the estimated cost of the merger including legal, professional,
etc.
(E)Represents the weighted average shares outstanding of IBC common stock
converted into 1,000 weighted average shares of insci $0.01 par value common
stock
<PAGE>
INSCI-STATEMENTS.COM, CORP
UNAUDITED PRO FORMA CONDENSED COMBINED STATEMENT OF OPERATIONS
FOR THE YEAR ENDED MARCH 31, 1998
(in thousands, except per share amounts)
PRO FORMA
INSCI IBC ADJUSTMENTS TOTAL
----- --- ----------- -----
Revenue
Product $ 4,604 $ -- $ -- $ 4,604
Services 5,201 9 5,210
-------- -------- ------ ------
Total revenue 9,805 9 -- 9,814
-------- -------- ------ ------
Cost of revenue
Product 1,991 1,991
Services 2,630 2,630
-------- -------- ------ ------
Total cost of
revenue 4,621 -- -- 4,621
-------- -------- ------ ------
Gross margin 5,184 9 -- 5,193
-------- -------- ------ ------
Expenses
Sales and marketing 3,935 3,935
Product development 1,958 755 2,713
General and administrative 1,861 485 2,346
Non-Recurring Charges 139 -- 139
-------- -------- ------ ------
Total expenses 7,893 1,240 -- 9,133
-------- -------- ------ ------
Income (loss) from operations (2,709) (1,231) -- (3,940)
-------- -------- ------ ------
Other income (expense)
Interest income 169 169
Interest expense (3) (6) (9)
Other -- -- (375)(D) (375)
-------- -------- ------ ------
Total other
income (expense) 166 (6) (375) (215)
-------- -------- ------ ------
Net income (loss) (2,543) (1,237) (375) (4,155)
======== ======== ====== ======
Preferred stock dividends (847) -- -- (847)
Net income (loss) applicable
to common shares $ (3,390) $ (1,237) $ (375) $(5,002)
======== ======== ====== ======
Basic earnings (loss) per
common share $ (0.73) $(154.63) $(0.89)
======== ======== ======
Diluted earnings (loss) per share $ (0.73) $(154.63) $(0.89)
======== ======== ======
Weighted average common
shares outstanding 4,615 8 992 (E) 5,615
======== ======== ====== ======
SEE NOTES TO UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL INFORMATION
(D) Represents the estimated cost of the merger including legal, professional,
etc.
(E) Represents the weighted average shares outstanding of IBC common stock
converted into 1,000 weighted average shares of insci $0.01 par value common
stock
<PAGE>
INSCI-STATEMENTS.COM, CORP
UNAUDITED PRO FORMA CONDENSED COMBINED STATEMENT OF OPERATIONS
FOR THE SIX MONTHS ENDED SEPTEMBER 30, 1999
(in thousands, except per share amounts)
PRO FORMA
INSCI IBC ADJUSTMENTS COMBINED
----- --- ----------- --------
Revenue
Product $ 2,923 $ -- $ -- $ 2,923
Services 3,321 80 3,401
-------- -------- ------ -------
Total revenue 6,244 80 -- 6,324
-------- -------- ------ -------
Cost of revenue
Product 990 -- 990
Services 1,358 -- 1,358
-------- -------- ------ -------
Total cost of
revenue 2,348 -- -- 2,348
-------- -------- ------ -------
Gross margin 3,896 80 -- 3,976
-------- -------- ------ -------
Expenses
Sales and marketing 1,941 -- 1,941
Product development 1,213 169 1,382
General and
administrative 1,297 373 1,670
-------- -------- ------ -------
Total expenses 4,451 542 -- 4,993
-------- -------- ------ -------
Income (loss) from operations (555) (462) -- (1,017)
-------- -------- ------ -------
Other income (expense)
Interest income 21 2 23
Interest expense (2) (72) (74)
Other 2 (1) (375)(D) (374)
-------- -------- ------ -------
Total other income
(expense) 21 (71) (375) (425)
-------- -------- ------ -------
Net income (loss) (534) (533) (375) (1,442)
======== ======== ====== =======
Preferred stock dividends (302) -- (302)
Net income (loss)
applicable to common
shares $ (836) $ (533) $ (375) $(1,744)
======== ======== ====== =======
Basic earnings (loss) per
common share $ (0.10) $ (66.63) $ (0.19)
======== ======== =======
Diluted earnings (loss)
per share $ (0.10) $ (66.63) $ (0.19)
======== ======== =======
Weighted average common
shares outstanding 8,130 8 992(E) 9,130
======== ======== ====== =======
SEE NOTES TO UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL INFORMATION
(D) Represents the estimated cost of the merger including legal, professional,
etc.
(E) Represents the weighted average shares outstanding of IBC common stock
converted into 1,000 weighted average shares of insci $0.01 par value common
stock
<PAGE>
NOTES TO UNAUDITED PRO FORMA CONDENSED
COMBINED FINANCIAL INFORMATION
Note 1
The pro forma information gives effect to insci-statement.com, corp's ("insci")
acquisition of Internet Broadcasting Company, Inc ("IBC") through a merger and
exchange of shares using the pooling of interest method of accounting. Under the
terms of acquisition agreement insci-statements.com acquired all of the stock of
IBC in exchange for 1,000,000 shares of insci common stock. The unaudited Pro
Forma Condensed Combined Statement of Operations gives effect to this
transaction as if it had taken place on April 1, 1997, the beginning of the
earliest period presented. The Unaudited Pro Forma Condensed Combined Balance
Sheet reflects this transaction as if it had taken place on September 30, 1999.
The pro forma financial statements are presented for illustrative purposes only
and therefore are not necessarily indicative of the operating results of
financial position that might have been achieved had the transactions occurred
as of an earlier date, nor are they necessarily indicative of operating results
or financial position that may occur in the future.
These pro forma financial statements should be read in conjunction with the
historical consolidated financial statements and notes thereto of insci,
incorporated by reference herein and IBC, included elsewhere in this filing.
Note 2
The unaudited pro forma condensed combined statements of operations reflect
insci's unaudited statement of operations for the six months ended September 30,
1999 and the audited statements of operations for the fiscal year ended March
31, 1999 and 1998 combined with IBC's unaudited statement of operations for the
six months ended September 30, 1999 and the audited statements of operations for
the years ended June 30, 1999 and 1998.
The unaudited pro forma balance sheet reflects insci's unaudited balance sheet
at September 30, 1999 combined with IBC unaudited balance sheet at
June 30, 1999.
Note 3
The pro forma financial information gives effect to the following pro forma
adjustments:
1. Convertible Debt of $378,000 and $276,000 was converted into 652,971 shares
of IBC Common Stock.
2. 300,000 shares of Preferred Stock were converted into 3,137,530 shares of
IBC Common Stock.
3. The resulting common stock in the amount 4,569,025 of was exchanged for
1,000,000 shares of insci common stock.
4. Acquisition costs of $375,000 were incurred and consist of professional and
legal fees.
Note 4
All vested and unvested IBC stock options were exchanged for similar insci
options upon consummation of the merger.
<PAGE>
Exhibit 3
INSCI-STATEMENTS.COM, CORP
INDEX TO SUPPLEMENTAL FINANCIAL STATEMENTS
Independent Auditors Reports ............................................ F-2
Supplemental Balance Sheets- March 31, 1999 and September 30, 1999 ..... F-4
Supplemental Statements of Operations- Years ended March 31, 1999
and 1998, and Six months ended September 30, 1999 and 1998 ............ F-5
Supplemental Statements of Stockholders Equity- Years ended March 31,
1999 and 1998 and Six months ended September 30, 1999 ................. F-6
Supplemental Statements of Cash Flows- Years ended March 31, 1999
and 1998 and Six Months Ended September 30, 1999 and 1998 ............. F-7
Notes to Supplemental Financial Statements............................... F-9
<PAGE>
Independent Auditor's Report
To the Stockholders and
Board of Directors of
insci-statements.com, corp
We have audited the accompanying supplemental balance sheet of
insci-statements.com, corp (formerly INSCI Corp) as of March 31, 1999 and the
related supplemental statements of operations, stockholders' equity, and cash
flows for each of the two years in the period ended March 31, 1999. These
supplemental financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion of these supplemental
financial statements based on our audits. We did not audit the financial
statements of The Internet Broadcasting Company, Inc., which statements reflect
total assets constituting approximately 2% of the related supplemental financial
statements total assets at March 31, 1999, and which reflect net loss
constituting approximately 72% and 33% of the related supplemental financial
statements total net loss for the years ended March 31, 1999 and 1998,
respectively. 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 audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts of disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
The supplemental 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 B-4 to the supplemental consolidated
financial statements. Generally accepted accounting principles proscribe giving
effect to a consummated business combination accounted for by the
pooling-of-interests method in financial statements that do not include the date
of consummation. These financial statements do not extend through the date of
consummation. However, they will become the historical financial statements of
insci-statements.com, corp after financial statements covering the date of
consummation of the business combination are issued.
In our opinion, based upon our audits and the report of the other
auditors, the supplemental financial statements referred to above present
fairly, in all material respects, the financial position of
insci-statements.com, corp as of March 31, 1999 and the results of its
operations and its cash flows for each of the two years in the period ended
March 31, 1999, after giving retroactive effect to the merger with The Internet
Broadcasting Company, Inc, as described in the notes to the supplemental
financial statements, in conformity with generally accepted accounting
principles.
/s/ Pannell Kerr Forster PC
New York, New York
December 10, 1999
<PAGE>
Independent Auditor's Report
To the Board of Directors
The Internet Broadcasting Company, Inc.
and Subsidiary
Pompano Beach, Florida
We have audited the consolidated balance sheets of The Internet Broadcasting
Company, Inc. (formerly The Capital Internet Group, Inc) and Subsidiary (a
Development Stage Company), as of June 30, 1999 and 1998 and the related
consolidated statements of operations, changes in stockholders' equity
(deficit), and cash flows for the years then ended and for the period from
August 23, 1996, (Inception) to June 30, 1999. These financial statements are
the responsibility of the Company's management. Our responsibility is to express
an opinion on the financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the consolidated financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of The Internet Broadcasting
Company, Inc. and Subsidiary at June 30, 1999 and 1998 and the results of its
operations and its cash flows for the years then ended and from August 23, 1996,
(Inception) to June 30, 1999, in conformity with generally accepted accounting
principles.
The financial statements have been prepared assuming that the Company will
continue as a going concern. As discussed in Note 13 to the financial
statements, the Company's significant operating losses, working capital
deficiency and negative net worth raise substantial doubt about its ability to
continue as a going concern. The financial statements do not include any
adjustment that might result from the outcome of this uncertainty.
/s/ Goldstein Lewin & Co.
Boca Raton, Florida
October 24, 1999
<PAGE>
INSCI-STATEMENTS.COM, CORP
SUPPLEMENTAL BALANCE SHEETS
(in thousands, except share amounts)
MARCH 31, SEPTEMBER 30,
ASSETS 1999 1999
-----------------------
(UNAUDITED)
Current assets:
Cash and cash equivalents (Notes B-3
and B-10) $1,892 1,289
Accounts receivable, net of allowance for
doubtful accounts of $100 (Note B-10) 3,004 4,292
Inventory (Note B-5) 43 29
Prepaid expenses and other current assets 197 276
------- -------
Total current assets 5,136 5,886
Property and equipment, net (Notes B-7 and D) 763 775
Capitalized software development costs, net of
accumulated amortization of $554 at
March 31, 1999 (Note B-6) 898 1,035
Purchased software, net of accumulated
amortization of $610 at March 31, 1999
(Note B-6) 1,693 1,726
Other 296 835
-------------------
Total assets $ 8,786 $10,257
===================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Line of Credit Bank 50 50
Accounts payable 1,526 1,141
Accrued expenses:
Compensation 747 705
Vacation 282 253
Commissions 216 268
Other 494 839
Current Portion of Capital Lease
Obligations 35 35
Deferred maintenance revenue (Note B-2) 1,252 1,330
-------------------
Total current liabilities 4,602 4,621
-------------------
Commitments and contingencies
(Notes E,F,G,I,J and K)
Capital Lease Obligations, Net of current
portion 28 28
Stockholders' equity (Notes B-4, B-13,I, J,K
and L)
Convertible preferred stock, $.01 par
value, authorized 10,000,000 shares:
10% Convertible redeemable preferred
stock, 103,335 and 0 shares issued and
outstanding, at March 31, 1999 and
September 30, 1999, respectively 1 -
8% Convertible redeemable preferred
stock, 2,148,363 and 1,416,461 shares
issued and outstanding at March 31,
1999 and September 30, 1999,
respectively 21 14
Common stock, $.01 par value: authorized
40,000,000 shares: issued and
outstanding 8,715,052 and 10,618,600
shares at March 31, 1999 and September
30, 1999, respectively 87 106
Additional paid-in capital 28,952 31,229
Accumulated deficit (24,905) (25,741)
-------------------
Total stockholders' equity 4,156 5,608
-------------------
Total liabilities and stockholders' equity $ 8,786 $10,257
===================
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS.
<PAGE>
INSCI-STATEMENTS.COM, CORP
SUPPLEMENTAL STATEMENTS OF OPERATIONS
(in thousands, except per share amounts)
SIX MONTHS ENDED
YEAR ENDED MARCH 31, SEPTEMBERA 30,
1999 1998 1999 1998
------------------- --------------------
(Unaudited) (Unaudited)
Revenue (Notes B-2 and M)
Product $ 5,992 $ 4,604 $ 2,923 $ 2,520
Services 6,626 5,210 3,401 2,998
------- ------- ------- -------
Total revenue 12,618 9,814 6,324 5,518
------- ------- ------- -------
Cost of revenue (Note B-6)
Product 1,288 1,991 990 668
Services 3,187 2,630 1,358 1,598
------- ------- ------- -------
Total cost of revenue 4,475 4,621 2,348 2,266
------- ------- ------- -------
Gross margin 8,143 5,193 3,976 3,252
------- ------- ------- -------
Expenses
Sales and marketing 4,187 3,935 1,941 2,003
Product development (Note B-6) .. 2,710 2,713 1,382 1,229
General and administrative 2,847 2,346 1,670 1,789
Non-recurring charges (Note C) .. -- 139 -- --
------- ------- ------- -------
Total expenses 9,744 9,133 4,993 5,021
------- ------- ------- -------
Loss from operations (1,601) (3,940) (1,017) (1,769)
------- ------- ------- -------
Other income (expense)
Interest income 77 169 23 45
Interest expense (79) (9) (74) (9)
Other -- -- 1 --
------- ------- ------- -------
Other income (expense) (2) 160 (50) 36
------- ------- ------- -------
Net loss (1,603) (3,780) (1,067) (1,733)
Preferred stock dividend (Notes
B-13 and I) (706) (847) (302) (298)
------- ------- ------- -------
Net loss applicable to common
shares $(2,309) $(4,627) $(1,369) $(2,031)
======= ======= ======= =======
Net loss per common share -
basic (Note B-9) $ (0.28) $ (0.82) $ (0.15) $ (0.26)
======= ======= ======= =======
Weighted average common
shares outstanding (Note B-9) 8,235 5,615 9,130 7,956
======= ======= ======= =======
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS.
<PAGE>
<TABLE>
INSCI-STATEMENT.COM, CORP
SUPPLEMENTAL STATEMENTS OF STOCKHOLDER'S EQUITY
Years ended March 31, 1999 and 1998 and Six months
ended September 30, 1999 (unaudited)
(in thousands, except share amounts)
<CAPTION>
Common Stock Preferred Stock Additional
----------------- --------------------- Paid-in Accumulated
Shares Amount Shares Amount Capital (Deficit) Total
----------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE, MARCH 31, 1997 (NOTE B-4) 5,224,110 $ 52 3,691,173 $ 37 $27,070 ($ 17,969) 9,190
10% Preferred stock conversion to
common stock 590,325 6 (702,345) (7) 1 -- --
8% Preferred stock conversion to
common stock 53,520 1 (49,999) (1) -- -- --
Common stock issued as dividend
on 10% preferred stocks 157,254 2 -- -- 394 (396) --
Common stock accrued as dividend
on 10% preferred stock -- -- -- -- 26 (26) --
Preferred stock issued as
dividend on 8% convertible
redeemable preferred stock -- -- 251,943 3 422 (425) --
Issuance of shares 149,588 1 -- -- 112 -- 113
Exercise of stock options 30,333 -- -- -- 38 -- 38
Net loss -- -- -- -- -- (3,780) (3,780)
----------------------------------------------------------------------------------------
BALANCE, MARCH 31, 1998 6,205,130 $ 62 3,190,772 $ 32 $28,063 $ (22,596) $ 5,561
10% Preferred stock conversion
to common stock 2,269,843 23 (1,498,602) (15) (8) -- --
8% Preferred stock conversion to
common stock 125 -- (125) -- -- -- --
Common stock issued as dividend
on 10% preferred stocks 62,364 -- -- -- 54 (54) --
Preferred stock issued as
dividend on 8% convertible
redeemable preferred stock -- -- 559,653 5 647 (652) --
Issuance of shares 70,000 1 -- -- (1) -- --
Stock options issued for services -- -- -- -- 83 -- 83
Exercise of stock options 95,000 1 -- -- 110 -- 111
Exercise of stock warrants 12,590 -- -- -- 4 -- 4
Net loss -- -- -- -- -- (1,603) (1,603)
----------------------------------------------------------------------------------------
BALANCE, MARCH 31, 1999 8,715,052 $ 87 2,251,698 $ 22 $28,952 $ (24,905) $ 4,156
8% Preferred stock conversion to
common stock 883,157 2 (812,472) (8) -- -- (6)
10% Preferred stock conversion to
common stock 60,927 7 (103,335) (1) 0 -- 6
Preferred stock issued as dividend
on 8% convertible redeemable
preferred stock -- -- 80,570 1 301 (302) --
Issuance of shares 125,000 1 -- -- 608 -- 609
Stock options issued for services -- -- -- -- 72 -- 72
Exercise of stock options 834,464 9 -- -- 1,296 -- 1,305
Net loss -- -- -- -- -- (1,067) (1,067)
Adjustment relating to IBC merger
(Note B-4) -- -- -- -- -- 533 533
----------------------------------------------------------------------------------------
BALANCE, SEPTEMBER 30, 1999
(UNAUDITED) 10,618,600 $ 106 1,416,461 $ 14 $31,229 $ (25,741) $ 5,608
========================================================================================
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS.
</TABLE>
<PAGE>
<TABLE>
INSCI-STATEMENTS.COM, CORP
SUPPLEMENTAL STATEMENTS OF CASH FLOWS
(in thousands)
<CAPTION>
YEAR ENDED SIX MONTHS ENDED
MARCH 31, SEPTEMBER 30,
1999 1998 1999 1998
--------- --------- -------- --------
<S> <C> <C> <C> <C>
Cash flows from operating activities: (unaudited) (unaudited)
Net loss $ (1,603) $ (3,780) $ (1,067) $ (1,733)
Reconciliation of net loss to net
cash provided by (used in)
operating activities:
Depreciation and amortization 428 428 247 223
Amortization of software costs 884 1,215 597 445
Non-recurring charges -- 139 73 40
Stock options issued for services 83 --
Changes in assets and liabilities:
Accounts receivable (92) (420) (1,267) 407
Inventory (42) 46 -- --
Prepaid expenses and other current asssets (22) 2 (65) 18
Accounts payable 406 533 (466) (48)
Accrued expenses (319) 348 397 (540)
Deferred maintenance revenue 338 77 78 139
Other (144) 74 (153) 209
-------- -------- -------- --------
Net cash provided by (used in) operating
activities (83) (1,338) (1,626) (840)
-------- -------- -------- --------
Cash flows from investing activities:
Additions to capitalized software costs (492) (567) (339) (234)
Additions to purchased software (906) (1,049) (428) (209)
Capital expenditures (358) (382) (260) (379)
Miscellaneous 5 (2) -- --
-------- -------- -------- --------
Net cash (used in) investing activities (1,751) (2,000) (1,027) (822)
-------- -------- -------- --------
Cash flows from financing activities:
Proceeds from line of credit 50 -- -- --
Proceeds from issuance of common stock 1,040 979 1,949 2
Proceeds from issuance of preferred stock -- -- -- 485
Proceeds from convertible loans -- -- 151 205
Payment of capital lease obligations (28) (6) -- --
Proceeds (Payment) of note payable -- (50) (50) 58
-------- -------- -------- --------
Net cash provided by financing activities 1,062 923 2,050 750
-------- -------- -------- --------
Net change in cash and cash equivalents (772) (2,415) (603) (912)
Cash and cash equivalents at beginning of period 2,664 5,079 1,892 2,664
-------- -------- -------- --------
Cash and cash equivalents at end of period $ 1,892 $ 2,664 $ 1,289 $ 1,752
======== ======== ======== ========
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS.
</TABLE>
<PAGE>
SUPPLEMENTAL DISCLOSURE OF NON CASH FINANCING AND INVESTING ACTIVITIES:
During fiscal years 1999 and 1998, the Company issued 2,332,332 and 801,099
shares, respectively, of its common stock in payment of dividends due and
conversions of its preferred stocks (Notes I and J)
Dividends were accreted on beneficial conversion features of preferred stock and
amounted to $8,000 and $235,000 in fiscal 1999 and 1998 respectively (Notes B-13
and I)
During fiscal years 1999 and 1998, the Company issued 559,653 and 251,943 shares
of its 8% Convertible Redeemable Preferred Stock in payment of the dividends due
on this stock. (Notes I and J)
During fiscal year 1999, the Company issued 70,000 shares of its common stock in
exchange for cancellation of 150,000 common stock warrants. (Note J)
During fiscal 1998, preferred stock dividends were accrued in the amount of
$26,000.
During the first six months ended September 30, 1999, the Company issued 125,000
shares of its Common Stock in exchange for software program rights. These shares
had a fair market value of $609,000.
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS.
<PAGE>
INSCI-STATEMENTS.COM, CORP
NOTES TO SUPPLEMENTAL FINANCIAL STATEMENTS
MARCH 31, 1999
(INFORMATION AT SEPTEMBER 30, 1999 AND
FOR THE SIX MONTHS ENDED SEPTEMBER 30, 1999 AND 1998 IS UNAUDITED)
NOTE A - BUSINESS
The Company is a provider of statement/ bill portal services and digital
document storage, workflow, and electronic commerce solutions. The company's
portal services and software solutions are designed to help customers become
more competitive, streamline business processes, improve customer service, and
take advantage of new technological developments to drive revenues.
At the Annual Meeting of Stockholders on November 9, 1999, INSCI Corp name
was changed to insci-statements.com, corp ("insci").
NOTE B - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
A summary of the significant accounting policies consistently applied in the
preparation of the accompanying supplemental financial statements follows:
1. Basis of presentation
The supplemental 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 B-4 to the supplemental financial statements. Generally
accepted accounting principles proscribe giving effect to a consummated business
combination accounted for by the pooling-of-interests method in financial
statements that do not include the date of consummation. These financial
statements do not extend through the date of consummation. However, they will
become the historical financial statements of insci-statements.com, corp after
financial statements covering the date of consummation of the business
combination are issued.
The accompanying supplementary balance sheet as of September 30, 1999 and the
supplementary statements of operations and cash flows for the six months ended
September 30, 1999 and the supplementary statement of shareholders' equity for
the six months ended September 30, 1999 are unaudited. In the opinion of
management, the unaudited supplementary financial statements have been prepared
on the same basis as the audited supplementary financial statements and include
all adjustments, consisting of normal recurring adjustments necessary for a fair
presentation of the financial position, results of operations, and cash flows
for the interim periods. The results of operations for the six months ended
September 30, 1999 are not necessarily indicative of operating results to be
expected for the full fiscal year.
The accompanying supplemental financial statements include the operations of
the Company and its wholly owned subsidiary; INSCI (UK) Limited, a product
development center located in the United Kingdom. During fiscal 1998, the
Company's Board of Directors approved the closing of the Company's Philippine
subsidiary. Neither subsidiary is financially significant to the consolidated
results of the Company. All intercompany transactions and balances have been
eliminated in the preparation of the financial statements.
The preparation of supplemental financial statements requires management to
make estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those estimates.
2. Revenue Recognition
Statement of Position 97-2, Software Revenue Recognition ("SOP 97-2"), was
issued in October 1997 by the American Institute of Certified Public Accountants
("AICPA") and was amended by Statement of Position 98-4 ("SOP 98-4"). SOP 97-2
provides revised and expanded guidance of software revenue recognition and
applies to all entities that earn revenue from licensing, selling, or otherwise
marketing computer software. The Company adopted SOP 97-2 and SOP 98-4 in fiscal
1999. Based on its interpretation of SOP 97-2 and SOP 98-4, the Company believes
its current revenue recognition policies and practices are consistent with SOP
97-2 and SOP 98-4. Additionally, the AICPA issued SOP 98-9 in December 1998,
which provides certain amendments to SOP 97-2, and is effective for transactions
entered into during fiscal 2000. Adoption of SOP 97-2 and SOP 98-4 did not have
a material impact on the Company's financial position or results of operations.
The Company believes that the adoption of SOP 98-9 will not have a material
impact on its financial positions 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, collectability is probable and vendor specific
objective evidence exists to allocate the total fee to elements of the
arrangements. The Company's software license agreement does not (i) entitle the
buyer to any right of return or exchange, or (ii) grant the customer any right
to product upgrades or enhancements.
Software maintenance revenue is recognized ratably over the contract
period, generally one year. The Company has arranged with third party providers
to perform all customer support obligations under its hardware maintenance
contracts. Consequently, the Company recognizes hardware maintenance revenue
upon commencement of the contract period.
Services revenue from consulting and systems integration is recognized
upon performance of the services where the customer contract is of a time and
material nature and there are no significant remaining obligations, and upon
acceptance of the completed project where the contract is of a short duration
for a fixed price.
Advance payments required from customers under contractual agreements
which have not been fulfilled are classified as customer deposits.
3. Cash and Cash Equivalents
Cash and cash equivalents consist of highly liquid investments with
insignificant interest rate risk and original maturities of three months or
less. They are carried at cost which approximates market value.
4. Acquisitions
On December 10, 1999, the Company completed the acquisition of The
Internet Broadcasting Company, Inc ("IBC") in a stock for stock merger. The
Company issued 1,000,000 of its common stock in exchange for all outstanding
common stock of IBC. Additionally, all vested and unvested IBC stock options
were exchanged for similar 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 supplemental statement of
stockholders equity reflects the accounts of the Company as if the additional
common stock had been issued during all periods presented. The supplemental
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 this 8-K filing, respectively.
The balance sheets of insci as of March 31, 1999 and September 30, 1999 have
been combined with the balance sheet of IBC as of June 30, 1999. The statement
of operations of insci for the years ended March 31, 1999 and 1998 has been
combined with IBC's statement of operations for the years ended June 30, 1999
and 1998. The statement of operations of insci for six month period ended
September 30, 1999 have been combined with the statement of operations of IBC
for the same six month period. An adjustment has been made to stockholders
equity at March 31, 1997 to account for the effects of the IBC merger. An
adjustment has been made to accumulated deficit for the six months ended
September 30, 1999 in the amount of $533,000 representing the IBC net loss for
the six months ended September 30, 1999. This adjustment results from the
different periods of combination of the balance sheet and statement of
operation.
The financial position and results of operations previously reported by insci
and IBC and the combined amounts presented in the accompanying supplemental
financial statements are summarized as follows (in thousands):
Year Ended Six months ended
March 31, September 30,
1999 1998 1999 1998
Revenue (unaudited) (unaudited)
insci 12,406 9,805 6,244 5,509
IBC 212 9 80 9
------------------------- ----------------------
Combined 12,618 9,814 6,324 5,518
------------------------- ----------------------
Net (loss)
insci (451) (2,543) (534) (664)
IBC (1,152) (1,237) (533) (1,069)
------------------------- ----------------------
Combined (1,603) (3,780) (1,067) (1,733)
------------------------- ----------------------
Total Assets
insci 8,629 10,100
IBC 157 157
----- ------
Combined 8,786 10,257
----- ------
Basic and diluted net (loss) per common share of insci on a historical basis
without giving effect to the IBC acquisition for the years ended March 31, 1999
and 1998 were ($0.16) and ($0.73), respectively.
5. 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.
6. Intangible Assets
a. Capitalized Software Development Costs
The Company capitalizes the qualifying costs of developing its software
products. Capitalization of costs requires that technological feasibility has
been established. Development costs incurred prior to the establishment of
technological feasibility are expensed as incurred. When the software is fully
documented and available for unrestricted sale, capitalization of development
costs ceases, and amortization commences and is computed on a product-by-product
basis, based on either a straight-line basis over the economic life of the
product or the ratio of current gross revenues to the total current and
anticipated future gross revenues, whichever is greater. The establishment of
technological feasibility and the ongoing assessment of recoverability of
capitalized software development costs require considerable judgment by
management with respect to certain external factors, including, but not limited
to, technological feasibility, anticipated future gross revenues, estimated
economic life and changes in software and hardware technologies.
Realization of capitalized software development costs is subject to the
Company's ability to market its software products in the future and generate
cash flows sufficient to support future operations. Capitalized software
development costs totaled $492,000 and $567,000 during the years ended March 31,
1999 and 1998, respectively. Amortization of capitalized software development
costs totaled $304,000 and $517,000 during the years ended March 31, 1999 and
1998, respectively, and is included in cost of revenue in the accompanying
statements of operations.
b. Purchased Software
The Company capitalizes as purchased software the costs associated with
software products either purchased from other companies for resale or developed
by other companies under contract with the Company (see Note E-4). The cost of
the software is amortized on the same basis as capitalized software costs. The
amortization period is re-evaluated quarterly with respect to certain external
factors, including, but not limited to, technological feasibility, anticipated
future gross revenues, estimated economic life and changes in software and
hardware technologies. Purchased software costs totaled $906,000 and $1,049,000
during the years ended March 31, 1999 and 1998, respectively. Amortization of
purchased software costs totaled $580,000 and $698,000 during the years ended
March 31, 1999 and 1998, respectively, and is included in cost of revenue in the
accompanying statements of operations.
7. Property and Equipment
Property and equipment are recorded at cost. Depreciation is provided on
the straight-line method over the estimated useful lives of the related assets.
Upon retirement or sale, the cost of the assets disposed of and the related
accumulated depreciation and amortization are removed from the accounts and any
resulting gain or loss is included in the determination of net income. The
estimated useful lives are as follows:
Furniture and fixtures..... 5-7 years
Equipment.................. 3-5 years
Leasehold improvements..... Life of lease
8. Translation into US dollars
The assets and liabilities of the Company's subsidiaries are translated
into US dollars at exchange rates in effect at the balance sheet date for
monetary items and at historical rates for non-monetary items. Revenue and
expense accounts are translated at the average exchange rate in effect during
each month. The cumulative foreign currency translation adjustment at March 31,
1999 and March 31, 1998 was not material.
In June 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 130 (SFAS 130) "Reporting Comprehensive
Income". SFAS 130 requires a company to report comprehensive income and its
components in a full set of financial statements. Comprehensive income is the
change in equity during a period from transactions and other events and
circumstances from nonowner sources, such as foreign currency translation
adjustments. The Company has not reported the income (loss) resulting from
foreign currency translation adjustments as comprehensive income as the effects
are not material to the financial statements. Accordingly, there is no material
difference between the Company's net loss reported and the comprehensive loss
for SFAS 130.
9. Loss Per Share
Basic net loss per common share is computed by dividing net loss
applicable to common shares by the weighted average number of common shares
outstanding during the year. For fiscal years 1999 and 1998, diluted loss per
share is the same as basic loss per share since the inclusion of stock options,
warrants and convertible securities would be antidilutive.
10. Concentrations of Credit Risk
Financial instruments which potentially expose the Company to concentrations
of credit risk consist primarily of cash and accounts receivable. The Company
maintains its cash balances in one financial institution. These balances are
insured by the Federal Deposit Insurance Corporation up to $100,000. At March
31, 1999, the uninsured amounts held at these financial institutions were
approximately $1,728,000. The Company has not experienced any losses on these
investments to date.
The Company has not experienced significant losses relating to collection of
accounts receivable. The Company performs ongoing credit evaluations of its
customers and maintains reserves for potential credit risks as determined by
management. Accounts receivable consists of geographically and industry
dispersed customers.
11. Impairment of Long-Lived Assets
In the event that facts and circumstances indicate that the cost of an asset
may be impaired, an evaluation of recoverability would be performed. If an
evaluation is required, the estimated future undiscounted cash flows associated
with the asset would be compared to the asset's carrying amount to determine if
a write-down to market value is required. No such write-downs were required in
fiscal 1999 and 1998.
12. Fair Value of Financial Instruments
Financial assets for which carrying values approximate fair value include
cash and cash equivalents and accounts receivable. Financial liabilities for
which carrying values approximate fair value include accounts payable and
accrued expenses.
The Company estimates that the carrying values approximate fair value due to
the short maturity or market rates of interest. However, considerable judgment
is required in interpreting market data to develop estimates of fair value.
Therefore, the estimates are not necessarily indicative of the amounts which
could be realized or would be paid in a current market exchange. The effect of
using different market assumptions and/or estimation methodologies may be
material to the estimated fair value amount.
13. Convertible Preferred Stock
The beneficial conversion feature of convertible preferred stock (see Note I)
is accounted for as a dividend to preferred shareholders and amortized over the
period from the date of issue through the date the security is first
convertible.
14. Accounting for Stock Options and Warrants
All stock options and warrants that have been granted by the Company to
employees have been at or above fair market value of the Company's Common Stock
at the time of grant. As a result, no compensation expense or other accounting
relating to the Company's stock options issued has been required to be recorded
within the financial statements of the Company. The Company has issued stock
options for services performed by outside organizations and has recorded a
charge of $83,000 to the Company's operating results for fiscal 1999
representing the estimated fair value of these activities.
The foregoing accounting is in accordance with Accounting Principles Board
Opinion No. 25 (APB Opinion No. 25) and related interpretations. The Company has
adopted the disclosure provisions of Statement of Financial Accounting Standards
No. 123, "Accounting for Stock-Based Compensation, " (SFAS 123). The Company has
included in Note L the impact of the fair value of employee stock-based
compensation plans on net loss and net loss per share on a pro forma basis for
awards granted pursuant to SFAS 123.
15. Advertising Costs
The Company expenses advertising as incurred. Advertising expense totaled
approximately $127,000 and $115,000 in fiscal 1999 and 1998, respectively.
16. Recently Issued Accounting Pronouncements
In February 1998, the Accounting Standards Executive Committee issued
Statement of Position ("SOP 98-1") "Accounting for the Costs of Computer
Software Developed or Obtained for Internal Use." SOP 98-1 establishes the
accounting for costs of software products developed or purchased for internal
use, including when such costs should be capitalized. The Company does not
expect SOP 98-1, which will be effective in fiscal 2000 to have a material
effect on its financial position or results of operations.
Statement of Position 98-5 ("SOP 98-5") "Reporting on the Costs of Start-Up
Activities" was issued in April 1998. SOP 98-5 requires the costs of start-up
activities, including organization costs, to be expensed as incurred. SOP 98-5
is effective for financial statements for fiscal years beginning after December
15, 1998. The Company will adopt SOP 98-5 in fiscal 2000.
NOTE C - NON-RECURRING CHARGES
During fiscal 1998, the Company's Board of Directors approved closing its
Philippine subsidiary. As a result, the accompanying Statement of Operations for
the year ended March 31, 1998 reflects a write-off of approximately $69,000
representing the subsidiary's net assets at March 31, 1998 and an accrual for
estimated closing costs of $70,000. Included in the Company's fiscal 1998
Statement of Operations is $139,000 in revenue and $246,000 in loss from
operations relating to the Philippine subsidiary. During fiscal 1999, the
Company closed its Philippine operations.
NOTE D - PROPERTY AND EQUIPMENT
Property and equipment at March 31, 1999 consist of the following (in
thousands):
Furniture and fixtures 157
Leasehold improvements 146
Equipment 1,461
------
1,764
Less accumulated depreciation and amortization (1,001)
------
763
------
Depreciation and amortization expense was $428,000 and $428,000 for fiscal years
1999 and 1998, respectively.
NOTE E - RELATED PARTY TRANSACTIONS
(1) In April, 1994, the Company loaned John L. Gillis, the Company's former
Executive Vice President and Chief Operating Officer, and his wife, the amount
of $150,000 to purchase a residence in Westborough, Massachusetts. During fiscal
1996 the Company established an allowance for loan loss as the underlying
collateral had minimal value. However, Mr. Gillis has been repaying this loan
through a surrender of a combination of stock options, salary and bonuses.
During fiscal 1999 and 1998, the loan was repaid by $29,190 and $16,119
respectively. Interest on the loan was $5,384 and $7,434 during fiscal 1999 and
1998 respectively. The outstanding loan balance after fiscal 1999 payments was
$47,834, which was offset by an allowance for loan losses of the same amount.
The loan balance was cancelled by the Company on March 31, 1999, upon Mr.
Gillis's resignation from the Company and in accordance with a separation
agreement between Mr. Gillis and the Company.
(2) The Company engaged Emerging Technology Ventures, Inc. ("ETVI") to
manage its acquisition and strategic alliance activities. Mr. Francis X. Murphy
("Mr. Murphy"), who is President of ETVI, is also a director of the Company.
ETVI is paid a monthly retainer of $6,000. In addition, during fiscal years 1999
and 1998, ETVI was paid an additional $39,000 and $26,000 respectively in
connection with consulting services performed for the Company on behalf of the
Company's Executive Committee. In October, 1995, ETVI was granted an incentive
stock option to acquire 400,000 shares of the Company's Common Stock at an
exercise price of $2.31 per share. These options are only exercisable to the
extent that transactions are completed in accordance with the terms of the
agreement. For completed transactions ETVI will receive a commission, which is
offset against cumulative retainer fees paid and a portion of the stock options
granted will vest concurrent with the date of the completed transaction. The
arrangement with ETVI also provides that a portion of the stock options granted
will vest upon arranging strategic sales alliances for the Company and that ETVI
will receive 2% of the revenues generated from these alliances. During fiscal
1999, as the result of establishing strategic alliances, 125,000 options were
vested. The fair value of the 125,000 options vested were estimated to be
approximately $50,000. During fiscal 1998, ETVI had 50,000 options vest as the
result of strategic alliances established. The fair value of the 50,000 options
vested were estimated to be approximately $20,000. Amounts earned related to the
2% of revenues from strategic alliances in during fiscal 1999 and 1998 were
$9,633 and $2,967, respectively. At March 31, 1999, remaining unvested options
outstanding totaled 167,201.
(3) The Company had engaged Gartner and Associates as financial
consultants to advise the Company. Mr. Leonard Gartner ("Mr. Gartner"),
principal of Gartner and Associates, is a former director of the Company. During
fiscal 1999, Gartner and Associates was paid $18,000. During fiscal 1998,
Gartner and Associates was paid a monthly retainer of $6,000 per month and, in
addition, approximately $22,000 in fees related to additional assignments for
the preparation of the Company's annual report and Form S-1 Registration
Statement.
(4) The Company collectively has entered into an agreement with
Technology Providers (Ltd. of Sri Lanka and Incorporated of USA) ("TPL") under
which TPL will provide computer programming services for certain software
products under development and for selected customer application projects.
Services rendered by TPL totaled $1,369,000 in fiscal 1999 and $1,078,000 in
fiscal 1998. TPL is owned by family members of Mr. Krishan A. Canekeratne, a
former Senior Vice President of Development for the Company who resigned in
fiscal 1999. Mr. Canekeratne had no direct ownership interest in TPL during his
employment with the Company. In the opinion of management, the fees paid under
this agreement are at fair market value rates. The Company has issued
approximately $1,114,000 in purchase orders for services to be performed by TPL
in fiscal 2000. At March 31, 1999, amounts due to TPL approximated $460,000.
(5) During fiscal 1998, Richard Gerstner ("Mr. Gerstner") a former director
of the Company was paid fees in the amount of $11,500 for consulting work
performed for the Company.
(6) During fiscal 1999 and fiscal 1998, Mitchell Capital, Inc., whose
principal shareholder is Mitchell Klein, a former director of the Company, was
paid consulting fees in the amount of $15,000 and $22,000, respectively, for
work performed for the Company.
NOTE F - LEASE COMMITMENTS
The Company's lease for its Massachusetts headquarters expires in September,
2004. The Company subleases a portion of this space under an agreement which
expires in November, 2000. Annual sublease rental income approximates $60,000.
The Company also leases office space in Pompano Beach, Florida for the IBC
office space. This lease expires January 31, 2001. As of March 31, 1999, future
minimum rent to be paid under these operating leases is as follows (in
thousands):
Year ending:
March 31, 2000................. $ 399
March 31, 2001................. 369
March 31, 2002................. 317
March 31, 2003................. 326
March 31, 2004.. 335
Thereafter..................... 170
------
$1,916
------
Total rent expense, net of approximately $60,000 of sublease rental income, was
approximately $315,000 and $376,000 for the years ended March 31, 1999 and 1998,
respectively.
NOTE G - REVOLVING CREDIT FACILITY
On August 7, 1998, the Company and Silicon Valley Bank ("SVB") finalized a
bank line of credit Agreement ("Agreement"). The terms of this Agreement provide
for a $1,500,000 working capital credit facility for a term of one year. The
terms further provide for working capital advances up to seventy five percent of
the Company's eligible domestic accounts receivable under ninety days from
invoice date. Collateral for the line, which is secured by a lien, is comprised
of all Company assets. The rate of interest to be paid to SVB is prime plus one
percent. In order to borrow against the line, the Company is required to meet
certain covenants which include minimum tangible net worth of $2 million and a
quick ratio of 1:50 to 1. The Company, at its option, may terminate the credit
facility with SVB without penalty. To date, the Company has not utilized any
portion of this credit facility.
NOTE H - INCOME TAXES
At March 31, 1999, insci had available net operating loss ("NOL")
carryforwards of approximately $14,600,000 resulting from accumulated operating
losses through fiscal 1999. The NOL carryforwards for tax reporting purposes
expire in various amounts through the year 2019. Management believes that an
"Ownership Change" occurred in January 1996 within the meaning of Section 382 of
the IRS Code. Under an ownership change, insci will be permitted to utilize
approximately $13,000,000 in NOL carryforwards (available on the date of such
change) in any year thereafter to reduce its income to the extent that the
amount of such income does not exceed the product of (the "Section 382 limit")
the fair market value of it's outstanding equity at the time of the ownership
change and long-term tax exempt rate published by the IRS.
Insci's Section 382 limits in fiscal 1999 and beyond will be approximately
$900,000 per year, and accordingly, insci will not be able to utilize its full
NOL benefits. From January 1996 through March 31, 1999, insci has NOL
carryforwards of approximately $1,600,000 which are available to offset future
income and expire in 2011 through 2019. Mamagement has fully reserved the tax
benefits of these operating losses because the likelihood of realization of the
tax benefits cannot be determined.
NOTE I - PREFERRED STOCK
1. 8% Convertible Redeemable Preferred Stock
On November 11, 1996, the Company completed 1,333,334 Units of a
Regulation "D" Private Placement Offering of 8% Convertible Redeemable Preferred
Stock. Proceeds from this offering, before underwriting commissions and
expenses, totaled $5,000,000. Each Unit consists of one share of 8% Preferred
Stock and one Warrant to purchase one share of Common Stock for $5.00 per share
for a period of three years expiring on October 1, 1999. The 8% Convertible
Preferred Stock and Warrants contain limited anti-dilution protection and
adjustment rights granted to purchasers of the Units. Each 8% convertible share
of preferred stock is convertible into one share of common stock.
Additionally, the Company paid to J. Michael Reisert & Co., Inc., the
placement agent, a commission of 8% per Unit, or the sum of $400,000, on the
completion of the minimum offering, in addition to approximately $87,500 in
expenses, as well as granting 133,333 Warrants to purchase 133,333 Units
comprised of 133,333 shares of 8% Preferred Stock, convertible into shares of
Common Stock and 133,333 warrants to purchase shares of Common Stock at $5.50
per share for a period of three years from the date of closing of the minimum
offering.
Dividends can be paid in cash or 8% Preferred Stock at the option of the
Company. The 8% Preferred Stock payable as dividends is to be valued at the
lessor of $3.75 or the average bid price for Common Stock for twenty consecutive
trading days prior to the end of the quarter (see Note J-4). In the event that
the average bid price for Common Stock during any sixty day period commencing
August 1, 1998 is $2.75 or less, holders of a majority of outstanding 8%
Preferred Stock can elect to have dividends paid in cash for the balance of the
life of the Preferred Stock (the "Cash Election"). If the Company fails to honor
the Cash Election, the Company must pay dividends in shares of 8% Preferred
Stock and a majority of holders of 8% Preferred Stock shall have the right to
designate one Board Member and the Company shall immediately appoint a designee
and use its best efforts to cause the election of the designee for so long as
twenty-five percent of the 8% Preferred Stock remains outstanding. While the
average bid price for the Company's Common Stock was below $2.75 for sixty
consecutive trading days subsequent to August 1, 1998, holders of the 8%
Preferred Stock have not yet elected to designate a member to the Board of
Directors. In the further event the average bid price for Common Stock during
the last thirty day period of any quarter commencing with the thirty day period
beginning September 1, 1998 is $3.75 or less, annual dividends on 8% Preferred
Stock will be automatically readjusted to eleven percent per annum for the
balance of the period that any 8% Preferred Stock is outstanding. Based upon the
Company's stock price being less than $3.75 for the period required, dividends
have been adjusted to eleven percent per annum commencing with the quarter ended
December 31, 1998.
The Company granted, as a part of the terms of the Placement, cost-free
registration rights with respect to the underlying shares for the Convertible
Redeemable Preferred Stock, the Unit Warrants and the Warrants granted to the
Placement Agent. The terms of the Placement involve the imposition of a penalty
if the underlying shares are not timely registered equal to a reduction in the
conversion price of the $3.75 Unit of 2% per month after nine months from the
date of closing with a maximum of 10%. The registration of the underlying shares
for this Placement was completed in the Company's Form S-1 Registration
Statement that was declared effective on October 6, 1997. An adjustment of 8% of
the Unit conversion price is in effect as a result of this provision. During
fiscal 1999 and 1998, shareholders of this preferred stock converted 125
preferred shares into 125 shares of common stock and 49,995 preferred shares
into 53,520 shares of common stock, respectively.
2. 10% Convertible Redeemable Preferred Stock
On June 15, 1995, the Company completed a private placement of 90-Day
Subordinated Notes (the "Notes") which were repayable in cash or in shares of
the Company's 10% Convertible Redeemable Preferred Stock ("10% Preferred
Stock"). A total of $1,200,000 of Notes were sold with net proceeds to the
Company of approximately $950,000.
In October 1995, the Company notified all holders of the Notes that
it was exchanging shares of the Company's 10% Preferred Stock in the amount of
one share for each $1.00 of principal and accrued interest balances due on the
Notes. Effective October 15, 1995 the Company exchanged 1,240,000 shares of the
Company's 10% Preferred Stock in the amount of one share for each $1.00 of
principal and accrued interest due on the Notes for the principal of its 90-Day
Subordinated Notes and the accrued interest payable thereon. The Preferred Stock
is convertible at the option of the holders into the Company's Common Stock. The
holder is able to convert an amount equal to the greater of either $.10, or 50%
(the beneficial conversion feature) of the average closing bid price of the
Common Stock during the 20 days immediately preceding the date that the
conversion notice is given. The underlying shares of Common Stock convertible
under this Preferred Stock were included in the Company's S-1 Registration
Statement declared effective on October 6, 1997. During fiscal 1998, individuals
who were employees of an investment firm that assisted in this offering
exercised their rights to acquire shares of the Company's common stock at a
price equal to the conversion features of the preferred stock. As a result,
these individuals acquired 149,588 shares of common stock for $113,750.
Dividends can be paid in cash or common stock. Dividends paid in common
stock are determined based upon a discount to the average trading price of the
Company's common stock during the twenty trading days immediately preceding the
payment date (see Note J-2).
In accordance with the terms of the conversion, a total of 448,602
shares of preferred stock have been surrendered and converted into 892,339
shares of the Company's Common Stock during the fiscal year ended March 31,
1999. During the fiscal year ended March 31, 1998, 402,345 shares of preferred
stock were surrendered and converted into 415,954 shares of the Company's Common
Stock.
3. 10% Convertible Preferred Stock
On September 20, 1996 the Company completed a Private Placement financing
under Regulation "D" for the sum of $1,350,000. The Company issued 1,350,000
shares of 10% Convertible Preferred Stock to accredited investors at $1.00 per
share. Each 10% convertible share of Preferred Stock is convertible into a share
of Common Stock of the Company for a period of three years, at a 30% discount
(the beneficial conversion feature) to the INSCI Corp trading market of the
Company's Common Stock. The Company has granted cost-free registration rights to
the holders of the Preferred Stock who have converted into Common Stock. The
underlying shares of Common Stock convertible under this Preferred Stock were
included in the Company's S-1 Registration Statement declared effective on
October 6, 1997. Three hundred thousand shares of the preferred stock have been
converted into 174,371 shares of common stock as of March 31, 1998. The
remaining 1,050,000 shares of preferred stock were converted into 1,377,504
shares of common stock during fiscal 1999.
Dividends were paid in the form of common stock determined by the average
of the trading market price of the Company's common shares during ten trading
days immediately preceding the dividend payment date (see Note J-3).
The Company entered into an agreement with Amerivet/Dymally Securities,
Inc. to act as Placement Agent for the 10% Convertible Preferred Stock and paid
as compensation to the Placement Agent 30,000 shares of restricted Common Stock
with cost-free registration rights in addition to $23,000 in commissions and
112,000 warrants to purchase 112,000 shares of Common Stock at $5.00 per share
for a period of 3 years expiring October 1999.
NOTE J- STOCKHOLDERS' EQUITY
(1) As of March 31, 1999, 8,715,052 shares of the Company's common stock were
outstanding. As of March 31, 1998, 6,205,130 shares of the Company's common
stock were outstanding. The increase in shares during fiscal 1999 primarily
resulted from conversions on the Company's 10% Convertible Redeemable Preferred
Stock and 10% Convertible Preferred Stock.
(2) During fiscal year 1999, a total of 448,602 shares of 10% Convertible
Redeemable Preferred Stock were surrendered and converted into 892,339 shares of
the Company's Common Stock. In addition, during the fiscal year ended March 31,
1999, the Company issued 33,068 shares of Common Stock in lieu of paying cash
dividends on its 10% Convertible Redeemable Preferred Stock. During fiscal year
1998, a total of 402,345 shares of 10% Convertible Redeemable Preferred Stock
were surrendered and converted into 415,954 shares of the Company's Common
Stock. In addition, during the fiscal year ended March 31, 1998, the Company
issued 98,038 shares of Common Stock in lieu of paying cash dividends on its 10%
Convertible Redeemable Preferred Stock.
(3) During fiscal year 1999, in accordance with the terms of its 10%
Convertible Preferred Stock, the Company issued 29,296 shares of Common Stock in
lieu of paying cash dividends on its 10% Convertible Preferred Stock. During
fiscal 1999, 1,050,000 shares of this Preferred Stock were surrendered and
converted into 1,377,504 shares of the Company's Common Stock. During fiscal
year 1998, the Company issued 59,216 shares of Common Stock in lieu of paying
cash dividends on its 10% Convertible Preferred Stock. During fiscal 1998,
300,000 shares of this Preferred Stock were surrendered and converted into
174,371 shares of the Company's Common Stock.
(4) During fiscal year 1999, in accordance with the terms of its 8%
Convertible Redeemable Preferred Stock, the Company issued 559,653 shares of 8%
Convertible Redeemable Preferred Stock in lieu of paying cash dividends on this
preferred stock. During fiscal 1999, 125 shares of this Preferred Stock were
surrendered and converted into 125 shares of the Company's Common Stock. During
fiscal year 1998, the Company issued 251,943 shares of 8% Convertible Redeemable
Preferred Stock in lieu of paying cash dividends on this preferred stock. During
fiscal 1998, 49,999 shares of this Preferred Stock were surrendered and
converted into 53,520 shares of the Company's Common Stock.
(5) During fiscal 1999, options were exercised to purchase 95,000 shares
of common stock for $110,605. During fiscal 1998, the Company issued 149,588
shares of Common Stock for $113,750 and options were exercised to purchase
30,333 shares of common stock for $37,663.
(6) The Company granted warrants to the Underwriters of its April 1994 IPO
to purchase up to 125,000 Units at an exercise price of $7.70 per unit, and had
granted registration rights relating to the underlying securities. In May 1996,
the Underwriters surrendered these warrants in exchange for new warrants to
purchase 187,500 shares of Common Stock at an exercise price of $3.50 per share.
The Company granted cost-free registration rights to the underlying Common Stock
shares of these warrants and has included these underlying Common Stock shares
in the Form S-1 Registration Statement that was declared effective on October 6,
1997. During fiscal 1998, the Company entered into an exchange agreement whereby
70,000 shares of common stock would be issued in exchange for the cancellation
of 150,000 warrants. The 70,000 shares were issued in fiscal 1999. The remaining
37,500 warrants expire December 1999.
(7) On April 21, 1994, the Company received net proceeds of approximately
$7,159,000 from its initial public offering ("IPO") of 1,250,000 units
("Units"). Each Unit consists of one share of the Company's Common Stock and one
redeemable Common Stock purchase warrant. Each warrant entitles the holder
thereof to purchase one-half of one share of Common Stock. Two warrants may be
exercised at an aggregate exercise price of $9.00, subject to adjustment under
certain circumstances, at any time after the warrants become separately
transferable, until 48 months from the date of the offering. The warrants are
redeemable by the Company at $.05 per warrant upon 30 days notice mailed within
20 days after the closing bid price of the Common Stock has equaled or exceeded
$11.25 for a period of 20 consecutive trading days. During 1998, the Company
extended the terms of the warrants until December 31, 1999, with all terms and
conditions of the warrants remaining the same.
(8) The following is a summary of the Company's stock warrant activity:
Number Weighted Expiration
of Shares Average Price Date
Balance March 31, 1997 2,430,439 $5.89 Sep-Dec 99
Fiscal 1998 activity 0
--------
Balance March 31, 1998 2,430,439 $5.89 Sep-Dec 99
Fiscal 1999 activity:
Cancelled (150,000) $3.50
Exercised (12,590) $0.35
--------
Balance March 31, 1999 2,267,849 $6.07 Sep-Dec 99
--------
NOTE K - COMMITMENTS AND CONTINGENCIES
Legal Proceedings
To the best of the Company's knowledge, there are no material legal
proceedings pending against the Company or any of its property, nor was any such
proceeding terminated during the fourth quarter ended March 31, 1999.
Employment Agreements
During 1998 the Company's Compensation Committee recommended to the Board
of Directors that the employment agreement of Dr. E. Ted Prince ("Dr. Prince")
the Company's Chairman of the Board of Directors and Chief Executive Officer
should be amended to provide for an extension and increase in compensation. The
Board of Directors subsequently approved the proposed amendment. Effective April
1, 1999, Dr. Prince's employment agreement provided for an extension of the term
of Dr. Prince's employment through September 30, 2001, and further provided for
salary compensation at an annual rate of $250,000 per annum with an incentive
bonus of up to 40% of base compensation based upon performance targets
established by the Board of Directors. Additionally, the amendment provided for
the immediate vesting of 200,000 stock options to purchase 200,000 shares of
Common Stock at $.95 per share. Further, an additional 300,000 stock options
were granted to Dr. Prince to purchase 300,000 shares at $1.75 per share vesting
over a 2-year period. The stock options granted to Dr. Prince are for a term of
ten (10) years and expire April 1, 2009. Additionally, the amendment also
provided that the exercise period of 950,000 options stock options previously
granted to Dr. Prince at $1.66 per share and 250,000 options at $2.00 per share
, would be extended until June 16, 2005.
The Company has employment agreements with its other executive officers which
also include annual incentive bonuses based upon attainment of defined
profitability criteria and other performance related objectives. If an executive
officer's employment is terminated for any reason other than voluntary
resignation or for cause (as defined in the agreements) then a severance benefit
will be paid. The severance benefit varies from officer to officer, but is not
greater in any instance than six month's salary and benefits. Exclusive of Dr.
Prince, key members of management have been granted stock options as part of
their compensation package.
Employee Benefit Plan
The Company maintains a defined contribution plan for the benefit of its
eligible employees pursuant to Section 401(K) of the Internal Revenue Code.
Contributions to the Plan by the Company will be made at its sole discretion.
Participants may also make contributions to the Plan. The Company did not make
any contributions to the Plan for fiscal years 1999 and 1998.
NOTE L - STOCK OPTION PLANS
The following is a summary of the Company's stock option activity:
<TABLE>
1992 STOCK OPTION PLAN 1992 DIRECTORS OPTION PLAN
<CAPTION>
Number Weighted Average Number Weighted Average
of Shares Exercise Price of Shares Exercise Price
<S> <C> <C> <C> <C>
Outstanding at March 31, 1997 609,565 $3.17 45,000 $3.01
Granted - - 200,000 2.25
Cancelled (249,432) 5.03 (15,000) 6.67
Exercised (5,333) 1.77 (25,000) 1.13
--------- ---------
Outstanding at March 31, 1998 354,800 1.75 205,000 2.23
Granted - - 460,000 1.04
Cancelled (121,667) 1.88 (33,333) 2.25
Exercised (20,000) 1.66 (5,000) 1.44
--------- ---------
Outstanding at March 31, 1999 213,133 1.69 626,667 1.36
--------- ---------
<CAPTION>
1997 EQUITY INCENTIVE PLAN OTHER STOCK OPTIONS
Number Weighted Average Number Weighted Average
of Shares Exercise Price of Shares Exercise Price
<S> <C> <C> <C> <C>
Outstanding at March 31, 1997 220,800 $5.43 3,205,942 $2.53
Granted 1,390,082 2.62 200,000 2.39
Cancelled (555,299) 4.41 (550,939) 5.39
Exercised - - - -
--------- ---------
Outstanding at March 31, 1998 1,055,583 2.26 2,855,003 1.95
Granted 2,326,499 1.15 196,000 1.04
Cancelled (941,918) 2.06 (100,000) 2.52
Exercised (25,000) 0.75 (45,000) 1.14
--------- ---------
Outstanding at March 31, 1999 2,415,164 1.27 2,906,003 1.79
--------- ---------
The following table summarizes information about stock options outstanding and
exercisable at March 31, 1999.
<CAPTION>
1992 STOCK 1992 DIRECTORS 1997 EQUITY OTHER STOCK
OPTION PLAN OPTION PLAN INCENTIVE PLAN OPTIONS
<S> <C> <C> <C> <C>
Outstanding
Option Price Range $1.50 - 3.00 $.89 - 2.25 $.75 - 3.75 $.93 - 5.00
Number of Shares 213,133 626,667 2,415,164 2,906,003
Weighted Average Life 6.3 7.7 9.4 6.4
Weighted Average Exercise Price $1.69 $1.36 $1.27 $1.79
Exercisable
Number of Shares 213,133 100,000 324,499 2,589,136
Weighted Average Exercise Price $1.69 $2.25 $1.39 $1.78
</TABLE>
Employee Stock Option Plans
On July 29, 1996 the Company adopted the 1997 Equity Incentive Plan (97 Plan)
authorizing 3,000,000 shares of Common Stock to replace the remaining and
ungranted shares under the 1992 Stock Option Plan that was terminated. The 97
Plan permits the Company to provide its employees with incentive compensation
opportunities which are highly motivational. On August 26, 1998, the Company
adopted a plan that allowed employees, at their election, to exchange existing
outstanding stock options for reissued stock options at an exercise price of
$1.22 per share. These options vest over a two year period. On August 26, 1998,
the market price of the Company's common stock was $1.19. A total of
approximately 743,000 options were exchanged and are included in the "granted"
and "cancelled" columns for fiscal 1999 in the tables for the 1992 and 1997
Plans. On October 7, 1997, the Company adopted a plan that allowed employees, at
their election, to exchange existing outstanding stock options for reissued
stock options at an exercise price of $2.25 per share, provided that these
options could not be exercised for a period of three years or until the ten day
average market price of the Company's Common Stock was $4.50 per share or
higher. On October 7, 1997, the market price of the Company's common stock was
$2.13. A total of approximately 650,000 options were exchanged and are included
in the "granted" and "cancelled" columns for fiscal 1998 in the tables for the
1992 and 1997 Plans.
Directors and Other Stock Options
The Directors Option Plan (the "Directors Plan") was adopted by the Board of
Directors to make service on the Board more attractive to present and
prospective directors. The plan has 1,000,000 authorized shares and provides
that each new director receive 100,000 stock options upon being appointed to the
Board of Directors. For each three years of service thereafter they are eligible
for an additional 100,000 options. In addition, Board members who participate on
committees are entitled to receive 20,000 options annually.
During fiscal 1999, the Company issued an aggregate of 400,000 options to new
board members or board members that reached their three year term and 60,000
options to various Board members for their participation on committees.
The Directors Plan is administered by a committee made up of at least two
members of the Board of Directors. The exercise price per share of any option
granted under the Directors Plan shall not be less than the fair market value of
such shares on the date of grant. Eligible directors include all members of the
Board of Directors who are not also employees of the Company or any parent or
subsidiary of the Company. Options expire five years from the date of grant,
subject to earlier termination in accordance with the terms of the Directors
Plan. All rights to exercise options terminate two years following the date the
optionee ceases to serve as a director of the Company with certain exceptions.
Stock Based Compensation
The Company applies APB Opinion No. 25 and related interpretations in
accounting for its stock option plans and, accordingly, no compensation cost has
been recognized because stock options granted under the plans were at exercise
prices which were equal to or greater than the market value at date of grant.
Had compensation expense been determined as provided in SFAS 123 for stock
options using the Black-Sholes option pricing model, the pro forma effect would
have been:
Fiscal 1999 Fiscal 1998
Net loss applicable to common shares -
as reported $(2,309,000) $(4,627,000)
Net loss applicable to common shares -
pro forma (4,309,000) (6,457,000)
Net loss per common share - as reported (.28) (.82)
Net loss per common share - pro forma (.53) (1.15)
The fair value of each option grant is calculated using the following weighted
average assumptions:
Fiscal 1999 Fiscal 1998
Expected life (years) 5 5
Interest rate 5.08% 6.92%
Volatility 117% 77%
Dividend yield 0 0
NOTE M - SEGMENT AND CUSTOMER INFORMATION
For the year ended March 31, 1999 sales made to UNISYS and to customer leads
furnished by UNISYS accounted for approximately 20% of the Company's total
revenues. Amounts due from these customers were approximately 20% of the
Company's accounts receivable balance as of March 31, 1999. For the year ended
March 31, 1998 sales made to UNISYS and to customer leads furnished by UNISYS
accounted for approximately 18% of the Company's total revenues. Amounts due
from customers as a percent of the Company's accounts receivable balance as of
March 31, 1998 were, in approximate percentages, Lason Inc. 17% and Putnam Trust
Company, 11%.
The Company adopted Statement of Financial Accounting Standards No. 131,
"Disclosures about Segments of an Enterprise and Related Information" ("SFAS
131") in the fiscal year ended March 31, 1999. SFAS 131 establishes standards
for reporting information regarding operating segments in annual financial
statements and requires selected information for those segments to be presented
in interim financial reports issued to stockholders. SFAS 131 also establishes
standards for related disclosures about products and services, and geographic
areas. Operating segments are identified as components of an enterprise about
which separate discrete financial information is available for evaluation by the
chief operating decision maker or decision making group, in making decisions how
to allocate resources and assess performance. To date, the Company has viewed
its operations as principally one segment, the developing marketing and
supporting imaging, document and data management, and archival products and
related services.
Revenue was derived from customers in the following geographic areas (in
thousands)
Year ended March 31
-------------------
1999 1998
---- ----
North America $11,008 $8,487
Europe 1,131 1,007
Other 479 320
------- ------
Total $12,618 $9,814
======= ======
NOTE N - SUBSEQUENT EVENTS
On December 17, 1999, insci completed a Regulation D Offering of its
Common Stock. The Offering involved purchasing 802,676 shares of common stock
for $2.4 million ($2.99 per share). Additionally, warrants were issued to
purchase 280,936 shares of common stock at $4.30 per share expiring December 18,
2004.
Insci further agreed to provide registration rights for the shares of
stock purchased and the underlying shares relating to the warrants. Insci has
agreed to register these shares within 90 days from the Closing Date otherwise
insci agreed to pay a penalty of 2% or 3% of the gross offering as defined.
This agreement also provides a right of first refusal on any future
financings and, in addition, could result in an additional amount of shares
issued if any new financing results in an issue price of less than $2.99 per
share, as defined.
<PAGE>
Exhibit 4
STOCK PURCHASE AGREEMENT
AMENDED STOCK PURCHASE as of December 10, 1999 by and among INSCI
CORP., a Delaware corporation, with its principal place of business at Two
Westborough Business Park, Westborough, MA 01581 (hereinafter referred to as
"INSCI"), INTERNET BROADCASTING COMPANY, INC., with its principal place of
business located at 555 S.W. 12th Avenue , Suite 110, Pompano Beach, FL 33069
(hereinafter referred to as "IBC" or "CORPORATION"), and the individuals and/or
entities listed on Exhibit "I" (hereinafter referred to as "SELLERS" or
"PRINCIPAL STOCKHOLDERS".)
W I T N E S S E T H:
WHEREAS, the within Amended Agreement supersedes in all respects any
prior understandings or agreements, written or otherwise, entered into by and
between the parties and is effective as of December 10, 1999; and
WHEREAS, SELLERS are desirous of selling, transferring and/or
exchanging all the issued and outstanding capital stock consisting of Common
Stock owned by SELLERS in IBC; and
WHEREAS, INSCI is desirous of purchasing from SELLERS listed on Exhibit
"I" (Listing of all STOCKHOLDERS) annexed hereto, all the issued and outstanding
IBC stock owned by SELLERS; and
WHEREAS, certain specific SELLERS (the "PRINCIPAL STOCKHOLDERS") are
agreeable to warranties and representations; and
WHEREAS, all other SELLERS are not providing all of the warranties and
representations; and
WHEREAS, the parties are desirous of defining their rights and
obligations with respect to said purchase and sale.
NOW, THEREFORE, IN CONSIDERATION OF THE MUTUAL COVENANTS AND
CONDITIONS HEREINAFTER SET FORTH, THE PARTIES AGREE AS
FOLLOWS:
1. SALE, PURCHASE AND EXCHANGE OF COMMON STOCK
Subject to the satisfaction of the terms and conditions of this
Agreement, and in reliance upon the covenants, representations and warranties
contained herein:
1.1 Sale of IBC Stock Owned by SELLERS
On the Closing Date (as hereinafter defined), all SELLERS shall sell,
assign, convey, exchange and transfer to INSCI, free and clear of any liens or
encumbrances or restrictions, and INSCI shall purchase and/or receive in
exchange from SELLERS, all right, title, and interest of SELLERS in and to the
IBC stock owned by SELLERS as listed on Exhibit "I" and Exhibit "I-A" for the
consideration stated herein.
It is understood and agreed that SELLERS listed on Exhibit "I-A" will
provide limited warranties and representations, as per a separate Agreement with
those SELLERS , the form of which Agreement is annexed to Exhibit "I-A" and the
delivery of an executed agreement from each such SELLER is a condition precedent
to the closing herein.
2. PURCHASE PRICE AND EXCHANGE BY INSCI FOR IBC COMMON STOCK
The purchase price and exchange for all of the issued and outstanding
IBC stock (the "Purchase Price" and "Exchange") shall be shares of restricted
Common Stock and Warrants to purchase Common Stock of INSCI payable as follows
on closing:
One Million (1,000,000) shares of fully paid non-assessable
Common Stock of INSCI, to be distributed to SELLERS pro rata based on their
ownership of IBC Stock; and
i) The price per share to be exchanged by INSCI will be
computed at the average closing price as reported by NASDAQ over the
ten (10) trading day period that precedes the Closing Date, subject to
a minimum purchase price of $4.00 per share on closing. In the event
that the price of INSCI Common Stock is less than $4.00 per share on
closing, then in that event, SELLERS will have the right to terminate
the within Agreement without liability on the part of either SELLERS or
INSCI.
ii) INSCI agrees to file a Registration Statement for the
Common Stock issued to SELLERS under this Agreement. Annexed hereto and
made a part hereof and marked EXHIBIT "II" is a Registration Rights
Agreement. The parties further agree that all sales will be in
accordance with Securities and Exchange Commission Regulations. INSCI
agrees to pay for the cost and expense of the Registration Statement.
The SELLERS listed on Exhibit "I" (that have deposited 125,000 shares
of INSCI Common Stock) are subject to the indemnification provisions of
the Agreement.
It is understood and agreed that the 125,000 shares (at $4.00 per
share) will be subject to the Escrow-Indemnification Agreement for a period of
one (1) year from the date of closing of the within transaction. Thereafter, for
the second year of said escrow indemnification, the value of the number of
shares to be held in escrow will be $100,000 calculated by the number of shares
based upon the bid price of the Common Stock of INSCI on the date that the
second year commences. There will be no shares in the third year of said
Indemnification Agreement, if no claims have been asserted against the Escrow.
(d) The CORPORATION shall include the CORPORATION and all existing
Subsidiaries, so long as it shall remain an operating company, and any future
subsidiary, so long as it is an operating subsidiary, together with such other
entities or offices engaged in or in the business of IBC.
(e) It is understood and agreed that the SELLERS listed on Exhibit "I"
make no warranties and/or representations with respect to any of the warranties
and representations herein and shall not be parties to the Escrow Agreement
referred to herein.
(f) IBC and SELLERS agree to provide, on or prior to closing, the
audited Financial Statements and unaudited interim period, as per Exhibit IV,
which qualifies for audit in accordance with the principles of general
acceptable accounting procedures, and Securities and Exchange Commission
Regulations, as provided for herein in Section 4.5.
(g) IBC and SELLERS agree to provide on closing, a cold comfort letter
from IBC's auditing firm in a form acceptable to INSCI's auditors, which is a
condition precedent to closing and further provides that there have been and are
no material adverse changes in IBC's Financial Statements from the last audited
statement, as required, in accordance with the applicable Securities and
Exchange Commission filing and reporting requirements and interim unaudited
statement to the day of closing.
3. REPRESENTATIONS AND WARRANTIES OF PRINCIPAL STOCKHOLDERS TO THE
CORPORATION
It is understood and agreed by the PRINCIPAL STOCKHOLDERS that, as an
inducement to INSCI to enter into this Agreement, PRINCIPAL STOCKHOLDERS have
made to INSCI the representations and warranties hereinafter set forth in
Section 4, all of which are true and correct on the date hereof in all material
respects, and that said warranties and representations will be true as of the
Closing Date in all material respects, except as otherwise provided in or
contemplated by this Agreement. In the event of any material misrepresentations
by PRINCIPAL STOCKHOLDERS, which is made known to or by INSCI prior to closing,
INSCI shall have the exercise right and option to terminate the within Agreement
without any further liability to INSCI. The representations and warranties shall
survive the purchase and sale of the IBC stock hereunder as to the extent set
forth in Section l3.4(a).
4. REPRESENTATIONS AND WARRANTIES OF PRINCIPAL STOCKHOLDERS
IBC and the PRINCIPAL STOCKHOLDERS represent and warrant to INSCI that:
4.1 Organization
IBC is a CORPORATION, duly organized, validly existing and in good
standing under the laws of the State of Delaware, and is licensed to do business
as a foreign corporation in any state or jurisdiction that the CORPORATION
carries on its business. Annexed hereto and marked EXHIBIT "V" is a listing of
all subsidiary corporations and jurisdictions in which IBC does business.
4.2 Qualification
The CORPORATION has the corporate power and authority to own its
properties and to carry on its business as now being conducted and is qualified
to do business and is in good standing in every jurisdiction in which the nature
of its business or the ownership or leasing of its properties require such
qualification, except where the failure to do so would not have any material
adverse effect on the business, assets or financial conditions of the
CORPORATION taken as a whole.
4.3 Authorization of Agreement
SELLERS have the power and authority to enter into this Agreement and
to sell to INSCI or exchange the IBC stock owned by them, and that the Board of
Directors of IBC has approved the within amended agreement. This Agreement
constitutes the legal, valid and binding obligation of SELLERS, enforceable in
accordance with its terms. Neither the execution and performance of this
Agreement, nor the consummation of the transactions contemplated hereby will
result in the violation of any provision of state or federal law, any order by
any court or other agency of government applicable to SELLERS or the
CORPORATION, the Certificate of Incorporation or By-laws of the CORPORATION or
any indenture, Financing Agreement, Stockholders Agreement, or other instrument
or agreement to which they are a party or by which they are bound, or be in
conflict herewith, result in a breach thereof, or constitute (with due notice or
lapse of time or both) a default thereunder or, except as may be provided in
this Agreement, result in the creation or imposition of any lien, charge or
encumbrance of any nature whatsoever upon any of the properties or assets of any
of the CORPORATION pursuant to any such indenture, agreement or instrument.
SELLERS and IBC will provide to INSCI a certified copy of a Board of Directors
Consent and the executed SELLERS agreements as provided for in the within
Agreement.
4.4 Capitalization
Copies of the Certificate of Incorporation and By-laws of the
CORPORATION have been delivered to INSCI. Exhibit "VI" hereto sets forth a list
of all authorized, issued, and outstanding shares of capital stock of the
CORPORATION. There are no other shares issued and outstanding of any
CORPORATION. As of the date hereof, the only issued and outstanding IBC stock is
owned by the persons listed in Exhibits "I" and "I-A", all of which have been
validly issued, fully paid, and are non-assessable. SELLERS and IBC warrant and
represent that neither has granted any rights, warrants, options, or other
commitments with respect to the IBC stock owned by them, and further warrant and
represent that there are no agreements, commitments or understandings, including
Stockholders Agreements, oral or written, with respect to the IBC stock owned by
SELLERS (other than this Agreement), which will not be terminated on Closing.
4.5 Financial Statements
(a) The Financial Statements as of IBC, audited by Goldstein Lewin &
Co., consisting of each of said year balance sheet, income statement changes in
financial position, including the footnotes, have been prepared in accordance
with generally accepted accounting principles applied on a consistent basis and
fairly present the financial position of the CORPORATION as of each respective
year end (June 30, 1998 and 1999), and that the CORPORATION will provide the
unaudited stub period to September 30, 1999, and unaudited roll forward to five
(5) days prior to the Closing Date as stated herein. SELLERS and IBC warrant and
represent that all financial statements provided for herein will be in
accordance with Regulation S-X as promulgated by appropriate Securities and
Exchange Commission Regulations.
(b) The unaudited Financial Statements of IBC, as of September 30,
1999, will consist of a balance sheet and income statement and changes in
financial position as of five (5) days prior to the Closing Date, which are
attached hereto, including the footnotes, and been prepared in accordance with
generally accepted accounting principles and Securities and Exchange Commission
Regulations, and fairly present the financial position of the CORPORATION as of
the Closing Date, and as of such date present the results of operations for the
CORPORATION which have been included in said Financial Statements.
(c) SELLERS and IBC further represent that there are no material
matters since June 30, 1999, and up to and including the Closing Date, that will
impact on the business of IBC that has not been disclosed to INSCI, and that all
proprietary trade secrets and related information is the property of IBC, and
that there are no known claims against said property.
4.6 Subsidiaries and Affiliates
The CORPORATION has no subsidiaries and does not own of record, or
beneficially, any capital stock or equity interest investment in, and does not
control, any other corporation, partnership, association or business entity or
concern.
4.7 Regulation
The CORPORATION has obtained and maintains all permits and licenses
which are necessary for the conduct of its business.
4.8 Taxes
The CORPORATION has filed all tax returns as may be required by the
CORPORATION including, without limitation, income, franchise, sales, use and
payroll tax returns, and all annual reports and other returns and reports,
heretofore required to be filed by them, all of which were prepared on a cash
basis. All taxes known to be due on such returns have been paid, other than
taxes not yet due or which may hereafter be paid without penalty. The
CORPORATION'S federal and state income tax returns have not, since formation of
the CORPORATION, and to SELLERS' knowledge and belief, been audited by the
Internal Revenue Service or by any state taxing authority in the jurisdictions
in which the CORPORATION is incorporated or qualified to do business. SELLERS
have no knowledge of any tax deficiency or additional assessments not adequately
provided for on the books of the CORPORATION. There are no tax audits, pending
or due, and SELLERS have no information which would lead them to reasonably
believe that a tax audit may be imminent. Additionally, SELLERS warrant and
represent that they will be responsible for any taxes due, or that may become
due, as a result of any claims for taxes due which arouse prior to the purchase
of stock by INSCI or after said closing, but have resulted due to the actions of
SELLERS or IBS, or their Officers and Directors, and agree to indemnify and hold
harmless INSCI from any taxes, interest or penalty as a result of INSCI
purchasing all of the issued and outstanding shares of Common Stock herein.
4.9 Litigation
Except as set forth in Exhibit "VII", there are no actions, suits or
proceedings, pending or threatened, at law or in equity or, to the best of the
knowledge of SELLERS, there are no grounds for any such litigation against or
affecting the CORPORATION, whether or not purportedly on behalf of the
CORPORATION, involving the possibility of a judgment against the CORPORATION
that is not covered by a policy of insurance and does not involve
(a) the loss or suspension of any license or permit necessary
to the business of the CORPORATION, or
(b) any judgment for damages or for injunctive or other legal,
equitable, monetary or non-monetary relief which, either individually
or in the aggregate, if adversely determined, would result in a
material adverse change in the business, operation, properties or
assets or in the condition, financial or otherwise, of the CORPORATION
taken as a whole. SELLERS have no knowledge of any unasserted claim,
the assertion of which is likely and which, if asserted, will seek
damages or injunctive or other legal, equitable, monetary or
non-monetary relief which, if adversely determined, would result in
such a material adverse change.
4.l0 Indebtedness
Subject to the exceptions referred to in Section 4.3 or in Section 4.5,
there exists no default under the provisions of any instrument evidencing any
indebtedness of the CORPORATION or any agreement relating thereto which entitles
the holder thereof to accelerate the repayment of any such indebtedness. SELLERS
expressly represent and warrant to INSCI that the indebtedness of the
CORPORATION is not in default.
The CORPORATION and SELLERS agree on Closing that the CORPORATION will
have a negative net worth not to exceed $650,000 (Net worth being the
Shareholders' deficit as set forth on the balance sheet), and that its working
capital will not be negative working capital in excess of $870,000 (working
capital for these purposes, being defined as current assets less current
liabilities, excluding the current portion of convertible loans payable included
in current liabilities, as set forth on the balance sheet) and that, in the
event the Company's negative working capital exceeds a negative of $870,000,
then in that event, INSCI will have the option of terminating the Agreement
without any liability on the part of INSCI, the Company or SELLERS or, in the
alternative, of adjusting the purchase price by a reduction in the number of
Shares and to reflect the increase in negative working capital in excess of the
aforesaid $870,00. To the extent that the CORPORATION meets the balance sheet
test described above, then INSCI agrees that it will, within a reasonable time
after closing, make payments related to the accounts payables of the CORPORATION
described on Exhibit XXI. INSCI will use its best efforts to pay the items
listed on the schedule of priority accounts payable.
4.11 Title to Properties
Except as set forth in Exhibit "VIII", and except any other minor
non-material liens and encumbrances or obligations of the CORPORATION of a
character which, in the aggregate, are not substantial in amount (not in excess
of $5,000) and do not materially detract from the value of the property or
assets subject thereto, or materially impair the operations of the CORPORATION,
and that the CORPORATION has good and marketable title to the properties and
assets owned by it, subject to no mortgage, pledge, lien, charge, security
interest or encumbrance, except those liens and encumbrances described on the
Financial Statements herein. It is understood and agreed that the $5,000 sum
herein is based upon the representation of SELLERS that they have no specific
knowledge or reason to believe that the financial statements and schedules of
liabilities of the CORPORATION as of the closing date are not true and correct
and have provided for all known and contingent liabilities.
4.12 Title to the Shares
(a) SELLERS own, and will on the Closing Date convey and exchange title
to the shares of IBC stock owned by them, free and clear of any liens,
encumbrances and restrictions.
(b) SELLERS, on closing, will issue a General Release in favor of the
CORPORATION and of INSCI, except for the terms and conditions to be performed by
INSCI under the within Agreement.
4.13 Broker or Finder
There is no person, firm or corporation retained by SELLERS of the
CORPORATION which is entitled to any brokerage or finders' fee with respect to
the transactions contemplated by this Agreement, except Adams Harness and Hill
and Kendrick Pierce. SELLERS will indemnify and hold INSCI harmless from any
claim for brokerage or finders' fees arising out of the transactions
contemplated by this Agreement made by any person, including the Brokers stated
herein, claiming to have been engaged by SELLERS.
4.14 Absence of Certain Changes with respect to CORPORATION
Except as set forth in the Financial Statements, officers and
accounting certificates of the CORPORATION between June 30, 1999, and the date
of closing and the date hereof, there has not been:
(a) Any material adverse change in the condition, assets
liabilities or business of the CORPORATION, taken as a whole, from that
shown in the Financial Statements, otherwise or known by SELLERS.
(b) Any damage, destruction or loss of any of the properties
or assets of the CORPORATION (whether or not covered by insurance)
materially adversely affecting the business of the CORPORATION, taken
as a whole;
(c) Any declaration, setting aside for payment or other
distribution in respect of any of the issued and outstanding IBC stock,
or any direct or indirect redemption, dividends, purchase or other
acquisition of any such stock. SELLERS are responsible for any
liability that results from any action taken by the CORPORATION.
(d) Any labor trouble of any character, materially adversely
affecting the business of the CORPORATION, taken as a whole;
(e) Any increase (individually or in the aggregate), except in
the ordinary course of business, in the contingent obligations of the
CORPORATION by way of guaranty, endorsement, indemnity, warranty or
otherwise;
(f) Any waiver or compromise by the CORPORATION of a valuable
right or of a material debt owed to them, taken as a whole;
(g) Any loans made by the CORPORATION to its employees,
officers, or directors other than travel and other expense advances
made in the ordinary course of business, except as provided for in
Exhibit "IX";
(h) Any issuance or sale by the CORPORATION of any shares of
its common stock or other securities;
(i) Any other event or condition of any character that has
materially and adversely affected the CORPORATION'S business taken as a
whole would that cause a material misrepresentation.
(j) Any agreement or commitment by the CORPORATION to do any
of the things described in this Section that would be in violation of
the warranties and representations contained herein.
(k) That there has been no material change with respect to the
payment of salaries or other benefits to employees of the CORPORATION,
and that the SELLERS have no knowledge of any circumstances which would
cause them to believe that any client or clients which comprise
material revenues of the CORPORATION will cease to do business with the
CORPORATION within the twelve month period from the date of Closing. In
addition thereto, that no party or parties to any agreement with the
CORPORATION is in default which would require the CORPORATION to take
legal action to enforce its rights.
(l) That the SELLERS have no information or knowledge that any
key employee will leave the employment of the CORPORATION (a Schedule
of Key Employees is annexed as Exhibit "X"), as a result of the
contemplated transaction and that, in addition, that SELLERS have no
knowledge or information as to the loss of a materially important
customer or supplier of the CORPORATION, and that the technology
utilized by the CORPORATION is proprietary and owned by the CORPORATION
as described in Exhibit "XI" herein, termed as a schedule of
Proprietary Technology, and that there are no known claims to the
technology.
(M) That the CORPORATION warrants and represents that all of
its software systems and products are Y2K compliant.
4.15 Contracts; Leases; Agreements
Exhibit XII sets forth all currently existing contracts, obligations,
plans, arrangements, commitments or like (written or oral) of any material
nature, to which the CORPORATION is a party or by which the CORPORATION is
bound, including without limitation the following of said agreements that at the
option of INSCI, all of said agreements may be modified, or revised by INSCI
consistent with the policies and plans as are acceptable to INSCI,
(a) Employment or consulting agreements, pension, profit
sharing, deferred compensation, stock bonus, retirement, stock option,
stock purchase, phantom stock or similar plans, including agreements
evidencing rights to purchase securities of the CORPORATION and
agreements among shareholders and the CORPORATION. All existing bonus
agreements are based upon performance, and the aggregate amount of
bonus payments due or to be paid to employees are reflected on the
Financial Statements of the CORPORATION;
(b) Loan or other agreements, notes, indentures, or
instruments relating to or evidencing indebtedness for borrowed money,
or mortgaging, pledging or granting or creating a lien or security
interest or other encumbrance on any of the CORPORATION's property or
any agreement or instrument evidencing any guaranty which may be
required for the CORPORATION to obtain bank financing for present
working capital needs;
(c) There are no agreements with dealers, sales
representatives, brokers or other distributors, jobbers, advertisers or
sales agencies;
(d) Agreements with any labor union or collective bargaining
organization or other labor agreements;
(e) Any contract or series of contracts with the same person
for the furnishing, leasing or purchase of machinery, equipment, goods
or services, including without limitation, agreements with processors
and subcontractors, except in the ordinary course of business;
(f) Any indenture, agreement or other (including private
placement brochures) relating to the sale or repurchase of shares of
capital stock;
(g) Any joint venture, contract or arrangement or other
agreement involving a sharing of profits or expenses;
(h) Agreements limiting the freedom of the CORPORATION to
compete in any line of business or in any geographic area or with any
person;
(i) Agreements providing for disposition or acquisition of the
business, assets or capital stock of the CORPORATION, agreements of
merger of consolidation to which the CORPORATION is a party, agreements
involving the acquisition of the business, assets or capital stock of
any other corporation, or letters of intent with respect to the
foregoing;
(j) All leases of real or personal property;
(k) All franchises, permits, licenses and other similar
authority and patents, patent rights, trade names, trade name rights,
copyrights and applications therefor owned, held, used, leased, relied
upon or licensed by the CORPORATION, together with a description of any
payment which any person has asserted the CORPORATION is or hereafter
may be obligated to pay in order to use such right; and
(l) All research and development agreements, other agreements
involving technology, systems, products, know-how and the like.
(m) All agreements of the CORPORATION are agreements made in
the ordinary course of business and are consistent with the financial
statements as annexed hereto and made a part hereof.
(n) All marketing, distribution and reseller agreements,
except as set forth on Exhibit "XIII"), the CORPORATION is not a party
to any agreement or instrument or subject to any charter or other
corporate restriction materially adversely affecting their business,
properties, or assets, operations or condition, financial or otherwise,
taken as a whole, and the CORPORATION is not in material default or
material adverse change in the business or prospectus that is not
discussed in the financial statements that are provided for in the
within Agreement or that is known by SELLERS of IBC in the performance,
observance or fulfillment of any of the obligations, covenants or
conditions contained in any agreement or instrument to which they are a
party, which default would have a material adverse affect on the
business operations, properties, assets or condition, financial or
otherwise, of the CORPORATION taken as a whole.
(o) All convertible or other outstanding securities have been
converted by the Holders thereof and on closing each Holder has
provided a General Release to IBC with respect to the conversion of the
security or securities held by them.
(p) IBC's Officers and Board of Directors, as set forth on
Exhibit "XIV", will submit their resignations to the Board of IBC on
closing of the within transaction.
(q) That all intellectual property rights are the property of
the corporation and that there are no claims with respect to said
property and additionally that the CORPORATION does not use any
intellectual property of IBC.
4.16 Insurance
Exhibit "XV" is an accurate list of each insurance policy owned or
maintained by the CORPORATION, copies of which have been delivered to INSCI. All
such policies are in full force and effect, and the CORPORATION has not received
any notice of cancellation with respect to any such policy. No claims are
pending under any such policy, except as explained on Exhibit "XV". To the best
of SELLERS' knowledge, there is no basis for the insurer thereunder to terminate
any such policy.
4.17 Shareholders' Directors and Officers;
Indebtedness
Exhibit "XIV" sets forth the names of the directors and officers of the
CORPORATION. Except as will be set forth in the Financial Statements, there are
no material indebtedness by the CORPORATION, to its officers, directors,
employees and shareholders or material indebtedness of such persons to the
CORPORATION. Except as described herein to the best of SELLERS' knowledge, none
of the officers, directors or shareholders of the CORPORATION, or their
respective spouses, owns directly or indirectly, individually or collectively, a
material interest in any entity which is a competitor, customer or supplier of
(or has any existing contractual relationship with) the CORPORATION. As of the
Closing Date, all loans and advances to SELLERS and their relatives from the
CORPORATION, and from the CORPORATION to SELLERS and their relatives, will have
been paid in full.
4.18 Consents
Except as set forth in Section 4.3, all material consents, approvals,
qualifications, orders or authorizations of, filings with, any governmental
authority, or any other party or entity, including any court, required in
connection with SELLERS' valid execution, delivery or performance of this
Agreement or the consummation of any other transaction contemplated on the part
of the CORPORATION and SELLERS by this Agreement and the agreements related
hereto have been obtained.
4.19 Employees
To SELLERS' knowledge, no employee of the CORPORATION (including, but
not limited to, the CORPORATION'S development personnel who have executed
agreements that all software developed and in process is the property of the
CORPORATION) is, by virtue of his employment by the CORPORATION and the nature
of the duties which he performs for the CORPORATION, in violation of any
non-competition or confidentiality agreement with any third-party. To SELLERS'
knowledge, no union is attempting to represent any of the CORPORATION'S
employees as a collective bargaining agent. SELLERS and IBC agree that all of
IBC's employees that will remain in the employ of IBC, or in the event of the
liquidation of IBC, at the option of INSCI will execute non-competitor,
non-disclosure agreements and confidential agreements.
4.20 Registration Rights
By his, her or its execution of this Agreement, each SELLER hereby
waives and forever releases IBC from any obligation related to the registration
of any IBC Securities.
4.21 Personal Holding Company
To the best of SELLERS' knowledge and belief, the CORPORATION is not a
personal holding company, nor is it subject to a Hart Scott Rodino filing.
4.22 Inactive Corporations
IBC has not formed any corporation or corporations except as stated on
Exhibit "V" annexed hereto. SELLERS warrant that the CORPORATION constitutes the
entire operating entity as established by the SELLERS, and that there are no
affiliates and/or subsidiaries of IBC. SELLERS warrant and represent that (a)
any prior or past Inactive Corporations are currently inactive, and (b) none of
the Inactive Corporations, to the best of SELLERS' knowledge, has any material
unpaid liabilities, except only franchise and similar taxes. SELLERS agree, at
the Closing, to assign to INSCI all of SELLERS' right, title and interest in and
to each of the Inactive Corporations.
4.23 Treasury Stock
All amounts payable for treasury stock, if any, purchased by IBC, has
been fully paid.
4.24 Representations Complete
No representation or warranty of the SELLERS or IBC made in this
Agreement or in any document or certificate furnished by SELLERS pursuant to
this Agreement or in connection with the transactions contemplated hereby
contains or will contain any untrue statement of a material fact, or omits to
state a material fact necessary to make any statement or act contained herein or
therein, in the light of the circumstances under which such statements and acts
were made, not misleading, except that any such document or certificate which is
dated speaks as of the date stated and not the present.
4.25 SELLERS and IBC warrant and represent they have been provided with
the INSCI 10-K/SB Report for the fiscal year ending March 31, 1999, and copies
of INSCI Form 10-Q/SB Reports for the quarter ending June 30, 1999, and have had
access to all Form 8-K Reports, and copies of all current proxy material filed
with the Securities and Exchange Commission, and that SELLERS are qualified
investors as that term is defined under the Securities Act.
4.26 SELLERS warrant and represent that there is no violation of the
applicable rules and regulations of the Securities and Exchange Commission,
and/or of State Blue Sky Regulatory Agencies in the State or States in which
SELLERS reside with respect to SELLERS purchasing or obtaining their shares from
the CORPORATION.
4.27 SELLERS warrant and represent that there is no material claim of
Stockholders, creditors or any regulatory agency, federal or state, that is
imminent, threatened or pending with respect to the CORPORATION.
5. REPRESENTATIONS AND WARRANTIES OF INSCI
INSCI represents and warrants to SELLERS as follows:
5.1 Organization and Qualification
INSCI is a corporation duly organized, validly existing and in good
standing under the laws of the State of Delaware. INSCI has the corporate power
and authority to own its assets, conduct its business as and where such business
is presently conducted, and enter into this Agreement.
INSCI represents that within the 24 months preceding the within
Agreement, it has filed all reports required to be filed by NASDAQ and the
Securities Act, and that said reports are true, complete and correct in all
material respects.
5.2 Effect of Agreement
INSCI's execution, delivery and performance of this Agreement, and the
consummation by INSCI of the transactions contemplated hereby, (a) have been
duly authorized by all necessary corporate actions by INSCI's Board of
Directors, (b) does not constitute a violation of or default under INSCI's
Certificate of Incorporation or Bylaws or any material contract or agreement to
which INSCI is a party or by which INSCI is bound, (c) do not constitute a
violation of any law, rule or regulation, or judgment or order, applicable to
INSCI, and (d) do not require the consent of, notice to or filing with any
person, company or governmental authority. This Agreement constitutes the valid
and legally binding agreement of INSCI, enforceable against INSCI in accordance
with its terms.
5.3 Reports
INSCI has timely filed all reports, schedules, forms, statements and
other documents with the SEC since January 1, 1997 (collectively the SEC
Documents"). As of their respective dates, the SEC Documents complied in all
material respect with the requirements of applicable law and none contained
anywhere statements of a material fact required to be stated therein or
necessary to make the statement therein, in light of the circumstances under
which they were merely misleading.
5.4 Broker or Finder
No person or company acting on INSCI's behalf is entitled to any
brokerage or finder's fee in connection with the transactions contemplated by
this Agreement, except Auerbach Pollak & Richardson, Inc.
5.5 Investment Matters
INSCI is purchasing the IBC stock for its own account for investment
and not with a view to or for sale in connection with any distribution thereof.
5.6 Representations Complete
INSCI warrants and represents to SELLERS that INSCI has not
made any untrue statement of material fact or omitted any material facts
concerning INSCI and that INSCI is aware that SELLERS are relying upon any
certificate or documents provided by INSCI to SELLERS.
6. COVENANTS OF SELLERS
INSCI, the CORPORATION and the SELLERS listed on Exhibit "I" warrant
and represent:
6.1 Documents or Information
Between the date hereof and the Closing Date, IBC, as per the
Confidentiality Agreement, shall permit INSCI's Representative to visit and
inspect any of the properties of the CORPORATION including its books of account
and records, and to discuss its affairs, finances and accounts with the
CORPORATION's officers and its independent public accountants, all at such
reasonable times and as often as any such person may reasonably request in
writing.
6.2 Conduct Pending Closing
Between the date of this Agreement and the Closing Date, except with
the prior written consent to INSCI.
(a) SELLERS shall maintain in full force and effect the corporate
existence of the CORPORATION, their respective rights and franchises ad all
business permits, trademarks and trade names owned or possessed by the
CORPORATIONS which are material to the conduct of the business of the
CORPORATION.
(b) Any outstanding taxes, assessments, and other governmental charges
imposed upon the CORPORATIONS with respect to their franchises or income will be
paid or accrued provided, however, that unless and until a foreclosure restrain
sale or any similar proceeding shall have been commenced, no such tax or charge
need be paid if the same is being contested in good faith by proper proceedings
diligently conducted.
(c) INSCI will be responsible for payment of any obligations of the
CORPORATION within the $870,000 negative working capitol covenant (excluding the
current portion of Convertible Loans Payable).
(d) SELLERS will cause the CORPORATION to keep its fixed assets in
working order and condition, reasonable wear and tear excepted, and the
CORPORATION will comply in all material respects with each provision of all
leases to which any of them is a party or under which any of them occupies
property if the breach of such provision might have a material adverse effect,
other than in the ordinary course of business, on the condition, financial or
otherwise, or operations of the CORPORATION taken as a whole, and the
CORPORATION will obtain all required consents in favor of INSCI to assure that
the within Agreement does not violate any leases, agreements or contracts of the
CORPORATION.
(e) The CORPORATION shall not enter into any material transaction or
agreement, including, but not limited to, a loan, lease, royalty, purchase or
sale agreement, directly or indirectly, with or which will benefit any officer,
director, or holder of the IBC stock or any family member or relative of such
officer, director, or shareholder or any corporation or other entity or person
which directly or indirectly controls, is controlled by or is under common
control with such officer, director or stockholder or family member or relative
of such officer, director, or stockholder.
(f) The CORPORATION will not: (i) sell or agree to sell any of the
assets listed in the CORPORATION'S financial statements, other than in the
ordinary course of business or in connection with the performance of this
Agreement; (ii) incur any obligations or liabilities (fixed or contingent),
except obligations or liabilities in the ordinary course of business and as
provided herein; (iii) discharge or satisfy any lien or encumbrance or pay any
obligations or liabilities (fixed or contingent) other than current liabilities
(including current installments of long-term debt) except as provided for or
contemplated by this Agreement; (iv) mortgage, pledge or subject to lien or any
other encumbrance any of their assets, tangible or intangible, except for
purchase money obligations or pursuant to existing agreements; (v) sell or
transfer any of their tangible assets or cancel any debts or claims except, in
each case, the ordinary course of business; (vi) waive any rights of a
substantial nature; (vii) sell, assign or transfer or grant rights under any
patents, trademarks, trade names, licenses or other intangible assets, except in
the ordinary course of business; or (viii) enter into any other transactions
except in the ordinary course of business.
6.3 Notice of Default
In the event that all of or any portion or an indebtedness of the
CORPORATION, including but not limited to loans and advances due from the
CORPORATION to the CORPORATION'S lending institution, shall be declared due and
payable before their stated maturity or due date, and prior to Closing, SELLERS
shall promptly notify INSCI.
6.4 Notice of Commencement of Proceedings or Change in Condition
SELLERS shall give written notice to INSCI within three (3) days of the
occurrence of any of the following events prior to Closing, stating in
reasonable detail the nature thereof; (a) any proceedings instituted against the
CORPORATION by or in any federal or state court or before any commission, board
or other regulatory body, federal, state or local, which if adversely
determined, would have a material adverse effect upon the CORPORATION'S business
operations, properties, assets or condition, financial or otherwise taken as a
whole; (b) any material adverse change in the CORPORATION'S condition, financial
or otherwise, taken as a whole; and (c) the occurrence of any event which
constitutes, or with notice or passage of time or both would constitute, a
material default in the performance of the CORPORATION'S obligations hereunder.
6.5 No Pension and Retirement Plans
SELLERS warrant and represent to INSCI that there are no pension and/or
retirement plans of the CORPORATION other than a 401K Plan wherein employees
must contribute, and that the employees of the CORPORATION, and the CORPORATION,
do not have liability with respect to said plan other than its administration.
Furthermore, that any pension or retirement plans are in accordance with current
ERISA Laws and/or any applicable Federal or State Regulations as made and
provided, and that within 90 days from the Closing, SELLERS will take the
necessary action to terminate the 401(K) Plan currently in effect with the
CORPORATION. Additionally, that SELLERS understand and agree that the SELLERS'
and/or Trustees' liability, if any, will survive for the applicable Statute of
Limitations following the period of the within Agreement.
6.6 Financing
SELLERS and INSCI agree that, prior to closing INSCI will have obtained
a commitment to financing on terms mutually satisfactory to INSCI and SELLERS to
consummate the Purchase Agreement. In the event that such financing is not
completed prior to closing, either party will have the right to terminate the
within Agreement without liability on the part of either the Sellers or INSCI.
INSCI represents that it has received several financing proposals and that
INSCI's board of directors has approved entering into an agreement for said
financing in accordance with the board resolution attached as exhibit XXI.
6.7 Minute Books.
Prior to the Closing, SELLERS shall deliver to INSCI copies of the
Minute Book of the CORPORATION, together with a representation by SELLERS that
(a) there is no omission from any such minute book of minutes of meetings of the
board of directors or stockholders of the respective CORPORATION at which action
was taken which would create any material obligation or liability of such
CORPORATION which remains outstanding as of the Closing Date and (b) the minutes
contained in such minute books are true and correct.
6.8 Assignment of Intellectual Property with each of the EMPLOYEES (the
"EMPLOYEES Proprietary and Confidentiality Agreements" as stated in Paragraph
4.19 herein in the form of Exhibit "XVII" annexed hereto.
7. COVENANTS OF INSCI.
7.1 Execution and Delivery of Employment Agreements. At the Closing,
INSCI shall cause the CORPORATION to execute and deliver:
(a) Employment Agreements with Messrs. Levine, MacQuarrie and Pernicano
( "SELLERS' Employment Agreements") in the form of Exhibit "XVI" annexed hereto;
and
8. COVENANTS OF SELLERS AND INSCI
8.1 Escrow Agreement.
At the Closing, the SELLERS and INSCI shall execute and deliver the
Escrow Agreement with respect to shares of stock of INSCI with Baratta &
Goldstein and Harris, Beach & Wilcox, listed as Exhibit "XVIII" herein.
9. CONDITIONS TO INSCI'S OBLIGATION TO PURCHASE SHARES
Each obligation of INSCI to be performed on the Closing Date shall be
subject to the satisfaction of each of the conditions stated in the within
Agreement in this Section 9, except to the extent that such satisfaction is
waived by INSCI in writing.
9.1 Performance by SELLERS.
(a) SELLERS shall have performed in all material respects all
obligations and agreements and complied in all material respects with all
covenants contained in this Agreement required to be performed or complied with
by SELLERS on or before Closing.
(b) SELLERS agree to deliver to INSCI, as a post closing
representation, the audited financial statements as provided for herein within
thirty (30) days after Closing, as well as a certificate from Goldstein Lewin &
Co., dated the Closing Date stating that they have reviewed the CORPORATION's
books and records and that there is no material adverse change in the financial
condition of the CORPORATION as of the Closing Date. SELLERS agree to provide
said cold comfort letter to INSCI's auditors and its counsel for their review
five (5) days prior to closing and to update said letter effective on Closing
Date. The within is in accordance with Section 4.5 as provided for herein.
9.2 Employment Agreements.
(a) Each of SELLERS identified in Section 7.1(a) shall have executed
and delivered a SELLERS' Employment Agreements.
(b) Each of the employees shall have executed and delivered to INSCI an
EMPLOYEES' Non Compete and assignment of Proprietary Rights agreements annexed
hereto and marked Exhibit "XVII".
9.3 Opinion of SELLERS' Counsel.
INSCI shall have received from counsel to SELLERS, an opinion addressed
to INSCI, dated as of the Closing Date in the form attached as Exhibit "XIX"
hereto.
9.4 INSCI and IBC agree that, prior to closing, INSCI and IBC will
mutually agree, in writing, that INSCI will do the following:
(a) Provide that Messrs. Levine, MacQuarrie and Pernicano will
participate in the INSCI incentive-based Employee Stock Option Plan,
and that Messrs. Levine, MacQuarrie and Pernicano will be awarded an
aggregate of 250,000 stock options in said Plan. Said options will vest
over a three (3) year period at the an exercise price equal to the fair
market value of INSCI Common Stock at the time of Closing.
(b) INSCI's Board will establish and/or permit IBC employees
to participate in an existing INSCI incentive-based Stock Option Plan.
9.5 Contract Execution.
IBC shall have delivered a signature page to this agreement, duly
executed by each of the SELLERS described in Exhibit "I", as well as a signature
page to the Agreement annexed to Exhibit "I-A", duly executed by each SELLER
identified in Exhibit "I-A".
(a) Since June 30, 1999 and to the date of closing, there have been no
material adverse changes in the business, prospects, operations, earnings,
assets or financial condition of IBC.
10. CONDITIONS TO SELLERS' CLOSING OBLIGATIONS
Each obligation of SELLERS to be performed on the Closing Date shall be
subject to the satisfaction of each of the conditions stated in this Section 10,
except to the extent that such satisfaction is waived by SELLERS in writing.
10.1 Performance by INSCI. INSCI shall have performed in all material
respects all obligations and agreements and complied in all material respects
with all covenants contained in this Agreement required to be performed or
complied with by INSCI on or before Closing.
10.2 Representations True.
SELLERS shall have delivered to INSCI a certificate of the President
and Secretary of IBC and of Stockholders dated as of the Closing Date,
certifying that all of the representations and warranties made to INSCI by
SELLERS in this Agreement are true and correct in all material respect on
closing.
10.3 Defaults.
There shall exist, as of the Closing Date, no condition or event which
constitutes, or which after notice or lapse of time or both would constitute, a
material default by SELLERS under this Agreement.
10.4 Employment Agreements.
(a) INSCI shall have caused the CORPORATION or INSCI to execute and
deliver the SELLERS' Employment Agreements described in Section 7.1.
(b) SELLERS shall have caused the employees to execute and deliver the
employees' Non Compete Agreements.
10.5 INSCI's Assignee and Option to Liquidate Corporation.
If INSCI shall assign its rights hereunder to a wholly-owned
subsidiary, the assignee shall, at the Closing, deliver a certificate, dated the
Closing Date and executed by its President, certifying that INSCI has taken the
appropriate Board of Directors' action to ratify and adjust and approve the
within Agreement. INSCI shall have the exclusive right and option to liquidate
and/or dissolve or merge the CORPORATION into INSCI.
11. TAXES FOR PERIOD ENDING ON CLOSING DATE
11.1 Preparation and Filing of Corporation Returns for the CORPORATION.
(a) SELLERS, or their representatives, shall prepare the federal and
any state and local income and other tax returns of the CORPORATION
(collectively "Returns") for the period from the end of the most recent federal
income tax year of each of the CORPORATION to the Closing Date based on the
books and records of the CORPORATION maintained for such periods by the
CORPORATION. SELLERS shall submit such Returns to the CORPORATION and SELLERS
shall promptly execute and file such Returns, as all of such Returns will be the
sole responsibility of SELLERS, and SELLERS agree to be responsible for any
taxes due or that may become due as a result of changing from a cash to an
accrual method. At the request of SELLERS, INSCI agrees to cause the CORPORATION
to make available to SELLERS, for the purpose of preparing such Returns (and
contesting any claims subsequently made for adjustment of such Returns), all
books and records of the CORPORATION for any relevant periods, and SELLERS shall
have the right to make extracts from and copies of such books and records.
(b) INSCI will promptly notify the SELLERS in the event any tax return
of the CORPORATION for any taxable period that SELLERS are responsible for is
audited. If the SELLERS, by notice to INSCI, appoint a representative (the
"Representative") to participate in such audit, INSCI will keep the
Representative apprised of the status of the audit, provide him with copies of
any revenue agent's reports, 30-day letters, 90-day letters or similar documents
and allow him to participate in the audit with respect to issues which, if
decided adversely to the CORPORATION, would increase the SELLERS' tax liability
without reimbursement under the within Agreement by the CORPORATION or would
give rise to any claim by INSCI against SELLERS under this Agreement. If any
such proceeding shall result in a refund of tax interest or penalty paid which
payment is subject to the provisions of Section 13 hereof, such refund shall be
paid over by the CORPORATION to SELLERS. No settlement with the Internal Revenue
Service or other taxing authority will be entered into for any Prior Period
without the written consent of the SELLERS with respect to any of SELLERS
liability as a result of any tax return filed by SELLERS. The SELLERS shall have
the right to prosecute on behalf of the CORPORATION in the Tax Court or other
court of competent jurisdiction (and to appeal) at their expense by counsel of
their choice in an appeal from an adverse decision of a taxing authority with
respect to SELLERS. If any such proceeding shall result in the refund of any
amounts paid by the SELLERS, such amounts, together with any interest thereon,
shall belong to the SELLERS. The parties hereto are aware that the provisions of
the Internal Revenue Code shall apply for purposes of any administrative or
judicial proceeding involving the federal income tax liability of the
CORPORATION for any Prior Period that is reflected on tax returns filed by
SELLERS.
11.2 SELLERS warrant and represent to INSCI that SELLERS will indemnify
and hold harmless INSCI for the payment of any taxes, interest or penalties due
as a result of the within Agreement, or SELLERS filing, failing to file, or any
taxes, interest or penalties due as a result of the operations of IBC to the
date of Closing which were due or should have been accrued prior to the date of
Closing and that, in the event any assessment and or claim is made before any
federal, state or municipal taxing authority as a result of SELLERS non-payment
of taxes due based upon the filing of federal income tax or any claim by the
taxing authority for the period up to and including Closing or for the period of
any tax return filed by SELLERS, that SELLERS agree to be bound by the terms and
conditions of the escrow agreement referred to herein.
12. EXPENSES.
Neither SELLERS nor INSCI will be responsible for fees, expenses and
charges incurred by the other in connection with this Agreement, with the
exception that upon completion of the closing herein, INSCI will pay certain
vendor obligations, as indicated in Exhibit XXI, by issuing to these vendors a
total of 58,293 warrants to purchase shares of INSCI common stock at a price of
$6.00 per share In the event that the within Agreement is terminated, SELLERS,
IBC and INSCI agree that each will be responsible for their own expenses. Upon
completion of the closing herein, INSCI agrees to accept liabilities associated
with any fees in connection with this agreement to the extent that they are
within the $870,000 negative net worth limitation.
13. INDEMNIFICATION.
13.1 The PRINCIPAL STOCKHOLDERS' Obligation to Indemnify.
From and after the Closing Date, the PRINCIPAL STOCKHOLDERS shall,
subject to the limitations hereinafter set forth, indemnify and hold harmless
INSCI and the CORPORATION from and against any and all actions, suits, claims,
demands, debts, liabilities, obligations, losses, damages, costs and expenses,
including without limitation reasonable attorney's fees (collectively,
"Damages"), arising out of or caused by any or all of the following:
(a) Any misrepresentation or breach of any warranty or representation
made by PRINCIPAL STOCKHOLDERS in this Agreement.
(b) Any failure by PRINCIPAL STOCKHOLDERS to perform any term or
provision of this Agreement to be performed by them.
(c) Any debt or liability of the CORPORATION which arose or was
incurred at any time before the Closing Date, other than (i) those which are
reflected on the balance sheet which is part of the financial statements as
certified by Goldstein Lewin & Co. and delivered pursuant to the within
Agreement, or in the notes thereto and (ii) those which are incurred between the
date of execution of the within Agreement and the Closing Date in the ordinary
course of business or with the consent of INSCI.
(d) Any deficiency or adjustment in income, franchise, sales, use,
payroll or other taxes, assessed against the CORPORATION with respect to any
period ending before the Closing Date.
(e) That certain specified SELLERS will indemnify and hold harmless
INSCI on a joint and several basis as to any liability hereunder with respect to
the amount of shares deposited in escrow by them.
13.2 INSCI's Obligation to Indemnify.
From and after the Closing Date, INSCI shall indemnify and hold
harmless SELLERS (and their respective heirs, estates, and representatives) from
and against any and all Damages arising out of or caused by any of the
following:
(a) Any misrepresentation or breach of any warranty or
representation made by INSCI in this Agreement.
(b) Any failure by INSCI to perform any term or provision of
this Agreement to be performed by it.
(c) Any debt or liability of the CORPORATION which arose or
was incurred before the Closing Date, if such debt or liability (i) was
reflected on the balance sheet which is part of the Financial
Statements certified by Goldstein Lewin & Co. and delivered to SELLERS.
(d) Any obligation or liability of any of the STOCKHOLDERS
under guarantees heretofore made by any of them of obligations or
liabilities of any of the CORPORATION and set forth herein.
13.3 Notices, Defenses and Payments.
With respect to each event, occurrence or matter ("Indemnification
Matter") as to which INSCI, on the one hand, and SELLERS, on the other hand, (in
either case referred to as the "Indemnitee"), is entitled to indemnification
from the other (the "Indemnitor") under this Section 13:
(a) Upon the Indemnitee's receipt of written documents
underlying the Indemnification Matter, or, if the Indemnification
Matter does not involve a third party action, suit, claim or demand,
after the Indemnitee first has actual knowledge of the Indemnification
Matter, the Indemnitee shall promptly give notice to the Indemnitor of
the nature of the Indemnification Matter and the amount demanded or
claimed in connection therewith ("Indemnification Notice").
(b) If a third party action, suit, claim or demand is
involved, then, upon receipt of the Indemnification Notice, the
Indemnitor shall, at its expense and through counsel of its choice,
assume and have sole control over the litigation, defense or settlement
thereof (collectively, "Defense"), except that the Indemnitee may, at
its option and expense and through counsel of its choice, participate
in the Defense. The Indemnitor and the Indemnitee shall fully cooperate
with each other in connection with such third party action, suit, claim
or demand, including without limitation by furnishing all available
documentary or other evidence as is reasonably requested by the other.
(c) All amounts owed by the Indemnitor to the Indemnitee (if
any) shall be paid in full within thirty (30) days after a final
settlement or agreement as to the amount owed is reached, or after a
final judgment or order (without further right of appeal) determining
the amount owed is rendered.
13.4 Limitations.
The Indemnitor's liability for indemnification under this Section 13
shall be limited as follows:
(a) Limits.
INSCI's sole recourse except, as to the three principal
officers for fraud or intentional misrepresentation, with respect to
any indemnity obligations hereunder shall be by set off against the
INSCI shares held in escrow pursuant to the Escrow Agreement attached
as Exhibit XVIII. In no event shall any SELLER have liability hereunder
except to the extent of such SELLER's pro rata interest in any INSCI
stock that, at any time, remains held in escrow.
(b) Payment of Undisclosed or Unknown
Liabilities.
The escrow shall be drawn upon only in the event that damages
incurred, as specified in Section 13.1, exceed $50,000 in the
aggregate. In the event damages do not exceed $50,000, INSCI will bear
the responsibility. SELLERS understand and agree that SELLERS will have
90 days from the date of any claim or claims to attend to said claim.
SELLERS further understand and agree that the CORPORATION and or INSCI,
at its right and option, after a 30 day period, shall have the right to
make payment for any and all claims either from the escrow fund, as
provided for herein, or, in the alternative, demand payment directly
from SELLERS unless a mutually agreeable arrangement for processing and
handling of any claim or claims is made by and between SELLERS, the
CORPORATION, and or INSCI, as the case may be.
(c) Right of Off-Set of Shares From Escrow.
So long as any shares of stock shall remain in escrow pursuant to the
Escrow Agreement, INSCI is entitled to a right of off-set under Section 13
herein.
14. CLOSING.
The closing (the "Closing") under this Agreement will be subject to
mutual agreement to all exhibits and shall take place at or about 10:00 A.M.
local time on , 1999 (the "Closing Date"), at the offices of Baratta & Goldstein
in New York City, New York or at such other time, date and place as SELLERS and
INSCI mutually agree.
Immediately following the closing, INSCI agrees that it will appoint to
its Board of Directors a qualified candidate recommended by the CORPORATION as
long as the candidate is acceptable to INSCI's Board to serve until the next
Annual Meeting of Shareholders. INSCI further agrees to nominate such director
for election by its Shareholders at the next Annual Meeting of Shareholders.
Additionally, INSCI further agrees to provide the opportunity to a designee of
the CORPORATION to attend INSCI Board Meetings as an observer. Such observer
shall have the right to attend all Meetings of the Board of Directors, to
receive notices of such Meetings, and to receive all information provided by
INSCI's Directors, provided that such observer shall be non-voting and shall not
have the liabilities of a Director. Such observer shall be designated as a Board
observer in any listing of Directors of INSCI.
15. NOTICES.
All notices, which are permitted or required under this Agreement shall
be in writing and delivered personally or sent by photocopy, facsimile or other
electronic means or by registered or certified mail, postage prepaid, addressed
as follows, or to such other person or address as may be designated by notice to
the other party:
If to SELLERS:
C/O Tom Willet, Esq.
Harris, Beach & Wilcox
130 East Main Street
Rochester, New York 14604
If to INSCI:
Two Westborough Business Park
Westborough, MA 01581
With a copy, which copy shall not constitute notice, to:
Baratta & Goldstein
597 Fifth Avenue
New York, NY 10017
If to IBC:
555 S.W. 12th Avenue
Suite 110
Pompano Beach, FL 33069
Notices will be deemed delivered (except as otherwise provided in this
Agreement) when delivered personally or upon being mailed by prepaid certified
or registered mail with return receipt requested or by such other method
(including air courier) which provides for a signed receipt upon delivery,
provided that any notice of change of address shall be effective only upon
receipt.
The addresses set forth above shall be conclusive for all purposes
unless and until written notice of a change of addresses shall be sent to the
parties herein.
16. MISCELLANEOUS.
16.1 Payments.
All payments pursuant to this Agreement shall be made in United States
dollars.
16.2 Waiver, Remedies Cumulative, etc.
(a) Waiver.
No delay on the part of INSCI or SELLERS in the exercise of any right,
power, privilege or remedy hereunder shall operate as a waiver thereof, nor
shall any exercise or partial exercise of any such right, power, privilege or
remedy preclude any further exercise thereof or the exercise of any right,
power, privilege or remedy. No modification or waiver of any provision of this
Agreement, nor consent to any departure by INSCI or SELLERS therefrom, shall be
effective in any event unless the same shall be in writing, and then such
waiver, consent or modification shall be effective only in the specific
instance, and for the purpose, for which given.
(b) Special Waiver.
Notwithstanding the foregoing, INSCI shall have the right to waive
compliance by SELLERS with any of the provisions hereof, or to modify such
provisions to a less restrictive obligation of SELLERS, on such terms as INSCI
shall determine in its sole discretion, with or without prior notice to SELLERS.
(c) Remedies.
The rights, powers, privileges and remedies hereunder are hereby
expressly specified to be cumulative and not exclusive of any right, power,
privilege or remedy which the par ties hereto would otherwise have, except that
the rights of the parties hereto to obtain damages shall be limited as provided
in the within Agreement.
16.3 Entire Agreement.
This Agreement and the other agreements provided for herein embody the
entire agreement and understanding among INSCI and SELLERS, and supersede all
prior agreements and understandings between INSCI and SELLERS relating to the
subject matter hereof and thereof.
16.4 Parties in Interest.
All the terms and provisions of this Agreement shall be binding upon
and inure to the benefit of and be enforce able by the respective legal
representatives, successors and assigns of the parties hereto, whether so
expressed or not; provided, however, that INSCI shall not have the right to
assign this Agreement, or its rights hereunder, prior to the Closing, except to
a wholly-owned subsidiary of INSCI. Any such assignment by INSCI shall be
effective only if the permitted assignee shall assume all of INSCI's obligations
under this Agreement and all agreements referred to herein.
16.5 Law Governing.
This Agreement is being executed and delivered and is intended to be
performed in New York and shall be construed and enforced in accordance with,
and governed by, the laws and decisions of such State.
16.6 Counterparts.
This Agreement may be executed simultaneously in one or more
counterparts thereof, each of which shall be deemed an original, but all of
which together shall constitute one and the same instrument.
16.7 Severability.
If any provision of this Agreement is construed to be prohibited or
unenforceable, then the remaining provisions hereof shall not be affected
thereby and shall be enforced with out regard thereto.
16.8 Section Headings.
Section and subsection headings in this Agreement are for convenience
of reference only, do not constitute a part of this Agreement, and shall not
affect its interpretation.
16.9 References.
All words used in this Agreement shall be construed to be of such
number and gender as the context requires or permits. Unless a particular
context clearly provides otherwise, the words "hereof" and "hereunder" and
similar references refer to this Agreement in its entirety and not to any
specific Section or Subsection.
16.10 Consent to Jurisdiction.
Each of INSCI and SELLERS hereby submits to the exclusive jurisdiction
of the courts of the State of New York and/or the Federal courts of the United
States of America located in the Southern District of New York in respect of the
interpretation and enforcement of the provisions of this Agreement, or any
document or instrument delivered pursuant hereto and hereby waives, and agrees
not to assert, as a defense in any action, suit or proceeding for the
interpretation or enforcement of this Agreement or any document or instrument
delivered pursuant hereto, that he or it is not subject thereto or that such
action, suit or proceeding may not be brought or is not maintainable in said
courts or that this Agreement or any document or instrument delivered pursuant
hereto may not be enforced in or by said courts that the action, suit or
proceeding is brought in an inconvenient forum, or that the venue of the action,
suit or proceeding is improper.
SELLERS and INSCI agree that final judgment (with all rights of appeal
having been expired or waived) against them in any such action, suit or
proceeding shall be conclusive and that INSCI is, or the SELLERS are, as the
case may be, entitled to enforce such judgment in any other jurisdiction by suit
on the judgment, a certified or exemplified copy of which shall be conclusive
evidence of the fact and amount of indebtedness arising from such judgment.
16.11 No Third Party Beneficiaries.
Except as specifically provided in Section 16.4 hereof, no provision of
this Agreement is intended to or shall be construed to grant or confer any right
to enforce this Agreement or any remedy for breach of this Agreement to or upon
any third party.
IN WITNESS WHEREOF, the parties hereto have each caused this Agreement
to be executed in the name and on behalf of each of them by one of their
respective officers, thereunto duly authorized, as of the day and year first
above written.
INSCI CORP.
By:
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INTERNET BROADCASTING COMPANY, INC.
By:
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Brad Levine
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Stephen MacQuarrie
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Chris Pernicano
<PAGE>
LISTING OF EXHIBITS
Exhibit "I" Listing of SELLERS (all Stockholders).
Exhibit "I-A" Listing of PRINCIPAL STOCKHOLDERS (Limited Warranties)
Exhibit "II" Registration Rights Agreement.
Exhibit "III" (Eliminated).
Exhibit "IV" Audited Financial Statements and Unaudited Interim Period.
Exhibit "V" Listing of all Subsidiary Corporations and Jurisdictions
in which IBC does Business.
Exhibit "VI" Listing of all Authorized, Issued and Outstanding Shares of
Capital Stock of IBC.
Exhibit "VII" Litigation.
Exhibit "VIII" Title to Properties.
Exhibit "IX" Loans made by IBC to Employees, Officers or Directors.
Exhibit "X" Schedule of Key Employees.
Exhibit "XI" Schedule of Proprietary Technology.
Exhibit "XII" Currently Existing Contracts, Leases and Agreements.
Exhibit "XIII" Marketing, Distribution and Re-selling Agreements.
Exhibit "XIV" IBC's Officers and Board of Directors (Resignations).
Exhibit "XV" Listing of Insurance Policies owned or maintained by IBC.
Exhibit "XVI" Sellers' Employment Agreements (Messrs. Levine, MacQuarrie
and Pernicano).
Exhibit "XVII" Employees' Non-Compete, Proprietary and Confidentiality
Agreements.
Exhibit "XVIII" Escrow Agreement.
Exhibit "XIX" Opinion Letter of Sellers' counsel.
Exhibit "XX" (Eliminated).
<PAGE>
INDEMNIFICATION AGREEMENT
EXHIBIT
The undersigned, BRAD LEVINE, STEPHEN MACQUARRIE and CHRIS PERNICANO
agree to hold harmless and indemnify INSCI CORP. ("INSCI") with respect to the
Stock Purchase Agreement dated , 1999, from any undisclosed or unknown
liabilities or claims which are not disclosed on Internet Broadcasting Company,
Inc.'s (IBC's) Financial Statements and/or Schedule of Liabilities, including
all contingent liabilities, as of the Closing Date up to an aggregate of 125,000
Shares on a pro rata basis as follows:
BRAD LEVINE - 41,666 Shares
STEPHEN MACQUARRIE - 41,666 Shares
CHRIS PERNICANO - 41,666 Shares
The within Indemnification and Hold Harmless Agreement is limited to the pro
rata number of shares deposited in escrow by Messrs. Levine, MacQuarrie and
Pernicano, as per the Escrow Agreement executed of even date with the firms of
Baratta & Goldstein and Harris Beach and Wilcox as Escrow Agents except for a
claim against the Sellers for fraud and misrepresentation. In the event of any
such claim by INSCI, damages will be governed by applicable law as made and
provided.
INSCI agrees that it will inform Messrs. Levine, MacQuarrie and
Pernicano in writing of any claim that is not scheduled on the Financial
Statement and Schedule of Liabilities of IBC as of the Closing Date, including
any contingent liabilities and that, in the event that any claim is asserted and
presented by INSCI to Messrs. Levine, MacQuarrie and Pernicano which claim is
not resolved and discharged to INSCI's satisfaction, within thirty (30) days
from the date of said notification, then in that event, INSCI will have the
right to notify the Escrow Agents of the amount of said claim and after payment
of same, to demand that the Escrow Agents turn over and return to INSCI in
satisfaction of said claim, on a pro rata basis, the number of shares standing
in the name of Messrs. Levine, MacQuarrie and Pernicano by multiplying the
number of shares held in escrow by the market price at the time of the payment
of said claim by INSCI so that INSCI will receive the return of the dollar value
of the claim paid in shares of stock.
It is understood and agreed that the aggregate of 125,000 shares of
Common Stock as stated herein will be subject to the within indemnification for
a period of one year from the date of the Stock Purchase Agreement and,
thereafter, during the second year from said date, that the aggregate number of
shares subject to the indemnification will be reduced to the sum of $100,000 in
value of said shares. The shares in escrow will be valued at the bid market
price on the second anniversary of the within Agreement (i.e., 25,000 shares at
$4.00 per share). It is understood and agreed that in the event there are no
claims either threatened or pending with respect to the Stock Purchase
Agreement, then in that event, on the third anniversary from the closing date of
the stock purchase transaction, all shares of Common Stock held by the joint
Escrow Agents will be released to Messrs. Levine, MacQuarrie and Pernicano.
Messrs. Levine, MacQuarrie and Pernicano agree that they will execute
all certificates and documents required by INSCI and the Escrow Agents to cause
the turn over or return to INSCI of the INSCI shares to INSCI.
INSCI, Messrs. Levine, MacQuarrie and Pernicano agree that they will
indemnify and hold harmless the Escrow Agents from any liability, except for
gross negligence, in accordance with the Escrow Agreement, which is annexed as
Exhibit "XVIII" herein.
The within agreement is governed by the laws of the State of New York
and may not be changed or modified except by the written agreement of the
parties herein.
Each of the parties agrees that if notice is required, that said notice
will be sent to the following parties:
Brad Levine, Stephen MacQuarrie and Chris Pernicano
C/O Tom Willet, Esq.
Harris, Beach & Wilcox
130 East Main Street
Rochester, New York 14604
With a copy, which copy shall not constitute notice, to:
Tom Willet, Esq.
Harris, Beach & Wilcox
130 East Main Street
Rochester, New York 14604
INSCI
Two Westborough Business Park
Westborough, MA 01581
With a copy, which copy shall not constitute notice, to:
Baratta & Goldstein
597 Fifth Avenue
New York, NY 10017
IN WITNESS WHEREOF, we have set our hands and seals this day of , 1999.
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BRAD LEVINE
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STEPHEN MACQUARRIE
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CHRIS PERNICANO
INSCI CORP.
By:
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