10QSB 1 t24533.txt QUARTERLY REPORT SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 --------------------------------------------------- FORM 10-QSB [X] Quarterly Report under Section 13 or 15d of the Securities Exchange Act of 1934 for the quarterly period ended: June 30, 2002 [ ] Transition report pursuant to Section 13 or 15d of the Securities Exchange Act of 1934 For the Transition period from ------------------------------ to --------------------------- Commission file number: 1-12966 INSCI CORP. (FORMERLY INSCI-STATEMENTS.COM, CORP.) (Exact name of registrant as specified in its charter) DELAWARE 06-1302773 -------------------- -------------------- (State of incorporation) (IRS employer identification number) Two Westborough Business Park Westborough, MA 01581 (Address of principal executive offices) Issuer's telephone number, including area code: (508) 870-4000 Check whether the issuer (1) filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No __ --- State the number of shares outstanding of each of the issuer's classes of common equity, as of the latest practicable date: TITLE OF EACH CLASS OUTSTANDING AUGUST 8, 2002 ------------------- -------------------------- Common Stock, par value $.01 52,761,299 Transitional Small Business Disclosure Format (check one) Yes No X ---- ----- INSCI CORP. INDEX PART I FINANCIAL INFORMATION Item 1. Financial Statements Consolidated Balance Sheet as of June 30, 2002 3 Consolidated Statements of Operations for the Three Months 4 Ended June 30, 2002 and 2001 Consolidated Statements of Cash Flows for the Three Months 5 Ended June 30, 2002 and 2001 Consolidated Statement of Stockholders's Deficit for the 6 Three Months Ended June 30, 2002 Notes to Financial Statements 7 Item 2. Management's Discussion and Analysis or Plan of Operation 11 PART II OTHER INFORMATION Item 1. Legal Proceedings 14 Item 2. Change in Securities 14 Item 3. Defaults Upon Senior Securities 14 Item 4. Submission of Matters to a Vote of Security Holders 14 Item 5. Other Information 14 Item 6. Exhibits and Reports on Form 8-K 14 (a) Exhibits. Exhibit 99.1, Certification pursuant to 18 U.S.C. Section 1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. Signature 15
INSCI CORP. CONSOLIDATED BALANCE SHEET JUNE 30, 2002 (UNAUDITED) (in thousands, except per share amounts) ASSETS Current assets: Cash $ 729 Accounts receivable, net of allowance for doubtful accounts of $100 1,898 Prepaid expenses and other current assets 295 -------- Total current assets 2,922 Property and equipment, net 222 Other assets 175 -------- $ 3,319 ======== LIABILITIES AND STOCKHOLDERS' DEFICIT Current liabilities: Accounts payable and accrued expenses $ 3,316 Advances against receivables sold with recourse 1,040 Deferred revenue 1,678 Convertible debt 2,795 -------- Total current liabilities 8,829 -------- Commitments and contingencies Series A Convertible Redeemable Preferred Stock, $.01 par value, authorized 4,308 shares: issued none -- Series B Convertible Redeemable Preferred Stock, $.01 par value, authorized 100 shares: issued none -- Stockholders' deficit: Convertible Preferred Stock, $.01 par value, authorized 5,592 shares: 8% Convertible Redeemable Preferred Stock, 74 shares issued and outstanding, no liquidation preference 1 Common Stock, $.01 par value, authorized 185,000 shares: issued and Outstanding 52,761 shares 527 Additional paid-in capital 47,018 Accumulated deficit (53,056) -------- Total stockholders' deficit (5,510) -------- $ 3,319 ========
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED FINANCIAL STATEMENTS. 3
INSCI CORP. CONSOLIDATED STATEMENTS OF OPERATIONS THREE MONTHS ENDED JUNE 30, 2002 AND 2001 (UNAUDITED) (in thousands, except per share amounts) 2002 2001 ---- ---- Revenue Product $ 793 $ 936 Services 1,477 1,549 --------- -------- Total revenue 2,270 2,485 --------- -------- Cost of revenue Product 65 32 Services 333 459 --------- -------- Total cost of revenue 398 491 --------- -------- Gross profit 1,872 1,994 --------- -------- Expenses Sales and marketing 510 623 Product development 447 593 General and administrative 537 803 --------- -------- 1,494 2,019 --------- -------- Operating income (loss) 378 (25) Interest expense, net (134) (110) --------- -------- Net income (loss) $ 244 $ (135) ========= ======== Basic earnings (loss) per common share $ 0.005 $ (0.014) ========= ======== Diluted earnings (loss) per common share $ 0.003 $ (0.014) ========= ======== Weighted average shares outstanding: Basic 54,177 16,129 ========= ======== Diluted 102,751 16,129 ========= ========
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED FINANCIAL STATEMENTS. 4
INSCI CORP. CONSOLIDATED STATEMENTS OF CASH FLOWS THREE MONTHS ENDED JUNE 30, 2002 AND 2001 (UNAUDITED) (in thousands, except per share amounts) 2002 2001* ---- ---- Cash flows from operating activities: Net income (loss) $ 244 $(135) Reconciliation of net income (loss) to net cash used in operating activities: Depreciation and amortization 39 88 Convertible debentures issued for services 75 30 Stock issued for services -- 20 Changes in assets and liabilities: Accounts receivable (629) 6 Prepaid expenses and other current assets (169) (66) Other assets -- 54 Accounts payable and accrued expenses (121) (216) Deferred revenue 195 74 ----- ----- Net cash used in operating activities (366) (145) ----- ----- Cash flows from investing activities: Capital expenditures (4) (1) Proceeds from sale of fixed assets -- 17 ----- ----- Net cash (used in) provided by investing activities (4) 16 ----- ----- Cash flows from financing activities: Repayments on short term debt (304) (130) Net advances (repayments) from sale of receivables 991 (149) Proceeds from convertible debt -- 250 ----- ----- Net cash provided by (used in) financing activities 687 (29) ----- ----- Net increase (decrease) in cash 317 (158) Cash at beginning of period 412 460 ----- ----- Cash at end of period $ 729 $ 302 ===== ===== * Reclassified for comparative purposes
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED FINANCIAL STATEMENTS. 5
INSCI CORP. CONSOLIDATED STATEMENT OF STOCKHOLDERS' DEFICIT FOR THE THREE MONTHS ENDED JUNE 30, 2002 (UNAUDITED) Additional Accum- Preferred Stock Common Stock Paid-in ulated Shares Amount Shares Amount Capital Deficit Total -------------- ---------- ------------- ----------- ------------- ------------- ------------- BALANCE, MARCH 31, 2002 80 $ 1 52,647 $ 526 $ 47,019 $(53,300) $(5,754) 8% preferred stock conversion to common stock (6) - 114 1 (1) -- -- Net income - - - - - 244 244 -------------- ---------- ------------- ----------- ------------- ------------- ------------ BALANCE, JUNE 30, 2002 74 $ 1 52,761 $ 527 $ 47,018 $(53,056) $(5,510) ============== ========== ============= =========== ============= ============= ============
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED FINANCIAL STATEMENTS. 6 INSCI CORP. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited) NATURE OF BUSINESS AND BASIS OF PRESENTATION The consolidated financial statements included in this report have been prepared by INSCI Corp., (the "Company" or "INSCI"), without audit, pursuant to the rules and regulations of the Securities and Exchange Commission regarding interim financial reporting. Certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States have been condensed or omitted pursuant to such rules and regulations. However, the Company believes that the disclosures contained herein are adequate to make the information presented not misleading. The financial statements should be read in conjunction with the financial statements and notes thereto included in the Company's annual report on Form 10-KSB for the fiscal year ended March 31, 2002. The results of the three months ended June 30, 2002 may not be indicative of the results that may be expected for the year ended March 31, 2003. INSCI Corp., formerly known as insci-statements.com, corp. ("INSCI") develops and provides software for electronic document distribution, storage and presentment. The accompanying consolidated financial statements have been prepared in conformity with generally accepted accounting principles, which contemplate continuation of the company as a going concern. The company, however, has sustained operating losses in prior years and has a working capital deficit and an accumulated deficit as of June 30, 2002, which creates uncertainty about the Company's ability to continue as a going concern. The Company's ability to continue operations as a going concern and to realize its assets and to discharge its liabilities is dependent upon obtaining additional financing sufficient for continued operations, its ability to settle claims from creditors as well as the achievement and maintenance of a level of profitable operations. Management believes that the current business plan if successfully implemented may provide the opportunity for the Company to continue as a going concern. The consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty. In the opinion of the management of the Company, the accompanying unaudited financial statements reflect all adjustments (of a normal and recurring nature) which are necessary to present fairly the financial position of the Company as of June 30, 2002 and the results of operations and cash flows for the three months ended June 30, 2002 and 2001. The accompanying consolidated financial statements for the three months ended June 30, 2002 and 2001 include the operations of INSCI and its wholly-owned subsidiary, Lognet 2000, Inc. ("Lognet"). The consolidated financial statements also include the Company's wholly-owned subsidiaries, InfiniteSpace.com, Corp. ("InfiniteSpace"), The Internet Broadcasting Company, Inc. ("IBC"), and INSCI (UK) Limited. which are no longer active effective with the end of the second quarter of fiscal 2001. All significant intercompany transactions and balances have been eliminated in the preparation of these financial statements. RECENTLY ISSUED ACCOUNTING STANDARDS In July 2001, the FASB issued SFAS No. 141, "Business Combinations," and SFAS No. 142, "Goodwill and Other Intangible Assets." Under these new standards, all acquisitions subsequent to June 30, 2001 must be accounted for under the purchase method of accounting, and purchased goodwill is no longer amortized over its useful life. Rather, goodwill will be subject to a periodic impairment test based upon its fair value. In fiscal 2002 the Company adopted this statement which did not impact the consolidated results of operations, financial position or cash flows. In June 2001, the FASB issued SFAS No. 143, "Accounting for Assets Retirement Obligations" ("SFAS 143"). SFAS 143 established accounting standards for recognition and measurement of a liability for the cost of asset retirement obligations. Under SFAS 143, the costs of retiring an asset will be recorded as a liability when the retirement obligation arises, and will be amortized to expense over the life of the assets. The Company is required 7 to adopt this statement no later than January 1, 2003 and does not expect it to have a material impact on its consolidated financial statements. In October 2001, the FASB issued SFAS No. 144, "Accounting for the Impairment of Disposal of Long-Lived Assets ("SFAS 144"). SFAS 144 addresses financial accounting and reporting for the impairment or disposal of long-lived assets and discontinued operations. The Company is currently evaluating the impact of these pronouncements to determine the effect, if any, they may have on the consolidated financial position and results of operations. The Company adopted this statement on April 1, 2002 with no material impact on our consolidated financial statements. EARNINGS (LOSS) PER COMMON SHARE Basic earnings (loss) per common share was computed by dividing net income (loss) applicable to common shares by the weighted average number of common shares outstanding during the period. Diluted earnings (loss) per common share was calculated by dividing net income by the sum of the weighted average number of common shares outstanding plus all additional common shares that would have been outstanding if potentially dilutive common shares had been issued. For the three months ended June 30, 2002, approximately 9.9 million shares from stock options, warrants and convertible securities were excluded because their exercise price exceeded market value. For the three months ended June 30, 2001, 8.9 million stock options, warrants and convertible securities were excluded due to their anti-dilutive effect.
The income (loss) used in determining basic and diluted THREE MONTHS ENDED earnings (loss) per share consisted of the following: JUNE 30, 2002 2001 ------------- -- -------------- BASIC Net income (loss) $ 244 $ (135) Preferred Stock Dividend - (89) ------------- -------------- $ 244 $ (224) ============= ============== DILUTED Net income (loss) $ 244 $ (135) Interest expense for Convertible debt with Series B Convertible Redeemable Preferred Stock 27 - Preferred Stock Dividend - (89) ------------- -------------- $ 271 $ (224) ============= ============== A reconciliation from the number of shares used in the basic earnings (loss) per share computation to the number of shares used in the diluted earnings per share computation is as follows: Weighted average shares of common stock outstanding during the period - Basic 54,177 16,129 Weighted average common equivalent shares due to stock options and warrants - - Convertible debt with Series A Convertible Redeemable Preferred Stock - - Convertible debt with Series B Convertible Redeemable Preferred Stock 48,574 - ------------- -------------- Weighted average shares of common stock outstanding 102,751 16,129 ============= ==============
SEGMENT REPORTING AND SIGNIFICANT CUSTOMERS For the three months ended June 30, 2002, sales to two of our customers represented 16% and 14% of total revenues. For the three months ended June 30, 2001, INSCI received 20% and 7%, respectively, of its total revenues from these customers. These two customers and another customer accounted for 31%, 10% and 22%, 8 respectively, of the Company's accounts receivable at June 30, 2002. At June 30, 2001, these customers accounted for 24% and 24%, respectively, of the Company's accounts receivable. A decline in revenues from either of these customers in future quarters could materially affect the revenues, operating results and liquidity of the Company. The Company operates as a single reportable segment as a developer and seller of software for electronic document distribution, storage and presentment. Revenue was derived from customers in the following geographic areas (in thousands) THREE MONTHS ENDED JUNE 30, 2002 2001 -------------------- --- ------------------- North America $ 2,042 $ 2,187 Europe 100 174 Other 128 124 -------------------- ------------------- $ 2,270 $ 2,485 ==================== =================== ADVANCES AGAINST RECEIVABLES SOLD WITH RECOURSE During May 2002, the Company entered into an agreement with a commercial financing company, which provides for the sale of all of the eligible domestic accounts receivable of the Company with recourse. Pursuant to the terms of the agreement, the Company will receive 80% of the face amount of an accepted account and will be charged a commission equal to 2.25% of the accepted amount. The Company granted to the financing company a security interest in all of the Company's assets and accounts receivable. The Company agreed upon an early termination arrangement of a prior financing agreement so that it could enter into this new agreement. As part of this new financing arrangement, the Company was required to payoff its loan in full to the Pennsylvania Business Bank in the sum of $285,000. CONVERTIBLE DEBT During June 2001, the Company entered into an Investment Agreement ("Agreement") with Selway Partners, LLC ("Selway") an affiliate of the Company. The Agreement provides up to a sum of $700,000 of subordinated convertible debentures (the "Debentures"). The Company has received $585,000 through June 30, 2002. The Debentures bear an annual interest rate of 13 percent payable in cash or in additional Debentures and are convertible into Series B Convertible Redeemable Preferred Stock (the "Series B Preferred") at a price of $10.00 per share which are convertible into shares of common stock of the Company, as defined in the agreement. The Debentures are secured by a junior lien on all of INSCI's assets. Unless previously converted into shares of Series B Preferred, principal and interest on the Debentures are payable at the earlier of June 15, 2002 or upon demand by the holder. An amendment to the Agreement extends the maturity date of the Debentures to September 1, 2002. The independent members of the Board of Directors of the Company authorized the Agreement, and the two Selway-designated Directors did not negotiate the terms of the agreement or participate in the vote by the Company's Board to proceed with the transaction. In connection with the Agreement, the Company amended its Management Agreement with Selway Management, Inc. The amended management agreement reduced the monthly management fee from $20,000 per month to $15,000 per month. The monthly management fee is payable at the option of Selway in either cash or additional subordinated convertible debentures ("Management Debentures"). The Company satisfied $210,000 of management fees by the issuance of Management Debentures to Selway Management, Inc. as of June 30, 2002. The Management Debentures have terms similar to the Debentures except for the Series B Preference Amount. The Management Debentures do not reduce the total amount available to the Company under the Agreement. The Convertible Debt has a number of covenant requirements and also contains certain registration rights. The Company has not complied with some of these covenants and may be deemed in default. As of the date of these financial statements, the Investors have not declared a default, but Selway has not waived its rights, and there can be no assurance that the Company will not be declared in default in the future. In the event a default was declared 9 which was uncured, the Investors could accelerate the principal and interest on the Convertible Debt and further assert a claim against the security pledged by the Company. In the event of a default, the entire $2,795,000 of convertible debt, which includes the $2.0 million financing in November 2000, will be in default as to the terms of the agreement. Accordingly, the Company has classified the principal as current in the accompanying consolidated balance sheet. RELATED PARTY TRANSACTIONS The Company incurred $10,000 during the quarter ended June 30, 2002 in loan guarantee fees to Selway, a related party, in connection with the loan from the Pennsylvania Business Bank ("Bank Loan"). As a result of the repayment of the Bank Loan, the Company was able to discontinue its monthly payment obligation in the sum of $5,000 per month to Selway. The Pennsylvania Business Bank cancelled both the Selway guarantee and the personal guarantee of the loan by the Company's Chairman, who had been a guarantor prior to his affiliation with the Company.
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION THREE MONTHS ENDED JUNE 30, 2002 2001 ---- ---- Cash paid for interest $ 45 $ 63 Noncash investing and financing activities: Common Stock issued for the conversion of 8% Convertible Redeemable Preferred Stock 114 - 8% Convertible Redeemable Preferred Stock issued as dividends - 383
CONTINGENCIES LEGAL PROCEEDINGS The Company is a defendant in an action commenced by one of its vendors for non-payment in the aggregate amount of $588,000, which has been included in accounts payable and accrued expenses. The Company is contesting this action and is asserting a number of affirmative defenses to the action. A resolution by settlement is being actively pursued. The outcome of these proceedings cannot be determined with certainty. It is the opinion of management that an unfavorable final determination of this action will have a material adverse effect on the Company's business, financial position and operating results. The Company may either voluntarily or involuntarily seek protection under the Federal Bankruptcy law. FINANCIAL STATEMENT PRESENTATION Certain amounts in the Statement of Cash Flows for the three months ended June 30, 2001 have been reclassified to conform to the presentation for the three months ended June 30, 2002. ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION The following discussion of management's analysis of operations for the three months ("First Quarter of Fiscal 2003") ended June 30, 2002 and the three months ("First Quarter of Fiscal 2002") ended June 30, 2001, and discussion of financial condition at June 30, 2002, should be read in conjunction with the financial statements and notes thereto contained elsewhere in this report. 10 We develop, sell, install and support scalable digital document storage solutions that provide capture, warehousing and delivery functions via networks or the Internet. Our products bridge back-office functions with front-office mission critical and customer-centric applications by displaying legacy-generated reports, bills, statements and other documents. Sales to end-users generally include software, systems integration, implementation and customization services, and training. ASP-enabling sales of our software and services also include integration and implementation services, and training with the added opportunity to build a recurring revenue stream by sharing the transaction revenue that our partners or customers generate from their ASP operations. Post-installation maintenance and customer support is available under the terms of a separate contract at an additional charge. We distribute our products through a combination of a direct sales force and through VARs, distributors and sales alliances with companies including Unisys Corporation and Xerox Corporation. Revenue is net of discounts and allowances given to third-party VARs and distributors. Our revenues fluctuate because of a variety of factors including the amount of revenue generated from our alliances with other companies selling our products, the length of the sales cycle for our products, demand for our products and the introduction of new products and product enhancements. The accompanying financial statements have been prepared on a going concern basis, which contemplates the realization of assets and the settlement of liabilities and commitments in the normal course of business. As of June 30, 2002, the Company had an accumulated deficit of $53.1 million and a working capital deficit of $5.9 million. Additional sources of capital, such as additional debt or equity offerings, will be necessary to fund our currently proposed activities for future periods. There can be no assurances, however, that we will be successful in obtaining funds from any such sources or be qualified to draw down on the convertible debt facility. There exists substantial doubt about the Company's ability to continue as a going concern. COMPARISON OF RESULTS OF OPERATIONS ----------------------------------- The following table sets forth, for the periods indicated, the percentage relationship that certain items of the Company's results of operations bear to total revenue:
THREE MONTHS ENDED JUNE 30, 2002 2001 % % Revenue Product 35 38 Services 65 62 ------------ ----------- Total revenue 100 100 ------------ ----------- Cost of revenue Product 3 1 Services 15 19 ------------ ----------- Total cost of revenue 18 20 ------------ ----------- Gross profit 82 80 ------------ ----------- Expenses Sales and marketing 22 25 Product development 20 24 General and administrative 23 32 ------------ ----------- Total expenses 65 81 ------------ ----------- Operating income (loss) 17 (1) Interest expense, net (6) (4) ------------ ----------- Net income (loss) 11 (5) ============ ===========
11 FIRST QUARTER OF FISCAL 2003 AS COMPARED TO FIRST QUARTER OF FISCAL 2002: REVENUE We develop, sell, install and support electronic document repository software with integrated internet, imaging, electronic distribution, presentation and archive (COLD) software for the enterprise level (high volume production) market. Sales to end-users generally include software, systems integration and consulting services including customizaton, installation, and training. Post-installation maintenance and customer support is available under the terms of a separate contract at an additional charge. We sell our products through a combination of a direct sales force and indirectly through VARs, distributors and sales alliances with companies including Unisys Corporation and Xerox Corporation. Revenue is net of discounts and allowances given to third party VARs and distributors. Revenues for the First Quarter of Fiscal 2003 totaled $2.3 million and decreased by $215,000 (9%) compared to revenues of $2.5 million for the First Quarter of Fiscal 2002. The decline was primarily due to a decline in product revenues attributed to the change in general economic conditions over the last year. For the First Quarter of Fiscal 2003 we received 16% and 14% of our total revenues from two of our customers. For the First Quarter of Fiscal 2002 we received 20% and 7% of our total revenues from these customers. A decline in revenues from either of these customers in future quarters could materially affect the revenues, operating results and liquidity of the Company. GROSS PROFIT Gross profit for the First Quarter of Fiscal 2003 was $1.9 million and decreased $122,000 (6%) compared to gross profit of $2.0 million for the prior year period. Gross margin improved from 80% for the First Quarter of Fiscal 2002 to 82% for the current year period. The decline in gross profit is directly related to the decline in revenue as previously noted. SALES AND MARKETING Sales and marketing expenses for the First Quarter of Fiscal 2003 were $510,000, a decline of $113,000 (18%) from the prior year period expenses of $623,000. This decrease reflects various cost reduction efforts enacted in the latter part of the First Quarter of Fiscal 2002. PRODUCT DEVELOPMENT Product development expenses declined $146,000 (25%) from the First Quarter of Fiscal 2002 level of $593,000 to $447,000 in the current year period. The decline was due to INSCI's reduced reliance on outside consultants and professional services, as well as the cost reduction efforts enacted in the latter part of the First Quarter of Fiscal 2002. GENERAL AND ADMINISTRATIVE General and administrative expenses were $537,000 for the First Quarter of Fiscal 2003, a decline of $266,000 (33%) from the prior year period. The balance of the decline was primarily due to the various cost reduction efforts enacted for Fiscal 2002, as well as a lower provision for doubtful accounts and less reliance on consultants. INTEREST EXPENSE, NET Interest expense for the First Quarter of Fiscal 2003 was $134,000, an increase of $24,000 (22%) from the prior year period. This increase was due to the higher level of borrowings in the current fiscal quarter. 12 LIQUIDITY AND CAPITAL RESOURCES At June 30, 2002, the Company had $729,000 of cash and working capital deficit of $5.9 million in comparison to $412,000 of cash and working capital deficit of $6.2 million at March 31, 2002. Accounts receivable were $1.9 million at June 30, 2002 and $1.3 million at March 31, 2002. The Company's cash flows are summarized below for the periods indicated: (in thousands)
THREE MONTHS ENDED JUNE 30, 2002 2001 ---- ---- Cash provided by (used in) Operating activities $(366) $ (145) Investing activities (4) 16 Financing activities 687 (29) --------------- ---------------- Net increase (decrease) in cash and cash equivalents $ 317 $ (158) =============== ================ Cash at end of period $ 729 $ 302 =============== ================
In May 2002, we entered into a new receivable financing arrangement with Benefactor Funding Corp ("Benefactor"), whereas Benefactor agreed to finance all eligible accounts receivable of the Company on a secured basis. Pursuant to the terms of the agreement, the Company will receive 80% of the factored receivables and be charged a commission of 2.25% of the factored invoice. The factoring agreement is secured by the Company's assets and accounts receivable. As of June 30, 2002 we have $8.8 million in liabilities and $3.3 million in assets for a net capital deficiency of $5.5 million. This net capital deficiency, unless remedied, can result in us not being able to continue our business operations. We believe that our current business plan, if successfully implemented, may provide the opportunity for the Company to continue as a going concern. However, in the event that satisfactory arrangements cannot be made with creditors, we may be required to seek protection under the Federal Bankruptcy law. There can be no assurance, assuming that INSCI successfully raises additional funds or enters into a business alliance, that it will continue to maintain profitability and positive cash flow. If additional funds from such activities are not available, we will be required to significantly modify the implementation and execution of our business plan and may not be able to continue as a going concern or may be required to seek protection under the Federal Bankruptcy law. Our new independent accountants have informed the Company that they will issue an unqualified opinion for our fiscal year ended March 31, 2002 with an explanatory paragraph discussing the existence of substantial doubt about our ability to continue as a going concern. Our former independent accountants for the prior fiscal year were Arthur Andersen LLP; therefore, the Company, pursuant to SEC Release No. 33-8070, did not file audited financial statements for the fiscal year ended March 31, 2002, but filed unaudited financial statements as a part of its Form 10-KSB filed on July 15, 2002. It is anticipated that an amendment to Form 10-KSB with audited financial statements will be filed prior to August 28, 2002. "FORWARD-LOOKING" STATEMENTS UNDER THE PRIVATE SECURITIES LITIGATION REFORM ACT: This Quarterly Report contains statements which constitute forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. These statements appear in a number of places in this Annual Report and include all statements that are not statements of historical fact regarding the intent, belief or expectations of INSCI and its management. These statements are based upon a number of assumptions and estimates, which are subject to significant uncertainties, many of which are beyond our control. Words such as "may," "would," "could," "will," "expect," "anticipate," "believe," "intend," "plan" and "estimate" are meant to identify such forward-looking statements. Such forward-looking statements are not guarantees and actual results may differ materially from those expressed or implied by such forward-looking statements. Factors that could cause actual results to differ materially include, but are not limited to our ability to achieve or maintain growth or profitability, our ability to execute our business strategy successfully, our ability to obtain financing and to pay off our existing liabilities and fund our working capital needs, our relationship with our existing lenders, our relationship with our customers and suppliers, increased competition, 13 possible system failures and rapid changes in technology and other factors discussed in this Quarterly Report and in our other filings with the Securities and Exchange Commission. QUARTERLY RESULTS: Quarterly revenues and results of operations may fluctuate as the result of a variety of factors, including the lengthy sales cycle for our products, the proportion of revenues attributable to software license fees versus services, the amount of revenue generated by alliances with other companies selling our products, demand for our products, the size and timing of individual license transactions, the introduction of new products and product enhancements by us or our competitors, changes in customer budgets, competitive conditions in the industry and general economic conditions. Additionally, the sale of our products generally involves a significant commitment of capital by our customers and may be delayed due to time-consuming authorization procedures within an organization. Other factors affecting our operating results include our ability to design and introduce on a timely basis new products which compete effectively on the basis of price and performance and which address customer requirements, product obsolescence, technological changes, competition and competitive pressures on price, the ability to hire and retain qualified personnel and general economic conditions affecting the investment by potential customers in technology based investments. There is no assurance that we can maintain or increase our sales volume going forward or that we will be able to achieve a profit in the marketing of our products. PART II OTHER INFORMATION ----------------- ITEM 1. LEGAL PROCEEDINGS The Company is a defendant in an action commenced on May 17, 2002 by Key Corporate Capital (formerly Leasetec)., ("Leasetec") in Worcester Superior Court, Docket No. 02-1047C. The Leasetec claim is for contracted lease payments as well as an action in replevin for the leased equipment. This claim is for the sum of $588,148.15 plus attorneys' fees and interest. The Company is contesting the claim, and has asserted a number of affirmative defenses to the claim. A resolution of the action by settlement is being actively pursued. ITEM 2. CHANGE IN SECURITIES This item is not applicable. ITEM 3. DEFAULTS UPON SENIOR SECURITIES This item is not applicable. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS This item is not applicable. ITEM 5. OTHER INFORMATION This item is not applicable. ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (A) EXHIBITS. Exhibit 99.1, Certification pursuant to 18 U.S.C. Section 1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. (B) REPORTS ON FORM 8-K. A Current Report of Form 8-K was filed by the Company on May 31, 2002 dated May 17, 2002 which reported the Company entering into a new financing agreement with Benefactor Funding Corp. whereby all eligible domestic receivables will be financed on a secured basis. 14 A Current Report of Form 8-K was filed by the Company on May 24, 2002 dated May 20, 2002 which reported a change in the Company's certifying accountants from Arthur Andersen LLP to Goldstein and Morris Certified Public Accountants. SIGNATURE 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 thereunto duly authorized. INSCI CORP. Date: August 9, 2002 By: /S/ HENRY F. NELSON --------------------------- Henry F. Nelson Chief Executive Officer, President and Chief Financial Officer 15