-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, GMH6Aw8PgoNgFrsyJnznK4PnxlxnlwupVrsZ5KxG9KDG6HWf6SKd4bfIv9pZUu/t Vl4KYJgTDJr2Ig6Dd5uRzQ== 0000909012-02-000666.txt : 20020827 0000909012-02-000666.hdr.sgml : 20020827 20020827151911 ACCESSION NUMBER: 0000909012-02-000666 CONFORMED SUBMISSION TYPE: 10KSB/A PUBLIC DOCUMENT COUNT: 1 CONFORMED PERIOD OF REPORT: 20020331 FILED AS OF DATE: 20020827 FILER: COMPANY DATA: COMPANY CONFORMED NAME: INSCI CORP CENTRAL INDEX KEY: 0000878612 STANDARD INDUSTRIAL CLASSIFICATION: SERVICES-COMPUTER INTEGRATED SYSTEMS DESIGN [7373] IRS NUMBER: 061302773 STATE OF INCORPORATION: DE FISCAL YEAR END: 0331 FILING VALUES: FORM TYPE: 10KSB/A SEC ACT: 1934 Act SEC FILE NUMBER: 001-12966 FILM NUMBER: 02749536 BUSINESS ADDRESS: STREET 1: TWO WESTBOROUGH BUSINESS PARK CITY: WESTBOROUGH STATE: MA ZIP: 01581 BUSINESS PHONE: 5088704000 MAIL ADDRESS: STREET 1: TWO WESTBOROUGH BUSINESS PARK CITY: WESTBOROUGH STATE: MA ZIP: 01581 FORMER COMPANY: FORMER CONFORMED NAME: INSCI CORP DATE OF NAME CHANGE: 19940411 FORMER COMPANY: FORMER CONFORMED NAME: INSCI STATEMENTS COM CORP DATE OF NAME CHANGE: 19991222 10KSB/A 1 t24632.txt AMENDED ANNUAL REPORT 3/31/02 ================================================================================ SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-KSB/A ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended: Commission File Number March 31, 2002 1-12966 ================================================================================ INSCI Corp. ================================================================================ Formerly insci-statements.com, corp. (Exact name of registrant specified in its charter) Two Westborough Business Park, Delaware Westborough, MA (State or other jurisdiction of (Address of Principal executive offices) incorporation or organization) 06-1302773 (I.R.S. Employer Identification No.) 01581 Zip Code (508) 870-4000 (Registrant's Telephone number, including area code) Securities registered pursuant to Section 12(b) of the Act: None Securities registered pursuant to Section 12(g) of the Act: Title of each class Common Stock, $.01 par value Check whether the issuer (1) filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No _____ Check if there is no disclosure of delinquent filers in response to Item 405 of Regulation S-B contained in this form, and no disclosure will be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-KSB/A or any amendment to this Form 10-KSB/A. X Revenues for the fiscal year ended March 31, 2002 were $8,483,000. The aggregate market value of the voting stock held by non-affiliates of the registrant, based upon the closing price for the Common Stock on July 8, 2002, as reported by OTCBB, was approximately $ 3.1 million. As of July 8, 2002, registrant had outstanding 52,761,299 shares of Common Stock. The Small Business issuer hereby amends its previously filed 10-KSB for the year ended March 31, 2002 to reflect the completion of the audit of its annual financial statements for the year ended March 31, 2002. Such audited financial statements reflect the same financial position, results of operations, cash flows and stockholders' equity (deficit) as previously reported in the Company's initial filing of its annual report. Some reclassifications in presentation have been made. Certain recent developments as discussed in Notes 6 and 11, if consummated, will affect the amount and classification of the related liabilities. As a result of Arthur Andersen LLP's demise, users of this annual report should be aware of certain related risks. See discussion of prior years financial statements disclosed in Management's Discussion and Analysis or Plan of Operations. ================================================================================ INSCI CORP. FORM 10-KSB/A FOR THE FISCAL YEAR ENDED MARCH 31, 2002 INDEX PART I PAGE Item 1. Description of Business......................................... 3 Item 2. Description of Properties....................................... 8 Item 3. Legal Proceedings............................................... 8 Item 4. Submission of Matters to a Vote of Securities Holders........... 8 PART II Item 5. Market for the Registrant's Common Equity and Related Stockholder Matters............................................. 9 Item 6. Management's Discussion and Analysis or Plan of Operations...... 9 Item 7. Financial Statements............................................ 15 Item 8. Changes in and Disagreements with Accountants on Accounting and Financial Disclosures........................................... 15 PART III Item 9. Directors, Executive Officers, Promoters and Control Persons; Compliance With Section 16(a) of the Exchange Act............... 17 Item 10. Executive Compensation.......................................... 18 Item 11. Security Ownership of Certain Beneficial Owners and Management.. 20 Item 12. Certain Relationships and Related Transactions.................. 22 Item 13. Exhibits and Reports on Form 8-K................................ 25 SIGNATURES................................................................. 26 EXHIBIT INDEX.............................................................. 29 -2- PART I ITEM 1. DESCRIPTION OF BUSINESS OVERVIEW INSCI Corp., formerly known as insci-statements.com, corp., ("INSCI" or the "Company") (Over-The-Counter Bulletin Board ("OTCBB"): INSS) is a provider of enterprise software solutions for electronic statement presentment (ESP), digital document storage and electronic content management. INSCI develops and markets the ESP+ Suite of scalable digital document solutions that provide high-volume digital asset presentment, preservation, and delivery functions via a company's internal networks or via the worldwide web. INSCI's software was originally used to replace microfiche. Today, our customers use the ESP+ Suite to support required business functions such as long-term document storage; printing and automated reprinting; and alternatives to traditional print and mail such as CD or email information delivery. INSCI's systems extend the value and usable life of formatted documents by web-enabling legacy-generated reports, bills, statements and other forms of digital information. INSCI was incorporated in Delaware in December 1989 and is headquartered in Westborough, Massachusetts. The mailing address for the Company's headquarters is 2 Westborough Business Park, Westborough MA and its telephone number is 508-870-4000. INSCI can also be reached at its Web site http://www.insci.com. Over the past several years, the Internet has matured and is now a critical business tool. Business research, B-to-B correspondence, email, and electronic commerce are all a common part of most corporations. INSCI's high volume document solutions, using the power of the Internet, provide an architecture to capture, store, and deliver the content contained in formatted business documents. The use of our software products typically enables the customer to increase productivity and operational efficiencies, reduce and/or eliminate document warehousing and handling costs, increase the level of customer service, generate additional revenue sources, enhance marketing capabilities, or gain other competitive advantages. These products are based on open client/server architecture capable of integrating with most computing platforms, data output formats, hardware storage devices and complementary e-commerce, electronic bill presentment, and on-line retailing technologies. Our software products are typically employed where electronic availability of customer-facing documents, source documents, and reports is necessary to support the business function. Customer-facing documents vary by industry but generally include invoices, statements, purchase orders, policies, explanation of benefits (EOB's), and transaction confirmation documents that are produced in high volume. Source documents may include new account applications, signature cards, purchase orders, signed bills of lading, insurance claim forms, health care claims, billings, bank and other personal financial information, contracts, and other similar documents. These types of documents require electronic indexing and storage to enable rapid retrieval and viewing for customer support functions, for adherence to regulatory requirements, for data analysis and report generation, for inclusion in Enterprise Resource Planning (ERP), Customer Resource Management (CRM) and Health Care Information Technology (HIT) implementations, and for e-commerce applications. Internet delivery and presentment is rapidly becoming a critical business requirement. New capabilities such as electronic bill presentment, customer access to statements and bills, and integrated invoicing and marketing extend the value of conventional printing and distribution of customer-facing documents. Our software products provide the core digital document repository and delivery capabilities that are required for electronic commerce applications. We also offer numerous services including consulting, systems integration, software installation, training, software maintenance and technical support. Our advanced systems integration services group integrates our technologies into the customer's business environment to more effectively leverage current and future investments in technology. -3- We separately market Application Program Interfaces (API's). The API's offer the ability to customize the graphical user interface and to select the features and functionality of the archive product. Additionally the API's are the platform to offer an interface to third party products. The company has substantially enhanced the API's based on Java technology and consider them a basis to form an Alliance Partner Program. Our strategic relationships include Unisys, Xerox, Fuji Xerox, Swets, and PFPC. Through marketing efforts with our Alliance Partners and our direct sales force, we have a presence in most major corporate sectors. ESP+ is used in the banking, financial services, telecommunications, insurance, utilities, manufacturing, healthcare, and government industries and is adaptable to many other industry environments. These alliances also provide the ability to offer our products in international markets. During the second half of Fiscal 2000, we established InfiniteSpace.com, Corp. ("InfiniteSpace"), a business-to-business, electronic statement presentment application service provider (ASP), as a separate wholly owned subsidiary. In December 1999 we acquired Internet Broadcasting Company, Inc. ("IBC") a developer and provider of proprietary technology for the secure delivery of financial documents. In May 2000 we also acquired Lognet 2000, Inc. (formerly Lognet, Inc.) ("Lognet") whose activity was in the PC-to-host and print connectivity industries, as well as the business of electronic bill presentment and payment. Subsequently, as we were unable to secure additional financing to support the operations and business strategy of InfiniteSpace, effective with the close of the second quarter of fiscal 2001, we redirected our strategy to focus on our core products and abandoned the operations of InfiniteSpace. MANAGEMENT CHANGES During May 2001, Lori R. Frank resigned as President and Chief Executive Officer and as a director of the Company, Yoav M. Cohen resigned as Chairman of the Board and director of the Company and Bahram Yusefzadeh and Glenn W. Sturm resigned as directors of the Company. On May 22, 2001, Henry F. Nelson was appointed as President and a director of the Company, Derek W. Dunaway was appointed as a director of the Company and Yaron I. Eitan, a director of the Company, was elected as Chairman of the Board. On June 26, 2001, Henry F. Nelson was also appointed Chief Executive Officer and Chief Financial Officer of the Company. On October 18, 2001, at our Annual Meeting of Stockholders, Yaron I. Eitan, Henry F. Nelson, Francis X. Murphy, Derek W. Dunaway and Mitchell Klein were elected by shareholders to serve as directors of the Company for the ensuing year. John Lopiano chose not to stand for re-election. SOFTWARE PRODUCTS AND SERVICES o THE INSCI ESP+ SOLUTIONS SUITE Our ESP+ family of integrated, client/server based software solutions enables customers to capture, store and present high volumes of value documents and reports. This software utilizes magnetic and optical disk, and CD to index, archive, retrieve, and distribute computer-generated documents and digital images including transaction documents and data. Documents are stored in a deep archive and can be rapidly retrieved for on-demand viewing, printing, Internet distribution, CD distribution and re-purposed for interactive Internet presentment and other e-commerce functions. The ESP+ Solutions Suite enables organizations to use existing print applications as the gateway for implementing digital document repositories, preserving their investment in legacy applications as well as establishing the required infrastructure for e-commerce applicability. ESP+ products are currently installed at over 250 customer sites worldwide. These systems are used in a wide range of vertical industry segments and deployed in departmental and enterprise-wide configurations. The ESP+ Solutions Suite is a comprehensive solution for the capture, storage and delivery of enterprise documents. The STORAGE component, ESP+archive, is the heart of the ESP+ Solutions Suite and is powered by either Windows or UNIX. The CAPTURE components enable documents to be set-up and ingested into the -4- ESP+archive system. The DELIVERY components enable different delivery methods (web, email, print, etc.) of ESP+archive data (stored documents). Finally, the TOOLS components increase the system flexibility and enable powerful integration with third party applications. STORAGE o ESP+ARCHIVE - DEEP DIGITAL ASSET PRESERVATION ESP+archive is a scalable digital document/digital asset preservation system. ESP+archive provides high-volume capture, index, storage, and retrieval functions. The system manages the ingestion, indexing, storage, and retrieval of high fidelity replicas of computer generated documents such as statements, bills, invoices and reports. Recent enhancement allows the system to store other forms of digital assets such as computer-generated graphics, or files from desktop applications. ESP+archive handles diverse data streams such as standard ASCII and EBCDIC formats, IBM(R) Advanced Function Presentation(R) (AFP), Xerox Metacode and DJDE, Adobe(R) Portable Document Format (PDF), PCL, Postscript, Binary Large Objects (BLOBs) and XML. CAPTURE o ESP+DESIGNER - DOCUMENT DEFINITION TEMPLATE FOR ESP+ARCHIVE ESP+designer is a graphical tool used to create document definition files for ESP+archive systems. ESP+designer offers a point and click approach that eases the process of capturing new statements, reports and other business documents for archival into an ESP+archive system. o ESP+IMAGE - IMAGE CAPTURE AND PROCESSING ESP+image is a high volume, high-throughput image capture and processing system. ESP+image is used (either centrally or distributed) in preparation for document image storage into the ESP+archive. ESP+image provides ESP+archive with extract index values (OCR, Bar Code, Manual Entry) that will be used for retrieval of scanned images alongside existing computer-produced outputs. DELIVERY o API TOOLKITS FOR ESP+ APItoolkits for ESP+ allow businesses to customize user interfaces, or integrate with third party or proprietary applications. The APItoolkit is the foundation of our Alliance Partner program. The APItoolkit for ESP+archive allows the customer to build their own applications and interfaces that make use of the document repository and its contents. The APItoolkit for ESP+image allows the customer to extend their scanning implementation features. The APItoolkit for ESP+web allows customization of user interfaces for use in an intranet/internet environment. o ESP+DESKTOP - DESKTOP ACCESS CLIENT ESP+desktop is a Windows-based document viewer client interface that provides access to ESP+archive server data (stored documents). By using ESP+desktop one can search, display, print, data mine, etc. stored documents in an ESP+archive system. ESP+desktop provides a rich feature set for the "power user". o ESP+WEB - WEB ACCESS CLIENT ESP+web is an easy-to-use document viewer that provides access to ESP+archive systems data (stored documents) over the Internet/Intranet. By using a common web browser such as Internet Explorer or Navigator, one can search, display, print, etc. stored documents in an ESP+archive system with no proprietary plug-ins or database connections required by the end user. -5- o ESP+DIRECT ESP+direct automates the distribution of documents contained in ESP+archive via e-mail. Triggered either by the arrival of new documents or through ad-hoc requests, automatic distribution is a natural requirement for today's emerging e-business initiatives. o ESP+CD - DOCUMENT PACKAGING AND DISTRIBUTION ON CD ESP+cd provides a CD distribution of selected stored documents in an ESP+archive system. ESP+cd can create custom self-contained CDs which include digital document repositories and all necessary search, retrieval and viewing components. CD content may be automatically extracted or requested on an ad-hoc basis from an ESP+archive system. TOOLS o ESP+FORMS - PDF PRESENTATION OF PLAIN TEXT DOCUMENTS ESP+forms is an easy-to-use tool that creates PDF-based overlays for plain text documents producing completely formatted documents for display or printing. The feature uses standard off-the-shelf tools (Adobe(R) Acrobat(TM), MS Word(R), etc.) to develop the PDF form overlay and ESP+forms to map the plain-text document content to the PDF form overlay. Flexible mapping allows users to customize form content. o ESP+IMPORT ESP+import is a bulk image import module that allows the ingestion of images from external sources and other systems, such as check imaging or third party image capture systems into an ESP+archive system. o PROFESSIONAL SERVICES GROUP Utilizing our core products and technologies and the capabilities of our professional services resources, we have developed specialized systems integration approaches and methodologies that allow us to carry out the implementation of advanced solutions within large and complex client environments. Based upon expertise in integrated output management, electronic printing, imaging, document management, on-demand printing, data storage, data mining, and web based statement presentment we provide services and solutions to global problems in the customer service and data storage areas. With these project management, technical, product and architectural skills, we are able to offer a unique set of solutions and capabilities to organizations that are seeking more than a software product to satisfy their organizational and business requirements. STRATEGIC ALLIANCES We have developed several strategic business alliances through which we extend our marketing efforts and generate sales. We believe that the Java based APItoolkit provides a platform for integration with Alliance Partners. The Company intends to actively market the Java based technology to certain vertical market Alliance Partners. For fiscal 2002, we received 22% and 12% of our total revenues from Unisys Corporation and Xerox Corporation, respectively. A decline in revenues from either of these sales partners in future periods would materially affect our revenues and operating results. We currently have agreements with a limited number of Alliance Partners. Alliance Partner agreements range from a referral agreement with a partner to a master value added reseller (VAR). VAR's generally are organizations that sell their own computer application software systems to special vertical markets, such as financial services, banks, health care organizations or credit unions. We sell our products directly to VARs for resale to the VARs' customers. VARs sell our products as part of an integrated system of hardware and software for the VARs' customers. -6- The company has also licensed the ESP+ suite of products to specific service bureaus on a transaction or subscription based pricing model. PRODUCT DEVELOPMENT The market for data storage and retrieval products is highly competitive and characterized by frequent technological change. Consequently, we must continually enhance our products and continue to develop new products. We utilize our development engineers and customer support personnel to identify, design, and develop product enhancements and new products. We have employed industry standard technology as a basis to develop our ESP+ Solution Suite. In the last fiscal year, we have consolidated the development and support of the ESP+ suite of products from third party developers and consultants. We believe that this will provide increased management and reduced cost associated with the development and support of our ESP+ Solution Suite. MARKETING AND SALES We market our products through our own sales force in combination with strategic alliances and VAR's. Marketing activities include trade journal advertising, distribution of sales and product literature describing our products and their applications and benefits, as well as attendance at trade shows and conferences, and on-going communications with our established base of customers via newsletters, new product announcements, direct mail and telemarketing. Promotion of our products includes publishing of user success stories, and distributing of press releases about the Company and our products. Our direct sales force focuses on prospects for our products that are in high volume, high performance environments. They provide assistance and make joint presentations with our Alliance Partners. Additionally, they frequently work with our systems engineers to provide pre-sales technical consulting services. We continue to seek to enter into additional marketing alliances that will have the potential to generate further significant sales. In particular we believe that companies in specific vertical markets such as financial services, banking, manufacturing, customer relationship management (CRM), healthcare, electronic commerce and printing areas are likely to require our products in order to meet their own objectives. Such alliances may take the form of a traditional distribution relationship or a tighter product integration of applications utilizing the Java based APItoolkit. We intend to continue discussions with such companies with a view toward furthering such alliances. VENDORS AND SUPPLIERS We have reduced our sales of third party hardware in order to focus on sales of our own software and services products, which generate higher gross margins. Typically, the hardware that hosts our software products is either owned or purchased directly by our customers. Accordingly, sales of third party hardware are minimal and we have no material dependence on third party hardware suppliers in order to attain our revenues. COMPETITION There are a number of suppliers offering electronic document archiving, document management, report management, imaging, information retrieval, electronic bill presentment and e-commerce products. However, in many instances, we believe that our products and services offer advantages over the competition. These advantages include: o a comprehensive product portfolio encompassing enterprise archive and retrieval, web-based functionality, scanning and imaging, CD, document and data mining, report generation and management, and a dual platform strategy with both Windows and UNIX product suites o high volume throughput and enterprise-level scalability o APItoolkit for integration o support for multiple intelligent data streams and other data formats o open systems connectivity o high speed document archival and access o comprehensive systems integration and support services o strategic alliances and partnership relationships with corporate partners -7- We believe that our market positioning, strategic alliances and product functionality allow us to compete favorably with products offered by our primary competitors. However, competition among companies providing these products is intense and many of our primary competitors have substantially greater financial resources, more personnel, greater access to related products, and broader contact with potential customers than we have. PROPRIETARY INFORMATION We do not hold any patents and currently rely upon a combination of trademarks, contractual rights, trade secrets and copyright laws to protect our proprietary rights in our products. We seek to protect our proprietary rights in our products through restrictions on disclosure and use set forth in customer agreements and employee nondisclosure agreements. Additionally, we require that all of our employees execute confidentiality, trade secret and invention agreements in connection with their employment by us. Despite these precautions, it may be possible for third parties, without authorization, to copy or duplicate our proprietary software or to obtain and use our proprietary information. Existing copyright laws afford only limited protection for computer software, and the laws of certain foreign countries do not protect our proprietary rights in our products to the same extent as the laws of the United States. Because of the rapid pace of technological change in our industry, we believe that the legal protection for our products is less significant for our success than the knowledge, technical expertise and marketing skills of our personnel, the frequency of product enhancements and the timeliness and quality of support services we provide. EMPLOYEES We employed 53 persons as of March 31, 2002. Our future success depends, in part, on our ability to retain existing and to attract new management and technical employees. We have no collective bargaining agreements and consider our relationships with our employees to be good. ITEM 2. DESCRIPTION OF PROPERTIES Effective October 1, 1994, we entered into a ten-year lease for approximately 21,650 square feet of office space located in Westborough, Massachusetts. We amended our Westborough lease on March 15, 1999 to include additional office space of 2,997 square feet. The lease was further amended on March 15, 2000 to include an additional 4,798 square feet of office space. As of June 2002, we are leasing to a subtenant approximately 4,130 square feet of office space under a sub-lease that extends through September 2004. Management considers our present office space adequate for our foreseeable needs. ITEM 3. LEGAL PROCEEDINGS The Company is a defendant in an action commenced on May 14, 2002 by Key Corporate Capital, Inc, (Leasetec Corporation) in Worcester Superior Court. The Leasetec action is for $588,148 in addition to interest, penalties and legal fees related to a claimed violation of an equipment lease with the Company. The Company is contesting the action, and has asserted a number of affirmative defenses to the action. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITIES HOLDERS No matters were submitted to a vote of security holders during the fourth quarter of the fiscal year covered by this report. -8- PART II ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS Our Common Stock was traded on the NASDAQ Small Cap Market from April 14, 1994, the effective date of our initial public offering, through June 26, 2001, thereafter on the Over-The-Counter Bulletin Board ("OTCBB"). The current trading symbol for our Common Stock is "INSS". The table below shows the high and low sales prices as reported in NASDAQ's informational reports. These prices represent prices between dealers, do not include retail mark-up, markdown or commissions, and may not necessarily represent actual transactions. COMMON STOCK PRICE FISCAL 2002 FISCAL 2001 Quarter HIGH LOW HIGH LOW ---- --- ---- --- First $0.44 $0.15 $6.50 $2.63 Second 0.30 0.06 3.65 2.00 Third 0.14 0.05 2.38 0.13 Fourth 0.08 0.03 1.13 0.22 - -------------------------------------------------------------------------------- On July 8, 2002, the closing price of the common stock was $0.06. As of July 8, 2002, we had 207 holders of record of our common stock. No dividends have been declared on our Common Stock for the two most recent fiscal years. We currently intend to retain our earnings (when realized) to finance future growth and therefore do not anticipate paying any cash dividends on our common stock for the foreseeable future. Additionally, our current convertible debt financing contains a covenant that prevents us from declaring a cash dividend on our Common Stock. ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATIONS GENERAL The following discussion of management's analysis of operations for the fiscal year ended March 31, 2002 ("Fiscal 2002") and the fiscal year ended March 31, 2001 ("Fiscal 2001"), and discussion of financial condition at March 31, 2002, should be read in conjunction with the financial statements and notes thereto contained elsewhere in this report. 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 Alliance Partners. During the second half of Fiscal 2000, we established InfiniteSpace.com, Corp. ("InfiniteSpace"), a business-to-business, electronic statement presentment application service provider (ASP), as a separate wholly owned subsidiary. The focus of InfiniteSpace was to provide electronic statement presentment services to the financial services industry. We completed two acquisitions to add to the resources of InfiniteSpace. The first was the acquisition on December 10, 1999, of all the common stock of Internet Broadcasting Company, Inc. ("IBC") in exchange for 1.0 million shares of our restricted common stock. This acquisition was accounted for as a pooling of interests. The second was the acquisition, on May 24, 2000, of all the common stock of Lognet 2000, Inc. (formerly Lognet, Inc.) ("Lognet") in exchange for 2.5 million restricted shares of our common stock resulting in a total purchase price of $8.4 million. This acquisition was accounted for under the purchase accounting method. Since we were unable to secure the additional financing to support the operations and business strategy of InfiniteSpace, effective with the close of the second quarter of Fiscal 2001, we redirected our strategy to focus on our core products, abandoned the operations of InfiniteSpace, wrote down certain assets related to the two acquisitions completed to support the subsidiary's portal services-based ASP strategy, and reduced our overall expenses. All charges associated with those actions were recorded as a non-recurring charge in Fiscal 2001 results of operations. -9- In November 2000, we finalized arrangements that provided an aggregate of $3.5 million in new financing, which included $2.0 million of subordinated convertible debt ("Convertible Debt) provided by Selway Partners LLC ("Selway"), which is a technology holding company engaged in building technology-oriented companies, and CIP Capital LP ("CIP"), a venture capital firm specializing in early and mid-stage technology companies. Selway is an affiliate of INSCI in that two of INSCI's five board of directors' members are affiliated with Selway. At the time of the financing, CIP was also a shareholder of INSCI. The total financing package also included $1.5 million of accounts receivable financing with Silicon Valley Bank. Selway and CIP were provided with an option through the end of March 2001 to invest an additional $3.0 million in INSCI under the same terms and conditions as the Convertible Debt. Selway and CIP elected not to exercise the option. For further discussion on the financing see Liquidity and Capital Resources. Our prior accounts receivable financing with Silicon Valley Bank was replaced on March 8, 2001 by an arrangement with Prestige Capital Corporation ("Prestige"). INSCI agreed to sell certain accounts receivable subject to limited recourse at a discount fee of up to 10% depending upon the length of time Prestige holds receivable before collection. INSCI received 75% of the face value of the receivable upon purchase by Prestige. The remaining amount less the discount fee is remitted to INSCI after Prestige collects the receivable in full. On March 1, 2001, INSCI sold the majority of the assets of Lognet to Paynet Electronic Billing Ltd. ("Paynet"), a non-affiliated privately-owned company based in Haifa, Israel. The assets sold to Paynet included all intellectual property rights, technology, development tools, hardware, furniture and equipment related to Lognet's Billminer electronic bill presentment and payment software and the Oneprint and Emulation product lines, as well as customer lists, marketing materials and other assets related to Lognet's business, including the name "Lognet". Paynet further agreed to hire most of Lognet's employees and assume the obligation for the hired employees' compensation and benefits. The consideration received for the sale of Lognet assets includes $245,000 in cash, of which $100,000 was received at closing and the balance as additional consideration for inventory and equipment, a 20 percent equity interest in Paynet and up to $1,600,000 in future royalties to be paid by Paynet, as a result of future sales on the Billminer Software, Oneprint and Emulation product lines. In connection with this sale, a $110,000 fee was paid to Econium, Inc., an affiliate of Selway, for Econium's assistance to Lognet. The equity interest in Paynet is subject to a share repurchase agreement option granted to Paynet for the sum of $1,000,000, as well as a right of first refusal agreement in favor of Paynet in the event of an initial public offering by Paynet. Results of operations for Fiscal 2001 reflect no gain or loss from this transaction. The carrying value of the investment in Paynet was recorded as of March 31, 2001 at $94,000, which was the carrying value of the assets sold. The Company was required to provide a release of lien of a portion of the collateral pledged to Selway and CIP in order to proceed with the asset sale. In obtaining the required release, the Company agreed to provide, in substitution of the collateral, a security interest on the 20% equity interest and the future royalties to Selway and CIP. As of June 21, 2001, we entered into a subordinated convertible debt facility of up to $700,000 with Selway. On June 27, 2001, we received gross proceeds of $250,000 and have drawn down an additional $280,000 of the facility. We can draw on the remainder of the facility at the discretion of Selway, and upon attaining certain operating milestones. The convertible debt bears an annual interest rate of 13 percent payable in cash or in additional debentures and is secured by a junior lien on all of INSCI's assets. In May 2002, we entered into a financing agreement with Benefactor Funding Corp. which was fully completed on May 17, 2002, wherein Benefactor will finance all of the eligible domestic accounts receivables of the Company on a secured basis. We agreed to an early termination of the Prestige Capital financing agreement so that we could enter into a new agreement with Benefactor. As part of the new financing arrangement with Benefactor, we were required to payoff our loan in full to Pennsylvania Business Bank in the sum of $285,000. With the repayment of the Pennsylvania Bank loan we were able to discontinue our monthly payment obligation of $5,000 per month to Selway for the Selway guarantee of the loan (see certain Relationships and Related Transactions). 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. -10- RESULTS OF OPERATIONS PRIOR YEARS FINANCIAL STATEMENTS FOR THE FISCAL YEAR ENDED MARCH 31, 2001 The auditors for the Fiscal Year ended March 31, 2001 were Arthur Andersen LLP ("Andersen"), the Company's former auditors. Andersen has not reissued its report for the Fiscal Year ended March 31, 2001, and the financial statements for the Fiscal Year ended March 31, 2001 have not been re-audited. Readers of the financial statements for the Fiscal Year ended March 31, 2001 are cautioned that there are certain inherent risks in relying upon said results in that there is limited recourse available against Andersen should readers rely to their detriment upon the prior report of Andersen. OVERVIEW Revenues were $8.5 million for Fiscal 2002 compared to $10.0 million for Fiscal 2001. The Fiscal 2001 revenues included $784,000 attributed to the Lognet subsidiary accounting for 51% of the decline in revenues. Consolidated net income for Fiscal 2002 was $368,000. Consolidated net loss for Fiscal 2001 was $17.5 million, which included non-recurring restructuring and other charges of $8.9 million. The consolidated net loss also includes $3.0 million of losses associated with our discontinued IBC and InfiniteSpace operations and our United Kingdom ("UK ") subsidiary. YEARS ENDED MARCH 31 (in thousands) 2002 2001 ---- ---- INCOME (LOSS) BEFORE NON-RECURRING EXPENSES INSCI $ 849 $ (4,527) InfiniteSpace -- (2,637) INSCI UK -- (394) Lognet (30) (521) NON-RECURRING EXPENSES Restructuring and other charges -- (8,916) -------- -------- INCOME (LOSS) FROM OPERATIONS 819 (16,995) Interest expense (451) (526) -------- -------- NET INCOME (LOSS) $ 368 $(17,521) ======== ======== The following table sets forth, for the periods indicated, the percentage relationship that certain items of our results of operations bear to revenue: FISCAL YEAR ENDED MARCH 31, 2002 2001 % % Revenue 100 100 Cost of revenue 22 42 ---- ---- Gross profit 78 58 ---- ---- Expenses: Sales and marketing 24 32 Product development 20 58 General and administrative 25 49 Non-recurring expenses: Restructuring and other charges -- 89 ---- ---- Total expenses 69 228 ---- ---- Income (loss) from operations 9 (170) Interest income (expense) (5) (5) ---- ---- Net income (loss) 4 (175) ==== ==== -11- The following table compares total revenues by quarter for Fiscal 2002 and Fiscal 2001: (in thousands):
TOTAL REVENUES BY QUARTER (in thousands) FISCAL 2002 FISCAL 2001 - ---------------- ------------- ------------- ------------- ------------- ------------- ------------- ------------- Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 -- -- -- -- -- -- -- -- $2,485 $2,223 $1,973 $1,802 $2,879 $2,506 $2,684 $1,946
The following table compares total revenues for Fiscal 2002 and Fiscal 2001 (in thousands):
FISCAL YEAR ENDED MARCH 31, REVENUES 2002 2001 % CHANGE - -------- --------- ---------- --------------- Product revenues $ 2,799 $ 4,043 (31)% Installation and implementation services 1,885 2,205 (15) Maintenance services 3,799 3,767 1 ---------- ------------- Total revenues $ 8,483 $ 10,015 (15) ========== ============= The following table compares revenues exclusive of the Lognet subsidiary for Fiscal 2002 and Fiscal 2001 (in thousands): FISCAL YEAR ENDED MARCH 31, REVENUES 2002 2001 % CHANGE - -------- --------- ---------- --------------- Product revenues $ 2,786 $ 3,624 (23)% Installation and implementation services 1,885 1,868 1 Maintenance services 3,799 3,740 2 ---------- ------------- Total revenues $ 8,470 $ 9,232 (8) ========== =============
REVENUES Revenues for Fiscal 2002 were approximately $8.5 million, a decline of $1.5 million or 15.3% from Fiscal 2001. Of this decline, product sales accounted for $1.2 million and installation and implementation services accounted for $300,000. Maintenance service revenues have demonstrated a small increase. Fiscal 2001 product revenues included $400,000 attributed to the Lognet subsidiary accounting for 34% of the decline for Fiscal 2002. The Company sold the assets of Lognet to Paynet Electronic Billing Ltd. ("Paynet"), a nonaffiliated privately owned company based in Israel on March 1, 2001. Decreases in product sales also reflect a de-emphasis on hardware related sales. INSCI's Fiscal 2001 revenues include $300,000 in hardware related sales as compared to $70,000 for Fiscal 2002, accounting for 15% of the decline. Additionally, the decline in product revenues was in part due to the slowdown in the general economy during the last two quarters of Fiscal 2002. Installation and implementation services revenue for Fiscal 2001 included $400,000 attributed to the Lognet subsidiary which more than accounts for the $300,000 decline in services revenues for Fiscal 2002. Net of the effect of Lognet, revenues declined 8% for the comparable period. For both Fiscal 2002 and Fiscal 2001 we received in excess of 10 percent each of our total revenues from Xerox Corporation and Unisys Corporation, two of our strategic sales partners. A decline in revenues from these sales partners in future quarters would materially affect the revenues and operating results of INSCI. GROSS PROFIT AND COST OF REVENUES Gross profit as a percent of revenues was 78.5% for Fiscal 2002 compared to 58.4% for Fiscal 2001. Gross profit for Fiscal 2002 was $6.7 million, an increase of $800,000 or 13.8% from the $5.9 million for Fiscal 2001, primarily reflecting the 56.3% decrease in cost of revenues from the prior year which was a result of the return to core operations and the discontinued operations of InfiniteSpace. -12- SALES AND MARKETING Sales and marketing expenses for Fiscal 2002 were $2.0 million, a decline of approximately $1.2 million or 37.7% from the prior year. The Fiscal 2001 expenses included $800,000 related to the discontinued operations of InfiniteSpace. The decline was also due to costs associated with lower revenues, a reduction in trade show and promotional spending and a reduction in sales personnel. PRODUCT DEVELOPMENT Product development expenses for Fiscal 2002 were approximately $1.7 million, a decrease of $4.0 million or 70.0% from Fiscal 2001. Product development expenses are 20% of Fiscal 2002 revenues as compared to 58% of the prior fiscal year's revenues. Expenditures for Fiscal 2001 reflect product development expenses for InfiniteSpace and Lognet in the amount of $1.4 million representing 14% of Fiscal 2001 revenues. The company realized further decreases in product development costs through the elimination of third party development expenses and an increased focus on core products. GENERAL AND ADMINISTRATIVE General and administrative expenses were approximately $2.1 million, a decrease of approximately $2.8 million or 57.5% from the prior year. The Fiscal 2001 expenses include general and administrative expenses for InfiniteSpace and Lognet totaling $1.4 million accounting for 50% of the decrease. The balance of the decrease was primarily due to decreased reliance on consultants, lower bad debt costs and the various cost reduction efforts enacted for Fiscal 2002. RESTRUCTURING AND OTHER CHARGES As a result of our strategic redirection, we have ceased operations of InfiniteSpace, IBC and our UK subsidiary, reduced operating expenses and have written-down our investment in Lognet. These changes and the costs of closing InfiniteSpace, IBC and UK; along with other costs associated with the realignment of strategy, have been charged to the operating results for Fiscal 2001. The major components of the charges were a write-down of $6.0 million for Lognet's goodwill, a $900,000 non-cash provision primarily related to equipment of terminated operations, $832,000 related to severance payments for approximately 20 terminated employees, $831,000 for lease termination costs and approximately $300,000 of other expenses associated primarily with the closure of InfiniteSpace and its data center. At March 31, 2002, the remaining accrual for restructuring costs was $560,000 for lease commitments. At this time, the remaining accrual appears to be adequate. INTEREST EXPENSE, NET Interest expense for Fiscal 2002 was $451,000. Interest expense for Fiscal 2001 was $601,000, offset by interest income of $75,000 for a net interest expense of $526,000. The decrease in net interest expense was due to $287,000 of non-cash interest charges related to the issuance of warrants for convertible debt financing in Fiscal 2001 offset by increased borrowings through the convertible debt financing. LIQUIDITY AND CAPITAL RESOURCES At March 31, 2002, INSCI had $412,000 of cash and working capital deficit of $6.2 million in comparison to $460,000 of cash and working capital deficit of $6.9 million at March 31, 2001. Accounts receivable were $1.3 million as of March 31, 2002 compared to receivables of $1.5 million as of March 31, 2001. -13- INSCI's cash flows are summarized below for the fiscal years indicated (in thousands): 2002 2001 ---- ---- Cash (used in) provided by Operating activities $ (298) $(5,629) Investing activities 8 2,512 Financing activities 242 1,666 ------- ------- (Decrease) in cash and cash equivalents $ (48) $(1,451) ======= ======= Cash and cash equivalents at end of year $ 412 $ 460 ======= ======= During November 2000, we closed $2.0 million of subordinated convertible debt ("Convertible Debt") financing with Selway, an affiliate, and CIP (the "Investors"). The Convertible Debt is convertible into an aggregate of approximately 1.5 million shares of INSCI Series A Convertible Redeemable Preferred Stock (the "Series A Preferred") at a price of $1.30 per Series A Preferred share. The Series A Preferred is in turn convertible on a one-for-two basis into shares of INSCI's Common Stock. The Convertible Debt bears interest at prime plus 2.5 percent payable in cash or in additional shares of Series A Preferred, at the option of the Investors, and is secured by a subordinated lien on all of the Company's assets. Unless previously converted into shares of Series A Preferred, principal and interest are payable at maturity in five years or upon an earlier redemption on or after two years at the option of the Investors. As part of the financing, the Investors have also been granted warrants to purchase approximately 462,000 Series A Preferred stock at $1.44 per share. Selway was also issued warrants to purchase 200,000 shares of common stock at $0.72 per share for services rendered in connection with the financing transaction. In addition Selway Management, Inc., an affiliate of Selway, entered into a $20,000 per month management consulting agreement for a term of three years with INSCI. The management fee is payable in either cash or shares of INSCI common stock at INSCI's option. The management agreement was amended in June 2001 whereby the monthly fee was reduced to $15,000 per month. This financing may result in dilution to INSCI's stockholders. The Convertible Debt has a number of nonfinancial covenant requirements such as certain registration rights and the obligation of the Company to obtain shareholder approval for the issuance of shares resulting from the conversion of the Convertible Debt and warrants. The Company has not complied with these covenants and may be deemed in default. As of the date of these financial statements, the Investors have not declared a default but there can be no assurance that the Company will not be declared in default in the future. In the event a default was declared that 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. Accordingly, the Company has classified the principal as current in the accompanying consolidated balance sheet. The Company is negotiating to restructure the terms of its related party convertible debt, which if agreed to, will allow the Company to reclassify some of the debt to long term. On March 8, 2001, we entered into a receivable financing arrangement with Prestige, which replaced a $1.5 million receivable financing arrangement with Silicon Valley Bank. INSCI agreed to sell certain accounts receivable to Prestige subject to limited recourse at a discount fee of up to 10% depending upon the length of time Prestige holds the receivable before collection. INSCI receives 75% of the face value of the receivable upon purchase by Prestige. At March 31, 2002, the balance of advances due to Prestige totaled $49,000 on receivables of $65,000. The cash proceeds from this financing arrangement were used to fund operations. During the year ended March 31, 2002, INSCI recorded $102,000 of discounts taken by Prestige as interest expense in the accompanying consolidated statements of operations. As of June 21, 2001, we entered into a subordinated convertible debt facility of up to $700,000 with Selway. We received gross proceeds of $250,000 from the financing in June 2001 and have drawn down an additional $280,000. INSCI can draw on the remainder of the facility, at the discretion of Selway, and upon attaining certain operating milestones. The convertible debt bears an annual interest rate of 13 percent payable in cash or in additional debentures and is 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 convertible debt is secured by a junior lien on all of INSCI's assets. -14- Unless previously converted into shares of Series B Preferred, principal and interest are payable at the earlier of June 15, 2002 or upon demand by Selway. An amendment to this agreement has extended the maturity date of the Debentures to September 1, 2002. The Series B Preferred has liquidation preferences, which are pari passu with other pre-existing shares of preferred stock. 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 face amount of the accepted account and will be charged a commission of 2.25% of the accepted amount. The financing agreement is secured by the Company's assets and accounts receivable. We have a deficiency in our financial statements in that we have $8.0 million in liabilities and $2.2 million in assets. This 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 or achieve 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. "FORWARD-LOOKING" STATEMENTS UNDER THE PRIVATE SECURITIES LITIGATION REFORM ACT: This Annual 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, possible system failures and rapid changes in technology and other factors discussed in this Annual Report and in our other filings with the Securities and Exchange Commission. ITEM 7. FINANCIAL STATEMENTS The information required by this Item is incorporated by reference to the Table of Contents to Consolidated Financial Statements and appears on page F-1 hereof. ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURES On May 20, 2002, by a resolution of its Board of Directors, the Company resolved to change auditing firms and dismissed Arthur Andersen LLP ("Andersen") and retained Goldstein and Morris Certified Public Accountants. The report of Andersen on the Company's financial statements for the 2001 fiscal year contained an emphasis of matter paragraph regarding the Company's ability to continue as a going concern, however did not contain a disclaimer of opinion and was not qualified or modified as to uncertainty, audit scope or accounting -15- principles. The prior fiscal year did not contain an adverse or disclaimer of opinion and was not qualified or modified as to uncertainty, audit scope or accounting principles. There were no disagreements with the Company's former accounting firm in any matter of accounting principles, practices, financial statement disclosures or auditing scope or procedures in connection with audits by the Company's former accounting firm for the two most recent fiscal years, or in any subsequent interim period preceding such change of accounting firms. -16- PART III ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS; COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT Certain information concerning the directors and executive officers of the Company is set forth in the following table and in the paragraphs following. Information regarding each such director's and executive officer's ownership of voting securities of the Company appears as "Security Ownership of Certain Beneficial Owners" below. Name Current Position With Company Director Since - -------------------------------------------------------------------------------- Yaron I. Eitan Director, Chairman 2000 Henry F. Nelson Director, Chief Executive Officer, President, Chief 2001 Financial Officer Francis X. Murphy Director 1995 Derek Dunaway Director 2001 Mitchell Klein Director 2001 Yaron I. Eitan, age 45, was appointed as a Director of the Company in June 2000. Mr. Eitan was the Chairman of Lognet 2000, Inc., prior to its acquisition by the Company in May 2000. Mr. Eitan is the founder, President and Chief Executive Officer of Selway Partners LLC, an operating holding company that invests in and advises technology companies. His activities at Selway include the founding of Test University, Inc. where he serves as Chief Executive Officer and Chairman. Between 1984 and 1998, Mr. Eitan was the founder, Chairman and Chief Executive Officer of Geotek Communications, Inc., and served as Chairman of Bogen Communications, Inc. and National Bank Three of the United Kingdom. Subsequent to Mr. Eitan's departure in 1998, Geotek Communications, Inc. filed a Chapter 11 petition under the Bankruptcy Act. Mr. Eitan holds a Masters of Business Administration from the Wharton School of Business of the University of Pennsylvania. Henry F. Nelson, age 44, was appointed as President and Director of the Company in May 2001. Subsequently, Mr. Nelson was appointed Chief Executive Officer and Chief Financial Officer. Mr. Nelson was the Chief Operating Officer of Practice Works, Inc., a division of Infocure, from December 1999 to 2000. He was a principal in VitalWorks, a technology based start-up from June 1999 until December 1999. Mr. Nelson was Chief Operating Officer of InterQual from November 1996 through June 1999. Prior thereto, he was with Sextant Corporation. Mr. Nelson holds a Bachelor of Science in Business Administration from Northeastern University. Francis X. Murphy, age 53, was elected a Director of the Company in September 1995. He is the founder of Emerging Technology Ventures, Inc. and has served as President from its inception in September 1994. Previously, Mr. Murphy served in executive management positions with various information technology firms. Mr. Murphy also serves on the board of directors of Vizacom, Inc. He holds both a Bachelors of Arts and Masters of Business Administration in Corporate Finance from Adelphi University. Derek Dunaway, age 32, was appointed a Director of the Company in May 2001. Mr. Dunaway is currently the President and Chief Executive Officer of TechOnLine Inc., a Boston based company focused on providing e-learning solutions to the engineering community and electronics industry. Mr. Dunaway joined TechOnLine from Selway Partners LLC, an operating holding company that invests in and advises technology companies, where he held the position of Vice President of Business Development from May 2000 through February 2001. Prior to joining Selway, from May 1999 through May 2000, he was Director of Strategy Consulting at AppNet, an Internet Consultancy serving the Fortune 500 and held several positions from June 1996 through May 1999 at Pricewaterhouse Coopers, in the Telecommunications and Media Strategy Practice, where he assisted top telecommunications and media industry management with corporate strategy development. Mr. Dunaway holds a Masters of Business Administration from the Wharton School of Business of the University of Pennsylvania and a Bachelors of Science from Southern Methodist University. -17- Mitchell Klein, age 51, was elected a Director of the Company in October 2001. Mr. Klein is currently the President of Betapoint Corporation, an investment management company formed in June 1994. Mr. Klein has served in various senior management positions with Digital Equipment Corporation for nine years after having been President of his own software development and consulting firm. Mr. Klein is a graduate of the State University of New York at Albany and holds a Master of Arts from the University of Michigan at Ann Arbor. Mr. Klein previously served as a Director of the Company from June 1997 to June 1998. ITEM 10. EXECUTIVE COMPENSATION The following table sets forth the compensation for each of the last three (3) fiscal years earned by the Chief Executive Officer and each of the most highly compensated executive officers whose individual remuneration exceeded $100,000 for the fiscal year ended March 31, 2002 (the "Named Executives"). The Company's compensation policies are discussed in "The Compensation Committee" section contained herein.
SUMMARY COMPENSATION TABLE Name Securities and Underlying All Principal Other Annual Options/ Other Position Year Salary Bonus Compensation SARs Compensation - ----------------------------- -------------------- ---------------------------- --------------- ------------------------ Henry F. Nelson 2002 $172,308 (1) -- -- -- -- Chief Executive 2001 -- -- -- -- -- Officer 2000 -- -- -- -- -- Lori R. Frank 2002 $47,105 (2) -- $1,558 (4) -- -- Chief Executive 2001 $81,098 (2) -- $3,635 (4) -- -- Officer 2000 -- -- -- -- -- Dr. E. Ted Prince 2002 -- -- -- -- $43,269 (6) Chief Executive 2001 $173,077 (3) -- -- -- $81,731 (6) Officer 2000 $250,000 -- $8,636 (5) -- -- * The Company does not have a restricted stock award program. (1) Mr. Nelson joined the Company in the first quarter of fiscal year 2002. Had he been employed as of the beginning of the fiscal year, his salary would have been $200,000. (2) Ms. Frank joined the Company in the third quarter of fiscal year 2001. During May 2001, Ms. Frank resigned from all positions held with the company. Had she been employed for a full fiscal year, her salary would have been $200,000. (3) Dr. Prince resigned as Chief Executive Officer on November 7, 2000. (4) In fiscal years 2002 and 2001, Ms. Frank received auto allowances of $1,558 and $3,635, respectively. (5) In fiscal year 2000, Dr. Prince received an auto allowance of $8,636. (6) In fiscal years 2002 and 2001, Dr. Prince was paid severance in the amount of $43,269 and $81.731, respectively.
-18- The following table provides information concerning options granted to officers and directors during the Fiscal Year ended March 31, 2002 and reflects the potential value of such options assuming 5% and 10% annual stock appreciation.
Option/SAR Grants in Last Fiscal Year (Individual Grants) Percent of Potential Realizable Total Shares Value at Assumed Underlying Annual Rates of Number Options Stock Price of Shares Granted to Appreciation for Underlying Employees in Exercise Option Term Name Options Fiscal Year Price Expiration Date 5% 10% - ------------------------ --------------- ----------------- -------------- ----------------------- ---------------- --------------- Derek Dunaway 120,000 104.3% $ 0.08 September 20, 06 $ 2,700 $ 5,900
The following table sets forth information concerning the exercise of options during the last fiscal year and unexercised options held as of the end of the fiscal year with respect to each of the named directors and executives:
Aggregate Option Exercises In Last Fiscal Year And Fiscal Year End Option Values Number of Securities Value of unexercised Shares acquired Value Underlying unexercised in-the-money options/SARs on exercise realized options/SARs at March 31, 2002 at March 31, 2002 (1) Name # $ Exercisable Unexercisable Exercisable Unexercisable - ------------------------------ ------------------ ---------------- --------------- ----------------- ---------------- -------------- Henry F. Nelson - - - - - - Yaron I. Eitan - - 40,000 80,000 - - Robert Little (2) - - 80,000 - - - John A. Lopiano (3) - - 120,000 - - - Francis X. Murphy - - 402,799 - - - Derek Dunaway - - - 120,000 - - Mitchell Klein - - - - - - Lori R. Frank - - - - - - Yoav M. Cohen (4) - - - - - - E. Ted Prince - - 1,659,000 - - - John C. Pemble - - 191,386 - - - (1) Calculated by multiplying the number of shares underlying options by the difference between the closing price of the Common Stock as quoted on the Over-The-Counter Bulletin Board on March 31, 2002 and the exercise price of the options. (2) Robert Little resigned as a director on November 29, 2000. (3) John A. Lopiano chose not to stand for re-election at the Company's 2001 annual meeting. (4) Yoav M. Cohen resigned as a director in May 2002. He was not vested in any options.
REMUNERATION OF NON-MANAGEMENT DIRECTORS Each member of the Board of Directors who is not an officer or employee of the Company is entitled to participate in the Directors Option Plan described below, and to receive reimbursement for travel and other expenses directly related to his activities as a director. The Company does not pay inside or outside directors on a per meeting basis for attendance at Board of Director meetings or related Committee meetings. However, each outside director may be compensated pursuant to a written agreement with the Company to provide specific types of professional services such as financial, accounting or tax advice covering compensation plans, acquisitions and debt/equity placements. No cash compensation was paid to non-management directors for the last completed fiscal year. Information related to option grants for these directors is provided under the heading "Options/SAR Grants in Last Fiscal Year" contained herein. -19- EMPLOYMENT AGREEMENTS During 2001 the Company's Compensation Committee recommended to the Board of Directors that they approve the employment agreement for Henry F. Nelson, the Company's President and Chief Financial Officer. The three-year agreement was effective May 22, 2001 and provides for an annual salary of $200,000 and an annual bonus of up to $50,000 or 10% of profits; whichever is greater, upon the achievement of certain milestones as established by the Board of Directors. The Company has employment agreements with its other management personnel, which generally continue until terminated by the employee or the Company, and provide for severance payments under certain conditions. DIRECTORS AND OTHER STOCK OPTIONS The Board of Directors adopted the Directors Option Plan in 1992 to make service on the Board more attractive to present and prospective directors. The Directors Plan was amended in September 1995 to increase the number of shares authorized to 1,000,000. On July 29, 1996 the Directors Plan was amended so that each new director receives 100,000 stock options upon being appointed to the Board of Directors. In addition, the current change of control provision was modified to reflect immediate vesting. Also, board members who participate on committees are entitled to receive 20,000 options. 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. At March 31, 2002 there were 740,001 Directors plan options outstanding and 146,665 options available for future grant. During fiscal 1996, the Company, with shareholder approval, granted aggregate stock options of 3,000,000 shares to new and continuing Directors and officers of the Company. The stock options were for a term up to five years and have vesting schedules based on different criteria including time qualifications and performance standards. The Company included the underlying shares in its Form S-1 Registration Statement that has been declared effective by the Securities and Exchange Commission on October 6, 1997. During the fiscal year ended March 31, 2002 the Company issued options in accordance with the Directors Plan as follows: 120,000 shares at $0.08 to Derek Dunaway. Mitchell Klein is eligible to receive options under the Directors Plan; however, these options have not been issued. ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT The following table sets forth, to the best knowledge of the Company, as of July 23, 2002, certain information with respect to (1) beneficial owners of more than five percent (5%) of the outstanding common stock of the Company, (2) beneficial ownership of shares of the Company's common stock by each director and named executive; and (3) beneficial ownership of shares of common stock of the Company by all directors and officers as a group. Unless otherwise noted, all shares are beneficially owned and the sole voting and investment power is held by the persons/entities indicated. Based upon the aggregate of all shares of Common Stock issued and outstanding as of July 23, 2002 in addition to shares issuable upon exercise of options or warrants currently exercisable or becoming exercisable within 60 days following the date of this report and which are held by the individuals named on the table. -20-
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS % of Shares of Total Common Common Options/ Beneficial Stock Name of Beneficial Owner Stock Other Ownership Outstanding(1) - ----------------------------------------------------------------------------------------------------------------------------------- Selway Partners LLC 1,068,896 33,298,421 (2)(3)(4) 34,367,317 39.9% 52 Forest Ave. (5) Paramus, NJ 07652 Robert Little 2,000,725 1,099,597 (8) 3,100,322 5.9% c/o INSCI Corp. 2 Westborough Business Park Westborough, MA 01581 Harrison Option Fund 4,656,543 - 4,656,543 8.8% c/o Betapoint Corporation 33 Scott Avenue Nashua, NH 03062 Yaron I. Eitan, Director - 34,407,317 (6)(7) 34,407,317 40.0% c/o INSCI Corp. 2 Westborough Business Park Westborough, MA 01581 Henry F. Nelson, CEO - - - 0.0% c/o INSCI Corp. 2 Westborough Business Park Westborough, MA 01581 Francis X. Murphy, Director - 402,799 (6) 402,799 0.8% c/o INSCI Corp. 2 Westborough Business Park Westborough, MA 01581 Derek Dunaway, Director - 34,367,317 (7) 34,367,317 39.9% c/o INSCI Corp. 2 Westborough Business Park Westborough, MA 01581 Mitchell Klein, Director - 4,656,543 (9) 4,656,543 8.8% c/o INSCI Corp. 2 Westborough Business Park Westborough, MA 01581 All current directors and executive officers as a group - 39,466,659 (6)(7) 39,466,659 45.6% -21- (1) Computed on the basis of 52,761,299 shares of common stock outstanding, plus, in the case of any person deemed to own shares of common stock as a result of owning options, warrants, or rights to purchase common stock exercisable within 60 days of the date of this report or convertible debt which is presently convertible into Series A Preferred Stock at a conversion factor of $1.30 and such Series A Preferred Stock is then convertible into common stock on a one for two ratio, the additional shares of common stock which would be outstanding upon such exercise, purchase or conversion by such person or group. (2) Includes 461,538 shares of common stock currently issuable upon exercise of preferred stock warrants followed by conversion into common stock. (3) Includes 1,836,883 shares of common stock currently issuable upon conversion of $1.0 million subordinated convertible debt plus interest accrued through July 23, 2002. (4) Includes 200,000 shares of common stock currently issuable upon exercise of a stock warrant. (5) Includes an estimated 30,800,000 of common stock that could be issuable upon the conversion of $585,000 of convertible debt issued pursuant to a June 21, 2001 investment agreement and an additional $225,000 of convertible debt issued pursuant to an amended management agreement. The debt is convertible into 81,000 shares of Series B Preferred Stock. The Series B Preferred Stock is convertible into shares of common stock based upon a formula that is dependent upon the conversion of Series A Preferred Stock into common stock and the trading value of the Company's common stock at the date of conversion. (6) Includes the following number of shares of common stock currently issuable upon exercise of stock options held by the following persons: Mr. Eitan 40,000 shares, Mr. Murphy 402,799 shares and all current officers and directors as a group 442,799 shares. (7) Includes 34,367,317 shares deemed to be beneficially owned by Selway which Mr. Dunaway and Mr. Eitan are affiliated with. All current officers and directors as a group also includes the shares attributable to Selway. (8) Includes 1,019,597 shares deemed to be beneficially owned by Mr. Little's wife. (9) Includes 4,656,543 shares deemed to be beneficially owned by the Harrison Option Fund of which Mr. Klein is President and General Partner.
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS During June 2001, the Company entered into an Investment Agreement ("Agreement") with Selway Partners, LLC ("Selway") a technology holding company. The Company's chairman Yaron Eitan and Derek Dunaway, a director of the Company are deemed affiliates of Selway. The former chairman of the Company, Yoav Cohen was also deemed an affiliate of Selway. Selway was an existing shareholder of Lognet 2000, Inc. ("Lognet"). The Company acquired Lognet on May 24, 2000 in a stock for stock exchange. The June 2001 Agreement provides up to a sum of $700,000 of subordinated convertible debentures (the "Debentures"). The Company received an initial $250,000 from the financing on June 27, 2001 and has subsequently drawn down an additional $335,000 of the facility. The Company can draw on the remainder of the facility at the discretion of Selway, and upon attaining certain operating milestones. 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. 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 were originally payable at the earlier of June 15, 2002 or upon demand by the holder. The maturity date for the Debentures has subsequently been extended to September 1, 2002. -22- The Series B Preferred is convertible at the option of the holder into Common Stock at a conversion price equal to (i) such number of shares of Common Stock as represents the "Current Value Percentage" (as defined) of total issued and outstanding Common Stock as of the date of conversion, plus (ii) such additional shares of Common Stock issuable after the date of conversion as may be necessary to maintain such Current Value Percentage upon the conversion of the 8% Preferred Stock and the Series A Preferred (issued in November 2000 to Selway and CIP Capital LP (see below)), or exercise of other convertible instruments. The Series B Preferred contains anti-dilution protection and adjustment rights granted to each share. Dividends accrue on a cumulative basis at an annual rate equal to 13% payable at the Company's option in additional shares of Series B Preferred or cash. The Series B Preferred will also share pari passu on an as-converted basis in any dividends declared on the Company's Common Stock. Each share of Series B Preferred shall be entitled to one vote for each share of Common Stock into which it is convertible. In the event of any liquidation, dissolution or winding-up of the Company, whether voluntary or involuntary, subject to the rights of pre-existing shares of Preferred Stock to be paid on a pari passu basis with the Series B Preferred, the holders of the Series B Preferred shall be entitled to receive the greater of (i) the portion of the liquidation value of the assets of the Company that the holders of the Series B Preferred would have received pro rata according to the number of shares of Common Stock that the holders of Series B Preferred would have had in the event that such holders had converted the Series B Preferred into Common Stock immediately prior to such liquidation event and as adjusted for any recapitalizations, stock combinations, stock dividends (whether paid or unpaid), stock splits and the like with respect to such shares or (ii) three and one half times the dollar principal amount of debentures converted into Series B Preferred plus the dollar amount of any interest, dividends or other amounts due on such debenture as are converted into Series B Preferred (the greater of (i) or (ii) being referred to herein as the "Series B Preference Amount"). The Series B Preferred may be redeemed at any time after three years from date of issuance by the holders at a price equal to the Series B Preference Amount (subject to adjustment as defined) plus an amount equal to the amount of all declared but unpaid dividends. During the fiscal year ended March 31, 2001, INSCI had entered into several arrangements with Selway. At March 31, 2002, the repayment of a $304,000 promissory note issued to the Pennsylvania Business Bank ("Bank") and recorded on the Company's balance sheet was guaranteed by Yaron Eitan and certain other stockholders, each of whom is jointly and severally liable on the promissory note. Subsequently, in May 2002, the Company entered into a financing agreement with Benefactor Funding Corp. to replace a prior lender, Prestige Capital Corporation. As part of the terms of the Benefactor financing, the Company was required to pay in full the sum of $285,000 to the Bank. Both Yaron Eitan, the Company's Chairman, and Selway guaranteed the debt due to the Bank as a result of an existing transaction prior to his becoming Chairman of the Company wherein the Company purchased the assets of Lognet. As a result of the payoff of the Pennsylvania Business Bank loan, the Company discontinued payments of the sum of $5,000 per month to Selway, which payments were made as a part of a restructure of the Pennsylvania Business Bank loan by the Company as Selway was required to guaranty the loan. The Company previously had a receivable financing arrangement with Prestige Capital Corporation ("Prestige") whereby the Company agreed to sell certain accounts receivable subject to limited recourse at a discount fee of up to 10% depending upon the length of time Prestige holds the receivable before collection. On March 8, 2001, Selway, entered into a Participation Agreement with Prestige whereby at Prestige's sole discretion Prestige may propose to assign to Selway one or more of the receivables that INSCI proposes to sell to Prestige, which Prestige would otherwise elect not to purchase. Selway may at its sole discretion agree to take an assignment on some or all of the receivables proposed for sale by Prestige. As consideration for this arrangement, Prestige retains one percent of the discount noted above and Selway will receive up to nine percent of the remaining discount as noted above. This agreement was cancelled during Fiscal 2002 and there were no outstanding amounts assigned to Selway under this agreement at March 31, 2002. Discounts earned by Selway on these assigned receivables totaled $11,500. Also during March 2001, Econium, Inc., an affiliate of Selway, earned an assistance fee of $110,000 in connection with the Company's March 1, 2001 sale of the majority of the assets of Lognet to Paynet Electronic Billing Ltd. a nonaffiliated privately owned company based in Haifa, Israel. -23- In November 2000, INSCI closed $2.0 million of subordinated convertible debt financing ("Convertible Debt") with Selway and CIP Capital L.P. of Wayne, Pennsylvania ("CIP") (collectively the "Investors"). CIP also was a shareholder of Lognet. The Convertible Debt is convertible into an aggregate of approximately 1.5 million shares of INSCI Series A Convertible Redeemable Preferred Stock (the "Series A Preferred") at a price of $1.30 per share. The Series A Preferred is in turn convertible on a one-for-two basis into shares of INSCI's Common Stock. The Convertible Debt bears interest at prime plus 2 1/2 percent payable in cash or in additional shares of Series A Preferred, at the option of the Investors, and is secured by a subordinated lien on all of INSCI's assets. Unless previously converted into shares of Series A Preferred, principal and interest are payable at maturity in five years or upon an earlier redemption on or after two years at the option of the Investors. As part of the financing, the Investors were also granted warrants to purchase 461,540 shares of Series A Preferred at an exercise price of $1.44 per share. The Series A Preferred is in turn convertible on a one-for-two basis into shares of INSCI's Common Stock. The warrants are immediately exercisable and expire in November 2002. Selway was also issued warrants to purchase 200,000 shares of Common Stock at $.72 per share for services rendered in connection with the financing transaction. The warrants are immediately exercisable and expire in November 2003. During November 2000, INSCI entered into a Management Consulting Agreement for a term of three years with Selway Management, Inc., an affiliate of Selway. During Fiscal 2001, Selway's $100,000 in management fees payable under this agreement was satisfied by the issuance of 164,385 shares of the Company's common stock to Selway. In connection with the Agreement, the Company amended its Management Agreement with Selway. 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"). During Fiscal 2002, the Company satisfied $20,000 in management fees by the issuance of 60,953 shares of the Company's stock to Selway. Pursuant to the amended management agreement $150,000 of management fees were satisfied by the issuance of $150,000 of Management Debentures to Selway during Fiscal 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. INSCI engaged Emerging Technology Ventures, Inc. ("ETVI") to manage acquisition and strategic alliance activities. Mr. Francis X. Murphy ("Mr. Murphy"), President of ETVI, is also a director of INSCI. ETVI was paid a monthly retainer of $6,000 through December 2000. Additionally, during Fiscal 2001, ETVI earned fees of $168,750 related to the acquisition of Lognet 2000, Inc. At March 31, 2002, approximately $96,000 remained as an outstanding liability. As a result of the November 2000 subordinated convertible debt financing, the Company entered into certain arrangements with Landsbury, LLP ("Landsbury"), wherein Landsbury agreed to act as a management consultant to the Company and perform consulting services, in exchange for the Company issuing Landsbury Common Stock purchase warrants to purchase approximately 10% of the then issued and outstanding Common Stock of the Company at $.72 per share. As part of this arrangement, Ms. Lori Frank, a member of Landsbury entered into an employment agreement with the Company to become its Chief Executive Officer ("CEO") and among other things, to receive options to purchase 825,000 shares of Common Stock of the Company pursuant to the Company's Stock Option Plan. These options are included in the computation of the 10% noted above. During May 2001, Ms. Frank resigned all positions held with the Company. Also during May 2001, two other members of Landsbury, Glen Sturm and Bahram Yusefzadeh, tendered their resignations as directors of the Company. -24- The Company, as of the current date, has not issued any of the Common Stock purchase warrants to Landsbury, nor has the Company issued any of the stock options to Ms. Frank. The Company has requested from Ms. Frank and Landsbury a release of any of the Company's obligations to Landsbury and/or Ms. Frank; however, there is no assurance that either Ms. Frank or Landsbury will provide general releases. As of the date of these financial statements, neither Ms. Frank nor Landsbury have notified the Company of any claims against the Company. ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K Reports: 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. 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. -25- SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this Report to be signed on its behalf by the undersigned, thereunto duly authorized. INSCI CORP. By: /s/ HENRY F. NELSON ----------------------- Henry F. Nelson, Chief Executive Officer, President, and Chief Financial Officer Dated August 26, 2002 -26- POWER OF ATTORNEY KNOW ALL MEN BY THESE PRESENTS, that each person whose signature appears below constitutes Henry F. Nelson as his attorney-in-fact, with the power of substitution, for him in any and all capacities, to sign any attached amendments to this Report on Form 10-KSB/A, and to file the same, with exhibits thereto and other documents in connection therewith, with the Securities and Exchange Commission, hereby ratifying and confirming all that said attorney-in-fact, or his substitute or substitutes, may do or cause to be done by virtue hereof. Pursuant to the requirements of the Securities Exchange Act of 1934, this Report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated. SIGNATURE TITLE DATE /S/ HENRY F. NELSON Chief Executive Officer, President, July 15, 2002 - ------------------- Chief Financial Officer and Director Henry F. Nelson /S/ YARON I. EITAN Director July 15, 2002 - ------------------ Yaron I. Eitan /S/ DEREK W. DUNAWAY Director July 15, 2002 - -------------------- Derek W. Dunaway /S/ FRANCIS X. MURPHY Director July 15, 2002 - --------------------- Francis X. Murphy /S/ MITCHELL KLEIN Director July 15, 2002 - ------------------ Mitchell Klein -27- INSCI CORP. EXECUTIVE OFFICERS OF THE REGISTRANT BOARD OF DIRECTORS Yaron I. Eitan (1,2) Chairman of the Board Henry F. Nelson Chief Executive Officer, President & Chief Financial Officer Derek Dunaway (1) Francis X. Murphy (2) Mitchell Klein (1) Member of the Audit Committee (2) Member of the Compensation Committee EXECUTIVE OFFICER Henry F. Nelson Chief Executive Officer, President & Chief Financial Officer AUDITORS: TRANSFER AGENT: Goldstein and Morris First Union National Bank 36 West 44th Street 1525 West W. T. Harris Blvd. - 3C3 New York, NY 10036 Charlotte, NC 28288 -28- INDEX OF EXHIBITS The following Exhibits are filed as part of, or incorporated by reference into, this Report on Form 10-KSB/A, as indicated below (footnote explanations are at end of Index): Sequential PAGE NUMBER EXHIBIT NO. DESCRIPTION OF EXHIBIT 3.1 Certificate of Incorporation of the Company. 3.2 Bylaws of the Company. 3.3 Amendment to Certificate of Incorporation of the Company Creating Preferred Stock. 3.4 Certificate of Amendment to the Certificate of Incorporation. 3.5 Certificate of Amendment to Certificate of Incorporation changing the Company name to insci-statements.com, corp. 3.6 Certificate of Amendment to Certificate of Incorporation changing the Company name to INSCI Corp. 3.7 Certificate of Amendment to Certificate of Incorporation increasing authorized number of Common Stock. 4.1 Rights agreement dated April 4, 2000 between the Company and the Rights Agent. 10.1 1992 Stock Option Plan. 10.2 1992 Directors Option Plan. 10.3 1992 Advisory Committee Plan. 10.4 Accounts Financing Agreement between the Registrant and Congress Financial Corporation, and related documents. 10.5 Form of 1991 Option. 10.6 Form of 1992 Warrants. 10.7 Form of 1992 Convertible Subordinated Note. 10.8 Form of 1992 Contingent Warrants. 10.9 Form of 1993 Warrant3/4Version A. 10.10 Form of 1993 Release Agreement. 10.11 Form of Management Agreement between the Registrant and Imtech. 10.12 Form of Tax Sharing Agreement between the Registrant and Imtech. 10.13 Form of Indemnification Agreement with the Registrant's Directors. 10.14 Marketing Associate Solution Alliance Agreement between UNISYS Corporation and Registrant. 10.16 Data General Value Added Reseller Discount Purchase Agreement. 10.17 Data General Optical Systems and Software Agreement. 10.18 Distribution Agreement between Fiserv CIR, Inc. and Registrant. 10.19 Lease Agreement relating to the Company's White Plains, New York headquarters. 10.20 Forms of Customer License Agreements used by the Company. 10.21 Forms of Employee Confidentiality Agreements used by the Company. 10.22 Nondisclosure and Noncompetition Agreement between the Registrant, Imtech and Mason Grigsby. 10.23 Form of 1993 Warrant - Version B. 10.24 Employment Agreement between the Company and John L. Gillis. 10.25 Employment Agreement between the Company and Kris Canekeratne. 10.26 Form of 1993 Exchange Agreement and Investor Suitability Representations. 10.27 Form of 1993 Conversion Agreement. 10.28 Waivers by Congress Financial Corporation. 10.29 Form of Investor's Warrant Agreement. 10.30 Form of Representative's Warrant Agreement. 10.31 License Agreement between Bull HN Information Systems, Inc. and Registrant. 10.33 Loan Agreement between BNY Financial Corporation and Registrant. 10.34 Preferred Stock Subscription Agreement between the Company and Imtech relating to Preferred Stock. -29- 10.35 Business Partner Agreement between International Business Machines Corporation and Registrant. 10.36 Waiver by BNY Financial Corporation. 10.37 Stock Escrow Agreement between Registrant, Imtech and First Union National Bank of North Carolina (as Escrow Agent) 10.39 Promissory Note to the Company from John L. Gillis and Sandra Gillis. 10.40 Stock pledge agreement by John L. Gillis and Sandra Gillis in favor of the Registrant. 10.41 Amendment to Loan Agreement between BNY Financial Corporation and Registrant. 10.42 Lease agreement relating to the Company's Westborough, MA headquarters. 10.43 Employment agreement with Jack Steinkrauss. 10.44 First amendment to employment agreement with John Gillis. 10.45 First amendment to employment agreement with Kris Canekeratne. 10.46 Agreement for system purchase by The Northern Trust Company. 10.47 Preferred stock conversion agreement. 10.48 Technology and Reseller Agreement with Elixir Technologies, Inc. 10.49 Private Placement Term Sheet and Exhibits for offering of 90-Day 10% Subordinated Notes. Repayable in Cash or in Shares of the Company's Proposed 10% Convertible Preferred Stock. 10.50 First Amendment to Private Placement Term Sheet and Exhibits. 10.51 Employment agreement with Edward J. Prince. 10.52 Release by BNY Financial Corporation of the Company's guarantee of the obligations of Imtech under the shared credit facility agreement. 10.53 Employment Contract with George Trigilio, Jr. 10.54 Amendment to Employment Contract for Dr. E. Ted Prince, CEO. 10.55 Warrant Exchange Agreement with Norcross & Company 10.56 Asset Purchase Agreement between the Company and Courtland Group, Inc. 10.57 10% Convertible Preferred Stock Private Placement Term Sheet and Exhibits 10.58 Unit Private Placement Term Sheet and Exhibits 10.59 Credit Line Agreement between the Company and Silicon Valley Bank 10.60 Amendment to Employment Agreement with E. Ted Prince, CEO 10.61 Acquisition Agreement between The Internet Broadcasting Company, Inc. and insci- statements.com, corp. 10.62 Regulation D Share Purchase Agreement, Form of Warrant and Registration Agreement with The Tail Wind Fund, Ltd. 10.63 Investment Agreement dated November 28, 2000 by and between the Company, Selway and CIP. 10.64 Employment Agreement with Lori Frank. 10.65 Asset Purchase Agreement between Lognet Systems Ltd, Lognet 2000, Inc., Paynet Electronic Billing Ltd. and insci-statements.com, corp. 10.66 Purchase and Sale Agreement between Prestige Capital Corporation and insci-statements.com Corp. 10.67 Participation Agreement between Prestige Capital Corporation and Selway Partners, LLC. 10.68 Employment Agreement with Henry F. Nelson 10.69 Investment Agreement as of June 21, 2001 between Selway Partners, LLC, Selway Management, Inc. and insci-statements.com,corp. 10.70 Amendment No. 1 to Management Agreement between insci-statements.com,corp. and Selway Management, Inc. 10.71 Factoring and Security Agreement between INSCI Corp. and Benefactor Funding Corp. 13.1 Form 10-QSB for the quarter ended June 30, 2001 13.2 Form 10-QSB for the quarter ended September 30, 2001 13.3 Form 10-QSB for the quarter ended December 31, 2001 16.1 Letter regarding change in certifying accountants 16.2 Arthur Andersen LLP letter regarding change in certifying accountants. 21.1 Subsidiaries of the Company - ---------------------------------- Unless otherwise noted, the exhibit is incorporated by reference with a prior filing. -30- TABLE OF CONTENTS TO CONSOLIDATED FINANCIAL STATEMENTS CONSOLIDATED FINANCIAL STATEMENTS PAGE Reports of Independent Public Accountants F-2 Consolidated Balance Sheet as of March 31, 2002 F-4 Consolidated Statements of Operations for the Years Ended March 31, 2002 and 2001 F-5 Consolidated Statements of Stockholders' Equity (Deficit) for the Years Ended March 31, 2002 and 2001 F-6 Consolidated Statements of Cash Flows for the Years Ended March 31, 2002 and 2001 F-7 Notes to Consolidated Financial Statements F-9 F-1 REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS The Board of Directors and Stockholders of INSCI Corp. We have audited the accompanying consolidated balance sheet of INSCI Corp. as of March 31, 2002 and the related consolidated statements of operations, stockholders' equity (deficit) and cash flows for the year then ended. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of INSCI Corp. as of March 31, 2002 and the results of its consolidated operations and its cash flows for the year then ended in conformity with accounting principles generally accepted in the United States of America. The accompanying consolidated financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in Note 1 to the consolidated financial statements, the Company has suffered losses from operations in prior years, has a net capital deficit and has a working capital deficit that raises substantial doubt about its ability to continue as a going concern. Management's plans in regard to these matters are also described in Note 1. The consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty. /s/ Goldstein and Morris ------------------------ New York, New York June 28, 2002, except for Note 11, as to which the date is August 21, 2002 F-2 THIS REPORT IS A COPY OF A PREVIOUSLY ISSUED ARTHUR ANDERSEN LLP REPORT. THIS REPORT HAS NOT BEEN REISSUED BY ARTHUR ANDERSEN LLP. THIS REPORT REFERS TO THE YEAR ENDED MARCH 31, 2000, WHICH, IN ACCORDANCE WITH SEC REQUIREMENTS IS NOT PRESENTED IN THIS FILING. Report of Independent Public Accountants To insci-statements.com, corp.: We have audited the accompanying consolidated balance sheet of insci-statements.com, corp. and subsidiaries as of March 31, 2001, and the related consolidated statements of operations, stockholders' equity (deficit) and cash flows for each of the years ended March 31, 2001 and 2000. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of insci-statements.com, corp. and subsidiaries as of March 31, 2001, and the results of their operations and their cash flows for each of the years ended March 31, 2001 and 2000, in conformity with accounting principles generally accepted in the United States. The accompanying consolidated financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in Note 1 to the consolidated financial statements, the Company's recurring losses from operations and limited capital resources along with other factors raise substantial doubt about its ability to continue as a going concern. Management's plans in regard to these matters are also described in Note 1. The financial statements do not include any adjustments that might result from the outcome of these uncertainties. /s/ Arthur Andersen LLP ----------------------- Boston, Massachusetts June 13, 2001, (except with respect to the matter discussed in Notes 1 and 15, as to which the date is June 27, 2001) F-3
INSCI CORP. CONSOLIDATED BALANCE SHEET MARCH 31, 2002 (in thousands, except per share amounts) ASSETS Current assets: Cash $ 412 Accounts receivable, net of allowance for doubtful accounts of $100 1,269 Prepaid expenses and other current assets 126 -------- Total current assets 1,807 Property and equipment, net 257 Other assets 175 -------- $ 2,239 ======== LIABILITIES AND STOCKHOLDERS' DEFICIT Current liabilities: Accounts payable and accrued expenses $ 3,466 Note payable, Bank 304 Deferred revenue 1,483 Convertible debt 2,740 -------- Total current liabilities 7,993 -------- Commitments and contingencies (Note 11) 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, 80 shares issued and outstanding, no liquidation preference 1 Common stock, $.01 par value, authorized 185,000 shares: issued and outstanding 52,647 shares 526 Additional paid-in capital 47,019 Accumulated deficit (53,300) -------- Total stockholders' deficit (5,754) -------- $ 2,239 ========
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED FINANCIAL STATEMENTS. F-4
INSCI Corp. CONSOLIDATED STATEMENTS OF OPERATIONS Years ended March 31, 2002 and 2001 (in thousands, except per share amounts) 2002 2001 -------- --------- Revenue Product $ 2,799 $ 4,043 Services 5,684 5,972 -------- -------- Total revenue 8,483 10,015 -------- -------- Cost of revenue Product 133 1,040 Services 1,688 3,124 -------- -------- Total cost of revenue 1,821 4,164 -------- -------- Gross profit 6,662 5,851 -------- -------- Expenses Sales and marketing 2,019 3,240 Product development 1,727 5,751 General and administrative 2,097 4,939 Restructuring and other charges -- 8,916 -------- -------- 5,843 22,846 -------- -------- Operating income (loss) 819 (16,995) Interest expense, net (451) (526) -------- -------- Net income (loss) 368 (17,521) Preferred stock dividend (213) (277) -------- -------- Net income (loss) attributable to common shareholders $ 155 $(17,798) ======== ======== Basic and diluted earnings (loss) per common share $ 0.004 $ (1.162) ======== ======== Weighted average shares outstanding: basic and diluted 35,205 15,319 ======== ========
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED FINANCIAL STATEMENTS. F-5
INSCI CORP. CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT) YEARS ENDED MARCH 31, 2002 AND 2001 (in thousands, except per share amounts) Additional Deferred Accum- Preferred Stock Common Stock Paid-in Compen ulated Shares Amount Shares Amount Capital -sation Deficit Total ------ ------ ------ ------ ------- ------- ------- ----- BALANCE, MARCH 31, 2000 944 $ 9 12,915 $ 129 $ 38,656 $ (938) $(35,657) $ 2,199 8% preferred stock conversion to common stock (310) (3) 337 3 -- -- -- -- 8% preferred stock issued as dividend on 8% preferred stock 227 2 -- -- 205 -- (207) -- 8% preferred stock dividend paid -- -- -- -- -- -- (70) (70) Stock options issued for services -- -- -- -- (118) -- -- (118) Reversal of deferred compensation -- -- -- -- (938) 938 -- -- Common stock issued for services -- -- 170 2 111 -- -- 113 Common stock issued for software rights -- -- 40 1 132 -- -- 133 Exercise of common stock options -- -- 106 1 159 -- -- 160 Common stock issued for acquisition of Lognet 2000, Inc. -- -- 2,500 25 8,413 -- -- 8,438 Common stock warrants issued for services -- -- -- -- 235 -- -- 235 Series A preferred warrants issued to investors -- -- -- -- 180 -- -- 180 Beneficial conversion feature on convertible debt -- -- -- -- 107 -- -- 107 Net loss -- -- -- -- -- -- (17,521) (17,521) -------- -------- -------- -------- -------- -------- -------- -------- BALANCE, MARCH 31, 2001 861 8 16,068 161 47,142 -- (53,455) (6,144) 8% preferred stock conversion to common stock (1,893) (18) 36,131 361 (343) -- -- -- 8% preferred stock issued as dividend on 8% preferred stock 1,112 11 -- -- 202 -- (213) -- Common stock issued for services- -- -- 448 4 18 -- -- 22 Net income - -- -- -- -- -- -- 368 368 -------- -------- -------- -------- -------- -------- -------- -------- BALANCE, MARCH 31, 2002 80 $ 1 52,647 $ 526 $ 47,019 $ -- $(53,300) $ (5,754) ======== ======== ======== ======== ======== ======== ======== ========
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED FINANCIAL STATEMENTS. F-6
INSCI Corp. CONSOLIDATED STATEMENTS OF CASH FLOWS Years ended March 31, 2002 and 2001 (in thousands, except per share amounts) 2002 2001* -------- ---------- Cash flows from operating activities: Net income (loss) $ 368 $(17,521) Reconciliation of net income (loss) to net cash used in operating activities: Depreciation and amortization 294 691 Noncash restructuring and other charges -- 7,045 Amortization of other assets -- 921 Convertible debentures issued for services 278 -- Stock options and warrants issued for services and expenses -- 375 Stock issued for services 22 113 Changes in assets and liabilities: Accounts receivable 193 1,226 Prepaid expenses and other current assets 36 (44) Other assets 60 259 Accounts payable and accrued expenses (1,511) 931 Deferred revenue (38) 375 -------- -------- Net cash used in operating activities (298) (5,629) -------- -------- Cash flows from investing activities: Capital expenditures (11) (468) Proceeds from sale of fixed assets 19 -- Net proceeds from sale of Lognet assets -- 135 Cash acquired upon purchase of Lognet, net of acquisition costs -- 2,845 -------- -------- Net cash provided by investing activities 8 2,512 -------- -------- Cash flows from financing activities: Net (repayments) proceeds on short-term debt (220) (424) Proceeds from convertible debt 462 2,000 Payment of dividend on 8% preferred stock -- (70) Proceeds from exercise of options and warrants -- 160 -------- -------- Net cash provided by financing activities 242 1,666 -------- -------- Net decrease in cash (48) (1,451) Cash at beginning of year 460 1,911 -------- -------- Cash at end of year $ 412 $ 460 ======== ======== * Reclassified for comparative purposes.
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED FINANCIAL STATEMENTS. F-7 INSCI CORP. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 1 - NATURE OF BUSINESS AND BASIS OF PRESENTATION 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 March 31, 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. NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES A summary of the significant accounting policies consistently applied in the preparation of the accompanying financial statements follows: BASIS OF CONSOLIDATION The consolidated financial statements include the accounts of INSCI Corp. and all wholly-owned subsidiaries (the "Company" or "INSCI"). All significant intercompany transactions and balances have been eliminated in the preparation of these financial statements. The accompanying consolidated financial statements give effect to INSCI's acquisition of Lognet 2000, Inc. ("Lognet") on May 24, 2000, which has been accounted for by the purchase method of accounting. Accordingly, operating results and cash flows for Fiscal 2001 include the results of Lognet subsequent to the date of acquisition. The accompanying financial statements also include the operations of INSCI and its wholly owned subsidiaries, InfiniteSpace.com, Corp. ("InfiniteSpace") located in Westborough, Massachusetts, Internet Broadcasting Company, Inc. located in Pompano Beach, Florida and INSCI (UK) Limited, a product development center located in the United Kingdom. These subsidiaries are no longer active and their operations ceased during the fiscal year ended March 31, 2001. USE OF ESTIMATES The preparation of financial statements requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. F-8 REVENUE RECOGNITION AND DEFERRED REVENUES PRODUCT REVENUES FROM SALE OF SOFTWARE LICENSES. INSCI recognizes product revenues from the sale of software licenses in accordance with Staff Accounting Bulletin No. 101, "Revenue Recognition in Financial Statements," Statement of Position No. 97-2, "Software Revenue Recognition," and SOP No. 98-9, "Modification of SOP No. 97-2, Software Revenue Recognition With Respect to Certain Transactions." For software license sales for which any services rendered are not considered essential to the functionality of the software, the Company recognizes revenue upon delivery of the software, provided (1) there is evidence of an arrangement, (2) collection of our fee is considered probable and (3) the fee is fixed or determinable. In certain of these arrangements, vendor specific objective evidence of fair value exists to allocate the total fee to all elements of the arrangement. If vendor specific objective evidence of fair value does not exist for the license element, the Company uses the residual method under SOP No. 98-9 to determine the amount of revenue to be allocated to the license element. Under SOP No. 98-9, the fair value of all undelivered elements such as post contract customer support or other services is deferred and subsequently recognized as the services are performed, with the difference between the total arrangement fee and the amount allocated for the undelivered elements being allocated to the delivered element. SERVICE REVENUES Service revenues include revenue from software maintenance contracts and systems integration and training revenue. Software maintenance revenue is recognized ratably over the contract period, generally one year. Systems integration and training revenue is recognized when there are no significant remaining obligations and upon acceptance by the customer of the completed project where the contract is of a short duration for a fixed price. Systems integration and training revenues provided to customers on a time and materials basis are recognized as the related services are performed. Advance payments required from customers under contractual agreements that have not been fulfilled are classified as customer deposits, which is included in accounts payable and accrued expenses in the accompanying consolidated balance sheet. DEFERRED REVENUES Deferred revenues represent (1) payments received from customers for software licenses, services and maintenance in advance of performing services and (2) amounts deferred in accordance with SOP No. 97-2 and SAB No. 101. PRODUCT DEVELOPMENT Product development includes all research and development expenses and software development costs. The Company expenses all research and development expenses as incurred. All software development costs associated with establishing technological feasibility, which we define as completion of beta testing, are expensed. Because of the insignificant amount of costs incurred between completion of beta testing and general customer release, no software development costs are capitalized in the accompanying consolidated financial statements. ACQUISITIONS On May 24, 2000, the Company completed the acquisition of Lognet in a stock for stock exchange. The Company issued 2,500,000 shares of its common stock in exchange for all outstanding common stock of Lognet. Lognet, a privately held company located in Totowa, New Jersey, and its wholly owned subsidiary, Lognet Systems Ltd. located in Haifa, Israel, are in the PC-to-host and print connectivity industries, as well as the business of electronic bill presentment and payment ("EBPP"). The Company agreed to certain registration rights for this transaction, as of the date of these financial statements such registration has not occurred and the Company is not F-9 aware of any claims asserted by the respective shareholders. The acquisition was accounted for by the purchase method of accounting. The purchase price was allocated to the estimated fair value of assets acquired and liabilities assumed. The purchase price allocation was based on the Company's estimates of respective fair values. The components of the purchase price and allocation are as follows: 2,500,000 restricted shares of INSCI common stock $ 8,438 Debt assumed 488 Acquisition costs 216 ------- Total consideration and acquisition costs $ 9,142 ======= Allocation of purchase price: Current assets $ 3,319 Property and equipment 172 Other assets 140 Goodwill 6,257 Current liabilities (522) Other liabilities (224) ------- Total $ 9,142 ======= The excess of consideration paid over the fair market value of net assets (goodwill) was being amortized over 10 years. During Fiscal 2001, the Company wrote off the unamortized goodwill balance of approximately $6.0 million due to management's decision to sell Lognet's assets and the Company's change in strategic direction. This charge was included in restructuring and other charges in Fiscal 2001. For Fiscal 2001, the results of operations for Lognet prior to the acquisition date are not material to the results of operations of INSCI. On March 1, 2001 INSCI sold the majority of the assets of Lognet to Paynet Electronic Billing Ltd. ("Paynet"), a nonaffiliated privately owned company based in Haifa, Israel. The assets sold to Paynet included all intellectual property rights, technology, development tools, hardware, furniture and equipment related to Lognet's Billminer electronic bill presentment and payment software and the Oneprint and Emulation product lines, as well as customer lists, marketing materials and other assets related to Lognet's business, including the name "Lognet". Paynet further agreed to hire most of Lognet's employees and assume the obligation for the hired employees' compensation and benefits. The consideration received for the sale of Lognet assets includes $245,000 in cash, of which $100,000 was received at closing and the balance as additional consideration for inventory and equipment, a twenty percent (20%) equity interest in Paynet and up to $1,600,000 in future royalties to be paid by Paynet, as a result of future sales on the Billminer Software, Oneprint and Emulation product lines. In connection with this sale, a $110,000 fee was paid to Econium, Inc. ("Econium"), an affiliate of Selway for Econium's assistance to Lognet. The equity interest in Paynet is subject to a share repurchase agreement option granted to Paynet for the sum of $1,000,000, as well as a right of first refusal agreement in favor of Paynet in the event of an initial public offering by Paynet. Results of operations for Fiscal 2001 reflect no gain or loss from this transaction. The carrying value of the investment in Paynet was recorded as of March 31, 2001 at $94,000, which was the carrying value of the assets sold. The Company was required to provide a release of lien of a portion of the collateral pledged to Selway and CIP in order to proceed with the Sale of Asset Agreement. In obtaining the required release, the Company agreed to provide, in substitution of the collateral, a security interest on the 20% equity interest and the future royalties to Selway and CIP. Revenues and net loss reported for Fiscal 2001 include approximately $800,000 and ($600,000), respectively, for Lognet. F-10 PROPERTY AND EQUIPMENT Property and equipment are recorded at cost. Depreciation is provided on the straight-line method over the estimated useful lives of the related assets. Upon retirement or sale, the cost of the assets disposed of and the related accumulated depreciation and amortization are removed from the accounts and any resulting gain or loss is included in the determination of net income. The estimated useful lives are as follows: Furniture and fixtures ................................... 5-7 years Equipment ................................... 3-5 years Software ................................... 1.5-3 years Leasehold improvements ................................... Life of lease INCOME TAXES The Company provides for income taxes in accordance with SFAS No. 109, ACCOUNTING FOR INCOME TAXES. SFAS No. 109 recognizes tax assets and liabilities for the cumulative effect of all temporary differences between financial statement carrying amounts and the tax basis of assets and liabilities and are measured using the enacted tax rates and laws that are currently in effect. FOREIGN CURRENCY TRANSLATION Foreign currencies are translated in accordance with SFAS No. 52, FOREIGN CURRENCY TRANSLATION. Under this standard, assets and liabilities of our foreign subsidiary are translated into U.S. dollars at current exchange rates. Income and expense items are translated at average rates of exchange prevailing during the year. 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 year. 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 year ended March 31, 2002, approximately 10.0 million shares from stock options, warrants and convertible debt were excluded because their exercise price exceeded market value and approximately 30.0 million shares from convertible debt are not included due to their anti-dilutive effect. For the year ended March 31, 2001, 11.0 million shares from stock options, warrants and convertible securities were excluded due to their anti-dilutive effect. CONCENTRATIONS OF CREDIT RISK Financial instruments that potentially expose the Company to concentrations of credit risk consist primarily of cash and accounts receivable. INSCI maintains its cash balances primarily in one financial institution. The Company's cash balances are insured by the Federal Deposit Insurance Corporation up to $100,000. At March 31, 2002, the uninsured amounts held were approximately $300,000. INSCI has not experienced any losses on these investments to date. INSCI 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. As of March 31, 2002, the Company has greater than 10% of the outstanding accounts receivable concentrated with two individual customers (see Note 14). F-11 IMPAIRMENT OF LONG-LIVED ASSETS The Company follows SFAS No. 121, ACCOUNTING FOR THE IMPAIRMENT OF LONG-LIVED ASSETS AND FOR LONG-LIVED ASSETS TO BE DISPOSED OF. This statement requires that long-lived assets be reviewed for impairment whenever events or changes in circumstances indicate that the assets' carrying amounts may not be recoverable. In performing the review for recoverability, if future undiscounted cash flows (excluding interest charges) from the use and ultimate disposition of the assets are less than their carrying values, an impairment loss is recognized. No write-downs have been required for the year ended March 31, 2002. FAIR VALUE OF FINANCIAL INSTRUMENTS The Company's financial instruments, which include cash and cash equivalents, trade receivables, convertible debentures and accounts payable, approximate fair value due to the short-term nature of these assets and liabilities. ACCOUNTING FOR STOCK OPTIONS AND WARRANTS SFAS No. 123, ACCOUNTING FOR STOCK-BASED COMPENSATION, requires that stock awards granted subsequent to January 1, 1995 be recognized as compensation expense based on their fair value at the date of grant. Alternatively, a company may use Accounting Principles Board ("APB") Opinion No. 25, ACCOUNTING FOR STOCK ISSUED TO EMPLOYEES, and disclose pro forma income amounts which would have resulted from recognizing such awards at their fair value. The Company has elected to account for stock-based compensation expense under APB Opinion No. 25 and make the required pro forma disclosures for compensation. Stock options and warrants granted to nonemployees are valued using the Black-Scholes option pricing model. RECENTLY ISSUED ACCOUNTING STANDARDS In June 1998, SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities" was issued and, as amended by SFAS No. 137, was adopted by the Company on July 1, 2000. This statement requires that an entity recognize all derivatives as either assets or liabilities and measure those instruments at fair value. The accounting for changes in the fair value of a derivative instrument depends on its intended use and the resulting designation. The adoption of this statement does not impact the Company's historical financial statements, as the Company currently does not use derivative instruments. 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 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. F-12 In November 2001, the FASB's Emerging Issues Task Force reached a consensus on EITF Issue 01-09, "Accounting for Consideration Given by a Vendor to a Customer or a Reseller of the Vendor's Products," which is a codification of EITF 00-14, 00-22 and 00-25. This issue presumes that consideration from a vendor to a customer or reseller of the vendor's products to be a reduction in the selling prices of the vendor's product and, therefore, should be characterized as a reduction of revenue when recognized in the vendor's income statement and could lead to negative revenue under certain circumstances. Revenue reduction is required unless consideration related to a separate identifiable benefit and the benefit's fair value can be established. This issue is to be applied retroactively in the first fiscal quarter beginning after December 15, 2001. The Company has not yet finalized its evaluation of the effects of this consensus on its consolidated financial statements; however, it does not expect this consensus to have a material impact on its financial statements. NOTE 3 - PROPERTY AND EQUIPMENT Property and equipment at March 31, 2002 consists of the following (in thousands): Furniture and fixtures $ 42 Equipment 445 Software 222 Leasehold improvements 57 ---- 766 Less accumulated depreciation and amortization 509 ---- $257 ==== Depreciation and amortization expense was $294,000 and $691,000 for fiscal years 2002 and 2001, respectively. NOTE 4 - RELATED PARTY TRANSACTIONS (1) INSCI engaged Emerging Technology Ventures, Inc. ("ETVI") to manage acquisition and strategic alliance activities. Mr. Francis X. Murphy ("Mr. Murphy"), President of ETVI, is also a director of INSCI. ETVI was paid a monthly retainer of $6,000 through December 2000. For completed transactions ETVI received a commission, which was offset against cumulative retainer fees paid. The arrangement with ETVI also provided that ETVI would receive 2% of the revenues generated from these alliances. Additionally, during Fiscal 2001, ETVI earned fees of $168,750 related to the acquisition of Lognet 2000, Inc. At March 31, 2002, approximately $96,000 remained as an outstanding liability, which is included in accounts payable and accrued expenses in the accompanying consolidated balance sheet. (2) INSCI entered into an agreement with Technology Providers (Ltd. of Sri Lanka and Incorporated of USA) ("TPL") under which TPL would provide computer programming services for certain software products under development and for selected customer application projects. Services rendered by TPL totaled $919,000 in Fiscal 2001. TPL is owned by family members of Mr. Krishan A. Canekeratne, a former Senior Vice President of Development for the Company, who resigned in fiscal 1999. Mr. Canekeratne had no direct ownership interest in TPL during his employment with INSCI. In the opinion of management, the fees paid under this agreement are at fair market value rates. This arrangement was terminated during fiscal 2001. Amounts due to TPL approximated $85,000 at March 31, 2002, which is included in accounts payable and accrued expenses in the accompanying consolidated balance sheet. (3) INSCI entered into a Management Consulting Agreement for a term of three years with Selway Management, Inc., an affiliate of Selway. During Fiscal 2001, $100,000 in management fees payable under this agreement were satisfied by the issuance of 164,385 shares of the Company's common stock to Selway. The Company satisfied $20,000 in management fees for April 2001 by the issuance of 60,953 shares of the Company's common stock to Selway. The agreement was revised effective May 1, 2001. Management fees totaling $165,000 in Fiscal 2002 were paid by issuance of convertible debentures. Selway is an affiliate of INSCI in that two of INSCI's five board of directors' members are affiliated with Selway. F-13 NOTE 5 -- NOTE PAYABLE, BANK The note payable's extended maturity date is October 1, 2002. The note requires monthly principal payments of $10,000 plus interest at 2% over prime, with a minimum rate of 9% per annum. The note was satisfied in May 2002 from the proceeds from a financing agreement. Pursuant to the terms of the agreement, the Company will receive 80% of the face amount of the accepted account and will be charged a commission equal to 2.25% of the accepted amount. The financing agreement is secured by the Company's assets and accounts receivable. The Company agreed upon an early termination of a prior financing agreement so that it could enter into this new agreement. NOTE 6 -- CONVERTIBLE DEBT During November 2000, INSCI closed $2.0 million of subordinated convertible debt financing ("Convertible Debt") with Selway Partners, LLC and CIP Capital L.P (the "Investors"), shareholders of the company. The Convertible Debt is convertible into an aggregate of approximately 1.5 million shares of INSCI Series A Convertible Redeemable Preferred Stock (the "Series A Preferred") at a price of $1.30 per share. The Series A Preferred is in turn convertible on a one-for-two basis into shares of INSCI's Common Stock. The Convertible Debt bears interest at prime plus 2 1/2 percent payable in cash or in additional shares of Series A Preferred, at the option of the Investors, and is secured by a subordinated lien on all of INSCI's assets. Unless previously converted into shares of Series A Preferred, principal and interest are payable at maturity in five years or upon an earlier redemption on or after two years at the option of the Investors. At the date of issuance, the Convertible Debt contained a beneficial conversion feature of approximately $107,000, which was recorded as interest expense. As part of the financing, the Investors have also been granted warrants to purchase 461,540 shares of Series A Preferred at an exercise price of $1.44 per share. The Series A Preferred is in turn convertible on a one-for-two basis into shares of INSCI's Common Stock. The warrants are immediately exercisable and expire in November 2002. The Company has valued these warrants using the Black-Scholes option pricing model, using volatility and expected life assumptions of 60% and two years, respectively. The fair value of approximately $180,000 was recorded as interest expense in the accompanying consolidated statements of operations. Selway was also issued warrants to purchase 200,000 shares of Common Stock at $.72 per share for services rendered in connection with the financing transaction. The warrants are immediately exercisable and expire in November 2003. The Company has valued these warrants using the Black-Scholes option pricing model, using volatility and expected life assumptions of 60% and three years, respectively. The fair value of approximately $69,000 was recorded in general and administrative expense in the accompanying consolidated statements of operations. During June 2001, the Company entered into an Investment Agreement ("Agreement") with Selway, a related party. The Agreement provides up to a sum of $700,000 of subordinated convertible debentures (the "Debentures"). The Company has received $570,000 through Fiscal 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. F-14 In connection with the Agreement, the Company amended its Management Agreement with Selway. 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"). During Fiscal 2002, the Company satisfied $150,000 of management fees by the issuance of Management Debentures to Selway. 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 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 $2,740,000 of convertible debt 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. The Company is negotiating to restructure the terms of its related party convertible debt, which if agreed to, will allow the Company to reclassify some of the debt to long-term. NOTE 7 - INCOME TAXES For the year ended March 31, 2002, income taxes of $148,000 were offset by net operating loss carryforwards. At March 31, 2002, INSCI has net operating loss ("NOL") carryforwards of approximately $31,550,000, which expire in various years through 2021, available to offset future taxable income. At March 31, 2002, INSCI had a deferred tax asset amounting to approximately $12,620,000. The deferred tax asset consists primarily of net operating loss carryforwards. Realization of deferred tax assets is dependent on future earnings, if any, the timing and amount of which is uncertain. Accordingly, the deferred tax asset has been fully offset by a valuation allowance of the same amount. Management believes that an "Ownership Change" occurred in January 1996 within the meaning of Section 382 of the Internal Revenue Code. Under an ownership change, the Company will be permitted to utilize approximately $13,000,000 in NOL carryforwards (available on the date of such change) in any year thereafter to reduce its income to the extent that the amount of such income does not exceed the product of (the "Section 382 limit") the fair market value of its outstanding equity at the time of the ownership change and the long-term tax exempt rate published by the IRS. In addition, the NOLs inherited through the Internet Broadcasting Company acquisition will also be limited due to the ownership change, which occurred on the acquisition date. The amount of the NOL, which will be subject to the Section 382 limit, will be approximately $2,200,000. NOTE 8- PREFERRED STOCK SERIES A CONVERTIBLE REDEEMABLE PREFERRED STOCK In connection with the November 2000 subordinated convertible debt financing, the Company's Board of Directors created the Series A Preferred consisting of 4,307,693 shares of which none have been issued as of the date of these financial statements. The Series A Preferred contain limited anti-dilution protection and adjustment rights granted to each share. Each share of Series A Preferred is convertible, at the option of the holder, into two shares of Common Stock, subject to adjustment as defined. Dividends accrue on a cumulative basis at an annual floating rate equal to prime rate plus 2.5 % payable in additional shares of Series A Preferred issued at a price of $1.30 per share, subject to adjustment as defined. The Series A Preferred will also share pari passu on an as converted basis in any dividends declared on the Company's Common Stock. Each share of Series A Preferred shall be entitled to one vote for each share of Common Stock into which it is convertible. F-15 The Series A Preferred may be redeemed at any time after five years from date of issuance by the holders for cash at $1.30 per share (subject to adjustment as defined) plus an amount equal to the amount of all declared but unpaid dividends. In the event of any liquidation, dissolution or winding-up of the Company whether voluntary or involuntary subject to the rights of the holders of 8% Preferred Stock to be paid on a pari passu basis with the Series A Preferred, the holders of the Series A Preferred shall be entitled to an amount equal to $1.30 per share adjusted for any recapitalizations, stock combinations, stock splits and the like with respect to such shares, SERIES B CONVERTIBLE REDEEMABLE PREFERRED STOCK In connection with the June 2002 subordinated convertible debt financing, the Company's Board of Directors created the Series B Preferred consisting of 100,000 shares of which none have been issued as of the date of these financial statements. The Series B Preferred is convertible at the option of the holder into Common Stock at a conversion price equal to (i) such number of shares of Common Stock as represents the "Current Value Percentage" (as defined) of total issued and outstanding Common Stock as of the date of conversion, plus (ii) such additional shares of Common Stock issuable after the date of conversion as may be necessary to maintain such Current Value Percentage upon the conversion of the 8% Preferred Stock and the Series A Preferred, or exercise of other convertible instruments. The Series B Preferred contains anti-dilution protection and adjustment rights granted to each share. Dividends accrue on a cumulative basis at an annual rate equal to 13% payable at the Company's option in additional shares of Series B Preferred or cash. The Series B Preferred will also share pari passu on an as-converted basis in any dividends declared on the Company's Common Stock. Each share of Series B Preferred shall be entitled to one vote for each share of Common Stock into which it is convertible. In the event of any liquidation, dissolution or winding-up of the Company, whether voluntary or involuntary, subject to the rights of pre-existing shares of Preferred Stock to be paid on a pari passu basis with the Series B Preferred, the holders of the Series B Preferred shall be entitled to receive the greater of (i) the portion of the liquidation value of the assets of the Company that the holders of the Series B Preferred would have received pro rata according to the number of shares of Common Stock that the holders of Series B Preferred would have had in the event that such holders had converted the Series B Preferred into Common Stock immediately prior to such liquidation event and as adjusted for any recapitalizations, stock combinations, stock dividends (whether paid or unpaid), stock splits and the like with respect to such shares or (ii) three and one half times the dollar principal amount of debentures converted into Series B Preferred plus the dollar amount of any interest, dividends or other amounts due on such debenture as are converted into Series B Preferred (the greater of (i) or (ii) being referred to herein as the "Series B Preference Amount"). The Series B Preferred may be redeemed at any time after three years from date of issuance by the holders at a price equal to the Series B Preference Amount (subject to adjustment as defined) plus an amount equal to the amount of all declared but unpaid dividends. 8% CONVERTIBLE REDEEMABLE PREFERRED STOCK On November 11, 1996, INSCI issued 1,333,334 Units of a Regulation "D" Private Placement Offering of 8% Convertible Redeemable Preferred Stock (8% Preferred Stock). The 8% Convertible Redeemable Preferred Stock contained limited anti-dilution protection and adjustment rights granted to purchasers of the Units. Each share of 8% preferred stock was convertible, at the option of the holder, into 1.08 shares of common stock. Dividends could be paid in cash or 8% Preferred Stock at the Company's option. The 8% Preferred Stock payable as dividends was to be valued at the lessor of $3.75 or the average bid price for Common Stock for twenty consecutive trading days prior to the end of the quarter. In accordance with the terms of the 8% Preferred Stock, annual dividends on 8% Preferred Stock were automatically readjusted in 1998 to eleven percent per annum for the balance of the period that any 8% Preferred Stock is outstanding. During Fiscal 2002, the Company issued 1,111,387 shares of 8% Preferred Stock in lieu of cash dividends. During Fiscal 2001, the Company paid approximately $70,000 in cash dividends and issued 227,127 shares of 8% Preferred Stock in lieu of cash dividends. F-16 Shares of 8% Preferred Stock could be redeemed at the Company's option, upon thirty days prior written notice to all then holders of record of the 8% Preferred Stock, for cash at $3.75 per share of 8% Preferred Stock. On October 1, 2001, any outstanding 8% Preferred Stock automatically converted into shares of common stock at the lesser of $3.75 per share or the average bid price for the common stock for twenty consecutive trading days ending five business days prior to October 1, 2001. During the first half of Fiscal 2002 and during Fiscal 2001, shareholders of this Preferred Stock converted 37,630 preferred shares into 40,904 shares of Common Stock and 310,151 preferred shares into 337,082 shares of Common Stock, respectively. During the six months ended March 31, 2002, 1,855,037 shares of Preferred Stock were converted into 36,090,201 shares of Common Stock. The terms and conditions of INSCI's 1996 Unit Purchase Agreement (the "Unit Placement") required holders of 8% Preferred Stock to automatically convert the issued and outstanding shares of Preferred Stock into shares of INSCI's Common Stock. In compliance with the Unit Placement, INSCI determined that one share of Preferred Stock was convertible into 19.455 shares of Common Stock. NOTE 9- STOCKHOLDERS' EQUITY (a) As of March 31, 2002, 52,647,799 shares of INSCI common stock were outstanding. As of March 31, 2001, 16,068,288 shares of INSCI common stock were outstanding. The increase in shares during Fiscal 2002 primarily resulted from the conversion of INSCI 8% preferred stock. (b) On December 17, 1999, INSCI entered into an equity transaction with The Tail Wind Fund, Ltd. ("Tail Wind"), wherein the Company received the sum of $2,185,000, net of issuance costs, as a result of the sale of 802,676 shares of Common Stock at $2.99 per share. Additionally, INSCI issued 280,936 Warrants to purchase 280,936 shares of Common Stock at $4.30 per share. The Warrants are exercisable for a period of five years. In January 2001, Tail Wind claimed that they are entitled to receive additional shares of Common Stock and a reduction in exercise price of the Common Stock Warrants due to antidilution provisions in the original agreement. During Fiscal 2002 an additional 387,482 common shares were issued to The Tail Wind Fund, Ltd. and the stock warrant price was reduced to $.25 per share. (c) On May 24, 2000, INSCI issued 2.5 million shares of its common stock to acquire all of the outstanding Common Stock of Lognet. (d) During Fiscal 2001, options were exercised to purchase 106,100 shares of Common Stock for $160,452. (e) During January 2001, INSCI entered into an agreement with Peregrine Asset Management, Inc. to have them provide certain investor relations services. The Company paid Peregrine the sum of $10,000 and granted them warrants to purchase 210,000 shares of INSCI common stock at $.72 per share with an expiration date of January 2006. These warrants are exercisable after the filing of a registration for the underlying warrant shares and provided that the then prevailing market price of INSCI's common stock is at least $1.00 per share. Additionally in March 2001, the lease agreement with the Company's landlord was amended to include additional security deposit, as well as the granting of warrants to purchase 120,000 shares of INSCI Common Stock at $.56 per share. These warrants are exercisable beginning September 1, 2001 through September 30, 2004. The fair value of these warrants have been determined using the Black-Scholes pricing model with volatility and expected life assumptions of 78% and five years, resulting in charges to general and administrative expense for Fiscal 2001 of $85,800. F-17 (f) The following are summaries of the Company's stock warrant activity:
COMMON STOCK WARRANTS Number Weighted Expiration - --------------------- of Shares Average Price Date -------------------- ------------------- -------------------- Balance March 31, 2000 530,936 $4.12 Oct 03-Dec 04 Issued 557,268 $0.85 Dec 02-Jan 06 -------------------- Balance March 31, 2001 1,088,204 $2.45 Dec 02-Jan 06 Issued -- -------------------- Balance March 31, 2002 1,088,204 $1.40 Dec 02-Jan 06 ==================== SERIES A PREFERRED STOCK WARRANTS Number Weighted Expiration - --------------------------------- of Shares Average Price Date -------------------- ------------------- -------------------- Balance March 31, 2000 - - Issued 461,538 $1.44 Nov 02-Jan 03 -------------------- Balance March 31, 2001 461,538 $1.44 Nov 02-Jan 03 Issued -- -------------------- Balance March 31, 2002 461,538 $1.44 Nov 02-Jan 03 ====================
(g) In December 2001, the shareholders approved a resolution, which amended the Company's certificate of incorporation to increase the number of authorized common shares from 40 million to 185 million. NOTE 10 - SUPPLEMENTAL CASH FLOW INFORMATION Year ended March 31, 2002 2001 -------------- ---------------- Cash paid for interest (in thousands) $ 142 $ 601 ============== ================ Noncash investing and financing activities: During fiscal 2002 and 2001, the Company issued 36,131,105 and 337,082 shares, respectively, of its common stock for the conversion of its 8% Convertible Redeemable Preferred Stock. During fiscal 2002 and 2001, the Company issued 1,111,387 and 227,127 shares, respectively, of its 8% Convertible Redeemable Preferred Stock in payment of the dividends on this stock. During fiscal 2001, the Company issued 2,500,000 shares of its common stock valued at $8.4 million to acquire all of the common shares of Lognet 2000, Inc. and assumed liabilities in the amount of $488,000. During fiscal 2001, the Company acquired software program rights in exchange for 40,000 shares of its Common Stock. During fiscal 2001, the Company issued 461,540 and 557,268 warrants to purchase Series A convertible redeemable preferred stock and common stock, respectively. These warrants were valued at $180,000 and $235,000, respectively. During fiscal 2001, the Company sold certain assets of Lognet to Paynet for $175,000 in net cash and noncash consideration consisting of a 20% equity interest in Paynet and future royalties. During fiscal 2001, the Company acquired property and equipment under capital leases with a value of $26,000. F-18 NOTE 11 - COMMITMENTS AND CONTINGENCIES LEGAL PROCEEDINGS The Company is a defendant in an action commenced by one of its vendors for non-payment in the amount of $588,000. The Company also has claims against it by several other vendors in the aggregate amount of $73,000. Both these amounts have been included in the liabilities of the Company. The Company is contesting the action and claims and is asserting a number of affirmative defenses on its behalf. The outcome of these proceedings cannot be determined with certainty. In August 2002, the Company reached a tentative resolution, subject to a formal executed agreement, to settle the action by payment of approximately $400,000. If consummated upon these terms, the Company will report a gain on troubled debt restructuring of approximately $225,000, less applicable legal costs, in the second quarter of the current fiscal year. It is the opinion of management that an unfavorable final determination of the action and claims 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. EMPLOYMENT AGREEMENTS The Company has employment agreements with its chief executive officer and another member of the management team. The agreements generally continue until terminated by the executive or the Company, and provide for severance payments under certain circumstances. As of March 31, 2002, if all of the employees under contract were to be terminated by the Company without good cause (as defined) under these contracts, the Company's liability would be approximately $160,000. LEASE COMMITMENTS The lease for the Company's Massachusetts headquarters expires in September 2004. As of March 31, 2002, future minimum lease payments to be paid under this operating lease are as follows: Year ending: March 31, 2003 $ 495 March 31, 2004 504 Thereafter 254 ---------- Total minimum lease payments $ 1,253 ========== Total rent expense, net of approximately $0 and $31,000 of sublease rental income, was approximately $342,000 and $488,000 for the years ended March 31, 2002 and 2001, respectively. MANAGEMENT CONSULTING ARRANGEMENT The Company entered into certain arrangements in November 2000 with Landsbury, LLP ("Landsbury"), wherein Landsbury had agreed to act as a management consultant to perform consulting services in exchange for the Company issuing Common Stock Purchase Warrants to purchase approximately 10% of the then issued and outstanding Common Stock of the Company at $.72 per share. The arrangement also provided for a member of Landsbury to enter into an employment agreement with the Company to act as its Chief Executive Officer ("CEO") and, among other things, to receive options to purchase 825,000 shares of Common Stock of the Company pursuant to the Company's Stock Option Plan. The stock options are included in the computation of the 10% noted above. During May 2001, the CEO resigned all positions held with the Company. Also during May 2001, two other members of Landsbury tendered their resignations as directors of the Company. None of the Common Stock Purchase Warrants have been issued to Landsbury. Neither the former CEO nor Landsbury have notified the Company that it has any claims under any agreements. In any event, the Company believes that it would have a meritorious defense to any claim or claims. F-19 NOTE 12 - EMPLOYEE BENEFIT PLAN INSCI maintains a defined contribution plan for the benefit of the Company's 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 2002 and 2001. NOTE 13 - STOCK OPTION PLANS EMPLOYEE STOCK OPTION PLANS The 1997 Equity Incentive Plan is the successor plan to the Company's 1992 Stock Option Plan, which was terminated in 1996. The outstanding options remain in effect according to their terms and conditions. Under the 1997 Equity Incentive Plan, the Company may grant incentive and nonqualified stock options to purchase up to an aggregate of 7,000,000 shares of common stock to directors, employees and consultants. Options may be granted at an exercise price of not less than 100 percent of the fair market value of the stock at the date of grant. Stock options become exercisable over varying dates as determined by the Board of Directors and expire no later than 10 years and one day from the date of the grant. DIRECTORS 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 at fair market value on the date of the grant 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. 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 ten 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. OTHER STOCK OPTIONS The Company does not have a formal plan in place for non-employees. However, from time to time, the Company, with the approval of the Board of Directors, grants stock options to non-employees. F-20 The following is a summary of stock option activity:
1992 STOCK OPTION PLAN DIRECTORS OPTION PLAN NUMBER WEIGHTED AVERAGE NUMBER WEIGHTED AVERAGE OF SHARES EXERCISE PRICE OF SHARES EXERCISE PRICE Outstanding at March 31, 2000 48,800 1.68 781,667 1.73 Granted - - 240,000 1.82 Cancelled (10,500) 1.68 (159,999) 3.09 ----------- ------------ Outstanding at March 31, 2001 38,300 1.68 861,668 1.50 Granted - - 120,000 0.08 Cancelled (13,000) 1.72 (241,667) 1.49 ----------- ------------ Outstanding at March 31, 2002 25,300 1.66 740,001 1.28 =========== ============ 1997 EQUITY INCENTIVE PLAN OTHER STOCK OPTIONS NUMBER WEIGHTED AVERAGE NUMBER WEIGHTED AVERAGE OF SHARES EXERCISE PRICE OF SHARES EXERCISE PRICE Outstanding at March 31, 2000 3,263,568 2.98 2,184,970 2.18 Granted 334,000 2.67 49,719 1.25 Cancelled (1,325,893) 3.49 (308,837) 2.00 Exercised (71,100) 1.20 (35,000) 2.15 ---------------- ---------------- Outstanding at March 31, 2001 2,200,575 2.69 1,890,852 2.19 Granted 115,000 0.19 -- -- Cancelled (530,488) 2.85 (215,000) 1.82 ---------------- ---------------- Outstanding at March 31, 2002 1,785,087 2.69 1,675,852 2.23 ================ ================
Options available for grant under the 1997 Equity Incentive Plan at March 31, 2002 are 4.6 million. Options available for grant under the Directors Option Plan at March 31, 2002 are 147,000. The following table summarizes information about stock options outstanding and exercisable at March 31, 2002.
1992 STOCK DIRECTORS 1997 EQUITY OTHER STOCK OPTION PLAN OPTION PLAN INCENTIVE PLAN OPTIONS Outstanding Option Price Range $1.66 - 1.94 $.08 - 3.35 $.08 - 7.54 $.72 - 5.09 Number of Shares 25,300 740,001 1,785,087 1,675,852 Weighted Average Life 3.4 2.3 3.2 1.0 Weighted Average Exercise Price $1.66 $1.28 $2.69 $2.23 Exercisable Number of Shares 25,300 533,335 1,568,417 1,675,852 Weighted Average Exercise Price $1.66 $.94 $2.59 $2.23
F-21 STOCK-BASED COMPENSATION All stock options and warrants that have been granted to employees and directors have been at or above fair market value of INSCI'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 its financial statements. The foregoing accounting is in accordance with APB Opinion No. 25, ACCOUNTING FOR STOCK ISSUED TO EMPLOYEES, and related interpretations. INSCI has adopted the disclosure provisions of SFAS No. 123, ACCOUNTING FOR STOCK-BASED COMPENSATION. Included below is the impact of the fair value of employee stock-based compensation plans on net income (loss) and earnings (loss) per share on a pro forma basis for awards granted pursuant to SFAS No. 123. Had compensation expense been determined as provided in SFAS No. 123 for stock options using the Black-Scholes option pricing model, the pro forma effect would have been (in thousands, except per share amounts): Fiscal 2002 Fiscal 2001 ----------- ----------- Net income (loss) applicable to common shareholders: As reported 155 (17,798) Pro forma 147 (19,242) Basic and diluted earnings (loss) per share: As reported 0.004 (1.162) Pro forma 0.004 (1.256) The fair value of each option grant is calculated using the following weighted average assumptions: FISCAL 2002 FISCAL 2001 ----------- ----------- Expected life (years) 5 5 Interest rate 5.00% 5.47% Volatility 226.00% 112.00% Dividend yield 0 0 The weighted average fair value of options granted during fiscal 2002 and 2001 was $.13 and $1.52, respectively. INSCI has issued stock options and warrants for services performed by outside organizations. The values of these options have been determined as provided in SFAS 123 for stock options using the Black-Scholes option pricing model resulting in charges to the Company's operating results of $0 and $117,000 for Fiscal 2002 and Fiscal 2001, respectively. NOTE 14 - SEGMENT AND CUSTOMER INFORMATION For the year ended March 31, 2002, sales made to two customers accounted for approximately 22% and 12% of the Company's total revenues. Amounts due from these customers were approximately 33% and 20% of the accounts receivable balance as of March 31, 2002. For the year ended March 31, 2001, sales made to two customers accounted for approximately 14% and 18% of the Company's total revenues. Amounts due from these customers were approximately 15% and 34% of the accounts receivable balance as of March 31, 2001. A decline in revenues from these customers in future periods could materially effect our revenues and operating results. The Company operates as a single reportable segment as a developer and seller of software for electronic document distribution, storage and presentment. F-22 Revenue was derived from customers in the following geographic areas (in thousands) YEAR ENDED MARCH 31, 2002 2001 --------------- ----------------- North America $7,166 $ 7,333 Europe 665 1,324 Other 652 1,358 --------------- ----------------- $8,483 $ 10,015 =============== ================= NOTE 15 - RESTRUCTURING AND OTHER CHARGES As a result of the Company's strategic redirection, INSCI has ceased operations of InfiniteSpace, IBC and UK, reduced operating expenses and has written down its investment in Lognet. These changes and the costs of closing InfiniteSpace, IBC and UK; along with other costs associated with the realignment of INSCI's strategy, have been charged to the operating results for Fiscal 2001. The major components of the charges were a write-down of $6.0 million for Lognet's goodwill, a $900,000 non-cash provision primarily related to equipment of terminated operations, $832,000 related to severance payments for approximately 20 terminated employees, $831,000 for lease termination costs and approximately $300,000 of other expenses associated primarily with the closure of InfiniteSpace and its data center. At March 31, 2002, the remaining accrual for restructuring costs was $560,000 for lease commitments and at this time, the remaining accrual appears to be adequate. NOTE 16 - FINANCIAL STATEMENT PRESENTATION Certain amounts in the Fiscal 2001 Consolidated Statements of Cash Flows have been reclassified to conform to the Fiscal 2002 presentation. F-23 -----END PRIVACY-ENHANCED MESSAGE-----