10QSB 1 t300807.txt 12/31/03 SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 --------------------------------------------------- FORM 10-QSB [X] Quarterly Report under Section 13 or 15d of the Securities Exchange Act of 1934 For the quarterly period ended: December 31, 2003 [ ] Transition report pursuant to Section 13 or 15d of the Securities Exchange Act of 1934 For the Transition period from to ------------------ ------------------ Commission file number: 1-12966 INSCI CORP. (Exact name of registrant as specified in its charter) DELAWARE 06-1302773 ------------------------------------ --------------------------------- (State of incorporation) (IRS employer identification number) Two Westborough Business Park Westborough, MA 01581 (Address of principal executive offices) Issuer's telephone number, including area code: (508) 870-4000 Check whether the issuer (1) filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No __ --- State the number of shares outstanding of each of the issuer's classes of common equity, as of the latest practicable date: TITLE OF EACH CLASS OUTSTANDING FEBRUARY 10, 2004 ------------------- ----------------------------- Common Stock, par value $.10 5,992,287 Transitional Small Business Disclosure Format (check one) Yes ___ No X - INSCI CORP. INDEX PAGE PART I FINANCIAL INFORMATION Item 1. Financial Statements Consolidated Balance Sheet as of December 31, 2003 3 Consolidated Statements of Operations for the Three Months and Nine Months Ended December 31, 2003 and 2002 5 Consolidated Statements of Stockholders' Deficit for the Nine Months Ended December 31, 2003 6 Consolidated Statements of Cash Flows for the Nine Months Ended December 31, 2003 and 2002 7 Notes to Consolidated Financial Statements 8 Item 2. Management's Discussion and Analysis or Plan of Operation 16 Item 3. Controls and Procedures 27 PART II OTHER INFORMATION Item 1. Legal Proceedings 27 Item 2. Change in Securities 28 Item 3. Defaults Upon Senior Securities 29 Item 4. Submission of Matters to a Vote of Security Holders 30 Item 5. Other Information 30 Item 6. Exhibits and Reports on Form 8-K 30 Signature 31 Certification pursuant to 18 U.S.C. Section 1350 as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 32 Certification pursuant to 18 U.S.C. Section 1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 33 -2-
INSCI CORP. CONSOLIDATED BALANCE SHEET DECEMBER 31, 2003 (UNAUDITED) (in thousands, except per share amounts) ASSETS Current assets: Cash $1,214 Accounts receivable, net of allowance for doubtful accounts of $10 1,550 Prepaid expenses and other current assets 425 ------ Total current assets 3,189 Property and equipment, net 984 Goodwill 1,174 Other assets 141 ------ $5,488 ====== THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED FINANCIAL STATEMENTS.
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INSCI CORP. CONSOLIDATED BALANCE SHEET DECEMBER 31, 2003 (UNAUDITED) (in thousands, except per share amounts) LIABILITIES AND STOCKHOLDERS' DEFICIT Current liabilities: Accounts payable $ 612 Accrued expenses 1,254 Advances against receivables sold with recourse 682 Deferred revenue 2,191 Convertible debt, current portion 647 Capital leases, current portion 88 -------- Total current liabilities 5,474 -------- Long term liabilities: Long term convertible debt, net of current portion 1,118 Capital leases, net of current portion 61 -------- Total long term liabilities 1,179 -------- Commitments and contingencies Total liabilities 6,653 -------- Stockholders' deficit: Series A Convertible Preferred Stock, $.01 par value, authorized 2,500 shares: issued none -- Series B Convertible Preferred Stock, $.01 par value, authorized 4,317 shares: issued and outstanding 123 1 Series C Convertible Preferred Stock, $.01 par value, authorized 3,183 shares: issued and outstanding 1,804 18 8% Convertible Redeemable Preferred Stock, $.01 par value, originally authorized 3,192 shares: issued and outstanding 74 1 Common stock, $.10 par value, authorized 185,000 shares: issued and outstanding 5,992 599 Additional paid-in capital 52,548 Accumulated deficit (54,332) -------- Total stockholders' deficit (1,165) -------- $ 5,488 ======== THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED FINANCIAL STATEMENTS.
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INSCI CORP. CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED) (in thousands, except per share amounts) THREE MONTHS ENDED NINE MONTHS ENDED DECEMBER 31, DECEMBER 31, 2003 2002 2003 2002 -------- -------- -------- -------- Revenue Product $ 603 $ 1,191 $ 2,153 $ 3,005 Services 1,626 1,340 3,944 4,076 -------- -------- -------- -------- Total revenue 2,229 2,531 6,097 7,081 -------- -------- -------- -------- Cost of revenue Product 34 24 115 111 Services 743 290 1,428 946 -------- -------- -------- -------- Total cost of revenue 777 314 1,543 1,057 -------- -------- -------- -------- Gross profit 1,452 2,217 4,554 6,024 -------- -------- -------- -------- Expenses Sales and marketing 873 575 2,167 1,601 Product development 958 514 2,268 1,429 General and administrative 775 527 1,649 1,561 Non-recurring items -- -- 380 -- -------- -------- -------- -------- 2,606 1,616 6,464 4,591 -------- -------- -------- -------- Operating income (loss) (1,154) 601 (1,910) 1,433 Interest expense, net (130) (155) (338) (463) -------- -------- -------- -------- Income (loss) before extraordinary item (1,284) 446 (2,248) 970 Extraordinary item - Gain from extinguishment of certain debt -- -- -- 192 -------- -------- -------- -------- Net income (loss) $ (1,284) $ 446 $ (2,248) $ 1,162 ======== ======== ======== ======== Basic earnings (loss) per common share Income (loss) before extraordinary item $ (0.228) $ 0.085 $ (0.433) $ 0.184 Extraordinary item 0.000 0.000 0.000 0.035 -------- -------- -------- -------- Total $ (0.228) $ 0.085 $ (0.433) $ 0.219 ======== ======== ======== ======== Diluted earnings (loss) per common share Income (loss) before extraordinary item $ (0.228) $ 0.047 $ (0.433) $ 0.109 Extraordinary item 0.000 0.000 0.000 0.019 -------- -------- -------- -------- Total $ (0.228) $ 0.047 $ (0.433) $ 0.128 ======== ======== ======== ======== Weighted average shares outstanding: Basic 5,992 5,276 5,583 5,276 ======== ======== ======== ======== Diluted 5,992 10,293 5,583 9,915 ======== ======== ======== ======== THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED FINANCIAL STATEMENTS.
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INSCI CORP. CONSOLIDATED STATEMENT OF STOCKHOLDERS' DEFICIT FOR THE NINE MONTHS ENDED DECEMBER 31, 2003 (UNAUDITED) (in thousands, except per share amounts) Additional Accum- Preferred Stock Common Stock Paid-in ulated Shares Amount Shares Amount Capital Deficit Total ------ ------ ------ ------ ------- ------- ----- BALANCE, MARCH 31, 2003 197 $ 2 5,276 $ 527 $ 48,338 $(51,917) $ (3,050) Issuance of Series C preferred shares 1,804 18 -- -- 3,482 -- 3,500 Issuance of common shares for purchase of net assets of WebWare Corporation -- -- 716 72 728 -- 800 Series B preferred dividend -- -- -- -- -- (123) (123) Series C preferred dividend -- -- -- -- -- (44) (44) Net (loss) -- -- -- -- -- (2,248) (2,248) -------- -------- -------- -------- -------- -------- -------- BALANCE, DECEMBER 31, 2003 2,001 $ 20 5,992 $ 599 $ 52,548 $(54,332) $ (1,165) ======== ======== ======== ======== ======== ======== ======== THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED FINANCIAL STATEMENTS.
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INSCI CORP. CONSOLIDATED STATEMENTS OF CASH FLOWS NINE MONTHS ENDED DECEMBER 31, 2003 AND 2002 (UNAUDITED) (in thousands, except per share amounts) 2003 2002 ------- ------- Cash flows from operating activities: Net income (loss) $(2,248) $ 1,162 Reconciliation of net income (loss) to net cash (used in) provided by operating activities: Depreciation and amortization 152 123 Non-cash restructuring and other charges (180) -- Convertible debentures issued for services -- 130 Gain from extinguishment of certain debt -- (192) Changes in assets and liabilities: Accounts receivable 780 (601) Prepaid expenses and other current assets (6) (77) Other assets 31 3 Accounts payable and accrued expenses (153) (173) Deferred revenue (15) 440 ------- ------- Net cash (used in) provided by operating activities (1,639) 815 ------- ------- Cash flows from investing activities: Purchase of net assets of WebWare Corporation (627) -- Capital expenditures (207) (76) ------- ------- Net cash used in investing activities (834) (76) ------- ------- Cash flows from financing activities: Proceeds from issuance of Series C preferred stock 3,500 -- Repayments on long term convertible debt (252) -- Repayments on long term debt -- (14) Repayments on capital leases (33) -- Repayments on short term debt -- (304) Net advances (repayments) from sale of receivables (176) 775 Series B preferred dividends paid (123) -- ------- ------- Net cash provided by financing activities 2,916 457 ------- ------- Net increase in cash 443 1,196 Cash, beginning of period 771 412 ------- ------- Cash, end of period $ 1,214 $ 1,608 ======= ======= THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED FINANCIAL STATEMENTS.
-7- INSCI CORP. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited) NATURE OF BUSINESS AND BASIS OF PRESENTATION The consolidated financial statements included in this report have been prepared by INSCI Corp., (the "Company" or "INSCI"), without audit, pursuant to the rules and regulations of the Securities and Exchange Commission regarding interim financial reporting. Certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America have been condensed or omitted pursuant to such rules and regulations. However, the Company believes that the disclosures contained herein are adequate to make the information presented not misleading. The financial statements should be read in conjunction with the financial statements and notes thereto included in the Company's annual report on Form 10-KSB for the fiscal year ended March 31, 2003. The results of the three months and nine months ended December 31, 2003 may not be indicative of the results that may be expected for the year ending March 31, 2004. INSCI Corp., formerly known as insci-statements.com, corp. ("INSCI") develops and markets certain software and services for the enterprise content management (ECM) market. The Company's products are distributed on an international basis. In the opinion of the management of the Company, the accompanying unaudited financial statements reflect all adjustments (of a normal and recurring nature) that are necessary to present fairly the financial position of the Company as of December 31, 2003 and the results of operations for the three and nine months ended December 31, 2003 and 2002 and cash flows for the nine months ended December 31, 2003. The accompanying consolidated financial statements for the three months and nine months ended December 31, 2003 and 2002 include the operations of INSCI and its wholly-owned subsidiaries, WCORP, Inc. ("WCORP") and Lognet 2000, Inc. ("Lognet"). WCORP was established August 26, 2003 to acquire certain assets and liabilities of WebWare Corporation ("WebWare"). WCORP acquired certain assets and assumed certain liabilities of WebWare on September 5, 2003; and as such the financial results of the Company include the results of WCORP from September 5, 2003 forward. Additional subsidiaries of the Company are InfiniteSpace.com, Corp. ("InfiniteSpace"), The Internet Broadcasting Company, Inc. ("IBC") and INSCI (UK) Limited, all of which are no longer active. All significant intercompany transactions and balances have been eliminated in the preparation of these financial statements. RECENTLY ISSUED ACCOUNTING STANDARDS In December 2003, the Financial Accounting Standards Board ("FASB") issued a revised FASB Interpretation ("FIN") No. 46, CONSOLIDATION OF VARIABLE INTEREST ENTITIES. FIN No. 46R addresses consolidation by business enterprises of variable interest entities and significantly changes the application of consolidation policies to variable interest entities and thus, improves comparability between enterprises engaged in similar activities when those activities are conducted through variable interest entities. The Company does not hold any variable interest entities. In May 2003, the FASB issued Statement of Financial Accounting Standards ("SFAS") No. 150, ACCOUNTING FOR CERTAIN FINANCIAL INSTRUMENTS WITH CHARACTERISTICS OF BOTH LIABILITIES AND EQUITY. SFAS No. 150 requires that certain financial instruments, which under previous guidance were accounted for as equity, must now be accounted for as liabilities. The financial instruments affected include mandatorily redeemable stock, certain financial instruments that require or may require the issuer to buy back some of its shares in exchange for cash or other assets and certain obligations that can be settled with shares of stock. Subsequently, FASB Staff Position 150-3 indefinitely deferred certain classification and measurement requirements of SFAS No. 150. SFAS No. 150 is effective for all financial instruments entered into or modified after May 31, 2003 and must be applied to existing instruments for the first interim period beginning after June 15, 2003. The adoption of SFAS No.150 had no effect on the Company's financial position, results of operations, or cash flows. -8- ACQUISITION On September 5, 2003, the Company's wholly owned subsidiary, WCORP, acquired certain assets and assumed certain liabilities of WebWare Corporation ("WebWare") from Diablo Management Group, as assignee for the benefit of creditors of WebWare. The total purchase price was $1.3 million. Additionally, the Company incurred closing costs of $127,000. The Company paid cash of $500,000 and issued 716,204 shares of its common stock valued at $800,000. The Company has granted registration rights for these shares, which are subject to a lock up agreement. This transaction has been accounted for as a purchase and accordingly, the operating results have been included in the Company's consolidated results of operations from the date of acquisition. The allocation of the purchase price is preliminary and subject to revision, which is not expected to be material, based on the fair value of net assets acquired. The components of the purchase price and allocation are as follows (in thousands): PURCHASE PRICE: Cash $ 500 716,204 shares of INSCI common stock 800 Acquisition costs 127 ------ Total consideration plus acquisition costs $1,427 ====== ALLOCATION OF PURCHASE PRICE: Fair value of assets acquired, net of $739 in liabilities assumed $ 253 Purchase price in excess of fair value of net assets acquired allocated to goodwill 1,174 ------ Total $1,427 ====== Goodwill, in accordance with SFAS No. 142, will be tested for impairment annually and whenever there is an impairment indicator. Unaudited proforma operating results for the nine months ended December 31, 2003 and 2002 for the Company, assuming the purchase of the assets of WebWare occurred on March 31, 2002, are as follows (in thousands): NINE MONTHS ENDED DECEMBER 31, 2003 2002 Revenue $ 6,686 $ 7,336 Income (loss) from continuing operations (4,531) (3,005) Basic and diluted loss per share from continuing operations (0.812) (0.570) STOCKHOLDERS' DEFICIT There were 185,000,000 shares of common stock with a par value of $.01 authorized and 59,923,340 shares issued and outstanding at December 31, 2003. On January 2, 2004, the Company effected a 1:10 reverse stock split resulting in a nine-tenths reduction in the number of shares issued. After the reverse stock split there were 5,992,287 shares of common stock outstanding with a par value of $.10. The number of authorized shares of common stock was not affected. All share and per share references for all periods presented have been restated to reflect the reverse stock split. -9- PAGE> EARNINGS (LOSS) PER COMMON SHARE Basic earnings (loss) per common share was computed by dividing net income (loss) applicable to common shares by the weighted average number of common shares outstanding during the period. Diluted earnings (loss) per common share was calculated by dividing net income (loss) by the sum of the weighted average number of common shares outstanding plus all additional common shares that would have been outstanding if potentially dilutive common shares had been issued. For the three months and nine months ended December 31, 2003, approximately 10.7 million and 8.3 million, respectively, of shares from stock options, warrants and convertible securities were excluded due to their anti-dilutive effect. Additionally, for the three months and nine months ended December 31, 2003, approximately 200,000 shares from stock options and warrants were excluded because their exercise price exceeded market value. For the three months and nine months ended December 31, 2002, approximately 700,000 shares from stock options, warrants and convertible securities were excluded because their exercise price exceeded market value.
The income (loss) used in determining basic and diluted earnings per shares consisted of the THREE MONTHS ENDED NINE MONTHS ENDED following: DECEMBER 31, DECEMBER 31, 2003 2002 2003 2002 ------- ------- ------- ------- BASIC Net income (loss) $(1,284) $ 446 $(2,248) $ 1,162 Preferred Stock dividend (83) -- (167) -- ------- ------- ------- ------- $(1,367) $ 446 $(2,415) $ 1,162 ======= ======= ======= ======= DILUTED Net income (loss) $(1,284) $ 446 $(2,248) $ 1,162 Interest expense for Convertible debt with Series B Convertible Redeemable Preferred Stock -- 33 -- 114 Preferred Stock dividend (83) -- (167) -- ------- ------- ------- ------- $(1,367) $ 479 $(2,415) $ 1,276 ======= ======= ======= ======= A reconciliation from the number of shares used in the basic earnings (loss) per share computation to the number of shares used in the diluted earnings (loss) THREE MONTHS ENDED NINE MONTHS ENDED per share computation is as follows: DECEMBER 31, DECEMBER 31, 2003 2002 2003 2002 ------ ------ ------ ------ Weighted average shares of common stock outstanding during the period - Basic 5,992 5,276 5,583 5,276 8% Convertible Redeemable Preferred Stock -- 142 -- 142 Convertible debt with Series B Convertible Redeemable Preferred Stock -- 4,875 -- 4,497 ------ ------ ------ ------ 5,992 10,293 5,583 9,915 ====== ====== ====== ======
MAJOR CUSTOMERS For the nine months ended December 31, 2003, sales to two customers accounted for approximately 17% and 11% of total revenue and accounted for 11% and 12%, respectively, of the Company's accounts receivable at December 31, 2003. For the three months ended December 31, 2003, sales to one customer represented approximately 15% of total revenue. -10- SEGMENT INFORMATION The Company operates as a single reportable segment as a developer and distributor of software solutions for the enterprise content management (ECM) market. Revenue was derived from customers in the following geographic areas (in thousands) THREE MONTHS ENDED NINE MONTHS ENDED DECEMBER 31, DECEMBER 31, 2003 2002 2003 2002 ---- ---- ---- ---- North America $1,921 $1,906 $5,301 $6,018 Europe 190 335 421 583 Other 118 290 375 480 ------ ------ ------ ------ $2,229 $2,531 $6,097 $7,081 ====== ====== ====== ====== ADVANCES AGAINST RECEIVABLES SOLD WITH RECOURSE During May 2002, the Company entered into an agreement with a commercial financing company, which provides for the sale of all of the eligible domestic accounts receivable of the Company with recourse. Pursuant to the terms of the agreement, the Company will receive 80% of the face amount of the accepted account and will be charged a commission equal to 2.25% of the accepted amount. The Company granted to the financing company a security interest in all of the Company's assets and accounts receivable. CONVERTIBLE DEBT The Series A Debentures bear an interest rate of 10% per annum with principal and interest payments of $45,000 per month, $65,000 per month and $80,000 per month in each successive twelve month period commencing December 1, 2002 and a final payment of approximately $308,000 due December 1, 2005. The Series A Debentures are secured by a subordinated lien on all of the Company's assets. Unless previously converted into shares of Series A Preferred, principal and accrued interest on Convertible Debentures is payable by redemption at the option of the investors at any time after March 31, 2004. As of December 31, 2003, the Convertible Debt is convertible into Series A Convertible Redeemable Preferred Stock (the "Series A Preferred"), which is in turn convertible into 1,604,858 shares of the Company's Common Stock at a price of $1.10 per share. This financing may result in dilution to INSCI's stockholders. Long-term convertible debt as of December 31, 2003 is as follows (in thousands): Series A Convertible Debentures $1,765 Less: current portion 647 ---------- $1,118 ========== Future payments required under the terms of the long-term convertible debt are as follows (in thousands): YEAR ENDING MARCH 31, 2004 $ 152 2005 708 2006 905 --------- $1,765 ========= -11- SERIES C CONVERTIBLE PREFERRED STOCK On December 31, 2003, the Company entered into an agreement with CSSMK, LLC ("CSSMK"), an entity which is majority owned by Henry F. Nelson, the Company's President and Chief Executive Officer, wherein CSSMK purchased 257,785 shares of Series C Convertible Preferred Stock ("Series C Preferred") for the sum of $500,000 or $1.9396 per share. The 257,785 shares of Series C Preferred are convertible on a 2:1 basis into 515,570 shares of common stock at the option of the holder. In connection with this agreement, CSSMK entered in to a Stockholder's Agreement with SCP Private Equity Partners II, LP ("SCP"). (See Related Party Transactions) On September 5, 2003, the Company and SCP, a private equity fund, entered into an agreement wherein SCP agreed to purchase 1,546,711 shares of Series C Preferred in the Company at a price of $1.9396 per share for a total of $3 million. SCP purchased 515,571 shares on closing for the sum of $1 million. As of December 31, 2003, the Company had received the balance of $2 million from SCP and had issued 1,031,140 shares of its Series C Preferred to SCP. The 1,546,711 shares of Series C Preferred are convertible on a 2:1 basis into 3,093,422 shares of common stock at the option of the holder. This conversion may result in dilution to INSCI's stockholders. Series C Preferred provides for annual cumulative dividends at 8% of the original issue price of $1.9396 per share, payable semi-annually in cash or in additional shares of Series C Preferred at the company's option. Holders of shares of Series C Preferred shall be entitled to vote equally with the shares of the Company's common stock and not as a separate class, at any annual or special meeting of stockholders of the Company on the following basis: each holder of shares of Series C Preferred shall be entitled to such number of votes as shall be equal to the number of shares of Common Stock into which the holder's Series C Preferred shares would convert immediately after the close of business on the record date fixed for such meeting. In addition, the holders of shares of Series C Preferred shall be entitled as a separate single class to elect two members to the Board at each election of directors. In the event of any liquidation, whether voluntary of involuntary, before any distribution or payment shall be made to any holders of any junior stock, the holders of Series C Preferred shall be entitled to be paid out of the assets of the Company an amount per share equal to the greater of (a) 200% of the Series C original issue price plus an amount equal to all accrued and unpaid dividends or (b) the price per share a holder of Series C Preferred would have been entitled to receive had all shares of outstanding preferred stock been converted into common stock immediately preceding such liquidation. The Series C Preferred provides for anti-dilution protection. All outstanding shares of Series C Preferred may be redeemed, out of legally available funds, at the request of holders of a majority in interest of the Series C Preferred on September 1, 2009. As a part of the investment agreement with SCP for the purchase of the Series C Preferred, the Company amended its agreements with Selway Partners LLC ("Selway") and CIP Capital LP ("CIP") with respect to the rights associated with the Company's Series A and Series B convertible preferred stock. Selway is an affiliate of SCP in that SCP is the majority shareholder of Selway and CIP is an affiliate of SCP in that Mr. Winston Churchill is a managing partner in both. SERIES B CONVERTIBLE PREFERRED STOCK On December 8, 2003, the Company filed an Amended and Restated Certificate of Designation of the Preferred Stock in connection with the designation of the rights and preferences for the Series B Convertible Preferred Stock ("Series B Preferred"), which modified and clarified the rights and preferences of the Company's Series B Preferred. Series B Preferred is convertible on a 70:1 basis. As of December 31, 2003, the Company has issued 123,344 shares of its Series B Preferred, which is convertible into 8,634,080 shares of the Company's common stock. This modifies the earlier designations in which Series B Preferred was convertible as follows: (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 or exercise of other convertible instruments. -12- Series B Preferred provides for annual cumulative dividends at 1.915% of the original issue price of $67.886 per share, payable monthly in cash or in additional shares of Series C Preferred at the holder's option. Holders of shares of Series B Preferred shall be entitled to vote equally with the shares of the Company's common stock and not as a separate class, at any annual or special meeting of stockholders of the Company on the following basis: each holder of shares of Series B Preferred shall be entitled to such number of votes as shall be equal to the number of shares of Common Stock into which the holder's Series B Preferred shares would convert immediately after the close of business on the record date fixed for such meeting. In addition, the holders of shares of Series B Preferred shall be entitled as a separate single class to elect two members to the Board at each election of directors. In the event of any liquidation, whether voluntary of involuntary, before any distribution or payment shall be made to any holders of any junior stock, the holders of Series B Preferred shall be entitled to be paid out of the assets of the Company an amount per share equal to the greater of (a) 51.6% of the Series B original issue price, which is equivalent to 350% of the original investment, plus an amount equal to all accrued and unpaid dividends or (b) the price per share a holder of Series B Preferred would have been entitled to receive had all shares of outstanding preferred stock been converted into common stock immediately preceding such liquidation. The Series B Preferred provides for anti-dilution protection. All outstanding shares of Series B Preferred may be redeemed, out of legally available funds, at the request of holders of at least 25% of the Series B Preferred on March 31, 2006. SERIES A CONVERTIBLE PREFERRED STOCK On December 8, 2003, the Company filed an Amended and Restated Certificate of Designation of the Preferred Stock in connection with the designation of the rights and preferences for the Series A Convertible Preferred Stock ("Series A Preferred"), which clarified the rights and preferences of the Company's Series A Preferred. The Company has not issued any shares of Series A Preferred. Series A Preferred, when issued, would be convertible into common stock on a 1.181818:1 basis. Series A Preferred provides for annual cumulative dividends at an annual floating rate equal to prime plus 2.5% of the original issue price of $1.30 per share, payable at the end of each fiscal quarter in shares of Series A Preferred. Holders of shares of Series A Preferred shall be entitled to vote equally with the shares of the Company's common stock and not as a separate class, at any annual or special meeting of stockholders of the Company on the following basis: each holder of shares of Series A Preferred shall be entitled to such number of votes as shall be equal to the number of shares of Common Stock into which the holder's Series A Preferred shares would convert immediately after the close of business on the record date fixed for such meeting. In addition, the holders of shares of Series A Preferred shall be entitled as a separate single class to elect three members to the Board at each election of directors. In the event of any liquidation, whether voluntary of involuntary, before any distribution or payment shall be made to any holders of any junior stock, the holders of Series A Preferred shall be entitled to be paid out of the assets of the Company an amount per share equal to the greater of (a) the Series A original issue price plus an amount equal to all accrued and unpaid dividends or (b) the price per share a holder of Series A Preferred would have been entitled to receive had all shares of outstanding preferred stock been converted into common stock immediately preceding such liquidation. The Series A Preferred provides for anti-dilution protection. All outstanding shares of Series A Preferred may be redeemed, out of legally available funds, at the request of holders of a at least 25% of the Series A Preferred on a date that is five years following the Company's first issuance of Series A Preferred Stock. -13- RELATED PARTY TRANSACTIONS Pursuant to the purchase by CSSMK of 257,785 shares of Series C Preferred Stock for the sum of $500,000, CSSMK entered into a Stockholders Agreement with SCP, wherein the transfer and assignment of its Series C Preferred Stock is restricted pursuant to the terms of the Stockholders Agreement, which also grants SCP rights of first refusal and certain voting rights. CSSMK may be deemed an affiliate of SCP as a result of the agreement entered into by and between CSSMK and SCP whereby CSSMK agrees to vote in accordance with SCP on certain matters as stated in the agreement. Henry F. Nelson, Chief Executive Officer and President of the Company, is a majority owner of CSSMK. The Company incurred interest expense on its convertible debt during the three months ended December 31, 2003 and 2002 of approximately $45,000 and $94,000, respectively, and for the nine months ended December 31, 2003 and 2002 in the amounts of approximately $143,000 and $271,000, respectively. This debt is held by Selway and CIP, both related parties. Selway is a related party of INSCI in that two of INSCI's five board of directors' members are affiliated with Selway. CIP is a related party of INSCI in that it is an affiliate of SCP, which is a related party of INSCI. Payments on the convertible debt during the three months and nine months ended December 31, 2003 totaled $155,000 and $380,000, respectively, for principal and interest. The Company paid dividends in the amount of approximately $54,000 and $122,000, respectively, to shareholders of its Series B Preferred during the three months and nine months ended December 31, 2003. The Series B Preferred is held by Selway and Selway Management, Inc. and CIP, all related parties. The Company accrued dividends of $44,000 on its Series C Preferred, held by SCP and CSSMK, related parties, for the period ended December 31, 2003. Accrued dividends are included under the caption of accrued expenses as of December 31, 2003 in the accompanying consolidated balance sheet. SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION NINE MONTHS ENDED DECEMBER 31, 2003 2002 ------------------- Cash paid for interest $ 330 $ 168 Noncash investing and financing activities: Common Stock issued in connection with the purchase of certain assets of WebWare 800 -- Capital lease obligations assumed with the purchase of certain assets of WebWare 181 -- Goodwill and other assets acquired in connection with the purchase of certain assets of WebWare 1,898 -- Common Stock issued for the conversion of 8% Convertible Redeemable Preferred Stock -- 114 Conversion of trade payable to long term debt -- 169 STOCK-BASED COMPENSATION The Company has elected to follow Accounting Principles Board Opinion ("APB") No. 25, ACCOUNTING FOR STOCK ISSUED TO EMPLOYEES, and related interpretations in accounting for its employee stock options. Under APB No. 25, when the exercise price of employee stock options is equal to or greater than the market price of the underlying stock on the date of grant no compensation expense is recorded. The Company discloses information relating to the fair value of stock-based compensation awards in accordance with SFAS No. 123, ACCOUNTING FOR STOCK-BASED COMPENSATION. No stock options or warrants were granted to employees during the nine months ended December 31, 2003 and 2002. -14- COMMITMENTS AND CONTINGENCIES LEGAL PROCEEDINGS The Company is a defendant in an action commenced by one of its customers for the return of certain pre-petition payments made prior to the customer's bankruptcy petition in the amount of approximately $121,000. The Company is contesting the action and is asserting a number of affirmative defenses on its behalf. The outcome of these proceedings cannot be determined with certainty. The Company does not believe that the resolution of this matter will have a material adverse effect on the Company's consolidated financial position or results of operations. EMPLOYMENT AGREEMENTS On December 31, 2003, effective as of April 1, 2003, the Company entered into an Amended and Restated Employment Agreement with Henry F. Nelson for a period of three years. The Employment Agreement provides for a base salary of $350,000 per annum and an annual bonus equal to 10% of the Company's operating income for each fiscal year, as reported in its annual audited financial statements, subject to adjustment for any non-recurring items as determined by the Compensation Committee. The Company's Compensation Committee and its Board of Directors approved the Employment Agreement. Additionally, the Company further agreed, subject to stockholders approval to increase the number of shares reserved under the Company's 1997 Equity Incentive Plan to 3,000,000 shares of common stock, to grant stock options to Mr. Nelson in the form of three successive grants aggregating 1,469,378 pre-split shares of the Company's Common Stock at an exercise price of $1.00 per share as follows: (i) 489,793 shares fully vested on the date of the grant;(ii) an option to purchase 489,792 shares, of which 163,264 shares shall vest on each successive anniversary of the date of the grant for three years; and (iii) an option to purchase 489,793 shares of Common Stock which shall become fully vested upon the date the Common Stock has averaged a price of at least $3.00 per share for any 60 consecutive day period as quoted in the Over the Counter market. LEASE COMMITMENTS On October 30, 2003, the Company entered into an operating lease for office space, which expires in April 2011. The lease provides for base rent, as well as a proportionate share of increases in real estate taxes and operating expenses over base period amounts. The minimum monthly payments under the operating lease commence as of February 2005. The Company will relocate to this office space before March 31, 2004. Rent is expensed on a straight-line basis over the term of the operating lease. Minimum payments for the leased property for subsequent years are as follows (in thousands): YEAR ENDING MARCH 31, 2004 $ -- 2005 64 2006 413 2007 441 2008 441 2009 441 2010 468 2011 496 2012 41 ------------ $2,805 ============ -15- Minimum payments for subsequent years under the operating lease for its currently occupied office space, which expires September 30, 2004, are as follows (in thousands): YEAR ENDING MARCH 31, 2004 $ 127 2005 254 -------- $ 381 ======== The Company sublets portions of its office space under sublease arrangements, which expire September 30, 2004. Minimum future sublease income for subsequent years is as follows (in thousands): YEAR ENDING MARCH 31, 2004 $ 39 2005 78 --------- $ 117 ========= NON-RECURRING ITEMS For the nine months ended December 31, 2003, non-recurring charges totaling $380,000 have been charged to operating results. These charges, consisting primarily of severance, relocation and moving expenses, will be incurred as part of a plan to realign the operations of the Company's newly formed subsidiary's operations. ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION The following discussion of management's analysis of operations for the three months ("Third Quarter of Fiscal 2004") and nine months ("First Three Quarters of Fiscal 2004") ended December 31, 2003 and the three months ("Third Quarter of Fiscal 2003") and nine months ("First Three Quarters of Fiscal 2003) ended December 31, 2002, and discussion of financial condition at December 31, 2003, should be read in conjunction with the financial statements and notes thereto contained elsewhere in this report. INSCI is a leading provider of solutions to the enterprise content management (ECM) market. INSCI's highly scalable solutions provide storage, access and presentment for mission-critical documents, reports, statements, e-mail and high value digital assets necessary for business functions or regulatory compliance. The industry recognized highly scalable archive solution supports high volume ingestion, digital asset preservation, and on-line presentment and delivery functions via internal networks or via the World Wide Web. With the addition of web-enabled capabilities, INSCI's customers can take advantage of e-commerce to improve communication, customer satisfaction and productivity while decreasing costs. For over ten years INSCI has been recognized for its ability to capture and store high volumes of electronic information. The Company recently acquired certain assets and liabilities of WebWare, a leading provider of content management solutions for the digital asset management (DAM) market. These advanced solutions offer broad management capability for rich media content such as video, voice, audio, graphics and related media. INSCI was originally founded to capture and preserve high volumes of mission critical business information. The Company's product offering includes web-based presentment capabilities for documents such as bank statements, 401(k) statements, customer and vendor statements, explanation of benefits (EOB's) and transaction confirmation documents. The Company has expanded its product offerings to include e-mail archiving and notification capabilities as well as the ability to capture, store and deliver high value digital assets such as spreadsheets, word documents, presentations and schedules. This offers our customers the ability to provide increased internal communication, productivity improvements and improved customer satisfaction and communication. With the addition of the WebWare ActiveMedia(TM) product offering the Company has substantially expanded its digital archive and rich media asset management capabilities and supports business efforts such as video and voice on demand, product launches, global marketing efforts, rich asset management and brand management. -16- The ESP+(TM) archive solution provides a robust platform to meet the demands of high-volume desktop and Internet-based content retrieval by thousands of users. The ESP+(TM) Solution Suite is built on a three tier scalable architecture and will support multiple platforms. Access to archived content is offered through both Windows-client and browser-based desktop solutions. Additionally, an industry-standard Java-based Application Program Interface (API) offers seamless integration with third-party applications, such as Websites, Customer Relationship Management (CRM), service providers, and Healthcare Information Technology (HIT) providing a platform for expanded market presence. ActiveMedia(TM) provides a secure, central repository where rich media files such as images, documents, video, animation, voice and other formats of rich media are required to be organized and stored, and may be delivered to desktops, websites, print publications, video on demand as they are needed. The application is offered as a standard licensed application and is also available in a web based hosted environment on a subscription basis.. The flexible J2EE based design offers a scaleable three-tier architecture that takes advantage of industry standard Web Services description language and a standard operating access protocol (SOAP) application program interface (API). The advanced interoperability architecture offers substantially increased market opportunities through the seamless integration with other third party application services providers. Sales to end-users generally include software license, professional services and maintenance contracts. Additionally, the ActiveMedia(TM) product is offered under a web based hosting contract. ASP-enabling sales typically include recurring revenues that are transaction based. As a long-standing provider of advanced and cost-effective solutions, INSCI has licenses at more than 500 companies across a host of industries - including financial services, telecommunications, insurance, utilities, manufacturing, healthcare, media, pharmaceutical and global product marketing companies - enhancing their bottom-line performance through highly-scalable fixed content and rich media asset management and electronic presentment applications. Since the archive and presentment solution is vertically non-specific, the Company's market opportunity is broad. INSCI also markets and licenses products on an international basis through its Alliance Partners. INSCI's strategic relationships include Unisys Corporation, Xerox Corporation, EMC, PFPC and IFIN Sistemi. Our revenues fluctuate because of a variety of factors including the amount of revenue generated from our alliances with other companies selling our products, the length of the sales cycle for our products, seasonality, capital spending trends, demand for our products, the introduction of new products and product enhancements and general economic conditions. -17- COMPARISON OF RESULTS OF OPERATIONS The following table sets forth, for the periods indicated, the percentage relationship that certain items of the Company's results of operations bear to total revenue: THREE MONTHS NINE MONTHS ENDED ENDED DECEMBER 31, DECEMBER 31, 2003 2002 2003 2002 % % % % Revenues Product 27 47 35 42 Services 73 53 65 58 ---- ---- ---- ---- Total revenues 100 100 100 100 ---- ---- ---- ---- Cost of revenues Product 2 1 2 2 Services 33 11 23 13 ---- ---- ---- ---- Total cost of revenues 35 12 25 15 ---- ---- ---- ---- Gross profit 65 88 75 85 ---- ---- ---- ---- Expenses Sales and marketing 39 23 36 23 Product development 43 20 37 20 General and administrative 35 21 27 22 Non-recurring item -- -- 6 -- ---- ---- ---- ---- Total expenses 117 64 106 65 ---- ---- ---- ---- Operating income (loss) (52) 24 (31) 20 Interest expense, net (6) (6) (6) (7) ---- ---- ---- ---- Income (loss) before extraordinary item (58) 18 (37) 13 Extraordinary item -- -- -- 3 ---- ---- ---- ---- Net income (loss) (58) 18 (37) 16 ==== ==== ==== ==== The following tables compare total revenues for the periods indicated (in thousands):
THREE MONTHS ENDED DECEMBER 31, 2003 2002 % CHANGE ------------------------------------- Product revenues $ 603 $ 1,191 (49)% Professional services 346 318 9 Maintenance and hosting contract revenues 1,280 1,022 25 --------- ----------- Total revenues $ 2,229 $ 2,531 (12) ========= =========== NINE MONTHS ENDED DECEMBER 31, 2003 2002 % CHANGE ------------------------------------- Product revenues $ 2,153 $ 3,005 (28)% Professional services 670 874 (23) Maintenance and hosting contract revenues 3,274 3,202 2 --------- ------------- Total revenues $ 6,097 $ 7,081 (14) ========= =============
-18- THIRD QUARTER OF FISCAL 2004 AS COMPARED TO THIRD QUARTER OF FISCAL 2003: REVENUES Revenues for the Third Quarter of Fiscal 2004 totaled $2.2 million and decreased by $302,000 or 12% compared to revenues of $2.5 million for the Third Quarter of Fiscal 2003. The current quarter revenues include $556,000 from WCORP. Product revenues decreased by $588,000 or 49% to $603,000 in the Third Quarter of Fiscal 2004 as compared to $1.2 million in the Third Quarter of Fiscal 2003. Professional service revenues of $346,000 increased $28,000, or 9%, in the Third Quarter of Fiscal 2004 as compared to $318,000 in the Third Quarter of Fiscal 2003. Maintenance and hosting revenues increased $258,000, or 25%, compared to the Third Quarter of Fiscal 2003. Maintenance contract revenues are earned ratably over the term of the contract commencing upon receipt of payment or when other acceptance is received. Hosting contract revenues are earned ratably over the period invoiced, typically monthly or quarterly. For the Third Quarter of Fiscal 2004 we received 15% of our total revenues from one customer. For the Third Quarter of Fiscal 2003 we received 27% and 11% of our total revenues from two customers. GROSS PROFIT Gross profit for the Third Quarter of Fiscal 2004 was $1.5 million and decreased $765,000 or 35% compared to gross profit of $2.2 million for the prior year period. The decline in aggregate gross profit is related to the decline in product revenue as previously noted and the costs associated with the hosting center. Gross margin decreased to 65% for the Third Quarter of Fiscal 2004 from 88% for the prior year period. The decrease in the gross margin percentage is primarily attributable to a decrease in product sales, which contribute a higher profit margin, and $446,000 in costs attributable to WCORP. The hosting center operates at a lower gross margin percentage. SALES AND MARKETING Sales and marketing expenses for the Third Quarter of Fiscal 2004 were $873,000, an increase of $298,000 or 52% from the prior year period. The increase reflects sales and marketing expenses attributable to WCORP of $273,000. PRODUCT DEVELOPMENT Product development expenses of $958,000 increased $444,000 or 86% from the Third Quarter of Fiscal 2003. Development costs incurred by WCORP contributed $357,000, or 80% of the increase. The increase is also reflective of the Company's increased product development efforts for additional products for the Enterprise Content Management (ECM) market. GENERAL AND ADMINISTRATIVE General and administrative expenses were $775,000 for the Third Quarter of Fiscal 2004 as compared to $527,000 for the prior year period, an increase of $248,000 or 47%. The portion of general and administrative expenses attributable to WCORP was $227,000. General and administrative expenses, exclusive of WCORP, increased by $21,000 for the Third Quarter of Fiscal 2004 as compared to the prior year period. INTEREST EXPENSE, NET Interest expense for the Third Quarter of Fiscal 2004 was $130,000, a decrease of $25,000 or 16% from the prior year period. The decrease was due to the lower level of borrowings in the current fiscal quarter as a portion of the convertible debt was converted to Series B Convertible Redeemable Preferred Stock as of March 31, 2003, as well as a lower interest rate on the refinanced convertible debt. -19- FIRST THREE QUARTERS OF FISCAL 2004 AS COMPARED TO FIRST THREE QUARTERS OF FISCAL 2003: REVENUES Revenues for the First Three Quarters of Fiscal 2004 totaled $6.1 million and decreased by $984,000 or 14% compared to revenues of $7.1 million for the First Three Quarters of Fiscal 2003. Product revenues decreased by $852,000 or 28% to $2.2 million in the First Three Quarters of Fiscal 2004 as compared to $3.0 million in the First Three Quarters of Fiscal 2003. Services revenues decreased $132,000 or 3% from $4.1 million in the First Three Quarters of Fiscal 2003 as compared to $3.9 million in the First Three Quarters of Fiscal 2004. Service revenues, exclusive of contract revenues, declined $204,000 or 23% as the Company experienced a decline in large-scale conversion contracts compared to the prior year period. Maintenance and hosting revenues increased $72,000 or 2% due to the inclusion of WCORP revenue totaling $265,000, offset by timing differences related to collection and revenue recognition. Maintenance revenues are earned ratably over the term of the contract commencing upon receipt of payment or when other acceptance is received. Hosting contract revenues are earned ratably over the period invoiced, typically monthly or quarterly. For the First Three Quarters of Fiscal 2004 we received 17% and 11% of our total revenues from two of our customers. For the First Three Quarters of Fiscal 2003 we received 17%, 11% and 10% of our total revenues from three of our customers. GROSS PROFIT Gross profit for the First Three Quarters of Fiscal 2004 was $4.6 million and decreased $1.5 million or 24% compared to gross profit of $6.0 million for the prior year period. The decline in aggregate gross profit is related to the decline in revenue as previously noted and the inclusion of costs associated with WCORP. Gross margin decreased to 75% for the First Three Quarters of Fiscal 2004 from 85% for the prior year period. The decrease in the gross margin percentage is primarily a result of lower product sales, which contribute a higher profit margin, and the increase in cost of services as a result of the addition of the costs of the hosting center, which operates at a lower profit margin. SALES AND MARKETING Sales and marketing expenses for the First Three Quarters of Fiscal 2004 were $2.2 million, an increase of $566,000 or 35% from the prior year period. The increase reflects the Company's expanded sales effort and its investments in marketing efforts to stimulate future sales as well as the inclusion of sales and marketing expenses attributable to WCORP of $328,000. PRODUCT DEVELOPMENT Product development expenses increased $839,000 or 59% from the First Three Quarters of Fiscal 2003 level of $1.4 million to $2.3 million in the current year period. The increase is reflective of the Company's increased product development efforts in additional products for the Enterprise Content Management (ECM) market and the establishment of a formalized quality assurance department. The operations of WCORP contributed $443,000 for the period. GENERAL AND ADMINISTRATIVE General and administrative expenses were $1.6 million for the First Three Quarters of Fiscal 2004, an increase of $88,000 or 6% from the prior year period. The operations of WCORP contributed $285,000 to General and Administrative expenses. Total expenses, exclusive of WCORP, declined by $197,000 compared to the prior period. The decrease is primarily attributable to a $180,000 reduction in the reserve for restructuring expenses accrued in Fiscal 2001. -20- NON-RECURRING ITEMS Non-recurring items in the First Three Quarters of Fiscal 2004 total $380,000 consisting of severance, relocation and moving expenses and other charges to be incurred as part of a plan to realign the operations of the Company's newly formed subsidiary's operations. INTEREST EXPENSE, NET Interest expense for the First Three Quarters of Fiscal 2004 was $338,000, a decrease of $125,000 or 27% from the prior year period. The decrease was due to the lower level of borrowings in the current fiscal quarter as a portion of the convertible debt was converted to Series B Convertible Redeemable Preferred Stock as of March 31, 2003, as well as a lower interest rate on the refinanced convertible debt and receivables financing. LIQUIDITY AND CAPITAL RESOURCES As of December 31, 2003, the Company had $1.2 million of cash and working capital deficit of $2.3 million in comparison to $1.6 million of cash and working capital deficit of $4.8 million at December 31, 2002. As of March 31, 2003, the Company had $771,000 of cash and working capital deficit of $1.9 million. Accounts receivable were $1.5 million at December 31, 2003 and $2.1 million at March 31, 2003. For the period ended December 31, 2003, the days sales outstanding (DSO) was 63 days compared to 88 days for the quarter ended March 31, 2003 and 66 days for the prior year period. The Company's cash flows are summarized below for the periods indicated: (in thousands) NINE MONTHS ENDED DECEMBER 31, 2003 2002 ---- ---- Cash provided by (used in) Operating activities $(1,639) $ 815 Investing activities (834) (76) Financing activities 2,916 457 ------- ------- Net increase in cash 443 1,196 Cash, beginning of period 771 412 ------- ------- Cash, end of period $ 1,214 $ 1,608 ======= ======= Net cash used in operating activities was $1.6 in the First Three Quarters of Fiscal 2004 compared to net cash generated from operating activities of $815,000 in the prior year period. The increased use of cash is primarily due to the increase in operating expenses and reduced revenues. Net cash used in investing activities was $834,000 in the First Three Quarters of Fiscal 2004 compared to $76,000 in the prior year period. The increase in cash used primarily consists of $627,000 used for the purchase of the WebWare assets. Net cash generated by financing activities was $2.9 million in the First Three Quarters of Fiscal 2004 compared to net cash generated by financing activities of $457,000 in the prior year period. The increase in cash provided by financing activities was due to investments in the Company's Series C Preferred Stock. -21- "FORWARD-LOOKING" STATEMENTS UNDER THE PRIVATE SECURITIES LITIGATION REFORM ACT: This Quarterly Report contains statements which constitute forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. These statements appear in a number of places in this Annual Report and include all statements that are not statements of historical fact regarding the intent, belief or expectations of INSCI and its management. These statements are based upon a number of assumptions and estimates, which are subject to significant uncertainties, many of which are beyond our control. Words such as "may," "would," "could," "will," "expect," "anticipate," "believe," "intend," "plan" and "estimate" are meant to identify such forward-looking statements. Such forward-looking statements are not guarantees and actual results may differ materially from those expressed or implied by such forward-looking statements. Factors that could cause actual results to differ materially include, but are not limited to our ability to achieve or maintain growth or profitability, our ability to execute our business strategy successfully, our ability to obtain financing and to pay off our existing liabilities and fund our working capital needs, our relationship with our existing lenders, our relationship with our customers and suppliers, increased competition, possible system failures and rapid changes in technology and other factors discussed in this Quarterly Report and in our other filings with the Securities and Exchange Commission. QUARTERLY RESULTS: Quarterly revenues and results of operations may fluctuate as the result of a variety of factors, including the lengthy sales cycle for our products, the proportion of revenues attributable to software license fees versus services, the amount of revenue generated by alliances with other companies distributing our products, demand for our products and services, the size and timing of individual license transactions, the introduction of new products and product enhancements by us or our competitors, changes in customer budgets and capital expenditures, competitive conditions in the industry and general economic conditions. Additionally, the sale of our products generally involves a significant commitment of capital by our customers and may be delayed due to time-consuming authorization procedures within an organization. Other factors affecting our operating results include our ability to design and introduce on a timely basis new products which compete effectively on the basis of price and performance, product obsolescence, technological changes, competition and competitive pressures on price, the ability to hire and retain qualified personnel and general economic conditions affecting the investment by potential customers in technology based investments. There is no assurance that we can maintain or increase our sales volume going forward or that we will be able to achieve a profit in the marketing of our products. BUSINESS RISKS An investment in our common stock involves a high degree of risk. You should consider carefully the following risks, and consult with your own legal, tax and financial advisors. WE RECENTLY COMPLETED AN ACQUISITION OF THE ASSETS OF A COMPANY WITH A HISTORY OF OPERATING LOSSES: The company recently completed an acquisition of the assets of a company with a history of operating losses and there is no assurance that the Company will be successful in reducing such losses. Such losses for the year ended December 31, 2002 were $8,796,000 and for the three months ended June 30, 2003 were $1,624,000. The extent to which such losses are not reduced would represent a significant business risk to the Company. THE MARKET FOR THE ACQUIRED PRODUCTS IS NOT ASSURED. The market for the digital asset market (DAM) is relatively limited at the current time and characterized by evolving technology and erratic adoption rates relative to vertical markets. Competitive performance within these markets requires significant investment in product development and market awareness. There is no assurance that such investments will yield increased revenues in the immediate future. -22- WE HAVE A HISTORY OF LOSSES AND OUR ABILITY TO BE PROFITABLE DEPENDS ON A NUMBER OF FACTORS THAT WE MAY BE UNABLE TO CONTROL. We have cumulative losses since our business began in 1989 and although recently profitable, there is no guarantee we will maintain profitability. While we reported our first two consecutive profitable fiscal periods for the fiscal year ended March 31, 2002 and fiscal year ended March 31, 2003, we have reported losses of $1,284 for the current quarter ended December 31, 2003. Our prior financial performance was the result of a restructuring plan focused on a return to the core operations of the business and a reduction in expenses. There can be no assurance that the expense reductions that have been implemented are sustainable over future periods or that revenues will increase. OUR QUARTERLY OPERATING RESULTS MAY EXPERIENCE VARIABILITY Our quarterly sales and operating results have varied significantly and may vary in the future as a result of several factors such as: o Size and timing of software license orders o Completion of backlog orders o Acceptance and sign off of service contracts o Market acceptance of existing products o Expansion of market demand for rich media based products and services o Seasonality o Customer budgetary constraints and timelines o Availability of embedded third party products or tool sets o Availability of Alliance Partner products o Financial condition of Alliance Partners o Variations of Alliance Partner strategy o Product introduction and acceptance o Competitive pricing o License revenues as a percentage of revenues o Changes in product distribution channels o Changes in sales force o Variations in expense levels o Change of business strategy o Competition o International exchange rates o Changes in accounting pronouncements A significant amount of our license and service revenues are derived from a limited number of customers. Such orders are typically placed within the specific financial quarter when revenue is recognized, and we expect this trend to continue. The placement of such orders is typically at the end of a fiscal quarter requiring shipment, and if a new customer, the implementation of the licensed product. The sales cycle is typically lengthy for a new licensed customer and less time for an existing customer. Revenue recognition for service contracts requires the acceptance and sign off from a customer. The amount of license product and service backlog at the end of a quarter is typically immaterial. We also experience variations in product demand due to customer budgetary constraints that may be imposed within a fiscal year. As a consequence, the Company experiences difficulty in forecasting license and service revenues within any period. The Company distributes products through Alliance Partners. Changes in the market strategy, product offering, financial condition, material changes in the sales distribution strategy, availability of hardware or software products, product defects and material changes in customer support may affect product orders and revenues in any period(s). -23- License revenue gross margins are substantially higher than other revenue sources. The percentage of license revenues to the overall revenues in a fiscal period may materially change the overall gross margins and profitability for any period. Variations in expense levels compared to other periods may result in changes in operating income within a fiscal period. ACQUISITION OF CERTAIN ASSETS OF WEBWARE CORPORATION On September 5, 2003, we reported that we purchased certain assets of WebWare Corporation ("WebWare") from Diablo Management Group, as assignee for the benefit of creditors of WebWare Corporation. The acquisition, which included the ActiveMedia(TM) products, was for cash and stock, for the assets, which now enables us to offer our customers a digital asset management (DAM) application for integrating rich media content, such as images, video, audio, graphics and on-demand features into content management systems, web publishing systems, and e-commerce portals. Our entering into this new area of business requires additional working capital and management expertise, and we will be competing with companies with far greater resources and staff, so that there is no assurance that we will be successful in reversing the losses sustained by the former WebWare business. BECAUSE WE HAVE EXPERIENCED LOSSES WE MAY NEED ADDITIONAL WORKING CAPITAL TO IMPLEMENT OUR BUSINESS PLAN. We believe that we may need additional financing to operate our business and implement our business plan. As of December 31, 2003 we had $1.2 million of cash and working capital deficit of $2.3 million in comparison to $1.6 million of cash and working capital of $4.8 million as of December 31, 2002. There can be no assurances, however, that we will be successful in obtaining funds from any such sources. If we issue equity securities, this will result in dilution to our stockholders. If additional funds are not available, we will be required to modify execution of our business plan. The WCORP business model utilizes a hosting service as a material component of its sales and service product offering. INSCI plans to incorporate such offering internally to further reduce the costs of such service. The consolidation will require substantial initial cash outlays to fund the implementation of such offering. There can be no assurance that service to the WCORP customer base will be impacted to the extent that the cash requirements will exceed that of management estimates. PRODUCT REVENUE CONCENTRATION. The Company generates a substantial portion of license revenues and services from the ESP+ archive solution. We expect that this trend will continue and any changes to this assumption such as general economic, technology based and competition may have a material adverse effect on the revenues and operating results of the Company. We do not expect that there will be a substantial change in revenue until the WebWare products contribute to our revenue growth. EXPANSION OF DIRECT SALES. To date, the Company has significantly relied on the indirect sales channel for sales leads and product revenues. The Company has invested, and expects to continue to invest, in the development and growth of a direct sales channel. To the extent that the Company is not successful in such efforts, future revenue growth and operating margins may be adversely affected. OUR BUSINESS GREATLY DEPENDS ON INDIRECT SALES. We depend upon introductions to potential customers by companies with which we maintain strategic alliances for a significant percentage of our sales. Although we have written agreements with UNISYS, Xerox Corporation, PFPC and other value added resellers; the agreements do not require customer introductions or provide for minimum required purchases of our products. If any of the companies with which we maintain strategic alliances decides not to refer potential customers to us, our sales may be reduced and operating losses increased. In addition, there is no assurance that we will be able to maintain our strategic alliances on current terms. -24- DEPENDENCE ON LICENSED TECHNOLOGY. INSCI depends on certain software products that are licensed from third parties, which are embedded and used in our products. The company believes that there are replacement alternatives for such third party products; however, the interruption of the availability of such products may have an adverse impact on the delivery of our products. Additionally, we expect our third party vendors to maintain and continually improve their products. To the extent that such products became obsolete or inoperable with other industry standard applications, we may experience an adverse effect on revenues, operating results and a decrease in customer satisfaction. DEPENDENCE ON INTERNET ACCEPTANCE, ACCESSIBILITY, INFRASTRUCTURE AND SECURITY. INSCI developed and realized revenues from its Internet based products and related services. The Internet is a new technology and as such, is characterized by rapid technology changes, evolving standards and adoption rates. Future revenues and services are dependent upon the acceptance of the Internet as a recognized method of commercial competence. The accessibility of the Internet has expanded over the last several years. Technology enhancements and improvements have accelerated the availability of Internet access. To the extent that continued developments in communications, communication standards, availability and accessibility do not continue to expand, the rate of adoption may decline. Additionally, the corporate expansion of the Internet as a commercial communications platform typically requires a capital expenditure and support infrastructure. To the extent that corporate capital expenditures decline or funding for Internet based programs are reduced, the accessibility and necessary supporting infrastructure may reduce the adoption and performance on the Internet. To the extent that there is an increase in the use of the Internet, or an increase in bandwidth, the infrastructure may not be able to effectively support demand and result in a degradation of commercial acceptance. Reduced response times may also affect the acceptance of the Internet. RAPID TECHNOLOGY CHANGES IN OUR INDUSTRY MAY ADVERSELY AFFECT OUR BUSINESS. Our business is subject to technological advances and possible product obsolescence. The market for our products is characterized by rapidly changing technology, intense competition, technological complexity and evolving industry standards. We must insure that our products are compatible with those products offered by third-party vendors, including server platforms for our software and various storage devices and platforms. We have no contracts with third-party vendors; therefore there is no assurance that we will be able to make our software products compatible with new products that are introduced by others. Our WebWare suite of products is subject to continued technological evolution and adoption which requires a continued investment by our Company to remain competitive. WE DEPEND ON PROPRIETARY TECHNOLOGY, WHICH IS NOT PROTECTED BY PATENTS. Our business depends on proprietary software technology for which we have no patent protection. Although we require our employees and others to whom we disclose proprietary information to sign non-disclosure agreements, this protection may not be sufficient. Our business will be adversely affected if anyone improperly uses or discloses our proprietary software or other proprietary information. BECAUSE OF THE HIGH COST, WE LACK PRODUCT LIABILITY INSURANCE. We develop, market, install and service electronic information and document management systems, which now include the WebWare product line. Failure of our products may result in a claim against us. Because of the high cost of product liability insurance, we do not maintain insurance to protect against claims associated with the use of our products. Any claim against us may result in costs to us in defending litigation. Further, any claim may require management's time and the use of our resources. -25- WE DEPEND UPON CERTAIN KEY EMPLOYEES TO DEVELOP OUR PRODUCTS. We do not have the financial resources to compete with larger more established companies to attract and retain certain key technological employees. The loss of current technological employees or our inability to recruit and retain employees with certain key technology skills will have an adverse effect on product development and our business. THE BOARD OF DIRECTORS OWNS A LARGE PERCENTAGE OF OUR COMMON STOCK AND CAN INFLUENCE MATTERS REQUIRING THE VOTE OF SHAREHOLDERS. On December 31, 2003, our directors and officers beneficially owned, as defined by the SEC Rules, approximately 16.0 million shares of common stock, representing 75.9% of the outstanding common stock. Holders of Series A (if convertible debt is converted in Series A Preferred), B and C preferred stock can vote on an as if converted basis and can therefore obtain shareholder approval or ratification of shareholder resolutions. Based on their ownership, our directors and officers have the ability to direct matters requiring a stockholder vote, including the election of directors, the amendment of charter documents, the merger or dissolution of our company and the sale of all or substantially all of our assets. Their voting power also may discourage or prevent any proposed takeover, or control whether a potential purchaser acquires the Company. LIQUIDITY. Our stock is traded on the Over the Counter Bulletin Board (OTCBB) under the symbol "INCC". As of December 31, 2003 we have 5,992,287 shares outstanding. Selway and CIP hold 123,344 shares of Series B Convertible Redeemable Preferred Stock, which, as of December 31, 2003, was convertible into 8,634,080 shares of the Company's Common Stock. Selway and CIP also hold $1.8 million of convertible debt, which if converted, would be convertible into 1,604,858 shares of the Company's Common Stock. As of December 31, 2003, SCP holds 1,546,711 shares of Series C Convertible Preferred Stock and CSSMK holds 257,785 shares of Series C Convertible Preferred Stock, which is convertible into 3,608,992 shares of the Company's Common Stock. The average trading volume for the 30-day trading period ended January 26, 2004 is 7,500. THE POTENTIAL ISSUANCE OF ADDITIONAL SHARES OF SERIES C OR OTHER CLASSES OF PREFERRED STOCK MAY NEGATIVELY AFFECT THE MARKET PRICE OF OUR COMMON STOCK AND SHAREHOLDER RIGHTS. Our certificate of incorporation empowers the board of directors with the right to determine the designations, rights, preferences and privileges of the holders of one or more series of preferred stock. The board of directors can issue, without stockholder approval, preferred stock with voting, dividend, conversion, liquidation or other rights, which could adversely affect the voting power and equity interest of common stock holders. BECAUSE OF CERTAIN PROVISIONS IN OUR BY-LAWS, AND THE ISSUED AND OUTSTANDING SHARES OF SERIES B AND SERIES C PREFERRED STOCK, CHANGE IN CONTROL MAY BE DIFFICULT. Our by-laws and the Delaware General Corporation Law contain provisions including a shareholders rights plan that may make a change in control more difficult or delay attempts by others to obtain control of us, even when this may be in the interests of stockholders. The Delaware General Corporation Law also imposes conditions on certain business combinations with "interested stockholders", as defined by Delaware law. Under certain agreements with key personnel, we also have provided stock options in the event of a change of control and a termination of those employment agreements without cause. Additionally, we have provided that if a change of control occurs, certain directors will receive immediate vesting of stock options granted under our 1992 Directors Option Plan. Change of control shall occur, in this instance, if a majority of the directors elected at any Annual Meeting are persons other than those nominated by management in the proxy statement distributed for such Annual Meeting. Additionally, Series A, Series B and Series C preferred stock have certain restrictive rights with respect to the issuance of other classes of preferred stock as well as liquidation preferences which can inhibit a change of control. -26- DIVIDENDS ON OUR COMMON STOCK ARE NOT LIKELY. We do not anticipate paying any cash dividends on our common stock. We intend to keep future earnings, if any, to finance the operation and expansion of our business. WE MAY BE REQUIRED TO PAY DIVIDENDS ON OUR SERIES B AND SERIES C PREFERRED STOCK IN SHARES OF SERIES C PREFERRED STOCK. We currently pay cash dividends on our Series B preferred stock. Dividends on the Series B preferred stock are payable in cash or shares of Series C preferred stock, at the option of the holder. While we may pay cash dividends on our Series C preferred stock, it is unlikely that we will do so at this time, and will pay dividends in shares of Series C stock, which, if converted into shares of the Company's common stock will result in further dilution to our common stockholders. A DECLINE IN THE MARKET PRICE OF OUR COMMON STOCK AFTER THE 1:10 REVERSE STOCK SPLIT MAY RESULT IN A GREATER PERCENTAGE DECLINE THAN WOULD HAVE OCCURRED IN THE ABSENCE OF A REVERSE STOCK SPLIT, AND THE LIQUIDITY OF OUR COMMON STOCK COULD BE ADVERSELY AFFECTED FOLLOWING THE REVERSE STOCK SPLIT. We have experienced a decline in the market price of our common stock following the effective date of the 1:10 reverse stock split. If the market price of our common stock continues to decline following the split, the percentage decline may be greater than would have occurred in the absence of a reverse stock split. The market price of our common stock will also, however, be based on our performance and other factors, which are unrelated to the number of shares outstanding. Furthermore, although it does not appear to have done so at this time, the reduced number of shares outstanding after the reverse stock split could adversely affect the future liquidity of our common stock. ITEM 3. CONTROLS AND PROCEDURES The Company maintains controls and procedures designed to ensure that information required to be disclosed in the reports that the Company files or submits under the Securities and Exchange Act of 1934 is recorded, processed, summarized and reported within the time periods specified in the rules and forms of the Securities and Exchange Commission. Based upon their evaluation of those controls and procedures performed within 90 days of the filing date of this report, the executive officers of the Company concluded that the Company's disclosure controls and procedures were adequate. There have not been any significant changes in the Company's internal controls or other factors that could affect these controls subsequent to the date of evaluation." PART II OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS The Company is a defendant in an action commenced on May 16, 2003 by Lason, Inc. ("Lason") in the United States Bankruptcy Court for the District of Delaware. The Lason action is seeking the return of certain pre-petition payments made prior to the bankruptcy petition of Lason in the amount of approximately $121,000. The Company is contesting the action and has asserted a number of affirmative defenses to the action. -27- ITEM 2. CHANGE IN SECURITIES On April 4, 2003, the Company completed two (2) Amendments to refinancing transactions. The first refinancing was with Selway Partners LLC ("Selway") and CIP Capital LP ("CIP") of a November 28, 2000 financing transaction. The second refinancing was for a separate refinancing for a June 21, 2001 financing transaction with Selway. The two Amendments were made as of November 30, 2002. With respect to the Selway-CIP November 28, 2000 financing transaction, the Company agreed that it would repay to Selway-CIP the balance of principal and interest of $2,505,000. On January 17, 2003, the Company paid approximately $305,000 toward the outstanding interest due to Selway-CIP, resulting in the balance due of $2,200,000, which will be paid in 36 monthly installments with interest of 10% per annum. The Selway-CIP refinancing agreement further provided for an extension of one year for the optional redemption of Selway-CIP to demand repayment of the principal and interest due on all of the outstanding Convertible Debentures. The Convertible Debentures are convertible into Series A Preferred Stock of the Company and ultimately into Common Stock. Series A Preferred Stock has a dividend of 2.5% plus prime per annum. In accordance with the terms of the Amendment, the conversion price for the Convertible Debentures convertible to Series A Preferred Stock and ultimately to Common Stock was repriced from $6.50 per share to $1.10 per share. The Company also amended its June 21, 2001 financing arrangement with Selway which provides that Selway has the right to convert issued and outstanding Convertible Debentures in the aggregate sum of $575,000, issued to Selway as a part of the June 21, 2001 transaction convertible into Series B Preferred Stock, which is ultimately convertible into Common Stock of the Company. Additionally, the Company had also issued to Selway Management, Inc. ("Selway Management") debentures in payment of management consulting fees, as per its Consulting Agreement with Selway Management in the sum of $460,000. The Company also entered into Amendment No. 2 to the Selway Management Agreement. The Convertible Debentures issued to Selway Management provided for the right of Selway Management to convert the Debentures into Series B Convertible Preferred Stock, which is ultimately convertible into Common Stock. Series B Convertible Stock has an annual dividend of 13%. Selway advised the Company that it assigned the sum of $193,230.33 in Convertible Debentures to CIP. Selway and CIP disclaim any affiliation with respect to their respective interest in the Convertible Debentures issued by the Company. On April 3, 2003, Selway, Selway Management and CIP converted their respective Convertible Debentures in the aggregate amount of $1,035,000 into the aggregate of 123,344 shares of Series B Convertible Stock as follows: Selway converted the sum of $381,769.67 of Convertible Debentures into 49,073 shares of Series B Preferred Stock; Selway Management converted the sum of $460,000 into 51,013 Convertible Debentures; and CIP converted the sum of $193,230.33 of Convertible Debentures into 23,258 Series B Convertible Preferred Stock. Shares of Series B Convertible Preferred Stock are convertible into shares of Common Stock of the Company. The 173,077 previously issued stock warrants to purchase Series A Preferred Stock issued to Selway Partners, LLC were extended to November 30, 2007, as well as the 173,077 warrants to purchase Series A Preferred stock issued to CIP Capital, L.P. Additionally, the 57,692 warrants to purchase Series A Preferred Stock issued to Selway Partners, LLC and CIP Capital, L.P. were extended to January 30, 2008, and the 20,000 warrants to purchase common stock which were previously issued to Selway Management, Inc. were extended to November 30, 2008. The Company amended its Certificate of Incorporation on March 31, 2003 with respect to the Series A and Series B Preferred Stock, in that the Series A Preferred Stock conversion into Common Stock was reduced from $6.50 per share to $1.10 per share, and the Series B Preferred Stock authorization was increased from 100,000 shares of Series B Preferred Stock to 200,000 shares of Series B Preferred Stock. The Registrant (the "Company"), on September 5, 2003, entered into an agreement with SCP Private Equity Partners II, LP ("SCP"), a private equity fund, as of September 4, 2003, wherein SCP agreed to purchase, 1,546,711 shares of Series C Convertible Preferred Stock in the Company at $1.9396 per share (the "Series C Preferred Stock") for the sum of $3,000,000. -28- The 1,546,711 shares of Series C Preferred Stock are convertible into 3,093,442 shares of common stock, or approximately 51.6% of the issued and outstanding shares of common stock of the Company. SCP purchased 515,571 shares of Series C Preferred Stock on closing for the sum of $1,000,000. Thereafter, SCP purchased the balance of 1,031,140 shares of Series C Preferred Stock for the aggregate sum of $2,000,000. As a part of the Purchase Agreement for the Series C Preferred Stock, Selway and CIP agreed to negotiate with the Company to modify certain provisions of the Series A and Series B convertible preferred stock. Selway is an affiliate of SCP in that SCP is the majority shareholder of Selway and CIP is an affiliate of SCP in that Mr. Winston Churchill is a managing partner in both. As a result of its purchase of Series C Preferred Stock and SCP's affiliate relationships with Selway and CIP, SCP is deemed the beneficial owner of 1,357,957 shares of Series A preferred stock (issuable upon the conversion of the Company's convertible debt), 123,344 shares of Series B preferred stock, 1,546,711 shares of Series C preferred stock, 461,538 warrants to purchase shares of Series A preferred stock and 596,520 shares of common stock of the Company which aggregate to 70.8% of the issued and outstanding common stock of the Company on a fully diluted basis. In accordance with the terms of the Series C Preferred Stock Purchase Agreement, the Company has filed a Certificate of Designation setting forth the rights and preferences for the Series C Preferred Stock. The Company has entered into a modification agreement with Selway and CIP to amend certain provisions of the Series A and Series B preferred stock pursuant to the Purchase Agreement for the Series C Preferred Stock. The Company amended its Certificate of Incorporation on December 8, 2003 with respect to the Series B Preferred Stock, in that the Series B Preferred Stock conversion into Common Stock was amended to convert on a 70:1 basis, replacing the following conversions formula: (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 or exercise of other convertible instruments. Additionally, the Series A, Series B and Series C Preferred Stock authorizations were amended to 2,500,000 shares, 4,317,040 shares and 3,182,960 shares, respectively from 4,307,693 shares, 200,000 shares and 2,300,000 shares, respectively. On December 22, 2003 the Company filed an amendment to the Company's Certificate of Incorporation to implement a reverse stock split of the outstanding shares of the Company's common stock at a ratio of 1:10 pursuant to prior shareholder approval. The 1:10 reverse stock split was effective as of January 2, 2004. There were 185,000,000 shares of common stock with a par value of $.01 authorized and 59,923,340 shares issued and outstanding at December 31, 2003. On January 2, 2004, the 1:10 reverse stock split resulted in a nine-tenths reduction in the number of shares issued. After the reverse stock split there were 5,992,287 shares of common stock outstanding with a par value of $.10. The reverse split will not affect the Company's authorized shares of common and preferred stock. On December 31, 2003, the Company entered into an agreement with CSSMK, LLC ("CSSMK"), an entity which is majority owned by Henry F. Nelson, the Company's President and Chief Executive Officer, wherein CSSMK purchased 257,785 shares of Series C Convertible Preferred Stock ("Series C Preferred") for the sum of $500,000 or $1.9396 per share. The 257,785 shares of Series C Preferred are convertible on a 2:1 basis into 515,570 shares of common stock at the option of the holder. ITEM 3. DEFAULTS UPON SENIOR SECURITIES This item is not applicable. -29- ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS On January 29, 2004, INSCI Corp held its Annual Meeting of Shareholders, and the shareholders resolved the following: (1) Election of Yaron I. Eitan, Henry F. Nelson, Francis X. Murphy, Derek Dunaway, Mitchell Klein, Amit Avnet, Steven Morgenthal, Adi Raviv, George Calhoun and Thomas G. Rebar to serve as directors until the next annual meeting. (2) Appointment of Goldstein and Morris Certified Public Accountants as the independent public accountants for the Company's fiscal year ended March 31, 2003. (3) Ratification of the Board of Directors resolution to increase the authorized number of stock options under the Company's 1997 Equity Incentive Plan to 3,000,000 shares. ITEM 5. OTHER INFORMATION On January 2, 2004, the Company effected a 1:10 reverse stock split resulting in a nine-tenths reduction in the number of shares issued. The Company's common stock is trading on the Over-the-Counter Bulletin Board ("OCTBB") under its new trading symbol "INCC" as of January 14, 2004. There were 185,000,000 shares of common stock with a par value of $.01 authorized and 59,923,340 shares issued and outstanding at December 31, 2003. After the reverse stock split there were 5,992,287 shares of common stock outstanding with a par value of $.10. The number of authorized shares of common stock was not affected. All share and per share references for all periods presented have been restated to reflect the reverse stock split. ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (A) EXHIBITS Exhibit 3.9 Copy of the form of Amendment of Certificate of Incorporation Exhibit 10.79 Copy of Amended and Restated Certificate of Designation of the Series A, Series B and Series C Preferred Stock Exhibit 10.80 Copy of Amendment No. 1 to the Series C Convertible Preferred Stock Purchase Agreement Exhibit 10.81 Copy of Stockholders Agreement Exhibit 10.82 Copy of Employment Agreement Exhibit 31.1 * Certification pursuant to 18 U.S.C. Section 1350 as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 Exhibit 32.1 * Certification pursuant to 18 U.S.C. Section 1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 Unless otherwise noted, the exhibit is incorporated by reference to the Company's Current Reports on Form 8-K filed January 13, 2004 and dated December 31, 2003. * Annexed hereto (B) REPORTS ON FORM 8-K A Current Report of Form 8-K/A was filed by the Company on November 19, 2003 dated September 5, 2003, amending the Current Report on Form 8-K filed by the Company on September 19, 2003 dated September 5, 2003, which reported the acquisition by WCORP, Inc., the Company's wholly owned subsidiary, of certain assets of WebWare Corporation from Diablo Management Group, as assignee for the benefit of creditors. The Company amended its Form 8-K to report the financial statements of the business acquired. A Current Report of Form 8-K was filed by the Company on January 13, 2004 dated January 2, 2004, which reported the 1:10 reverse stock split effective on January 2, 2004. The Company filed an amendment to its Certificate of Incorporation to implement the reverse stock split of the outstanding shares of the Company's common stock at a ratio of 1:10. The Company's authorized shares of common and preferred stock will not be affected by the reverse split. -30- A Current Report on Form 8-K was filed by the Company on January 13, 2004 dated December 31, 2003, which reported an agreement with CSSMK, LLC ("CSSMK"), an entity which is majority owned by Henry F. Nelson, the Company's President and Chief Executive Officer, to purchase 257,785 shares of Series C Preferred Stock for the sum of $500,000 or $1.9396 per share. Additionally, CSSMK also entered into a Stockholders Agreement with SCP, wherein the transfer and assignment of its Series C Preferred Stock is restricted pursuant to the terms of the Stockholders Agreement, which also grants SCP rights of first refusal and certain voting rights. The Company also reported, on December 31, 2003, effective as of April 1, 2003, it entered into an Employment Agreement with Henry F. Nelson for a period of three years. SIGNATURE Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this Report to be signed on its behalf by the undersigned thereunto duly authorized. INSCI CORP. Date: February 12, 2004 By: /S/ HENRY F. NELSON ---------------------------------------- Henry F. Nelson Chief Executive Officer, President and Chief Financial Officer -31-