U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-QSB
[X] Quarterly report under Section 13 or 15(d) of the Securities Exchange Act of
1934
For the quarterly period ended September 30, 1997.
[ ] Transition report under Section 13 or 15(d) of the Securities Exchange Act
of 1934
For the transition period from __________ to __________.
Commission file number 0-19817
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INTRANET SOLUTIONS, INC.
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(Exact Name of Registrant as Specified in Its Chapter)
Minnesota 41-1652566
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(State or Other Jurisdiction of (I.R.S. Employer Identification No.)
Incorporation or Organization)
9625 West 76th Street, Suite 150, Eden Prairie, Minnesota 55344
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(Address of Principal Executive Offices)
(612) 903-2000
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(Issuer's Telephone Number, Including Area Code)
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(Former Name, Former Address and Former Fiscal Year, If Changed Since
Last Report)
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: At November 10, 1997 there
were 7,872,729 shares of common stock, $0.01 par value outstanding.
<PAGE>
INTRANET SOLUTIONS, INC.
Form 10-QSB Index
September 30, 1997
Part I Financial Information
Item 1. Financial Statements
Consolidated Balance Sheets -
September 30, 1997 and March 31, 1997 3
Consolidated Statements of Operations -
for the three and six months ended
September 30, 1997 and 1996 4
Consolidated Statements of Cash Flows -
for the three and six months ended
September 30, 1997 and 1996 5
Notes to Consolidated 6
Financial Statements
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of
Operations 8
Part II: Other Information
Item 4: Submission of Matters to a Vote of Security-Holders 15
Item 6: Exhibits and Reports on Form 8-K 15
<PAGE>
INTRANET SOLUTIONS, INC.
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
<TABLE>
<CAPTION>
ASSETS
SEPTEMBER 30, MARCH 31,
1997 1997
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<S> <C> <C>
CURRENT ASSETS:
Cash $ 1,172,744 $ 121,798
Accounts receivable, net 6,010,950 3,612,803
Note receivable 570,604 801,993
Inventories 499,264 495,960
Prepaid expenses and other current assets 586,431 523,703
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Total current assets 8,839,993 5,556,257
PROPERTY AND EQUIPMENT, NET 2,509,679 2,615,224
INTANGIBLE ASSETS, NET 797,327 841,511
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$ 12,146,999 $ 9,012,992
============= =============
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
CURRENT LIABILITIES:
Revolving credit facility $ 2,451,649 $ 1,809,086
Promissory notes payable, net of discount 1,082,638 808,932
Current portion of long-term debt 569,428 1,019,599
Current portion of capital lease obligations 248,307 233,097
Accounts payable 3,687,403 2,716,723
Accrued expenses 687,539 592,234
Deferred revenue 202,602 210,351
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Total current liabilities 8,929,566 7,390,022
LONG-TERM DEBT, NET OF CURRENT PORTION 409,489 812,930
CAPITAL LEASE OBLIGATIONS, NET OF CURRENT PORTION 560,429 683,514
OTHER 80,827 199,887
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Total liabilities 9,980,311 9,086,353
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COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY (DEFICIT):
Series A Preferred stock, $.01 par value, $5.00 stated value,
1,000,000 shares authorized, 800,000 and 0 shares issued and
outstanding, respectively, net of discount 2,980,046 --
Common stock, $.01 par value, 24,000,000 shares
authorized, 7,693,790 and 7,523,603 issued and outstanding,
respectively 76,938 75,236
Additional paid-in capital 5,861,512 3,827,356
Retained earnings (deficit) (6,554,945) (3,744,833)
Unearned compensation (196,863) (231,120)
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Total stockholders' equity (deficit) 2,166,688 (73,361)
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$ 12,146,999 $ 9,012,992
============= =============
</TABLE>
See accompanying notes to the condensed consolidated financial statements
<PAGE>
INTRANET SOLUTIONS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
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SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30,
1997 1996 1997 1996
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
REVENUES:
Hardware integration $ 3,605,149 $ 2,248,025 $ 6,556,839 $ 4,639,787
Software, technical services and support 1,395,055 1,135,624 3,000,018 2,238,581
------------ ------------ ------------ ------------
Total revenues 5,000,204 3,383,649 9,556,857 6,878,368
------------ ------------ ------------ ------------
COST OF REVENUES:
Hardware integration 3,089,770 1,858,218 5,523,812 3,858,879
Software, technical services and support 577,588 700,265 1,566,501 1,448,733
------------ ------------ ------------ ------------
Total cost of revenues 3,667,358 2,558,483 7,090,313 5,307,612
------------ ------------ ------------ ------------
Gross profit 1,332,846 825,166 2,466,544 1,570,756
------------ ------------ ------------ ------------
OPERATING EXPENSES:
Sales and marketing 750,075 451,219 1,338,305 851,245
General and administrative 611,086 472,276 1,174,873 781,097
Research and development 331,605 285,529 636,971 531,987
------------ ------------ ------------ ------------
Total operating expenses 1,692,766 1,209,024 3,150,149 2,164,329
------------ ------------ ------------ ------------
Income (loss) from operations (359,920) (383,858) (683,605) (593,573)
INTEREST EXPENSE, NET 103,360 7,128 196,143 48,761
------------ ------------ ------------ ------------
LOSS BEFORE INCOME TAXES (463,280) (390,986) (879,748) (642,334)
Provision for (benefit of) income taxes -- (134,549) -- (221,049)
------------ ------------ ------------ ------------
LOSS FROM CONTINUING OPERATIONS (463,280) (256,437) (879,748) (421,285)
DISCONTINUED OPERATIONS (NOTE 6)
Loss from operations of discontinued
distribution group (net of applicable
taxes) (514,506) (374,904) (950,364) (495,904)
------------ ------------ ------------ ------------
NET LOSS ($ 977,786) ($ 631,341) ($ 1,830,112) ($ 917,189)
PREFERRED STOCK ACCRETION (NOTE 5) 980,000 -- 980,000 --
------------ ------------ ------------ ------------
LOSS ATTRIBUTABLE TO COMMON SHAREHOLDERS ($ 1,957,786) ($ 631,341) ($ 2,810,112) ($ 917,189)
============ ============ ============ ============
LOSS FROM CONTINUING OPERATIONS
PER COMMON SHARE ($ 0.06) ($ 0.03) ($ 0.12) ($ 0.06)
============ ============ ============ ============
NET LOSS PER COMMON SHARE ($ 0.13) ($ 0.08) ($ 0.24) ($ 0.12)
============ ============ ============ ============
LOSS ATTRIBUTABLE TO COMMON SHAREHOLDERS
PER COMMON SHARE ($ 0.26) ($ 0.08) ($ 0.37) ($ 0.12)
============ ============ ============ ============
WEIGHTED AVERAGE COMMON SHARES
OUTSTANDING (NOTE 2) 7,639,630 7,440,606 7,591,377 7,440,606
============ ============ ============ ============
</TABLE>
See accompanying notes to the condensed consolidated financial statements
<PAGE>
INTRANET SOLUTIONS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
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SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30,
1997 1996 1997 1996
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss ($ 977,786) ($ 631,341) ($ 1,830,112) ($ 917,189)
Adjustments to reconcile net loss
to cash flows from operating activities -
Depreciation and amortization 226,634 122,852 388,276 229,883
Loss on sale of fixed assets 1,947 3,056 1,947 3,056
Stock option compensation earned 16,896 1,221 34,257 2,442
Discount amortization 23,532 -- 53,952 --
Changes in operating assets and liabilities (1,547,066) (867,085) (1,569,754) (684,157)
------------ ------------ ------------ ------------
Cash flows from operating activities (2,255,843) (1,371,297) (2,921,434) (1,365,965)
------------ ------------ ------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from sale of fixed assets 3,767 -- 3,767 --
Proceeds from note receivable -- 159,167 248,222 159,167
Purchases of fixed assets (195,375) (176,958) (244,261) (410,892)
------------ ------------ ------------ ------------
Cash flows from investing activities (191,608) (17,791) 7,728 (251,725)
------------ ------------ ------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net advances from revolving credit facility (177) (292,459) 642,563 88,087
Proceeds from long-term debt -- 500,000 -- 500,000
Payments on long-term debt (116,598) (24,999) (233,858) (49,998)
Payments on capital leases (57,226) (37,911) (107,875) (85,209)
Payments on other long-term liabilities (50,216) -- (72,260) --
Repurchase of treasury stock (9,400) (10,000) (8,800) (10,000)
Issuance of preferred stock 3,529,024 -- 3,529,024 --
Issuance of common stock -- -- -- 29,247
Proceeds from reverse merger -- 1,118,200 -- 1,118,200
Proceeds from stock options and warrants 213,578 -- 215,858 --
------------ ------------ ------------ ------------
Cash flows from financing activities 3,508,985 1,252,831 3,964,652 1,590,327
------------ ------------ ------------ ------------
NET INCREASE (DECREASE) IN CASH 1,061,534 (136,257) 1,050,946 (27,363)
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 111,210 146,407 121,798 37,513
------------ ------------ ------------ ------------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 1,172,744 $ 10,150 $ 1,172,744 $ 10,150
============ ============ ============ ============
NON-CASH TRANSACTIONS:
Conversion of debt to common stock -- -- $ 250,000 --
Conversion of debt to preferred stock $ 150,000 -- $ 150,000 --
SUPPLEMENTAL DISCLOSURE OF CASH FLOWS
INFORMATION:
Cash paid for interest $ 156,698 $ 54,566 $ 284,643 $ 140,611
Cash paid for income taxes -- -- 3,531 --
DETAIL OF CHANGES IN OPERATING ASSETS AND
LIABILITIES:
Accounts receivable ($ 1,404,684) ($ 36,388) ($ 2,398,147) $ 132,449
Income taxes receivable -- (503,579) -- (503,579)
Inventories (57,608) 189,956 (3,304) 4,400
Prepaid expenses and other current assets (167,082) (181,912) (226,539) (417,755)
Accounts payable (21,823) (335,805) 970,680 186,454
Accrued expenses and other current liabilities 104,131 643 87,556 (86,126)
------------ ------------ ------------ ------------
Net changes in operating assets
and liabilities ($ 1,547,066) ($ 867,085) ($ 1,569,754) ($ 684,157)
============ ============ ============ ============
</TABLE>
See accompanying notes to the condensed consolidated financial statements
<PAGE>
INTRANET SOLUTIONS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SIX MONTHS ENDED SEPTEMBER 30, 1997 AND 1996
(UNAUDITED)
(1) BASIS OF FINANCIAL STATEMENT PRESENTATION
The accompanying unaudited consolidated financial statements have been prepared
by the Company pursuant to the rules and regulations of the Securities and
Exchange Commission. Certain information and footnote disclosures normally
included in financial statements prepared in accordance with generally accepted
accounting principles have been condensed or omitted pursuant to such rules and
regulations. Although management believes that the disclosures are adequate to
make the information presented not misleading, it is suggested that these
interim consolidated financial statements be read in conjunction with the
Company's most recent audited consolidated financial statements and notes
thereto. In the opinion of management, all adjustments (which include only
normal recurring adjustments) necessary for a fair presentation of the financial
position, results of operations and cash flows for the interim period presented
have been made. Operating results for the six months ended September 30, 1997
are not necessarily indicative of the results that may be expected for the year
ending March 31, 1998.
(2) NET INCOME (LOSS) PER COMMON SHARE
Net income (loss) per common share is determined by dividing net income (loss)
by the weighted average number of common share and common share equivalents
outstanding during each period. Common share equivalents include the dilutive
effects of options and warrants which are assumed to be exercised at the
beginning of periods using the treasury stock method and the fair value of the
Company's common shares. Common share equivalents are not included in the
calculation if the effect is anti-dilutive. Primary and fully diluted net income
(loss) per share are the same.
(3) RECENT ACCOUNTING PRONOUNCEMENTS
In February 1997, the Financial Accounting Standards Board issued Statement No.
128, Earnings Per Share, which is required to be adopted on December 31, 1997.
At that time, the Company will be required to change the method currently used
to compute earnings per share and restate all prior periods. Under the new
requirements for calculating basic earnings per share, the dilutive effect of
stock options will be excluded. The impact of Statement No. 128 on the periods
presented is not expected to be material.
In June 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 130, "Reporting Comprehensive Income" ("SFAS
130"). SFAS 130 establishes standards for the reporting of comprehensive income
and its components in a full set of general-purpose financial statements. The
Company will be required to adopt SFAS No. 130 for periods beginning after
December 15, 1997 and does not expect such adoption to have a material effect on
the consolidated financial statements.
In June 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 131, "Disclosures About Segments of An
Enterprise and Related Information" ("SFAS 131"). SFAS 131 revises information
regarding the reporting of operating segments. It also establishes standards for
related disclosures about products and services, geographic areas and major
customers. The Company will be required to adopt SFAS 131 for periods beginning
after December 15, 1997 and has not yet evaluated the impact of such adoption on
the notes to its consolidated financial statements.
<PAGE>
(4) NOTE RECEIVABLE
At September 30, 1997, the Company had a note receivable ("Note") arising from
the sale of the MacGregor trademark with an outstanding balance of $570,000 due
from Hutch Sports USA, Inc. (Hutch). The entire amount of this note was due and
in arrears. The Company commenced an action against Hutch on July 26, 1997 and
received a judgment against Hutch on August 22, 1997. On August 29, 1997, the
parent company of Hutch, RDM Sports Group, Inc. filed a voluntary petition for
Chapter 11 bankruptcy in the United State Court, Northern District of Georgia.
On October 29, 1997, the Company sold the Note for its approximate carrying
value. The Company received $414,000 of the sale proceeds on October 29, 1997,
and the remaining balance is due on or before December 31, 1997.
(5) SERIES A CONVERTIBLE PREFERRED STOCK
During July 1997, the Company closed on the sale of $4,000,000 of convertible
preferred stock. The Company issued 800,000 units, each consisting of one share
of 5% $.01 par value Series A convertible preferred stock with a $5.00 stated
value and a warrant to acquire one share of the Company's common stock at an
exercise price of $5.18. The preferred stock is convertible into the Company's
common stock at a price equal to 75% market value at the time of conversion,
with a maximum conversion price of $3.71 per share and a minimum conversion
price of $1.00 per share.
In connection with this transaction, the Company recorded a non-cash deemed
dividend of $1.6 million. The deemed dividend was recorded as a discount to
preferred stock with a corresponding credit to additional paid in capital. The
discount will be recognized during the period in which the shares become
eligible for conversion, which will occur ratably from issuance through December
31, 1997. During the quarter ended September 30, 1997, the Company recognized
$980,000 of the non-cash discount accretion. The remaining $590,000 non-cash
charge will be recognized during the quarter ending December 31, 1997. The
accretion of the discount is reflected in the statement of operations as an
adjustment to net loss, but has no net effect on total stockholders' equity.
(6) DISCONTINUED OPERATIONS
In September 1997, the Company formally adopted a plan to dispose of its
on-demand publishing distribution group. The plan of disposal specifically
targets a sale of substantially all the assets of the distribution group
subsidiary to an established on-demand publishing provider.
In October 1997, the Company entered into a letter of intent to sell its
on-demand publishing distribution group to a subsidiary of a large international
supplier of office automation equipment and related services. The parties expect
to complete the transaction by December 31, 1997. The Company intends to seek
other buyers should the transaction not be completed as planned.
As of September 30, 1997, the net assets and liabilities of the on-demand
publishing distribution group were as follows:
(in millions)
Total Assets $3.8
Less: Total Liabilities 2.8
-------------
Net Assets $1.0
=============
Revenues from discontinued operations were $1.3 million and $700,000 for the
quarters ended September 30, 1997 and 1996, respectively. Revenues from
discontinued operations were $2.5 million and $1.4 million for the six months
ended September 30, 1997 and 1996, respectively. Interest expense included in
discontinued operations related to obligations of the distribution group was
$61,000 and $31,000 for the quarters ended September 30, 1997 and 1996,
respectively. Interest expense included in discontinued operations was $122,000
and $76,000 for the six months ended September 30, 1997 and 1996, respectively.
Tax benefits of $196,000 and $260,000 related to discontinued operations were
recognized for
<PAGE>
the quarter and six months ended September 30, 1996, respectively. No tax
provision or benefits related to discontinued operations was recognized during
the six months ended September 30, 1997.
The Company expects the net realizable value from the sale of the distribution
group to be for an amount greater than its net book value, net of any estimated
income or loss from operations for the period of October 1, 1997 through
December 31, 1997.
(7) RECLASSIFICATIONS
Certain accounts in the prior year financial statements have been reclassified
for comparative purposes to conform with the presentation in the current year
financial statements.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
OVERVIEW
IntraNet Solutions, Inc. ("IntraNet" or the "Company") provides integrated
solutions for the creation, management and distribution of critical business
information. IntraNet offers its customers a variety of products including
proprietary intranet document management software, customized off-the-shelf
software applications, hardware and software implementation. The evolution of
Web technology as a tool for storing, managing and distributing information,
coupled with the Company's experience in designing systems and creating custom
software applications, has created an opportunity for the Company to develop a
line of document management software products utilizing Web technology.
The Company's revenues are derived from (i) the sale of proprietary and
non-proprietary software products, (ii) the sale of hardware products, (iii) the
sale of maintenance and support contracts, and (iv) the sale of technical and
other services. Revenue from the sale of software is recognized in accordance
with AICPA Statement of Position 91-1 Software Revenue Recognition. Accordingly,
revenue is recognized at the time of product shipment if no significant Company
obligations remain and collection of the resulting sale price is probable.
Revenue from maintenance and support contracts is generally recognized ratably
over the term of the contract. Revenue from contracts with original durations of
one year or less is recognized at the time of sale if the Company does not
expect to have material future obligations to service the contracts. Revenue
from technical and other services are recognized as the related services are
performed. Revenue from the sale of all other products and services is
recognized at the time of delivery to the customer.
<PAGE>
RESULTS OF OPERATIONS FOR THE QUARTER ENDED SEPTEMBER 30, 1997
COMPARED TO THE QUARTER ENDED SEPTEMBER 30, 1996
REVENUES
Total revenues increased to $5.0 million for the quarter ended
September 30, 1997 from $3.4 million for the quarter ended September 30, 1996,
or $1.6 million (47.8%). This increase related to increases in all revenue
product lines.
HARDWARE INTEGRATION. Hardware integration revenues increased a total
of $1.4 million or 60.4% for the quarter ended September 30, 1997 compared to
the quarter ended September 30, 1996 ($3.6 million in 1997 compared to $2.2
million in 1996). The increase in hardware integration revenue was principally
due to the expansion of the Company's customer base and increased sales to
existing customers.
SOFTWARE, TECHNICAL SERVICES AND SUPPORT. Software, technical services
and support revenues increased a total of $300,000, or 22.8% for the quarter
ended September 30, 1997 compared to the quarter ended September 30, 1996 ($1.4
million in 1997 compared to $1.1 million in 1996). Increases in software revenue
accounted for substantially all of the total increase. The growth in software
revenue was primarily attributable to the Company's proprietary software
products.
COST OF REVENUES AND GROSS PROFIT
Total cost of revenues increased to $3.7 million for the quarter ended
September 30, 1997 from $2.6 million for the quarter ended September 30, 1996.
Total cost of revenues as a percent of total revenues was 73.3% in 1997 compared
to 75.6% in 1996. Gross profit increased to $1.3 million for the quarter
September 30, 1997 compared to $800,000 for the quarter ended September 30,
1996. Total gross profit as a percent of total revenues was 26.7% in 1997
compared to 24.4% in 1996. The increase in gross profit was primarily
attributable to incremental revenue contributions in all product lines.
HARDWARE INTEGRATION. Cost of hardware integration revenues increased
to $3.1 million for the quarter ended September 30, 1997 from $1.9 million for
the quarter ended September 30, 1996. Cost of hardware integration revenues as a
percent of hardware integration revenues was 85.7% in 1997 compared to 82.7% in
1996. Gross profit from hardware integration was 14.3% for the quarter ended
September 30, 1997 compared to 17.3% for the quarter ended September 30, 1996.
SOFTWARE, TECHNICAL SERVICES AND SUPPORT. Cost of software, technical
services and support revenues decreased to $600,000 for the quarter ended
September 30, 1997 from $700,000 for the quarter ended September 30, 1996. Cost
of software, technical services, and support revenues as a percent of software,
technical services, and support revenue was 41.4% in 1997 compared to 61.7% in
1996. Gross profit on software, technical services and support was 58.6% for the
quarter ended September 30, 1997 compared to 38.3% for the quarter ended
September 30, 1996. The increase in gross profit was primarily attributable to
the increase in sales of higher margin proprietary software. Gross profit from
software revenues increased to
<PAGE>
72.3% for the quarter ended September 30, 1997 from 46.1% for the quarter ended
September 30, 1996.
OPERATING EXPENSES
SALES AND MARKETING. Sales and marketing expenses increased to $800,000
for the quarter ended September 30, 1997 compared to $500,000 for the quarter
ended September 30, 1996. Sales and marketing expenses as a percent of total
revenues were 15.0% in 1997 compared to 13.3% in 1996. Sales and marketing
increased as a percent of revenues primarily due to an expansion of the
Company's marketing efforts for its proprietary line of software products.
GENERAL AND ADMINISTRATIVE. General and administrative expenses were
$600,000 for the quarter ended September 30, 1997 compared to $500,000 for the
quarter ended September 30, 1996. General and administrative expenses as a
percent of total revenue were 12.2% in 1997 compared to 14.0% in 1996.
RESEARCH AND DEVELOPMENT. Research and development expenses were
$300,000 for each of the quarters ended September 30, 1997 and September 30,
1996. Research and development expenses as a percent of total revenue were 6.6%
in 1997 compared to 8.4% in 1996.
DISCONTINUED OPERATIONS
In September 1997, the Company formally adopted a plan to dispose of its
on-demand publishing distribution group. The plan of disposal specifically
targets a sale of substantially all the assets of the distribution group
subsidiary to an established on-demand publishing provider. In October 1997, the
Company entered into a letter of intent to sell its on-demand publishing
distribution group to a large international supplier of office automation
equipment and related services. The parties expect to complete the transaction
by December 31, 1997.
Distribution services revenues increased a total of $600,000 for the quarter
ended September 30, 1997 compared to the quarter ended September 30, 1996 ($1.3
million in 1997 compared to $700,000 in 1996). The increase in distribution
services revenue was primarily attributable to the expansion of the customer
base through additions to the direct sales force and the opening of the
Company's Arizona location, net of the closing of three other locations.
Cost of distribution services revenue increased to $1.1 million for the quarter
ended September 30, 1997 compared to $500,000 for the quarter ended September
30, 1996. Cost of distribution services revenues as a percent of distribution
services revenue was 83.7% in 1997 compared to 76.2% in 1996. Gross profit on
distribution services was 16.3% for the quarter ended September 30, 1997
compared to 23.8% for the quarter ended September 30,1996. Lower margins on
distribution services were primarily due to costs associated with experiencing
lower than optimal capacity utilization.
Distribution Services operating expenses decreased a total of $100,000 to
$600,000 for the quarter ended September 30, 1997 from $700,000 for the quarter
ended September 30, 1996.
<PAGE>
RESULTS OF OPERATIONS FOR THE SIX MONTHS ENDED SEPTEMBER 30, 1997
COMPARED TO THE SIX MONTHS ENDED SEPTEMBER 30, 1996
REVENUES
Total revenues increased to $9.6 million for the six months ended
September 30, 1997 from $6.9 million for the six months ended September 30,
1996, or $2.7 million (38.9%). This increase related to increases in all revenue
product lines.
HARDWARE INTEGRATION. Hardware integration revenues increased a total
of $1.9 million or 41.3% for the six months ended September 30, 1997 compared to
the six months ended September 30, 1996 ($6.5 million in 1997 compared to $4.6
million in 1996). The increase in hardware integration revenue was primarily due
to the expansion of the Company's customer base and increased sales to existing
customers.
SOFTWARE, TECHNICAL SERVICES AND SUPPORT. Software, technical services
and support revenues increased a total of $800,000, or 34.0% for the six months
ended September 30, 1997 compared to the six months ended September 30, 1996
($3.0 million in 1997 compared to $2.2 million in 1996). Increases in software
revenue accounted for $500,000 of the total increase. The growth in software was
primarily attributable to the Company's proprietary software products.
COST OF REVENUES AND GROSS PROFIT
Total cost of revenues increased to $7.1 million for the six months
ended September 30, 1997 from $5.3 million for the six months ended September
30, 1996. Total cost of revenues as a percent of total revenues was 74.2% in
1997 compared to 77.2% in 1996. Gross profit increased to $2.5 million for the
six months ended September 30, 1997 compared to $1.6 million for the six months
ended September 30, 1996. Total gross profit as a percent of total revenues
25.8% in 1997 compared to 22.8% in 1996. The increase in gross profit was
primarily attributable to incremental revenue contributions in all product
lines.
HARDWARE INTEGRATION. Cost of hardware integration revenues increased
to $5.5 million for the six months ended September 30, 1997 from $3.9 million
for the six months ended September 30, 1996. Cost of hardware integration
revenues as a percent of hardware integration revenues was 84.2% in 1997
compared to 83.2% in 1996. Gross profit from hardware integration was 15.8% for
the six months ended September 30, 1997 compared to 16.8% for the six months
ended September 30, 1996. The decrease in gross profit was primarily
attributable to competitive pricing on larger integration contracts.
<PAGE>
SOFTWARE, TECHNICAL SERVICES AND SUPPORT. Cost of software, technical
services and support revenues increased to $1.6 million for the six months ended
September 30, 1997 from $1.4 million for the six months ended September 30,
1996. Cost of software, technical services, and support revenues as a percent of
software, technical services, and support revenue was 52.2% in 1997 compared to
64.7% in 1996. Gross profit on software, technical services and support was
47.8% for the six months ended September 30, 1997 compared to 35.3% for the six
months ended September 30, 1996. The increase in gross profit was primarily
attributable to the increase in sales of higher margin proprietary software.
Gross profit from software revenues increased to 62.7% in the six months ended
September 30, 1997 from 41.9% in the six months ended September 30, 1996.
OPERATING EXPENSES
SALES AND MARKETING. Sales and marketing expenses increased to $1.3
million for the six months ended September 30, 1997 compared to $900,000 for the
six months ended September 30, 1996. Sales and marketing expenses as a percent
of total revenues were 14.0% in 1997 compared to 12.4% in 1996. Sales and
marketing increased as a percent of revenues primarily due to an expansion of
the Company's marketing efforts for its proprietary line of software products.
GENERAL AND ADMINISTRATIVE. General and administrative expenses
increased to $1.2 million for the six months ended September 30, 1997 compared
to $800,000 for the six months ended September 30, 1996. General and
administrative expenses as a percent of total revenue were 12.3% in 1997
compared to 11.4% in 1996. General and administrative expenses increased
primarily due to increases in staffing, expenses related to the relocation of
corporate headquarters, and other related new facility costs.
RESEARCH AND DEVELOPMENT. Research and development expenses were
$600,000 for the six months ended September 30, 1997 and $500,000 for the six
months ended September 30, 1996. Research and development expenses as a percent
of total revenue were 6.7% in 1997 compared to 7.7% in 1996. Total research and
development expenses increased in 1997 compared to 1996 reflecting the
introduction of the Company's proprietary software product during the fiscal
year ended March 31, 1997.
DISCONTINUED OPERATIONS
Distribution services revenues increased a total of $1.1 million for the six
months ended September 30, 1997 compared to the six months ended September 30,
1996 ($2.5 million in 1997 compared to $1.4 million in 1996). The increase in
distribution services revenue was primarily attributable to the expansion of the
customer base through additions to the direct sales force and the opening of the
Company's Arizona location, net of the closing of three other locations.
Cost of distribution services revenue increased to $2.1 million for the six
months ended September 30, 1997 compared to $1.0 million for the six months
ended September 30, 1996. Cost of distribution services revenues as a percent of
distribution services revenue was 82.9% in 1997 compared to 72.9% in 1996. Gross
profit on distribution services was 17.1% for the six months ended September 30,
1997 compared 27.1% for the six months ended September
<PAGE>
30,1996. Lower margins on distribution services were primarily due to costs
associated with experiencing lower than optimal capacity utilization.
Distribution Services operating expenses increased a total of $200,000 from $1.1
million for the six months ended September 30, 1996 to $1.3 million for the six
months ended September 30, 1997.
LIQUIDITY AND CAPITAL RESOURCES
In December 1996, the Company issued $1.0 million of 9% promissory
notes. During the fourth quarter of fiscal 1997 the Company issued an additional
$500,000 of 9% promissory notes. As additional consideration for the loans, the
Company issued each lender a warrant to acquire an aggregate of 300,000 shares
of Common Stock at an exercise price of $4.00. During the six months ended
September 30, 1997, $250,000 of these notes were converted into approximately
71,000 shares of common stock at $3.50 per share.
In July, 1997, the Company completed a $4.0 million private placement
of 5% Series A $.01 par value convertible preferred stock with a stated value of
$5.00 per share. Included in the $4.0 million was $150,000 of existing 9%
promissory notes which were converted into the private placement. The remaining
9% promissory notes mature on January 15, 1998 ($975,000) and April 15, 1998
($125,000).
The Company's revolving working capital line of credit allows for
borrowings of up to $3.6 million based on available collateral at the bank's
base lending rate plus 2.5%. At September 30, 1997, the Company had advances of
$2.5 million, which are due on demand. On November 10, 1997, the Company has
$1.5 million in advances and $1.1 million of availability on its working capital
line of credit. At September 30, 1997, the Company also had term loans and
promissory notes with financial institutions outstanding in the amount of
$826,300. The term loans require monthly principal payments of $38,400 plus
interest at the bank's base lending rate plus 2.5%. At September 30, 1997 the
Company also had a demand note payable to its principal stockholder in the
amount of $27,500 which accrues interest at a rate of 12%.
On September 30, 1997, the Company had a note receivable arising from
the sale of the MacGregor trademark with an outstanding balance of $570,000 due
from Hutch Sports USA, Inc. (Hutch). The entire amount of this note was due and
in arrears. The Company commenced an action against Hutch on July 26, 1997 and
received a judgment against Hutch on August 22, 1997. On August 29, 1997, the
parent company of Hutch, RDM Sports Group, Inc. filed a voluntary petition for
Chapter 11 bankruptcy in the United State Court, Northern District of Georgia.
On October 29, 1997, the Company sold the Note for its approximate carrying
value. The Company received $414,000 of the sale proceeds on October 29, 1997,
and the remaining balance is due on or before December 31, 1997.
As of September 30, 1997 the Company had cash of $1.2 million. Capital
expenditures for the six months ended September 30, 1997 and 1996, including
equipment financed with capital lease obligations, were $240,000 and $410,000
respectively. During the year ended March 31, 1997 the Company acquired
substantially all the assets of a graphic communications
<PAGE>
and custom printing business. The purchase price consisted of cash of $675,800,
a promissory note of $267,800, and shares of the Company's common stock valued
at $350,000. The promissory note bears interest at prime plus 1.5%. The balance
of $125,200 remaining on this note is due March 1, 1998.
The Company acquired a portion of its distribution services production
equipment with capital lease obligations. These leases require total monthly
payments of $28,500 and carry interest rates between 10.1% and 16.6%. In
addition, the Company has also entered into certain operating leases for
facilities and equipment. These leases require total monthly payments of $32,700
(net of monthly sublease income of $13,900) for facilities and $37,100 (net of
monthly sublease income of $6,200) for production and office equipment. The
Company also has a long-term consulting agreement with a former stockholder that
requires monthly payments of $10,300 through July 2000.
The Company's capital requirements in connection with its development
and marketing activities have been and will continue to be significant. The
Company will continue to evaluate future financing needs in order to strengthen
its capital position. Future financings, if necessary to pursue such objectives,
may be dilutive to shareholders, or may contain restrictive covenants. There can
be no assurance that additional financing will be available to the Company on
commercially reasonable terms, or at all.
PRIVATE SECURITIES LITIGATION REFORM ACT
The Private Securities Litigation Reform Act of 1995 provides a "safe
harbor" for forward-looking statements. Certain information included in this
Form 10-QSB and other materials filed or to be filed by the Company with the
Securities and Exchange Commission (as well as information included in oral
statements or other written statements made or to be made by the Company)
contains statements that are forward-looking, such as statements relating to
plans for future expansion, product development, market acceptance of new
products, and other business development activities as well as other capital
spending, financing sources and the effects of regulation and competition. Such
forward-looking information involves important risks and uncertainties that
could significantly affect anticipated results in the future and, accordingly,
such results may differ from those expressed in any forward-looking statements
made by or on behalf of the Company. These risks and uncertainties include, but
are not limited to, those relating to product development and market acceptance
of new products, dependence on existing management, leverage and debt service
(including sensitivity to fluctuations in interest rates), domestic or global
economic conditions, changes in federal or state tax laws or the administration
of such laws.
<PAGE>
PART II
OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.
The Company is not a party to any material pending legal proceedings and,
to the best of its knowledge, its properties are not the subject of any
such proceedings.
ITEM 2. CHANGES IN SECURITIES.
None
ITEM 3. DEFAULTS UPON SENIOR SECURITIES.
None
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY-HOLDERS.
On August 21, 1997, the Company held its Annual Meeting of the Shareholders
to consider and vote upon the following proposals. The tabulation of the
votes, in favor, against, and abstaining with regard to the proposals is
set forth below.
Broker
Proposal In Favor Against Abstain Non-Votes
-------- -------- ------- ------- ---------
1. ELECTION OF DIRECTORS
Robert F. Olson 6,473,750 -- 12,777 --
Ronald E. Eibensteiner 6,473,875 -- 12,652 --
Henry Fong 6,473,850 -- 12,677 --
David D. Koentopf 6,473,875 -- 12,652 --
Jeffrey J. Sjobeck 6,473,875 -- 12,652 --
2. AMENDMENT AND
RESTATEMENT OF BYLAWS
OF THE CORPORATION 6,459,907 13,386 2,999 10,235
ITEM 5. OTHER INFORMATION.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits.
None
(b) Report on Form 8-K
For the six months ended September 30, 1996, the Company did not file
any reports on Form 8-K.
<PAGE>
SIGNATURES
In accordance with the requirements of the Exchange Act, the Registrant has duly
caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
INTRANET SOLUTIONS, INC.
(the "Registrant" or "Company")
Dated November 13, 1997 By: /s/ Robert F. Olson
------------------------------------
Robert F. Olson
Its: Chief Executive Officer
------------------------------------
(Principal Executive Officer)
Dated November 13, 1997 By: /s/ Jeffrey J. Sjobeck
------------------------------------
Jeffrey J. Sjobeck
Its: Chief Financial Officer
------------------------------------
(Principal Financial Officer)
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