<PAGE> 1
U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-KSB
[X] Annual report under Section 13 or 15(d) of the Securities Exchange Act of
1934
For the fiscal year ended March 31, 1998.
[ ] 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
--------------------------------
INTRANET SOLUTIONS, INC.
- - --------------------------------------------------------------------------------
(Exact Name of Registrant as Specified in Its Chapter)
Minnesota 41-1652566
- - ------------------------------- ------------------------------------
(State or Other Jurisdiction of (I.R.S. Employer Identification No.)
Incorporation or Organization)
9625 West 76th Street, Suite 150, Eden Prairie, Minnesota 55344
- - --------------------------------------------------------------------------------
(Address of Principal Executive Offices)
(612) 903-2000
- - --------------------------------------------------------------------------------
(Issuer's Telephone Number, Including Area Code)
- - --------------------------------------------------------------------------------
(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
----------- ----------
Check if there is no disclosure of delinquent filers pursuant to Item
405 of Regulation S-B contained in this form, and no disclosure will be
contained, to the best of registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this
Form 10-KSB or any amendment to this Form 10-KSB.
-----------
The issuer had total revenues of $19,449,795 for its fiscal year ended
March 31, 1998.
As of June 23, 1998, assuming as market value the price of $4.875 per
share (the last sales price of the Company's Common Stock on the Nasdaq SmallCap
Market), the aggregate market value of shares held by non-affiliates was
$21,870,430.
As of June 23, 1998 the Company had outstanding 8,676,983 shares of
Common Stock, $.01 par value.
Documents Incorporated by Reference: Portions of the Company's Proxy
Statement for its Annual Meeting of Shareholders to be conducted on September
16, 1998 (the "1998 Proxy Statement") are incorporated by reference into Part
III of this Form 10-KSB, to the extent described in Part III. The 1998 Proxy
Statement will be filed within 120 days after the end of the fiscal year ended
March 31, 1998.
<PAGE> 2
TABLE OF CONTENTS
PAGE
PART I
Item 1. Description of Business 1
Item 2. Properties 14
Item 3. Legal Proceedings 15
Item 4. Submission of Matters to a Vote of Security Holders 15
PART II
Item 5. Market for Registrant's Common Equity
and Related Stockholder Matters 16
Item 6. Management's Discussion and Analysis of Financial Condition
and Results of Operations 16
Item 7. Financial Statements 22/F1
Item 8. Changes in and Disagreements with Accountants
on Accounting and Financial Disclosure 22
PART III
Item 9. Directors, Executive Officers, Promoters and Control Persons:
Compliance with Section 16(a) of the Exchange Act 23
Item 10. Executive Compensation 23
Item 11. Security Ownership of Certain Beneficial Owners
and Management 23
Item 12. Certain Relationships and Related Transactions 23
Item 13. Exhibits and Reports on Form 8-K 24
<PAGE> 3
PART I
ITEM 1. DESCRIPTION OF BUSINESS
IntraNet Solutions develops and implements integrated solutions for the
management and distribution of critical business information through the
Internet, intranets and extranets. IntraNet Solutions offers its customers a
variety of products, including proprietary intranet document management software
and hardware and software implementation services. The evolution of Web
technology as a tool for storing, managing and distributing information, coupled
with IntraNet Solutions' experience in designing systems and creating software
applications, has created an opportunity for IntraNet Solutions to develop and
market a line of document management software products utilizing Web technology.
Its customers represent a wide range of industries such as healthcare, legal,
manufacturing and telecommunications.
IntraNet Solutions intends to expand the array of proprietary software
products offered in its Intra.doc!(R) Management System product line as a means
of increasing its share of the expanding Web-based document management software
market. Intra.doc!(R) is a registered trademark of the Company.
INDUSTRY
Historical Development of Computer Systems. For more than two decades,
the U.S. computer industry has directed much of its innovation towards the
evolution of data processing tasks from centralized computer systems (typically
mainframe computers and minicomputers) to decentralized network systems, which
are generally smaller and more cost-effective. In a centralized computer system,
users are connected to a large central computer which handles both data
processing and storage functions. Traditionally, the primary appeal of
centralized computer systems has been their ability to provide large numbers of
users with shared, centrally managed data. Users of centralized computer
systems, however, grew increasingly dissatisfied with the high cost of these
systems and, as a result of advances in microprocessor performance and
networking technology, network computing emerged as a promising alternative to
the centralized computer system. Network computing allows users to obtain both
connectivity to shared data and the price and performance advantages of
distributed processing.
Local and Wide Area Networks. During the 1980's, local area networks
("LANs") and wide area networks ("WANs") proliferated as enterprise-wide
computing solutions to take the place of centralized systems. Advances in
microprocessor performance also resulted in the development of multiple formats,
including a range of different word processing, spreadsheet, CAD and other
graphics applications which run on a variety of computing platforms with little
data sharing compatibility. The absence of compatibility between computing
platforms and applications has greatly reduced the utility of LANs and WANs as
mechanisms for sharing information among users of an enterprise computing
system. Without an effective means of creating, storing, and searching for
information, workers have been forced to re-create documents from scratch,
duplicating effort and increasing the margin for error. Certain collaborative
computing solutions, such as Lotus Notes(R), were developed to alleviate the
absence of widespread connectivity. However, (Lotus Notes is a registered
trademark of the Lotus Development Corporation) these products use proprietary
database structures which fail to provide ready access to remote databases. In
addition, any new or upgraded software applications must be custom-integrated
into the proprietary platform, involving significant outside expertise and
expense.
The Internet and World Wide Web. The Internet is a global collection of
computer networks that links thousands of public and private computer networks
and millions of public and private computers around the world. Developed in
1969, the Internet acts as a "network of networks", allowing computers connected
to the Internet to communicate with each other using the Internet protocol
("TCP/IP"). The Internet has historically been used primarily by academic
institutions and government agencies to exchange information via electronic
mail. Recently, the Internet has experienced rapid growth in use and increased
internationalization as a result of, among other things, the growth in the
number of commercial hosts, the expanded breadth of information content, an
increase in the installed base of personal computers,
1
<PAGE> 4
improvements in telecommunications infrastructure supporting Internet use and
technological advances such as improved graphical interfaces, all of which make
the Internet more useful and easier to use.
The World Wide Web (the "Web"), a client/server network of hyperlinked
multimedia databases, was introduced in 1992. The Web enables users to find,
retrieve and link information on the Internet in a consistent way that makes the
underlying complexities transparent to the user. Electronic documents are
published on Web servers in a common format described by the Hypertext Markup
Language ("HTML"). The Web can be easily accessed using client software known as
Web browsers that use a standard protocol called Hypertext Transfer Protocol
("HTTP"). The Web allows users to offer and retrieve textual, graphical and
other information.
Business Applications of Web Technology. Initial business applications
of Web technology focused on its utility as a new channel for direct selling.
Although a few businesses are realizing revenues directly from Web sales, the
majority of commercial users currently employ the Web for external
communications about their products and services to potential customers. Only
recently have enterprises commenced using Web technology as a means of internal
communication and information management. This technology offers these
organizations a means of overcoming the same distributed and heterogeneous
information problems the Internet and World Wide Web were designed to solve on a
global basis. Since many organizations already have an Internet system in
operation, the application of Web technology to serve internal data sharing
needs is both operationally intuitive and cost-effective.
Private internets, or "intranets", are rapidly gaining acceptance among
the corporate community. Corporate intranets use the infrastructure and
standards of the Internet and World Wide Web, but are secured from access by
general users of the public Internet through software programs commonly known as
"firewalls". Through Web browsers, the same electronic information can be viewed
by any person in the organization, regardless of the system he is using. More
importantly, the uniform presentation of information enables intranets to
consolidate all computers, software and databases existing within the host
organization into a single system, enabling users to find information wherever
it resides.
A more recent trend in corporate intranets is the development of the
external intranet, or "extranet." An extranet exists when businesses allow
customers, suppliers, or multiple global locations access to their internal
systems via Internet connections. Using Web technology for this type of
collaborative system offers a great cost advantage over wide area networks,
which use long distance and leased phone lines.
PRODUCTS AND SERVICES
IntraNet Solutions believes that its current and future competitive
position in the document management market, will be largely dependent upon its
ability to offer solutions for web-based document management and distribution
needs.
IntraNet Solutions recently released Intra.doc! Management System
(MS) Version 3, an update to its document management system, an
intranet/Internet software application that utilizes Web technology to provide
users with access to any document on their network -- regardless of the document
location or the original software application used for its creation. Intra.doc!
MS offers document management in a Web environment, which allows system users
Web browser access to documents created on a multitude of computing
platforms thereby offering IntraNet Solutions' customers a means of overcoming
the data sharing compatibility problems inherent in systems operating without
Web technology.
2
<PAGE> 5
THE INTRA.DOC! (R) MANAGEMENT SYSTEM
IntraNet Solutions' flagship product is the Intra.doc! Management
System, an intranet/Internet software application that utilizes Web technology
to provide users with access to any document, regardless of location or the
software application used to create it. Intra.doc! offers customers a means of
overcoming the data sharing compatibility problems inherent in traditional
LAN/WAN systems. Intra.doc! automatically places documents into a Web-ready
format while preserving the formats in which the documents were created.
Additionally, the software automatically creates and indexes the Web hyperlinks
that make it possible to navigate through the information and further
categorizes data in such a manner that permits full text searches by the user.
Document-based data is not only viewable, but authorized users may
access the documents in their native formats. Intra.doc! MS eliminates the need
to generate manual links and navigational aids, continually updates the Web site
with the most current information, permits secure file management and revision
control, overcomes database querying limitations, allows diverse documents
(including those in CAD formats) to be accessible and linked on a Web, allows
access to multiple repositories (libraries) of information, allows users to
search for and view information from any location, and minimizes the cost of,
and time required for both installation and day to day management of business
information on a Web site. All an authorized user needs to access the site is a
standard Web browser and a Web document viewer.
Intra.doc! MS contains several features calculated both to expand
access to, and increase the amount of information readily available on any
organization's Document Management System:
- - - Authorized users have access to the information that they require for
decision-making, and general users of the public Internet are
restricted from accessing the system.
- - - All system users are able to generate and publish information for
distribution throughout approved areas of the organization without
having to go through a mediator.
- - - System administrators may use existing firewall technology to grant
varying levels of security access to different groups of users.
- - - Barriers to entering the information-sharing system are extremely low.
Users require only a personal computer, a browser, and in some cases,
generic document viewing software.
- - - Implicit barriers to usage are also very low. Web sites can be created
directly by end users who are able to view documents and author them
without specialized skills or software systems. Users can author
documents in whichever form is convenient to them.
- - - System flexibility is high, which means the system can be adapted to
the changing needs of people in the organization.
Intra.doc! is designed to move information through a three-layer
architecture that acts to store, structure and catalog the data, format the data
for Web site publishing, and maintain the Web site with the most current version
thereof.
After a user has authored a document in any software application, the
document is submitted to Intra.doc! through a Web interface. In some instances,
the document may require approval before publication and the parties that
approve it are notified through a Web-based list of the status of the various
documents awaiting publication. Once documents have been approved, the document
information in various formats is placed in repository called the IntraNet Web
Library (the "Library"), where it is structured and organized. Documents stored
in the Library remain continuously accessible in their native software
applications. Authors are required to submit certain "metadata" (profile
information) for each document, such as its title, subject, author and revision
date. This information is later used to organize the data and provide for ease
in document retrieval.
3
<PAGE> 6
The refinement layer of Intra.doc! converts each document to
Web-readiness. The refinement layer contains three components: the Intra.doc!
Document Refinery(TM), the Intra.doc! Web Refinery(TM), and the Intra.doc!
Full-Text Refinery(TM). The Document Refinery(TM) converts documents to Adobe
PDF or HTML formats, or preserves them in their native format if conversion is
not possible. The Full-Text Refinery(TM) uses Intra.doc!'s Verity text
search engine to index the document text and metadata to permit document
searching after publication. The Web Refinery(TM) then generates HTML links and
menu hierarchies according to the Web site structure and meta data information,
and then continually maintains the site to ensure that the most current
information available is reflected there.
The third and final layer of the Intra.doc! architecture allows users
with Netscape Navigator (Netscape Navigator is a trademark of Netscape
Communications Corporation), Microsoft Explorer (Microsoft Explorer is a
trademark of Microsoft Corporation) and other common Internet browsers
to use easy navigational menus to access necessary information. Any user on the
system can view a document created in virtually any application without having
the origin software loaded on their desktop. Authorized users may even "check
out" documents in order to modify them. Full Web site search capabilities are
provided, and documents are hierarchically structured to facilitate navigation.
When maintaining a Web site with Intra.doc!, the labor-intensive tasks
of making information Web-ready are automated. More importantly, the information
itself becomes more accessible, up-to-date, and meaningful to the users, while
the system preserves the controls necessary for data security.
The software is uniquely architected to deliver mission-critical
document management functions including library management; Web publishing;
universal access with minimal administration; page-level and user-specific
security; e-mail-based workflow; and a Universal Business Address for each
document. All this in a package that is workgroup affordable, and enterprise
scalable. At the heart of the system is the Intra.doc! server, a Java-based
server that manages all of the HTTP communications except the communication to
the search engine that is continually running on the Web server.
The Intra.doc! MS architecture increases efficiency of use and
administration by separating the functions of management and publishing. The
Intra.doc! Library is the repository--the vault of corporate documents where
documents are maintained in their native formats. The Intra.doc! Document
Refinery converts documents into Web-viewable format (PDF or other) and
automatically publishes them to the Web site. This structure allows the Web site
to function efficiently while the documents themselves are managed separately.
Information about documents and their attributes is stored in an SQL
database. This provides rapid access as Web pages are built and refreshed
dynamically. Organizations may use the common database of their choice and then
scale up the Intra.doc! system for full enterprise deployment when desired,
utilizing popular databases such as Microsoft Access, Microsoft SQL Server and
Oracle. This powerful, fast, and flexible architecture is augmented by the
Intra.doc! Security module which allows administrators to set permissions by
content and by user.
LIBRARY MANAGEMENT
- - - CHECK-IN/CHECK-OUT AND REVISION MANAGEMENT - Documents in their native
format are stored in a central repository called a library or a vault.
Users access the library via a Web browser for viewing, check-in,
check-out, and printing. Only one user is allowed to have a document
checked out at a time but many may view the released version of the
document. Revision management capabilities are provided to track and record
revision histories, to control Web site content, and to ensure that the
user always views the most current version of the document. As documents
are checked in, document attributes can be added. These attributes, called
metadata, include information such as author, subject, date, department, or
part number information about the document that will help the user and
others find it. Any number of these may be custom attributes tailored to
an organization's particular needs.
4
<PAGE> 7
WEB PUBLISHING
- - - WEB LAYOUT EDITOR - The Web Layout Editor enables users to build Web pages
and update their hierarchy using Java applets. Each Web page functions
dynamically to show search results and point users toward related
information. Dynamic links to HTML pages, documents, and reports are
instantly viewable as changes or additions are made to Web pages in the Web
Layout Editor. Any knowledge worker, working from any location, not just a
Webmaster working at the Web server, can define new search criteria and
build dynamic Web pages.
- - - DOCUMENT CONVERSION - The Intra.doc! Management System's document
conversion facility uses agent technology and a messaging queue to take
standard desktop applications and convert them so they can be automatically
published to the Web site. The Web-viewable format is definable, but most
organizations choose to convert documents to Adobe's Portable Data Format
(PDF); this format is widely popular because it preserves the original look
and feel of documents, including all fonts and graphics. Once converted,
documents can be viewed using Adobe Reader plug-ins, other plug-in and
helper applications, or documents can be viewed in their native format
using the native application.
- - - CONTENT AND ATTRIBUTE INDEXING - Two main search mechanisms are provided.
The first is content indexing. This uses industry-standard methods to
generate a full-text database of the contents of documents - every
word, every phrase. The second is attribute indexing. This uses the
documents' attributes or meta data such as their authors, titles, part
numbers or subjects to generate a database that will meaningfully relate
documents to one another.
- - - SECURITY - The Intra.doc! MS security module is designed to accommodate
those with strict security needs and those who require little or no
security for their Web site. Administrators may set security two ways: by
content and by user. Access to content is controllable down to the page
level, allowing any specific document to remain confidential. Access by
users may be defined by specific roles and workgroups, and controlled by
user names and passwords, restricting access as needed while permitting the
flexibility to move documents through a managed workflow process.
- - - BROWSER-BASED ADMINISTRATION - The Intra.doc! MS browser-based
administration allows authorized users round-the-clock access to the system
from any remote location. Thus, key administrative functions can be
performed anywhere, anytime. This is especially critical in organizations
where departmental workgroups are geographically dispersed and information
must be available at all times without disruption.
WORKFLOW
- - - The Intra.doc! Management System's workflow capability lets multiple
authors contribute to the same document through an organized, managed
process. This is useful not only for creating documents concurrently, but
also for tracking documents through an approval process before they are
published to the Web site. The workflow module allows controls to be placed
on who may check documents in and out, and on the number of reviewers.
Documents to be shared, edited and/or approved are distributed and returned
via existing e-mail systems. To improve efficiency, the status of the
review process can be examined anytime, at a glance, using the Intra.doc!
system.
UNIVERSAL BUSINESS ADDRESS
- - - Every document in the Intra.doc! Management System has its own universal
business address (UBA) or http, making it easy to manage and control
documents anywhere in the enterprise. The UBA can be used for such controls
as reducing storage requirements and standardizing corporate information.
For example, instead of e-mailing a copy of meeting minutes to everyone,
a UBA link maybe provided to the e-mail message. Recipients simply click
on the link to view the minutes automatically.
5
<PAGE> 8
INTRA.DOC!(R) LEGACY -- PAPER TO WEB SOLUTION
Announced in August, 1997, Intra.doc! Legacy, is a product offering
that integrates Adobe Acrobat Capture (Adobe Acrobat Capture is a trademark of
Adobe Systems, Inc.) with IntraNet Solutions' flagship product, Intra.doc! MS.
Intra.doc! Legacy enables companies to automatically convert large volumes of
paper-based documents to Web-ready PDF files, and then publish, access and
maintain them on a dynamic intranet/Internet Web site. The end result is that
customers can cost effectively and quickly build a library of corporate
information from paper documents with a typical application being completed in
just a few weeks.
Intra.doc! Legacy is integrated with Adobe Acrobat Capture and offers
customers a streamlined method of page recognition (hundreds-to-millions
including text and images) in eight languages that costs thousands of dollars
less than proprietary imaging systems, by providing them with a single compact
- - -- fully searchable -- file that looks like the original printed document. In
addition, with Intra.doc! MS, knowledge workers use their Web browser (Netscape
or Microsoft Explorer) to access, make changes or print the documents they need
on demand to a Web-viewable PDF format and automatically publish them to a
dynamic intranet Web site."
Intra.doc! Legacy scans in paper documents and Web-enables their
contents by automatically generating the HTML hyperlinks that make them truly
Web-usable. Intra.doc! Legacy works with a variety of popular document formats
including, Word, Excel, Quark, FrameMaker, Word Perfect, even databases, CAD
drawings and more. The system turns these various formats into one "neutral"
format for storing and sharing on the Web.
The unifying format under which all documents are combined is Adobe's
Portable Data Format (PDF). It is the industry's most universally accepted Web
format, because in PDF, documents are published to the Web exactly as they look
on paper. Intra.doc! Legacy's architecture is open to publishing to all formats
in addition to Adobe PDF.
INTRA.DOC!(R) ORDER MANAGEMENT SYSTEM
In November of 1996, IntraNet Solutions introduced its proprietary
Intra.doc! Order Management System (OMS). This product allows customers to
remotely store, revise, secure access to, and distribute documents, directly
through the Internet or via traditional "dial-up" systems. Users of the
Intra.doc! OMS system can send copies of documents, physically or
electronically, to IntraNet Solutions for electronic warehousing. Once the
documents have been stored, customers may access them via the Internet or
"dial-up", retrieving documents for revisions as needed.
Over the Internet, customers use a common browser for access to the
Intra.doc! OMS interface and to their documents. Documents are formally checked
out of IntraNet Solutions' data vault system and retrieved to the user's desktop
for revisions in their native applications. Once the revisions are complete,
documents are checked back in to IntraNet Solutions' data vault system, where
revision histories are controlled and maintained.
The Company believes that using Intra.doc! OMS to access and revise
documents over the Internet is ideal for businesses with remote locations,
customer sites, or distribution channels. Many businesses need a constant flow
of training manuals, product brochures, operating manuals and similar documents
throughout their organizations. The use of traditional printing services
requires significant investments of time and labor to place printing orders and
deliver current versions of documents for reproduction. Moreover, traditional
printing services frequently impose minimum order requirements for each printing
job. Such requirements usually result in excess quantities of documents that
must be destroyed when revisions are made.
6
<PAGE> 9
OPERATING ENVIRONMENTS
Intra.doc! MS Version 3, Intra.doc! Legacy and Intra.doc! OMS are
available on Windows NT and Sun Solaris operating environments.
KEY CUSTOMERS
With a horizontal business application for the management of
business-critical documents across the enterprise, IntraNet Solutions focuses on
delivering solutions which allow organizations to tap the full potential of the
Web with its industrial strength Intra.doc! family of products. Intra.doc! MS
software is finding early success in industry segments such as manufacturing,
finance, education, scientific and medical research and government. Customers
include U.S. retailer Dayton Hudson Corporation; leading international law firm
Hancock, Rothert and Bunshoft, LLP; health care providers Allina Health Care of
Minnesota, and Wellmark Blue Cross and Blue Shield of Iowa; and large
manufacturing companies such as the Agfa Division of Bayer and Siemens.
IntraNet Solutions believes that its customers' total investment in
Intra.doc! MS document management software may be as much as one half the cost
of known competing systems. IntraNet Solutions estimates that a substantial
majority of most customers' investment in alternative document management
systems is attributable to consulting services arising out of system
installation. Moreover, additional consulting services are frequently necessary
to support advances in microprocessor technology or software applications that
require customization of the existing system. Intra.doc! attempts to invert the
traditional relationship between acquisition costs and associated consulting
services. By combining the ease of installing Intra.doc! with an internal
architecture that is specifically designed to provide for future volume
increases in information, and new and diverse document types along with other
advances in Web technology, Intra.doc! should reduce a customer's need for
future consulting services as the business and the system grow in tandem.
KEY PRODUCT DIFFERENTIATION
The Delphi Group, a leading industry analyst firm and authority on
document management, performed a detailed review of Intra.doc! and reported the
following key advantages of the software:
- - - Intra.doc! MS provides an intuitive model for document management.
From the users point of view, Intra.doc! is analogous to a
real-world filing cabinet. This makes this software easy to learn and
use, making it more accessible to users throughout the organization.
Both the use of a standard Web interface and the support for authoring
tools add to Intra.doc!'s ease-of-use.
- - - Intra.doc! MS permits virtually any document type to be accessible on
the Web. This flexibility addresses the need expressed by 93% of
intranet users surveyed by The Delphi Group that corporate information
must be made available on the intranet.
- - - Intra.doc! MS provides vastly simplified file management for intranet
documents. Links and navigational aids are automatically generated
and continually updated. Users are thus provided with timely and
correct information with minimal administrative overhead.
- - - Intra.doc! MS requires less investment than most other document
management products. The reduced cost of installation, and especially
the overall costs of daily maintenance and system administration
reduce the life cycle cost of IntraNet Solutions' software.
- - - Reprinted with permission from The Delphi Group, Boston, MA copyright
January 1998, Delphi Insight Series on Document Management.
7
<PAGE> 10
SALES, MARKETING AND DISTRIBUTION
IntraNet Solutions believes that as the trend toward network-based
computing environments and use of Internet technology continues, the demand for
its products and services, especially its proprietary intranet software products
and on-demand publishing services, will increase. Management believes that the
breadth of IntraNet Solutions' line of products and services enables it to
vertically integrate any one aspect of a customer's document management needs
with all others. IntraNet Solutions' marketing strategy also entails leveraging
its competitive advantages with an aggressive direct sales approach, combined
with seminar selling, media advertising, and regional direct mail campaigns.
Additionally, IntraNet Solutions is developing an `alternate channels' marketing
strategy for its software products, allowing third-party organizations to market
its proprietary products in strategic niches and geographical areas. These
alternate channels include vertically oriented resellers, large system
integrators, strategic industry relationships, and software distributors.
STRATEGIC PARTNERS AND SUPPLIERS
Historically, the majority of the hardware and software products sold
by IntraNet Solutions have been through reseller arrangements with Sun
Microsystems, Inc. ("Sun") and Interleaf, Inc. ("Interleaf"). IntraNet Solutions
maintains its own internal development staff to provide the customization
required by a significant number of implementations for Sun and Interleaf
products.
IntraNet Solutions has entered into an agreements with Adobe Systems,
Inc. and Verity, Inc. to integrate and sell certain of their software products.
IntraNet Solutions will provide total publishing/document management solutions
to new and existing customers using Adobe's extensive line of products that
complement IntraNet Solutions' Web-based Intra.doc! MS.
IntraNet Solutions is an ISV (Independent Software Vendor) of Sun
Microsystems and has been named Sun's exclusive sales agent for all public and
private education institutions in Minnesota and Wisconsin. In addition,
IntraNet Solutions is one of only two vendors who can market the entire Sun
product line to these customers. IntraNet Solutions is the largest value added
reseller of Sun products within the Midwest. IntraNet Solutions considers the
Sun market to be critical to fueling its software sales of Intra.doc! MS
Version 3 is a Java-built architecture that will be an ideal solution for an
enterprise UNIX environment on the Sun platform - one of the most prominent
platforms for intranet/Internet systems.
In 1997, IntraNet Solutions announced a strategic distribution
agreement with MCI Systemhouse to resell Intra.doc! to gain a foothold in the
highly desirable intranet space within large corporations in the United States.
IntraNet Solutions also signed an agreement with Xerox Ltd. to distribute its
products in Europe, the Middle East and Africa. IntraNet Solutions also has
partnerships with leading vendors such as Adobe Systems, Hewlett-Packard,
Microsoft and Netscape.
PRODUCT DEVELOPMENT
IntraNet Solutions has divided its software development personnel into
two departments: Custom Applications, which concentrates on providing billable
services, and Research and Development, which is concerned with proprietary
intranet applications for resale. Intra.doc! and related document management
software products currently consume most of IntraNet Solutions' research and
development resources.
IntraNet Solutions recently released Intra.doc! Version 3, which
features a Java server-based architecture, enhanced security, browser-based
administration, e-mail-based workflow pages and availability on the Sun Solaris
operating environment. Version 3 also supports additional databases such as
Microsoft SQL Server and Oracle as external repositories.
8
<PAGE> 11
IntraNet Solutions considers its ability to service any aspect of a
customer's document creation, management and distribution requirements to be its
primary competitive advantage. Customers compelled to use multiple vendors to
install or maintain a Document Management System face an ongoing risk that
various components of their systems do not fit together conceptually, or simply
will not work. IntraNet Solutions' vertical integration allows it to deliver a
complete solution, or set of solutions, covering the entire spectrum of the
document management life cycle.
Within the document management market, the majority of products
currently available were designed for specialized, high-volume line-of-business
applications and require a substantial investment. IntraNet Solutions believes
that certain lower cost solutions offered by other document management vendors
offers little more than file storage and viewing solutions. IntraNet Solutions'
proprietary software occupies a relatively unaddressed area of the market,
offering substantial features at a low cost. Also, the Company believes that
its commitment to Web standards stand out in contrast to its competitors and
enables it to offer its customers the most cost-effective solutions available
with current and developing technologies.
EMPLOYEES
As of June 1, 1998, the Company had approximately 90 employees. Ten
employees working at the Company's Phoenix facilities are members of a
collective bargaining unit. The labor contract covering such employees will
expire unless earlier renewed on June 25, 2000. No other employees of the
Company are currently represented by a labor union. Management considers its
employee relations to be good.
CERTAIN FACTORS
In addition to the matters discussed elsewhere in this Annual Report on
Form 10-KSB, the following are important factors that could cause actual results
of events to differ materially from those contained in any forward-looking
statement made on or behalf of the Company
History of Operating Losses and Accumulated Deficit; Uncertainty of Future
Operating results; Fluctuations in Future Operating Results; Limited Operating
History. The Company incurred a loss attributable to common shareholders of $5.3
million for the year ended March 31, 1998 and a net loss of $3,748,464 for the
year ended March 31, 1997. The Company had an accumulated deficit of $9.1
million at March 31, 1998. The Company intends to continue to make expenditures
related to new product introductions, marketing, research and development, and
administrative infrastructure over the near term.
The likelihood of the Company's success must be considered in light of
the problems, expenses, difficulties, complications and delays frequently
encountered in connection with the establishment of any business. There is no
assurance that the Company can operate profitably or that it will successfully
implement its expansion plans. Additionally, the Company has only a limited
operating history upon which to base an evaluation of its current principal
business and prospects. Operating results for future periods are subject to
numerous uncertainties, and there can be no assurance that the Company will
achieve or sustain profitability on an annual or quarterly basis. The Company's
prospects must be considered in light of the risks encountered by businesses in
the early stage of development, particularly businesses in new and rapidly
evolving markets. Future operating results will depend upon many factors,
including the demand for the Company's products, the level of product and price
competition, the ability of the Company to develop and market new products and
product enhancements, the growth of activity on the Internet, the World Wide Web
and private intranet networks, the success of the Company in attracting and
retaining motivated and qualified personnel, the ability of the Company to
control its costs and general economic conditions. There can be no assurance
that the Company will be successful in addressing such risks.
Significant Capital Requirements; Need for Additional Financing. The
Company's capital requirements in connection with its development and marketing
activities have been and will continue to be significant. The Company has been
dependent upon the proceeds from sales of its securities, as well as various
private loans, to fund its development and marketing activities. There can be no
assurance that such additional funding will be available on terms attractive to
the Company, or at all. Any additional equity financings may be dilutive to
shareholders, and additional debt financing, if available, may involve
9
<PAGE> 12
restrictive covenants. Collaborative arrangements may require the Company to
relinquish rights to certain of its technologies, products or marketing
territories. In the event that the proceeds of the offering and cash flow prove
to be insufficient to fund operations (due to a change in the Company's plans or
a change or inaccuracy in its assumptions or as a result of unanticipated
expenses, technical difficulties, problems or otherwise), the Company would be
required to seek additional financing sooner than currently anticipated. The
Company has no current arrangement with respect to, or sources of, additional
financing. The inability to obtain additional financing when needed, would have
a material adverse effect on the Company.
Uncertainty of Future Operating Results; Fluctuations in Future
Operating Results. Prior growth rates in the Company's revenue and operating
results are not necessarily indicative of future growth, if any, or of future
operating results. The Company's future operating results may vary substantially
from quarter to quarter and will depend on many factors, including the level of
sales of its proprietary software products, and continued expansion of the
market for corporate intranets. At its current stage of operations, the
Company's quarterly revenues and results of operations may be materially
affected by the timing of the development, introduction and market acceptance of
the Company's and its competitors' products. Product development and marketing
costs are often incurred in periods before any revenues are recognized from the
sales of products. Operating expenses are higher during periods in which such
product development costs are incurred and marketing efforts are
commenced. In addition, the timing of the Company's receipt of significant
contracts could add to quarter to quarter variation in operating results. Due
to these and other factors, including the general economy, stock market
conditions and announcements by the Company or its competitors, the market
price of the Company's Common Stock may be highly volatile.
Intense Competition. The markets for business application software and
computer software generally are intensely competitive. The Company faces
competition from a variety of software vendors, most of whom have substantially
greater financial, technical and marketing resources than the Company, and many
of the Company's competitors currently marketing products in the document
management market are more established than the Company and have the benefits of
pre-existing relationships with potential customers and greater name recognition
than the Company. The Company also faces indirect competition from other systems
integrators and value added resellers. The Company's competitors could introduce
products with more features and lower prices than the Company's products, or
which render the Company's products obsolete. These companies could also bundle
existing or new products with other more established products in order to
compete with the Company. Although the Company believes its product features and
pricing enable it to compete effectively with respect to such factors, there can
be no assurance that the Company will have the financial resources, technical
expertise or marketing, distribution or support capabilities to compete
successfully in the future.
Emerging Markets; Dependence Upon Continued Market Expansion. The
continued expansion of the Company's business is generally dependent on the
continued expansion of the markets for which its products were developed, and
specifically dependent upon the continued growth of activity on the Internet,
the Web and private intranet networks. The intranet market is a relatively new
market and is intensely competitive, highly fragmented and subject to change. As
such, the Company's success will continue to be dependent upon a continuation of
the trend toward network-based computing environments and the continued
willingness of large businesses to reengineer the processes they employ to
create, store, manage and distribute data. Any factors which have an adverse
impact on the continued expansion of these markets generally could have a
material adverse impact on the Company.
Management of Rapid Growth. The Company has experienced rapid growth in
revenues, personnel, research and development activities and the general
expansion of its business. In addition, the Company's markets have evolved and
continue to evolve at a rapid pace. The Company believes that continued growth
in the number and breadth of its product lines and services and in its personnel
will be required to maintain its competitive position. The Company's growth,
coupled with the rapid evolution of its markets, has placed and will continue to
place significant strains on its administrative operations and financial
resources and will increase the demands placed on its internal systems,
procedures and controls. The Company's ability to support, manage and control
its continued growth is also dependent upon, among other things, its ability to
train, supervise and manage increased personnel. There can be no assurance that
the Company's personnel, procedures, staff, internal controls or systems will be
adequate to support such
10
<PAGE> 13
growth or that management will be able to achieve the rapid, effective
execution of the product and business initiatives necessary to successfully
penetrate the markets for the Company's products and services. If the Company
is unable to manage future growth effectively, the Company's business,
operating results and financial condition will be materially adversely
affected.
Dependence on Narrow Product Line; Technology Risks; Risk of Market
Acceptance. To date, the Company has marketed a limited line of its proprietary
software products. The Company's future success will depend, to a large extent,
on its ability to increase sales from existing products and derive sales from
new products. There can be no assurance that the Company will be able to
further penetrate the market with its existing products or introduce and gain
acceptance of its new products. The market for Internet software products is
highly competitive and characterized by rapid innovation and technological
change. The Company's products were specifically designed to meet the needs of
the document management market, but other companies have also introduced or
announced the development of products designed to address the same markets as
the Company's products. In addition, technological advances that would make the
Company's products less attractive to current and potential customers could
adversely impact the business of the Company. The Company's plans with respect
to the development of new products are subject to the risks inherent in the
development and marketing of complex software products, including the risks
that the release of the product may be delayed, errors may be found in the
product after its release despite extensive testing, and discovered errors may
not be corrected in a timely manner. Further, the commercial success of the
Company's products will depend on the willingness of potential customers to
perform and accept the use of the Company's products to create, manage and
distribute unstructured business-critical data.
Dependence on Development of New Products. The Company's future success
is dependent upon its continued introduction of new software products and its
ability to develop enhancements and upgrades to its existing product line.
During the years ended March 31, 1996, 1997 and 1998, the Company incurred
approximately $500,000, $1.1 million and $1.2 million, of research and
development costs, respectively. The Company devotes significant resources
to research and development; however, the development of new, technologically
advanced products is a complex and uncertain process requiring high levels of
innovation, as well as the accurate anticipation of technological and market
trends. Delays in the introduction or shipment of new or enhanced products, the
inability of such products to gain market acceptance or problems associated
with new or enhanced products could adversely affect the Company's operating
results. The market for the Company's products is characterized by rapidly
changing technology, frequent new product introductions and product enhancement
and evolving industry standards. The introduction or enhancement of products
embodying new technology or the emergence of new industry standards could
render the Company's current products, or any other products the Company may
develop in the future, obsolete and unmarketable. The Company's ability to
anticipate changes in technology, products and industry standards and to
successfully develop and introduce new and enhanced products on a timely basis
will be a significant factor in the Company's ability to grow and remain
competitive. There can be no assurance that the Company will be successful in
introducing new products to respond to emerging industry trends, and there can
be no assurance that the level of research and development expenses necessary
for the Company to remain competitive will be as currently anticipated or that
the Company's revenues will be sufficient to cover its research and development
costs.
Dependence Upon Proprietary Technology; Risk of Infringement. The
Company's success is heavily dependent upon proprietary technology. The Company
has no patents or pending patent applications. In the absence of significant
patent or copyright protection, the Company may be vulnerable to competitors who
attempt to develop functionally equivalent products. Although the Company
believes that it has all rights necessary to market its products without
infringing upon any patents, copyrights or trademarks held by others, there can
be no assurance that conflicting patent, copyright or trademark rights do not
exist. There can be no assurance that third parties will not claim infringement
by the Company with respect to its current or future products. The Company
expects that software product developers will increasingly be subject to
infringement claims as the number of products and competitors in the Company's
industry segment grows and the functionality of products in different industry
segments overlaps. Any such claims, with or without merit, could be
time-consuming, result in costly litigation, cause product shipment delays or
require the Company to enter into royalty or licensing agreements. Such royalty
or licensing agreements, if required, may not be available on terms
acceptable to the Company or at all, which would have a material adverse effect
upon the Company's business, operating results and financial condition. The
Company relies upon trade secret protection, confidentiality procedures and
contractual provisions to
11
<PAGE> 14
protect its proprietary information. There can be no assurance that
others will not independently develop substantially equivalent proprietary
information and techniques or otherwise gain access to the Company's trade
secrets or disclose such technology, or that the Company can meaningfully
protect its trade secrets. Intra.doc!(R) is a registered trademark of the
Company. The Company has applied for trademark registration for INTRANET
SOLUTIONS(TM). There can be no assurance that any trademarks which have been
applied for but are not yet issued will be issued. In the absence of trademark
protection, the Company may be unable to take advantage of the brand name
recognition it is attempting to build. Further, even if all trademarks applied
for are issued, there can be no assurance that such trademarks will prove
valuable to the Company.
Dependence Upon Key Vendor Relationships. The Company is materially
dependent on Sun Microsystems, Inc. for the supply of hardware products sold as
part of its systems. Any disruption in the relationship between the Company and
Sun Microsystems, Inc. would have an immediate and material adverse impact on
the Company. Although the Company believes that secondary sources are currently
available for similar hardware products, there can be no assurance that suitable
alternative vendor relationships could be established in a timely manner, if at
all. The Company purchased approximately 72%, 68% and 76% of its total product
resale requirements from Sun Microsystems, Inc. in each of the fiscal years
ended 1996, 1997 and 1998, respectively.
Dependence on Key Personnel; Need for Additional Employees. The Company
is currently greatly dependent on the personal knowledge and experience of
Messrs. Olson and Sjobeck. The Company believes that its senior management team
has knowledge which, due to the Company's relatively small size, is personal to
such individuals and has not been institutionalized. As such, the loss of any of
these key personnel could be detrimental to the Company. There can be no
assurance that the loss of the services of Mr. Olson or any of its executive
officers or other key employees would not have a material adverse effect on the
Company. To avoid the negative impact which the loss of a senior manager could
have on the Company, as well as to achieve its business plan, the Company must
hire additional employees at various operational levels. The future development
and success of the Company will depend in part upon its ability to attract and
retain additional personnel with the highly specialized expertise necessary to
provide, engineer, design and support the integration of such products and
services. There can be no assurance that the Company will be able to attract or
retain such personnel or that the hiring and retention of such personnel will
result in the institutionalization of vital information.
Product Defects and Product Liability. The Company's software products
are complex and sophisticated and could from time to time contain design defects
or software errors that could be difficult to detect and correct. Errors, bugs
or viruses may result in the loss of or the delay in market acceptance or the
loss of customer data. The Company's license agreements with its customers
typically contain provisions designed to limit the Company's exposure to
potential product liability claims; however, it is possible that the limitation
of liability provisions contained in the Company's license agreements may not be
effective under the laws of certain jurisdictions. Although the Company has not
experienced any material adverse effect resulting from any software defects or
errors, there can be no assurance that despite testing by the Company and its
customers, errors will not be found in new products which could result in a
delay or an inability to achieve market acceptance and thus could have a
material adverse impact upon the Company's business, operating results or
financial condition.
Former Shareholder Lien. On July 31, 1995, Technical Publishing
Solutions, Inc., a predecessor in interest to the Company ("TPSI") redeemed 50
percent of the outstanding shares of its common stock from a former shareholder
and director for an aggregate redemption price of $200,000. TPSI paid $150,000
of the purchase price in cash and delivered a the balance of the redemption
price in the form of a promissory note with a face amount of $50,000. The note
requires annual principal payments of approximately $10,000 and matures in
August 2000. TPSI and the former shareholder also entered into consulting and
non-competition agreements pursuant to which the Company is obligated to make
payments of $10,000 per month through August 2000. To secure the purchase price
of the redeemed shares and TPSI's monetary obligations under the aforementioned
agreements, TPSI granted the former shareholder a security interest in the
redeemed shares. As a result of the 1996 merger of TPSI with and into the
Company, the Company succeeded to the obligations of TPSI under these
agreements. In the event the
12
<PAGE> 15
Company fails to satisfy its monetary obligations under these agreements,
the former shareholder may be able to assert a claim of ownership interest in
the Company. If the former shareholder is successful in this regard, the value
of the shares of Common Stock may be reduced substantially.
Control by Founder. Mr. Robert F. Olson, the Company's President and
Chief Executive Officer, currently holds approximately 50 percent of the
Company's outstanding Common Stock. As such, Mr. Olson is able to exercise
control over the business policies and affairs of the Company, including all
determinations with respect to the acquisition or disposition of assets by the
Company, future issuances of Common Stock or other securities by the Company,
and any dividend payable on the Common Stock. Such concentration of ownership
may also have the effect of delaying, deferring or preventing a change in
control of the Company.
Effects of Delisting from Nasdaq SmallCap Market; Lack of Liquidity of
Low Priced Stocks. If the Company fails to maintain the qualification for its
Common Stock to trade on the Nasdaq SmallCap Market, its securities could be
subject to delisting. The Nasdaq Stock Market recently implemented increases in
the quantitative standards for maintenance of listings on the Nasdaq SmallCap
Market. The new standards for continued listing on the Nasdaq SmallCap Market
include maintenance of any of (i) $2,000,000 of net tangible assets, (ii)
$35,000,000 of market capitalization or (iii) $500,000 of net income for two of
the last three years. In the event that the Common Stock is delisted from the
Nasdaq SmallCap Market, trading, if any, in the Common Stock would thereafter be
conducted in the over-the-counter markets in the so-called "pink sheets" or the
National Association of Securities Dealer's "Electronic Bulletin Board."
Consequently, the liquidity of the Company's Common Stock would likely be
impaired, not only in the number of shares which could be bought and sold, but
also through delays in the timing of the transactions, reduction in security
analysts' and the news media's coverage if any, of the Company and lower prices
for the Company's securities than might otherwise prevail.
In addition, if the Company's securities were to become delisted from
trading on the Nasdaq SmallCap Market and the trading price of such securities
were to fall below $5.00 per share, trading in such securities would also be
subject to the requirements of certain rules promulgated under the Exchange Act,
which require additional disclosure by broker-dealers in connection with any
trades involving a stock defined as a penny stock (generally, any non-Nasdaq
equity security that has a market price of less than $5.00 per share, subject to
certain exceptions). Such rules require the delivery, prior to any penny stock
transaction, of a disclosure schedule explaining the penny stock market and the
risks associated therewith, and impose various sales practice requirements on
broker-dealers who sell penny stock to persons other than established customers
and accredited investors (generally institutions). For these types of
transactions, the broker-dealer must make a special suitability determination
for the purchase and have received the purchaser's written consent to the
transaction prior to the sale. The additional burdens imposed upon
broker-dealers by such requirements may discourage broker-dealers from effecting
transactions in the Common Stock which could severely limit the market liquidity
of such Common Stock and the ability of purchasers in this offering to sell
their shares of Common Stock in the secondary market.
Demand and Incidental Registration Rights. Certain shareholders and
warrant holders of the Company, including Robert F. Olson, have the right,
subject to certain conditions, to participate in future registrations of the
Company's equity securities or to demand that the Company register up to
approximately 4.3 million shares of Common Stock owned by them as of the date of
this Prospectus. Pursuant to these registration rights, if the Company proposes
to register any of its Common Stock, other than in certain specified instances,
either on its own behalf or for the account of others, such holders are entitled
to notice of such proposed registration and must be given the opportunity to
participate therein. These demand and
13
<PAGE> 16
incidental registration rights are subject to certain terms and limitations.
Absence of Dividends. The Company has never paid cash dividends on its
Common Stock and does not anticipate paying cash dividends in the foreseeable
future. Moreover, the Company is prohibited from paying any cash dividends under
the terms of its existing credit agreement.
Shares Eligible for Future Sale Of the 8.7 million shares currently
outstanding, approximately 4.5 million shares of Common Stock will be freely
tradable by persons who are not affiliates of the Company and 4.2 million shares
will be eligible for public sale under Rule 144, subject in certain cases to
volume and manner of sale limitations. The Company is obligated to issue
approximately 1.4 million shares of Common Stock in the event that currently
outstanding warrants are exercised all of which will be freely tradable without
restriction except for volume restrictions on sales by affiliates pursuant to
Rule 144. The Company may issue up to an additional 2.3 million shares of Common
Stock under its employee stock option plan. The Company may issue additional
options, warrants, or equity securities in the future. The sale, or availability
for sale, of substantial amounts of Common Stock in the public market subsequent
to this offering, or the perception that such sales could occur, could adversely
affect the prevailing market price of the Common Stock and could impair the
Company's ability to raise additional capital through the sale of its equity
securities.
Volatility of Stock Price. The market prices of the Company's
securities have experienced and may continue to experience substantial
volatility. The securities markets have from time to time experienced
significant price and volume fluctuations that may be unrelated to the operating
performance of particular companies. The market prices of the common stock of
many publicly traded technology companies have in the past been, and in the
future are expected to be, especially volatile. Announcements of technological
innovations or new products by the Company or its competitors, developments or
disputes concerning patents or proprietary rights, and economic and other
external factors, as well as period-to-period fluctuations in the Company's
financial results, may have a significant impact on the market price of the
Common Stock.
Possible Issuances of Preferred Stock; Anti-Takeover Effect of
Minnesota Law. Pursuant to the Company's Articles of Incorporation, the
Company's shareholders do not have the right to cumulative voting in the
election of directors. In addition, the Board of Directors has authority to fix
the rights, preferences, privileges and restrictions, including voting rights,
of unissued shares of the Company's capital stock and to issue such stock
without any further vote or action by the shareholders. The rights of the
holders of Common Stock will be subject to, and may be adversely affected by,
the rights of the holders of any preferred stock that have already been or may
be created and issued in the future. The issuance of preferred stock could have
the effect of delaying, deferring or preventing a change in control of the
Company. In addition, certain provisions of Minnesota law applicable to the
Company could have the effect of discouraging certain attempts to acquire the
Company, which could deprive the Company's shareholders of opportunities to sell
their shares of Common Stock at prices higher than prevailing market prices and
may also have a depressive effect on the market price of the Company's Common
Stock.
ITEM 2. PROPERTIES
The executive offices of the Company are located in Eden Prairie,
Minnesota, where the Company leases approximately 18,000 square feet of office
and warehouse space. The Company also leases approximately 13,000 square feet of
office and warehouse space for its Phoenix distribution group facility. The
Company is also sub-landlord with respect to several other properties for which
sublease arrangements cover substantially all of its lease obligations. The
Company utilizes virtual offices for its remaining sales, services and marketing
efforts. The Company may need to obtain additional facilities during the course
of the next several years.
14
<PAGE> 17
ITEM 3. LEGAL PROCEEDINGS
The Company is not a party to any material legal proceeding.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matter was submitted to a vote of the Company's security holders
during the fourth quarter of the fiscal year ended March 31, 1998.
15
<PAGE> 18
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Price Range of Common Stock
The Company's Common Stock trades in the over-the counter market
through NASDAQ under the symbol INRS. The following table sets forth the range
of high and low sale prices for the Common Stock for the periods indicated, as
reported by NASDAQ. The quotes represent "Inter-Dealer" prices without
adjustments or mark-ups, mark-downs or commissions and may not necessarily
present actual transactions. On June 23, 1998, the last sale price of the Common
Stock was $4.875. As of June 23, 1998, the Company had approximately 100 record
holders of Common Stock.
<TABLE>
<CAPTION>
COMMON STOCK
HIGH LOW
<S> <C> <C>
FISCAL 1998:
First Quarter ended 6/30/97 5.00 3.38
Second Quarter ended 9/30/97 8.38 4.38
Third Quarter ended 12/31/97 8.25 3.63
Fourth Quarter ended 3/31/98 7.13 5.13
FISCAL 1997:
First Quarter ended 6/30/96 21.75 10.00
Second Quarter ended 9/30/96 19.00 8.00
Third Quarter ended 12/31/96 9.50 5.50
Fourth Quarter ended 3/31/97 8.25 4.38
</TABLE>
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
INTRODUCTION
IntraNet Solutions, Inc. ("IntraNet" or the "Company") develops and
implements integrated solutions for the management and distribution of
critical business information. IntraNet offers its customers a variety of
products, including proprietary intranet document management software, hardware
and software implementation services. 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 and market a complete 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, (iv) the sale of technical and other
services, and (v) the sale of on-demand publishing 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 the 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.
16
<PAGE> 19
RESULTS OF OPERATIONS
The following table sets forth certain items from the Company's
consolidated statements of operations as a percent of total revenues for the
periods indicated.
<TABLE>
<CAPTION>
YEAR ENDED MARCH 31,
-------------------------------
Revenues: 1996 1997 1998
------- -------- -------
<S> <C> <C> <C>
Hardware integration 64.5% 64.7% 62.7%
Software, technical services and support 35.5 35.3 37.3
------- -------- -------
Total revenues 100.0% 100.0% 100.0%
Cost of revenues:
Hardware integration 53.4 54.3 52.7
Software, technical services and support 22.0 20.7 16.5
------- -------- -------
Total cost of revenues 75.4 75.0 69.2
------- -------- -------
Gross profit 24.6 25.0 30.8
Operating Expenses
Sales and marketing 11.8 12.4 16.1
General and administrative 8.6 12.3 12.1
Research and development 3.8 6.9 6.4
------- -------- -------
Total operating expenses 24.2 31.6 34.6
------- -------- -------
Operating Income (loss) .4% (6.6)% (3.8)%
======= ======== =======
</TABLE>
YEAR ENDED MARCH 31, 1998 COMPARED TO THE YEAR ENDED MARCH 31, 1997
REVENUES
Total revenues increased to $19.5 million for the year ended March 31,
1998 from $16.2 million for the year ended March 31, 1997, or $3.3 million
(20.1%). This increase related to increases in all revenue product lines.
Hardware Integration. Hardware integration revenues increased a total
of $1.7 million or 16.3% for the year ended March 31, 1998 compared to the year
ended March 31, 1997 ($12.2 million in 1998 compared to $10.5 million in 1997).
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 $1.6 million or 27.1% for the year
ended March 31, 1998 compared to the year ended March 31, 1997 ($7.3 million in
1998 compared to $5.7 million in 1997). Increases in software revenue accounted
for $1.2 million of the total increase. The growth in software was primarily
attributable to the introduction of the Company's proprietary software products
during the year ended March 31, 1998, which accounted for $2.6 million in
software revenues. Revenues from proprietary software products increased $1.7
million, or 188%.
COST OF REVENUES AND GROSS PROFIT
Total cost of revenues increased to $13.4 million for the year ended
March 31, 1998 from $12.1 million for the year ended March 31, 1997. Total cost
of revenues as a percent of total revenues was 69.2% in 1998 compared to 75.0%
in 1997. Gross profit increased to $6.0 million for the year ended March 31,
1998 compared to $4.1 million for the year ended March 31, 1997. Total gross
profit as a percent of total
17
<PAGE> 20
revenues was 30.8% in 1998 compared to 25.0% in 1997. The increase in gross
profit was primarily attributable to incremental revenue contributions in all
product lines.
Hardware Integration. Cost of the hardware integration revenues
increased to $10.2 million for the year ended March 31, 1998 from $8.8 million
for the year ended March 31, 1997. Cost of hardware integration revenues as a
percent of hardware integration revenues was 84.1% in 1998 compared to 83.9% in
1997. Gross profit from hardware integration was 15.9% for the year ended March
31, 1998 compared to 16.1% for the year ended March 31, 1997. The reduction in
gross profit was primarily attributable to larger integration projects with
lower margins and increased competition.
Software, Technical Services and Support. Cost of software, technical
services and support revenues decreased to $3.2 million for the year ended March
31, 1998 from $3.3 million for the year ended March 31, 1997. Cost of software,
technical services, and support revenues as a percent of software, technical
services, and support revenue was 44.1% in 1998 compared to 58.6% in 1997. Gross
profit on software, technical services and support was 55.9% for the year ended
March 31, 1998 compared to 41.4% for the year ended March 31, 1997. The increase
in gross profit was primarily attributable to the increase in sales of
proprietary software. Margins on proprietary software products were 88.9 %.
OPERATING EXPENSES
Sales and Marketing. Sales and marketing expenses increased to $3.1
million for the year ended March 31, 1998 compared to $2.0 million for the year
ended March 31, 1997. Sales and marketing expenses as a percent of total
revenues were 16.1% in 1998 compared to 12.4% in 1997. Sales and marketing
expenses increased as a percent of revenues primarily due to increases in
staffing and marketing/advertising programs.
General and Administrative. General and administrative expenses
increased to $2.4 million for the year ended March 31, 1998 compared to $2.0
million for the year ended March 31, 1997. General and administrative expenses
as a percent of total revenue were 12.2% in 1998 compared to 12.3% in 1997.
Total general and administrative expenses increased primarily due to the overall
increase in revenues.
Research and Development. Research and development expenses increased
to $1.2 million for the year ended March 31,1998 compared to $1.1 for the year
ended March 31, 1997. Research and development expenses as a percent of total
revenue were 6.4% in 1998 compared to 6.9% in 1997.
DISCONTINUED OPERATIONS
Revenues from discontinued operations were $5.0 million and $3.8
million for the years ended March 31, 1998 and 1997, respectively. Revenues
increased primarily due to the Company's Phoenix location being opened for a
full year compared to five months during the year ended March 31, 1997.
Cost of revenues from discontinued operations were $4.0 million and
$3.1 million for the years ended March 31, 1998 and 1997, respectively.
Gross profit from discontinued operations were 19.9% and 21.2% for the years
ended March 31, 1998 and 1997, respectively.
Loss from discontinued operations was $2.6 million for each of the
years ended March 31, 1998 and 1997. Loss from discontinued operations for the
year ended March 31, 1998 includes an adjustment of $750,000 to fully amortize
goodwill associated with the acquisition of the Company's Phoenix location and
writedown certain other assets to their estimated net realizable value. Loss
from discontinued operations for the year ended March 31, 1997 includes a charge
of $400,000 related to the closing two distribution group facilities.
18
<PAGE> 21
YEAR ENDED MARCH 31, 1997 COMPARED TO THE YEAR ENDED MARCH 31, 1996
REVENUES
Total revenues increased to $16.2 million for the year ended March 31,
1997 from $12.7 million for the year ended March 31, 1996, or $3.5 million
(27.3%). This increase related to increases in all revenue product lines.
Hardware Integration. Hardware integration revenues increased a total
of $2.3 million or 27.8% for the year ended March 31, 1997 compared to the year
ended March 31, 1996 ($10.5 million in 1997 compared to $8.2 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 $1.2 million or 26.4% for the year
ended March 31, 1997 compared to the year ended March 31, 1996 ($5.7 million in
1997 compared to $4.5 million in 1996). Increases in software and services
revenue each accounted for $500,000 of the total increase and support revenue
accounted for $200,000 of the total increase. The growth in software was
primarily attributable to the introduction of the Company's proprietary software
products during the year ended March 31, 1997, which accounted for $800,000 in
software revenues. The growth in support revenue was primarily attributable to
growth in the installed base of hardware and software, and renewals of support
contracts.
COST OF REVENUES AND GROSS PROFIT
Total cost of revenues increased to $12.1 million for the year ended
March 31, 1997 from $9.6 million for the year ended March 31, 1996. Total cost
of revenues as a percent of total revenues was 75% in 1997 compared to 75.4% in
1996. Gross profit increased to $4.1 million for the year ended March 31, 1997
compared to $3.1 million for the year ended March 31, 1996. Total gross profit
as a percent of total revenues was 25.0% in 1997 compared to 24.6% 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 $8.8 million for the year ended March 31, 1997 from $6.8 million for the year
ended March 31, 1996. Cost of hardware integration revenues as a percent of
hardware integration revenues was 83.9% in 1997 compared to 82.9% in 1996. Gross
profit from hardware integration was 16.1% for the year ended March 31, 1997
compared to 17.1% for the year ended March 31, 1996. The reduction in gross
profit margin was primarily attributable to larger integration projects with
lower margins and increased competition.
Software, Technical Services and Support. Cost of software, technical
services and support revenues increased to $3.3 million for the year ended March
31, 1997 from $2.8 million for the year ended March 31, 1996. Cost of software,
technical services, and support revenues as a percent of software, technical
services, and support revenue was 58.6% in 1997 compared to 61.9% in 1996. Gross
profit on software, technical services and support was 41.4% for the year ended
March 31, 1997 compared to 38.1% for the year ended March 31, 1996. The increase
in gross profit was primarily attributable to the increase in sales of
proprietary software. Margins on proprietary software products were 71.6
percent.
OPERATING EXPENSES
Sales and Marketing. Sales and marketing expenses increased to $2.0
million for the year ended March 31, 1997 compared to $1.5 million for the year
ended March 31, 1996. Sales and marketing expenses as a percent of total
revenues were 12.4% in 1997 compared to 11.8% in 1996. Sales and marketing
expenses increased as a percent of revenues primarily due to increases in
staffing and marketing programs.
15
<PAGE> 22
General and Administrative. General and administrative expenses
increased to $2.0 million for the year ended March 31, 1997 compared to $1.1
million for the year ended March 31, 1996. General and administrative expenses
as a percent of total revenue were 12.3% in 1997 compared to 8.6% in 1996.
General and administrative expenses increased primarily due to increases in
staffing, expenses related to the relocation of corporate headquarters, and the
overall increase in revenues.
Research and Development. Research and development expenses increased
to $1.1 million for the year ended March 31,1997 compared to $500,000 for the
year ended March 31, 1996. Research and development expenses as a percent of
total revenue were 6.9% in 1997 compared to 3.8% in 1996. Total research and
development expenses increased $600,000 in 1997 compared to 1996 due to a focus
on development of proprietary software products and related expansion of the
research and development staffing.
DISCONTINUED OPERATIONS
Revenues from discontinued operations were $3.8 million and $1.5
million for the years ended March 31, 1997 and 1996, respectively. Revenues
increased primarily due to the opening of several new locations.
Cost of revenues from discontinued operations were $3.0 million and
$1.1 million for the years ended March 31, 1997 and 1996, respectively. Gross
profit from discontinued operations were 21.2% and 26.5% for the years ended
March 31, 1998 and 1997, respectively.
Loss from discontinued operations was $2.6 million and $200,000 for
the years ended March 31, 1997 and 1996, respectively. Loss from discontinued
operations for the year ended March 31, 1997 includes a charge of $400,000
related to the closing of two distribution group facilities.
LIQUIDITY AND CAPITAL RESOURCES
Since its inception, the Company has financed its operations primarily
through revolving working capital and term loans from banking institutions
together with the sale of stock and subordinated debt. In December 1996, the
Company issued $1.0 million 9% promissory notes. During the fourth quarter of
fiscal 1997 the Company issued an additional $500,000 9% promissory notes.
During the year ended March 31, 1998, $250,000 of those notes were converted
into approximately 71,000 shares of common stock, $150,000 were converted into
preferred stock and $850,000 were paid at maturity. Additionally, in April,
1998, $250,000 of these notes were paid. In consideration of these borrowings,
the Company issued the lenders warrants to acquire an aggregate of 300,000
shares of Common Stock at an exercise price of $4.00.
During July 1997, the Company issued $4,000,000 of Series A 5%
Convertible Preferred Stock. The Company issued 800,000 units, each consisting
of one share of $.01 par value preferred stock 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. During the year
ended March 31, 1998, 350,000 shares of Series A Preferred Stock were converted
into 471,380 shares of common stock.
In May, 1998, the Company completed the sale of $3,000,000 of 4% Series
B Convertible Preferred Stock. The preferred stock is convertible into the
Company's current stock at a price equal to 84% of market value at the date of
conversion with a maximum conversion price of $7.56 and a minimum conversion
price of $1.81. In connection with this transaction, the Company will recognize
a non-cash deemed dividend of $570,000. The deemed dividend will be recorded as
a discount to preferred stock with a corresponding credit to additional paid in
capital. The discount will be recognized at the date of issue of the preferred
stock, the same date in which the shares are eligible for conversion. The
accretion of the discount will be reflected in the statement of operations as an
adjustment to net income (loss).
20
<PAGE> 23
The Company's revolving working capital line of credit allows for
borrowings of up to $3.85 million based on available collateral at the bank's
base lending rate plus 2.5%. At March 31, 1998, the Company had advances of
$2.25 million, which are due on demand. At March 31, 1998, the Company also
had term loans and promissory notes outstanding in the amount of $657,800.
The term loans and promissory notes require monthly principal payments of
$35,400 plus interest at the bank's base lending rate plus 2.5%. At March 31,
1998 the Company also had a demand note payable to its principal stockholder in
the amount of $27,500 which accrues at a rate of 12%.
As of March 31, 1998 the Company had cash of approximately $1.0
million. Capital expenditures for the year ended March 31, 1998 and
1997, including equipment financed with capital lease obligations, were $1.0
million and $457,700 respectively.
The Company has entered into certain operating leases for facilities
and equipment. These leases require total monthly payments, net of related
sublease arrangements, of $59,200. 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. Future financing, if
necessary, may be dilutive to shareholders or may contain restrictive terms or
covenants. There can be no assurance that additional financing will be available
to the Company on commercially reasonable terms, or at all.
YEAR 2000 COMPLIANCE
The Company has studied its computer hardware and software to determine
its exposure to the change of century date problem. The Year 2000 date problem
consists of a date format shortcoming where the Year is represented by two
digits causing programs that perform arithmetic operations, comparisons, or
sorting of date fields to yield incorrect results. Based on the Company's study,
the Company does not believe that the costs to become Year 2000 compliant will
be material. Costs as incurred will be charged to operating expenses.
RECENTLY ISSUED ACCOUNTING STANDARDS
The American Institute of Certified Public Accountants has issued
Statement of Position (SOP), SOP 97-2, which supersedes Statement of Position
91-1, "Software Revenue Recognition." Management has assessed this new Statement
and believes that is adoption will not have a material effect on the timing of
the Company's software revenue recognition or cause changes to its software
recognition policy.
In June 1997, the FASB issued Statement No. 130 "Reporting
Comprehensive Income" and Statement No. 131 "Disclosures about Segments of an
Enterprise and Related Information" which are effective for fiscal years
beginning after December 15, 1997. Statement No. 130 will require the Company to
display an amount representing total comprehensive income, as defined by the
statement, as part of the Company's basic financial statements. Comprehensive
income will include items such as unrealized gains or losses on certain
investment securities and foreign currency items. Statement No. 131 will require
the Company to disclose financial and other information about its business
segments, their products and services, geographic areas, major customers,
revenues, profits, assets and other information. The adoption of these two
statements is not expected to have a material effect on disclosure in the
consolidated financial statements of the Company.
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-KSB 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 needs and 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,
21
<PAGE> 24
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.
ITEM 7. FINANCIAL STATEMENTS
The Financial Statements of the Company are included herein following
the signatures, beginning at page F-1
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANT ON ACCOUNTING AND
FINANCIAL DISCLOSURE
On February 26, 1997, the Company, with the approval of its Board of
Directors, engaged Ernst & Young LLP as the independent accountants for the
Company and its subsidiaries. Prior to the engagement of Ernst & Young LLP, Lund
Koehler Cox & Company, PLLP had served as the principal independent certified
public accountants for the Company and its subsidiaries. The reports on the
Company's Consolidated Financial Statements prepared by Lund Koehler Cox &
Company, PLLP for the years ended March 31, 1995 and 1996 contained no adverse
opinion or disclaimer of opinion and were not qualified or modified as to
uncertainty, auditing scope or accounting principles. In connection with the
audits for the years ended March 31, 1995 and 1996 and through February 26,
1997, there were no disagreements, with Lund Kohler Cox & Company on any matter
of accounting principles or practices, financial statement disclosure or
auditing scope or procedure, which disagreements, if not resolved to the
satisfaction of Lund Koehler Cox & Company, PLLP, that would have caused Lund
Koehler Cox & Company, PLLP to make reference to the subject matter of the
disagreements in its reports. During the years ended March 31, 1995 and 1996 and
through February 26, 1997 the Company has not consulted with Ernst & Young LLP
on items which (1) were or should have been subject to Statement of Auditing
Standards 50, or (2) concerned the subject matter of a disagreement or
reportable event with the former independent public accountant.
On March 12, 1998, the Company, with the approval of its Board of
Directors, engaged Grant Thornton LLP as the independent accountants for the
Company and its subsidiaries. Prior to the engagement of Grant Thornton LLP,
Ernst & Young LLP had served as the principal independent certified public
accountants for the Company and it subsidiaries. The reports on the Company's
Consolidated Financial Statements prepared by Ernst & Young LLP for the year
ended March 31, 1997 contained a qualification regarding the Company's ability
to continue as a going concern. In connection with the audit for the year ended
March 31, 1997, there were no disagreements, with Ernst & Young, LLP on any
matter of accounting principles or practices, financial statement disclosure or
auditing scope or procedure, which disagreements, if not resolved to the
satisfaction of Ernst & Young, LLP that would have caused Ernst & Young, LLP to
make reference to the subject matter of the disagreements in its report. During
the year ended March 31, 1997 and through March 12, 1998 the Company has not
consulted with Grant Thornton LLP on items which (1) were or should have been
subject to Statement of Auditing Standards 50, or (2) concerned the subject
matter of a disagreement or reportable event with the former independent public
accountant.
22
<PAGE> 25
PART III
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS;
COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACT
Information in response to this Item is incorporated herein by
reference to the Company's definitive proxy statement to be filed pursuant to
Regulation 14A within 120 days after the end of the fiscal year covered by this
form 10-KSB.
ITEM 10. EXECUTIVE COMPENSATION
Information in response to this Item is incorporated herein by
reference to the Company's definitive proxy statement to be filed pursuant to
Regulation 14A within 120 days after the end of the fiscal year covered by this
form 10-KSB.
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Information in response to this Item is incorporated herein by reference to the
Company's definitive proxy statement to be filed pursuant to Regulation 14A
within 120 days after the end of the fiscal year covered by this form 10-KSB.
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Information in response to this Item is incorporated herein by
reference to the Company's definitive proxy statement to be filed pursuant to
Regulation 14A within 120 days after the end of the fiscal year covered by this
form 10-KSB.
23
<PAGE> 26
ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
EXHIBIT INDEX
Number Description
3.1 Amended and Restated Articles of Incorporation,
(incorporated by reference to Exhibit 3.1 of the
Registrants registration statement on Form SB-2, File No.
333-14175)
3.2 By-laws (incorporated by reference to Exhibit 3.2 of the
Registrant's registration statement on Form SB-2, File
No. 333-14175)
3.3 Articles of Amendment to Articles of Incorporation, as
dated on June 20, 1997 (incorporated by reference to
exhibit 3.3 of the Registrant's Form 10-KSB for the
fiscal year ended March 31, 1997)
4.1 Certificate of Designation of Series B Preferred Stock
(incorporated by reference to exhibit 4.1 of the
Registrant's registration statement on Form S-3, File No.
333-57181)
4.2 Securities Purchase Agreement dated May 6, 1998, by and
among the Company, Stark International and Shepherd
Investments International, Ltd. (incorporated by
reference to exhibit 4.2 of the Registrant's registration
statement on Form S-3, File No. 333-57181)
4.3 Registration Rights Agreement dated May 6, 1998, by and
among the Company, Stark International and Shepherd
Investments International, Ltd. (incorporated by
reference to exhibit 4.3 of the Registrant's Registration
Statement on Form S-3, File No. 333-57181)
4.4 Certificate of Designation of Series A Convertible
Preferred Stock (incorporated by reference to exhibit
3(i) (A) of the Registrant's Form 10-QSB for the quarter
ended June 30, 1997)
4.5 Form of Stock Purchase Warrant issued to purchasers of
units containing the Company's Series A Convertible
Preferred Stock and Stock Purchase Warrants (incorporated
by reference to exhibit 4.1 of the Registrant's Form
10-QSB for the quarter ended June 30, 1997)
4.6 Form of Registration Rights Agreement entered into by and
between the Company and purchasers of units containing
the Company's Series A Convertible Preferred Stock and
Stock Purchase Warrants (incorporated by reference to
exhibit 10.1 of the Registrant's Form 10-QSB for the
quarter ended June 30, 1997)
10.1 Lease Agreement by and between CSM Investors, Inc. and
the Company dated April 24, 1996 (incorporated by
reference to exhibit 10.1 of the Registrant's
registration statement on Form SB-2, File No. 333-14175)
10.2 Credit and Security Agreement by and between Diversified
Business Credit, Inc. and the Company dated March 14,
1995 (incorporated by reference to exhibit 10.2 of the
Registrant's registration statement on Form SB-2, File
No. 333-14175)
10.3 Term Loan Supplement to Credit Agreement dated March 14,
1995 by and between the Company and Diversified Business
Credit, Inc. (incorporated by reference to exhibit 10.3
of the Registrant's registration statement on Form SB-2,
File No. 333-14175)
10.4 Company's 1994-1997 Stock Option Plan (incorporated by
reference to exhibit 10.4 of the Registrant's
registration statement on Form SB-2, File No. 333-14175)
10.5 Employment Agreement dated July 30, 1996 by and between
the Company and Robert Olson (incorporated by reference
to exhibit 10.5 of the Registrant's registration
statement on Form SB-2, File No. 333-14175)
10.6 Employment Agreement dated July 30, 1996 by and between
the Company and Jeffrey J. Sjobeck (incorporated by
reference to exhibit 10.6 of the Registrant's
registration statement on Form SB-2, File No. 333-14175)
10.7 Promissory Note by and between the Company and Circle F
Ventures, LLC dated December 23,1996 (incorporated by
reference to exhibit 10.7 of the Registrant's Form 10-KSB
for the fiscal year ended March 31, 1997)
10.8 Amendment dated March 4, 1997 to the Promissory Note by
and between the Company and Circle F Ventures, LLC dated
December 23, 1996 (incorporated by reference to exhibit
10.8 of the Registrant's Form 10-KSB for the fiscal year
ended March 31, 1997)
10.9 Lease Agreement by and between Lake Corporate Center LLC
and the Company dated April 22, 1998 (filed herewith)
24
<PAGE> 27
10.10 Stock Purchase Warrant Agreement by and between the
Company and Circle F Ventures, LLC dated December 23,
1996 (incorporated by reference to exhibit 10.10 of the
Registrant's Form 10-KSB for the fiscal year ended March
31, 1997)
10.11 Security Agreement by and between the Company and Circle
F Ventures, LLC dated December 23, 1996 (incorporated by
reference to exhibit 10.11of the Registrant's Form 10-KSB
for the fiscal year ended March 31, 1997)
10.12 Subordination Agreement by and between the Company,
Diversified Business Credit, Inc. and Circle F Ventures,
LLC dated December 23, 1996 (incorporated by reference to
exhibit 10.12 of the Registrant's Form 10-KSB for the
fiscal year ended March 31, 1997)
10.13 Promissory Note by and between the Company and Circle F
Ventures, LLC dated March 18 1997 (incorporated by
reference to exhibit 10.13 of the Registrant's Form
10-KSB for the fiscal year ended March 31, 1997)
10.14 Sublease Agreement by and between CSM Investors, Inc.,
Digital River, Inc. and the Company dated April 22, 1998
(filed herewith)
10.15 Stock Purchase Warrant Agreement by and between the
Company and Circle F Ventures, LLC dated March 18 1997
(incorporated by reference to exhibit 10.15 of the
Registrant's Form 10-KSB for the fiscal year ended March
31, 1997)
10.16 Schedule identifying certain material details of
documents substantially identical to those set forth in
exhibits 10.17, 10.18, 10.19 and 10.20 (incorporated by
reference to exhibit 10.16 of the Registrant's Form
10-KSB for the fiscal year ended March 31, 1997)
10.17 Promissory Note by and between the Company and Rita M.
Olson dated December 20, 1996 (incorporated by reference
to exhibit 10.17 of the Registrant's Form 10-KSB for the
fiscal year ended March 31, 1997)
10.18 Amendment dated March 4, 1997 to the Promissory Note by
and between the Company and Rita M. Olson dated December
20, 1996 (incorporated by reference to exhibit 10.18 of
the Registrant's Form 10-KSB for the fiscal year ended
March 31, 1997)
10.19 Amendment dated June 5, 1997 by and between the Company
and Rita M. Olson dated December 20, 1996 (incorporated
by reference to exhibit 10.19 of the Registrant's Form
10-KSB for the fiscal year ended March 31, 1997)
10.20 Stock Purchase Warrant Agreement by and between the
Company and Rita M. Olson dated December 20, 1996
(incorporated by reference to exhibit 10.20 of the
Registrant's Form 10-KSB for the fiscal year ended March
31, 1997)
10.21 Note Conversion and Subscription Agreement by and between
the Company and Rita M. Olson dated June 6, 1997
(incorporated by reference to exhibit 10.21 of the
Registrant's Form 10-KSB for the fiscal year ended March
31, 1997)
10.22 Note Conversion and Subscription Agreement by and between
the Company and Wayne W. Mills dated June 6, 1997
(incorporated by reference to exhibit 10.22 of the
Registrant's Form 10-KSB for the fiscal year ended March
31, 1997)
21 Subsidiaries of Company (incorporated by reference to
exhibit 21 of the Registrant's registration statement on
Form SB-2, File No. 333-14175)
23.1 Consent of Lund Koehler Cox & Company, PLLP (filed
herewith)
23.2 Consent of Ernst & Young LLP (filed herewith)
23.3 Consent of Grant Thornton LLP (filed herewith)
25.1 Powers of Attorney (set forth on signature page)
27 Financial Data Schedule (filed herewith)
(b) Reports on Form 8-K
On March 12, 1998 the Company filed a current report of Form
8-K, announcing that the Company changed its independent accounting
firm to Grant Thornton LLP.
25
<PAGE> 28
SIGNATURES
In accordance with Section 13 or 15 (d) of the Securities Exchange Act
of 1934, the registrant caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
IntraNet Solutions, Inc.
("Registrant")
Dated: June 25, 1998 By /s/ Robert F. Olson
-----------------------
Robert F. Olson
Chairman of the Board and
Chief Executive Officer
Pursuant to the requirements of the Securities and Exchange Act of
1934, this Report has been signed on June 30, 1997 by the following persons on
behalf of the Registrant, in the capacities indicated.
Each person whose signature appears below constitutes and appoints
Jeffrey J. Sjobeck as his true and lawful attorney-in-fact and agent with the
full power of substitution and resubstitution, for him and his name place and
stead, in any all capacities, to sign any or all amendments to this Annual
Report on Form 10-KSB and to file the same, with all exhibits thereto, and other
documents in connection therewith, with the Securities and Exchange Commission,
granting unto said attorney-in-fact and agent full power and authority to do and
perform each and every act and thing requisite and necessary to be done in and
about the premises, as fully to all intents and purposes as he might or could do
in person, hereby ratifying and confirming all said attorney-in-fact and agent,
each acting alone, or his substitute or substitutes, may lawfully do or cause to
be done by virtue thereof.
By: /s/ Robert F. Olson
---------------------------------
Robert F. Olson
Its: Chief Executive Officer
---------------------------------
(Principal Executive Officer)
By: /s/ Jeffrey J. Sjobeck
---------------------------------
Jeffrey J. Sjobeck
Its: Chief Financial Officer
---------------------------------
(Principal Financial Officer)
By: /s/ Steven Waldron
---------------------------------
Steven Waldron
Its: Director
---------------------------------
By: /s/ Ronald E. Eibensteiner
---------------------------------
Ronald E. Eibensteiner
Its: Director
---------------------------------
By: /s/ Paul Anderson
---------------------------------
Paul Anderson
Its: Director
---------------------------------
By: /s/ David D. Koentopf
---------------------------------
David D. Koentopf
Its: Director
---------------------------------
By: /s/ Kenneth Holec
---------------------------------
Kenneth Holec
Its: Director
---------------------------------
22
<PAGE> 29
/*INTRANET SOLUTIONS, INC.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
<S> <C>
Report of Independent Accountants - Grant Thornton LLP................................................................F-2
Report of Independent Accountants - Ernst & Young LLP.................................................................F-3
Report of Independent Accountants - Lund, Koehler, Cox & Company, PLLP................................................F-4
Consolidated Balance Sheets as of March 31, 1997 and 1998...............................................................F-5
Consolidated Statements of Operations for the years ended March 31, 1996,
1997 and 1998.......................................................................................................F-6
Consolidated Statements of Stockholders' Equity (Deficit) for the years ended
March 31, 1996, 1997 and 1998.......................................................................................F-7
Consolidated Statements of Cash Flows for the years ended March 31, 1996,
1997 and 1998.......................................................................................................F-8
Notes to Consolidated Financial Statements..............................................................................F-9
</TABLE>
F-1
<PAGE> 30
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholders
IntraNet Solutions, Inc.
We have audited the consolidated balance sheet of IntraNet Solutions,
Inc. as of March 31, 1998, and the related consolidated statements of
operations, stockholders' equity (deficit) and cash flows for year then ended.
These financial statements are the responsibility of the Company's management.
Our responsibility is to express an opinion on these financial statements based
on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above
present fairly, in all material respects, the consolidated financial position
of IntraNet Solutions, Inc. as of March 31, 1998, and the consolidated results
of its operations and its consolidated cash flows for the year then
ended in conformity with generally accepted accounting principles.
GRANT THORNTON LLP
Minneapolis, Minnesota
June 1, 1998
F-2
<PAGE> 31
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholders
IntraNet Solutions, Inc.
We have audited the accompanying consolidated balance sheet of IntraNet
Solutions, Inc. as of March 31, 1997 and the related consolidated statements of
operations, stockholders' equity (deficit) and cash flows for the year ended
March 31, 1997. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the March 31, 1997 financial statements referred to
above present fairly, in all material respects, the consolidated financial
position of IntraNet Solutions, Inc. at March 31, 1997 and the consolidated
results of its operations and its cash flows for the year then ended, in
conformity with generally accepted accounting principles.
The accompanying finacial statements have been prepared assuming that
IntraNet Solutions, Inc. will continue as a going concern. As more fully
described in Note 1, the Company has incurred recurring operating losses and
has net capital and working capital deficiencies. These conditions raise
substantial doubt about the Company's ability to continue as a going concern.
(Management's plan in regard to these matters are also described in Note 1).
The financial statements do not include any adjustments to reflect the possible
future effects on the recoverablility and classification of assets or the
amounts and classification of liabilities that may result from the outcome of
this uncertainty.
ERNST & YOUNG LLP
Minneapolis, Minnesota
June 30, 1997
F-3
<PAGE> 32
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholders
IntraNet Solutions, Inc.
We have audited the consolidated balance sheet of IntraNet Solutions,
Inc. as of March 31, 1996, and the related consolidated statements of
operations, stockholders' equity (deficit) and cash flows for the year then
ended. These consolidated financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
consolidated financial statements based on our audit.
We conducted our audit in accordance with generally accepted
auditing standards. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit also included assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall financial statement presentation. We believe that our
audit provides a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position
of IntraNet Solutions, Inc. as of March 31, 1996, and the results of its
operations and its cash flows for the year then ended in conformity with
generally accepted accounting principles.
LUND KOEHLER COX & COMPANY, PLLP
Minneapolis, Minnesota
May 14, 1996
F-4
<PAGE> 33
INTRANET SOLUTIONS, INC.
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
ASSETS
MARCH 31,
---------------------------------------
1997 1998
----------------- ------------------
CURRENT ASSETS:
<S> <C> <C>
Cash $ 121,798 $994,526
Accounts receivable, net 2,779,849 4,925,301
Notes receivable 801,993 277,703
Inventories 313,160 233,121
Prepaid expenses and other current assets 371,817 540,472
----------- ------------
Total current assets 4,388,617 6,971,123
PROPERTY AND EQUIPMENT, NET 564,924 682,750
INTANGIBLE ASSETS, NET 133,338 93,338
NET ASSETS OF DISCONTINUED OPERATIONS 2,015,903 709,128
----------- ------------
$7,102,782 $8,456,339
=========== ============
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
CURRENT LIABILITIES:
Revolving credit facility $1,809,086 $2,246,122
Promissory notes payable, net of discount 808,932 250,965
Current portion of long-term debt 996,314 412,666
Accounts payable 2,089,926 2,906,293
Deferred revenues 210,351 210,110
Accrued expenses 433,583 563,786
----------- ------------
Total current liabilities 6,348,192 6,589,942
LONG-TERM DEBT, NET OF CURRENT PORTION 628,064 156,250
OTHER 199,887 42,215
----------- ------------
Total liabilities 7,176,143 6,788,407
----------- ------------
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY (DEFICIENCY):
Series A Preferred stock, $.01 par value, $5.00 stated value,
1,000,000 shares authorized, 450,000 shares issued and
outstanding in 1998 -- 2,003,844
Common stock, $.01 par value, 24,000,000 shares authorized,
7,523,603 and 8,607,445 issued and outstanding, respectively 75,236 86,075
Additional paid-in capital 3,827,356 8,760,980
Accumulated deficit (3,744,833) (9,064,694)
Unearned compensation (231,120) (118,273)
----------- ------------
Total stockholders' equity (deficit) (73,361) 1,667,932
----------- ------------
$7,102,782 $8,456,339
=========== ============
</TABLE>
The accompanying notes are an integral part of the financial statements.
F-5
<PAGE> 34
INTRANET SOLUTIONS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
YEAR ENDED MARCH 31,
-------------------------------------------------------------
1996 1997 1998
------------------ ------------------ ------------------
REVENUES:
<S> <C> <C> <C>
Hardware integration $8,198,800 $10,476,702 $12,186,886
Software, technical services and support 4,522,054 5,713,874 7,262,909
--------------- -------------- --------------
Total revenues 12,720,854 16,190,576 19,449,795
--------------- -------------- --------------
COST OF REVENUES:
Hardware integration 6,795,594 8,792,240 10,249,621
Software, technical services and support 2,799,650 3,345,764 3,203,407
--------------- -------------- --------------
Total cost of revenues 9,595,244 12,138,004 13,453,028
--------------- -------------- --------------
Gross profit 3,125,610 4,052,572 5,996,767
--------------- -------------- --------------
OPERATING EXPENSES:
Sales and marketing 1,497,051 2,014,160 3,130,885
General and administrative 1,092,000 1,983,591 2,369,011
Research and development 480,464 1,115,782 1,243,068
--------------- -------------- --------------
Total operating expenses 3,069,515 5,113,533 6,742,964
--------------- -------------- --------------
Income (loss) from operations 56,095 (1,060,961) (746,197)
INTEREST EXPENSE, NET 125,710 127,747 332,109
--------------- -------------- --------------
LOSS BEFORE INCOME TAXES (69,615) (1,188,708) (1,078,306)
Income taxes (benefit) (21,320) -- --
--------------- -------------- --------------
LOSS FROM CONTINUING OPERATIONS (48,295) (1,188,708) (1,078,306)
DISCONTINUED OPERATIONS
Loss from operations of discontinued
distribution group (net of applicable
taxes) (199,512) (2,559,756) (2,576,666)
--------------- -------------- --------------
NET LOSS (247,807) (3,748,464) (3,654,972)
PREFERRED STOCK DIVIDENDS AND ACCRETION (NOTE 8) -- -- (1,664,889)
--------------- -------------- --------------
LOSS ATTRIBUTABLE TO COMMON SHAREHOLDERS ($247,807) ($3,748,464) ($5,319,861)
=============== ============== ==============
LOSS FROM CONTINUING OPERATIONS PER COMMON
SHARE - BASIC AND DILUTED ($0.01) ($0.19) ($0.14)
=============== ============== ==============
NET LOSS PER COMMON SHARE - BASIC AND DILUTED ($0.04) ($0.58) ($0.47)
=============== ============== ==============
LOSS ATTRIBUTABLE TO COMMON SHAREHOLDERS PER
SHARE - BASIC AND DILUTED ($0.04) ($0.58) ($0.68)
=============== ============== ==============
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING 5,762,055 6,418,111 7,844,190
=============== ============== ==============
</TABLE>
The accompanying notes are an integral part of the financial statements.
F-6
<PAGE> 35
INTRANET SOLUTIONS, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
<TABLE>
<CAPTION>
PREFERRED STOCK COMMON STOCK
--------------------------- --------------------------
SHARES AMOUNT SHARES AMOUNT
---------- -------------- ------------ -----------
<S> <C> <C> <C> <C>
BALANCE - MARCH 31, 1995 -- -- 8,637,166 $ 86,372
Repurchase of common
stock -- -- (4,318,583) (43,186)
Grant of compensatory
stock options -- -- -- --
Stock option
compensation
Earned -- -- -- --
Net loss -- -- -- --
------------ ------------- ----------- -----------
BALANCE - MARCH 31, 1996 -- -- 4,318,583 43,186
Grant of compensatory
stock options -- -- -- --
Exercise of stock
options
and warrants -- -- 60,926 609
Stock option
compensation
Earned -- -- -- --
Conversion of
Promissory notes -- -- 158,346 1,583
Shares issued in
reverse acquisition -- -- 2,940,587 29,406
Shares issued in
conjunction
with acquisition -- -- 45,161 452
Warrants issued in
conjunction
with promissory notes -- -- -- --
Net loss -- -- -- --
------------ ------------- ----------- -----------
BALANCE - MARCH 31, 1997 -- -- 7,523,603 75,236
Exercise of stock
options and warrants -- -- 541,034 5,411
Cancellation of
compensatory stock
options -- -- -- --
Conversion of
promissory notes -- -- 71,428 714
Issuance of preferred
stock 800,000 3,562,395 -- --
Conversion of preferred
stock common to stock (350,000) (1,558,551) 471,380 4,714
Non-cash deemed
dividend -- (1,570,000) -- --
Deemed dividend
accretion -- 1,570,000 -- --
Dividends paid on
preferred stock -- -- -- --
Stock option
compensation earned -- -- -- --
Net Loss -- -- -- --
------------ ------------ ------------ -----------
BALANCE - MARCH 31, 1998 450,000 $ 2,003,844 8,607,445 $ 86,075
============ ============ ============ ===========
</TABLE>
<TABLE>
<CAPTION>
ADDITIONAL RETAINED UNEARNED TOTAL
PAID-IN EARNINGS COMPENSATION
CAPITAL (ACCUMULATED
DEFICIT)
--------- ------------ -------------- -----------
<S> <C> <C> <C> <C>
BALANCE - MARCH 31, 1995 ($57,029) $ 396,160 ($17,779) $ 407,724
Repurchase of common
stock -- (144,722) -- (187,908)
Grant of compensatory
stock options 5,236 -- (5,236) --
Stock option
compensation
Earned -- -- 6,808 6,808
Net loss -- (247,807) -- (247,807)
----------- ------------ ----------- -----------
BALANCE - MARCH 31, 1996 (51,793) 3,631 (16,207) (21,183)
Grant of compensatory
stock options 241,222 -- (241,222) --
Exercise of stock
options
and warrants 66,610 -- -- 67,219
Stock option
compensation
Earned -- -- 26,309 26,309
Conversion of
Promissory notes 548,417 -- -- 550,000
Shares issued in
reverse acquisition 2,583,352 -- -- 2,612,758
Shares issued in
conjunction
with acquisition 349,548 -- -- 350,000
Warrants issued in
conjunction
with promissory notes 90,000 -- -- 90,000
Net loss -- (3,748,464) -- (3,748,464)
----------- ------------ ----------- -----------
BALANCE - MARCH 31, 1997 3,827,356 (3,744,833) (231,120) (73,361)
Exercise of stock
options and warrants 1,625,082 -- -- 1,630,493
Cancellation of
compensatory stock
options (64,581) -- 64,581 --
Conversion of
promissory notes 249,286 -- -- 250,000
Issuance of preferred
stock -- -- -- 3,562,395
Conversion of preferred
stock common to stock 1,553,837 -- -- --
Non-cash deemed
dividend 1,570,000 -- -- --
Deemed dividend
accretion -- (1,570,000) -- --
Dividends paid on
preferred stock -- (94,889) -- (94,889)
Stock option
compensation earned -- -- 48,266 48,266
Net Loss -- (3,654,972) -- (3,654,972)
----------- ------------ ----------- -----------
BALANCE - MARCH 31, 1998 $8,760,980 ($9,064,694) ($ 118,273) $ 1,667,932
=========== ============ =========== ===========
</TABLE>
The accompanying notes are an integral part of the financial statements.
F-7
<PAGE> 36
INTRANET SOLUTIONS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEAR ENDED MARCH 31,
-------------------------------------------------------------
1996 1997 1998
------------------ ----------------- ------------------
CASH FLOWS FROM OPERATING ACTIVITIES:
<S> <C> <C> <C>
Net income (loss) ($247,807) ($3,748,464) ($3,654,972)
Adjustments to reconcile net income (loss)
to cash flows from operating activities -
Depreciation and amortization 159,340 231,157 290,094
Loss on sale of fixed assets 7,603 1,609 448
Stock option compensation earned 6,808 26,309 48,266
Deferred income taxes (42,000) -- --
Discount amortization -- 17,527 71,894
Non-cash special charges -- 219,361 --
Discontinued operations (379,955) (867,555) 1,029,072
Changes in operating assets and liabilities (226,921) (750,395) (1,458,259)
------------ ------------- -------------
Cash flows from operating activities (722,932) (4,870,451) (3,673,457)
------------ ------------- -------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from note receivable -- 1,114,169 816,034
Proceeds from sale of fixed assets 126,286 6,570 3,398
Purchases of fixed assets (161,318) (285,103) (371,766)
Acquisition of covenant-not-to-compete (200,000) -- --
------------ ------------- -------------
Cash flows from investing activities (235,032) 835,636 447,666
------------ ------------- -------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net advances from revolving credit facility 874,936 700,988 437,036
Proceeds from convertible promissory notes 550,000 -- --
Proceeds from long-term debt -- 2,433,313 --
Payments on long-term debt (119,163) (183,196) (1,274,963)
Payments on capital leases (171,135) (8,624) (10,360)
Payments on other long-term liabilities -- -- (102,447)
Repurchase of common stock (148,400) (8,800) (7,725)
Issuance of preferred stock -- -- 3,521,373
Payment of dividends on preferred stock -- -- (94,889)
Proceeds from stock options and warrants -- 67,219 1,630,494
Proceeds from reverse merger -- 1,118,200 --
------------ ------------- -------------
Cash flows from financing activities 986,238 4,119,100 4,098,519
------------ ------------- -------------
NET INCREASE IN CASH 28,274 84,285 872,728
CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR 9,239 37,513 121,798
------------ ------------- -------------
CASH AND CASH EQUIVALENTS, END OF YEAR $37,513 $121,798 $994,526
============ ============= =============
SUPPLEMENTAL DISCLOSURE OF CASH FLOWS INFORMATION:
Cash paid for interest $226,533 $351,955 $343,181
Cash paid for income taxes $19,396 $600 $7,281
NONCASH FINANCING AND INVESTING ACTIVITIES:
Equipment acquired with capital lease obligation $93,530 $328,460 --
Conversion of debt to common stock -- -- $250,000
Conversion of debt to preferred stock -- -- $150,000
Common stock redeemed with note payable, net $37,908 -- --
Common stock issued on purchase of business -- $350,000 --
Note receivable from sale of discontinued operations -- -- $277,703
DETAIL OF CHANGES IN OPERATING ASSETS AND LIABILITIES:
Accounts receivable ($771,913) ($102,883) ($2,145,452)
Inventories (68,509) (62,888) 80,039
Prepaid expenses and other current assets (246,578) (492,640) (291,674)
Accounts payable 779,732 (365,621) 816,366
Accrued expenses and other liabilities 80,347 273,637 82,462
------------ ------------- -------------
Net changes in operating assets and liabilities ($226,921) $(750,395) ($1,458,259)
============ ============= =============
</TABLE>
The accompanying notes are an integral part of the financial statements.
F-8
<PAGE> 37
INTRANET SOLUTIONS, INC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(1) NATURE OF THE BUSINESS
IntraNet Solutions, Inc. (the "Company") developes and implements
proprietary software solutions for the management and distribution of critical
business information. The Company offers its customers a variety of
products, including proprietary intranet document management software, hardware
and services. The Company markets its products both domestically and
internationally. The majority of the Company's revenues are currently derived
in the United States.
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation
The consolidated financial statements include the accounts of the
Company and its wholly-owned subsidiaries. All significant intercompany
transactions and balances have been eliminated.
Revenue Recognition
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
training, consulting and development 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 contract. Revenue from training, consulting
and developmental 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.
Cash and Cash Equivalents
The Company considers all short-term, highly liquid investments that
are readily convertible into known amounts of cash and have maturities of three
months or less at the time of purchase to be cash equivalents.
Inventories
Inventories, consisting primarily of computer hardware and software and
publishing supplies, are valued at the lower of cost (first-in, first-out) or
market value. The Company's policy is to perform quarterly evaluations of
inventory, based upon business trends, to specifically identify obsolete,
slow-moving and nonsalable inventory. Inventory reserves are evaluated quarterly
to ensure they continually reflect the current business environment and trends.
Property and Equipment
Property and equipment, including leasehold improvements, are recorded
at cost. Depreciation is provided using the straight-line method over the
estimated useful lives of the assets, three to seven years, or the life of the
lease, whichever is shorter. Maintenance, repairs and minor renewals are
expensed when incurred. The carrying value of property and equipment is assessed
annually and/or when circumstances indicate that their carrying value may be
impaired or not recoverable. The Company determines such
F-9
<PAGE> 38
INTRANET SOLUTIONS, INC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
impairment by measuring undiscounted future cash flows. If an impairment is
present, the assets are reported at the lower of carrying value or fair value.
Intangible Assets
Intangible assets, consisting of goodwill and agreements not to
compete, are recorded at cost and are presented net of accumulated amortization
of $122,300 and $106,700 at March 31, 1997 and 1998, respectively. Goodwill is
amortized on a straight-line basis over terms of eight to fifteen years.
Agreements not to compete are amortized on a straight-line over basis their
respective terms. Amortization expense was $34,300, $88,000 and $748,200 for the
years ended March 31, 1996, 1997 and 1998, respectively. The carrying value of
intangible assets is assessed periodically or when factors indicating an
impairment are present. The Company employs an undiscounted cash flow method of
assessment for these assets.
Software Development Costs
Software development costs generally are expensed as incurred.
Statement of Financial Accounting Standards No. 86 requires the capitalization
of certain software development costs once technological feasibility is
established. The capitalized cost is then amortized on a straight-line basis
over the estimated product life, or on the ratio of current revenues to total
projected product revenues, whichever is greater. To date, the period between
achieving technological feasibility, that the Company has defined as the
establishment of a working model, and the general availability of such software
has been short and software development costs qualifying for capitalization have
been insignificant. Accordingly, the Company has not capitalized any software
development costs.
Advanced Royalties
The Company does not capitalize any nonrefundable advance royalties
until it has an established market for its products. Nonrefundable advance
royalties that qualify for capitalization are expensed at the contractual
royalty rate based on actual product sales.
Net Income (Loss) per Common Share
On December 31, 1997, the Company adopted Statement of Financial
Accounting Standards No. 128, "Earnings per Share" ("SFAS 128"). As required by
SFAS 128, all current and prior year income (loss) per share data have been
restated where necessary to conform to the provisions of SFAS 128.
The Company's basic net income (loss) per share amounts have been
computed by dividing net income (loss) by the weighted average number of
outstanding common shares. The Company's diluted net income (loss) per share is
computed by dividing net income (loss) by the weighted average number of
outstanding common shares and common share equivalents relating to stock
options, when dilutive. For each of the years ended March 31, 1996, 1997 and
1998, the Company incurred net losses and therefore basic and diluted per share
amounts are the same. Common stock equivalent shares consist of convertible
preferred stock (using the if converted method) and stock options and warrants
(using the treasury stock method). Common stock equivalents as of March 31, 1998
included 606,061 shares related to convertible preferred stock and 1,009,736
shares related to options and warrants.
Advertising
The Company expenses the cost of advertising as it is incurred.
Advertising expense for the year ended March 31, 1996, 1997, and 1998 was
$73,000, $249,900 and $604,200, respectively.
F-10
<PAGE> 39
INTRANET SOLUTIONS, INC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Recently Issued Accounting Standards
The American Institute of Certified Public Accountants has issued
Statement of Position (SOP), SOP 97-2, which supersedes Statement of Position
91-1, "Software Revenue Recognition." Management has assessed this new Statement
and believes that its adoption will not have a material effect on the timing of
the Company's software revenue recognition or cause changes to its software
recognition policy.
In June 1997, the FASB issued Statement No. 130 "Reporting
Comprehensive Income" and Statement No. 131 "Disclosures about Segments of an
Enterprise and Related Information" which are effective for fiscal years
beginning after December 15, 1997. Statement No. 130 will require the Company to
display an amount representing total comprehensive income, as defined by the
statement, as part of the Company's basic financial statements. Comprehensive
income will include items such as unrealized gains or losses on certain
investment securities and foreign currency items. Statement No. 131 will require
the Company to disclose financial and other information about its business
segments, their products and services, geographic areas, major customers,
revenues, profits, assets and other information. The adoption of these two
statements is not expected to have a material effect on disclosure in the
consolidated financial statements of the Company.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
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.
(3) DISCONTINUED OPERATIONS
In September 1997, the Company formally adopted a plan to dispose of
its on-demand publishing distribution group. The plan of disposal targets a sale
of substantially all of the assets of the distribution subsidiary to an existing
on-demand publishing provider. The Company has restated the prior financial
statements to present the operating results of the distribution group as a
discontinued operation.
During the year ended March 31, 1998, the Company completed the sale of
substantially all the assets of its Minneapolis Distribution Group operations
for approximately $1.6 million. The sale price included cash of $359,000, a
promissory note of $278,000 and assumption of liabilities of $1.0 million. As
of March 31, 1998, the remaining assets and liabilities related to the
distribution group are located at the Company's Phoenix location. During the
quarter ended March 31, 1998, the Company recognized a $750,000 write-down to
the carrying value of the Phoenix assets to reflect their estimated net
realizable value. Included in this amount was $660,000 to fully amortize the
goodwill associated with the acquisition of the Phoenix division and $90,000 to
write-down certain equipment.
F-11
<PAGE> 40
INTRANET SOLUTIONS, INC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The components of net assets of discontinued operations included in the
Company's consolidated balance sheets as of March 31, 1997 and 1998 are as
follows:
<TABLE>
<CAPTION>
1997 1998
-----------------------------
<S> <C> <C>
Accounts receivable $832,954 $469,732
Inventories and other current assets 334,686 134,451
Property, equipment and other assets 2,758,473 562,992
=============================
Total assets $3,926,113 $ 1,167,175
=============================
Accounts payable and accrued expenses $785,448 $ 262,738
Debt 1,124,762 195,309
=============================
Total liabilities $1,910,210 $ 458,047
=============================
Net assets $2,015,903 $ 709,128
=============================
</TABLE>
Summarized financial information for the discontinued operations were
as follows:
<TABLE>
<CAPTION>
Year Ended March 31,
1996 1997 1998
----------------------------------------------------------
<S> <C> <C> <C>
Operating revenues $ 1,514,888 $ 3,819,430 $ 5,023,206
Net Loss $ (199,512) $ (2,559,756) $ (2,576,666)
</TABLE>
(4) RELATED PARTY TRANSACTIONS
The Company contracts with an entity that provides programming services
to certain of its customers. This entity is beneficially controlled by a
principal stockholder of the Company. Total fees under this contract arrangement
for the years ending March 31, 1996, 1997 and 1998 were $51,000, $19,000 and
$36,000 respectively.
(5) PROPERTY AND EQUIPMENT
Property and equipment consisted of the following at:
<TABLE>
<CAPTION>
March 31,
----------------------------------
1997 1998
---- ----
<S> <C> <C>
Equipment and furniture $ 931,272 $1,234,228
Leasehold improvements 81,192 117,237
------------- -------------
Total property and equipment 1,012,464 1,351,465
Less: accumulated depreciation 447,540 668,715
------------- -------------
Total property and equipment, net $564,924 682,750
============= =============
</TABLE>
(6) REVOLVING CREDIT FACILITY
The Company has a revolving credit agreement that provides for borrowings of up
to $3.85 million based on available collateral. Advances of $1,809,086 and
$2,246,122 were outstanding as of March 31, 1997 and 1998, respectively.
Advances are due on demand and accrue interest at the bank's base lending rate
plus 2.5% (the effective rate of interest was 11.0% on March 31, 1997 and
1998). As of March 31, 1998 the Company had borrowing availability, based on
available collateral, of approximately $500,000. The agreement is secured by
substantially all Company assets, personally
F-12
<PAGE> 41
INTRANET SOLUTIONS, INC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
guaranteed by a stockholder, and requires the Company to meet various
covenants including maintenance of minimum levels of net worth. Total debt
underlying this agreement, including long-term debt, was $2.7 million as of
March 31, 1998.
(7) LONG TERM DEBT AND PROMISSORY NOTES PAYABLE
<TABLE>
<CAPTION>
March 31,
----------------------------------
1997 1998
------------- -------------
<S> <C> <C>
Term loans - bank, monthly principal installments
of $35,400 plus interest at the bank's base lending
rate plus 2.0% to 2.5% (effective rates of 10.5% to
11.0% at March 31, 1997 and 1998), matures at various
dates from April 1998 through December 2000, secured by
substantially all Company assets and guaranteed
by a stockholder.
$825,141 $406,795
Notes payable - stockholder, due on demand,
quarterly interest payments at 12%, unsecured
and subordinated to bank indebtedness. 27,500 27,500
Promissory notes - due April 15, 1998 net of
$72,473 and $194 discount respectively, interest
at 9% due at maturity, $750,000 secured by substantially
all Company assets and subordinated to bank debt. (1)
1,427,527 250,965
Note Payable - LaFountain Corporation, principal
installment of $133,313 due on demand
quarterly interest payments at prime
plus 1.5%, unsecured. 133,313 125,152
Other 19,829 9,469
------------ ------------
Total long-term debt and promissory notes payable 2,433,310 819,881
Less: current maturities 1,805,246 663,631
============ ============
Long-term debt and promissory notes payable, net $628,064 $156,250
============ ============
</TABLE>
(1) The Company issued $1.5 million of promissory notes, $800,000 of
which was secured and $250,000 of which was issued beneficially to the principal
stockholder of the Company. Included in the $1.5 million promissory notes the
Company issued $150,000 to an officer of the Company and $125,000 beneficially
to a member of the Board of Directors. The promissory notes bear interest at 9%
plus 300,000 warrants with an exercise price of $4.00. The amount outstanding at
March 31, 1998 is recorded net of a discount, and is being accreted to its
redemption value over the term of the debt, resulting in an effective rate of
16%.
F-13
<PAGE> 42
INTRANET SOLUTIONS, INC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Future maturities of long-term debt are as follows:
<TABLE>
<CAPTION>
<S> <C>
1999 $663,631
2000 75,000
2001 75,000
2002 6,250
=============
$819,881
=============
</TABLE>
The fair value of long-term debt approximates its carrying value,
estimated using discounted cash flow analysis, based on the Company's
incremental borrowing rate for similar types of securities.
(8) STOCKHOLDERS' EQUITY
Stock redemption - During July 1995, the Company agreed to acquire 50%
of its outstanding common stock from a single stockholder for $200,000.
Stock splits - On June 2, 1995, the Company declared a 900-for-1 stock
split. On November 6, 1995, the Company declared a 21.22-for-1 stock split, and
on October 31, 1996, the Company declared a 1-for-4 reverse stock split. The
effects of the stock splits have been retroactively applied in the financial
statements.
Preferred Stock - During July 1997, the Company issued $4,000,000 of
Series A 5% Convertible Preferred Stock. The Company issued 800,000 units, each
consisting of one share of $.01 par value preferred stock 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.
During the year ended March 31, 1998, 350,000 shares of Series A Preferred Stock
were converted into 471,380 shares of common stock.
In connection with this transaction, the Company recorded a non-cash
deemed dividend of approximately $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 was recognized during the periods in which the
shares become eligible for conversion, which occurred ratably from issuance
through 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. During the year ended March 31, 1998, the Company
also paid approximately $94,900 in preferred stock dividends.
Warrants - The Company has 1,379,589 non-redeemable stock purchase
warrants with exercise prices of $2.32 to $8.00, outstanding at March 31, 1998.
The warrants expire on various dates through January, 2003.
Stock options - On January 16, 1996 and December 1, 1997, the Board of
Directors approved the 1994-1997 Stock Option Plan and the 1997 Director Stock
Option Plan, respectively, (collectively the Plan), pursuant to which options
and other awards to acquire an aggregate of 2,500,000 and 300,000 shares,
respectively, of the Company's common stock may be granted. The 1997 Director
Stock Option Plan remains subject to shareholder approval. The Company
integrated all previously granted options into the Plan. The Plan is
administered by the Board of Directors, which has the discretion to determine
the number and purchase price of shares subject to stock options (which may be
below the fair market value of the common stock on the date thereof), the term
of each option, and the terms of exercisability.
F-14
<PAGE> 43
INTRANET SOLUTIONS, INC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Certain options have exercise prices less than the fair market value of
the Company's common stock on the date of the grant. The Company recognizes the
compensation element of these grants over the vesting period of the related
options, generally five years. The options generally vest over periods of one to
five years.
The Company has elected to follow Accounting Principles Board Opinion
No 25, Accounting for Stock Issued to Employees ("APB 25") and related
Interpretations in accounting for its employee stock options because, as
discussed below, the alternative fair value accounting provided for under FASB
Statement No. 123, Accounting for Stock-Based Compensation ("Statement 123"),
requires use of option valuation models that were not developed for use in
valuing employee stock options. Under APB 25, if the exercise price of the
Company's employee stock options equals the market price of the underlying stock
on the date of grant, no compensation expense is recognized.
Pro forma information regarding net loss and net loss per share is
required by Statement 123, and has been determined as if the Company had
accounted for its employee stock options under the fair value method of
Statement 123. The fair value for those options was estimated at the date of
grant using the Black-Scholes option pricing model with the following
weighted-average assumptions for the years ended March 31, 1996, 1997 and 1998:
risk free interest rates of 6.0%, 6.0% and 6.3%, dividend yield of 0%;
volatility factor of the expected market price of the Company's common stock of
65%, 65% and 75%, and a weighted-average expected life of the options 8.5 years.
The Black-Scholes option valuation model was developed for use in
estimating the fair value of traded options which have no vesting restrictions
and are fully transferable. In addition, option valuation models require the
input of highly subjective assumptions. Because the Company's employee stock
options have characteristics significantly different from those of traded
options, and because changes in the subjective input assumptions can materially
affect the fair value estimate, in management's opinion, the existing models do
not necessarily provide a reliable single measure of the fair value of its
employee stock options.
For purposes of pro forma disclosures, the estimated fair value of the
options is amortized to expense over the options' vesting period. The Company's
pro forma information is as follows:
<TABLE>
<CAPTION>
Year Ended Year Ended Year Ended
March 31, March 31, March 31,
1996 1997 1998
--------------------- ------------------- ----------------------
<S> <C> <C> <C>
Pro forma loss from continuing operations $(187,788) $(1,671,344) $(2,046,306)
Pro forma loss from continuing operations
per common share, basic and diluted $(0.03) $(0.26) $(0.26)
Pro forma net loss $(387,300) $(4,231,100) $(4,622,972)
Pro forma net loss per common share,
basic and diluted $(0.07) $(0.66) $(0.59)
Pro forma loss attributable to common
shareholders $(387,300) $(4,231,100) $(6,287,861)
Pro forma loss attributable to common
shareholders per common share,
basic and diluted $(0.07) $(0.66) $(0.80)
</TABLE>
The pro forma effect on net loss for the years ended March 31, 1996,
1997, and 1998 is not representative of the pro forma effect on net loss in
future years because it does not take into consideration pro forma compensation
expense related to grants made prior to 1996.
F-15
<PAGE> 44
INTRANET SOLUTIONS, INC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
A summary of the Company's stock option activity, and related
information through March 31, 1998 is as follows:
<TABLE>
<CAPTION>
Weighted- Average
Options Exercise Price
------- ------------------
<S> <C> <C>
Outstanding as of March 31, 1995 497,771 $ .22
Granted 934,166 4.25
---------- -----------
Outstanding as of March 31, 1996 1,431,937 2.85
Granted 353,500 6.29
Exercised (47,618) .76
Forfeited (168,106) 3.15
---------- -----------
Outstanding as of March 31, 1997 1,569,713 3.66
Granted 948,000 5.26
Exercised (155,725) 2.13
Forfeited (277,626) 5.04
--------- -----------
Outstanding as of March 31, 1998 2,084,362 $ 4.33
========= ===========
</TABLE>
<TABLE>
<CAPTION>
March 31, 1996 March 31, 1997 March 31, 1998
-------------- -------------- --------------
<S> <C> <C> <C>
Options exercisable at end of period 475,056 594,576 855,708
======= ======= =======
Weighted-average fair value of options
granted during the year N/A $6.44 $4.19
=== ===== =====
</TABLE>
The following table summarizes information about the stock options
outstanding at March 31, 1998:
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
------------------------------------------------------ ------------------------------------
Weighted- Weighted-
Average Average
Range of Number Remaining Exercise Number Weighted- Average
Exercise Price Outstanding Contractual Life Price Exercisable Exercise Price
-------------- ----------- ---------------- --------- ----------- -----------------
<S> <C> <C> <C> <C> <C>
$.20 - $.56 361,744 6.5 $3.27 270,259 $ .28
$3.00-$3.99 439,185 7.5 3.20 200,271 3.16
$4.00-$5.99 596,384 8.0 4.80 218,629 4.64
$6.00-$7.00 578,750 8.0 6.12 58,250 6.22
10.36 108,299 7.0 10.36 108,299 10.36
---------- ------- --------- ---------- ---------
$.20 - $10.36 2,084,362 7.6 $4.33 855,708 $3.75
========== ======= ========= ========== =========
</TABLE>
(9) RETIREMENT SAVINGS PLAN
The Company maintains a pre-tax salary reduction/profit sharing plan
under the provisions of Section 401(k) of the Internal Revenue Code. The plan
covers substantially all full-time employees who have reached the age of 21.
Profit sharing contributions by the Company are discretionary. No contributions
have been made for the years ended March 31, 1996, 1997 and 1998.
F-16
<PAGE> 45
INTRANET SOLUTIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(10) INCOME TAXES
The Company's provision for income taxes consisted of the following
components:
<TABLE>
<CAPTION>
Years Ended March 31,
-----------------------------------------------
1996 1997 1998
----------- --------- ---------
Current:
<S> <C> <C> <C>
Federal ($59,770) $ -- $ --
State - -- --
---------- --------- ---------
Total (59,770) -- --
Deferred (66,000) -- --
---------- --------- ---------
($125,770) $ -- $ --
Discontinued operations 104,450 $ -- $ --
---------- --------- ---------
Total Provision ($21,320) $ -- $ --
========== ========= =========
</TABLE>
The tax effects of temporary differences giving rise to the deferred items
consisted of the following at:
<TABLE>
<CAPTION>
March 31,
1997 1998
----------- ----------
Deferred tax liabilities:
<S> <C> <C>
Depreciation and amortization $(123,800) $(88,700)
Deferred tax assets:
Deferred revenue 84,100 84,000
Accounts Receivable and other reserves 160,300 212,000
Inventory 11,800 24,800
Net operating loss carryforwards 1,409,000 2,620,000
Other 45,800 30,100
----------- ------------
1,587,200 2,882,200
Valuation allowance (1,587,200) (2,882,200)
----------- ------------
Net deferred tax (liability) $ -- $ --
=========== ============
</TABLE>
Deferred tax liabilities and deferred tax assets reflect the net tax
effects of temporary differences between the approximate carrying amounts of
assets and liabilities for financial reporting purposes and the amounts used for
income tax purposes. At March 31, 1998, the Company had net operating loss (NOL)
carryforwards of approximately $6.5 million which begin to expire in 2011.
The valuation allowance at March 31, 1998 was recognized to completely
reserve for the net deferred tax assets. The reserve has been established due to
the uncertainty of future taxable income which is necessary to realize the
benefits of the deferred tax assets.
F-17
<PAGE> 46
INTRANET SOLUTIONS, INC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(11) COMMITMENTS AND CONTINGENCIES
Operating leases - The Company has entered into certain noncancelable
operating lease agreements related to office/warehouse space, equipment and
vehicles. Total rent expense under operating leases net of sublease income, was,
$254,700, $874,100 and $1.0 million for the years ended March 31, 1996, 1997,
and 1998, respectively.
Minimum remaining rental commitments under operating leases net of sublease
arrangements as of March 31, 1998 are as follows:
<TABLE>
<CAPTION>
<S> <C>
1999 $718,100
2000 550,300
2001 342,300
2002 227,200
2003 183,700
Thereafter 428,600
==============
Total $2,450,200
==============
</TABLE>
Software royalties - The Company has entered into several software
royalty agreements whereby it is required to pay a royalty amount based upon
actual sales of certain software products. As of March 31, 1996, 1997 and
1998, the Company had advanced royalties of $50,000, $51,500 and $308,400,
respectively. Royalties earned during the years ended March 31, 1997 and 1998
were $209,200 and $230,600, respectively. No royalties were earned during the
year ended March 31, 1996.
Consulting agreement - The Company has a consulting agreement with a
former stockholder that requires monthly payments of $10,300 through July 2000.
(12) CONCENTRATION OF RISK
Major suppliers - The Company utilizes a single supplier to provide the
majority of its computer hardware sales. Purchases from this supplier were
approximately 72%, 68% and 76% of total product purchases during the years ended
March 31, 1996, 1997 and 1998, respectively. The Company has a supply and resale
agreement with this supplier that expires June 30, 1998 and is renewable
annually.
The Company previously utilized a single supplier to provide the
majority of its software and maintenance services. Purchases from this supplier
were approximately 14%, 12%, and 7% of total product purchases during the years
ended March 31, 1996, 1997, and 1998, respectively. The Company has terminated
its supply and resale agreement with this supplier.
Accounts receivable - Accounts receivable is presented net of an
allowances of $30,000, $181,500 and $516,500 as of March 31, 1996, 1997 and
1998, respectively. The Company sells its products and services principally to
large United States customers. No customer has accounted for 10% or more of the
Company's revenues in the years ended March 31, 1996, 1997 and 1998. Credit is
extended based on an evaluation of the customer's financial condition and a cash
deposit is generally not required. The Company estimates its potential losses on
trade receivables on an ongoing basis and provides for anticipated losses in the
period in which the revenues are recognized. Credit losses have historically
been minimal and have been within management's expectations.
F-18
<PAGE> 47
INTRANET SOLUTIONS, INC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(13) SUBSEQUENT EVENT
In May, 1998, the Company completed the sale of $3,000,000 of 4% Series
B Convertible Preferred Stock. The preferred stock is convertible into the
Company's current stock at a price equal to 84% of market value at the date of
conversion with a maximum conversion price of $7.56 and a minimum conversion
price of $1.81. In connection with this transaction, the Company will recognize
a non-cash deemed dividend of $570,000. The deemed dividend will be recorded as
a discount to preferred stock with a corresponding credit to additional paid in
capital. The discount will be recognized at the date of issue of the preferred
stock, the same date in which the shares are eligible for conversion. The
accretion of the discount will be reflected in the statement of operations as an
adjustment to net income (loss).
F-19
<PAGE> 1
EXHIBIT 10.9
OFFICE/WAREHOUSE LEASE
THIS INDENTURE OF LEASE, dated this 22 day of April, 1998 by and
between Lake Corporate Center, LLC, a Minnesota limited liability company
(hereinafter referred to as "Lessor"), and IntraNet Solutions, Inc. a Minnesota
corporation (hereinafter referred to as "Lessee").
DEFINITIONS:
"PREMISES"-- That certain real property located in the City of Eden
Prarie, County of Hennepin and State of Minnesota and legally
described on Exhibit "A" attached hereof, including all buildings and site
improvement located thereon.
"BUILDING"--That certain office/warehouse building containing
approximately 70,641 square feet located upon the Premises and commonly
described as Lake Corporate Center, 8091 Wallace Road, Eden Prairie, Minnesota.
"DEMISED PREMISES"--That certain portion of the Building located at 8091
Wallace Road, Eden Prairie, Minnesota, for a total of approximately 18,404
square feet consisting of 15,907 square feet of office space, approximately
2,431 square feet of warehouse space, and approximately 66 square feet of common
area Mechanical Room as measured from the outside walls of the Demised Premises
to the center of the partition wall. The Demised Premises include a
non-exclusive easement for access to common areas, as hereinafter defined, and
all licenses and easements appurtenant to the Demised Premises. For the purpose
of calculating Base Rent as indicated in Article 42 of the Lease Addendum,
Mechanical Room shall be considered warehouse.
"COMMON AREAS"--The term "common area" means the entire areas to be used
for the non-exclusive use by Lessee and other lessees in the Building,
including, but not limited to, corridors, lavatories, driveways, truck docks,
parking lots and landscaped areas. Subject to reasonable rules and regulations
promulgated by Lessor, the common areas are hereby made available to Lessee and
its employees, agents, customers, and invitees for reasonable use in common with
other lessees, their employees, agents, customers and invitees.
"Leasehold Improvements" - So long as Landlord retains its status as a
licensed contractor, Landlord reserves the right to bid and perform any tenant
improvements for the property.
WITNESSETH:
TERM:
1. For and in consideration of the rents, additional rents, terms,
provisions and covenants herein contained, Lessor hereby lets, leases and
demises to Lessee the Demised Premises for the term of eighty-four months
commencing on the 1st day of August, 1998 (sometimes called "the Commencement
Date") and expiring the 31st day of July, 2005 (sometimes called "Expiration
Date"), unless sooner terminated as hereinafter provided. As long as the said
Lease is signed and a space plan is approved by April 22, 1998, construction of
the Premises shall be completed by July 1, 1998, at which time IntraNet
Solutions, Inc. shall have access for the purpose of facility set-up and
commencing business operations. If construction of the Premises is not completed
by July 1, 1998, Landlord shall pay IntraNet Solutions, Inc. $2,000.00 per day
until construction is completed. Such access shall be under all terms and
conditions of the lease except for Base Rent and Additional Rent. However, for
every day that the lease signing and space plan is delayed beyond April 22,
1998, the daily penalty above shall be delayed equally to the delay of
signatures.
BASE RENT:
2. Lessor reserves and Lessee shall pay Lessor, a total rental of (See
Addendum) payable in advance, in equal monthly installments of (See Addendum)
commencing on the Commencement Date and continuing on the first day of each and
every month thereafter for the next succeeding months during the balance of the
term (sometimes called "Base Rent"). In the event the Commencement Date falls on
a date other than the first of a month the rental for that month shall be
prorated and adjusted accordingly.
ADDITIONAL RENT: 3. Lessee shall pay to Lessor throughout
the term of this Lease the following:
<PAGE> 2
a. Lessee shall pay a sum equal to 26.05% of the Real Estate taxes. The
term "Real Estate Taxes" shall mean all real estate taxes, all assessments (to
be paid over the longest period allowed by the taxing authority), and any taxes
in lieu thereof which may be levied upon or assessed against the Premises of
which the Demised Premises are a part. Lessee, in addition to all other payments
to Lessor by Lessee required hereunder shall pay to Lessor, in each year during
the term of this Lease and any extension or renewal thereof, Lessee's
proportionate share of such real estate taxes and assessments paid in the first
instance by Lessor.
Any tax year commencing during any lease year shall be deemed to correspond
to such lease year. In the event the taxing authorities include in such real
estate taxes and assessments the value of any improvements made by Lessee, or of
machinery, equipment, fixtures, inventory or other personal property or assets
of Lessee, then Lessee shall pay all the taxes attributable to such items in
addition to its proportionate share of said aforementioned real estate taxes and
assessments. A photostatic copy of the tax statement submitted by Lessor to
Lessee shall be sufficient evidence of the amount of taxes and assessments
assessed or levied against the Premises of which the Demised Premises are a
part.
b. A sum equal to 26.05% of the annual aggregate operating expenses
incurred by Lessor in the operation, maintenance and repair of the Premises. The
term "Operating Expenses" shall include but not be limited to maintenance,
repair, replacement and care of all common areas (including common area
utilities and lighting) common area plumbing and roofs, parking and landscaped
areas, signs, snow removal, non-structural repair and maintenance of the
exterior of the Building, Insurance premiums, management fee (which shall not
exceed 4.5% of the Gross collectibles) wages and fringe benefits of personnel
employed for such work, costs of equipment purchased and used for such purposes,
and the cost or portion thereof properly allocable to the Premises (amortized
over such reasonable period as Lessor shall determine together with the interest
at the rate of ten percent (10%) per annum on the unamortized balance) of any
capital improvements made to the Building by Lessor after the Base Year which
result in a reduction of Operating Expenses or made to the Building by Lessor
after the date of this Lease that are required under any governmental law or
regulation that was not applicable to the Building at the time it was
constructed. The following items are excluded from Operating Expenses:
1. Leasing commissions, attorney fees, costs and disbursements and
other expenses incurred in connection with negotiations or disputes with other
tenants, prospective tenants or other occupants of the Building, or associated
with the enforcement or Lessor's defense of any other tenants, prospective
tenants or other occupants of the Building, or associated with the enforcement
or Lessors defense of any other tenant leases or the defense of Lessor's title
to or interest in the real property or any part thereof.
2. Costs incurred by Lessor in connection with the construction of the
improvements of the Building related facilities, the correction of defects in
construction pursuant to this Lease or in the discharge of Lessor's Work under
Exhibit "D".
3. Costs (including permit, license and inspection fees) incurred in
renovating or otherwise improving or decorating, painting or redecorating space
for other tenants or other occupants or in renovating or redecorating leasable
vacant space in the Building;
4. Lessor's costs of any services sold or provided tenants or other
occupants of the Building for which Lessor is entitled to be reimbursed by such
tenants or other occupants as an additional charge or rental over and above the
base rent and other rents payable under leases with such tenant or other
occupant;
5. Except as hereinbefore provided, costs incurred by Lessor for
alterations or additions which are considered capital improvements and
replacements under generally accepted accounting principles, unless said Capital
Expenditures result in lower operating expenses in which case Lessor can recover
an amount equal to the annual operating expenses savings;
6. Depreciation and amortization; and interest on debt or amortization
payments on any mortgages or deed of trusts;
7. Except to the extent that expenses are specific to said "Building",
Lessor's general corporate overhead and general administrative expenses;
8. Any compensation paid to clerks, attendants or other persons working
in or managing commercial concessions operated by Lessor'
9. All items and services for which Lessee reimburses Lessor or pays to
third parties or all items and services which Lessor provides selectively to one
or more tenants or occupants of the Project (other than Lessee) without
reimbursement;
10. Advertising and promotional expenditures;
11. Repairs or other work occasioned by fire, windstorm or other
casualty which are reimbursed to Lessor by insurance or by the exercise of the
right of eminent domain;
12. Costs to comply with applicable environmental and hazardous
materials laws which are incurred to correct pre-existing site conditions prior
to the Commencement Date of this Lease, or which are directly attributable to
another tenant's acts, negligence or failure to act;
c. In no event shall the total adjusted monthly rent be less than Seventeen
Thousand Six Hundred Eight and 97
3
<PAGE> 3
/100 Dollars ($17,608.97) per month during the term of this Lease.
The payment of the sums set forth in this Article 3 shall be in addition to
the Base Rent payable pursuant to Article 2 of this Lease. All sums due
hereunder shall be due and payable within thirty (30) days of delivery of
written certification by Lessor setting forth the computation of the amount due
from Lessee. In the event the lease term shall begin or expire at any time
during the calendar year, Lessee shall be responsible for his pro-rata share of
Additional Rent under subdivisions a. and b. during the Lease and/or occupancy
time.
Prior to commencement of this Lease, and prior to the commencement of each
calendar year thereafter commencing during the term of this Lease or any renewal
or extension thereof, Lessor will estimate for each calendar year (i) the total
amount of Real Estate Taxes; (ii) the total amount of Operating Expenses; (iii)
Lessee's share of Real Estate Taxes for such calendar year; (iv) Lessee's share
of Operating Expenses for such calendar year; and (v) the computation of the
annual and monthly rental payable during such calendar year as a result of
increases or decreases in Lessee's share of Real Estate Taxes, and Operating
Expenses.
Said estimates will be in writing and will be delivered or mailed to Lessee.
The amount of Lessee's share of Real Estate Taxes, and Operating Expenses
for each calendar year, so estimated, shall be payable as Additional Rent, in
equal monthly installments, in advance, on the first day of each month during
such calendar year at the option of Lessor. In the event that such estimate is
delivered to Lessee before the first day of January of such calendar year, said
amount, so estimated, shall be payable as additional rent in equal monthly
installments, in advance, on the first day of each month during such calendar
year. In the event that such estimate is delivered to Lessee after the first day
of January of such calendar year, said amount, so estimated, shall be payable as
additional rent in equal monthly installments, in advance, on the first day of
each month over the balance of such calendar year, with the number of
installments being equal to the number of full calendar months remaining in such
calendar year.
Upon completion of each calendar year during the term of this Lease or any
renewal or extensions thereof, Lessor shall cause its accountants to determine
the actual amount of the Real Estate Taxes, and Operating Expenses payable in
such calendar year and Lessee's share thereof and deliver a written
certification of the amounts thereof to Lessee. If Lessee has underpaid its
share of Real Estate Taxes, or Operating Expenses for such calendar year, Lessee
shall pay the balance of its share of same within ten (10) days after the
receipt of such statement. If Lessee has overpaid its share of Real Estate
Taxes, or Operating Expenses for such calendar year, Lessor shall either (i)
promptly refund such excess, or (ii) credit such excess against the most current
monthly installment or installments due Lessor for its estimate of Lessee's
share of Real Estate Taxes, and Operating Expenses for the next following
calendar year. A prorata adjustment shall be made for a fractional calendar year
occurring during the term of the Lease or any renewal or extension thereof based
upon the number of days of the term of the Lease during said calendar year as
compared to three hundred sixty-five (365) days and all additional sums payable
by Lessee or credits due Lessee as a result of the provision of this Article 3
shall be adjusted accordingly.
COVENANT TO PAY RENT:
4. The covenants of Lessee to pay the Base Rent and the Additional Rent are
each independent of any other covenant, condition, provision or agreement
contained in this Lease. All rents are payable to Lessor at 3600 Holly Lane
North, Suite 100, Plymouth, MN 55441.
UTILITIES:
5. Lessor shall provide mains and conduits to supply water, gas,
electricity and sanitary sewage to the Premises. Lessee shall pay, when due, all
charges for garbage disposal, refuse removal, water, electricity, gas, telephone
and/or other utility services or energy source furnished to the Demised Premises
during the term of this Lease, or any renewal or extension thereof. If Lessor
elects to furnish any of the foregoing utility services of other services
furnished or caused to be furnished to Lessee, then the rate charged by Lessor
shall not exceed the rate Lessee would be required to pay to a utility company
or service company furnishing any of the foregoing utilities or services. The
charges thereof shall be deemed additional rent in accordance with Article 3. It
is understood that gas and electrical service for the Demised Premises is
separately metered.
CARE AND REPAIR OF DEMISED PREMISES:
6. Lessee shall, at all times throughout the term of this Lease, including
renewals and extension, and at its sole expense, keep and maintain the Demised
Premises in a clean, safe, sanitary and first class condition and in compliance
with all applicable laws, codes, ordinances, rules and regulations. Lessee's
obligations hereunder shall include but not be limited to the maintenance,
repair and replacement, if necessary, of heating, air conditioning fixtures,
equipment, and systems, all lighting and plumbing fixtures and equipment,
fixtures, motors and machinery, all interior walls, partitions, doors and
windows, including the regular painting thereof, all exterior entrances,
windows, doors and docks and the replacement of all broken glass. When used in
this provision, the term "repairs" shall include replacements or renewals when
necessary, and all
4
<PAGE> 4
such repairs made by Lessee shall be equal in quality and
class to the original work. The Lessee shall keep and maintain all portions of
the Demised Premises and the sidewalk and areas adjoining the same in a clean
and orderly condition, free of accumulation of dirt, rubbish.
If Lessee fails, refuses or neglects to maintain or repair the Demised
Premises as required in this Lease after thirty (30) day notice shall have been
given Lessee, in accordance with Article 33 of this Lease, Lessor may make such
repairs without liability to Lessee for any loss or damage that may accrue to
Lessee's merchandise, fixtures or other property or to Lessee's business by
reason thereof, and upon completion thereof, Lessee shall pay to Lessor all
costs plus 12% of overhead incurred by Lessor in making such repairs upon
presentation to Lessee of bill therefor.
Lessor shall repair, at its expense, the structural portions of the
Building and roof, provided however where structural repairs are required to be
made by reason of the acts of Lessee which are not covered by standard fire and
extended coverage insurance, the costs thereof shall be borne by Lessee and
payable by Lessee to Lessor upon demand.
The Lessor shall be responsible for all outside maintenance of the Demised
Premises, including grounds and parking areas. All such maintenance which is the
responsibility of Lessor shall be provided as reasonably necessary to the
comfortable use and occupancy of Demised Premises during business hours, except
Saturdays, Sundays and holidays, upon the condition that Lessor shall not be
liable for damages for failure to do so due to causes beyond its control. In the
event the HVAC systems require repair or replacement during the Manufacturers
warranty period, Lessor shall look to the warranty to cover such costs. Lessee
shall be responsible for such repair or replacement only after the warranty
period has expired.
SIGNS:
7. Any sign, lettering, picture, notice or advertisement installed on or in
any part of the Premises and visible from the exterior of the Building, or
visible from the exterior of the Demised Premises, shall be approved by Lessor
and installed at Lessee's expense. In the event of a violation of the foregoing
by Lessee, Lessor may remove the same without any liability and may charge the
expense incurred by such removal to Lessee.
ALTERATIONS, INSTALLATION, FIXTURES:
8. Except as hereinafter provided, Lessee shall not make any alteration,
additions, or improvements in or to the Demised Premises or add, disturb or in
any way change any plumbing or wiring therein without the prior written consent
of Lessor, which consent shall not be unreasonably withheld.. In the event
alterations are required by any governmental agency by reason of the use and
occupancy of the Demised Premises by Lessee, Lessee shall make such alterations
at its own cost and expense after first obtaining Lessor's approval of plans and
specifications therefor and furnishing such indemnification as Lessor may
reasonably require against liens, costs, damages and expenses arising out of
such alterations. Alterations or additions by Lessee must be built in compliance
with all laws, ordinances and governmental regulations affecting the Premises
and Lessee shall warrant to Lessor that all such alterations, additions, or
improvements shall be in strict compliance with all relevant laws, ordinances,
governmental regulations, and insurance requirements. Construction of such
alterations or additions shall commence only upon Lessee obtaining and
exhibiting to Lessor the requisite approvals, licenses and permits and
indemnification against liens. All alterations, installations, physical
additions or improvements to the Demised Premises made by Lessee shall at once
become the property of Lessor and shall be surrendered to Lessor upon the
termination of this Lease; provided, however, this clause shall not apply to
movable equipment or furniture owned by Lessee which may be removed by Lessee at
the end of the term if this Lease of Lessee is not then in default.
POSSESSION:
9. Except as hereinafter provided Lessor shall deliver possession of the
Demised Premises to Lessee in the condition required by this Lease on or before
the Commencement Date, but delivery of possession prior to or later than such
Commencement Date shall not affect the expiration date of this Lease. The
rentals herein reserved shall commence on the date when possession of the
Demised Premises is delivered by Lessor to Lessee. Any occupancy by Lessee prior
to the beginning of the term shall in all respects be the same as that of Lessee
under this Lease. Lessor shall have no responsibility or liability for loss or
damage to fixtures, facilities or equipment installed or left on the Demised
Premises. If Demised Premises are not ready for occupancy by Commencement Date
and possession is later than Commencement Date, rent shall begin on date of
possession.
SECURITY AND DAMAGE DEPOSIT:
10. As described in Article 42 of the Lease Addendum, Lessee has deposited
with Lessor the sum of Fifteen Thousand Dollars and 00/100 ($15,000.00), receipt
of which is acknowledged hereby by Lessor, which deposit is to be held by
Lessor, without liability for interest, as a security an damage deposit for the
faithful performance by Lessee during the term hereof or any extension. It is
agreed and understood that if Lessee is not in default of the Lease, the Fifteen
Thousand Dollars and 00/100 ($15,000.00) Security Deposit shall be returned to
Lessee
5
<PAGE> 5
within ten (10) days after the thirty-sixth (36th) month of the lease
term. Prior to the time when Lessee shall be entitled to the return of this
security deposit, Lessor may co-mingle such deposit with Lessor's own funds and
to use such security deposit for such purpose as Lessor may determine. In the
event of the failure of Lessee to keep and perform any of the terms, covenants
and conditions of this Lease to be kept and performed by Lessee during the term
hereof or any extension hereof, then Lessor, either with or without terminating
this Lease may (but shall not be required to) apply such portion of said deposit
as may be necessary to compensate or repay Lessor for all losses or damages
sustained or to be sustained by Lessor due to such breach on the part of Lessee,
including, but not limited to overdue and unpaid rent, any other sum payable by
Lessee to Lessor pursuant to the provisions of this Lease, damages or
deficiencies in the reletting of Demised Premises, and reasonable attorney's
fees incurred by Lessor. Should the entire deposit or any portion thereof, be
appropriated and applied by Lessor, in accordance with the provisions of this
paragraph, Lessee upon written demand by Lessor, shall remit forthwith to Lessor
a sufficient amount of cash to restore said security deposit to the original sum
deposited, and Lessee's failure to do so within five (5) ten (10) days after
receipt of such demand shall constitute a breach of this Lease. Said security
deposit shall be returned to Lessee, less any depletion thereof as the result of
the provisions of this paragraph, at the end of the term of this Lease or any
renewal thereof, or upon the earlier termination of this Lease. Lessee shall
have no right to anticipate return of said deposit by withholding any amount
required to be paid pursuant to the provision of this Lease or otherwise.
In the event Lessor shall sell the Premises, or shall otherwise convey or
dispose of its interest in this Lease, Lessor will assign aid security deposit
or any balance thereof to Lessor's assignee, whereupon Lessor shall be released
from all liability for the return or repayment of such security deposit and
Lessee shall look solely to the said assignee for the return and repayment of
said security deposit. Said security deposit shall not be assigned or encumbered
by Lessee without such consent of Lessor, and any assignment or encumbrance
without such consent shall not bind Lessor. In the event of any rightful and
permitted assignment of this Lease by Lessee, said security deposit shall be
deemed to be held by Lessor as a deposit made by the assignee, and Lessor shall
have no further liability with respect to the return of said security deposit to
Lessee.
USE:
11. The Demised Premises shall be used and occupied by Lessee solely for
the purposes of general office and warehouse, including light manufacturing and
assembly, so long as such use is in compliance with all applicable laws,
ordinances and governmental regulations affecting the Building and Premises. The
Demised Premises shall not be used in such manner that, in accordance with any
requirement of law or of any public authority, Lessor shall be obligated on
account of the purpose or manner of said use to make any addition or alteration
to or in the Building. The Demised Premises shall not be used in any manner
which will increase the rates required to be paid for pubic liability or for
fire and extended coverage insurance covering the Premises. Lessee shall occupy
the Demised Premises conduct its business and control its agents, employees,
invitees and visitors in such a way as is lawful, and reputable and will not
permit or create any nuisance, noise, odor, or otherwise interfere with, annoy
or disturb any other Lessee in the Building in its normal business operations or
Lessor in its management of the Building. Lessee's use of the Demised Premises
shall conform to all Lessor's rules and regulations relating to the use of the
Premises. Outside storage on the Premises of any type of equipment, property or
materials owned or used on the Premise by Lessee or its customers and suppliers
shall not be permitted.
ACCESS TO DEMISED PREMISES:
12. The Lessee agrees to permit Lessor and the authorized representatives
of Lessor to enter the Demised Premises at all times during usual business hours
and upon reasonable verbal notice except in the event of an emergency for the
purpose of inspecting the same and making any necessary repairs to the Demised
Premises and performing any work therein that may be necessary to comply with
any laws, ordinances, rules, regulations or requirements of any public authority
or of the Board of Fire Underwriters or any similar body or that Lessor may deem
necessary to prevent waste or deterioration in connection with the Demised
Premises. Nothing herein shall imply any duty upon the part of Lessor to do any
such work which, under any provision of this Lease, Lessee may be required to
perform and the performance thereof by Lessor shall not constitute a waiver of
Lessee's default in failing to perform the same. The Lessor may, during the
progress of any work in the Demised Premises, keep and store upon the Demised
Premises all necessary materials, tools and equipment. The Lessor shall not in
any event be liable for inconvenience, annoyance, disturbance, loss of business,
or other damage of Lessee by reason of making repairs or the performance or any
work in the Demised Premises, or on account of bringing materials, supplies and
equipment into or through the Demised Premises during the course thereof and the
obligations of Lessee under this Lease shall not thereby be affected in any
manner whatsoever.
Lessor reserves the right to enter upon the Demised Premises at any time in
the event of an emergency and at reasonable hours and upon reasonable verbal
notice to exhibit the Demised Premises to prospective purchasers or others; and
to exhibit the Demised Premises to prospective
6
<PAGE> 6
Lessees and to display "For Lease" or similar signs on windows or doors in the
Demised Premises during the last one hundred eighty (180) days of the term of
this Lease, all without hindrance or molestation by Lessee.
EMINENT DOMAIN:
13. In the event of any eminent domain or condemnation proceeding or
private sale in lieu thereof in respect to the Premises during the term thereof,
the following provisions shall apply:
a. If the whole of the Premises shall be acquired or condemned by eminent
domain or any public or quasi-public use or purpose, then the term of this Lease
shall cease and terminate as of the date possession shall be taken in such
proceeding and all rentals shall be paid up to that date.
b. If any part constituting less than the whole of the Premises shall be
acquired or condemned as aforesaid, and in the event that such partial taking or
condemnation shall materially affect the Demised Premises so as to render the
Demised Premises unsuitable for the business of Lessee, in the reasonable
opinion of Lessor and Lessee, then the term of this Lease shall cease and
terminate as of the date possession shall be taken by the condemning authority
and rent shall be paid to the date of such termination.
In the event of a partial taking or condemnation of the Premises which
shall not materially affect the Demised premises so as to render the Demised
Premise unsuitable for the business of Lessee, in the reasonable opinion of
Lessor, this Lease shall continue in full force and effect but with a
proportionate abatement of the Base Rent and Additional Rent based on the
portion, if any, of the Demised Premise taken. Lessor reserves the right, at its
option, to restore the Building and the Demised Premises to substantially the
same condition as they were prior to such condemnation. In such event, Lessor
shall give written notice to Lessee, within thirty (30) days following the date
possession shall be taken by the condemning authority, of Lessor's intention to
restore. Upon Lessor's notice of election to restore, Lessor shall commence
restoration and shall restore the Building and the Demised Premises with
reasonable promptness, subject to delays beyond Lessor's control and delays in
the making of condemnation or sale proceeds adjustment by Lessor; and Lessee
shall have no right to terminate this Lease except as herein provided. Upon
completion of such restoration, the rent shall be adjusted based upon the
portion, if any, of the Demised Premises restored.
c. In the event of any condemnation or taking as aforesaid, whether whole
or partial, Lessee shall not be entitled to any part of the award paid for such
condemnation and Lessor is to receive the full amount of such award, Lessee
hereby expressly waiving any right to claim to any part thereof.
d. Although all damages in the event of any condemnation shall belong to
Lessor whether such damages are awarded as compensation for diminution in value
of the leasehold or to the fee of the Demised Premises, Lessee shall have the
right to claim and recover from the condemnating authority, but not from Lessor,
such compensation as may be separately awarded or recoverable by Lessee in
Lessee's own right on account of any and all damage to Lessee's business by
reason of the condemnation and for or on account of any cost or loss to which
Lessee might be put in removing Lessee's merchandise, furniture, fixtures,
leasehold improvements and equipment. However, Lessee shall have no claim
against Lessor or make any claim with the condemning authority of the loss of
its leasehold estate, any unexpired term of loss of any possible renewal or
extension of said lease or loss of any possible value of said lease, any
unexpired term, renewal or extension of said Lease.
DAMAGE OR DESTRUCTION:
14. In the event of any damage or destruction to the Premises by fire or
other cause during the term hereof, the following provisions shall apply:
a. If the Building is damaged by fire or any other cause to such extent
that the cost of restoration, as reasonably estimated by Lessor, will equal or
exceed thirty percent (30%) of the replacement value of the Building (exclusive
of foundations) just prior to the occurrence of the damage, then Lessor may, no
later than the sixtieth (60th) day following the damage, give Lessee written
notice of Lessor's election to terminate this Lease.
b. If the cost of restoration as estimated by Lessor will equal or exceed
fifty percent (50%) of said replacement value of the Building and if the Demised
Premises are not suitable as a result of said damage for the purposes for which
they are demised hereunder, in the reasonable opinion of Lessee, then Lessee
may, no later than the sixtieth (60th) day following the damage, give Lessor a
written notice of election to terminate this Lease.
c. If the cost of restoration as estimated by Lessor shall amount to less
than thirty percent (30%) of said replacement value of the Building, or if,
despite the cost, Lessor does not elect to terminate this Lease, Lessor shall
restore the Building and the Demised Premises with reasonable promptness,
subject to delays beyond Lessor's control and delays in the making of insurance
adjustments by Lessor; and Lessee shall have no right to terminate this Lease
except as herein provided. Lessor shall not be responsible for restoring or
repairing leasehold improvements of Lessee.
d. In the event of either of the elections to terminate, this Lease shall
be deemed to terminate on the date of the receipt of the notice of election and
all rentals shall be paid up to that date. Lessee shall have no claim against
Lessor for the value of any unexpired term of this Lease.
7
<PAGE> 7
e. In any case where damage to the Building shall materially affect the
Demised Premises so as to render them unsuitable in whole or in part for the
purposes for which they are demised hereunder, then, unless such destruction was
wholly or partially caused by the negligence or breach of the terms of this
Lease by Lessee, its employees, contractors or licensees, a portion of the rent
based upon the amount of the extent to which the Demised Premises are rendered
unsuitable shall be abated until repaired or restored. If the destruction or
damage was wholly or partially caused by negligence or breach of the terms of
this Lease by Lessee as aforesaid and if Lessor shall elect to rebuild, the rent
shall not abate and Lessee shall remain liable for the same.
CASUALTY INSURANCE:
15. a. Lessor shall at all times during the term of this Lease, at its
expense, maintain a policy or policies of insurance with premiums paid in
advance issued by an insurance company licensed to do business in the State of
Minnesota insuring the Building against loss or damage by fire, explosion or
other insurable hazards and contingencies for the full replacement value,
provided that Lessor shall not be obligated to insure any furniture, equipment,
machinery, goods or supplies not covered by this Lease which Lessee may bring
upon the Demised Premises or any additional improvements which Lessee may
construct or install on the Demised Premise.
b. Lessee shall not carry any stock of goods or do anything in or about the
Demised Premises which will in any way impair or invalidate the obligation of
the insurer under any policy of insurance required by this Lease.
c. Lessor hereby waives and releases all claims, liabilities and causes of
action against Lessee and its agents, servants and employees for loss or damage
to, or destruction of, the Premises or any portion thereof, including the
buildings and other improvements situated thereon, resulting from fire,
explosion and other perils included in standard extended coverage insurance,
whether caused by the negligence of any of said persons or otherwise. Likewise,
Lessee hereby waives and releases all claims, liabilities and causes of action
against Lessor and its agents, servants and employees for loss or damage to, or
destruction of, any of the improvements, fixtures, equipment, supplies,
merchandise and other property, whether that of Lessee or of others, upon or
about the Premises resulting from fire, explosion or the other perils included
in standard extended coverage insurance, whether caused by the negligence of any
of said persons or otherwise. The waiver shall remain in force whether or not
Lessee's insurer shall consent thereto.
d. In the event that the use of the Demised Premises by Lessee increases
the premium rate for insurance carried by Lessor on the improvements of which
the Demised Premises are a part, Lessee shall pay Lessor, upon demand, the
amount of such premium increase. If Lessee installs any electrical equipment
that overloads the power lines to the building or its wiring, Lessee shall, at
its own expense, make whatever changes are necessary to comply with the
requirements of the insurance underwriter, insurance rating bureau and
governmental authorities having jurisdiction.
PUBLIC LIABILITY INSURANCE:
16. Lessee shall during the term hereof keep in full force and effect at
its expense a policy or policies of public liability insurance with respect to
the Demised Premises and the business of Lessee, in which both Lessee and Lessor
shall be covered by being named as insured parties under reasonable limits of
liability not less than: $500,000 for injury/death to any one person; $1,000,000
for injury/death to more than one person, and $500,000 with respect to damage to
property. Such policy or policies shall provide that ten (10) days written
notice must be given to Lessor prior to cancellation thereof. Lessee shall
furnish evidence satisfactory to Lessor at the time this Lease is executed that
such coverage is in full force and effect.
DEFAULT OF LESSEE:
17. a. In the event of any failure of Lessee to pay any rental due
hereunder within ten (10) days written notice or any failure to perform any
other of the terms, conditions or covenants of this Lease to be observed or
performed by Lessee for more than thirty (30) days after written notice of such
failure shall have been given to Lessee, or if Lessee or an agent of Lessee
shall falsify any report required to be furnished to Lessor pursuant to the
terms of this Lease, or if Lessee or any guarantor of this Lease shall become
bankrupt or insolvent, or file any debtor proceedings or any person shall take
or have against Lessee or any guarantor of this Lease in any court pursuant to
any statue either of the United States or of any state a petition of bankruptcy
or insolvency or for reorganization or for the appointment of a receiver or
trustee of all or a portion of Lessee's or any such guarantor's property, or if
Lessee or any such guarantor makes an assignment for the benefit or creditors,
or petitions for or enters into an arrangement, or if Lessee shall abandon the
Demised Premises or suffer this Lease to be taken under any writ of execution,
then in any such event Lessee shall be in default hereunder, and Lessor, in
addition to other rights of remedies it may have, shall have the immediate right
or re-entry and may remove all persons and property from the Demised Premises
and such property may be removed and stored in a public warehouse or elsewhere
at the cost of, and for the account of Lessee, all without service of notice or
resort to legal process and without being guilty of trespass, or becoming liable
for any loss or damage which may be occasioned thereby.
8
<PAGE> 8
b. Should Lessor elect to re-enter the Demised Premises, as herein
provided, or should it take possession of the Demised Premises pursuant to legal
proceedings or pursuant to any notice provided for by law, it may either
terminate this Lease or it may from time to time, without terminating this
Lease, make such alterations and repairs as may be necessary in order to relet
the Demised Premises, and relet the Demised Premises or any part thereof upon
such term or terms (which may be for a term extending beyond the term of this
Lease) and at such rental or rentals and upon such other terms and conditions as
Lessor in its sole discretion may deem advisable. Upon each such subletting all
rentals received by Lessor from such reletting shall be applied first to the
payment of any indebtedness other than rent due hereunder from Lessee to Lessor;
second, to the payment of any costs and expenses of such reletting, including
brokerage fees and attorney's fees and costs of such alterations and repairs;
third, to the payment of the rent due and unpaid payment of future rent as the
same may become due and payable hereunder. If such rentals received from such
reletting during any month be less than that to be paid during that month by
Lessee hereunder, Lessee, upon demand, shall pay any such deficiency to Lessor.
No such re-entry or taking possession of the Demised Premises by Lessor shall be
construed as an election on its part to terminate this Lease unless a written
notice of such intention be given to Lessee or unless the termination thereof be
decreed by a court of competent jurisdiction. Notwithstanding any such reletting
without termination, Lessor may at any time after such re-entry and reletting
elect to terminate this Lease for any such breach, in addition to any other
remedies it may have, it may recover from Lessee all damages it may incur by
reason of such breach, including the cost of recovering the Demised Premises,
reasonable attorney's fees, and including the worth at the time of such
termination of the excess, if any, of the amount of rent and charges equivalent
to rent reserved in this Lease for the remainder of the stated term over the
then reasonable rental value of the Demised Premises for the remainder of the
slated term, all of which amounts shall be immediately due and payable from
Lessee to Lessor.
c. Lessor may, at its option, instead of exercising any other rights or
remedies available to it in this Lease or otherwise by law, statue or equity,
spend such money as is reasonably necessary to cure any default of Lessee herein
and the amount so spent, and costs incurred, including attorney's fees in curing
such default, shall be paid by Lessee, and additional rent, upon demand.
d. In the event suit shall be brought for recovery of possession of the
Demised Premises, for the recovery of rent of any other amount due under the
provisions of this Lease, or because of the breach of any other covenant herein
contained on the part of Lessee to be kept or performed, and a breach shall be
established, Lessee shall pay to Lessor all expenses incurred therefor,
including a reasonable attorney's fee, together with interest on all such
expenses at the rate of ten percent (10%) per annum from the date of such breach
of the covenants of this Lease.
e. Intentionally deleted
f. No remedy herein or elsewhere in this Lease or otherwise by law, statue
or equity, conferred upon or reserved to Lessor or Lessee shall be exclusive of
any other remedy, but shall be cumulative, and may be exercised from time to
time and as often as the occasion may arise.
COVENANTS TO HOLD HARMLESS:
18. Unless the liability for damage or loss is caused by the gross
negligence of Lessor, its agents or employees, Lessee shall hold harmless Lessor
from any liability for damages to any person or property in or upon the Demised
Premises and the Premises, including the person and the property of Lessee and
its employees and all persons in the Building at its or their invitation or
sufferance, and from all damages resulting from Lessee's failure to perform the
covenants of this Lease. All property kept, maintained or stored on the Demised
Premises shall be so kept, maintained or stored at the sole risk of Lessee.
Lessee agrees to pay all sums of money in respect of any labor, service,
materials, supplies or equipment furnished or alleged to have been furnished to
Lessee in or about the Premises, and not furnished on order of Lessor, which may
be secured by and Mechanic's Materialmen's or other lien to be discharged at the
time performance of any obligation secured thereby matures, provided that Lessee
may contest such lien, but if such lien is reduced to final judgment and if such
judgment or process thereon is not stayed, or if stayed and said stay expires,
then and in each such event, Lessee shall forthwith pay and discharge said
judgment. Lessor shall have the right to post and maintain on the Demised
Premises, notices of non-responsibility under the laws of the State of
Minnesota.
NON-LIABILITY:
19. Subject the terms and conditions of Article 14 hereof, Lessor shall not
be liable for damage to any property of Lessee or of others located on the
Premises, not for the loss of or damage to any property of Lessee or of others
by theft or otherwise. Lessor shall not be liable for any injury or damage to
persons or property resulting from fire, explosion, falling plaster, steam, gas,
electricity, water, rain or snow or leaks from any part of the Premises or from
the pipes, appliances, or plumbing works or from the roof, street or subsurface
or from any other place or by dampness or by any other cause of whatsoever
nature. Lessor shall not be liable for any such damage caused by other Lessees
or persons in the Premises, occupants of adjacent property, of the buildings, or
the public or caused
9
<PAGE> 9
by operations in construction of any private, public or
quasi-public work. All property of Lessee kept or stored on the Demised Premises
shall be so kept or stored at the risk of Lessee only and Lessee shall hold
Lessor harmless from any claims arising out of damage to the same, including
subrogation claims by Lessee's insurance carrier.
SUBORDINATION:
20. This Lease shall be subordinated to any mortgages that may now exist or
that may hereafter be placed upon the Demised Premises and to any and all
advances made thereunder, and to the interest upon the indebtedness evidenced by
such mortgages, and to all renewals, replacements and extensions thereof. In the
event of execution by Lessor after the date of this Lease of any such mortgage
renewal, replacement or extension, Lessee agrees to execute a subordination
agreement with the holder thereof which agreement shall provide that:
a. Such holder shall not disturb the possession and other rights of Lessee
under this Lease so long as Lessee is not in default hereunder,
b. In the event of acquisition of title to the Demised Premises by such
holder, such holder shall accept Lessee as Lessee of the Demised Premises under
the terms and conditions of this Lease and shall perform all the obligations of
Lessor hereunder, and
c. Lessee shall recognize such holder as Lessor hereunder.
Lessee shall, upon receipt of a request from Lessor therefore, within ten
(10) days after receipt of such request, execute and deliver to Lessor or to any
proposed holder of a mortgage or trust deed or to any proposed purchaser of the
Premises, a certificate in recordable form, certifying that this Lease is in
full force and effect, and that there are no offsets against rent nor defenses
to Lessee's performance under this Lease, or setting further any such offsets or
defenses claimed by Lessee, as the case may be.
ASSIGNMENT OR SUBLETTING:
21. Lessee agrees to use and occupy the Demised Premises throughout the
entire term hereof for the purpose or purposes herein specified and for no other
purposes, in the manner and to substantially the extent now intended, and not to
transfer or assign this Lease or sublet said Demised Premises, or any part
thereof, whether by voluntary act, operation of law, or otherwise, without
obtaining the prior written consent of Lessor in each instance. Lessee shall
seek such consent of Lessor by a written request therefor, setting forth such
information as Lessor may deem necessary. Lessor agrees not to withhold consent
unreasonably. Consent by Lessor to any assignment of this Lease or to any
subletting of the Demised Premises shall not be a waiver of Lessor's rights
under this Article as to any subsequent assignment or subletting. Lessor's
rights to assign this Lease are and shall remain unqualified. No such assignment
or subleasing shall relieve Lessee from any of Lessee's obligations in this
Lease contained, nor shall any
assignment or sublease or other transfer of this Lease be effective unless the
assignees, sublessee or transferee shall at the time of such assignment,
sublease or transfer, assume in writing for the benefit of Lessor, its
successors or assigns, all of the terms, covenants and conditions of this Lease
thereafter to be performed by Lessee and shall agree in writing to be bound
thereby. Should Lessee sublease in accordance with the terms of this Lease,
fifty percent (50%) of any increase in rental received by Lessee over the per
square foot rental rate which is being paid by Lessee shall be forwarded to and
retained by Lessor, less any costs incurred by Lessee for such assignment of
sublet, which increase shall be in addition to the Base Rent and Additional Rent
due Lessor under this Lease.
ATTORNMENT:
22. In the event of a sale or assignment of Lessor's interest, in the
Premises, or the Building in which the Demised Premises are located, or this
Lease, or if the Premises come into custody or possession of a mortgagee or any
other party whether because of a mortgage foreclosure, or otherwise, Lessee
shall attorn to such assignee or other party and recognize such party as Lessor
hereunder; provided, however Lessee's peaceable possession will not be disturbed
so long as Lessee faithfully performs its obligations under this Lease. Lessee
shall execute, on demand, any attornment agreement required by any such party to
be executed, containing such provisions and such other provisions as such party
may require.
NOVATION IN THE EVENT OF SALE:
23. In the event of the sale of the Demised Premises, Lessor shall be and
hereby is relieved of all of the covenants and obligations created hereby
accruing from and after the date of sale, and such sale shall result
automatically in the purchaser assuming and agreeing to carry out all the
covenants and obligations of Lessor herein. Notwithstanding the foregoing
provisions of this Article, Lessor, in the event of a sale of the Demised
Premises, shall cause to be included in this agreement of sale and purchase a
covenant whereby the purchaser of the Demised Premises assumes and agree to
carry out all of the covenants and obligations of Lessor herein.
The Lessee agrees at any time and from time to time upon not less than ten
(10) days prior written request by Lessor to execute, acknowledge and deliver to
Lessor a statement in writing certifying that this Lease is unmodified and in
full force and effect as modified and stating the
10
<PAGE> 10
modifications, and the dates to which the basic rent and other charges have
been paid in advance, if any, it being intended that any such statement
delivered pursuant to this paragraph may be relied upon by any prospective
purchaser of the fee or mortgagee or assignee of any mortgage upon the fee of
the Demised Premises.
SUCCESSORS AND ASSIGNS:
24. The terms, covenants and conditions hereof shall be binding upon and
inure to the successors and assigns of the parties hereto.
REMOVAL OF FIXTURES:
25. Notwithstanding anything contained in Article 8, 29 or elsewhere in
this Lease, with the exception of the initial improvements as noted herein and
attached as Exhibit D, if Lessor requests then Lessee will promptly remove at
the sole cost and expense of Lessee all fixtures, and equipment installed by
Lessee simultaneously with vacating the Demised Premises and Lessee will
promptly restore said Demised Premises to the condition that existed immediately
prior to said fixtures and equipment having been installed, all at the sole cost
and expense of Lessee.
QUIET ENJOYMENT:
26. Lessor warrants that it has full right to execute and to perform this
Lease and to grant the estate demised, and that Lessee, upon payment of the
rents and other amounts due and the performance of all the terms, conditions,
covenants and agreements on Lessee's part to be observed and performed under
this Lease, may peaceably and quietly enjoy the Demised Premises for the
business uses permitted hereunder, subject, nevertheless, to the terms and
conditions of this Lease.
RECORDING:
27. Lessee shall not record this Lease without the written consent of
Lessor. However, upon the request of either party hereto, the other party shall
join in the execution of the Memorandum lease for the purposes of recordation.
Said Memorandum lease shall describe the parties, the Demised Premises and the
term of the Lease and shall incorporate this Lease by reference. This Article 27
shall not be construed to limit Lessor's right to file this Lease under Article
22 of this Lease.
OVERDUE PAYMENTS:
28. All monies due under this Lease from Lessee to Lessor shall be due on
demand, unless otherwise specified and if not paid within five (5) days of when
due, shall result in the imposition of a service charge for such late payment in
the amount of five percent (5%) of the amount due.
SURRENDER:
29. On the Expiration Date or upon the termination hereof upon a day other
than the Expiration Date, Lessee shall peaceably surrender the Demised Premises
broom-clean in good order, condition and repair, reasonable wear and tear only
excepted. On or before the Expiration Date or upon termination of this Lease on
a day other than the Expiration Date, Lessee shall, at its expense, remove all
trade fixtures, personal property and equipment and signs from the Demised
Premises and any property not removed shall be deemed to have been abandoned.
Any damage caused in the removal of such items shall be repaired by Lessee and
at its expense. All alterations, additions, improvements and fixtures (other
than trade fixtures) which shall have been made or installed by Lessor or Lessee
upon the Demised Premises and all floor covering so installed shall at the
option of Lessor remain upon and be surrendered with the Demised Premises as a
part thereof, without disturbance, molestation or injury, and without charge, at
the expiration or termination of this Lease. If the Demised Premises are not
surrendered on the Expiration Date or the date of termination, Lessee shall
indemnify Lessor against loss or liability, claims, without limitation, made by
any succeeding Lessee founded on such delay. Lessee shall promptly surrender all
keys for the Demised Premises to Lessor at the place then fixed for payment of
rent and shall inform Lessor of combinations of any locks and safes on the
Demised Premises.
HOLDING OVER:
30. In the event of a holding over by Lessee after expiration or
termination of this Lease without the consent in writing of Lessor, Lessee shall
be deemed a lessee at sufferance and shall pay rent for such occupancy at the
rate of 150% the lease-current aggregate Base and Additional Rent, prorated for
the entire holdover period, plus all attorney's fees and expenses incurred by
Lessor in enforcing its rights hereunder, plus any other damages occasioned by
such holding over. Except as otherwise agreed, any holding over with the written
consent of Lessor shall constitute Lessee a month-to-month lessee.
ABANDONMENT:
31. Intentionally deleted
CONSENTS BY LESSOR:
32. Whenever provision is made under this Lease for Lessee securing the
consent or approval by Lessor, such consent or approval shall only be in
writing, and shall not be unreasonably withheld or delayed.
11
<PAGE> 11
NOTICES:
33. Any notice required or permitted under this Lease shall be deemed
sufficiently given or secured if sent by registered or certified return receipt
mail to Lessee at Lake Corporate Center, 8091 Wallace Road, Eden Prairie,
Minnesota and to Lessor at the address then fixed for the payment of rent as
provided in Article 4 of this Lease, and either party may by like written notice
at any time designate a different address to which notices shall subsequently be
sent or rent to be paid.
RULES AND REGULATIONS:
34. Lessee shall observe and comply with the rules and regulations as
Lessor may prescribe, on written notice to Lessee for the safety, care and
cleanliness of the Building.
INTENT OF PARTIES:
35. Except as otherwise provided herein, Lessee covenants and agrees that
if it shall any time fail to pay any such cost or expenses, or fail to take out,
pay for, maintain or deliver any of the insurance policies above required, or
fail to make any other payment or perform any other act on its part to be made
or performed as in this Lease provided, then Lessor may, but shall not be
obligated so to do, and without notice to or demand upon Lessee and without
waiving or releasing Lessee from any obligations of Lessee in this Lease
contained, pay any such cost or expense, effect any such insurance coverage and
pay premiums therefor, and may make any other payment or perform any other act
on the part of Lessee to be made and performed as in this Lease provided, in
such manner and to such extent as Lessor may deem desirable, and in exercising
any such right, to also pay all necessary and incidental costs and expenses,
employ counsel and incur and pay reasonable attorneys' fees. All sums so paid by
Lessor and all necessary and incidental costs and expenses in connection with
the performance of any such act by Lessor, together with interest thereon at the
rate of ten percent (10%) per annum from the date of making of such expenditure,
by Lessor, shall be deemed additional rent hereunder, and shall be payable to
Lessor on demand. Lessee covenants to pay any such sum or sums with interest as
aforesaid and Lessor shall have the same rights and remedies in the event of the
non-payment thereof by Lessee as in the case of default by Lessee in the payment
of the Base Rent payable under this Lease.
GENERAL:
36. The Lease does not create the relationship of principal and agent or of
partnership or of joint venture or of any association between Lessor and Lessee,
the sole relationship between the parties hereto being that of Lessor ad Lessee.
No waiver of any default of Lessee hereunder shall be implied from any
omission by Lessor to take any action on account of such default if such default
persists or is repeated,
and no express waiver shall affect any default other than the default specified
in the express waiver and that only for the time and to the extent therein
stated. One or more waivers by Lessor shall not then be construed as a waiver of
a subsequent breach of the same covenant, term or condition. The consent to or
approval by Lessor of any act by Lessee requiring Lessor's consent or approval
shall not waive or render necessary Lessor's consent to or approval of any
subsequent similar act by Lessee shall be construed to be both a covenant and a
condition. No action required or permitted to be taken by or on behalf of Lessor
under the terms or provisions of this Lease shall be deemed to constitute an
eviction or disturbance of Lessee's possession of the Demised Premises. All
preliminary negotiations are merged into and incorporated in this Lease. The
laws of the State of Minnesota shall govern the validity, performance and
enforcement of this Lease.
a. This Lease and the exhibits, if any, attached hereto and forming a part
hereof, constitute the entire agreement between Lessor and Lessee affecting the
Demised Premises and there are no other agreements, either oral or written,
between them other than are herein set forth. No subsequent alteration,
amendment, change or addition to this Lease shall be binding upon Lessor or
Lessee unless reduced to writing and executed in the same form and manner in
which this Lease is executed.
b. If any agreement, covenant or condition of this Lease or the application
thereof to any person or circumstances shall, to any extent, be invalid or
unenforceable, the remainder of this Lease, or the application of such
agreement, covenant or condition to persons or circumstances other than those as
to which it is held invalid or unenforceable, shall not be affected thereby and
each agreement, covenant or condition of this Lease shall be valid and be
enforced to the fullest extent permitted by law.
HAZARDOUS MATERIAL:
37. a. The Demised Premises hereby leased shall be used by and/or at the
sufferance of Lessee only for the purpose set forth in Article 11 above and for
no other purposes. Lessee shall not use or permit the use of the Demised
Premises in any manner that will tend to create waste or a nuisance, or will
tend to unreasonably disturb other Lessees in the Building or the Premises.
Lessee, its employees and all persons visiting or doing business with Lessee in
the Demised Premises shall be bound by and shall observe the reasonable rules
and regulations made by Lessor relating to the Demised Premises, the Building
12
<PAGE> 12
or the Premises of which notice in writing shall be given to Lessee, and all
such rules and regulations shall be deemed to be incorporated into and form a
part of this Lease.
b. Lessee covenants throughout the Lease Term, at Lessee's sole cost and
expense, promptly to comply with all laws and ordinances and the orders, rules
and regulations and requirements of all federal, state and municipal governments
and appropriate departments, commissions, boards, and officers thereof, and the
orders, rules and regulations of the Board of Fire Underwriters where the
Demised Premises are situated, or any other body now or hereafter as well as
extraordinary, and whether or not the same require structural repairs or
alterations, which may be applicable to the Demised Premises, or the use or
manner of use of the Demised Premises. Lessee will likewise observe and comply
with the requirements of all policies of public liability, fire and all other
policies of insurance at any time in force with respect to the buildings and
improvements on the Demised Premises and the equipment thereof.
c. In the event any Hazardous Material (hereinafter defined) is brought or
caused to be brought into or onto the Demised Premises, the Building or the
Premises by Lessee, Lessee shall handle any such material in compliance with all
applicable federal, state and/or local regulations. For purposes of this
Article, "Hazardous Material" means and includes any hazardous, toxic or
dangerous waste, substance or material defined as such in (or for purposes of)
the Comprehensive Environmental Response, Compensation, and Liability Act, and
so-called "Superfund" or "Superlien" law, or any federal, state or local statue,
law, ordinance, code, rule, regulation, order decree regulation, relating to, or
imposing liability or standards of conduct concerning, any hazardous, toxic or
dangerous waste, substance or material, as now or at any time hereafter in
effect. Lessee shall submit to Lessor on an annual basis copies of its approved
hazardous materials communication plan, OSHA monitoring plan, and permits
required by the Resource Recovery and Conservation Act of 1976, if Lessee is
required to prepare, file or obtain any such plans or permits. Lessee will
indemnify and hold harmless Lessor from any losses, liabilities, damages, costs
or expenses (including reasonable attorneys' fees) which Lessor may suffer or
incur as a result of Lessee's introduction into or onto the Demised Premises,
Building or Premises of any Hazardous Material. This Article shall survive the
expiration or sooner termination of this Lease.
CAPTIONS:
38. The captions are inserted only as a matter of convenience and for
reference, and in no way define, limit or describe the scope of this Lease nor
the intent or any provision thereof.
ATTACHMENTS:
39. See also rider attached hereto and made a part hereof containing
articles 42 through Article 44 inclusive as well as Exhibits A through Exhibit
D, inclusive, which Exhibits are attached hereto and made a part hereof.
EXHIBIT DESCRIPTION
------- -----------
EXHIBIT A Legal Description
EXHIBIT B Demised Premises
EXHIBIT C Building Rules and
Regulations
EXHIBIT D Construction Specifications/
Space Plan
SUBMISSION:
40. Submission of this instrument to Lessee or proposed Lessee or his
agents or attorneys for examination, review, consideration or signature does not
constitute or imply an offer to lease, reservation of space, or option to lease,
and this instrument shall have no binding legal effect until execution hereof by
both Lessor/Owner and Lessee or its agents.
REPRESENTATION:
41. It is agreed and understood that Jonathan Yanta and Jason Meyer,
agents or brokers with United Properties Brokerage Company, are representing
Lake Corporate Center, LLC., Lessor, and Mr. Paul Bickford, agent or broker with
Welsh Companies, is representing IntraNet Solutions, Inc., Lessee in this
transaction.
13
<PAGE> 13
IN WITNESS WHEREOF, Lessor and Lessee have caused these presents to be executed
in form and manner sufficient to bind them at law, as of the day and year first
above written.
LESSEE: LESSOR:
INTRANET SOLUTIONS, INC. LAKE CORPORATE CENTER, LLC
a Minnesota corporation a Minnesota limited liability company
By: /s/ Jeffrey J. Sjobeck By: /s/ Michael Leuer
Its: Chief Financial Officer Its: Governor
STATE OF Minnesota
COUNTY OF Hennepin ss:_____________________________
on this __23___ day of April, 1998, personally came before me, a Notary Public
within and for said County, Jeffrey Sjobeck and _______________________, to me
well known to be the same persons described in and who executed the foregoing
instrument, and acknowledged that they executed the same as their free act and
deed.
/s/ Julie A. Grebin
NOTARY PUBLIC
My commission expires: 1-31-00
<PAGE> 14
LEASE ADDENDUM
This Indenture of Lease, dated this 22nd day of April, 1998 by and between Lake
Corporate Center, a Minnesota Limited Liability Company hereinafter referred to
as "Lessor", and IntraNet Solutions, Inc., a Minnesota corporation, hereinafter
referred to as "Lessee", is attached to and made a part of that certain Office /
Warehouse Lease of even date hereof (the "Lease Form"). The Lease Form as
modified by this Addendum is hereinafter referred to as the Lease. Except to the
extent otherwise defined below, all capitalized terms used in this Addendum
shall be as defined in the Lease Form.
Lessor and Lessee mutually agree as follows:
Any provision of the Lease Form to the contrary notwithstanding, the following
provisions shall apply:
42. Base Rent: The following is hereby added to and made a part of Article 2,
Base Rent of this Lease:
<TABLE>
<CAPTION>
ANNUAL BASE RATE
----------------
PER SQUARE FOOT MONTHLY TOTAL PERIOD
---------------- ------- ------------
PERIOD OFFICE/WAREHOUSE BASE RENT BASE RENT
------ ---------------- --------- ---------
<S> <C> <C> <C>
August 1, 1998 through and
including July 31, 2000 $10.66 / $5.66 $15,308.47 $367,403.28
August 1, 2000 through and
including July 31, 2002 $10.81 / $5.74 $15,523.95 $372,514.80
August 1, 2002 through and
including July 31, 2005 $11.02 / $5.86 $15,827.30 $569,782.80
-----------
TOTAL BASE RENT OVER TERM: $1,309,760.88
</TABLE>
43. PREPAID FUNDS: Pursuant to a Letter of Intent dated April 6, 1998, by and
between the parties herein, Lessee has deposited with Lessor Twenty-five
Thousand Dollars and 00/100 ($25,000.00) which shall be applied in the following
manner: $15,000.00 shall be applied to the Security and Damage Deposit as
described in Article 10 of this lease and $10,000.00 shall be applied towards
August 1998 Base Rent.
44. TENANT IMPROVEMENTS: Lessor shall construct at Lessor's cost the
improvements to the Demised Premises as indicated on the space plan and
construction specifications attached hereto as Exhibit D. In addition to Exhibit
D, the following shall also be at Lessor's expense:
a. One Thousand Five Hundred Dollars and 00/100 ($1,500.00)
reception desk allowance.
b. The agreed upon reasonable charges from E-Design to produce such
space plan.
LESSEE LESSOR
INTRANET SOLUTIONS, INC. LAKE CORPORATE CENTER,
a Minnesota corporation a Minnesota Limited Liability company
By: /s/ Jeffrey J. Sjobeck By: Michael Leuer
---------------------- -------------
Its: Chief Financial Officer Its: Governor
--------
Date: April 23, 1998 Date: April 22, 1998
-------------- --------------
<PAGE> 15
EXHIBIT A
LEGAL DESCRIPTION
EDEN PRAIRIE INDUSTRIAL CENTER
LOT 5 BLOCK 2
LAKE CORPORATE CENTER
PID #: 16-116-22-24-0012
<PAGE> 16
EXHIBIT C
BUILDING RULES AND REGULATIONS
1. Any sign, lettering, picture, notice or advertisement installed on or in
any part of the premises and visible from any exterior or interior common
area of the Complex or from the exterior of the Premises, shall be
installed at Lessee's sole cost and expense, and in such manner,
character and style as Lessor may approve in writing. Anything herein to
the contrary notwithstanding, approval as to signs shall be subject to
Lessor's approval which may be withheld in Lessor's sole discretion. In
the event of a violation of the foregoing by Lessee, Lessor may remove
the same without any liability and may charge the expense incurred by
such removal to Lessee.
2. Lessee, its employees, customers, invitees and guests shall not obstruct
sidewalks, entrances, passages, corridors, vestibules, halls, or
stairways in and about the Complex which are used in common with other
tenants and their employees, customers, guests and invitees, and which
are not a part of the Premises of Lessee. Lessee shall not place objects
against glass partitions or doors or windows which would be unsightly
from the Complex corridors or from the exterior of the Complex and will
promptly remove any such objects upon notice from Lessor.
3. Lessee shall not make excessive noises, cause disturbances or vibrations,
use or operate any electrical or mechanical devices that emit excessive
sound or other waves, disturbances or create obnoxious odors, nor operate
any device/equipment for radio/television broadcasting or reception from
or within the Complex or elsewhere and shall not place or install any
projections, antennas, aerials or similar devices inside or outside the
Premises or on the Complex.
4. Lessee shall not waste electricity, water or air conditioning furnished
by Lessor, if any, and shall cooperate fully with Lessor to ensure the
most effective operation of the Complex's heating and air conditioning
systems.
5. Lessee assumes full responsibility for protecting its space from theft,
robbery and pilferage, which includes keeping doors locked and other
means of entry to the Premises closed and secured after normal business
hours.
6. In no event shall Lessee bring into the Complex flammables, such as
gasoline, kerosene, naphtha, benzene, explosives or any other article of
intrinsically dangerous nature. If, by reason of the failure of Lessee to
comply with the provisions of this subparagraph, any insurance premium
for all or any part of the Complex shall at any time be increased, Lessee
shall make immediate payment of the whole of the increased insurance
premium, without waiver of any of Lessor's other rights at law or in
equity for Lessee's breach of this lease.
7. Lessee shall comply with all applicable federal, state and municipal
laws, ordinances and regulations, and building rules and shall not
directly or indirectly make any use of the Premises which may be
prohibited by any of the foregoing or which may be dangerous to persons
or property or may increase the cost of insurance or require additional
insurance coverage.
8. Lessor shall have the right to prohibit any advertising by Lessee which
in Lessor's reasonable opinion tends to impair the reputation of the
Complex or its desirability as a building complex for office/warehouse
use, and upon written notice from Lessor, Lessee shall refrain from or
discontinue such advertising.
9. The Premises shall not be used for cooking (as opposed to heating of
food), lodging, sleeping or for any immoral or illegal purpose.
10. Unless expressly permitted by Lessor, no additional locks or similar
devices shall be attached to any door or window and no keys other than
those provided by Lessor shall be made for any door. If more than two
keys for one lock are desired by Lessee, Lessor may provide the same upon
payment by Lessee. Upon termination of this Lease or of Lessee's
possession, Lessee shall surrender all keys of the Premises and shall
explain to Lessor all combination locks on safes, cabinets and vaults.
11. Any carpeting cemented down shall be installed with a releasable
adhesive. In the event of a violation of the foregoing by Lessee, Lessor
may charge the expense incurred by removal to Lessee.
<PAGE> 17
12. The restrooms, drinking fountains and other plumbing fixtures shall not
be used for any purpose other than those for which they are constructed,
and no sweepings, rubbish, rags, coffee grounds or other substances shall
be thrown therein. All damages resulting from any misuse of the fixtures
shall be borne by Lessee who, or whose employees, agents, visitors or
licensees have caused same. No person shall waste water by interfering or
tampering with the faucets or otherwise.
13. Lessee shall not overload any utilities serving the Premises.
14. No dog or other animal shall be allowed in the Complex.
15. All loading/unloading, receiving/delivery of goods/supplies or disposal
of garbage/refuse shall be made only through entryways provided for such
purposes. Lessee shall be responsible for any damage to the Complex or
the property of its employees or others and injuries sustained by any
person whomsoever resulting from the use or moving of such articles in or
out of the Premises, and shall make all repairs and improvements required
by Lessor or governmental authorities in connection with the use or
moving of such articles.
16. All safes, equipment or other heavy articles shall only be used by Lessee
in a manner which will not interfere with or cause damage to the Premises
or the Complex in which they are located, or to the other tenants or
occupants of said Complex. Lessee shall be responsible for any damage to
the building or the property of its employees or others and injuries
sustained by any person whomsoever resulting from the use or moving of
such articles in or out of the Premises, and shall make all repairs and
improvements required by Lessor or governmental authorities in connection
with the use or moving of such articles.
17. Canvassing, soliciting, and peddling in or about the Complex is
prohibited and each Lessee shall cooperate to prevent the same.
18. Wherever in these Building Rules and Regulations the word "Lessee"
occurs, it is understood and agreed that it shall mean Lessee's
associates, employees, agents, clerks, invitees, and visitors. Wherever
the word "Lessor" occurs, it is understood and agreed that it shall mean
Lessor's assigns, agents, clerks, and visitors.
19. Intentionally deleted
20. Intentionally deleted
21. Lessee, its employees, customers, invitees and guests shall, when using
the parking facilities in and around the Complex, observe and obey all
signs regarding fire lanes and no parking zones, and when parking always
park between the designated lines. Lessor reserves the right to tow away,
at the expense of the owner, any vehicle which is improperly parked or
parked in a no parking zone. All vehicles shall be parked at the sole
risk of the owner, and Lessor assumes no responsibility for any damage to
or loss of vehicles. No vehicles shall be parked overnight.
22. In case of invasion, mob, riot, public excitement, or other commotion,
Lessor reserves the right to prevent access to the Complex during the
continuance of the same by closing the doors or otherwise, for the safety
of the tenants or the protection of the Complex and the property therein.
Lessor shall in no case be liable for damages resulting from any error or
action taken with regard to the admission to or exclusion from the
Complex of any person.
23. All entrance doors to the Premises shall be locked when the Premises are
not in use. All common corridor doors, if any, shall also be closed
during times when the air conditioning equipment in the Complex is
operating so as not to dissipate the effectiveness of the system or place
an overload thereon.
24. Lessee shall be responsible for all repair, maintenance and replacement
of mechanical systems and devices directly associated with Lessee's
demised premises, including, but not limited to, heating and air
conditioning equipment, water heaters, exhaust fans, plumbing and
electrical. Lessor must be advised of any such repair, etc. and must
approve of any such repair.
2
<PAGE> 18
25. Alterations of any nature to the demised premises by Lessee shall require
written approval of Lessor. Such approval shall be at the sole discretion
of Lessor. In the event of a violation of the foregoing by Lessee, Lessor
may remove the same without any liability and may charge the expense
incurred by such removal to Lessee.
26. No awning or other projection shall be attached to the outside walls of
the Complex. No curtains, blinds, shades or screens visible from the
exterior or interior common area of the Complex or visible from the
exterior of the Premises, shall be attached to, hung in, or used in
connection with any window or door of the Premises without the prior
written consent of Lessor. Such curtains, blinds, shades, screens or
other fixtures must be of a quality, type, design and color, and attached
in manner approved by Lessor.
27. Lessee and Lessee's employees, agents, visitors and licensees shall
observe faithfully and comply strictly with the foregoing rules and
regulations and such other and further appropriate rules and regulations
as Lessor or Lessor's agent may from time to time adopt. Reasonable
notice of any additional rules and regulations shall be given in such
manner as Lessor may reasonably elect.
28. Lessor reserves the right at any time to rescind, alter or waive, in
whole or in part, any of these Rules and Regulations when deemed
necessary, desirable, or proper, in Lessor's judgment, for its best
interest or for the best interest of the tenants of the Complex. Lessee
reserves the right to refuse compliance with any subsequent additional
rules and regulations added to those agreed to at the time of signing the
lease.
29. Any trash dumpsters must be kept inside the premises.
30. No outside storage of materials is allowed.
3
<PAGE> 19
EXHIBIT D
LAKE CORPORATE CENTER
CONSTRUCTION SPECIFICATIONS/SPACE PLAN
I. BUILDING STANDARD TENANT LEASE FINISH
A. DEMISING PARTITION OFFICE, WAREHOUSE SEPARATION WALL, AND
TOILET WALL PARTITION:
Shall be 5/8" fire rated gypsum wallboard on 3-5/8" metal studs to
underside of deck. Gypsum wallboard interior face to office
an toilet rooms shall be taped, bedded and sanded to accept
scheduled wall finish. Gypsum wallboard interior to warehouse
shall not be taped.
B. INTERIOR PARTITIONS:
Shall be 5/8" fire rated gypsum wallboard on 3-5/8" metal studs to the
underside of suspended ceiling grid at 10' 0" above finished
floor. Gypsum wallboard is taped, bedded and sanded to accept
scheduled wall finish. Gypsum wallboard applications to the
inside face of the exterior wall, in office areas only, shall
extend to 10' 0" above finish floor, applied to metal furring
strips and be taped, bedded and sanded to accept scheduled
wall finish.
C. FLOOR COVERING:
Shall be selected from either 30-32 oz. cut pile nylon or 22-26 oz.
level loop nylon in building standard colors in office areas.
Carpet shall be directly glued down on concrete floor slab.
Carpet base shall be 4" carpet base in building standard color
Warehouse area concrete floor slabs have been sealed at the
time of installation with curing sealer.
D. CEILING HEIGHTS/CEILING SUSPENSION SYSTEM AND ACOUSTICAL
CEILING TILE:
Shall be 24" x 48" lay-in panel, revealed edge "second-look", ceiling
tile in 15/16" exposed white suspended steel grid at 10' 0"
clear height in office area. The warehouse ceiling is exposed
structure, unpainted, at 18' average clear height to bottom of
bar joists.
E. WALL FINISHES:
Two coats of scrubbable flat latex wall paint on office walls in
building standard paint manufacturers' colors, including 20%
wall covering.
F. INTERIOR DOORS:
Shall be 3' 0" x 8' 0" x 1-1/2" solid core oak veneer doors with
stained wood frames. Sidelights are optional at additional
cost.
G. RESTROOMS:
Shall consist of two toilet room facilities including all plumbing
fixtures to code, exhaust fan and hot water heater. Walls
will be painted gypsum board with ceramic tile to 4' 0" above
finish floor on fixture wall only and ceramic base throughout.
Ceramic tile floor and base shall be provided in toilet rooms
and shared corridor space. Toilet room ceiling will be
2' x 4' acoustical ceiling tile. Toilet accessories will
include a toilet paper holder and metal toilet partitions
(when necessary). All toilet rooms will be handicap
accessible.
H. MECHANICAL:
<PAGE> 20
Gas-fired roof top heating/air conditioning units for office area,
metered to each tenant with controls in tenant space. Sized for 1
ton air conditioning load for 450 square feet of office area.
Warehouse space heating shall be sized for the average of 40 BTU
per square foot, (assuming the presence of 1 rolling overhead
exterior door in warehouse space).
I. PLUMBING:
Toilet room fixtures shall consist of a white porcelain handicap
accessible floor-mount toilet, a white porcelain lavatory and
electric hot water heater sized to service restroom requirements.
A white porcelain handicap accessible drinking fountain will be
provided. A commodity wall hung janitor sink will be provided,
recessed behind doors when necessary.
J. FIRE PROTECTION:
Wet pipe sprinkler system and fire protection controls are installed
in building shell as per regulatory codes. One semi-recessed head
per 225 square feet in the office area and one head per 130
square feet in the warehouse area will be provided. Head
relocation, if required by tenant plan, is done under tenant
lease finish cost.
K. ELECTRICAL SERVICE:
Shall consist of 120/208 volt, 3-phase, 200 amp service complete with
distribution panel and circuit breakers for only equipment
provided.
L. ELECTRICAL RECEPTACLES:
Shall be duplex receptacles providing one receptacle per 150 square
feet of office space and one duplex receptacle in warehouse
located at panel. One light switch will be provided per 200
square feet of office. Two switches allowed per warehouse space.
All receptacle and switch plate covers shall be ivory color.
M. TELEPHONE:
One 4' x 4' plywood telephone board for mounting equipment by others
will be provided. Empty conduit through walls to empty box, one
telephone outlet will be provided per 200 square feet of office
area, located to accommodate tenant's own telephone installation.
NO phone cable or equipment will be provided or installed by
Landlord. Any communication or computer cable must be fire rated
for installation in the air plenum ceiling.
N. LIGHT FIXTURES:
Shall be 2' x 4' recessed fluorescent parabolic light fixtures.
Twenty-five (25) 30-foot candles of light provided in warehouse.
One fixture shall be provided per eighty (80) square feet of
rentable office area. The lighting will be 8' fluorescent strip
fixtures.
II. IMPROVEMENTS PROVIDED AT LESSEE'S EXPENSE
All improvements constructed to the Premises that are in addition to the
tenant improvements listed in Paragraph I of this Exhibit "D" shall be
approved by Lessor and the cost thereof shall be paid by Lessee.
III. DESIGN OF TENANT IMPROVEMENTS
Intentionally deleted
2
<PAGE> 1
EXHIBIT A
EXHIBIT 10.14
ASSIGNMENT OF LEASE
THIS ASSIGNMENT is executed as of this 21st day of April, 1998,
by INTRANET INTEGRATION GROUP, INC., a Minnesota corporation ("Assignor"), in
favor of DIGITAL RIVER, INC., a Delaware corporation ("Assignee").
RECITALS
Assignor, as Tenant, and CSM Investors, Inc., a Minnesota
corporation, as Landlord ("Landlord") entered into that certain Leases
("the Lease") dated April 24, 1996 regarding 32,919 square feet of
space in the Golden Triangle Business Center, located at 9625-9675 West
76th Street, Eden Prairie, Minnesota (the "Premises").
Assignor desires to sell, transfer, convey and assign to
Assignee, and Assignee desires to acquire and assume Assignor's
interest in the Lease, according to the terms and conditions set forth
hereinbelow.
NOW, THEREFORE, in consideration of the mutual promises herein and
other good and valuable consideration, the receipt and sufficiency of
which is hereby acknowledged by both parties, Assignor and Assignee agree as
follows:
1.) Recitals. The foregoing recitals are correct and are incorporated
herein.
2.) Assignment and Assumption. As of the Effective Date (defined
below): (i) Assignor hereby assigns, transfers and conveys the Tenant's
interest in the Lease to Assignee and (ii) Assignee hereby assumes and agrees
to perform all of the obligations of the Tenant under the Lease that arise from
and after the Effective Date hereof in accordance with the terms and conditions
set forth in the Lease.
3.) Representations and Warranties. Assignor represents and warrants
to Assignee as follows:
(a) A true and complete copy of the Lease is attached hereto as
Exhibit A and it is the only instrument and agreement in effect
between Landlord and Assignor. The Lease contains the entire
agreement between Landlord and Assignor concerning the Premises. The
Lease is in full force and effect and has not in any way been
modified, amended, terminated or rescinded.
(b) To the best of Assignor's knowledge, there exists no default nor
any event that, with the passing of time or delivery of notice or
both, would constitute a default under the Lease.
<PAGE> 2
(c) Rent and all other amounts due and payable by Assignor under
the Lease (collectively, the "Rent") are current and no Rent or
other amount is presently due and payable by Assignor to Landlord,
including any retroactive adjustments to Rent.
(d) Assignor has not issued or received any notice of cancellation,
termination or any other document affecting the Lease in any way, and
has no knowledge of any violation of any governmental statute,
regulation or ordinance relating to the Premises or the Lease.
(e) Assignor has good right to assign and transfer the Lease
(subject to obtaining the Consent of Landlord). The Lease is free
and clear of all charges and encumbrances.
(f) Assignor has received no notice of actual or threatened
reduction or curtailment of any utility service supplied to the
Premises, nor of any action or proceeding in condemnation, eminent
domain, or foreclosure in connection with or relating to the Premises.
(g) Assignor has not notice of any actual or threatened cancellation
or suspension of any certificates of occupancy for all or any portion
of the Premises.
(h) Assignor is not in default in any of its legal obligations or
liabilities regarding the Premises.
(i) To the best of Assignor's knowledge, Assignor's current use of
the Premises does not violate any federal, state, local or other
governmental building, zoning, health, accessibility, safety, planning,
subdivision, or other law, ordinance, or regulation, or any applicable
private restriction, and such use is a legal conforming use.
(j) Assignor has not received any notice of, nor is Assignor aware
of, any action, litigation, investigation, condemnation, violation, or
proceeding of any kind from any federal, state or local government
entity against Assignor relating to any portion of the Premises.
(k) Assignor is not aware of any defects in the structures or other
improvements on the Premises, including but without limitation the
roof, fixtures, systems or structure of such improvements.
Assignee is relying on the accuracy of the foregoing representations and
warranties in entering into this Agreement. The foregoing representations and
warranties are a material inducement to Assignee to enter into this Agreement.
4.) Effective Date. The Effective Date of this Assignment shall be
July 15, 1998, or such earlier date as may be mutually agreed by Assignor and
Assignee.
5.) Delivery of Occupancy
(a) As of May 1, 1998, Assignee shall have access to approximately
1,500 square feet of the Premises as shown cross-hatched on the plan
attached hereto as Exhibit B (the
2.
<PAGE> 3
"Partial Premises"). Assignee shall pay rent Assignor in the amount of
Three Thousand and no/100 Dollars ($3,000.00) in consideration for such
early occupancy, which amount shall be due and payable on or before May
1, 1998 and shall be considered gross rent, inclusive of all base rent,
additional rent, operating costs, real estate taxes, utility costs and
all other charges, fees, costs and expenses. Prior to May 1, 1998,
Assignor shall remove all personal property and all other items from
the Partial Premises and shall deliver the Partial Premises in
broom/vacuum clean condition, at Assignor's expense.
(b) Assignee shall pay all costs and expenses in connection with
setting up the Partial Premises for Assignee's use.
(c) During said early occupancy of the Partial Premises, Assignor
will make available to Assignee 20 of 24 frames on one of its T-1
Lines. Assignee will work with the MIS Director of Assignor on
accessing such line to not disrupt Assignor's systems. Any costs
associated with activating such T-1 Line shall be at the cost of
Assignee and Assignee further agrees to diligently work toward its own
T-1 Line in a reasonable and timely fashion.
(d) On the Effective Date, assignor shall deliver all of the
Premises to Assignee in broom/vacuum clean condition. If such
occupancy commences on a date other than the first of a calendar month,
then base rent, additional rent and other charges under the Lease, and
any other operating expenses in connection with the Premises, shall be
prorated between Assignor and Assignee as of the date of such
occupancy.
(e) The raised floor production area within the Premises shall
remain intact and shall not be altered by Assignor. Without
limitation, the raised floor, air conditioning equipment and fixtures,
and fire safety equipment and systems shall not be removed or altered
by Assignor. However, Assignor shall remove its computer equipment and
personal property.
6.) HVAC Certification. Prior to the Effective Date, Assignor
shall deliver to Assignee a certification from a licensed, bonded and insured
HVAC contractor that all heating, ventilating and air conditioning equipment
serving the Premises is in proper working order.
7.) Security Deposit. Prior to the execution of the Agreement,
Assignee deposited with Assignor the sum of Twenty Thousand and no/100 Dollars
($20,000.00). Contemporaneously with the execution of this Assignment,
Assignee has deposited with Assignor an additional sum of Eleven Thousand and
no/100 Dollers ($11,000.00). Said total of Thirty-one Thousand and no/100
Dollars ($31,000.00) shall be a security deposit for the performance by
Assignee of the terms and covenants of the Lease hereby assumed by Assignee.
If Assignee fails to keep and perform the terms and covenants of the Lease
assumed by Assignee and Assignor incurs loss or damage as a result of Landlord
pursuing such payment or performance from Assignor, then Assignor, then
Assignor shall have the right to apply such portion of said deposit as may be
necessary to reimburse Assignor for such loss or damage sustained. Said
deposit shall be returned to Assignee, less any depletion thereof as a result
of the provisions of
3.
<PAGE> 4
this paragraph, upon the expiration or termination of the Lease. If, at any
time prior to the expiration or termination of the Lease, Assignor is released
from liability under the Lease, then the entire deposit shall be promptly
returned to Assignee.
8.) Miscellaneous. The heading used herein are for convenience only
and are not to be used in interpreting this Agreement. This Agreement shall be
construed, enforced and interpreted under the laws of the State of Minnesota.
This Agreement is the entire agreement between Assignor and Assignee regarding
the subject matter hereof; any prior agreements are superseded hereby. This
Agreement may not be modified, amended or changed orally, but only by an
agreement in writing signed by the parties hereto. Neither party shall be
deemed to have waived any rights under this Agreement unless such waiver is
given in writing and signed by such party. If any provision of this Agreement
is invalid or unenforceable, such provision shall be deemed to be modified to
be within the limits of enforceability or validity, if feasible; however, if
the offending provision cannot be so modified, it shall be stricken and all
other provisions of this Agreement in all other respects shall remain valid and
enforceable. In the event of a breach or default under this Agreement, the
non-defaulting party shall be entitled to recover reasonable attorneys' fees
and court cost incurred to enforce its rights regarding such default or breach.
IN WITNESS WHEREOF, the parties hereto have executed this Assignment of
Lease of the day and year first above written.
ASSIGNOR:
INTRANET INTEGRATION GROUP,
INC.
Dated: 4-21-98 By: [SIG]
----------------------- ---------------------------
Its: CEO
ASSIGNEE:
DIGITAL RIVER, INC.
Dated: 4-21-98 By: [SIG]
----------------------- ---------------------------
Its: President
4
<PAGE> 5
CONSENT TO ASSIGNMENT AND ASSUMPTION OF LEASE
THIS CONSENT TO ASSIGNMENT AND ASSUMPTION OF LEASE ("Consent") is into efective
as of APRIL 22, 1998 ("Effective Date"). by CSM INVESTORS, INC., a Minnesota
corporation ("Landlord"), in favor of INTRANET INTEGRATION GROUP, INC., a
Minnesota corporation d/b/a Technical Publishing Solutions, Inc. ("Assignor")
and DIGITAL RIVER, INC., a Delaware corporation ("Assignee").
RECITALS
A. Landlord and Assignor, as the Tenant, are parties to that
certain lease dated April 24, 1996 (the "Lease") whereby landlord leases to
Assignor the premises ("Premises") consisting of approximately 32,919 square
feet of area in the Golden Triangle Business Center located at 9625-9675 West
76th Street, Eden Prairie, Minnesota (the "Project"), as more fully described
in the Lease.
B. Assignor and Assignee have executed that certain Assignment of
Lease dated April 21, 1998 with an effective date of July 15, 1998 (the
"Effective Date"), a true and correct copy of which is attached hereto as
EXHIBIT A (the "Assignment") whereby Assignor has assigned to Assignee, and
Assignee has assumed, all of Assignor's right, title, interest and obligations
in, to and under the Lease, subject to the covenants, terms and conditions set
forth therein.
C. As a condition of the Assignment, Assignor and Assignee have
requested that Landlord consent to and approve of the Assignment.
D. Landlord is willing to do so conditioned upon and subject to
the terms and conditions set forth herein.
NOW THEREFORE, FOR GOOD AND VALUABLE CONSIDERATION, the receipt and sufficiency
of which are hereby acknowledged, Landlord hereby agrees as follows:
CONSENT
1. Landlord hereby consents to and approves of the Assignment,
subject to the terms hereof.
2. Notwithstanding Landlord's consent to the Assignment, Landlord
does not agree to and nothing contained herein or in the Assignment shall be
construed as a release of Assignor from its obligations, covenants, duties and
liabilities under the Lease monetary or otherwise.
3. Assignor and Assignee agree that Assignee shall be responsible
for any sums owing Landlord, or shall receive the benefit of any sums due from
landlord, if any, derived from Landlor's annual reconciliation of Operation
Expenses incurred in the year 1998, to be performed in accordance with the
Lease in the year 1999.
4. Landlord consents and agrees to the following:
a. Notice Address: From and after the Effective Date, the
address for notices to the Tenant under Section 14.5 of
the Lease shall be as follows:
DIGITAL RIVER, INC.
9625 W. 76TH STREET
SUITE 150
EDEN PRAIRIE, MN 55344
ATTN: JOEL A. RONNING
b. Improvements. Landlord consents to Assignee making the
alterations and improvements described and/or shown in
the attached EXHIBIT B (the "Work"). The Work shall be
<PAGE> 6
performed at Assignee's sole cost and expense by
licensed and insured contractors and in accordance
with all of the requirements, terms and conditions of
the Lease, including without limitation, Section 6.2 of
the Lease.
c. Permitted Use. Landlord agrees that the permitted
uses under Section 1.5 shall include the sale of
products by internet commerce, including but not
limited to software and digital products.
d. Signage. Landlord consents to changing the
name of the business operating at the Premises to
"Digital River, Inc." or upon request of Assignee, a
substantially similar name, and subject to the terms of
Section 3.2 and Exhibit D of the Lease, to a change in
the signage for the Premises to reflect the name change.
5. Except as specifically provided herein, nothing contained in this
Consent shall be construed to modify or alter any of the terms, covenants or
conditions of the Lease and the Lease shall remain in full force and effect.
6. Nothing contained in this consent to any future assignment or
sublease of all or any portion of the Premises by either Assignor or Assignee.
7. This Consent may be executed in any number of counterparts,
each of which when so executed and delivered shall be deemed an original, but
together shall constitute one and the same instrument.
8. This Consent is expressly conditioned upon execution of this
Consent by Landlord's mortgage lender for the Project, USG Annuity & Life
Company, and if this Consent is not so executed, both the Assignment and this
Consent shall be null and void and of no effect.
IN WITNESS WHEREOF, Landlord has executed this Consent effective as of the day
and year first above written.
LANDLORD:
CSM INVESTORS, INC.,
a Minnesota corporation
REVIEWED
BY: [SIG] BY DJY
-----------------------
Title: V.P. DATE
--------------------- 4/23/98
CONSENT OF LENDER
The undersigned, being the present holder of an Assignment of Rents and Leases
dated September 5, 1996 executed by CSM Investors, Inc. in favor of the
undersigned, relative to the project commonly known as the Golden Triangle
Business Center located in Eden Prairie, Minnesota, hereby consents to the
above described Assignment, subject to and conditioned upon the same terms and
conditions as set forth hereinabove for Landlord's consent.
Dated: May 4, 1998 USG ANNUITY & LIFE COMPANY,
--------------------- an Oklahoma corporation
By USG INVESTMENT MANAGEMENT LLC,
its authorized representative
By: Daniel J. Foley
----------------------
Daniel J. Foley
Its: Vice President
---------------------
<PAGE> 1
EXHIBIT 23.1
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANT
As independent public accountants, we hereby consent to the
incorporation by reference of our report dated May 14, 1996 included in this
Form 10-KSB into the Company's previously filed registration statements number
333-14175, 333-11489, and 333-33437, and 333-57181.
/s/ LUND KOEHLER COX & COMPANY, PLLP
Minneapolis, Minnesota
June 25, 1998
<PAGE> 1
EXHIBIT 23.2
CONSENT OF INDEPENDENT AUDITORS
We consent to the incorporation by reference in the Registration
Statements (Form S-8 No. 333-11489) pertaining to the 1994 - 1997 Stock Option
and Compensation Plan of IntraNet Solutions Inc., (Form S-3 No. 333-14175)
pertaining to the registration of 562,635 shares of IntraNet Solutions Inc.
common stock, (Form S-3 No. 333-33437) pertaining to the registration of
2,204,033 shares of IntraNet Solutions Inc. common stock and (Form S-3 No.
333-57181) pertaining to the registration of 1,945,900 shares of IntraNet
Solutions, Inc. common stock, of our report dated June 30, 1997, with respect to
the consolidated financial statements of IntraNet Solutions Inc., for the year
ended March 31, 1997 included in this Annual Report (Form 10-KSB) .
/s/ Ernst & Young LLP
Minneapolis, Minnesota
June 25, 1998
<PAGE> 1
EXHIBIT 23.3
AUDITOR'S CONSENT
We have issued our report dated June 1, 1998 accompanying the consolidated
financial statements included in the Annual Report of IntraNet Solutions, Inc.
on Form 10-KSB for the year ended March 31, 1998. We hereby consent to the
incorporation by reference of said report in the Registration Statements of
IntraNet Solutions, Inc. on Form S-8 (File No. 333-11489) and on Forms S-3
(File No. 333-14175, File No. 333-33437 and File No. 333-57181).
/s/ Grant Thornton LLP
Minneapolis, Minnesota
June 25, 1998
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> MAR-31-1998
<PERIOD-END> MAR-31-1998
<CASH> 994,526
<SECURITIES> 0
<RECEIVABLES> 5,719,496
<ALLOWANCES> 516,492
<INVENTORY> 233,121
<CURRENT-ASSETS> 6,971,123
<PP&E> 1,351,465
<DEPRECIATION> 668,715
<TOTAL-ASSETS> 8,456,339
<CURRENT-LIABILITIES> 6,589,942
<BONDS> 0
0
2,003,844
<COMMON> 86,075
<OTHER-SE> (421,987)
<TOTAL-LIABILITY-AND-EQUITY> 8,456,339
<SALES> 19,449,795
<TOTAL-REVENUES> 19,449,795
<CGS> 13,453,028
<TOTAL-COSTS> 13,453,028
<OTHER-EXPENSES> 6,742,964
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 332,109
<INCOME-PRETAX> (1,078,306)
<INCOME-TAX> 0
<INCOME-CONTINUING> (1,078,306)
<DISCONTINUED> (2,576,666)
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (5,319,861)
<EPS-PRIMARY> (0.68)
<EPS-DILUTED> (0.68)
</TABLE>
