U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-QSB
[X] Quarterly report under Section 13 or 15(d) of the Securities Exchange Act of
1934
For the quarterly period ended December 31, 1997.
[ ] Transition report under Section 13 or 15(d) of the Securities Exchange Act
of 1934
For the transition period from _________ to __________.
Commission file number 0-19817
--------------------------------
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
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(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
----------- ----------
State the number of shares outstanding of each of the issuer's classes
of common equity, as of the latest practicable date: At February 5, 1998 there
were 8,270,060 shares of common stock, $0.01 par value outstanding.
<PAGE>
INTRANET SOLUTIONS, INC.
Form 10-QSB Index
December 31, 1997
Part I Financial Information
Item 1. Financial Statements
Consolidated Balance Sheets -
December 31, 1997 and March 31, 1997 3
Consolidated Statements of Operations -
for the three and nine months ended
December 31, 1997 and 1996 4
Consolidated Statements of Cash Flows -
for the three and nine months ended
December 31, 1997 and 1996 5
Notes to Consolidated 6
Financial Statements
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of
Operations 8
Part II: Other Information 15
<PAGE>
INTRANET SOLUTIONS, INC.
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
<TABLE>
<CAPTION>
ASSETS
DECEMBER 31, MARCH 31,
1997 1997
------------ -----------
<S> <C> <C>
CURRENT ASSETS:
Cash $ 104,600 $ 121,798
Accounts receivable, net 5,280,250 3,612,803
Note receivable 155,850 801,993
Inventories 404,618 495,960
Prepaid expenses and other current assets 772,250 523,703
------------ -----------
Total current assets 6,717,568 5,556,257
PROPERTY AND EQUIPMENT, NET 2,555,453 2,615,224
INTANGIBLE ASSETS, NET 775,235 841,511
------------ -----------
$ 10,048,256 $ 9,012,992
============ ===========
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
CURRENT LIABILITIES:
Revolving credit facility $ 1,034,413 $ 1,809,086
Promissory notes payable, net of discount 1,097,521 808,932
Current portion of long-term debt 524,545 1,019,599
Current portion of capital lease obligations 257,797 233,097
Accounts payable 3,159,108 2,716,723
Accrued expenses 699,915 592,234
Deferred revenue 136,233 210,351
------------ -----------
Total current liabilities 6,909,532 7,390,022
LONG-TERM DEBT, NET OF CURRENT PORTION 343,213 812,930
CAPITAL LEASE OBLIGATIONS, NET OF CURRENT PORTION 492,550 683,514
OTHER 50,436 199,887
------------ -----------
Total liabilities 7,795,731 9,086,353
------------ -----------
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY (DEFICIT):
Series A Preferred stock, $.01 par value, $5.00 stated value,
1,000,000 shares authorized, 682,500 and 0 shares issued and
outstanding, respectively, net of discount 3,039,167 --
Common stock, $.01 par value, 24,000,000 shares
authorized, 8,078,392 and 7,523,603 issued and outstanding,
respectively 80,784 75,236
Additional paid-in capital 7,103,878 3,827,356
Retained earnings (deficit) (7,791,306) (3,744,833)
Unearned compensation (179,998) (231,120)
------------ -----------
Total stockholders' equity (deficit) 2,252,525 (73,361)
------------ -----------
$ 10,048,256 $ 9,012,992
============ ===========
</TABLE>
See accompanying notes to the condensed consolidated financial statements
<PAGE>
INTRANET SOLUTIONS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
--------------------------- -----------------------------
DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31,
1997 1996 1997 1996
----------- ----------- ------------ ------------
<S> <C> <C> <C> <C>
REVENUES:
Hardware integration $ 3,119,082 $ 3,309,953 $ 9,675,921 $ 7,949,740
Software, technical services and support 1,894,859 1,580,891 4,894,877 3,819,472
----------- ----------- ------------ ------------
Total revenues 5,013,941 4,890,844 14,570,798 11,769,212
----------- ----------- ------------ ------------
COST OF REVENUES:
Hardware integration 2,656,069 2,802,856 8,179,881 6,661,735
Software, technical services and support 725,055 937,701 2,291,556 2,386,434
----------- ----------- ------------ ------------
Total cost of revenues 3,381,124 3,740,557 10,471,437 9,048,169
----------- ----------- ------------ ------------
Gross profit 1,632,817 1,150,287 4,099,361 2,721,043
----------- ----------- ------------ ------------
OPERATING EXPENSES:
Sales and marketing 776,621 532,504 2,114,926 1,384,416
General and administrative 581,405 491,100 1,756,278 1,271,530
Research and development 305,933 286,394 942,904 818,381
----------- ----------- ------------ ------------
Total operating expenses 1,663,959 1,309,998 4,814,108 3,474,327
----------- ----------- ------------ ------------
Income (loss) from operations (31,142) (159,711) (714,747) (753,284)
INTEREST EXPENSE, NET 91,126 16,667 287,269 65,429
----------- ----------- ------------ ------------
LOSS BEFORE INCOME TAXES (122,268) (176,378) (1,002,016) (818,713)
Provision for (benefit of)
income taxes -- (60,588) -- (281,637)
----------- ----------- ------------ ------------
LOSS FROM CONTINUING OPERATIONS (122,268) (115,790) (1,002,016) (537,076)
DISCONTINUED OPERATIONS (NOTE 6)
Loss from operations of discontinued
distribution group (net of
applicable taxes) (474,093) (417,864) (1,424,457) (913,767)
----------- ----------- ------------ ------------
NET LOSS (596,361) ($ 533,654) (2,426,473) ($ 1,450,843)
PREFERRED STOCK DIVIDENDS AND ACCRETION
(NOTE 4) 640,000 -- 1,620,000 --
----------- ----------- ------------ ------------
LOSS ATTRIBUTABLE TO COMMON SHAREHOLDERS ($1,236,361) ($ 533,654) ($ 4,046,473) ($ 1,450,843)
=========== =========== ============ ============
LOSS FROM CONTINUING OPERATIONS
PER COMMON SHARE - BASIC AND DILUTED ($ 0.02) ($ 0.02) ($ 0.13) ($ 0.07)
=========== =========== ============ ============
NET LOSS PER COMMON SHARE - BASIC AND
DILUTED ($ 0.08) ($ 0.07) ($ 0.31) ($ 0.19)
=========== =========== ============ ============
LOSS ATTRIBUTABLE TO COMMON SHAREHOLDERS
PER COMMON SHARE - BASIC AND DILUTED ($ 0.16) ($ 0.07) ($ 0.52) ($ 0.19)
=========== =========== ============ ============
WEIGHTED AVERAGE COMMON SHARES
OUTSTANDING (NOTE 2) 7,928,910 7,464,401 7,712,353 7,448,525
=========== =========== ============ ============
</TABLE>
See accompanying notes to the condensed consolidated financial statements
<PAGE>
INTRANET SOLUTIONS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
--------------------------- ---------------------------
DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31,
1997 1996 1997 1996
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss ($ 596,361) ($ 533,654) ($2,426,473) (1,450,843)
Adjustments to reconcile net loss
to cash flows from operating activities -
Depreciation and amortization 207,551 168,643 595,827 398,526
Loss on sale of fixed assets 5,314 3,788 7,261 6,844
Stock option compensation earned 16,865 8,789 51,122 11,231
Discount amortization 14,883 -- 68,835 --
Changes in operating assets and liabilities 57,238 (947,438) (1,512,516) (1,631,595)
----------- ----------- ----------- -----------
Cash flows from operating activities (294,510) (1,299,872) (3,215,944) (2,665,837)
----------- ----------- ----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from sale of fixed assets 2,150 -- 5,917 --
Proceeds from note receivable 414,755 636,668 662,977 795,835
Purchases of fixed assets (238,697) (1,113,992) (482,958) (1,524,884)
Purchase of goodwill -- (725,533) -- (725,533)
----------- ----------- ----------- -----------
Cash flows from investing activities 178,208 (1,202,857) 185,936 (1,454,582)
----------- ----------- ----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net advances from revolving credit facility (1,417,236) 39,979 (774,673) 128,066
Proceeds from long-term debt -- 1,808,721 -- 2,308,721
Payments on long-term debt (111,159) (50,404) (345,017) (100,402)
Proceeds from capital leases -- 398,342 -- 398,342
Payments on capital leases (58,389) (44,691) (166,264) (129,900)
Payments on other long-term liabilities (30,941) -- (103,201) --
Repurchase of treasury stock 550 600 (8,250) (9,400)
Issuance of preferred stock (7,651) -- 3,521,373 --
Issuance of common stock -- 351,300 -- 380,547
Payments of dividends on preferred stock (50,000) -- (50,000) --
Proceeds from reverse merger -- -- -- 1,118,200
Proceeds from stock options and warrants 722,984 -- 938,842 --
----------- ----------- ----------- -----------
Cash flows from financing activities (951,842) 2,503,847 3,012,810 4,094,174
----------- ----------- ----------- -----------
NET INCREASE (DECREASE) IN CASH (1,068,144) 1,118 (17,198) (26,245)
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 1,172,744 10,150 121,798 37,513
----------- ----------- ----------- -----------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 104,600 $ 11,268 $ 104,600 $ 11,268
=========== =========== =========== ===========
NON-CASH TRANSACTIONS:
Conversion of debt to common stock -- -- $ 250,000 --
Conversion of debt to preferred stock -- -- $ 150,000 --
SUPPLEMENTAL DISCLOSURE OF CASH FLOWS
INFORMATION:
Cash paid for interest $ 129,127 $ 54,273 $ 413,840 $ 178,749
Cash paid for income taxes $ 4,500 $ 450 $ 8,031 $ 500
DETAIL OF CHANGES IN OPERATING ASSETS AND
LIABILITIES:
Accounts receivable $ 730,700 ($2,026,831) ($1,667,447) ($1,894,382)
Income taxes receivable -- -- -- 70,000
Inventories 94,646 (226,543) 91,342 (222,143)
Prepaid expenses and other current assets (185,820) (96,743) (412,359) (514,498)
Deferred income taxes -- (214,313) -- (787,892)
Accounts payable (528,295) 1,252,519 442,385 1,438,973
Accrued expenses and other current liabilities (53,993) 364,473 33,563 278,347
----------- ----------- ----------- -----------
Net changes in operating assets
and liabilities $ 57,238 ($ 947,438) ($1,512,516) ($1,631,595)
=========== =========== =========== ===========
</TABLE>
See accompanying notes to the condensed consolidated financial statements
<PAGE>
INTRANET SOLUTIONS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NINE MONTHS ENDED DECEMBER 31, 1997 AND 1996
(UNAUDITED)
(1) BASIS OF FINANCIAL STATEMENT PRESENTATION
The accompanying unaudited consolidated financial statements have been prepared
by the Company pursuant to the rules and regulations of the Securities and
Exchange Commission. Certain information and footnote disclosures normally
included in financial statements prepared in accordance with generally accepted
accounting principles have been condensed or omitted pursuant to such rules and
regulations. Although management believes that the disclosures are adequate to
make the information presented not misleading, it is suggested that these
interim consolidated financial statements be read in conjunction with the
Company's most recent audited consolidated financial statements and notes
thereto. In the opinion of management, all adjustments (which include only
normal recurring adjustments) necessary for a fair presentation of the financial
position, results of operations and cash flows for the interim period presented
have been made. Operating results for the nine months ended December 31, 1997
are not necessarily indicative of the results that may be expected for the year
ending March 31, 1998.
(2) NET INCOME (LOSS) PER COMMON SHARE
In 1997, the Financial Accounting Standards Board issued Statement of Financial
Accounting Standards No. 128, EARNING PER SHARE. Statement 128 replaced the
previously reported primary and fully diluted earnings per share with basic and
diluted earnings per share. Unlike primary earnings per share, basic earnings
per share excludes any dilutive effects of common stock equivalents such as
options, warrants, and convertible securities. Diluted earnings per share is
very similar to the previously required fully diluted earnings per share.
Statement 128 requires presentation of both basic and diluted earnings per share
unless they are the same. Common stock equivalents are excluded from calculating
diluted earnings per share if the effects are anti-dilutive. For the periods
presented, basic and diluted earnings per share are the same. All earnings per
share amounts for all periods have been presented, and where necessary, restated
to conform to the Statement 128 requirements.
(3) RECENT ACCOUNTING PRONOUNCEMENTS
In June 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 130, "Reporting Comprehensive Income" ("SFAS
130"). SFAS 130 establishes standards for the reporting of comprehensive income
and its components in a full set of general-purpose financial statements. The
Company will be required to adopt SFAS 130 for periods beginning after December
15, 1997 and does not expect such adoption to have a material effect on the
consolidated financial statements.
In June 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 131, "Disclosures About Segments of An
Enterprise and Related Information" ("SFAS 131"). SFAS 131 revises information
regarding the reporting of operating segments. It also establishes standards for
related disclosures about products and services, geographic areas and major
customers. The Company will be required to adopt SFAS 131 for periods beginning
after December 15, 1997 and has not yet evaluated the impact of such adoption on
the notes to its consolidated financial statements.
<PAGE>
(4) SERIES A CONVERTIBLE PREFERRED STOCK
During July 1997, the Company closed on the sale of $4,000,000 of convertible
preferred stock. The Company issued 800,000 units, each consisting of one share
of 5% $.01 par value Series A convertible preferred stock with a $5.00 stated
value and a warrant to acquire one share of the Company's common stock at an
exercise price of $5.18. The preferred stock is convertible into the Company's
common stock at a price equal to 75% market value at the time of conversion,
with a maximum conversion price of $3.71 per share and a minimum conversion
price of $1.00 per share. During the quarter ended December 31, 1997, 117,500
shares of Series A Preferred Stock were converted into 158,299 shares of common
stock.
In connection with this transaction, the Company recorded a non-cash deemed
dividend of $1.6 million. The deemed dividend was recorded as a discount to
preferred stock with a corresponding credit to additional paid in capital. The
discount was recognized during the periods in which the shares become eligible
for conversion, which occurred ratably from issuance through December 31, 1997.
During the quarter ended December 31, 1997, the Company recognized the remaining
$590,000 of the non-cash discount accretion. 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.
(5) DISCONTINUED OPERATIONS
In September 1997, the Company formally adopted a plan to dispose of its
on-demand publishing distribution group. The plan of disposal specifically
targets a sale of substantially all the assets of the distribution group
subsidiary to an established on-demand publishing provider.
In October 1997, the Company entered into a letter of intent to sell its
on-demand publishing distribution group to a subsidiary of a large international
supplier of office automation equipment and related services. As of December 31,
1997 the Company was still in negotiations with this party and several other
suitors who are interested in the Distribution Group.
As of December 31, 1997, the net assets and liabilities of the on-demand
publishing distribution group were as follows:
(in millions)
Total Assets $3.6
Less: Total Liabilities 2.6
---------------
Net Assets $1.0
===============
Revenues from discontinued operations were $1.3 million and $1.2 million for the
quarters ended December 31, 1997 and 1996, respectively. Revenues from
discontinued operations were $3.8 million and $2.6 million for the nine months
ended December 31, 1997 and 1996, respectively. Interest expense included in
discontinued operations related to obligations of the distribution group was
$60,000 and $38,000 for the quarters ended December 31, 1997 and 1996,
respectively. Interest expense included in discontinued operations was $182,000
and $113,000 for the nine months ended December 31, 1997 and 1996, respectively.
Tax benefits of $219,000 and $479,000 related to discontinued operations were
recognized for the quarter and nine months ended December 31, 1996,
respectively. No tax provision or benefits related to discontinued operations
was recognized during the nine months ended December 31, 1997.
In connection with the negotiations with potential suitors, the Company is
currently evaluating the net realizable value it expects to receive from the
sale of the Distribution Group.
<PAGE>
(6) RECLASSIFICATIONS
Certain accounts in the prior year financial statements have been reclassified
for comparative purposes to conform with the presentation in the current year
financial statements.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
OVERVIEW
IntraNet Solutions, Inc. ("IntraNet" or the "Company") provides integrated
solutions for the creation, management and distribution of critical business
information. IntraNet offers its customers a variety of products including
proprietary intranet document management software, customized off-the-shelf
software applications, hardware and software implementation. The evolution of
Web technology as a tool for storing, managing and distributing information,
coupled with the Company's experience in designing systems and creating custom
software applications, has created an opportunity for the Company to develop a
line of document management software products utilizing Web technology.
The Company's revenues are derived from (i) the sale of proprietary and
non-proprietary software products, (ii) the sale of hardware products, (iii) the
sale of maintenance and support contracts, and (iv) the sale of technical and
other services. Revenue from the sale of software is recognized in accordance
with AICPA Statement of Position 91-1 Software Revenue Recognition. Accordingly,
revenue is recognized at the time of product shipment if no significant Company
obligations remain and collection of the resulting sale price is probable.
Revenue from maintenance and support contracts is generally recognized ratably
over the term of the contract. Revenue from contracts with original durations of
one year or less is recognized at the time of sale if the Company does not
expect to have material future obligations to service the contracts. Revenue
from technical and other services are recognized as the related services are
performed. Revenue from the sale of all other products and services is
recognized at the time of delivery to the customer.
<PAGE>
RESULTS OF OPERATIONS FOR THE QUARTER ENDED DECEMBER 31, 1997
COMPARED TO THE QUARTER ENDED DECEMBER 31, 1996
REVENUES
Total revenues increased to $5.0 million for the quarter ended December
31, 1997 from $4.9 million for the quarter ended December 31, 1996, or $100,000
(2.5%). This increase related to an increase in software, technical services and
support revenue.
HARDWARE INTEGRATION. Hardware integration revenues decreased a total
of $200,000 or 5.8% for the quarter ended December 31, 1997 compared to the
quarter ended December 31, 1996 ($3.1 million in 1997 compared to $3.3 million
in 1996). The decrease in hardware integration revenue was principally due to
the Company's continued focus on its proprietary software products.
SOFTWARE, TECHNICAL SERVICES AND SUPPORT. Software, technical services
and support revenues increased a total of $300,000, or 20.0% for the quarter
ended December 31, 1997 compared to the quarter ended December 31, 1996 ($1.9
million in 1997 compared to $1.6 million in 1996). Increases in software revenue
accounted for substantially all of the total increase. The growth in software
revenue was primarily attributable to the Company's proprietary software
products.
COST OF REVENUES AND GROSS PROFIT
Total cost of revenues decreased to $3.4 million for the quarter ended
December 31, 1997 from $3.7 million for the quarter ended December 31, 1996.
Total cost of revenues as a percent of total revenues was 67.4% in 1997 compared
to 76.5% in 1996. Gross profit increased to $1.6 million for the quarter
December 31, 1997 compared to $1.2 million for the quarter ended December 31,
1996. Total gross profit as a percent of total revenues was 32.6% in 1997
compared to 23.5% in 1996. The increase in gross profit margin was primarily
attributable to revenues from the Company's proprietary software products.
HARDWARE INTEGRATION. Cost of hardware integration revenues decreased
to $2.7 million for the quarter ended December 31, 1997 from $2.8 million for
the quarter ended December 31, 1996. Cost of hardware integration revenues as a
percent of hardware integration revenues was 85.2% in 1997 compared to 84.7% in
1996. Gross profit from hardware integration was 14.8% for the quarter ended
December 31, 1997 compared to 15.3% for the quarter ended December 31, 1996.
SOFTWARE, TECHNICAL SERVICES AND SUPPORT. Cost of software, technical
services and support revenues decreased to $700,000 for the quarter ended
December 31, 1997 from $900,000 for the quarter ended December 31, 1996. Cost of
software, technical services, and support revenues as a percent of software,
technical services, and support revenue was 38.3% in 1997 compared to 59.3% in
1996. Gross profit on software, technical services and support was 61.7% for the
quarter ended December 31, 1997 compared to 40.7% for the quarter ended December
31, 1996. The increase in gross profit was primarily attributable to the
increase in sales of higher
<PAGE>
margin proprietary software. Gross profit from software revenues increased to
80.6% for the quarter ended December 31, 1997 from 44.6% for the quarter ended
December 31, 1996.
OPERATING EXPENSES
SALES AND MARKETING. Sales and marketing expenses increased to $800,000
for the quarter ended December 31, 1997 compared to $500,000 for the quarter
ended December 31, 1996. Sales and marketing expenses as a percent of total
revenues were 15.5% in 1997 compared to 10.9% in 1996. Sales and marketing
increased as a percent of revenues primarily due to an expansion of the
Company's marketing efforts for its proprietary line of software products.
GENERAL AND ADMINISTRATIVE. General and administrative expenses were
$600,000 for the quarter ended December 31, 1997 compared to $500,000 for the
quarter ended December 31, 1996. General and administrative expenses as a
percent of total revenue were 11.6% in 1997 compared to 10.0% in 1996.
RESEARCH AND DEVELOPMENT. Research and development expenses were
$300,000 for each of the quarters ended December 31, 1997 and December 31, 1996.
Research and development expenses as a percent of total revenue 6.1% in 1997
compared to 5.9% in 1996.
DISCONTINUED OPERATIONS
In September 1997, the Company formally adopted a plan to dispose of its
on-demand publishing distribution group. The plan of disposal specifically
targets a sale of substantially all the assets of the distribution group
subsidiary to an established on-demand publishing provider. In October 1997, the
Company entered into a letter of intent to sell its on-demand publishing
distribution group to a large international supplier of office automation
equipment and related services. As of December 31, 1997, the Company is still in
negotiations with this party and several other suitors who are interested in the
Distribution Group.
Distribution services revenues increased a total of $100,000 for the quarter
ended December 31, 1997 compared to the quarter ended December 31, 1996 ($1.3
million in 1997 compared to $1.2 million in 1996). The increase in distribution
services revenue was primarily attributable to the expansion of the customer
base through additions to the direct sales force and the addition of the
Company's Arizona location, net of the closing of three other locations.
Cost of distribution services revenue were $1.0 million for the quarters ended
December 31, 1997 and December 31, 1996. Cost of distribution services revenues
as a percent of distribution services revenue was 83.3% in 1997 compared to
80.0% in 1996. Gross profit on distribution services was 16.7% for the quarter
ended December 31, 1997 compared to 20.0% for the quarter ended December
31,1996. Lower margins on distribution services were primarily due to costs
associated with experiencing lower than optimal capacity utilization.
Distribution Services operating expenses decreased a total of $200,000 to
$600,000 for the quarter ended December 31, 1997 from $800,000 for the quarter
ended December 31, 1996.
<PAGE>
RESULTS OF OPERATIONS FOR THE NINE MONTHS ENDED DECEMBER 31, 1997
COMPARED TO THE NINE MONTHS ENDED DECEMBER 31, 1996
REVENUES
Total revenues increased to $14.6 million for the nine months ended
December 31, 1997 from $11.8 million for the nine months ended December 31,
1996, or $2.8 million (23.8%). This increase related to increases in all revenue
product lines.
HARDWARE INTEGRATION. Hardware integration revenues increased a total
of $1.7 million or 21.7% for the nine months ended December 31, 1997 compared to
the nine months ended December 31, 1996 ($9.7 million in 1997 compared to $8.0
million in 1996). The increase in hardware integration revenue was primarily due
to the expansion of the Company's customer base and increased sales to existing
customers.
SOFTWARE, TECHNICAL SERVICES AND SUPPORT. Software, technical services
and support revenues increased a total of $1.1 million, or 28.2% for the nine
months ended December 31, 1997 compared to the nine months ended December 31,
1996 ($4.9 million in 1997 compared to $3.8 million in 1996). Increases in
software revenue accounted for $1.0 million of the total increase. The growth in
software was primarily attributable to the Company's proprietary software
products.
COST OF REVENUES AND GROSS PROFIT
Total cost of revenues increased to $10.5 million for the nine months
ended December 31, 1997 from $9.0 million for the nine months ended December 31,
1996. Total cost of revenues as a percent of total revenues was 71.9% in 1997
compared to 76.9% in 1996. Gross profit increased to $4.1 million for the nine
months ended December 31, 1997 compared to $2.7 million for the nine months
ended December 31, 1996. Total gross profit as a percent of total revenues 28.1%
in 1997 compared to 23.1% in 1996. The increase in gross profit margin was
primarily attributable to revenues from the Company's proprietary software
products.
HARDWARE INTEGRATION. Cost of hardware integration revenues increased
to $8.2 million for the nine months ended December 31, 1997 from $6.7 million
for the nine months ended December 31, 1996. Cost of hardware integration
revenues as a percent of hardware integration revenues was 84.5% in 1997
compared to 83.8% in 1996. Gross profit from hardware integration was 15.5% for
the nine months ended December 31, 1997 compared to 16.2% for the nine months
ended December 31, 1996. The decrease in gross profit was primarily attributable
to competitive pricing on larger integration contracts.
<PAGE>
SOFTWARE, TECHNICAL SERVICES AND SUPPORT. Cost of software, technical
services and support revenues decreased to $2.3 million for the nine months
ended December 31, 1997 from $2.4 million for the nine months ended December 31,
1996. Cost of software, technical services, and support revenues as a percent of
software, technical services, and support revenue was 46.8% in 1997 compared to
62.5% in 1996. Gross profit on software, technical services and support was
53.2% for the nine months ended December 31, 1997 compared to 37.5% for the nine
months ended December 31, 1996. The increase in gross profit was primarily
attributable to the increase in sales of higher margin proprietary software.
Gross profit from software revenues increased to 70.3% in the nine months ended
December 31, 1997 from 43.1% in the nine months ended December 31, 1996,
primarily due to increased sales of the Company's proprietary software.
OPERATING EXPENSES
SALES AND MARKETING. Sales and marketing expenses increased to $2.1
million for the nine months ended December 31, 1997 compared to $1.4 million for
the nine months ended December 31, 1996. Sales and marketing expenses as a
percent of total revenues were 14.5% in 1997 compared to 11.8% in 1996. Sales
and marketing increased as a percent of revenues primarily due to an expansion
of the Company's marketing efforts for its proprietary line of software
products.
GENERAL AND ADMINISTRATIVE. General and administrative expenses
increased to $1.8 million for the nine months ended December 31, 1997 compared
to $1.3 million for the nine months ended December 31, 1996. General and
administrative expenses as a percent of total revenue were 12.0% in 1997
compared to 10.8% in 1996.
RESEARCH AND DEVELOPMENT. Research and development expenses were
$900,000 for the nine months ended December 31, 1997 and $800,000 for the nine
months ended December 31, 1996. Research and development expenses as a percent
of total revenue were 6.5% in 1997 compared to 7.0% in 1996.
DISCONTINUED OPERATIONS
Distribution services revenues increased a total of $1.2 million for the nine
months ended December 31, 1997 compared to the nine months ended December 31,
1996 ($3.8 million in 1997 compared to $2.6 million in 1996). The increase in
distribution services revenue was primarily attributable to the expansion of the
customer base through additions to the direct sales force and the addition of
the Company's Arizona location, net of the closing of three other locations.
Cost of distribution services revenue increased to $3.1 million for the nine
months ended December 31, 1997 compared to $2.0 million for the nine months
ended December 31, 1996. Cost of distribution services revenues as a percent of
distribution services revenue was 83.0% in 1997 compared to 76.2% in 1996. Gross
profit on distribution services was 17.0% for the nine months ended December 31,
1997 compared 23.8% for the nine months ended December 31,
<PAGE>
1996. Lower margins on distribution services were primarily due to costs
associated with experiencing lower than optimal capacity utilization.
Distribution Services operating expenses were $1.9 million for the nine months
ended December 31, 1996 and December 31, 1997.
LIQUIDITY AND CAPITAL RESOURCES
In December 1996, the Company issued $1.0 million of 9% promissory
notes. During the fourth quarter of fiscal 1997 the Company issued an additional
$500,000 of 9% promissory notes. As additional consideration for the loans, the
Company issued each lender a warrant to acquire an aggregate of 300,000 shares
of Common Stock at an exercise price of $4.00. During the nine months ended
December 31, 1997, $250,000 of these notes were converted into approximately
71,000 shares of common stock at $3.50 per share. On January 15, 1998, the
Company paid off $850,000 of the 9% promissory notes. The remaining 9%
promissory notes ($250,000) mature on April 15, 1998.
In July, 1997, the Company completed a $4.0 million private placement
of 5% Series A $.01 par value convertible preferred stock with a stated value of
$5.00 per share. Included in the $4.0 million was $150,000 of existing 9%
promissory notes which were converted into the private placement. During the
quarter ending December 31, 1997, 117,500 shares of Series A Preferred Stock
were converted into 158,299 shares of common stock.
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 December 31, 1997, the Company had advances of
$1.0 million, which are due on demand. On February 11, 1998, the Company had
$1.7 million in advances and $300,000 of availability on its working capital
line of credit. At December 31, 1997, the Company also had term loans and
promissory notes with financial institutions outstanding in the amount of
$715,100. The term loans and promissory notes require monthly principal payments
of $38,400 plus interest at approximately prime plus 2.5%. At December 31, 1997
the Company also had a demand note payable to its principal stockholder in the
amount of $27,500 which accrues interest at a rate of 12%.
On December 31, 1997, the Company had a note receivable arising from
the sale of the MacGregor trademark with an outstanding balance of $155,600 due
from Hutch Sports USA, Inc. (Hutch). On October 29, 1997, the Company sold the
Note for its approximate carrying value. The Company received payment on
$414,000 of the note on October 29, 1997, and the remaining balance was paid on
January 23, 1998.
As of December 31, 1997 the Company had cash of $100,000. Capital
expenditures for the nine months ended December 31, 1997 and 1996, including
equipment financed with capital lease obligations, were $480,000 and $1.5
million respectively. During the year ended March 31, 1997 the Company acquired
substantially all the assets of a graphic communications and custom printing
business. The purchase price consisted of cash of $675,800, a promissory note of
$267,800, and shares of the Company's common stock valued at $350,000. The
promissory
<PAGE>
note bears interest at prime plus 1.5%. The balance of $125,200 remaining on
this note is due March 1, 1998.
The Company acquired a portion of its distribution services production
equipment with capital lease obligations. These leases require total monthly
payments of $28,400 and carry interest rates between 10.1% and 16.6%. In
addition, the Company has also entered into certain operating leases for
facilities and equipment. These leases require total monthly payments of $40,400
(net of monthly sublease income of $13,900) for facilities and $37,100 (net of
monthly sublease income of $6,200) for production and office equipment. The
Company also has a long-term consulting agreement with a former stockholder that
requires monthly payments of $10,300 through July 2000.
The Company's capital requirements in connection with its development
and marketing activities have been and will continue to be significant. The
Company will continue to evaluate future financing needs in order to strengthen
its capital position. Future financings, if necessary to pursue such objectives,
may be dilutive to shareholders, or may contain restrictive covenants. There can
be no assurance that additional financing will be available to the Company on
commercially reasonable terms, or at all.
In December 1997, the Company terminated its reseller agreement with
Interleaf, Inc. Approximately 30% of the Company's software, technical services,
and support revenues for the nine months ended December 31, 1997 were derived
from its reseller arrangement with Interleaf. The Company believes however that
the termination of this relationship will not have a material effect on
operations as a result of anticipated growth in proprietary software revenues at
higher margins.
PRIVATE SECURITIES LITIGATION REFORM ACT
The Private Securities Litigation Reform Act of 1995 provides a "safe
harbor" for forward-looking statements. Certain information included in this
Form 10-QSB and other materials filed or to be filed by the Company with the
Securities and Exchange Commission (as well as information included in oral
statements or other written statements made or to be made by the Company)
contains statements that are forward-looking, such as statements relating to
plans for future expansion, product development, market acceptance of new
products, and other business development activities as well as other capital
spending, financing sources and the effects of regulation and competition. Such
forward-looking information involves important risks and uncertainties that
could significantly affect anticipated results in the future and, accordingly,
such results may differ from those expressed in any forward-looking statements
made by or on behalf of the Company. These risks and uncertainties include, but
are not limited to, those relating to product development and market acceptance
of new products, dependence on existing management, leverage and debt service
(including sensitivity to fluctuations in interest rates), domestic or global
economic conditions, changes in federal or state tax laws or the administration
of such laws.
<PAGE>
PART II
OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.
TIMOTHY AND MARGARET JOHNSON V. MACGREGOR SPORTS, INC., ET AL,
commenced on or about December 17, 1997 in the Minnesota State
District County in Ramsey County, Minnesota. The suit alleges
that Johnson's daughter was injured by a t-ball batting-tee
manufactured by MacGregor Sports Inc. and sold to the Johnsons
by Toys "R" Us. The Company is currently pursuing discovery to
determine whether the Company's predecessor, MacGregor Sports
& Fitness, Inc., was in the distribution chain for the t-ball
assembly, and if so, whether the insurer for a policy issued
to MacGregor Sports & Fitness will obligated to defend or
indemnify IntraNet Solutions Inc.
Other than the foregoing, the Company is not a party to any
material pending legal proceedings and, to the best of its
knowledge, its properties are not the subject of any such
proceedings.
ITEM 2. CHANGES IN SECURITIES.
None
ITEM 3. DEFAULTS UPON SENIOR SECURITIES.
None
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY-HOLDERS.
None
ITEM 5. OTHER INFORMATION.
None
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits.
None
(b) Report on Form 8-K
For the nine months ended December 31, 1997, the
Company did not file any reports on Form 8-K.
<PAGE>
SIGNATURES
In accordance with the requirements of the Exchange Act, the Registrant has duly
caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
INTRANET SOLUTIONS, INC.
(the "Registrant" or "Company")
Dated February 13, 1998 By: /s/ Robert F. Olson
----------------------------
Robert F. Olson
Its: Chief Executive Officer
----------------------------
(Principal Executive Officer)
Dated February 13, 1998 By: /s/ Jeffrey J. Sjobeck
----------------------------
Jeffrey J. Sjobeck
Its: Chief Financial Officer
----------------------------
(Principal Financial Officer)
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