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PROSPECTUS
3,680,000 SHARES
INTRANET SOLUTIONS LOGO
COMMON STOCK
IntraNet Solutions, Inc. is offering 3,230,000 shares and the selling
shareholders are offering 450,000 shares. Our common stock is traded on the
Nasdaq SmallCap Market under the symbol "INRS." Our common stock has been
approved for listing on the Nasdaq National Market under the symbol "INRS" upon
completion of this offering. On June 3, 1999, the last reported sale price of
our common stock was $9.00 per share.
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PER SHARE TOTAL
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Public offering price....................................... $8.00 $29,440,000
Underwriting discounts and commissions...................... $0.56 $ 2,060,800
Proceeds, before expenses, to IntraNet Solutions............ $7.44 $24,031,200
Proceeds, before expenses, to the selling shareholders...... $7.44 $ 3,348,000
</TABLE>
The underwriters have a 30-day option to purchase up to 552,000 additional
shares of common stock from us and the selling shareholders to cover
over-allotments, if any.
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INVESTING IN THE COMMON STOCK INVOLVES RISKS.
SEE "RISK FACTORS" BEGINNING ON PAGE 6.
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NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES
COMMISSION HAS APPROVED OR DISAPPROVED OF THESE SECURITIES OR PASSED UPON THE
ADEQUACY OR ACCURACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
DAIN RAUSCHER WESSELS U.S. BANCORP PIPER JAFFRAY
a division of Dain Rauscher
Incorporated
June 3, 1999
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INSIDE FRONT COVER GRAPHICS:
- - - Caption: "Rapid, Secure Access and Management of Unstructured Business Data on
Intranets and Extranets."
- - - Computer screen pictures and graphics depicting intranets.
- Computer screen picture depicting Intra.doc!'s intranet related screen.
- Graphic depicting Intra.doc! intranet applications, including:
manufacturing plant, distribution center, field reps and workgroup.
- - - Graphic depicting a firewall, showing the secure separation of intranets and
extranets.
- - - Graphics and computer screen picture depicting extranets.
- Graphic depicting Intra.doc! extranet applications, including: suppliers,
customers, outside contractors and business parties.
- Computer screen picture depicting Intra.doc!'s extranet related screen.
- - - Product logos depicting Intra.doc! product capabilities, including: Archive
Replication, Document Management, Search Site, Customize Site and Subscribe to
Content.
<PAGE> 3
You should rely only on the information contained in this prospectus. We
have not, and the underwriters have not, authorized any other person to provide
you with different information. This prospectus is not an offer to sell, nor is
it seeking an offer to buy, these securities in any state where the offer or
sale is not permitted. The information in this prospectus is complete and
accurate as of the date on the front cover, but the information may have changed
since that date.
Intra.doc! and IntraNet Solutions are trademarks registered to IntraNet
Solutions, Inc., and we have applied for trademark registration for each of the
following additional marks: Document Refinery, Web Refinery and Web Vault. This
prospectus also contains trademarks of companies other than IntraNet Solutions.
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TABLE OF CONTENTS
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PAGE
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Prospectus Summary.............. 4
Risk Factors.................... 6
Forward-Looking Statements...... 13
Use of Proceeds................. 14
Dividend Policy................. 14
Price Range of Common Stock..... 14
Capitalization.................. 15
Dilution........................ 16
Selected Consolidated Financial
Data.......................... 17
Management's Discussion and
Analysis of Financial
Condition and Results of
Operations.................... 19
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PAGE
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Business........................ 31
Management...................... 48
Principal and Selling
Shareholders.................. 53
Description of Securities....... 54
Shares Eligible for Future
Sale.......................... 56
Underwriting.................... 57
Where You Can Find More
Information................... 59
Legal Matters................... 59
Experts......................... 59
Index to Consolidated Financial
Statements.................... F-1
</TABLE>
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Except as otherwise stated, all information presented in this prospectus
assumes no exercise of the underwriters' over-allotment option.
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PROSPECTUS SUMMARY
This summary highlights only selected information contained elsewhere in
this prospectus. Before making an investment in IntraNet Solutions' common
stock, you should read the entire prospectus, including the Consolidated
Financial Statements and related Notes, all of which should be consulted when
reading this summary. This prospectus contains forward-looking statements. The
outcome of the events described in these forward-looking statements is subject
to risks and actual results could differ materially.
INTRANET SOLUTIONS, INC.
IntraNet Solutions is a leading provider of Web-based data and content
management solutions for intranets, extranets and the Internet. Our Intra.doc!
suite of products offers customers the ability to rapidly access, manage and
publish unstructured business data. According to The Delphi Group, over 85% of
an organization's internal information is unstructured business data, or data
contained in graphic, document or text format as opposed to structured data
typically stored in databases or data warehouses. Organizations require a broad
range of features to effectively manage this data and content in a Web
environment, including sophisticated security, rapid access, multiple version
control and continual updating of Web links, as well as e-commerce capabilities.
We address these complex needs by providing a comprehensive, Web-based solution
that performs key functions automatically, eliminates administrative bottlenecks
and continuously delivers the most current information to users.
Our Intra.doc! suite of products leverages the customer's existing Internet
infrastructure to enable the rapid and secure access and Web-publication of an
organization's unstructured business data on intranets, extranets and the
Internet. Intra.doc! enables organizations to capture sets of unstructured
business data, attach appropriate security and profiling information, known as
meta data, and dynamically publish and manage this information in a Web
environment without the need to manually reconfigure data sets. Our products
provide a comprehensive solution, based on open Web standards and Java server
architecture, with sophisticated security and searching capabilities. This
enterprise-scalable, cost-effective solution is quickly deployed, easily
maintained and may be configured to meet an organization's specific
requirements. In addition, our products provide e-commerce capabilities to
enable our customers to easily and cost-effectively sell data and content over
the Web.
The market for our products is growing quickly as organizations are rapidly
adopting intranets and extranets. CAP Ventures, a leading research organization,
estimates that spending on corporate intranets doubled in 1997 to $8.5 billion
and predicts an annual growth rate of 50% through the year 2000. In 1997, The
Delphi Group estimated that over 80% of desktops within Fortune 1000 companies
will be connected to an intranet by 1999. In addition, Forrester Research
estimates that more than 80% of Fortune 1000 companies plan to offer extranets
by the year 2000.
Our products provide a broad-based solution applicable across a wide
variety of industries that enables organizations to effectively utilize their
business-critical data and content. Since Intra.doc! was introduced in fiscal
1997, it has been adopted by over 200 businesses and government organizations
for use on over 300 intranet, extranet and Internet sites. Customer applications
of Intra.doc! have ranged from single workgroups to enterprise-wide solutions.
Our customers include organizations such as British Aerospace Airbus, Ltd.,
Cargill Incorporated, Ericsson Telecom AB, GE Capital Corporation and
Hewlett-Packard Company.
IntraNet Solutions was incorporated in Minnesota in 1989. In September
1998, we completed the sale of all businesses unrelated to our Intra.doc! suite
of products. Our executive offices are located at 8091 Wallace Road,
Minneapolis, Minnesota 55344; our telephone number is 612-903-2000; and our Web
site is located at http://www.intranetsol.com. Information contained on our Web
site is not part of this prospectus.
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THE OFFERING
Common stock offered by IntraNet
Solutions............................... 3,230,000 shares
Common stock offered by the selling
shareholders............................ 450,000 shares
Common stock to be outstanding after the
offering................................ 14,209,578 shares(1)
Use of Proceeds......................... Working capital and other general
corporate purposes. See "Use of
Proceeds."
Nasdaq SmallCap Market and Nasdaq
National Market symbol.................. INRS
SUMMARY CONSOLIDATED FINANCIAL DATA
(IN THOUSANDS)
The amounts accompanying the line items "revenues," "cost of revenues" and
"gross profit" below relate solely to Intra.doc! product licenses and associated
services and exclude amounts attributable to our hardware integration and
support business, the sale of which was completed in September 1998.
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YEAR ENDED MARCH 31,
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1997 1998 1999
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CONSOLIDATED STATEMENTS OF OPERATIONS DATA:
Revenues(2)................................................. $ 914 $ 2,973 $ 8,429
Cost of revenues(2)......................................... 244 570 1,665
Gross profit(2)............................................. 670 2,403 6,764
Operating expenses.......................................... 5,114 6,743 8,587
Net loss(3)................................................. $(3,748) $(3,655) $ (854)
</TABLE>
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AS OF MARCH 31, 1999
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ACTUAL AS ADJUSTED(4)
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CONSOLIDATED BALANCE SHEET DATA:
Cash and equivalents........................................ $1,951 $25,632
Working capital............................................. 4,288 27,969
Total assets................................................ 7,300 30,981
Preferred stock(3).......................................... 334 --
Shareholders' equity........................................ 5,076 28,757
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- - -------------------------
(1) Based on the number of shares outstanding as of March 31, 1999, and includes
101,078 shares issuable upon the automatic conversion of outstanding shares
of Series A convertible preferred stock upon completion of this offering and
75,000 shares included in this offering that were issued upon the exercise
of outstanding stock options. This number does not include 1,848,015 shares
issuable upon the exercise of other options then outstanding, with a
weighted average exercise price of $4.28 per share; 1,286,114 shares
issuable upon the exercise of warrants, with a weighted average exercise
price of $4.26 per share; and 1,052,566 shares reserved for issuance in
connection with future stock options and other awards under the 1994-1997
Stock Option Plan and the 1997 Director Stock Option Plan. See
"Capitalization" and Note 9 of Notes to Consolidated Financial Statements.
(2) Excludes the following amounts related to our hardware integration and
support business, the sale of which was completed in September 1998:
revenues of $15,277 in 1997, $16,477 in 1998 and $5,630 in 1999; cost of
revenues of $11,895 in 1997, $12,883 in 1998 and $4,601 in 1999; and gross
profit of $3,382 in 1997, $3,594 in 1998 and $1,029 in 1999.
(3) The information set forth above excludes the effect of dividends
attributable to our Series A and Series B convertible preferred stock. Such
dividends, $1,665 in 1998 and $718 in 1999, reflect the aggregate of cash
dividends paid and the value associated with the discount conversion feature
provided with each series of preferred stock. Pursuant to the terms of the
issued and outstanding shares of Series A convertible preferred stock, each
share will be converted into shares of common stock upon the completion of
this offering. No shares of Series B convertible preferred stock are
outstanding.
(4) The as adjusted amounts reflect the sale by IntraNet Solutions of 3,230,000
shares of common stock in this offering, after deducting the underwriting
discount and estimated offering expenses and the issuance of 75,000 shares
of common stock included in this offering, which shares were issued to a
selling shareholder upon the exercise of stock options at an exercise price
of $0.20 per share. See "Use of Proceeds" and "Capitalization."
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RISK FACTORS
This offering involves a high degree of risk. You should carefully consider
the risks and uncertainties described below and the other information in this
prospectus before deciding whether to invest in shares of our common stock. If
any of the following risks actually occur, our business, operating results and
financial condition could be materially adversely affected. This could cause the
trading price of our common stock to decline, and you may lose part or all of
your investment.
This prospectus also contains certain forward-looking statements that
involve risks and uncertainties. These statements relate to our future plans,
objectives, expectations and intentions. These statements may be identified by
the use of words such as "believes," "expects," "may," "will," "could,"
"should," "seeks," "pro forma," "as adjusted" or "anticipates," and similar
expressions. Our actual results could differ materially from those discussed in
these statements. Factors that could contribute to these differences include
those discussed below and elsewhere in this prospectus.
WE HAVE A LIMITED OPERATING HISTORY ON WHICH TO EVALUATE OUR PROSPECTS.
We recorded our first sale of Intra.doc! to customers in fiscal 1997.
Accordingly, we have only a limited operating history in our current product
line on which you can base your evaluation of our business and prospects. In
addition, our prospects must be considered in light of the risks and
uncertainties encountered by companies in an early stage of development in new
and rapidly evolving markets. Many of these risks are discussed under the
subheadings below.
FLUCTUATIONS IN OUR OPERATING RESULTS MAY MAKE IT DIFFICULT TO PREDICT OUR
FUTURE PERFORMANCE.
Our revenues and operating results are difficult to predict and may
fluctuate significantly from quarter to quarter. If our quarterly revenues or
operating results fall below the expectations of investors or securities
analysts, the price of our common stock could fall substantially. A large part
of our sales typically occur in the last month of a quarter. If these sales were
delayed from one quarter to the next for any reason, our operating results could
fluctuate dramatically. In addition, certain of our products have long sales
cycles, making the timing of sales difficult to predict. Furthermore, our
infrastructure costs are generally fixed. As a result, modest fluctuations in
revenues between quarters may cause large fluctuations in operating results.
These factors all tend to make the timing of revenues unpredictable and may lead
to high period-to-period fluctuations in operating results.
Our quarterly revenues and operating results may fluctuate for several
additional reasons, many of which are outside of our control, including the
following:
- demand for our products and services;
- the timing of new product introductions and sales of our products and
services;
- unexpected delays in introducing new products and services;
- increased expenses, whether related to sales and marketing, research and
development or administration;
- changes in the rapidly evolving market for data and content management
solutions;
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- the mix of revenues from product licenses and services, as well as the
mix of products licensed;
- the mix of services provided and whether services are provided by our
staff or third-party contractors;
- the mix of domestic and international sales;
- costs related to possible acquisitions of technology or businesses;
- general economic conditions; and
- public announcements by our competitors.
WE MAY NOT BE PROFITABLE IN THE FUTURE.
Since fiscal 1995, we have not experienced consecutive profitable quarters
and have not been profitable on an annual basis. Our revenues may not grow in
future periods, may not grow at past rates and we may not sustain our recent
quarterly profitability. If we do not sustain our recent quarterly
profitability, the market price of our stock may fall. Our ability to sustain
our recent profitable operations depends upon many factors beyond our direct
control. These factors include, but are not limited to:
- the demand for our products;
- our ability to quickly introduce new products;
- the level of product and price competition;
- our ability to control costs; and
- general economic conditions.
THE INTENSE COMPETITION IN OUR INDUSTRY MAY REDUCE OUR FUTURE SALES AND PROFITS.
The market for our products is highly competitive and is likely to become
more competitive. We may not be able to compete successfully in our chosen
marketplace, which may have a material adverse effect on our business, operating
results and financial condition. Additional competition may cause pricing
pressure, reduced sales and margins, or prevent our products from gaining and
sustaining market acceptance. Many of our current and potential competitors have
greater name recognition, access to larger customer bases, and substantially
more resources than we have. Competitors with greater resources than ours may be
able to respond more quickly than we can to new opportunities, changing
technology, product standards or customer requirements.
WE MAY HAVE DIFFICULTY MANAGING OUR GROWTH.
Any failure to properly manage our growth may have a material adverse
effect on our business, operating results and financial condition. The rapid
growth that we have experienced places significant challenges on our management,
administrative and operational resources. To properly manage this growth, we
must, among other things, implement and improve additional and existing
administrative, financial and operational systems, procedures and controls on a
timely basis. We will also need to expand our finance, administrative and
operations staff. We may not be able to complete the improvements to our
systems,
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procedures and controls necessary to support our future operations in a timely
manner. Management may not be able to hire, train, integrate, retain, motivate
and manage required personnel and may not be able to successfully identify,
manage and exploit existing and potential market opportunities. In connection
with our expansion, we plan to increase our operating expenses to expand our
sales and marketing operations, develop new distribution channels, fund greater
levels of research and development, broaden services and support and improve
operational and financial systems. Our failure to generate additional revenue
commensurate with an increase in operating expenses during any fiscal period
could have a material adverse effect on our financial results for that period.
WE DEPEND ON THE INTEGRATION AND CONTINUED SERVICE OF OUR KEY PERSONNEL.
We are a small company and depend greatly on the knowledge and experience
of our senior management team, many of whom have only recently joined us, and
other key personnel. If we fail to quickly integrate our team or lose any of
these key personnel our business, operating results and financial condition
could be materially adversely affected. We must hire additional employees to
meet our business plan and alleviate the negative effect that the loss of a
senior manager could have on us. Our success will depend in part on our ability
to attract and retain additional personnel with the highly specialized expertise
necessary to engineer, design and support our products and services. Like other
software companies, we face intense competition for qualified personnel. We may
not be able to attract or retain such personnel.
OUR SUCCESS DEPENDS ON OUR ABILITY TO EXPAND OUR SALES FORCE AND DISTRIBUTION
CHANNELS.
To increase our market share and revenues, we must increase the size of our
sales force and the number of our distribution channel partners. Our failure to
do so may have a material adverse effect on our business, operating results and
financial condition. There is intense competition for sales personnel in our
business, and we cannot be sure that we will be successful in attracting,
integrating, motivating and retaining new sales personnel. Our existing or
future distribution channel partners, primarily resellers, may choose to devote
greater resources to marketing and supporting the products of other companies.
In addition, we will need to resolve potential conflicts among our sales force
and distribution channel partners.
WE HAVE RELIED AND EXPECT TO CONTINUE TO RELY ON SALES OF OUR INTRA.DOC! PRODUCT
LINE FOR OUR REVENUES.
We currently derive all of our revenues from product licenses and services
associated with our Intra.doc! software products. If we do not continue to
increase revenues related to our existing products or generate revenues from new
products and services, our business, operating results and financial condition
may be materially adversely affected. We will continue to depend on revenues
related to new and enhanced versions of our Intra.doc! product line for the
foreseeable future. Our success will largely depend on our ability to increase
sales from existing Intra.doc! products and generate sales from product
enhancements and new products. We cannot be certain that we will be successful
in upgrading and marketing our existing products or that we will be successful
in developing and marketing new products and services. The market for our
products is highly competitive and subject to rapid technological change.
Technological advances could make our Intra.doc! products less attractive to
customers and adversely affect our business. In addition, complex software
product development involves certain inherent risks, including risks that errors
may be found
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in a product enhancement or new product after its release, even after extensive
testing, and the risk that discovered errors may not be corrected in a timely
manner.
WE MAY REQUIRE ADDITIONAL FINANCING.
If we cannot raise funds as needed on acceptable terms, we may be unable to
develop or enhance our products, take advantage of future opportunities or
respond to competitive pressures or anticipated requirements, all of which may
have a material adverse effect on our business, operating results and financial
condition. We expect the net proceeds from this offering, together with our
current resources, to meet our capital requirements for at least the next 12
months. After that time, we may need to raise additional funds. We cannot be
certain that we will be able to do so on favorable terms, if at all. Further, if
we issue equity securities, our shareholders may experience additional dilution.
THE YEAR 2000 MAY ADVERSELY AFFECT OUR PRODUCTS AND INTERNAL SYSTEMS.
We are subject to potential Year 2000 problems affecting our products, our
internal systems and the systems of our suppliers, any of which may have a
material adverse effect on our business, operating results and financial
condition.
Our products may be adversely affected by the Year 2000 as a result of
undetected errors or defects. Known or unknown errors or defects in our products
related to the Year 2000 could result in delay or loss of revenue, diversion of
development resources, damage to our reputation, or increased service and
warranty costs, any of which may materially adversely affect our business,
operating results, or financial condition.
If our suppliers, vendors, major distributors or partners fail to correct
their Year 2000 problems, such failure could result in an interruption in, or
failure of, our normal business activities or operations. In addition, our
internal systems include both information technology, or IT, and non-IT systems.
We may experience material unanticipated problems and costs caused by undetected
errors or defects in the technology used in our internal IT and non-IT systems.
We have not yet completed the development of a contingency plan to address
situations that may result if we are unable to achieve Year 2000 compliance of
our critical operations. The cost of developing and implementing such a plan may
itself be material.
THE YEAR 2000 MAY ADVERSELY AFFECT PURCHASES OF OUR PRODUCTS.
Our current or future customers may incur significant expense to achieve
Year 2000 compliance. If our customers are not Year 2000 compliant they may
expend material costs to remedy problems or they may face litigation expense. In
either case, Year 2000 issues could reduce or eliminate customers' budgets for
purchases of our products. Even those customers who currently believe they are
Year 2000 compliant may defer purchases of our products until after January 1,
2000 in order to reassess their own compliance or to assess the compliance of
our products. Delays in purchases of our products as a result of the Year 2000
could have a material adverse effect on our business, operating results and
financial condition.
OUR SUCCESS DEPENDS ON OUR ABILITY TO PROTECT OUR PROPRIETY TECHNOLOGY.
If we are unable to protect our intellectual property, or incur significant
expense in doing so, our business, operating results and financial condition may
be materially adversely
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affected. Any steps we take to protect our intellectual property may be
inadequate, time consuming and expensive. We currently have no patents or
pending patent applications. Without significant patent or copyright protection,
we may be vulnerable to competitors who develop functionally equivalent
products. We may also be subject to claims that our current products infringe on
the intellectual property rights of others. Any such claim may have a material
adverse effect on our business, operating results and financial condition.
We anticipate that software product developers will be increasingly subject
to infringement claims due to growth in the number of products and competitors
in our industry, and the overlap in functionality of products in different
industries. Any infringement claim, regardless of its merit, could be
time-consuming, expensive to defend, or require us to enter into royalty or
licensing agreements. Such royalty or licensing agreements may not be available
on commercially favorable terms, or at all. We are not currently involved in any
intellectual property litigation.
We rely on trade secret protection, confidentiality procedures and
contractual provisions to protect our proprietary information. Despite our
attempts to protect our confidential and proprietary information, others may
gain access to this information. Alternatively, other companies may
independently develop substantially equivalent information. IntraNet Solutions
has been issued trademarks for the Intra.doc! mark and the IntraNet Solutions
mark and has applied for trademark registration for the following marks:
Document Refinery, Web Refinery and Web Vault.
We are not certain whether any trademarks that have been applied for will
be issued. In the absence of trademark protection, we may be unable to take
advantage of the brand name recognition we are attempting to build. In addition,
even if all trademarks applied for are issued, we cannot be sure that such
trademarks will prove valuable to us.
WE COULD BE SUBJECT TO PRODUCT LIABILITY CLAIMS IF OUR CUSTOMERS' DATA IS
DAMAGED THROUGH THE USE OF OUR PRODUCTS.
If software errors or design defects in our products cause damage to
customers' data and our agreements do not protect us from related product
liability claims, our business, operating results and financial condition may be
materially adversely affected. Our software products are complex and
sophisticated and may contain design defects or software errors that are
difficult to detect and correct. Errors, bugs or viruses may result in the loss
of market acceptance or the loss of customer data. Our agreements with customers
that attempt to limit our exposure to product liability claims may not be
enforceable in certain jurisdictions where we operate.
SIGNIFICANT FLUCTUATION IN THE MARKET PRICE OF OUR COMMON STOCK COULD RESULT IN
SECURITIES LITIGATION AGAINST US.
In the past, securities class action litigation has been brought against
publicly held companies following periods of volatility in the price of their
securities. If we were subject to such litigation due to volatility in our stock
price, we may incur substantial costs. Such litigation could divert the
attention of our senior management away from our business, which could have a
material adverse effect on our business, operating results and financial
condition.
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The market price of our common stock has fluctuated significantly in the
past and may do so in the future. The market price of our common stock may be
affected by each of the following factors, many of which are outside of our
control:
- variations in quarterly operating results;
- changes in estimates by securities analysts;
- changes in market valuations of companies in our industry;
- announcements by us of significant events, such as major sales,
acquisitions of businesses or losses of major customers;
- additions or departures of key personnel; and
- sales of our equity securities.
OUR PERFORMANCE WILL DEPEND ON THE GROWTH AND ACCEPTANCE OF THE INTERNET.
Our products are designed to be used with the Internet and private
intranets and extranets. If the use of these methods of electronic communication
does not grow, our business, operating results and financial condition may be
materially adversely affected. Continued growth in the use of the Internet will
require ongoing and widespread interest in its capabilities for communication
and commerce. Its growth will also require maintenance and expansion of the
infrastructure supporting its use and the development of performance
improvements, such as high speed modems. The Internet infrastructure may not be
able to support the demands placed on it by continued growth. The ongoing
development of corporate intranets depends on continuation of the trend toward
network-based computing and on the willingness of businesses to reengineer the
processes used to create, store, manage and distribute their data. All of these
factors are outside of our control.
OUR EXISTING SHAREHOLDERS WILL EXERCISE SIGNIFICANT CONTROL OVER INTRANET
SOLUTIONS.
Robert F. Olson, our President and Chief Executive Officer, will hold
approximately 24% of our outstanding common stock after the offering and the
sale of all 375,000 shares being offered by Mr. Olson. Accordingly, Mr. Olson
will be able to exercise significant control over the affairs of IntraNet
Solutions. Additionally, our directors and executive officers will beneficially
own approximately 27% of our common stock upon the completion of this offering.
These persons will effectively control IntraNet Solutions and be able to direct
its affairs, including approval of the acquisition or disposition of assets,
future issuances of common stock or other securities and the authorization of
dividends on our common stock. Our directors and executive officers could use
their stock ownership to delay, defer or prevent a change in control of IntraNet
Solutions, depriving shareholders of the opportunity to sell their stock at a
price in excess of the prevailing market price.
SUBSTANTIAL SALES OF OUR COMMON STOCK COULD ADVERSELY AFFECT OUR STOCK PRICE.
The sale, or availability for sale, of substantial quantities of our common
stock may have the effect of depressing its market price by potentially
introducing a large number of sellers into an already volatile market. In
addition, the sale of these shares could impair our ability to raise capital
through the sale of additional equity securities. Following the completion of
this offering approximately 14,210,000 shares of our common stock will be
outstanding, approximately 10,000,000 of which will be freely tradable. Another
4,200,000 shares will be
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eligible for sale to the public under Rule 144 of the Securities Act of 1933. We
have outstanding warrants to purchase up to an aggregate of 1,286,114 shares of
common stock, of which approximately 1,200,000 shares may be resold pursuant to
currently effective registration statements. After the exercise of stock options
for 75,000 shares, which shares are included in this offering, there will be
1,848,015 shares subject to outstanding options and 1,052,566 additional shares
available for new grants under our employee stock option plan.
Our directors and officers have executed lock-up agreements that limit
their ability to sell our common stock. These individuals have agreed not to
sell or otherwise dispose of an aggregate of approximately 4,100,000 shares of
our common stock for a period of at least 180 days after the date of this
prospectus without the written approval of the underwriters. When the lock-up
agreements expire, these shares will become eligible for sale, subject to the
volume, manner of sale and notice requirements of Rule 144.
MANAGEMENT HAS BROAD DISCRETION OVER THE USE OF PROCEEDS FROM THIS OFFERING.
We have not designated any of the net proceeds anticipated from this
offering for specific uses. Consequently, management will have considerable
discretion in the use of all remaining net proceeds from the offering. You will
not have the ability to evaluate the economic, financial or other information on
which we base our decisions on how to use the proceeds.
INVESTORS WILL EXPERIENCE IMMEDIATE AND SUBSTANTIAL DILUTION IN THE BOOK VALUE
OF THEIR INVESTMENT.
The price of shares included in this offering is expected to be
substantially higher than the book value per share of the shares of common stock
outstanding after completion of the offering. If you purchase common stock in
this offering, you will experience immediate dilution of approximately $5.98 per
share, measured by the excess of the public offering price of $8.00 per share
over the pro forma book value following the offering.
WE CAN ISSUE SHARES OF PREFERRED STOCK WITHOUT SHAREHOLDER APPROVAL, WHICH COULD
ADVERSELY AFFECT THE RIGHTS OF COMMON SHAREHOLDERS.
Our Articles of Incorporation permit us to establish the rights,
privileges, preferences and restrictions, including voting rights, of unissued
shares of our capital stock and to issue such shares without approval from our
shareholders. The rights of holders of our common stock may suffer as a result
of the rights granted to holders of preferred stock that may be issued in the
future. In addition, we could issue preferred stock to prevent a change in
control of IntraNet Solutions, depriving shareholders of an opportunity to sell
their stock at a price in excess of the prevailing market price.
CERTAIN PROVISIONS OF MINNESOTA LAW MAY MAKE A TAKEOVER OF INTRANET SOLUTIONS
DIFFICULT, DEPRIVING SHAREHOLDERS OF OPPORTUNITIES TO SELL SHARES AT
ABOVE-MARKET PRICES.
Certain provisions of Minnesota law may have the effect of discouraging
attempts to acquire IntraNet Solutions without the approval of our Board of
Directors. Consequently, our shareholders may lose opportunities to sell their
stock for a price in excess of the prevailing market price.
12
<PAGE> 13
FORWARD-LOOKING STATEMENTS
The information contained in this prospectus contains forward-looking
statements that involve a number of risks and uncertainties. Forward-looking
statements can be identified by the use of forward-looking terminology such as
"believes," "expects," "may," "will," "could," "should," "seeks," "pro forma,"
"as adjusted" or "anticipates," or other variations thereof, including their use
in the negative, or by discussions of strategies, plans or intentions. Such
statements include but are not limited to statements under the caption
"Summary," "Risk Factors," "Use of Proceeds," "Management's Discussion and
Analysis of Financial Condition and Results of Operations," "Business" and
elsewhere in this prospectus. A number of factors could cause our results to
differ materially from those anticipated by such forward-looking statements,
including those discussed under "Risk Factors."
In addition, such forward-looking statements necessarily depend on
assumptions and estimates that may prove to be incorrect. Although we believe
the assumptions and estimates reflected in such forward-looking statements are
reasonable, we cannot guarantee that our plans, intentions or expectations will
be achieved. The information contained in this prospectus, including the section
discussing risk factors, identifies important factors that could cause such
differences.
The cautionary statements made in this prospectus are intended to be
applicable to all related forward-looking statements wherever they appear in
this prospectus. We assume no obligation to update such forward-looking
statements or to update the reasons that actual results could differ materially
from those anticipated in such forward-looking statements.
13
<PAGE> 14
USE OF PROCEEDS
Based on the public offering price of $8.00 per share, we estimate that the
net proceeds to IntraNet Solutions from the sale of the 3,230,000 shares of
common stock offered by us in this offering will be approximately $23.7 million
after deducting underwriting discounts and commissions and estimated offering
expenses, all of which are payable by IntraNet Solutions. If the underwriters'
over-allotment option is exercised in full, we estimate that our net proceeds
from this offering will be $27.3 million. We anticipate that the net proceeds
will be used for working capital and general corporate purposes. We may also use
a portion of the net proceeds to acquire or invest in businesses, technologies,
product lines or service offerings that are complementary to our business. We
have no present plans, understandings or commitments in this regard. As a
result, we will have significant discretion as to the use of the net proceeds.
Pending such use, we intend to invest the net proceeds in short-term, interest-
bearing, investment-grade securities.
We will not receive any proceeds from the sale of common stock by the
selling shareholders.
DIVIDEND POLICY
We have not paid cash dividends on our common stock for several years. In
addition, the agreement relating to our revolving line of credit prohibits the
payment of dividends on our capital stock. We anticipate that all of our
earnings, if any, will be retained for development of our business and we do not
anticipate paying any cash dividends in the foreseeable future.
PRICE RANGE OF COMMON STOCK
Our common stock is traded on the Nasdaq SmallCap Market under the symbol
INRS. The following table presents for the periods indicated, the range of high
and low closing sale prices for our common stock as reported on the Nasdaq
SmallCap Market.
<TABLE>
<CAPTION>
HIGH LOW
----- -----
<S> <C> <C>
FISCAL YEAR ENDED MARCH 31, 1998:
First Quarter............................................... $5.00 $3.38
Second Quarter.............................................. 8.38 4.38
Third Quarter............................................... 8.25 3.63
Fourth Quarter.............................................. 7.13 5.13
FISCAL YEAR ENDED MARCH 31, 1999:
First Quarter............................................... 7.13 4.56
Second Quarter.............................................. 5.50 2.75
Third Quarter............................................... 6.06 3.00
Fourth Quarter.............................................. 8.25 4.81
FISCAL YEAR ENDING MARCH 31, 2000:
First Quarter (through June 3, 1999)........................ 13.06 7.78
</TABLE>
On June 3, 1999, the last reported sale price of our common stock was $9.00
per share. We had 121 shareholders of record and an estimated 1,500 beneficial
owners of our common stock as of March 31, 1999.
14
<PAGE> 15
CAPITALIZATION
The following table presents the capitalization of IntraNet Solutions as of
March 31, 1999 and as adjusted to reflect the conversion of all outstanding
shares of Series A convertible preferred stock into shares of common stock upon
the closing of the offering, the issuance of 75,000 shares included in this
offering, which shares were issued to a selling shareholder upon the exercise of
stock options at an exercise price of $0.20 per share, and the sale of 3,230,000
shares of common stock offered by IntraNet Solutions in this offering and the
application of the estimated net proceeds from the sale of those shares. The
information presented below should be read in conjunction with the Consolidated
Financial Statements and related Notes and "Management's Discussion and Analysis
of Financial Condition and Results of Operations" contained elsewhere in this
prospectus.
<TABLE>
<CAPTION>
AS OF MARCH 31, 1999
-----------------------
ACTUAL AS ADJUSTED
-------- -----------
(IN THOUSANDS)
<S> <C> <C>
Long-term obligations, net of current maturities......... $ 84 $ 84
Shareholders' equity:
Capital stock, $0.01 par value, 25,000,000 shares
authorized; 3,959,455 undesignated
Series A convertible preferred stock, $0.01 par
value, $5.00 stated value, 1,000,000 shares
designated; 75,000 shares issued and
outstanding....................................... 334 --
Series B convertible preferred stock, $0.01 par
value, $10,000 stated value, 350 shares
designated; no shares issued and outstanding...... -- --
Common stock, $0.01 par value, 20,040,195 shares
designated, 10,803,500 shares issued and
outstanding (14,209,578 shares as adjusted(1)).... 108 142
Additional paid-in capital............................. 15,296 39,277
Accumulated deficit.................................... (10,637) (10,637)
Unearned compensation.................................. (25) (25)
-------- --------
Total shareholders' equity.......................... 5,076 28,757
-------- --------
Total capitalization.............................. $ 5,160 $ 28,841
======== ========
</TABLE>
- - -------------------------
(1) Excludes options outstanding on March 31, 1999 to purchase 1,848,015 shares
of our common stock at a weighted average exercise price of $4.28 per share,
warrants outstanding on March 31, 1999 to purchase 1,286,114 shares of our
common stock at a weighted average exercise price of $4.26, and an
additional 1,052,566 shares of common stock reserved for issuance in
connection with future stock options and other awards under the 1994-1997
Stock Option Plan and the 1997 Director Stock Option Plan. Includes an
assumed 101,078 shares issuable upon conversion of the 75,000 shares of
Series A convertible preferred stock outstanding at March 31, 1999, which
will be automatically converted into shares of common stock upon completion
of this offering. Shares of Series A convertible preferred stock are
convertible into shares of common stock at the rate of 75% of market value,
subject to minimum and maximum conversion prices of $1.00 and $3.71 per
share, respectively. The amount set forth above assumes the application of
the maximum conversion price of $3.71 per share. See Note 9 of Notes to
Consolidated Financial Statements included in this prospectus.
15
<PAGE> 16
DILUTION
The pro forma net tangible book value of our common stock as of March 31,
1999 was $5.1 million, or $0.46 per share. Pro forma net tangible book value per
share represents the amount of our total tangible assets less total liabilities,
divided by the number of shares of common stock outstanding after giving effect
to the conversion of all shares of Series A convertible preferred stock into
common stock and the issuance to a selling shareholder of 75,000 shares included
in this offering upon the exercise of stock options at an exercise price of
$0.20 per share. After giving effect to our issuance and sale of 3,230,000
shares of common stock in this offering and after deducting estimated
underwriting discounts and commissions and offering expenses, our pro forma net
tangible book value as of March 31, 1999 would have been $28.8 million, or $2.02
per share. This represents an immediate increase in pro forma net tangible book
value of $1.56 per share to existing shareholders and an immediate dilution of
$5.98 per share to new investors purchasing shares of common stock in the
offering. The following table illustrates this dilution:
<TABLE>
<S> <C> <C>
Public offering price per share............................. $8.00
Pro forma net tangible book value per share as of March
31, 1999............................................... $0.46
Increase per share attributable to new investors.......... 1.56
-----
Pro forma net tangible book value per share after this
offering.................................................. 2.02
-----
Dilution per share to new investors......................... $5.98
=====
</TABLE>
The table above assumes no exercise of any stock options or warrants
outstanding as of March 31, 1999. As of March 31, 1999, there were options
outstanding to purchase 1,848,015 shares of our common stock at a weighted
average exercise price of $4.28 per share (excluding options held by a selling
shareholder to purchase 75,000 shares, the exercise of which is given pro forma
effect in the amounts appearing above) and warrants outstanding to purchase
1,286,114 of our common stock at a weighted average exercise price of $4.26. To
the extent that any of these options or warrants are exercised, there will be
further dilution to new investors. See "Capitalization."
16
<PAGE> 17
SELECTED CONSOLIDATED FINANCIAL DATA
The Selected Consolidated Financial Data presented below as of and for each
of the fiscal years in the five-year period ended March 31, 1999 have been
derived from our Consolidated Financial Statements. The Selected Consolidated
Financial Data should be read in conjunction with "Management's Discussion and
Analysis of Financial Condition and Results of Operations" and the Consolidated
Financial Statements and the related Notes included in this prospectus.
<TABLE>
<CAPTION>
YEAR ENDED MARCH 31,
---------------------------------------------------------
1995 1996 1997 1998 1999
--------- --------- --------- --------- ---------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
CONSOLIDATED STATEMENTS OF OPERATIONS DATA:
Revenues:
Product licenses................... $ -- $ -- $ 886 $ 2,563 $ 6,827
Services........................... -- -- 28 410 1,602
Hardware integration and support... 9,754 12,721 15,277 16,477 5,629
--------- --------- --------- --------- ---------
Total revenues....................... 9,754 12,721 16,191 19,450 14,058
Cost of revenues:
Product licenses................... -- -- 230 285 662
Services........................... -- -- 14 285 1,003
Hardware integration and support... 7,230 9,595 11,894 12,883 4,601
--------- --------- --------- --------- ---------
Total cost of revenues............... 7,230 9,595 12,138 13,453 6,266
--------- --------- --------- --------- ---------
Gross profit......................... 2,524 3,126 4,053 5,997 7,792
--------- --------- --------- --------- ---------
Operating expenses:
Sales and marketing................ 1,182 1,497 2,014 3,131 4,316
General and administrative......... 827 1,092 1,984 2,369 2,929
Research and development........... 338 480 1,116 1,243 1,342
--------- --------- --------- --------- ---------
Total operating expenses............. 2,347 3,069 5,114 6,743 8,587
--------- --------- --------- --------- ---------
Income (loss) from operations........ 177 57 (1,061) (746) (795)
Other income (expense):
Gain on sale of hardware
integration unit................ -- -- -- -- 517
Interest expense, net.............. (57) (126) (128) (332) (55)
Income tax benefit (expense)....... (64) 21 -- -- --
--------- --------- --------- --------- ---------
Income (loss) from continuing
operations......................... 56 (48) (1,189) (1,078) (333)
Discontinued operations:
Loss on sale of distribution
group........................... -- -- -- -- (111)
Income (loss) from operations of
distribution group.............. 16 (200) (2,559) (2,577) (410)
--------- --------- --------- --------- ---------
Net income (loss).................... 72 (248) (3,748) (3,655) (854)
Preferred stock dividends and
accretion.......................... -- -- -- (1,665) (718)
--------- --------- --------- --------- ---------
Income (loss) attributable to common
shareholders....................... $ 72 $ (248) $(3,748) $(5,320) $(1,572)
========= ========= ========= ========= =========
</TABLE>
17
<PAGE> 18
<TABLE>
<CAPTION>
YEAR ENDED MARCH 31,
---------------------------------------------
1995 1996 1997 1998 1999
----- ------ ------ ------ ------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C>
Earnings per share -- basic and diluted:
Income (loss) from continuing
operations............................. $0.01 $(0.01) $(0.19) $(0.14) $(0.03)
===== ====== ====== ====== ======
Net income (loss)......................... $0.01 $(0.04) $(0.58) $(0.47) $(0.09)
===== ====== ====== ====== ======
Income (loss) attributable to common
shareholders........................... $0.01 $(0.04) $(0.58) $(0.68) $(0.17)
===== ====== ====== ====== ======
Weighted average shares -- basic and
diluted................................... 8,637 5,762 6,418 7,844 9,509
</TABLE>
<TABLE>
<CAPTION>
AS OF MARCH 31,
---------------------------------------------------------
1995 1996 1997 1998 1999
--------- --------- --------- --------- ---------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
CONSOLIDATED BALANCE SHEET DATA:
Cash and equivalents............... $ 3 $ 2 $ 122 $ 995 $1,951
Working capital (deficit).......... (130) (1,135) (1,960) 165 4,288
Total assets....................... 3,058 4,538 7,103 8,456 7,300
Long-term obligations, net of
current maturities.............. 377 195 828 198 84
Total shareholders' equity
(deficit)....................... 408 (21) (73) 1,668 5,076
</TABLE>
18
<PAGE> 19
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion and analysis should be read in conjunction with
"Selected Consolidated Financial Data" and our Consolidated Financial Statements
and related Notes included elsewhere in this prospectus. The discussion in this
prospectus contains forward-looking statements that involve risks and
uncertainties, such as statements of our plans, objectives, expectations and
intentions. The cautionary statements made in this prospectus should be read as
being applicable to all related forward-looking statements wherever they appear
in this prospectus. Our actual results could differ materially from those
discussed here. Factors that could cause or contribute to such differences
include those discussed in "Risk Factors," as well as those discussed elsewhere
in this prospectus.
OVERVIEW
IntraNet Solutions is a leading provider of Web-based data and content
management solutions for intranets, extranets and the Internet. The company
responsible for developing our current business was founded in 1990. In July
1996, it merged with and into a publicly traded corporation, which was organized
under Minnesota law in November 1989. The name of the entity surviving this
merger was changed to IntraNet Solutions, Inc. Following the merger, our
business included intranet data and content management software, on-demand
publishing and hardware integration services.
Our experience in assisting organizations in managing their documents and
other unstructured data led us to identify the need for a comprehensive solution
for accessing, managing and publishing data and content in a Web environment. In
fiscal 1997, we launched our first Web-based software product currently known as
Intra.doc!. We incorporated a Java server architecture with Intra.doc! Version
3.0 in January 1998 and began shipping Intra.doc! Version 3.5, which provided an
enhanced enterprise-scaleable solution, in September 1998. In order to focus our
resources exclusively on developing and marketing Web-based data and content
management solutions, we have disposed of our other businesses. In mid-1998, we
completed the final sale of substantially all of our on-demand publishing
assets, and we sold our hardware integration operations in late 1998. Since
October 1998, we have focused exclusively on developing and marketing Web-based
solutions for accessing, managing and publishing data and content. Accordingly,
certain reclassifications have been made to the categories of revenues and cost
of revenues presented in our 1997 and 1998 financial statements to conform with
the presentation used in the 1999 financial statements. These reclassifications
had no effect on losses from continuing operations or net losses as previously
reported.
We currently derive all of our revenues from licenses of our Intra.doc!
suite of products and related services. Revenues are recognized on product
licenses when a purchase order has been received, the product has been shipped
and no significant obligations remain related to implementation. Services
revenues consist of fees from consulting and maintenance. Consulting services
include needs assessment, software integration, security analysis, application
development and training. We bill consulting fees either on a time and materials
basis or on a fixed price schedule. Our clients typically purchase annual
maintenance agreements, and we price maintenance agreements based on a
percentage of the product license fee. Clients purchasing maintenance agreements
receive product upgrades, Web-based technical support and telephone hot-line
support. We recognize revenues from maintenance agreements ratably over the term
of the agreement, typically one year.
19
<PAGE> 20
Cost of revenues consists of technology royalties, costs to manufacture,
package and distribute our products and related documentation, as well as
personnel and other expenses related to providing services. Sales and marketing
expenses consist primarily of employee salaries, commissions, and costs
associated with marketing programs such as advertising, public relations and
trade shows. Research and development expenses consist primarily of salaries and
related costs associated with the development of new products, the enhancement
of existing products and the performance of quality assurance and documentation
activities. General and administrative expenses consist primarily of salaries
and other personnel-related costs for executive, financial, human resources,
information services and other administrative personnel, as well as legal,
accounting and insurance costs. Losses from discontinued operations consist
primarily of losses on the operations of our former on-demand publishing
distribution group and losses on the write-down and sale of its assets.
Since our inception, we have incurred substantial costs to develop our
technology and products, to recruit and train personnel for our sales and
marketing, research and development and services departments, and to establish
an administrative organization. As a result, we had an accumulated deficit of
$10.6 million at March 31, 1999. We anticipate that our operating expenses will
increase substantially in future quarters as we increase sales and marketing
operations, develop new distribution channels, fund greater levels of research
and development, broaden services and improve operational and financial systems.
In addition, our limited operating history makes it difficult for us to predict
future operating results. We cannot be certain that we will achieve or sustain
revenue growth or profitability.
Software development costs have been accounted for in accordance with
Statement of Financial Accounting Standards, SFAS, No. 86, Accounting for the
Costs of Computer Software to be Sold, Leased, or Otherwise Marketed. Under that
accounting standard, software development costs may be capitalized once the
technological feasibility of the project is established. The amount of software
development costs that may be capitalized is subject to limitations based on the
net realizable value of the potential product. To date, the period between
achieving technological feasibility of our products and the general availability
of the products has been short. As a result, software development costs
qualifying for capitalization have been immaterial. Accordingly, we have not
capitalized any software development costs and have instead charged all such
costs to research and development expenses.
We had 67 full-time employees at March 31, 1999, down from 107 at March 31,
1998 and 121 at March 31, 1997. This decrease is primarily due to the sale of
the hardware integration and on-demand publishing businesses and the resulting
transfer of related employees. If we achieve our business plan, we will incur
substantial growth, which will place a significant demand on our management,
administrative and operational resources. In order to manage growth effectively,
we must implement and improve our operational systems, procedures and controls
on a timely basis. We expect that future expansion will continue to challenge
our ability to hire, train, motivate and manage our employees. Competition is
intense for highly qualified sales and marketing, research and development,
services and management personnel. If our total revenue does not increase
relative to our operating expenses, our management systems do not expand to meet
increasing demands, we fail to attract, assimilate and retain qualified
personnel, or we otherwise fail to manage our expansion effectively, our
business, operating results and financial condition may be materially adversely
affected.
20
<PAGE> 21
RESULTS OF OPERATIONS -- FISCAL YEAR ENDED MARCH 31, 1999 COMPARED TO FISCAL
YEAR ENDED MARCH 31, 1998
REVENUES
Total revenues decreased by $5.4 million, or 28%, to $14.1 million for the
year ended March 31, 1999 from $19.5 million for the year ended March 31, 1998.
This decrease related primarily to the sale of our hardware integration
business, partially offset by increased revenues for product licenses of
Intra.doc! software.
Product Licenses. Revenues for product licenses, which related entirely to
Intra.doc! software, increased by $4.2 million, or 162%, to $6.8 million for the
year ended March 31, 1999 from $2.6 million for the year ended March 31, 1998.
The growth in revenues for product licenses was attributable to the expansion of
our customer base and increased sales to existing customers.
Services. Revenues for services, which related entirely to services
associated with Intra.doc! software, increased by $1.2 million, or 293%, to $1.6
million for the year ended March 31, 1999 from $409,000 for the year ended March
31, 1998. The increase in revenues for services was primarily attributable to a
larger installed base of products.
Hardware Integration and Support. Revenues for hardware integration and
support decreased by $10.9 million, or 66%, to $5.6 million for the year ended
March 31, 1999 from $16.5 million for the year ended March 31, 1998. The
decrease in revenues for hardware integration was due to the sale of the
hardware integration business during the quarter ended September 30, 1998.
COST OF REVENUES AND GROSS PROFIT
Total cost of revenues decreased by $7.2 million, or 53%, to $6.3 million
for the year ended March 31, 1999 from $13.5 million for the year ended March
31, 1998. Total cost of revenues as a percentage of total revenues was 45% in
1999 compared to 69% in 1998. Gross profit increased by $1.8 million, or 30%, to
$7.8 million for the year ended March 31, 1999 from $6.0 million for the year
ended March 31, 1998. Total gross profit as a percentage of total revenues was
55% in 1999 compared to 31% in 1998. The increase in gross profit was primarily
attributable to a shift in product mix from hardware integration and support to
product licenses and services related to Intra.doc! software.
Product Licenses. Cost of revenues for product licenses, which related
entirely to Intra.doc! software, increased by $378,000, or 133%, to $663,000 for
the year ended March 31, 1999 from $285,000 for the year ended March 31, 1998.
Gross profit as a percentage of revenues for product licenses was 90% for the
year ended March 31, 1999 compared to 89% for the year ended March 31, 1998.
Services. Cost of revenues for services, which related entirely to services
associated with Intra.doc! software, increased by $718,000, or 252%, to $1.0
million for the year ended March 31, 1999 from $285,000 for the year ended March
31, 1998. Gross profit as a percentage of revenues for services was 37% for the
year ended March 31, 1999 compared to 30% for the year ended March 31, 1998. The
increase in gross profit as a percentage of revenues for services was primarily
due to higher-margin maintenance contracts representing a greater portion of
revenues for services in 1999 than in 1998.
21
<PAGE> 22
Hardware Integration and Support. Cost of revenues for hardware integration
and support decreased by $8.3 million, or 64%, to $4.6 million for the year
ended March 31, 1999 from $12.9 million for the year ended March 31, 1998. The
decrease in cost of revenues for hardware integration and support was due to the
sale of the hardware integration and support business during the quarter ended
September 30, 1998. Gross profit as a percentage of hardware integration
revenues was 18% for the year ended March 31, 1999 compared to 22% for the year
ended March 31, 1998. The reduction in gross profit as a percentage of hardware
integration and support revenues was primarily attributable to larger hardware
integration projects with lower margins as well as to increased competition.
OPERATING EXPENSES
Sales and Marketing. Sales and marketing expenses increased by $1.2
million, or 39%, to $4.3 million for the year ended March 31, 1999 from $3.1
million for the year ended March 31, 1998. Sales and marketing expenses as a
percentage of total revenues were 31% in 1999 compared to 16% in 1998. Sales and
marketing expenses increased as a percentage of total revenues primarily due to
decreased revenues for hardware integration and support, combined with increased
staffing and marketing expenses for advertising, public relations and trade
shows supporting our Intra.doc! suite of products. The increase was partially
offset by decreased sales and marketing expenses related to hardware integration
and support programs.
General and Administrative. General and administrative expenses increased
by $560,000, or 23%, to $2.9 million for the year ended March 31, 1999 from $2.4
million for the year ended March 31, 1998. General and administrative expenses
as a percentage of total revenues were 21% in 1999 compared to 12% in 1998.
General and administrative expenses increased primarily due to increased
personnel expenses, including hiring expenses, and increased expenses for
professional services.
Research and Development. Research and development expense increased by
$99,000, or 8%, to $1.3 million for the year ended March 31, 1999 from $1.2
million for the year ended March 31, 1998. Research and development expenses as
a percentage of total revenue were 10% in 1999 compared to 6% in 1998. The
increase in research and development expenses was primarily due to increases in
staffing and related costs required to support our continued emphasis on product
enhancements, partially offset by decreased expenses related to our hardware
integration operations.
OTHER INCOME (EXPENSE)
Other income was $462,000 for the year ended March 31, 1999 compared to
other expense of $332,000 for the year ended March 31, 1998. Other income in
1999 included a gain of $517,000 on the sale of the assets of our hardware
integration business unit, partially offset by net interest expense. Other
expense in 1998 consisted of interest expense on our revolving line of credit.
DISCONTINUED OPERATIONS
Total losses on discontinued operations decreased by $2.2 million, or 85%,
to $410,000 for the year ended March 31, 1999 from $2.6 million for the year
ended March 31, 1998. The decrease in total losses on discontinued operations
was primarily because 1999 included only a partial year of losses on
discontinued operations while 1998 included a full year. The loss in 1998 also
includes an adjustment of $750,000 to fully amortize goodwill associated with
the
22
<PAGE> 23
acquisition of a discontinued facility and a write-down of certain other assets
to their estimated net realizable value.
RESULTS OF OPERATIONS -- FISCAL YEAR ENDED MARCH 31, 1998 COMPARED TO FISCAL
YEAR ENDED MARCH 31, 1997
REVENUES
Total revenues increased by $3.3 million, or 20%, to $19.5 million for the
year ended March 31, 1998 from $16.2 million for the year ended March 31, 1997.
Revenues increased in all product lines.
Product Licenses. Revenues for product licenses, which related entirely to
Intra.doc! software, increased by $1.7 million, or 192%, to $2.6 million for the
year ended March 31, 1998 from $886,000 for the year ended March 31, 1997. The
growth in revenues for product licenses was attributable to the expansion of our
customer base and increased sales to existing customers.
Services. Revenues for services, which related entirely to services
associated with Intra.doc! software, were $409,000 for the year ended March 31,
1998 compared to $28,000 for the year ended March 31, 1997. The increase in
services revenues was attributable primarily to a greater base of installed
products in 1998.
Hardware Integration and Support. Revenues for hardware integration and
support increased by $1.2 million, or 8%, to $16.5 million for the year ended
March 31, 1998 from $15.3 million for the year ended March 31, 1997. The
increase in hardware integration revenues was primarily due to the expansion of
our customer base and increased sales to existing customers.
COST OF REVENUES AND GROSS PROFIT
Total cost of revenues increased by $1.4 million, or 12%, to $13.5 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 percentage of total revenues was 69% in
1998 compared to 75% in 1997. Gross profit increased by $1.9 million, or 46%, to
$6.0 million for the year ended March 31, 1998 from $4.1 million for the year
ended March 31, 1997. Total gross profit as a percentage of total revenues was
31% in 1998 compared to 25% in 1997. The increase in gross profit was primarily
attributable to increased revenues in all product lines.
Product Licenses. Cost of revenues for product licenses, which related
entirely to Intra.doc! software, increased by $55,000, or 24%, to $285,000 for
the year ended March 31, 1998 from $230,000 for the year ended March 31, 1997.
Gross profit as a percentage of product license revenues was 89% for the year
ended March 31, 1998, compared to 74% for the year ended March 31, 1997. The
increase in gross profit as a percentage of revenues was primarily attributable
to reduced royalty rates on licensed technology incorporated in our Intra.doc!
software.
Services. Cost of revenues for services, which related entirely to services
associated with Intra.doc! software, was $285,000 for the year ended March 31,
1998 compared to $14,000 for the year ended March 31, 1997. Gross profit as a
percentage of revenues for services was 30% for the year ended March 31, 1998.
The increase in cost of revenues for services was primarily due to a greater
base of installed products in 1998.
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Hardware Integration and Support. Cost of revenues for hardware integration
and support increased by $1.0 million, or 8%, to $12.9 million for the year
ended March 31, 1998 from $11.9 million for the year ended March 31, 1997. Gross
profit as a percentage of hardware integration and support revenues was 22% for
the year ended March 31, 1998 compared to 22% for the year ended March 31, 1997.
OPERATING EXPENSES
Sales and Marketing. Sales and marketing expenses increased by $1.1
million, or 55%, to $3.1 million for the year ended March 31, 1998 from $2.0
million for the year ended March 31, 1997. Sales and marketing expenses as a
percentage of total revenues were 16% in 1998 compared to 12% in 1997. The
increase in sales and marketing expenses as a percentage of total revenues was
primarily due to increases in staffing and marketing expenses for advertising,
public relations and trade shows supporting our Intra.doc! suite of products.
General and Administrative. General and administrative expenses increased
$385,000, or 19%, to $2.4 million for the year ended March 31, 1998 from $2.0
million for the year ended March 31, 1997. General and administrative expenses
as a percentage of total revenues were 12% in 1998 compared to 12% in 1997. The
increase in general and administrative expenses corresponded with the increase
in revenues for the period.
Research and Development. Research and development expenses increased by
$127,000, or 12%, to $1.2 million for the year ended March 31,1998 from $1.1
million for the year ended March 31, 1997. Research and development expenses as
a percentage of total revenue were 6% in 1998 compared to 7% in 1997.
QUARTERLY RESULTS
The following tables present unaudited consolidated statements of
operations data both in absolute dollars and as a percentage of total revenues
for each of our last eight quarters. This data has been derived from unaudited
consolidated financial statements that have been prepared on the same basis as
the annual audited consolidated financial statements and, in our opinion,
include all normal recurring adjustments necessary for a fair presentation of
such information. These unaudited quarterly results should be read in
conjunction with the Consolidated Financial Statements and related Notes
appearing elsewhere in this prospectus. The consolidated results of operations
for any quarter are not necessarily indicative of the results for any future
period. Certain reclassifications have been made to the categories of revenues
and cost of revenues presented in our 1997 and 1998 financial statements to
conform with the presentation used in the 1999 financial statements. These
reclassifications had no effect on losses from continuing operations and net
losses previously reported.
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<TABLE>
<CAPTION>
THREE MONTHS ENDED
---------------------------------------------------------------------------------------
JUNE 30, SEPT. 30, DEC. 31, MAR. 31, JUNE 30, SEPT. 30, DEC. 31, MAR. 31,
1997 1997 1997 1998 1998 1998 1998 1999
-------- --------- -------- -------- -------- --------- -------- --------
(IN THOUSANDS, EXCEPT PERCENTAGES)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
CONSOLIDATED STATEMENTS OF OPERATIONS
DATA:
Revenues:
Product licenses...................... $ 204 $ 545 $ 653 $ 1,161 $ 776 $1,509 $2,044 $2,498
Services.............................. 57 63 91 199 225 285 500 592
Hardware integration and support...... 4,296 4,392 4,270 3,519 3,215 2,414 -- --
------ ------- ------- ------- ------- ------ ------ ------
Total revenues.......................... 4,557 5,000 5,014 4,879 4,216 4,208 2,544 3,090
------ ------- ------- ------- ------- ------ ------ ------
Cost of revenues:
Product licenses...................... 48 59 58 120 94 115 199 254
Services.............................. 36 37 82 130 142 180 317 364
Hardware integration and support...... 3,339 3,571 3,241 2,732 2,570 2,031 -- --
------ ------- ------- ------- ------- ------ ------ ------
Total cost of revenues.................. 3,423 3,667 3,381 2,982 2,806 2,326 516 618
------ ------- ------- ------- ------- ------ ------ ------
Gross Profit............................ 1,134 1,333 1,633 1,897 1,410 1,882 2,028 2,472
------ ------- ------- ------- ------- ------ ------ ------
Operating expenses:
Sales and marketing................... 588 750 777 1,016 937 1,109 1,114 1,156
General and administrative............ 564 611 581 613 651 656 689 933
Research and development.............. 305 332 306 300 285 344 346 367
------ ------- ------- ------- ------- ------ ------ ------
Total operating expenses................ 1,457 1,693 1,664 1,929 1,873 2,109 2,149 2,456
------ ------- ------- ------- ------- ------ ------ ------
Income (loss) from operations........... (323) (360) (31) (32) (463) (227) (121) 16
Other income (expense):
Gain on sale of hardware integration
unit................................ -- -- -- -- -- 517 -- --
Interest income (expense), net........ (93) (103) (91) (45) (31) (19) (11) 6
------ ------- ------- ------- ------- ------ ------ ------
Income (loss) from continuing
operations............................ (416) (463) (122) (77) (494) 271 (132) 22
Discontinued operations:
Loss on sale of distribution group.... -- -- -- -- (111) -- -- --
Loss from operations of distribution
group............................... (436) (515) (474) (1,152) (410) -- -- --
------ ------- ------- ------- ------- ------ ------ ------
Net income (loss)....................... (852) (978) (596) (1,229) (1,015) 271 (132) 22
Preferred stock dividends and
accretion............................. -- 980 640 45 603 29 80 6
------ ------- ------- ------- ------- ------ ------ ------
Income (loss) attributable to common
shareholders.......................... $ (852) $(1,958) $(1,236) $(1,274) $(1,618) $ 242 $ (212) $ 16
====== ======= ======= ======= ======= ====== ====== ======
AS A PERCENTAGE OF TOTAL REVENUES:
Revenues:
Product licenses...................... 4.5% 10.9% 13.0% 23.8% 18.4% 35.9% 80.3% 80.8%
Services.............................. 1.3 1.3 1.8 4.1 5.3 6.8 19.7 19.2
Hardware integration and support...... 94.2 87.8 85.2 72.1 76.3 57.3 -- --
------ ------- ------- ------- ------- ------ ------ ------
Total revenues.......................... 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0
------ ------- ------- ------- ------- ------ ------ ------
Cost of revenues:
Product licenses...................... 1.1 1.2 1.2 2.5 2.2 2.7 7.8 8.2
Services.............................. 0.8 0.7 1.6 2.7 3.4 4.3 12.5 11.8
Hardware integration and support...... 73.3 71.4 64.6 56.0 61.0 48.3 -- --
------ ------- ------- ------- ------- ------ ------ ------
Total cost of revenues.................. 75.2 73.3 67.4 61.2 66.6 55.3 20.3 20.0
------ ------- ------- ------- ------- ------ ------ ------
Gross profit............................ 24.8 26.7 32.6 38.8 33.4 44.7 79.7 80.0
------ ------- ------- ------- ------- ------ ------ ------
Operating expenses:
Sales and marketing................... 12.9 15.0 15.5 20.8 22.2 26.4 43.8 37.4
General and administrative............ 12.4 12.2 11.6 12.6 15.4 15.6 27.1 30.2
Research and development.............. 6.7 6.6 6.1 6.1 6.8 8.2 13.6 11.9
------ ------- ------- ------- ------- ------ ------ ------
Total operating expenses................ 32.0 33.8 33.2 39.5 44.4 50.2 84.5 79.5
------ ------- ------- ------- ------- ------ ------ ------
Income (loss) from operations........... (7.2) (7.1) (0.6) (0.7) (11.0) (5.5) (4.8) 0.5
Other income (expense):
Gain on sale of hardware integration
unit................................ -- -- -- -- -- 12.3 -- --
Interest income (expense), net........ (2.0) (2.1) (1.8) (0.9) (0.7) (0.5) (0.4) 0.2
------ ------- ------- ------- ------- ------ ------ ------
Income (loss) from continuing
operations............................ (9.2) (9.2) (2.4) (1.6) (11.7) 6.3 (5.2) 0.7
Discontinued Operations:
Loss on sale of distribution group.... -- -- -- -- (2.6) -- -- --
Loss from operations of distribution
group............................... (9.6) (10.3) (9.5) (23.6) (9.7) -- -- --
------ ------- ------- ------- ------- ------ ------ ------
Net income (loss)....................... (18.8) (19.5) (11.9) (25.2) (24.0) 6.3 (5.2) 0.7
Preferred stock dividends and
accretion............................. -- 19.6 12.8 0.9 14.3 0.7 3.1 0.2
------ ------- ------- ------- ------- ------ ------ ------
Income (loss) attributable to common
shareholders.......................... (18.8)% (39.1)% (24.7)% (26.1)% (38.3)% 5.6% (8.3)% 0.5%
====== ======= ======= ======= ======= ====== ====== ======
</TABLE>
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Revenues. Revenues for product licenses and services, which are related
entirely to Intra.doc! software, have increased in each of the quarters since
its release, except for the quarter ended June 30, 1998. We implemented a
reorganization of our sales department during the quarter ended June 30, 1998,
which temporarily diverted the focus of the sales department, leading to reduced
sales in the quarter. Version 3.5 of our Intra.doc! software was launched during
the quarter ended September 30, 1998. Version 3.5 included significant
improvements in the enterprise-scalability features of our Intra.doc! software.
The launch of Version 3.5, combined with the renewed efforts of the reorganized
sales department, generated a significant increase in revenues for product
licenses in the quarter ended September 30, 1998.
Cost of Revenues and Gross Profit. Cost of revenues for product licenses
and services, which are related entirely to Intra.doc! software, have increased
in each of the quarters since its release, except for the quarter ended June 30,
1998. The decrease in cost of revenues from the quarter ended March 31, 1998
corresponds with the decrease in revenues experienced during the same period.
Total gross profit as a percentage of total revenues has generally increased, on
a quarter to quarter basis, from June 30, 1997 to September 30, 1998 as our
product mix has shifted away from hardware integration and support to Intra.doc!
product licenses and services. Total gross profits as a percentage of total
revenues were sharply higher in the two most recent quarters relative to the six
previous quarters because revenues in the two most recent quarters related
exclusively to Intra.doc! products and services.
As a result of our limited operating history, we cannot forecast operating
expenses based on historical results. Accordingly, we base our expenses in part
on projections of future revenues. Most of these expenses are fixed in the short
term, and we may not be able to quickly reduce spending if revenues are lower
than we have projected. Our ability to forecast accurately our quarterly
revenues is limited due to the sales cycle of our software products, which makes
it difficult to predict the quarter in which license sales will occur, and the
variability of client demand for professional services. We expect our business,
operating results and financial condition to be materially adversely affected if
revenues do not meet projections. We expect our revenues and operating results
may vary significantly from quarter to quarter. A number of factors are likely
to cause these variations, including:
- demand for our products and services;
- the timing of new product introductions and sales of our products and
services;
- unexpected delays in introducing new products and services;
- increased expenses, whether related to sales and marketing, research and
development or administration;
- changes in the rapidly evolving market for data and content management
solutions;
- the mix of revenues from product licenses and services, as well as the
mix of products licensed;
- the mix of services provided and whether services are provided by our
staff or third-party contractors;
- the mix of domestic and international sales;
- costs related to possible acquisitions of technology or businesses;
- general economic conditions; and
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- public announcements by our competitors.
Accordingly, we believe that quarter-to-quarter comparisons of our
operating results are not necessarily meaningful. Investors should not rely on
the results of one quarter as an indication of future performance.
We plan to increase our operating expenses to expand sales and marketing
operations, develop new distribution channels, fund greater levels of research
and development, broaden services and support and improve operational and
financial systems. If our revenues do not increase along with these expenses,
our business, operating results and financial condition in a given quarter may
be materially adversely affected.
NET OPERATING LOSS CARRYFORWARDS
As of March 31, 1999, we had net operating loss carryforwards of
approximately $7.9 million. The net operating loss carryforwards will expire at
various dates beginning in 2011, if not utilized. The Tax Reform Act of 1986
imposes substantial restrictions on the utilization of net operating losses and
tax credits in the event of an "ownership change" of a corporation. Our ability
to utilize net operating loss carryforwards on an annual basis will be limited
as a result of "ownership changes" in connection with the sale of equity
securities. We have provided a full valuation allowance on the deferred tax
asset because of the uncertainty regarding its realization. Our accounting for
deferred taxes involves the evaluation of a number of factors concerning the
realizability of our deferred tax assets. In concluding that a full valuation
allowance was required, management considered such factors as our history of
operating losses, potential future losses and the nature of our deferred tax
assets. See Note 11 to the Consolidated Financial Statements included in this
prospectus.
LIQUIDITY AND CAPITAL RESOURCES
We have funded our operations and satisfied our capital expenditure
requirements primarily through revolving working capital and term loans from
banking institutions, private placements of debt and equity securities and
proceeds from the sale of assets related to prior lines of business. Cash used
in operating activities was $4.9 million in 1997, $3.7 million in 1998 and $1.4
million in 1999. The $1.4 million of cash used in operating activities for the
year ended March 31, 1999 includes a decrease in accounts receivable of
approximately $1.1 million from March 31, 1998. This decrease was largely
attributable to the reduction of receivables related to the hardware integration
unit that was sold in September 1998.
To date, we have invested our capital expenditures primarily in property
and equipment, consisting largely of computer hardware and software. Capital
expenditures for the year ended March 31, 1997, 1998 and 1999 were approximately
$285,000, $372,000 and $365,000, respectively. We have also entered into capital
and operating leases for facilities and equipment. We expect that our capital
expenditures will increase as our employee base grows. At March 31, 1999, we did
not have any material commitments for capital expenditures.
As of March 31, 1999, we had $2.0 million in cash and cash equivalents and
$4.3 million in working capital. Net cash provided by financing activities was
$4.1 million in 1997, $4.1 million in 1998 and $1.4 million in 1999. We have a
$2.25 million revolving line of credit with Diversified Business Credit, Inc.
that bears interest at the bank's prime rate plus 2.0%. As of March 31, 1999,
$422,000 was outstanding under the revolving line of credit and was
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<PAGE> 28
due on demand. This line of credit is secured by substantially all of our
assets. As of March 31, 1999, we were in compliance with all financial covenants
and restrictions related to the line of credit.
We currently believe that the net proceeds of this offering, together with
cash and cash equivalents on hand and commercial credit facilities, will be
sufficient to meet our working capital requirements for at least the next 12
months. After that time, we may require additional funds to support our working
capital requirements or for other purposes and may seek to raise such additional
funds through public or private equity financings or from other sources. We
cannot be certain that additional financing will be available on terms favorable
to us, or on any terms, or that any additional financing will not be dilutive.
RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
We adopted the American Institute Certified Public Accountants' Statement
of Position, or SOP, 97-2, Software Revenue Recognition, and SOP 98-4, Deferral
of the Effective Date of a Provision of SOP 97-2, Software Revenue Recognition,
as of April 1, 1998. SOP 97-2 and SOP 98-4 provide guidance for recognizing
revenue on software transactions and supersede SOP 91-1 Software Revenue
Recognition. The adoption of SOP 97-2 and SOP 98-4 did not have a material
effect on our operating results.
In December 1998, the American Institute of Certified Public Accountants
issued SOP 98-9, Modification of SOP 97-2, Software Revenue Recognition With
Respect to Certain Transactions. SOP 98-9 amends SOP 98-4 to extend the deferral
of the application of certain passages of SOP 97-2 provided by SOP 98-4 through
fiscal years beginning on or before March 15, 1999. All other provisions of SOP
98-9 are effective for transactions entered into during fiscal years beginning
after March 15, 1999. We believe that the adoption of SOP 98-9 will not have a
material effect on our consolidated financial statements.
In February 1998, the American Institute of Certified Public Accountants
issued SOP 98-1, Accounting for the Costs of Computer Software Developed or
Obtained for Internal Use. SOP 98-1 establishes the accounting for costs of
software products developed or purchased for internal use, including when such
costs should be capitalized. SOP 98-1 is effective for financial statements for
fiscal years beginning after December 15, 1998. We do not expect that SOP 98-1
will have a material effect on our consolidated financial statements.
SFAS No. 133, Accounting for Derivative Instruments and Hedging Activities
was issued in June 1998. We are not required to adopt SFAS No 133 until April 1,
2000. We believe the adoption of SFAS No. 133 will not have a material effect on
our consolidated financial statements.
YEAR 2000 COMPLIANCE
The "Year 2000 issue" refers generally to the problems that some software
may have in determining the correct century. For example, software with
date-sensitive functions that are not Year 2000 compliant may not be able to
distinguish whether "00" means 1900 or 2000, which may result in system failures
or the creation of erroneous data.
We have adopted a Year 2000 readiness program for the current versions of
our products. Our program includes Year 2000 readiness assessment and
implementation of solutions to potential readiness issues. Solutions include
remediation, upgrading and replacement of
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<PAGE> 29
certain product versions, as well as validation testing, and contingency
planning. We continue to respond to customer questions about prior versions of
our products on a case-by-case basis.
We have completed all phases of our Year 2000 readiness program, except for
contingency planning, for the current versions of all of our products. As a
result, the current versions of each of our products are Year 2000 compliant,
when configured and used in accordance with the related documentation, and
provided that the underlying operating system of the host machine and any other
software used with or in the host machine or our products are also Year 2000
compliant.
We have tested software obtained from third parties that is incorporated
into our products, and are seeking assurances from our vendors that licensed
software is Year 2000 compliant. Despite our testing, testing by current and
potential clients and assurances from developers of products incorporated into
our products, our products may contain undetected errors or defects associated
with Year 2000 date functions. Known or unknown errors or defects in our
products could result in delayed or lost revenues, diversion of development
resources, damage to our reputation or increased service and warranty costs, any
of which may have a material adverse affect on our business, operating results
and financial condition. Some commentators have predicted significant litigation
regarding Year 2000 compliance issues, and we are aware of such lawsuits against
other software vendors. Because of the unprecedented nature of such litigation,
it is uncertain whether or to what extent this may affect us.
Our internal systems include both our information technology, or IT, and
non-IT systems. We have completed an assessment of our material internal IT
systems, including both our own software products and third-party software and
hardware technology. We have also initiated an assessment of our non-IT systems.
We expect to complete testing and any required remediation of our IT systems in
1999. To the extent that we are not able to test the technology provided by
third-party vendors, we are seeking assurances from the vendors that their
systems are Year 2000 compliant. Although we are not currently aware of any
material operational issues or costs associated with preparing our internal IT
and non-IT systems for the Year 2000, we may experience material unanticipated
problems and costs caused by undetected errors or defects in the technology used
in our internal IT and non-IT systems.
We do not currently have complete information concerning the Year 2000
compliance status of all of our customers. Our current and potential clients may
incur significant expenses to achieve Year 2000 compliance. If our clients are
not Year 2000 compliant, they may experience material costs to remedy problems,
or they may face litigation costs. In either case, Year 2000 issues could reduce
or eliminate funds that current or potential customers would otherwise have had
for purchases of our products and services. Moreover, the information technology
personnel of our customers and potential customers may be required to focus
substantial efforts on addressing the Year 2000 issues of their own companies,
leaving them unable to evaluate or acquire new technology such as our products.
In addition, customers who currently believe they are Year 2000 compliant may
defer purchases of our products until after January 1, 2000 in order to reassess
their own compliance or to assess the compliance of our products. As a result,
our business, operating results and financial condition may be materially
adversely affected.
We have funded our Year 2000 program from available cash and have not
separately accounted for these costs in the past. To date, these costs have not
been material. We may incur additional costs related to the Year 2000 program
for administrative personnel to manage the project, outside contractor
assistance, technical support for our products, product
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engineering and customer satisfaction. We may experience material problems and
costs associated with Year 2000 compliance that may materially adversely affect
our business, operating results and financial condition.
We have not yet completed development of a contingency plan to address
situations that may result if we are unable to achieve Year 2000 readiness of
our critical operations. The cost of developing and implementing such a plan may
itself be material. We are also subject to external forces that might generally
affect industry and commerce, such as utility or transportation company Year
2000 compliance failures and related service interruptions.
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BUSINESS
OVERVIEW
IntraNet Solutions is a leading provider of Web-based data and content
management solutions for intranets, extranets and the Internet. Our Intra.doc!
suite of products offers customers the ability to leverage their existing
Internet infrastructure to rapidly access, manage and publish unstructured
business data, or data contained in graphic, document or text format as opposed
to structured data typically stored in databases or data warehouses. We address
the complex data and content management needs of an organization by providing a
comprehensive, Web-based solution that performs key functions automatically,
eliminates administrative bottlenecks and continuously delivers the most current
information to users.
Intra.doc! enables organizations to capture sets of unstructured business
data, attach appropriate security and profiling information, known as meta data,
and dynamically publish and manage this information in a Web environment without
the need to manually reconfigure data sets. Our solution is based on open Web
standards and Java server architecture and provides sophisticated security and
searching capabilities. This enterprise-scalable, cost-effective solution is
quickly deployed, easily maintained and may be configured to meet an
organization's specific requirements. In addition, our products provide
e-commerce capabilities to enable our customers to easily and cost effectively
sell data and content over the Web.
Our products provide a broad-based solution applicable across a wide
variety of industries that enables organizations to effectively utilize their
business-critical data and content. Since Intra.doc! was introduced in fiscal
1997, it has been adopted by over 200 businesses and government organizations
for use on over 300 intranet, extranet and Internet sites. Customer applications
of Intra.doc! have ranged from single workgroups to enterprise-wide solutions.
Our customers include organizations such as British Aerospace Airbus, Ltd.,
Cargill Incorporated, Ericsson Telecom AB, GE Capital Corporation and
Hewlett-Packard Company.
INDUSTRY BACKGROUND
Explosive Growth of the Internet
The emergence and acceptance of the Internet and the World Wide Web has
fundamentally changed the way that businesses communicate, obtain information,
purchase goods and transact business. International Data Corporation, or IDC,
estimates that the number of Internet users worldwide will grow from
approximately 147 million in 1999 to 320 million in 2002. Within the United
States, shipments of web browsers are expected to grow from 10 million units in
1997 to over 124 million units in 2002, according to IDC. In addition, an IDC
report estimates that Internet-centric software specifically designed for Web
technology, which accounted for less than $1.0 billion in revenue in 1996, will
exceed $12.0 billion in revenue by 2000 due to the aggressive corporate adoption
of Web technology.
Rapid Adoption of Corporate Intranets and Extranets
Corporations are employing intranets and extranets in order to capitalize
on their investments in Web-based infrastructure by sharing computing resources
and facilitating communication among employees. Intranets typically refer to
secure Web-based networks dedicated to an organization's employees, while
extranets extend such networks beyond an
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organization's "internal walls" to include suppliers, vendors, partners,
customers and other businesses. Intranets and extranets utilize common Internet
protocols and Web browsers to share information and efficiently communicate
among users in the secure environment of a private network.
Organizations are rapidly adopting intranets and extranets. CAP Ventures, a
leading research organization, estimates that spending on corporate intranets
doubled in 1997 to $8.5 billion and predicts an annual growth rate of 50%
through the year 2000. In 1997, The Delphi Group estimated that over 80% of
desktops within Fortune 1000 companies will be connected to an intranet by the
year 1999. In addition, Forrester Research estimates that more than 80% of
Fortune 1000 companies plan to offer extranets by the year 2000. IDC estimates
that the number of installed Web and Internet servers, which are necessary to
support intranets and extranets, will grow from approximately 6.3 million in
1998 to nearly 12.0 million in the year 2002.
Intranets provide multiple users the potential to securely and efficiently
access a wealth of data and up-to-date information in a wide variety of formats,
such as CAD files, engineering schematics, design specifications, audio and
video clips, graphics and traditional documents. Intranet usage has evolved
beyond document access and internal distribution of information to enable
organizations to streamline, automate and increase the productivity of everyday
business processes in a wide variety of applications. For example, engineering
and manufacturing departments are using intranets for ISO certification,
technical manual publication and quality assurance processes. Intranets also
allow human resource departments to make real-time changes to policies and
procedures, perform full-text searches of resumes and facilitate reimbursement
of employee expenses. Similarly, at the corporate management level, the
effective use of intranets enables managers to have rapid and secure access to
relevant business data, leading to expeditious and well-informed decisions.
Extranets expand intranet applications to enable organizations to
selectively share business-critical data with suppliers, vendors, partners,
customers and other businesses. Extranet applications are increasingly being
used to increase sales, cut costs and improve customer service and support.
Organizations are making large investments in these applications to create
meaningful and attractively presented content that conveys important information
to selected recipients. Extranets also provide a platform for content-enabled
e-commerce, allowing businesses to efficiently sell data and content through the
execution of business transactions over the Internet. We believe this feature
will become increasingly important given the projected growth in the number of
customers who can be reached over the Internet. Forrester Research estimates
that revenue generated by Internet commerce will exceed $320 billion by 2002.
Need for Comprehensive Web-based Data and Content Management Solutions
Organizations are facing many difficult challenges in utilizing their
intranets and extranets to manage unstructured business data in a Web
environment. Unstructured business data is data stored in graphic, document or
text format as opposed to structured data typically stored in databases or data
warehouses. According to The Delphi Group, over 85% of an organization's
internal information is unstructured business data. This data may be paper-based
or in outdated versions of various software applications and includes all types
of information, such as contracts and personnel records, product catalogs and
marketing materials and design specifications and regulatory documentation. Any
Web-based solution in this area must meet a wide range of needs by converting
data into a standard format and by providing sophisticated security, access and
version control, dynamic updating of data and
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automatic updating of Web links. It is critical that the integrity of the data
and content on an organization's intranet or extranet is constantly maintained
so that users are always utilizing the most current information. In addition,
any solution must provide scalability that allows it to effectively manage the
business-critical information for organizations with thousands of documents and
thousands of users who are often at dispersed locations. Most existing solutions
require significant human resources to address this complex range of problems.
This increase in administrative needs has created delays in accessing, managing
and publishing information. Organizations are seeking a fast, efficient and
comprehensive means of utilizing their data and content in a Web environment.
Two alternative approaches have typically been used by organizations
attempting to address the problem of dynamically accessing, managing and
publishing data and content in a Web environment: in-house solutions and
traditional document management products.
In-house solutions are custom applications that are developed by an
organization's information systems personnel using software and hardware tools
from a variety of vendors. These solutions require significant resources for
custom development, evaluation, implementation and integration of disparate
technologies and platforms. Consequently, these efforts are often plagued by
long development cycles, difficult deployment, high ongoing maintenance costs
and limited functionality and scalability due to software and hardware
incompatibility issues. Many organizations utilizing in-house solutions do not
have the technical expertise or the resources to fully migrate their existing
legacy data to an intranet or extranet. In-house solutions are commonly
constrained by "Webmaster bottlenecks," in which the person or group responsible
for the updating of data and information may become overwhelmed by the
continuous manual coding and recoding required to make ongoing revisions to the
vast amounts of information managed on the organization's intranet and extranet.
In addition, many corporate intranets and extranets supported by in-house
solutions are unreliable and frequently suffer extended periods of downtime due
to various problems, such as browser incompatibility.
Traditional document management products were originally developed for
client-server environments to address a different problem from the one
organizations are now seeking to address through a Web-based solution. These
monolithic applications were designed for the management of document creation
and retention in a client-server environment and not for the ease of access,
distribution and version control that is possible in a Web environment. The
client-server architecture of these systems is geared towards a personal
computer, or PC, environment that is not Web-based and requires proprietary
software installation on the PC of each individual user. Completion of software
updates is often a lengthy process as the update must be made on every PC in the
system. Traditional document management systems generally offer features
designed to meet specific document management problems such as document creation
and editing. Many organizations have attempted to modify these client-server
applications to function in a Web environment. This retrofitting is usually
expensive and time consuming and often degrades performance while creating
systems that are difficult to manage because they are operating outside of their
intended environment. These problems are often compounded as an organization
grows and attempts to scale a retrofitted document management product to meet
its increased needs.
Another drawback to both in-house solutions and traditional document
management products is that they do not fully enable e-commerce of an
organization's data and content. E-commerce has typically focused on sales of
hardgoods such as books and clothing that are purchased over the Web and mailed
separately to the consumer. Organizations are now seeking to sell data and
content, or softgoods, directly on the Web. This can include research,
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articles, drawings and designs, technical manuals or product catalogs that are
purchased and delivered over the Web for immediate consumption. Most in-house
solutions and retrofitted traditional document management products do not permit
businesses to take full advantage of these e-commerce opportunities. The
limitations of many of these solutions and products stem from their inability to
give multiple customers simultaneous access to the same content while providing
for flexible payment methods. In contrast, e-commerce applications that have a
completely Web-based architecture are able to more successfully leverage
valuable content by simultaneously publishing it to multiple customers.
Web-based applications also provide numerous payment methods such as payment per
click, time-based payment and self-subscription by customers.
The accelerated adoption of intranets and extranets as a primary
communication channel is driving organizations to seek new Web-based solutions
that will enable them to capitalize on their intranets and extranets to develop,
maintain and leverage relationships with employees, customers and others.
Web-based data and content management solutions provide a cost-effective and
rapid means of disseminating information to global organizations. An effective
data and content management solution must get the appropriate information to the
right end user, in a usable format and in a cost-effective manner, to assist in
decision-making and improve service response. The inability of organizations to
effectively leverage their existing Internet infrastructure presents a
significant opportunity for a company that can offer a cost-effective and
comprehensive solution that gives organizations the ability to easily access,
manage, publish and maintain business-critical data.
OUR SOLUTION
Our solution is Intra.doc!, a suite of Web-based software products that
gives organizations a cost-effective and comprehensive means to access, manage,
publish and maintain unstructured business data and content through intranets,
extranets or the Internet. Intra.doc! allows customers to rapidly access, manage
and publish this data in a secure Web environment that leverages their existing
Internet infrastructure. This solution is quickly deployed, easily maintained
and may be configured to fit an organization's specific requirements. The
Web-based architecture of Intra.doc! makes it scalable for geographically
diverse enterprises while its modularity permits significant add-on
functionality, including content-enabled e-commerce opportunities.
Our solution has the following key benefits:
Comprehensive Solution. Intra.doc! provides a comprehensive solution to
data and content management needs. Our Web-based architecture utilizes the
customer's existing Internet infrastructure and provides a full range of data
and content management services without requiring customization. Our modular
technology allows customers to configure Intra.doc! to meet their individual
requirements. This modularity has also allowed us to rapidly develop new
features to meet our customers' evolving needs, such as e-commerce capabilities.
Intra.doc! also has central enterprise-level security that integrates with the
customer's existing security framework in most cases. Intra.doc! enables
organizations to centrally manage data and content on their intranets, extranets
or the Internet, regardless of the number or distance between locations of the
servers supporting those systems. Attachment of meta data and security
information, authentication and replication of data, as well as updating, all
have the capacity to occur automatically without the need to reconfigure
documents, thereby dramatically reducing administration by eliminating a number
of data handlers.
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Scalable and Dynamic. Intra.doc! can manage the data and content of
organizations ranging from a small workgroup to an organization with tens of
thousands of users. Our solution is Web-server based, which gives Intra.doc!
significant expansion potential as to the amount and type of data and content it
can manage. As the volume of data and content increases, it is distributed
across multiple Intra.doc! repositories that can be simultaneously accessed by
users. The use of multiple repositories enhances an organization's intranet and
extranet performance by optimizing the workload and system requirements placed
upon individual servers. Performance is also enhanced by Intra.doc!'s dynamic
management functions, including the ability to selectively retrieve, archive and
replicate content on an intranet, extranet or Internet site while performing
mass revisions of meta data. This allows users to quickly complete complex
reorganizations or consolidations of data and content. The Web environment of
Intra.doc! provides enhanced speed and dynamic performance while minimizing
costs and administration.
Easy to Install and Use. Our Intra.doc! solution has many features that
make it easy to install and use. The Intra.doc! Management System is an
out-of-the box solution that can be quickly deployed, often in a matter of days.
The Intra.doc! Management System and most of our modules are installed on the
customers' servers, not on the individual PCs of the customers' employees. This
effectively eliminates most of the time-consuming installation and maintenance
efforts mandated by the majority of traditional and in-house document management
systems. Many customers have implemented Intra.doc! without any third-party
consulting assistance. In addition, our component level architecture allows
customers to configure the Intra.doc! user interface to create a unique "look
and feel" to their intranet or extranet site. Once installed, Intra.doc!
delivers Web-browser based data and content access, management and publication
to individual users. This allows Intra.doc! to be utilized by all types of users
in organizations across diverse industries. Our automated solution enables users
to perform system administration, minimizing the involvement of information
systems departments.
Open and Flexible. Intra.doc! is designed to integrate with the existing
infrastructure of an intranet, extranet or the Internet. Our solution
dynamically accesses, manages and publishes most data types, from CAD files and
graphics to audio and video clips to traditional documents. The Web-based
architecture of Intra.doc! gives users the freedom to utilize data and content
much more quickly and creatively than traditional solutions. Intra.doc!'s
modularity also allows for easy configuration. This is all accomplished in a
secure environment that interacts with the organization's existing security
framework.
STRATEGY
Our objective is to enhance our position as a leading provider of Web-based
data and content management solutions for organizations ranging from small
workgroups to complex multinational enterprises. Key strategies to achieving
this objective include:
Expand Product Leadership. We believe that the Intra.doc! suite of products
is the leading Web-based solution for data and content management across
intranets, extranets and the Internet. We believe that both users of data and
content and managers making information systems purchasing decisions prefer our
solution to available alternatives because it is easier to deploy, more
cost-effective, offers faster and more dynamic management of data and content
and contains sophisticated security mechanisms while utilizing an open Web-
based architecture. Intra.doc! can also be used by organizations of nearly any
size due to its scalability and can be adopted to a wide range of data and
content management needs because
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of its modular design. We will continue to develop both new features for our
existing suite of products and new products to enable our customers to further
leverage their intranets and extranets.
Aggressively Penetrate Our Market. We plan to aggressively penetrate the
data and content management solutions market through the following avenues:
- Expand Direct Sales Channels. We will continue to expand our direct sales
force and sales support network to increase the rate of customer adoption
of our products in both the United States and internationally. We intend
to build world-class direct sales channels by adding high-quality direct
sales personnel and devoting increased resources to telemarketing and
pre-sales support services.
- Develop Indirect Sales Channels. To increase the distribution and
visibility of our products, we will continue to develop our indirect
channels through strategic alliances with resellers, value-added
resellers, or VARs, original equipment manufacturers, or OEMs, key
systems integrators and other channel partners in both domestic and
international markets. We believe that a multi-channel sales effort will
broaden customer awareness of our products and will allow us to more
rapidly reach a greater number of customers.
- Increase Penetration of Existing Customers. We intend to expand sales to
existing customers by increasing the add-on feature sets offered to
existing workgroups, by adding new workgroup applications within existing
customers and by using multiple workgroup applications within an
organization as a platform to launch an enterprise-wide solution. The
cost-effectiveness of Intra.doc! allows us to gain entry into an
organization at the workgroup level while the scalability of our solution
and the ease with which it can be deployed allows existing customers to
quickly and efficiently increase the breadth of their Intra.doc! use.
Continue to Build Brand Awareness. We will continue to promote the
Intra.doc! brand as synonymous with comprehensive, cost-effective, Web-based
solutions for data and content management. In order to accelerate the acceptance
and penetration of our brand, we will engage in an active public relations
program, participate in trade shows and conferences and advertise our products
through traditional and on-line media channels and our Web site. These efforts
will focus on leveraging our reputation with existing customers and product
leadership to drive brand awareness in the data and content management market.
Continue to Invest in Technology. We believe that the technical features of
Intra.doc!, including its open Web-based architecture, its
enterprise-scalability and the modularity of its feature sets, distinguish our
products in the market. We believe that our customers purchase our products
based on their performance characteristics. We feel that this reputation for
performance will facilitate the acceptance of enhancements and additional
products into our markets. In order to maintain our technological leadership, we
will continue to invest in research and development. We intend to focus our
research and development efforts on both enhancements to our existing solution
and the development of new products as the demands of our market evolve.
Expand Services Offerings. We have established successful relationships
with our customers by serving as a consultant in the development of their data
and content management systems. We are expanding our services capabilities in
order to extend our range of services and more completely address areas such as
business strategy, project management
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and application development. We believe that providing high-quality services
will strengthen our customer relationships and enhance our product development
efforts.
PRODUCTS
Intra.doc! Management System. Our core application, the Intra.doc!
Management System, provides a cost-effective, powerful and comprehensive
solution for accessing, managing and publishing data and content across
intranets, extranets and the Internet. This system is based upon open Web
standards and utilizes an organization's existing Internet infrastructure.
Intra.doc! is quickly deployed and provides sophisticated security mechanisms
that integrate with most mechanisms already in place within our customers'
organizations. Most types of unstructured data can be accessed, managed and
published by Intra.doc!, from CAD files and engineering schematics to audio and
video clips to graphics and traditional documents. The Intra.doc! Management
System and most of our modules are installed on the customers' servers, not on
the individual PCs of the customers' employees.
Intra.doc! captures unstructured business data and attaches meta data,
which organizes and stores this data in Intra.doc! repositories for easy
identification, access and Web-publication. This process automatically converts
data and content to Web-based formats, which are then dynamically published to a
secure Web site on an intranet, extranet or the Internet. When users revise or
add data and content to Intra.doc!, our system dynamically updates and manages
the Web site while maintaining the native file. Each piece of data has its own
secure Web address, or URL, so it can be utilized by both an organization's
intranet users and, if desired, shared with customers, suppliers and partners on
an extranet or Internet site.
Individual users can search for data and content within Intra.doc! using
the leading Web browsers. Users submit sophisticated full-text or multiple-field
searches using stored meta data contained in one or more Intra.doc!
repositories. Once users receive a results list, they can easily navigate
through data from multiple sources using hyperlinks, copy text and graphics,
zoom and enhance the view, find words within text, print the data or download
the data in its native format.
Intra.doc! provides sophisticated security mechanisms utilizing an
organization's existing security framework. Intra.doc! integrates with
frameworks such as Windows NT domains and Lightweight Directory Access Protocol,
or LDAP, directories by mapping to these security systems. This enables systems
administrators to secure data and content and control access while using an
enterprise-level security standard. Security can be assigned to workgroups,
users, collections of data or individual Web pages. This flexibility allows
Intra.doc! to secure data and content for specific projects or for certain
groups quickly and efficiently. Users maintain a single log on and password to
access data and content no matter how many levels of security are added within
their workgroup or across their enterprise.
The Web-based architecture of Intra.doc! enables easy installation of our
system. This architecture also simplifies administrative functions. Through a
Web browser, systems administrators can create Intra.doc! users and groups, set
security options, create folders and configure publishing parameters. Intra.doc!
also allows systems administrators to format and control data and content on the
Web site. The automatic nature of many Intra.doc! management and publication
functions eliminates manual steps in these processes and minimizes the number of
data handlers. This increases efficiency and accuracy and makes Intra.doc! a
dynamic tool that provides the most current business-critical information.
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INTRA.DOC! PRODUCT MODULES
The Intra.doc! Management System is available in various product
configurations for both workgroups and enterprises. Organizations may also
select from a variety of additional product modules, as described below.
[GRAPHIC DEPICTING PRODUCTS]
Intra.doc! Softgoods E-Commerce Solution. Intra.doc! Softgoods E-Commerce
Solution allows organizations to leverage their existing Internet infrastructure
into content-enabled e-commerce opportunities. This solution gives organizations
revenue creation ability by efficiently monitoring, distributing and charging
for data and content offered to customers, suppliers or partners over an
intranet, extranet or the Internet. Our Softgoods module allows organizations to
further evolve their business models by e-commerce enabling all content on an
Intra.doc! system for charge back, sale or self-subscription. The ease with
which Intra.doc! Web-publishes and updates data and content creates a valuable
resource for those who can benefit from an organization's information. Our
Softgoods module allows this resource to be directly translated into revenue for
our customers.
Intra.doc! Archiver/Replicator. Intra.doc! Archiver/Replicator facilitates
the easy movement of data among Intra.doc! server sites across an enterprise.
The Archiver/Replicator moves both native data and Web-based data while
accessing and organizing this information based on the attached meta data. The
Replicator allows duplicate data to be made available to other user groups and
to be automatically and easily transferred among intranet, extranet and Internet
servers. This feature allows organizations to move data both within the firewall
and outside the firewall for customer or supplier use and for use with our
Softgoods module. The Replicator can automatically export data and content from
one Web site and import it to another to provide synchronized Web-publishing
between Intra.doc! sites. The Archiver allows users to export a bundle of data
for off-line storage and subsequently import and manage that bundle at any time,
exactly as it was before export. Import mapping allows mass
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substitution of meta data so that groups of information can be simultaneously
imported and reorganized or consolidated.
Intra.doc! Legacy. Intra.doc! Legacy automatically scans and converts an
organization's paper-based legacy data and content into Web-ready files, which
allows access, management and publication of these files in Intra.doc!. Our
Legacy module can both scan in the image and capture product bar codes and other
important meta data to streamline data conversion and organization into one easy
process. Intra.doc! Legacy uses both Adobe Capture and Kofax Ascent Capture
scanning technology to provide users with a single, compact, fully searchable
file that replicates the original data and content.
Intra.doc! Enterprise Search. Intra.doc! Enterprise Search permits users to
perform sophisticated full-text or multiple field searches across all of an
organization's Intra.doc! repositories. Enterprise-level security allows users
to search for information across the organization while ensuring that they
access only the data and content that they are authorized to view and modify.
Searches using the Enterprise Search module can be accomplished quickly by all
types of personnel because they are managed through the user's Web browser.
Additional Product Modules. Additional Intra.doc! product modules include
the following:
- Intra.doc! Developer's Kit allows our customers to easily configure
Intra.doc! to create their own "look and feel."
- Intra.doc! ODMA Extensions provide users with the ability to manage and
Web-publish data directly from any ODMA compliant application, such as
Microsoft Word, WordPerfect and Adobe FrameMaker.
- Intra.doc! Forms enables one or multiple users to electronically complete
and manage forms in a Web environment.
- Intra.doc! PDF Watermark allows data to be dynamically watermarked with
specific comments or instructions.
- Intra.doc! AutoCAD Conversion permits native AutoCAD engineering drawings
to be accessed, managed and published in a Web-based format.
- Intra.doc! TIFF Conversion allows tag image file format, or TIFF, files
to be checked into Intra.doc! and then Web-published as multiple-page PDF
files.
- Intra.doc! Report Parsing captures mainframe reports, organizes them by
parsing meta data and batch-loads this information into an Intra.doc!
repository.
- Intra.doc! CD Publisher allows organizations to publish data and content
directly from the Web to CD-ROM for use by individuals without Web
access.
- Intradoc.net Hosting Service provides a complete range of Intra.doc! data
and content management services administered by our staff through a
secure Web site.
PRICING
Our pricing is based on the number of servers and contributors rather than
the number of users. Pricing currently ranges from $18,000 to $85,000 per server
for the Intra.doc! Management System, with add-on modules ranging from $2,500 to
$25,000 per server.
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Applications of Intra.doc! typically encompass multiple servers. For an
additional annual maintenance fee, we provide customers with maintenance and
support packages, including hotline support and product updates, to help them
obtain the maximum benefit of Intra.doc!.
SERVICES
Our services organization provides solution-focused services that enable
our customers to realize the potential of our products in an open network
computing environment. We act as a business partner to our customers by
providing a broad spectrum of services, including needs assessment, software
integration, security analysis, application development and training. These
services are offered for fees, the amount of which depends on the nature and
scope of the project. We are currently focusing on expanding our consulting
services to increase our breadth of experience and geographic coverage.
TECHNOLOGY
We believe our advanced technology provides our customers with a
comprehensive solution for rapidly accessing, managing and Web-publishing
business-critical data and content across intranets, extranets and the Internet
in less time, at lower cost and with better results than existing alternatives.
PRODUCT ARCHITECTURE
We believe that we have developed a unique and comprehensive architecture
for meeting the technical demands of applications designed for data and content
management through intranets, extranets and the Internet. By emphasizing a
Web-based data and content management architecture that provides profiling, or
meta data, capabilities and is designed for extremely scalable and
high-performance delivery, Intra.doc! provides an efficient architecture for
organizations to build and deploy Web-publishing applications quickly and
cost-effectively. We believe this architecture also provides a strong foundation
on which we can deliver future products.
Web-based Solution. Our products are designed to seamlessly and efficiently
interface with Web browsers, eliminating the need to install additional client
software. Intra.doc! is a server-based system written in Java, enabling it to
function in both the Windows NT and UNIX environments. On the front end,
Intra.doc! is client-side neutral and utilizes HTML interfaces that are
compatible with the leading Web browsers. Once the browser has been launched,
users can search for data and content utilizing Verity's search engine, navigate
to a Web page and view data and content via a standard browser, a plug-in or
another viewing application. In addition, each piece of data and content is
automatically fully indexed allowing for full-text searching through the Web
browser. Intra.doc! also enables users to check out data and content for editing
and check it back in to dynamically update the Intra.doc! repository and the Web
site. As Web architecture continues to evolve, our architecture strategy is to
continue to develop Intra.doc! as a Web-based solution that integrates
seamlessly with an organization's existing intranet, extranet and Internet
infrastructure.
Data and Content Storage and Management. Intra.doc! stores data and
content, including text and graphics, in its native format in a repository and
enables access and management control features for this information. Utilizing a
server-based architecture, Intra.doc! can access and manage vast amounts of
unstructured data and content across a large number of intranet, extranet and
Internet users in a geographically dispersed
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environment. Depending upon the needs of the organization, this storage can take
place on a single server for less intensive workgroup applications or across a
large number of servers for enterprise-wide solutions, affording efficient
scalability. As a data and content manager, Intra.doc! enables standard library
services such as check-in, check-out, version control and data history.
Intra.doc! enables users to rapidly and securely access data and content while
providing management functions.
Document conversion for Web-publishing. Once a document or graphic has been
created or edited, Intra.doc! dynamically attaches meta data and automatically
converts the document to a Web-based format. This capability allows users to
build Web pages quickly and efficiently and provides search capabilities to
allow dynamic utilization of Web content.
Intra.doc! is a multi-tiered, server-based system that is written in Java.
The server layer contains all system processing logic and handles functions such
as document conversion and connection to the relational database. This
relational database is used to store all document profile information in the
Intra.doc! repository. Published content is stored directly on the Web server
and all file transfers are via hypertext transfer protocol, or HTTP. File access
does not have to be processed with a common gateway interface, or CGI, script,
thereby reducing retrieval time. A security plug-in is used on the server to
reduce security complexity and speed processing.
The ability to use standard HTTP provides a number of significant
advantages such as the transfer of data and content through firewalls while
using standard compression, encryption and certificate servers. HTTP allows
organizations to keep their firewall configurations simple and secure. The
following diagram details Intra.doc!'s system architecture.
[GRAPHIC DEPICTING ARCHITECTURE]
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The architecture of Intra.doc! embodies the following concepts that make it
an enterprise-scalable system that is easily deployable and can be utilized by a
wide range of customers:
- Ease of use and administration. Our Intra.doc! products feature quick
installation, often in a matter of days, ease-of-use for individual users
and simple maintenance procedures for administrators.
- Ease of integration. From inception, our products have been built on open
Web standards enabling seamless integration into existing corporate
environments. Our component architecture allows customers the ability to
integrate immediately with other system components. For example, our
compatibility with Windows NT domains and LDAP security frameworks allows
our customers to efficiently integrate NT or LDAP central security with
Intra.doc! to control and secure access to the data and content in the
Intra.doc! repository without duplicating their efforts.
- Scalability. Our customers' business-critical data and content needs
continue to expand and evolve. Our understanding of the scaling of a
customer's future data and content management needs as volume and
bandwidth increase across an enterprise ensures that our customers'
information investments are protected and that they can continue to grow
with Intra.doc!
- Flexibility. With our open Web standards, multi-platform Java-based
solution, we offer customers the flexibility to solve information
management problems and address future needs utilizing their existing
Internet infrastructure.
We believe Intra.doc! is a comprehensive solution for organizations that
require Web-based data and content management solutions across intranets,
extranets and the Internet. We believe that by fostering the creation and
adoption of an open Web-based standard for data and content management utilizing
intranets and extranets, we will be able to maintain and extend our technology
leadership.
RESEARCH AND DEVELOPMENT
We have made substantial investments in research and development through
both internal development and technology acquisitions. We expect to develop most
of our technology enhancements internally while continuing to evaluate
externally developed technologies for integration into our Intra.doc! product
line.
The majority of our research and development activity has been directed
towards developing feature extensions to our Intra.doc! suite of products. Our
goal is to add features that allow our customers to leverage their data and
content to expand their services and create content-based revenue opportunities.
To this end, we intend to enhance the custom content delivery capabilities of
Intra.doc! and allow data and content to be built dynamically from multiple
sources. In addition, we will focus on expanding the range of data sets
Intra.doc! is capable of managing.
In order to continue to provide product leadership in the data and content
management market, we intend to make major product releases each year.
Intra.doc! Version 4.0 is scheduled for release in the second half of 1999. The
success of new introductions is dependent on several factors, including timely
completion and market introduction, differentiation of new products and
enhancements from those of our competitors and market acceptance of new products
and enhancements.
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Our research and development expenditures for fiscal 1997, 1998 and 1999
were approximately $1.1 million, $1.2 million and $1.3 million. We expect that
we will continue to commit significant resources to research and development in
the future. All research and development costs have been expensed as incurred.
The market for our products is characterized by rapid technological change,
frequent new product introductions and enhancements, evolving industry standards
and rapidly changing customer requirements. The introduction of products
incorporating new technologies and the emergence of new industry standards could
render existing products obsolete and unmarketable. Our future success will
depend in part on our ability to anticipate changes, enhance our current
products, develop and introduce new products that keep pace with technological
advancements and address the increasingly sophisticated needs of our customers.
We may not be successful in developing and marketing new products and
enhancements that respond to competitive and technological developments and
changing customer needs.
CUSTOMERS
Our customer base has grown to well over 200 customers representing a
diverse group of industries. Our customers range from small manufacturing firms
to Fortune 500 companies. Selected customers using Intra.doc! include:
AEROSPACE AND AIRLINE
AlliedSignal
Britannia Airways
British Aerospace Airbus
The Sabre Group
BANKING AND FINANCE
Cargill
Dean Witter Reynolds
Fidelity
GE Capital
ING Barings
KPMG Peat Marwick
U.S. Bancorp Piper Jaffray
CONSUMER
Carlson Companies
Dayton Hudson
Land O'Lakes
OfficeMax
Revlon
GAS AND UTILITIES
Central Iowa Power
Natural Gas Company of
Trinidad & Tobago
Sierra Pacific Power
Wisconsin Electric Power
GOVERNMENT AND EDUCATION
County of San Mateo, CA
Lawrence Livermore National Labs
Los Alamos National Labs
Minnesota Department of Transportation
Swiss Highway Authority
University of California
University of Minnesota
HEALTH CARE
Allina Health System
Guidant
Tufts Health Care
United Health Group
Wellmark Blue Cross Blue Shield of Iowa
MANUFACTURING
Eaton
Ecolab
Fisher Controls
Honeywell
Maytag
Toro
Toyota USA
TRW
Zilog
TECHNOLOGY
Data General
Ericsson
Fujitsu
GE Information Services
GTE Internetworking
Hewlett-Packard
IBM
Lucent Technologies
Rockwell Collins
Siemens Microelectronics
Sony
St. Paul Software
Synopsys
Xerox
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CUSTOMER PROFILES
Large Retail Organization. A large retail organization sought to streamline
the dissemination of information to its suppliers. The retailer's system
published and mailed to suppliers approximately one thousand paper-based
documents containing the retailer's supplier procedures and requirements. Paper
publication of these documents was inefficient and expensive as it involved 48
different departments across three separate operating companies, each with its
own supplier procedures and requirements. Accordingly, the retailer needed a
solution that would allow it to publish the documents on an extranet. Unable to
find a suitable packaged application, the retailer spent considerable resources
creating an in-house solution consisting of an extranet-based content retrieval
system with a manual document conversion process. The labor-intensive updating
and Web conversion process required extensive revision time and necessitated
frequent distribution of paper addendums. The retailer also needed to publish
the documents more frequently, but doing so with the in-house solution was cost
prohibitive.
To eliminate the time-consuming conversion process of the in-house
solution, the retailer installed Intra.doc!, which automatically converts
documents into a Web format. Updating is now a dynamic process as individual
departments simply revise documents and store them in Intra.doc! for automatic
publication. Intra.doc! allows the documents to be published more frequently
with greater accuracy while significantly reducing the costs of administration.
The retailer now also utilizes Intra.doc! in other areas of its business as a
means to publish sales, inventory and statistical reports on the Web in order to
make them available to clients.
International Manufacturing Company. A manufacturer of process control
valves and regulators sought to utilize its existing intranet to more
effectively distribute data and content within the organization. The
manufacturer's system required administrators to manually create HTML pages and
generate links to thousands of engineering designs and specifications for
delivery to 14 manufacturing plants around the world. As the manufacturer's
intranet grew, this process required increasing human and technical resources to
properly maintain the HTML pages and links. Accordingly, the manufacturer
required a Web-based architecture that could provide on-line data and content
publishing, create a data index for searching on the Web and allow content
contributors to Web-publish documents using a browser. The manufacturer also
needed the system to handle the multiple data types utilized in the
manufacturer's business and translate them into a Web format. Additional
requirements included workgroup-level security and ease of administration as
limited technical resources were available to support the intranet site.
After installing Intra.doc!, the manufacturer was able to significantly
reduce the time required to disseminate its business-critical information from
up to two weeks under the prior system to less than one day. According to the
manufacturer, it rapidly realized a complete recovery of its investment within a
single department by eliminating over 1.5 million sets of documents annually
that would have otherwise been manually distributed. The manufacturer is
currently converting all of its microfiche documents, including over 100 reports
of up to 80,000 pages, into a Web format and storing them on Intra.doc! for
on-line delivery and updating.
Leading Technology Company. A semiconductor manufacturer sought to replace
its manual revision management process. The manufacturer had an active database
of 20,000 pieces of internal data and content consisting of engineering
drawings, design records and manufacturing and testing specifications. The
manufacturer's original revision management process required administrators to
manually handle between 300 to 400 change notices a
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month. This process required a minimum of one week to generate a paper-based
change notice, obtain the necessary internal approvals, and send the entire
change notice to document control. Accordingly, the manufacturer needed a
solution that would automate this process, make documents accessible on its
intranet and provide cost-effective implementation and training. Representatives
from the major functional areas of the organization identified several required
features, including revision control, the capability of managing different
native file types, easy administration, flexible security and workflow
management.
The semiconductor manufacturer installed Intra.doc! as the revision
management system for its entire organization. Intra.doc!'s Web-based
capabilities allowed creation of an unlimited number of meta data fields,
enabling sophisticated searching of its high volume of change notices. The
flexibility of Intra.doc!'s Web-based architecture allowed the manufacturer to
configure its revision management system to its specifications so that it could
immediately utilize Intra.doc!'s data and content management functions. An
internal user group easily installed Intra.doc! without third-party consultants
and is now performing ongoing system administration. The manufacturer estimates
that Intra.doc! cost significantly less than developing an in-house solution or
purchasing a client-server document management product.
SALES AND MARKETING
We market and sell our products using a combination of direct and indirect
distribution channels. Our primary distribution channel is our direct sales
force, which targets mid- and large-size organizations. Our sales approach
typically includes a technical systems evaluation performed by our pre-sales
personnel, followed by demonstrations of our products' capabilities and direct
negotiations with our sales staff. In addition, we have an internal
telemarketing operation that is responsible for customer prospecting, lead
generation and follow-up. These activities identify and develop leads for
further sales efforts by our direct sales force. As of March 31, 1999, we had 22
direct sales and sales support personnel in the United States while our
international direct sales and sales support organization consisted of six
persons. Our goal is to increase both the number and geographic scope of our
direct sales force.
We also use indirect sales channels to increase the distribution and
visibility of our products through strategic alliances with resellers, VARs,
OEMs, key systems integrators and other channel partners in both domestic and
international markets. None of our distribution partners have exclusive
distribution rights.
We use a variety of marketing programs to build market awareness of our
brand name and our products, as well as to attract potential customers to our
products. A broad mix of programs is used to accomplish these goals, including
market research, product and strategy updates with industry analysts, public
relations activities, direct mail and relationship marketing programs, seminars,
trade shows, speaking engagements, Web site marketing and joint marketing
programs. Our marketing organization produces marketing materials in support of
sales to prospective customers that include brochures, data sheets, white
papers, presentations and demonstrations. Our joint marketing and distribution
partners include Adobe Systems, Inc., Microsoft Corporation, Sun Microsystems,
Inc. and Verity, Inc. In addition, our Intra.doc! suite of products incorporates
Adobe and Verity technology. Verity also sells our products using its own direct
sales force pursuant to a non-exclusive reseller agreement.
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<PAGE> 46
COMPETITION
The market for Web-based data and content management solutions is intensely
competitive, subject to rapid technological change and significantly affected by
new product introduction and other market activities of industry participants.
We expect competition to persist and intensify in the future. We have two
primary sources of competition: in-house solutions created by potential
customers and traditional document management products. In-house solutions are
developed by potential customers' internal information systems departments using
software and hardware tools from a variety of vendors. Traditional document
management products include those offered by companies such as PC DOCS Group
International Inc., which has entered into an agreement to be acquired by
Hummingbird Communications Ltd., Documentum, Inc. and Open Text Corporation. In
addition, companies participating in the market for Internet site management may
provide future competition to us if they move into broad-based data and content
management.
Many of our competitors have longer operating histories and significantly
greater financial, technical, marketing and other resources than we do and thus
may be able to respond more quickly to new or changing opportunities,
technologies and customer requirements. Also, many current and potential
competitors have greater name recognition and access to larger customer bases
than we have. Such competitors may be able to undertake more extensive
promotional activities and offer more attractive terms to purchasers than we
can. In addition, current and potential competitors have established or may
establish cooperative relationships among themselves or with third parties to
enhance their products. Accordingly, it is possible that new competitors or
alliances among competitors may emerge and rapidly acquire significant market
share.
Competition in our market could materially and adversely affect our ability
to obtain revenues from software license fees from new or existing customers on
terms favorable to us. Further, competitive pressures may require us to reduce
the price of our software. In either case, there can be no assurance that we
will be able to compete successfully with existing or new competitors or that
competition will not have a material adverse effect on our business, operating
results and financial condition.
PROPRIETARY RIGHTS
We rely on a combination of copyright, trade secret, trademark,
confidentiality procedures and contractual provisions to protect our proprietary
rights. Our software, documentation and other written materials are provided
limited protection by United States and international copyright laws. We license
our products in object code format for limited use by customers. We treat the
source code for our products as a trade secret and we require all employees and
third-parties who need access to the source code to sign non-disclosure
agreements. We have registered the trademarks IntraNet Solutions and Intra.doc!
in the United States and Canada.
Despite our efforts to protect our proprietary rights, unauthorized parties
may attempt to copy aspects of our products or to obtain and use information
that we regard as proprietary. Policing unauthorized use of our products is
difficult, and while we are unable to determine the extent to which piracy of
our software exists, software piracy can be expected to be a persistent problem.
Litigation may be necessary in the future to enforce our intellectual property
rights, to protect our trade secrets, to determine the validity and scope of the
proprietary rights of others or to defend against claims of infringement or
invalidity. However, the laws of many countries do not protect our proprietary
rights to as great an extent as do the
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<PAGE> 47
laws of the United States. Any litigation could result in substantial costs and
diversion of resources and could have a material adverse effect on our business,
operating results and financial condition. Our efforts to protect our
proprietary rights may not be adequate or our competitors may independently
develop similar technology. Any failure by us to meaningfully protect our
property could have a material adverse effect on our business, operating results
and financial condition.
We have not been notified that our products infringe the proprietary rights
of third parties. However, there can be no assurance that third parties will not
claim infringement with respect to our current or future products. We expect
that developers of Web-based data and content management products will
increasingly be subject to infringement claims as the number of products and
competitors in our market grows and as the functionality of products in
different segments of the software industry increasingly overlaps. Any claims,
with or without merit, could be time consuming to defend, result in costly
litigation, divert management's attention and resources, cause product shipment
delays or require us to enter into royalty or licensing agreements. Royalty or
licensing agreements, if required, may not be available on terms acceptable to
us or at all. A successful claim of product infringement against us and our
failure or inability to license the infringed technology or develop or license
technology with comparable functionality could have a material adverse effect on
our business, operating results and financial condition.
EMPLOYEES
As of March 31, 1999, we had 67 employees. Our future success will depend
in part on our ability to attract, retain, integrate and motivate highly
qualified sales, technical and management personnel, for whom competition is
intense. From time to time we also employ independent contractors to support our
services, product development, sales and marketing departments. Our employees
are not represented by any collective bargaining unit, and we have never
experienced a work stoppage. We believe our relations with our employees are
good.
FACILITIES
IntraNet Solutions is headquartered in Minneapolis, Minnesota, where we
lease approximately 15,000 square feet pursuant to a seven-year lease expiring
in 2005.
LEGAL PROCEEDINGS
We are not currently a party to any material legal proceedings.
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<PAGE> 48
MANAGEMENT
EXECUTIVE OFFICERS, DIRECTORS AND KEY PERSONNEL
The following table sets forth certain information with respect to each of
the executive officers, directors and other key personnel of IntraNet Solutions,
as of the date of this prospectus.
<TABLE>
<CAPTION>
NAME AGE POSITION
---- --- --------
<S> <C> <C>
Robert F. Olson...................... 43 President, Chief Executive Officer and
Chairman of the Board
Gregg A. Waldon...................... 38 Chief Financial Officer, Treasurer,
Secretary and Director
Katherine W. Bloomfield.............. 46 Vice President, Consulting Services
George Daum.......................... 43 Vice President, Sales
Patricia H. Fukasawa................. 43 Vice President, Training and Administration
Vernon J. Hanzlik.................... 41 Vice President, Strategic Development
Frank A. Radichel.................... 49 Vice President, Research and Development
Daniel P. Ryan....................... 40 Vice President, Marketing
Ronald E. Eibensteiner*.............. 46 Director
Kenneth H. Holec*.................... 43 Director
Steven C. Waldron*................... 50 Director
</TABLE>
- - -------------------------
* Member of Audit Committee and Compensation Committee
ROBERT F. OLSON founded our business and has served as President, Chief
Executive Officer and Chairman of the Board of IntraNet Solutions and its
predecessor company since 1990. From 1987 to 1990, he served as the General
Manager of the Greatway Communications Division of Anderberg-Lund Printing
Company, an electronic publishing sales and service organization. Prior to that
time, Mr. Olson held management and marketing positions in several electronic
publishing service organizations.
GREGG A. WALDON has served as our Chief Financial Officer, Treasurer and
Secretary, and as a director, since April 1999. From 1992 to April 1999, he held
various financial management positions with GalaGen Inc., a publicly traded
biopharmaceutical company, where he served as Chief Financial Officer since
November 1994. Prior to that time, Mr. Waldon was employed by
PricewaterhouseCoopers LLP.
KATHERINE W. BLOOMFIELD has served as our Vice President, Consulting
Services since October 1998. From June 1997 to October 1998, she was a
consultant with PricewaterhouseCoopers LLP specializing in data warehousing and
the Internet. From August 1994 to June 1997, Ms. Bloomfield was a director of
professional services for Apertus Technologies Incorporated, a developer of
systems integration software. From 1992 to July 1994, she was a Project Leader
for Siemens AG, a multinational electronics company.
GEORGE DAUM has served as our Vice President, Sales since March 1998. From
July 1997 through March 1998, he served as Vice President of Worldwide Channels
of Structural Dynamics Research Corporation, or SDRC, a developer of engineering
and manufacturing software. From December 1995 to July 1997, Mr. Daum served as
Vice President of Operations of CAMAX Manufacturing Technologies, a developer of
manufacturing software owned by SDRC. From November 1993 to December 1995, Mr.
Daum served as Vice President of Sales for CAMAX.
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<PAGE> 49
PATRICIA H. FUKASAWA has served as our Vice President, Training and
Administration since July 1996 . She has been employed by IntraNet Solutions and
its predecessor company since 1990 in various marketing positions. Prior to that
time, Ms. Fukasawa held various technical support positions with Honeywell Inc.,
a multinational technology products company, and Control Data Corporation, a
computer hardware manufacturer.
VERNON J. HANZLIK has served as our Vice President, Strategic Development
since April 1999. He has been employed by IntraNet Solutions and its predecessor
company since 1991 and served as Vice President, Product Marketing from June
1996 to April 1999. Prior to that time, Mr. Hanzlik held marketing and
application consulting positions with Lee Data Corporation, a computer hardware
manufacturer.
FRANK A. RADICHEL has served as our Vice President, Research and
Development since March 1995. From 1990 to March 1995, he served as CALS Project
Leader and Technical Architect for Alliant TechSystems Inc., a manufacturer of
aerospace and defense technologies. Prior to that time, Mr. Radichel held
various positions in the Test Equipment Design Department of Honeywell Inc.
DANIEL P. RYAN has served as our Vice President, Marketing since April
1999. From September 1997 to April 1999, he served as Vice President of
Marketing for Foglight Software, Inc., a developer of enterprise performance
management solutions. From March 1995 to September 1997, Mr. Ryan served as
Director of Marketing for Compact Devices Inc., a developer of Internet
application software. Prior to that time, Mr. Ryan was employed by Sync Research
Inc., a developer of wide-area network access solutions, as its Director of
Corporate Marketing.
RONALD E. EIBENSTEINER has served as a director of IntraNet Solutions since
March 1996. He has been President of Wyncrest Capital, Inc., a venture capital
firm that he founded, since 1990. Mr. Eibensteiner is a director of OneLink
Communications, Inc., a company that specializes in transforming raw
telecommunications data into visual business intelligence.
KENNETH H. HOLEC has served as a director of IntraNet Solutions since
February 1998. He has been President and Chief Executive Officer of ShowCase
Corporation, a supplier of data warehousing systems, since November 1993. From
1985 to 1993, Mr. Holec served as President and Chief Executive Officer of
Lawson Associates, Inc., a developer of financial and human resource management
software products.
STEVEN A. WALDRON has served as a director of IntraNet Solutions since
February 1998. He has been President and Chief Executive Officer of St. Paul
Software, Inc., a provider of e-commerce software and transaction processing
services, since November 1997. From 1992 to March 1995, he was president of
Innovex, Inc., a diversified technology company. Prior to that time, Mr. Waldron
served as President and Chief Executive Officer of Norstan, Inc., a supplier of
telecommunications hardware and software, which he co-founded.
COMMITTEES OF THE BOARD OF DIRECTORS AND DIRECTOR COMPENSATION
Board Committees. The Board of Directors maintains an Audit Committee
composed of Messrs. Eibensteiner, Holec and Waldron. The Audit Committee
recommends to the Board of Directors the appointment of independent auditors,
reviews and approves the scope of the annual audit and any non-audit services
performed by the independent auditors, reviews the findings and recommendations
of the independent auditors and periodically reviews and approves major
accounting policies and significant internal accounting control procedures.
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<PAGE> 50
The Board of Directors also maintains a Compensation Committee comprised of
Messrs. Eibensteiner, Holec and Waldron. The Compensation Committee reviews and
recommends compensation of officers and directors, administers stock option
plans and reviews major personnel matters.
Director Compensation. Members of the Board of Directors who are not
employees of IntraNet Solutions are eligible to receive stock option grants
under the 1997 Director Stock Option Plan. No options were granted under the
plan in the fiscal year ended March 31, 1999.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
No interlocking relationship exists between our Compensation Committee and
any member of any other company's board of directors or compensation committee,
nor has any such relationship existed in the past.
EXECUTIVE COMPENSATION
The following table presents the compensation for each of the last three
fiscal years of the Chief Executive Officer and the other executive officer of
IntraNet Solutions who received salary and bonuses in excess of $100,000 for the
fiscal year ended March 31, 1999.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG-TERM
COMPENSATION
ANNUAL AWARDS
COMPENSATION ------------------
FISCAL ----------------- COMMON STOCK ALL OTHER
NAME AND PRINCIPAL POSITION YEAR SALARY BONUS UNDERLYING OPTIONS COMPENSATION(1)
- - --------------------------- ------ -------- ------ ------------------ ---------------
<S> <C> <C> <C> <C> <C>
Robert F. Olson........... 1999 $168,175 $ -- -- $13,067
President and Chief 1998 155,000 -- -- 10,492
Executive Officer 1997 141,793 -- -- 10,492
Jeffrey J. Sjobeck(2)..... 1999 106,720 -- -- --
Chief Financial Officer, 1998 100,000 -- 10,000 --
Treasurer and Secretary 1997 82,291 2,100 12,500 --
</TABLE>
- - -------------------------
(1) Represents matching contributions by us under our 401(k) Savings Incentive
Plan and term life and disability insurance premiums.
(2) Mr. Sjobeck resigned on April 2, 1999.
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<PAGE> 51
AGGREGATED FISCAL 1999 YEAR-END OPTION VALUES
The following table presents information about options held by the
executive officers named in the Summary Compensation Table and the value of
those options as of March 31, 1999.
<TABLE>
<CAPTION>
VALUE OF UNEXERCISED
NUMBER OF UNEXERCISED IN-THE-MONEY OPTIONS AT
OPTIONS AT MARCH 31, 1999 MARCH 31, 1999(1)
---------------------------- ----------------------------
NAME EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
---- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C>
Robert F. Olson................. -- -- $ -- $ --
Jeffrey J. Sjobeck.............. 61,929 30,529(2) 376,716 166,628(2)
</TABLE>
- - -------------------------
(1) Based on a value of $8.25, the per share closing price of our common stock
on the Nasdaq SmallCap Market on March 31, 1999, net of the option exercise
price.
(2) As a result of Mr. Sjobeck's resignation in April 1999, these options will
not become exercisable and will be returned to the available option pool
under the 1994-1997 Stock Option and Compensation Plan.
EMPLOYMENT AGREEMENTS
In July 1996, we entered into a three-year employment agreement with Robert
F. Olson, our President and Chief Executive Officer. Mr. Olson receives an
annual base salary of $155,000, subject to annual increases, and has the
opportunity to earn performance-related bonuses. Pursuant to this agreement, Mr.
Olson has agreed not to compete with us for a two-year period after any
termination of employment. In the event of his termination without cause, Mr.
Olson will be entitled to receive severance compensation equal to the greater of
six months of his then current base salary or the balance of the compensation
due and owing to him under his employment agreement.
In April 1999, we entered into a two-year employment agreement with Gregg
A. Waldon, our Chief Financial Officer, Treasurer and Secretary. Mr. Waldon
receives a minimum base salary of $125,000, subject to annual increases, plus
annual performance bonuses of up to $40,000. Mr. Waldon has agreed not to
compete with us during his employment and for a period of nine months following
his termination from employment. In the event of a change in control or his
termination of employment without cause, Mr. Waldon will receive severance pay
equal to 180 days of his then current base salary.
BENEFIT PLANS
1994-1997 Stock Option and Compensation Plan. We adopted and our
shareholders have approved the 1994-1997 Stock Option and Compensation Plan for
our officers, directors other than outside directors, employees and certain key
consultants and advisors. The purpose of the plan is to enhance shareholder
value and to advance our interests by furnishing a variety of economic
incentives designed to attract, retain and motivate those persons eligible for
incentives under the plan. Incentives under the plan consist of opportunities to
purchase or receive our shares of common stock, monetary payments or both.
The plan is administered by a stock option committee consisting of Messrs.
Eibensteiner, Holec and Waldron. The committee has complete and final authority
with respect to the interpretation and administration of the plan. Eligibility
for incentives under the plan is determined by the committee with respect to
both individuals and groups based on a variety of criteria, including, but not
limited to, pay grade, job performance, job responsibility, length of service
and various other factors that the committee may deem appropriate at the time of
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<PAGE> 52
granting any incentives. To date, we have made grants of incentives to 66 of our
current employees have been made in the form of non-qualified stock options.
Incentives under the plan may be granted in any combination of the
following forms, as determined by the committee:
- incentive stock options;
- non-statutory or non-qualified stock options;
- stock appreciation rights;
- stock awards;
- restricted stock awards;
- performance shares; and
- cash awards.
Prices and expiration dates of, and material conditions to, the granting of
options under the plan are determined by the committee based on our assessment
of employment, tax and other financial factors affecting us from time to time.
Incentives granted under the plan generally are not transferable. Subject to
certain adjustments, the maximum number of shares of common stock that may be
issued under the plan is 2,500,000. Generally, an optionee may pay the exercise
price to exercise a stock option in the form of cash or the surrender of shares
of common stock. Options granted under the plan may be exercisable for up to ten
years from the date of grant, if the optionee ceases to be employed by us for
any reason, the options generally expire six months after the date of
termination of employment.
1997 Director Stock Option Plan. We adopted, and our shareholders have
approved, the 1997 Director Stock Option Plan. The plan allows the Board of
Directors to grant stock options to members of the Board of Directors who are
not our employees. The exercise price of any option granted under the plan is
equal to the fair market value of our common stock on the grant date. The term
of an option granted under the plan may not exceed ten years from the date of
grant.
LIMITATION OF LIABILITY AND INDEMNIFICATION
Our Articles of Incorporation limit the liability of our directors for
monetary damages arising from a breach of their fiduciary duty as directors,
except to the extent otherwise required by the Minnesota Business Corporation
Act. This limitation of liability does not affect the availability of equitable
remedies such as injunctive relief or rescission.
Our Bylaws provide that we shall indemnify our directors and officers to
the fullest extent permitted by Minnesota law, including any circumstances in
which indemnification is otherwise discretionary under Minnesota law.
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<PAGE> 53
PRINCIPAL AND SELLING SHAREHOLDERS
The following table presents information regarding beneficial ownership of
our common stock as of March 31, 1999, held by each person known by us to be the
beneficial owner of more than 5% of our common stock, each executive officer
named in the Summary Compensation Table, each director, each selling shareholder
and all executive officers and directors as a group. The table also presents the
same information as adjusted to reflect the sale of shares offered hereby and
the conversion of all outstanding shares of Series A convertible preferred stock
into shares of common stock upon completion of this offering. In accordance with
the rules of the SEC, beneficial ownership includes the shares issuable pursuant
to stock options that are exercisable within 60 days of March 31, 1999. Shares
issuable pursuant to stock options are considered outstanding for computing the
percentage of the person holding the options but are not considered outstanding
for computing the percentage of any other person. The number of shares of common
stock outstanding after this offering includes the 3,230,000 shares of common
stock being offered for sale by us in this offering and the exercise of options
to purchase 75,000 shares of common stock and the sale of those shares in this
offering by a selling shareholder. The percentage of beneficial ownership for
the following table is based on 10,803,500 shares of common stock outstanding as
of March 31, 1999 and 14,209,578 shares of common stock outstanding after the
completion of this offering, assuming conversion of all outstanding shares of
Series A convertible preferred stock into common stock, and assuming no exercise
of the underwriters' over-allotment option. Unless otherwise indicated, the
address for each listed shareholder is: c/o IntraNet Solutions, Inc., 8091
Wallace Road, Minneapolis, Minnesota 55344. To our knowledge, except as
indicated in the footnotes to this table, the persons named in the table have
sole voting and investment power with respect to all shares of common stock.
<TABLE>
<CAPTION>
SHARES SHARES
BENEFICIALLY OWNED BENEFICIALLY OWNED
PRIOR TO THE OFFERING SHARES AFTER THE OFFERING
---------------------- BEING ----------------------
NAME AND ADDRESS OF BENEFICIAL OWNER NUMBER PERCENTAGE OFFERED NUMBER PERCENTAGE
- - ------------------------------------ --------- ---------- ------- --------- ----------
<S> <C> <C> <C> <C> <C>
Robert F. Olson(1)............... 3,816,632 34.9% 375,000 3,441,632 24.0%
Jeffrey J. Sjobeck(2)............ 61,929 * -- 61,929 *
Ronald E. Eibensteiner(3)........ 464,660 4.2 -- 464,660 3.2
Kenneth H. Holec(4).............. 10,000 * -- 10,000 *
Steven C. Waldron(4)............. 10,000 * -- 10,000 *
Vernon J. Hanzlik(4)............. 250,591 2.3 75,000 175,591 *
Perkins Capital Management,
Inc.(5)........................ 952,635 8.4 -- 952,635 6.5
All directors and executive officers
as a group (5 persons)(6)...... 4,301,292 38.8 375,000 3,926,292 27.1
</TABLE>
- - -------------------------
* Less than 1% of currently outstanding common stock.
(1) Includes 35,714 shares owned by Mr. Olson's spouse, 50,000 shares issuable
upon exercise of a warrant held by Mr. Olson and 84,619 shares issuable upon
exercise of a warrant owned by a trust for the benefit of Mr. Olson's minor
children.
(2) Includes 61,929 shares issuable upon exercise of options owned by Mr.
Sjobeck.
(3) Includes 316,588 shares owned by an investment fund owned and managed by Mr.
Eibensteiner and 137,072 shares issuable upon exercise of options and
warrants owned by Mr. Eibensteiner.
(4) Represents shares issuable upon exercise of options.
(5) Ownership is based on information contained in a Schedule 13G filed with the
SEC on February 11, 1999. Includes 520,716 shares issuable upon exercise of
options and warrants owned by Perkins Capital Management, Inc. The address
for this shareholder is: 730 East Lake Street, Wayzata, Minnesota 55391.
(6) Includes the shares issuable upon exercise of the options and warrants
described in the footnotes above.
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<PAGE> 54
DESCRIPTION OF SECURITIES
Our authorized capital stock consists of 25,000,000 shares, of which
19,154,695 shares have been designated as common stock, 1,000,350 shares have
been designated as preferred stock and 4,844,955 shares remain undesignated.
COMMON STOCK
As of March 31, 1999, there were 10,904,578 shares of common stock
outstanding and held by 121 shareholders of record and approximately 1,500
beneficial owners, after giving effect to the conversion of all outstanding
shares of Series A convertible preferred stock into shares of common stock upon
the closing of the offering. Based upon the number of shares outstanding as of
March 31, 1999 and giving effect to the issuance of the shares of common stock
being offered by us and the issuance of 75,000 shares included in the offering,
which shares were issued to a selling shareholder upon the exercise of stock
options, there will be 14,209,578 shares of common stock outstanding upon the
closing of the offering.
Holders of shares of common stock are entitled to one vote for each share
held of record on all matters on which shareholders are entitled or permitted to
vote. There is no cumulative voting for the election of directors. Subject to
the prior rights of holders of preferred stock, the holders of common stock are
entitled to receive dividends when and as declared by the Board of Directors out
of funds legally available for dividends. Upon a liquidation, our creditors and
holders of our preferred stock with preferential liquidation rights will be paid
before any distribution to holders of our common stock. The holders of our
common stock would be entitled to receive a pro rata amount per share of any
excess distribution. Holders of common stock have no preemptive or subscription
rights. There are no conversion rights, redemption rights, sinking fund
provisions or fixed dividend rights with respect to the common stock. All
outstanding shares of common stock are fully paid and nonassessable, and the
shares of common stock to be issued upon completion of this offering will be
fully paid and nonassessable.
Our directors and executive officers as a group beneficially own
approximately 39% of our outstanding common stock. Upon the completion of the
offering, and giving effect to the conversion of currently outstanding shares of
Series A convertible preferred stock into shares of common stock, such persons
will beneficially own approximately 27% of the outstanding shares. Accordingly,
such persons will continue to be able to control our affairs, including, without
limitation, the sale of our equity or debt securities, the appointment of
officers, the determination of officers' compensation and the determination as
to whether to register outstanding securities.
PREFERRED STOCK
We have authorized two series of preferred stock. These consist of
1,000,000 shares of Series A convertible preferred stock and 350 shares of
Series B convertible preferred stock. As of March 31, 1999, there were 75,000
shares of Series A convertible preferred stock outstanding, all of which will be
automatically converted into an aggregate of 101,078 shares of common stock upon
the closing of the offering, assuming the application of the maximum conversion
price of $3.71 per share. No shares of Series B convertible preferred stock are
currently outstanding.
Our Board of Directors has authority to fix the rights, preferences,
privileges and restrictions, including voting rights, of our unissued shares of
capital stock and to issue stock
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<PAGE> 55
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 may be created and issued
in the future.
We have no current plans to issue any additional shares of preferred stock.
However, the issuance of preferred stock or of rights to purchase preferred
stock could have the effect of making it more difficult for a third party to
acquire, or of discouraging a third party from attempting to acquire, a majority
of our outstanding common stock.
WARRANTS
As of March 31, 1999, there were warrants outstanding to purchase up to
1,286,114 shares of our common stock at exercise prices ranging from $2.32 to
$8.00 per share. These warrants contain anti-dilution provisions providing for
adjustments to the exercise price and the number of shares of common stock
underlying these warrants upon the occurrence of specified events, including any
recapitalization, reclassification, stock dividend, stock split, stock
combination or similar transaction.
REGISTRATION RIGHTS
Certain current and former members of our Board of Directors possess
incidental registration rights with respect to an aggregate of approximately
3,400,000 shares of our common stock. Each of these persons has waived such
registration rights with respect to this offering.
POTENTIAL ANTI-TAKEOVER EFFECT OF MINNESOTA LAW
We are governed by the provisions of Sections 302A.671 and 302A.673 of the
Minnesota Business Corporation Act, which are anti-takeover laws. In general,
Section 302A.671 provides that the shares of a corporation acquired in a
"control share acquisition" have no voting rights unless voting rights are
approved in a prescribed manner. A "control share acquisition" is an
acquisition, directly or indirectly, of beneficial ownership of shares that
would, when added to all other shares beneficially owned by the acquiring
person, entitle the acquiring person to have voting power of 20% of more in the
election of directors. In general, Section 302A.673 prohibits a publicly held
Minnesota corporation from engaging in a "business combination" with an
"interested shareholder" for a period of four years after the date of the
transaction in which the person became an interested shareholder, unless the
business combination is approved in a prescribed manner. "Business combination"
includes mergers, asset sales and other transactions resulting in a financial
benefit to the interested shareholder. An "interested shareholder" is a person
who is the beneficial owner, directly or indirectly, of 10% or more of the
corporation's voting stock, or an affiliate or associate of the corporation and,
at any time within four years prior to the date in question, was the beneficial
owner, directly or indirectly, of 10% or more of the corporation's voting stock.
TRANSFER AGENT AND REGISTRAR
Norwest Bank Minnesota, N.A., is the transfer agent and registrar for our
common stock.
55
<PAGE> 56
SHARES ELIGIBLE FOR FUTURE SALE
Upon completion of the offering, and after giving effect to the conversion
of all Series A convertible preferred stock into shares of common stock and the
issuance of 75,000 shares included in the offering to a selling shareholder upon
the exercise of outstanding options, 14,209,578 shares of common stock will be
outstanding. Of this amount, approximately 10,000,000 shares will be freely
tradable on the public market without restriction or further registration under
the Securities Act, by persons who are not deemed to be our affiliates or acting
as underwriters as those terms are defined in the Securities Act. The
approximately 4,200,000 remaining shares of common stock are subject to the
resale limitations of Rule 144 of the Securities Act. Sales of these securities
must be registered under the Securities Act or made in accordance with an
exemption from registration, such as Rule 144.
Rule 144 provides that if at least one year has elapsed since shares of
common stock that constitute "restricted securities" were last acquired from us
or our affiliates, the holder is generally entitled to sell, within any
three-month period, a number of shares that does not exceed the greater of 1% of
the shares of common stock then outstanding or the reported average weekly
trading volume of the common stock during the four calendar weeks immediately
preceding the date on which notice of the sale is sent to the SEC. Sales under
Rule 144 are subject to certain manner of sale restrictions, notice requirements
and availability of current public information concerning us. Rule 144 also
applies the previously described limitations to unregistered sales of our common
stock by our affiliates. A person who is not our affiliate during the three
months preceding the sale, generally may sell shares without regard to the
volume limitations, manner of sale provision, notice requirements or the
availability of public information concerning us, provided that at least two
years have elapsed since the shares were last acquired from us or our
affiliates.
56
<PAGE> 57
UNDERWRITING
The underwriters named below, acting through their representatives, Dain
Rauscher Wessels, a division of Dain Rauscher Incorporated, and U.S. Bancorp
Piper Jaffray Inc., have severally agreed, subject to the terms and conditions
of the underwriting agreement, to purchase from us and the selling shareholders
the number of shares of common stock listed opposite their names below. The
underwriters are committed to purchase and pay for all such shares if any are
purchased, subject to the conditions stated in the underwriting agreement.
<TABLE>
<CAPTION>
NAME OF UNDERWRITER NUMBER OF SHARES
------------------- ----------------
<S> <C>
Dain Rauscher Wessels....................................... 1,490,500
U.S. Bancorp Piper Jaffray Inc. ............................ 1,219,500
Banc of America Securities LLC ............................. 115,000
BancBoston Robertson Stephens Inc. ......................... 115,000
Hambrecht & Quist LLC ...................................... 115,000
Morgan Stanley Dean Witter.................................. 115,000
Advest, Inc. ............................................... 85,000
William Blair & Company, L.L.C. ............................ 85,000
Craig-Hallum Capital Group, Inc. ........................... 85,000
John G. Kinnard & Company, Incorporated..................... 85,000
McDonald Investments Inc., a KeyCorp Company................ 85,000
Soundview Technology Group, Inc. ........................... 85,000
---------
Total.................................................. 3,680,000
=========
</TABLE>
The representatives have advised us and the selling shareholders that the
underwriters propose to offer the shares of common stock to the public at the
offering price set forth on the cover page of this prospectus and to certain
dealers at such price less a concession of not in excess of $0.33 per share, of
which $0.10 may be reallowed to other dealers. After the public offering, the
public offering price, concession and reallowance to dealers may be reduced by
the representatives. No such reduction will change the amount of proceeds to be
received by us and the selling shareholders as set forth on the cover page of
this prospectus.
The underwriting agreement contains covenants of indemnity among the
underwriters, us, and the selling shareholders against civil liabilities,
including liabilities under the Securities Act and liabilities arising from
breaches of representations and warranties contained in the underwriting
agreement.
We have granted to the underwriters an option to purchase up to 484,500
additional shares of common stock. The selling shareholders have granted the
underwriters on option to purchase up to 67,500 additional shares of common
stock. These options may be exercised at any time up to 30 days after the date
of this prospectus. The option entitles the underwriters to purchase the
additional shares of common stock at the same price per share as the 3,680,000
shares being sold in this offering. If the underwriters exercise the option,
each of the underwriters must purchase approximately the same percentage of
additional shares from us and the selling shareholders that they purchased in
the primary offering. If purchased, the additional shares will be sold by us and
the selling shareholders in approximately the same percentage of additional
shares as the shares included in the primary offering. If purchased, the
additional shares will be sold by the underwriters on the same terms as those on
which the 3,680,000 shares are being sold.
57
<PAGE> 58
The price of the shares of common stock purchased by the underwriters will
be the public offering price set forth on the cover page of the prospectus less
the following underwriting discounts and commissions, to be paid by us and the
selling shareholders.
<TABLE>
<CAPTION>
TOTAL WITHOUT TOTAL WITH
PER SHARE OVER-ALLOTMENT OVER-ALLOTMENT
--------- -------------- --------------
<S> <C> <C> <C>
By IntraNet Solutions..................... $0.56 $1,808,800 $2,080,120
By the selling shareholders............... $0.56 $ 252,000 $ 289,800
</TABLE>
We will also pay the total expenses of this offering.
Our officers and directors have agreed not to sell, transfer, grant any
third party the right to purchase, or otherwise dispose of any shares of common
stock or other securities that they own or acquire, other than shares of common
stock acquired in open market transactions, for a period of 180 days after the
date of this prospectus without the prior written consent of the underwriters.
This 180-day period is known as the lock-up period. The representatives may,
without notice and in their sole discretion allow any officer or director to
dispose of common stock or other securities prior to the expiration of the
lock-up period. There are however, currently no agreements between the
underwriters and any of our officers or directors allowing such sales.
In addition, we have agreed that we will not issue, sell, offer to sell, or
otherwise dispose of any shares of our common stock or other securities during
the lock-up period without the prior consent of the underwriters. This agreement
does not include shares of common stock or other securities issued pursuant to
employee stock option plans, employee stock purchase plans, or common stock or
other securities outstanding on the date of this prospectus. However, we have
agreed that employee stock options issued during the lock-up period to our
officers and directors may not be exercised prior to the expiration of the
lock-up period. Any shares of common stock issued to our officers and directors
during the lock-up period pursuant to the exercise of stock options or other
securities outstanding on the date of this prospectus shall bear a restrictive
legend restricting the transfer of such shares during the lock-up period.
The underwriters have advised us that in connection with this offering,
certain persons participating in this offering may engage in transactions that
may have the effect of stabilizing or maintaining the market price of the common
stock at a level above that which might otherwise prevail in the open market.
These transactions may include stabilizing bids, syndicate covering transactions
and the imposition of penalty bids. A "stabilizing bid" is a bid for or the
purchase of common stock on behalf of the underwriters for the purpose of
preventing or retarding a decline in the market price of the common stock. A
"syndicate covering transaction" is the bid for or the purchase of the common
stock on behalf of the underwriters to reduce a short position incurred by the
underwriters in connection with this offering. A "penalty bid" is an arrangement
permitting the representatives to reclaim the selling concession otherwise
accruing to an underwriter or syndicate member in connection with the offering
if the common stock originally sold by such underwriter or syndicate member is
purchased by the representatives in a syndicate covering transaction and has
therefore not been effectively placed by such underwriter or syndicate member.
The representatives have advised us that such transactions may be affected on
the Nasdaq SmallCap Market, Nasdaq National Market or otherwise and, if
commenced, may be discontinued at any time.
58
<PAGE> 59
WHERE YOU CAN FIND MORE INFORMATION
We are subject to the reporting requirements of the Securities Exchange Act
of 1934 requiring us to file reports, proxy statements and other information
with the SEC. These reports, proxy statements and other information filed by us
can be inspected and copied at the public reference facilities maintained by the
SEC at 450 Fifth Street, N.W., Room 1024, Washington D.C. 20549, and at the
SEC's regional offices at 7 World Trade Center, Suite 1300, New York, New York
10048, and 500 West Madison Street, Suite 1400, Chicago, Illinois 60661. Copies
of these materials can also be obtained from the Public Reference Section of the
SEC at 450 Fifth Street, N.W., Washington D.C. 20549, at prescribed rates.
Please call the SEC at 1-800-SEC-0330 for further information on the operation
of the public reference facilities. The SEC also makes our filings publicly
available on the Internet. The SEC's Web site is located at http://www.sec.gov.
We have filed a registration statement on Form S-1 with the SEC under the
Securities Act of 1933 with respect to the shares of common stock offered by
this prospectus. This prospectus, which constitutes a part of the registration
statement, does not contain all of the information set forth in the registration
statement and its exhibits and schedules. We have omitted certain items in
accordance with the rules and regulations of the SEC. For further information
with respect to us and the common stock offered by this prospectus, please
reference the registration statement and its exhibits and schedules. Statements
contained in this prospectus regarding the contents of any contract or any other
document to which the prospectus makes reference are not necessarily complete.
In each instance, we advise you to refer to the copy of the contract or other
document filed as an exhibit to the registration statement. Each such statement
is qualified in all respects by this reference. Copies of the registration
statement, and its exhibits and schedules, may be inspected without charge at
the public reference facilities maintained by the SEC or obtained at prescribed
rates from the Public Reference Section of the SEC at the above addresses. The
registration statement can also be accessed through the SEC's Web site.
LEGAL MATTERS
The legality of the issuance of the shares offered hereby will be passed
upon for us and the selling shareholders by Maslon Edelman Borman & Brand, LLP,
Minneapolis, Minnesota. Certain legal matters will be passed upon for the
underwriters by Faegre & Benson LLP, Minneapolis, Minnesota.
EXPERTS
Our consolidated financial statements as of March 31, 1999 and March 31,
1998 and for the years then ended included in this prospectus have been audited
by Grant Thornton LLP, independent certified public accountants, as indicated in
their report thereon, and are included herein in reliance upon the authority of
said firm as experts in giving said report. Our consolidated financial
statements for the year ended March 31, 1997 were audited by Ernst & Young LLP,
independent auditors, as indicated in their report thereon, and are included
herein in reliance upon the authority of said firm as experts in giving said
report.
59
<PAGE> 60
INTRANET SOLUTIONS, INC.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<S> <C>
Report of Independent Certified Public Accountants -- Grant
Thornton LLP.............................................. F-2
Report of Independent Accountants -- Ernst & Young LLP...... F-3
Consolidated Balance Sheets as of March 31, 1998 and
1999...................................................... F-4
Consolidated Statements of Operations for the years ended
March 31, 1997, 1998 and 1999............................. F-5
Consolidated Statements of Shareholders' Equity (Deficit)
for the years ended March 31, 1997, 1998 and 1999......... F-6
Consolidated Statements of Cash Flows for the years ended
March 31, 1997, 1998 and 1999............................. F-7
Notes to Consolidated Financial Statements.................. F-8
</TABLE>
F-1
<PAGE> 61
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
To the Board of Directors and Shareholders
IntraNet Solutions, Inc.
We have audited the accompanying consolidated balance sheets of IntraNet
Solutions, Inc. and subsidiaries as of March 31, 1999 and 1998, and the related
consolidated statements of operations, shareholders' equity (deficit) and cash
flows for each of the two years in the period ended March 31, 1999. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with 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 audits provide 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. and subsidiaries as of March 31, 1999 and 1998 and the
consolidated results of their operations and their consolidated cash flows for
each of the two years in the period ended March 31, 1999 in conformity with
generally accepted accounting principles.
/s/ GRANT THORNTON LLP
Minneapolis, Minnesota
April 14, 1999
F-2
<PAGE> 62
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Shareholders
IntraNet Solutions, Inc.
We have audited the accompanying consolidated statements of operations,
shareholders' equity, and cash flows of IntraNet Solutions, Inc. and
subsidiaries 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.
Since the date of completion of our audit of the accompanying consolidated
financial statements and initial issuance of our report thereon dated June 30,
1997, which report contained an explanatory paragraph regarding the Company's
ability to continue as a going concern, the Company, as discussed in Note 9, has
completed an issuance of its preferred stock and the exercise of stock options
and warrants resulting in net proceeds of $5,151,867 and $4,225,421 in 1998 and
1999, respectively. Therefore, the conditions that raised substantial doubt
about whether the Company will continue as a going concern no longer exist.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, IntraNet Solutions, Inc. and
subsidiaries' consolidated results of operations and cash flows for the year
ended March 31, 1997, in conformity with generally accepted accounting
principles.
/s/ Ernst & Young LLP
June 30, 1997,
except for Note 9, as to which the date is
April 28, 1999
F-3
<PAGE> 63
INTRANET SOLUTIONS, INC.
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
MARCH 31,
--------------------------
1998 1999
----------- ------------
<S> <C> <C>
ASSETS
Current assets:
Cash and equivalents................................. $ 994,526 $ 1,950,893
Accounts receivable, net............................. 4,925,301 3,615,273
Current maturities of notes receivable............... 61,793 113,959
Inventories.......................................... 233,121 52,001
Prepaid royalties.................................... 308,424 391,579
Prepaid expenses and other current assets............ 232,048 304,323
----------- ------------
Total current assets......................... 6,755,213 6,428,028
Notes receivable, net of current maturities............ 215,910 105,448
Property and equipment, net............................ 776,088 766,509
Net assets of discontinued operations.................. 709,128 --
----------- ------------
$ 8,456,339 $ 7,299,985
=========== ============
LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Revolving credit facility............................ $ 2,246,122 $ 421,685
Current maturities of long-term obligations.......... 663,631 177,631
Accounts payable..................................... 2,906,293 447,446
Deferred revenues.................................... 210,110 534,735
Commissions payable.................................. 166,325 230,228
Accrued expenses..................................... 397,461 327,882
----------- ------------
Total current liabilities.................... 6,589,942 2,139,607
Long-term obligations, net of current maturities....... 198,465 84,492
----------- ------------
Total liabilities............................ 6,788,407 2,224,099
----------- ------------
Commitments and contingencies.......................... -- --
Shareholders' equity (deficit):
Capital stock, $0.01 par value, 25,000,000 shares
authorized, 4,844,955 shares undesignated
Series A convertible preferred stock, $0.01 par
value, $5.00 stated value, 1,000,000 shares
designated, 450,000 and 75,000 shares issued and
outstanding at March 31, 1998 and 1999.......... 2,003,844 333,969
Series B convertible preferred stock, $0.01 par
value, $10,000 stated value, 350 shares
authorized, none issued or outstanding at March
31, 1998 and 1999............................... -- --
Common stock, $0.01 par value, 19,154,695 shares
designated, 8,607,445 and 10,803,500 issued and
outstanding at March 31, 1998 and 1999.......... 86,075 108,035
Additional paid-in capital........................... 8,760,980 15,295,977
Accumulated deficit.................................. (9,064,694) (10,637,166)
Unearned compensation................................ (118,273) (24,929)
----------- ------------
Total shareholders' equity................... 1,667,932 5,075,886
----------- ------------
$ 8,456,339 $ 7,299,985
=========== ============
</TABLE>
The accompanying notes are an integral part of the financial statements.
F-4
<PAGE> 64
INTRANET SOLUTIONS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
YEAR ENDED MARCH 31,
---------------------------------------
1997 1998 1999
----------- ----------- -----------
<S> <C> <C> <C>
Revenues:
Product licenses........................ $ 885,620 $ 2,563,339 $ 6,826,952
Services................................ 28,282 409,335 1,601,743
Hardware integration and support........ 15,276,674 16,477,121 5,629,621
----------- ----------- -----------
Total revenues............................ 16,190,576 19,449,795 14,058,316
----------- ----------- -----------
Cost of revenues:
Product licenses........................ 229,935 285,271 662,741
Services................................ 13,537 284,517 1,002,601
Hardware integration and support........ 11,894,532 12,883,240 4,600,683
----------- ----------- -----------
Total cost of revenues.................... 12,138,004 13,453,028 6,266,025
----------- ----------- -----------
Gross profit.............................. 4,052,572 5,996,767 7,792,291
----------- ----------- -----------
Operating expenses:
Sales and marketing..................... 2,014,160 3,130,885 4,315,646
General and administrative.............. 1,983,591 2,369,011 2,929,037
Research and development................ 1,115,782 1,243,068 1,342,394
----------- ----------- -----------
Total operating expenses.................. 5,113,533 6,742,964 8,587,077
----------- ----------- -----------
Loss from operations...................... (1,060,961) (746,197) (794,786)
Other income (expense):
Gain on sale of hardware integration
unit................................. -- -- 516,934
Interest expense, net................... (127,747) (332,109) (54,823)
----------- ----------- -----------
Loss from continuing operations........... (1,188,708) (1,078,306) (332,675)
Discontinued operations:
Loss on sale of distribution group...... -- -- (111,103)
Loss from operations of distribution
group................................ (2,559,756) (2,576,666) (410,361)
----------- ----------- -----------
Net loss.................................. (3,748,464) (3,654,972) (854,139)
Preferred stock dividends and accretion... -- (1,664,889) (718,333)
----------- ----------- -----------
Loss attributable to common
shareholders............................ $(3,748,464) $(5,319,861) $(1,572,472)
=========== =========== ===========
Loss per common share -- basic and
diluted:
Continuing operations................... $ (0.19) $ (0.14) $ (0.03)
Discontinued operations................. (0.40) (0.14) (0.05)
Net loss................................ (0.58) (0.47) (0.09)
Loss attributable to common
shareholders......................... (0.58) (0.68) (0.17)
=========== =========== ===========
Weighted average common shares
outstanding............................. 6,418,111 7,844,190 9,508,886
=========== =========== ===========
</TABLE>
The accompanying notes are an integral part of the financial statements.
F-5
<PAGE> 65
INTRANET SOLUTIONS, INC.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (DEFICIT)
YEARS ENDED MARCH 31, 1997, 1998 AND 1999
<TABLE>
<CAPTION>
SERIES A SERIES B
CONVERTIBLE CONVERTIBLE RETAINED
PREFERRED STOCK PREFERRED STOCK COMMON STOCK ADDITIONAL EARNINGS
---------------------- -------------------- --------------------- PAID-IN (ACCUMULATED
SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT CAPITAL DEFICIT)
-------- ----------- ------ ----------- ---------- -------- ----------- ------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance at April 1,
1996.................. -- $ -- -- $ -- 4,318,583 $ 43,186 $ (51,793) $ 3,631
Grant of compensatory
stock options......... -- -- -- -- -- -- 241,222 --
Exercise of stock
options and
warrants.............. -- -- -- -- 60,926 609 66,610 --
Stock option
compensation earned... -- -- -- -- -- -- -- --
Conversion of
promissory notes...... -- -- -- -- 158,346 1,583 548,417 --
Shares issued in
reverse acquisition... -- -- -- -- 2,940,587 29,406 2,583,352 --
Shares issued in
conjunction with
acquisition........... -- -- -- -- 45,161 452 349,548 --
Warrants issued in
conjunction with
promissory notes...... -- -- -- -- -- -- 90,000 --
Net loss............... -- -- -- -- -- -- -- (3,748,464)
-------- ----------- ---- ----------- ---------- -------- ----------- ------------
Balance at March 31,
1997.................. -- -- -- -- 7,523,603 75,236 3,827,356 (3,744,833)
Exercise of stock
options and
warrants.............. -- -- -- -- 541,034 5,411 1,625,082 --
Conversion of
promissory notes...... -- -- -- -- 71,428 714 249,286 --
Issuance of convertible
preferred stock....... 800,000 3,562,395 -- -- -- -- -- --
Conversion of preferred
stock to common
stock................. (350,000) (1,558,551) -- -- 471,380 4,714 1,553,837 --
Record non-cash deemed
dividend.............. -- (1,570,000) -- -- -- -- 1,570,000 --
Record deemed dividend
accretion............. -- 1,570,000 -- -- -- -- -- (1,570,000)
Dividends paid on
convertible preferred
stock................. -- -- -- -- -- -- -- (94,889)
Net loss............... -- -- -- -- -- -- -- (3,654,972)
Other.................. -- -- -- -- -- -- (64,581) --
-------- ----------- ---- ----------- ---------- -------- ----------- ------------
Balance at March 31,
1998.................. 450,000 2,003,844 -- -- 8,607,445 86,075 8,760,980 (9,064,694)
Exercise of stock
options and
warrants.............. -- -- -- -- 334,381 3,343 1,370,814 --
Cancellation of
compensatory stock
options............... -- -- -- -- -- -- (90,760) --
Issuance of common
stock................. -- -- -- -- 29,057 291 119,709 --
Issuance of convertible
preferred stock....... -- -- 300 2,851,264 -- -- -- --
Conversion of preferred
stock to common
stock................. (375,000) (1,669,875) (300) (2,851,264) 1,832,617 18,326 4,502,813 --
Record non-cash deemed
dividend.............. -- -- -- (570,000) -- -- 570,000 --
Record deemed dividend
accretion............. -- -- -- 570,000 -- -- -- (570,000)
Dividends paid on
convertible preferred
stock................. -- -- -- -- -- -- 14,088 (148,333)
Net loss............... -- -- -- -- -- -- -- (854,139)
Other.................. -- -- -- -- -- -- 48,333 --
-------- ----------- ---- ----------- ---------- -------- ----------- ------------
Balance at March 31,
1999.................. 75,000 $ 333,969 -- $ -- 10,803,500 $108,035 $15,295,977 $(10,637,166)
======== =========== ==== =========== ========== ======== =========== ============
<CAPTION>
TOTAL
SHAREHOLDERS'
UNEARNED EQUITY
COMPENSATION (DEFICIT)
------------ -------------
<S> <C> <C>
Balance at April 1,
1996.................. $ (16,207) $ (21,183)
Grant of compensatory
stock options......... (241,222) --
Exercise of stock
options and
warrants.............. -- 67,219
Stock option
compensation earned... 26,309 26,309
Conversion of
promissory notes...... -- 550,000
Shares issued in
reverse acquisition... -- 2,612,758
Shares issued in
conjunction with
acquisition........... -- 350,000
Warrants issued in
conjunction with
promissory notes...... -- 90,000
Net loss............... -- (3,748,464)
--------- -----------
Balance at March 31,
1997.................. (231,120) (73,361)
Exercise of stock
options and
warrants.............. -- 1,630,493
Conversion of
promissory notes...... -- 250,000
Issuance of convertible
preferred stock....... -- 3,562,395
Conversion of preferred
stock to common
stock................. -- --
Record non-cash deemed
dividend.............. -- --
Record deemed dividend
accretion............. -- --
Dividends paid on
convertible preferred
stock................. -- (94,889)
Net loss............... -- (3,654,972)
Other.................. 112,847 48,266
--------- -----------
Balance at March 31,
1998.................. (118,273) 1,667,932
Exercise of stock
options and
warrants.............. -- 1,374,157
Cancellation of
compensatory stock
options............... 90,760 --
Issuance of common
stock................. -- 120,000
Issuance of convertible
preferred stock....... -- 2,851,264
Conversion of preferred
stock to common
stock................. -- --
Record non-cash deemed
dividend.............. -- --
Record deemed dividend
accretion............. -- --
Dividends paid on
convertible preferred
stock................. -- (134,245)
Net loss............... -- (854,139)
Other.................. 2,584 50,917
--------- -----------
Balance at March 31,
1999.................. $ (24,929) $ 5,075,886
========= ===========
</TABLE>
The accompanying notes are an integral part of the financial statements.
F-6
<PAGE> 66
INTRANET SOLUTIONS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEAR ENDED MARCH 31,
-----------------------------------------
1997 1998 1999
----------- ----------- -----------
<S> <C> <C> <C>
Operating activities:
Net loss........................................... $(3,748,464) $(3,654,972) $ (854,139)
Adjustments to reconcile net loss to cash flows
from operating activities --
Depreciation and amortization.................. 231,157 290,094 308,244
Gain on sale of hardware integration unit...... -- -- (516,934)
Loss on sale of fixed assets................... 1,609 448 42,418
Discount amortization.......................... 17,527 71,894 --
Non-cash special charges....................... 219,361 -- --
Discontinued operations........................ (867,555) 1,029,072 709,128
Changes in operating assets and liabilities.... (750,395) (1,458,259) (1,152,160)
Other.............................................. 26,309 48,266 50,917
----------- ----------- -----------
Net cash flows used in operating activities........ (4,870,451) (3,673,457) (1,412,526)
----------- ----------- -----------
Investing activities:
Proceeds from sale of the hardware integration
group, net of related expenses................... -- -- 1,279,352
Proceeds from note receivable...................... 1,114,169 816,034 58,296
Proceeds from sale of fixed assets................. 6,570 3,398 6,355
Purchases of fixed assets.......................... (285,103) (371,766) (364,731)
----------- ----------- -----------
Net cash flows provided by investing
activities..................................... 835,636 447,666 979,272
----------- ----------- -----------
Financing activities:
Net advances (repayments) from revolving credit
facility......................................... 700,988 437,036 (1,824,437)
Proceeds from long-term obligations................ 2,433,313 -- --
Payments on long-term obligations.................. (191,820) (1,285,323) (806,935)
Payments on other long-term liabilities............ -- (102,447) (61,800)
Issuance of preferred stock........................ -- 3,521,373 2,851,264
Payment of dividends on preferred stock............ -- (94,889) (134,245)
Proceeds from stock options and warrants........... 67,219 1,630,494 1,374,157
Proceeds from reverse merger....................... 1,118,200 -- --
Other.............................................. (8,800) (7,725) (8,383)
----------- ----------- -----------
Net cash flows provided by financing
activities..................................... 4,119,100 4,098,519 1,389,621
----------- ----------- -----------
Net increase in cash................................. 84,285 872,728 956,367
Cash and equivalents, beginning of year.............. 37,513 121,798 994,526
----------- ----------- -----------
Cash and equivalents, end of year.................... $ 121,798 $ 994,526 $ 1,950,893
=========== =========== ===========
Supplemental disclosure of cash flows information:
Cash paid for interest............................. $ 351,955 $ 343,181 $ 71,661
Cash paid for income taxes......................... 600 7,281 6,842
Non-cash financing and investing activities:
Equipment acquired with capital lease obligation... $ 328,460 $ -- $ 84,377
Conversion of debt to common stock................. -- 250,000 --
Conversion of debt to preferred stock.............. -- 150,000 --
Common stock issued for royalties.................. -- -- 120,000
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................................ $ (102,883) $(2,145,452) $ 1,100,028
Inventories........................................ (62,888) 80,039 68,240
Prepaid expenses and other current assets.......... (492,640) (291,674) (17,098)
Accounts payable................................... (365,621) 816,366 (2,458,847)
Accrued expenses and other liabilities............. 273,637 82,462 155,517
----------- ----------- -----------
Net changes in operating assets and
liabilities.................................... $ (750,395) $(1,458,259) $(1,152,160)
=========== =========== ===========
</TABLE>
The accompanying notes are an integral part of the financial statements.
F-7
<PAGE> 67
INTRANET SOLUTIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 1997, 1998 AND 1999
1. NATURE OF THE BUSINESS
IntraNet Solutions, Inc. (the "Company") is a leading provider of Web-based
data and content management solutions for intranets, extranets and the Internet.
The Company's Intra.doc! suite of products offers customers the ability to
rapidly access, manage and publish unstructured business data. The Company's
customers are primarily located throughout the United States and in Europe.
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 currently derives all of its revenues from
licenses of its Intra.doc! suite of products and related services. Product
license revenue is recognized when a purchase order has been received, the
product has been shipped, and no significant obligations remain related to
implementation. Services revenue consists of fees from consulting and
maintenance. Consulting services include needs assessment, software integration,
security analysis, application development and training. The Company bills
consulting fees either on a time and materials basis or on a fixed-price
schedule. The Company's clients typically purchase maintenance agreements
annually, and the Company prices maintenance agreements based on a percentage of
the product license fee. Clients purchasing maintenance agreements receive
product upgrades, Web-based technical support and telephone hot-line support.
The Company recognizes revenue from maintenance agreements ratably over the term
of the agreement, typically one year.
Customer advances and billed amounts due from customers in excess of
revenue recognized are recorded as deferred revenue.
The Company adopted Statement of Position, or SOP, 97-2, Software Revenue
Recognition, and SOP 98-4, Deferral of the Effective Date of a Provision of SOP
97-2, Software Revenue Recognition, as of April 1, 1998. SOP 97-2 and SOP 98-4
provide guidance for recognizing revenue on software transactions and supersede
SOP 91-1, Software Revenue Recognition. The adoption of SOP 97-2 and SOP 98-4
did not have a material effect on the Company's financial results.
In December 1998, the American Institute of Certified Public Accountants
issued SOP 98-9 Modification of SOP 97-2, Software Revenue Recognition, With
Respect to Certain Transactions. For the Company, SOP 98-9 amends SOP 98-4 to
extend the deferral of the application of certain passages of SOP 97-2 provided
by SOP 98-4 through March 31, 1999. All other provisions of SOP 98-9 are
effective for transactions entered into after March 31, 1999. The Company
believes the adoption of SOP 98-9 will not have a material effect on its
consolidated financial statements results or financial condition.
Cash and Equivalents: The Company considers all short-term, highly liquid
investments that are readily convertible into known amounts of cash and have
original maturities of three months or less to be cash equivalents.
F-8
<PAGE> 68
INTRANET SOLUTIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
MARCH 31, 1997, 1998 AND 1999
Inventories: Inventories, consisting primarily of computer software, are
valued at the lower of cost (first-in, first-out) or market value.
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, ranging from
three to seven years, or the life of the lease for leasehold improvements,
whichever is shorter. Maintenance, repairs and minor renewals are expensed when
incurred.
Software Development Costs: Software development costs have been accounted
for in accordance with Statement of Financial Accounting Standards (SFAS) No.
86, Accounting for the Costs of Computer Software to be Sold, Leased, or
Otherwise Marketed. Under SFAS No. 86 software development costs may be
capitalized once the technological feasibility of the project is established.
The amount of software development costs that may be capitalized is subject to
limitations based on the net realizable value of the potential product. To date,
the period between achieving technological feasibility of the Company's products
and the general availability of the products has been short. Software
development costs qualifying for capitalization have, consequently, been
immaterial. Accordingly, the Company has not capitalized any software
development costs and has instead charged all such costs to research and
development expense.
Net Income (Loss) per Common Share: 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, 1997, 1998 and 1999, 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, 1997, 1998 and 1999 included 1,275,876,
1,009,736 and 1,719,534 shares related to stock options and warrants and
included 606,061 and 67,756 shares, respectively, related to convertible
preferred stock at March 31, 1998 and 1999, respectively. There were no common
stock equivalents as of March 31, 1997 related to convertible preferred stock.
Advertising: The Company expenses the cost of advertising as it is
incurred. Advertising expense for the years ended March 31, 1997, 1998, and 1999
was $244,900, $596,200 and $751,500, respectively.
Recently Issued Accounting Standards: In February 1998, the American
Institute of Certified Public Accountants issued Statement of Position, or SOP,
98-1, Accounting for the Costs of Computer Software Developed or Obtained for
Internal Use. SOP 98-1 establishes the accounting for costs of software products
developed or purchased for internal use, including when such costs should be
capitalized. SOP 98-1 is effective for financial statements for fiscal years
beginning after December 15, 1998. The Company believes that SOP 98-1 will not
have a material impact on its consolidated financial statements.
F-9
<PAGE> 69
INTRANET SOLUTIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
MARCH 31, 1997, 1998 AND 1999
The Company adopted SFAS No. 130, Reporting Comprehensive Income, effective
April 1, 1998. SFAS No. 130 established standards for the reporting and display
of an amount representing comprehensive income and its components as part of the
company's basic financial statements. Comprehensive income includes certain
non-owner changes in equity that currently are excluded from net income. Because
the company historically has not experienced transactions that would be included
in comprehensive income, the adoption of SFAS No. 130 did not have any effect on
the consolidated financial position, results of operations, or cash flows of the
Company.
SFAS No. 133, Accounting for Derivative Instruments and Hedging Activities
was issued in June 1998 and the Company is not required to adopt SFAS No 133
until April 1, 2000. The Company believes the adoption of SFAS No. 133 will not
have a material effect on its consolidated financial statements.
Stock-based Compensation: The Company utilizes the intrinsic value method
for stock-based compensation. Under this method, compensation expense is
recognized for the amount by which the market price of the common stock on the
date of grant exceeds the exercise price of an option.
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 reclassifications have been made to the 1997 and
1998 financial statements to conform with the presentation used in the 1999
financial statements.
3. SALE OF HARDWARE INTEGRATION UNIT
During the fiscal year ended March 31, 1999, the Company sold the
operations of its hardware integration unit to Osage Systems Group, Inc.
("Osage") for approximately $1.6 million, and certain future financial
consideration from Osage, dependent on the performance of the unit over the next
two years.
In conjunction with the sale of its hardware integration unit, the Company
entered into a non-competition agreement with Osage. As a result, the Company
recorded the necessary provision for the reserve or write-down of the assets and
contracts associated with the hardware integration unit to their net realizable
value. The gain on the sale of the hardware integration unit operations of
$516,934 has been recorded in the statement of operations as other income.
F-10
<PAGE> 70
INTRANET SOLUTIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
MARCH 31, 1997, 1998 AND 1999
Revenues, cost of revenues, and gross profit for the hardware integration
and support unit are as follows:
<TABLE>
<CAPTION>
YEAR ENDED MARCH 31,
----------------------------------------
1997 1998 1999
----------- ----------- ----------
<S> <C> <C> <C>
Revenues:
Hardware integration.................... $10,476,702 $12,186,886 $4,357,809
Support................................. 4,799,972 4,290,235 1,271,812
----------- ----------- ----------
Total revenues............................ 15,276,674 16,477,121 5,629,621
----------- ----------- ----------
Cost of revenues:
Hardware integration.................... 8,792,240 10,249,621 3,711,929
Support................................. 3,102,292 2,633,619 888,754
----------- ----------- ----------
Total cost of revenues.................... 11,894,532 12,883,240 4,600,683
----------- ----------- ----------
Gross profit.............................. $ 3,382,142 $ 3,593,881 $1,028,938
=========== =========== ==========
</TABLE>
4. DISCONTINUED OPERATIONS
During the fiscal year ended March 31, 1998, the Company sold the
Minneapolis facility of its on-demand publishing operations for approximately
$1.6 million. The sale price included cash of approximately $359,000, a
promissory note of $278,000 and assumption of liabilities of approximately $1.0
million. The promissory note is payable in quarterly installments of $27,100,
including interest at 1.5% over prime (effective rate of 9.25% at March 31,
1999) and is due in March 2001. Future maturities of principal on this note are
$113,959 for 2000 and $100,105 for 2001. No gain or loss on the transaction was
recorded.
During the fiscal year ended March 31, 1999, the Company sold substantially
all of the remaining assets of its on-demand publishing operations, located in
Phoenix, Arizona for approximately $486,680. The sale price was substantially
for assumption of liabilities. The Company incurred a loss on the sale of the
related assets of $111,103.
The components of net assets of discontinued operations included in the
Company's consolidated balance sheet as of March 31, 1998 are as follows:
<TABLE>
<S> <C>
Accounts receivable......................................... $ 469,732
Inventories and other current assets........................ 134,451
Property, equipment and other assets........................ 562,992
----------
Total assets................................................ $1,167,175
==========
Accounts payable and accrued expenses....................... $ 262,738
Debt........................................................ 195,309
----------
Total liabilities........................................... $ 458,047
==========
Net assets.................................................. $ 709,128
==========
</TABLE>
F-11
<PAGE> 71
INTRANET SOLUTIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
MARCH 31, 1997, 1998 AND 1999
Summarized financial information for the discontinued operations are as
follows:
<TABLE>
<CAPTION>
YEARS ENDED MARCH 31,
-----------------------------------------
1997 1998 1999
----------- ----------- -----------
<S> <C> <C> <C>
Operating revenues....................... $ 3,819,430 $ 5,023,206 $ 729,111
Operating expenses....................... (6,196,457) (7,337,227) (1,103,836)
Interest................................. (182,729) (262,645) (35,636)
Income taxes............................. -- -- --
----------- ----------- -----------
Net loss from discontinued operations.... $(2,559,756) $(2,576,666) $ (410,361)
=========== =========== ===========
</TABLE>
5. 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, 1997, 1998 and 1999 were $49,000, $36,000 and $42,000,
respectively.
6. PROPERTY AND EQUIPMENT
Property and equipment consists of the following:
<TABLE>
<CAPTION>
MARCH 31,
------------------------
1998 1999
---------- ----------
<S> <C> <C>
Equipment and furniture................................. $1,327,566 $1,584,938
Leasehold improvements.................................. 117,237 75,842
---------- ----------
1,444,803 1,660,780
Less accumulated depreciation........................... 668,715 894,271
---------- ----------
$ 776,088 $ 766,509
========== ==========
</TABLE>
7. REVOLVING CREDIT FACILITY
The Company has a revolving credit agreement that provides for borrowings
of up to $2.5 million, subject to the availability of assets securing the loan.
Advances are due on demand and accrue interest at the bank's base lending rate
plus 2.5% (effective rate of 11.0% and 10.25% on March 31, 1998 and 1999,
respectively). At March 31, 1999 the Company had borrowing availability, of
approximately $2.1 million. The agreement is secured by substantially all the
Company's assets, personally guaranteed by a stockholder, and requires the
Company to meet various covenants including maintenance of minimum levels of net
worth.
On April 1, 1999 the Company entered into a new credit agreements which
provides for borrowings of up to $2.25 million, subject to the availability of
assets securing the loan. Advances will be due on demand and accrue interest at
the bank's lending rate plus 2.0%. The new agreement is due on demand and
secured by substantially all the Company assets and requires the Company to meet
various covenants including maintenance of minimum level of
F-12
<PAGE> 72
INTRANET SOLUTIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
MARCH 31, 1997, 1998 AND 1999
net worth. The agreement automatically renews annually unless the Company
provides 60 days notice to cancel or demand is made by the lender.
8. LONG-TERM OBLIGATIONS
Long-term obligations consist of the following:
<TABLE>
<CAPTION>
MARCH 31,
--------------------
1998 1999
-------- --------
<S> <C> <C>
Notes payable to shareholder, due on demand, quarterly
interest payments at 12.0%, unsecured and subordinated to
bank indebtedness........................................ $ 27,500 $ 20,000
Capital lease obligation, due in monthly installments of
$3,880 including interest at 10.5%, through December
2000, secured by computer equipment...................... -- 77,323
Contract payable, due in monthly installments of $10,300
with no interest, through July 30, 2000.................. -- 164,800
Notes payable to bank...................................... 406,795 --
Other notes................................................ 427,801 --
-------- --------
Total long-term debt....................................... 862,096 262,123
Less current maturities.................................... 663,631 177,631
-------- --------
$198,465 $ 84,492
======== ========
</TABLE>
Future maturities of long-term obligations are as follows:
<TABLE>
<S> <C>
2000................................................... $177,631
2001................................................... 84,492
--------
$262,123
========
</TABLE>
9. SHAREHOLDERS' EQUITY
Series A convertible preferred stock: During the year ended March 31, 1998,
the Company issued $4.0 million of Series A 5% convertible preferred stock. The
Company issued 800,000 units, each consisting of one share of $0.01 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% of 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 Series A convertible preferred stock were converted into 471,380
shares of common stock. During the year ended March 31, 1999, 375,000 shares of
Series A convertible preferred stock were converted into 795,197 shares of
common stock. The Series A convertible preferred stock is automatically
converted into common stock upon the
F-13
<PAGE> 73
INTRANET SOLUTIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
MARCH 31, 1997, 1998 AND 1999
Company's public sale of equity securities with gross proceeds equal to or in
excess of $10.0 million.
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
shareholders' equity. The Company also paid $94,889 and $148,333 in preferred
stock dividends during the years ended March 31, 1998 and 1999, respectively.
Series B convertible preferred stock: In May, 1998, the Company issued $3.0
million of Series B 4% convertible preferred stock. This preferred stock was
convertible into the Company's common 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. During the year ended March 31, 1999, all the
Series B convertible preferred stock, including accrued dividends, were
converted into 1,037,420 of shares of common stock.
In connection with this transaction, the Company recognized a non-cash
deemed dividend of $570,000. The deemed dividend was recorded as a discount to
preferred stock with a corresponding credit to additional paid-in capital. The
discount was recognized at the date of issue of the preferred stock, the same
date at which the shares were eligible for conversion. 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 shareholders' equity.
Warrants: The Company has 1,286,114 non-redeemable stock purchase warrants
with exercise prices of $2.32 to $8.00 outstanding at March 31, 1999. The
warrants expire on various dates through June, 2003.
Stock options: The Company maintains the 1994-1997 Stock Option Plan and
the 1997 Director Stock Option Plan, (collectively, the "Plan"), pursuant to
which options and other awards to acquire an aggregate of 3,100,000 and 300,000
shares, respectively, of the Company's common stock may be granted. 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.
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.
Pro forma information regarding the fair value of stock options is
determined at the date of grant using the Black-Scholes option pricing model
with the following weighted-average assumptions for the years ended March 31,
1997, 1998 and 1999: risk free interest rates of 6.0%, 6.3% and 5.0%,
respectively; no dividend yield; volatility factor of the expected market
F-14
<PAGE> 74
INTRANET SOLUTIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
MARCH 31, 1997, 1998 AND 1999
price of the Company's common stock of 65%, 75%, and 75%, respectively; and a
weighted-average expected life of the options of 8.5 years.
The Company's pro forma information had the fair value method been used is
as follows:
<TABLE>
<CAPTION>
1997 1998 1999
----------- ----------- -----------
<S> <C> <C> <C>
Pro forma loss from continuing
operations............................ $(1,671,344) $(2,046,306) $(1,768,675)
Pro forma loss from continuing
operations per common share, basic and
diluted............................... (0.26) (0.26) (0.19)
Pro forma net loss...................... (4,231,100) (4,622,472) (2,290,139)
Pro forma net loss per common share,
basic and diluted..................... (0.66) (0.59) (0.24)
Pro forma loss attributable to common
shareholders.......................... (4,231,100) (6,287,861) (3,008,472)
Pro forma loss attributable to common
shareholders per common share, basic
and diluted........................... (0.66) (0.80) (0.32)
</TABLE>
These pro forma results are not representative of future effects of
applying this method, because they do not take into consideration the pro forma
effect of grants made prior to 1996.
F-15
<PAGE> 75
INTRANET SOLUTIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
MARCH 31, 1997, 1998 AND 1999
A summary of the Company's stock option activity, and related information
through March 31, 1999 is as follows:
<TABLE>
<CAPTION>
WEIGHTED-
AVERAGE
SHARES EXERCISE PRICE
--------- --------------
<S> <C> <C>
Outstanding as of April 1, 1996........................ 1,431,937 $2.85
Granted.............................................. 353,500 6.29
Exercised............................................ (47,618) 0.76
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
Granted.............................................. 374,000 4.52
Exercised............................................ (221,076) 3.64
Forfeited............................................ (314,271) 5.31
--------- -----
Outstanding as of March 31, 1999....................... 1,923,015 $4.12
========= =====
</TABLE>
<TABLE>
<CAPTION>
MARCH 31,
-------------------------------
1997 1998 1999
------- ------- ---------
<S> <C> <C> <C>
Options exercisable at end of year................ 594,576 855,708 1,044,148
======= ======= =========
Weighted-average fair value of options granted
during the year................................. $6.44 $4.19 $3.52
======= ======= =========
</TABLE>
The following table summarizes information about the stock options
outstanding at March 31, 1999:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING
-------------------------------------------- OPTIONS EXERCISABLE
WEIGHTED- -----------------------------
WEIGHTED-AVERAGE AVERAGE WEIGHTED-
RANGE OF NUMBER REMAINING EXERCISE NUMBER AVERAGE
EXERCISE PRICE OUTSTANDING CONTRACTUAL LIFE PRICE EXERCISABLE EXERCISE PRICE
-------------- ----------- ---------------- --------- ----------- --------------
<S> <C> <C> <C> <C> <C>
$ 0.20-$0.56............ 316,872 5.5 $ 0.24 271,128 $ 0.24
$ 3.00-$3.99............ 538,666 7.6 3.25 234,708 3.15
$ 4.00-$5.99............ 827,178 8.5 5.01 403,713 4.94
$ 6.00-$7.99............ 132,000 9.1 6.29 26,300 6.09
$10.36.................. 108,299 6.9 10.26 108,299 10.36
--------- ---------
1,923,015 8.1 4.12 1,044,148 3.91
========= =========
</TABLE>
F-16
<PAGE> 76
INTRANET SOLUTIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
MARCH 31, 1997, 1998 AND 1999
10. 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 by the Company for the years ended March 31, 1997, 1998 and 1999.
11. INCOME TAXES
Due to net operating losses for the years ended March 31, 1997, 1998, and
1999, the Company has recorded no current income tax provision. The tax effects
of temporary differences giving rise to deferred income taxes consisted of the
following:
<TABLE>
<CAPTION>
MARCH 31,
-----------------------------------------
1997 1998 1999
----------- ----------- -----------
<S> <C> <C> <C>
Deferred tax liabilities:
Depreciation and amortization.............. $ (123,800) $ (88,700) $ (44,300)
Deferred tax assets:
Deferred revenue........................... 84,100 84,000 213,900
Accounts receivable and other reserves..... 160,300 212,000 90,700
Inventories................................ 11,800 24,800 24,800
Net operating loss carryforwards........... 1,409,000 2,620,000 3,166,300
Other...................................... 45,800 30,100 99,700
----------- ----------- -----------
1,587,200 2,882,200 3,551,100
Valuation allowance.......................... (1,587,200) (2,882,200) (3,551,100)
----------- ----------- -----------
$ -- $ -- $ --
=========== =========== ===========
</TABLE>
The Company's provision for income taxes differs from the expected tax
benefit amount computed by applying the statutory federal income tax rate of
34.0% to income before taxes as a result of the following:
<TABLE>
<CAPTION>
YEAR ENDED MARCH 31,
-----------------------------
1997 1998 1999
----- ----- -----
<S> <C> <C> <C>
Federal statutory rate................................... (34.0)% (34.0)% (34.0)%
State taxes, net of federal benefit...................... -- 0.6 0.9
Stock based compensation................................. (3.1) (4.3) (27.9)
Change in valuation allowance............................ 42.4 35.4 66.8
Other.................................................... (5.3) 2.3 (5.8)
----- ----- -----
--% --% --%
===== ===== =====
</TABLE>
Deferred tax liabilities and deferred tax assets reflect the net tax
effects of temporary differences between the carrying amounts of assets and
liabilities for financial reporting purposes and the amounts used for income tax
purposes. The valuation allowance has been established due to the uncertainty of
future taxable income, which is necessary to realize the benefits of the
deferred tax assets. At March 31, 1999, the Company had net operating loss
F-17
<PAGE> 77
INTRANET SOLUTIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
MARCH 31, 1997, 1998 AND 1999
(NOL) carryforwards of approximately $7.9 million which begin to expire in 2011.
These NOL's are subject to annual utilization limitations due to prior ownership
charges.
12. COMMITMENTS AND CONTINGENCIES
Operating leases -- The Company has entered into certain non-cancelable
operating lease agreements related to office/warehouse space, equipment and
vehicles. Total rent expense under operating leases net of sublease income, was,
$309,409, $435,364 and $402,539 for the years ended March 31, 1997, 1998, and
1999, respectively.
Minimum remaining rental commitments under operating leases net of sublease
arrangements as of March 31, 1999 are as follows:
<TABLE>
<S> <C>
For the year ended March 31,
2000........................................................ $ 371,700
2001........................................................ 255,700
2002........................................................ 206,800
2003........................................................ 204,800
2004........................................................ 203,800
Thereafter.................................................. 265,100
----------
$1,507,900
==========
</TABLE>
Software royalties -- The Company has entered into several software royalty
agreements whereby it is required to pay a royalty amount based upon
predetermined payment schedules. At March 31, 1997, 1998 and 1999, the Company
recorded advanced royalties as prepaid expense of $51,500, $308,400 and
$391,600, respectively. Royalties are recognized as expense based on sales, and
during the years ended March 31, 1997, 1998 and 1999 totaled $209,200, $230,600
and $511,700, respectively.
Consulting agreement -- The Company has a consulting agreement with a
former shareholder that requires monthly payments of $10,300 through July 2000.
13. RISKS AND UNCERTAINTIES
Accounts receivable -- Accounts receivable is presented net of allowances
of $408,000 and $310,000 as of March 31, 1998 and 1999, respectively. No
customer has accounted for 10% or more of the Company's revenues in the years
ended March 31, 1997, 1998 and 1999. 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 within
management's expectations.
Year 2000 -- The Year 2000 issue relates to limitations in computer systems
and applications that may prevent proper recognition of the Year 2000. The
potential effect of the Year 2000 issue on the Company and its business partners
will not be fully determinable until the year 2000 and thereafter. If year 2000
modifications are not properly completed either by
F-18
<PAGE> 78
INTRANET SOLUTIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
MARCH 31, 1997, 1998 AND 1999
the Company or entities with whom the Company conducts business, the Company's
revenues and financial condition could be adversely impacted.
14. SEGMENTS OF BUSINESS AND GEOGRAPHIC AREA INFORMATION
Effective April 1, 1998, the Company adopted SFAS No 131, Disclosures about
Segments of an Enterprise and Related Information. SFAS No. 131 did not have a
significant effect as the Company operates as a single segment.
A summary of the Company's operations by geographic area follows:
<TABLE>
<CAPTION>
YEAR ENDED MARCH 31,
-----------------------------------------
1997 1998 1999
----------- ----------- -----------
<S> <C> <C> <C>
Revenues:
United States.......................... $15,751,061 $19,042,461 $12,614,001
Europe................................. 439,515 407,334 1,444,315
----------- ----------- -----------
Total revenues...................... $16,190,576 $19,449,795 $14,058,316
=========== =========== ===========
Identifiable assets:
United States.......................... $ 564,924 $ 764,863 $ 745,214
Europe................................. -- 11,225 21,295
----------- ----------- -----------
Total............................... $ 564,924 $ 776,088 $ 766,509
=========== =========== ===========
</TABLE>
Sales are attributed to countries or region based on the location of the
customer.
F-19
<PAGE> 79
INSIDE BACK COVER GRAPHICS:
- IntraNet Solutions logo followed by: "Web-based Data and Content
Management Solutions."
- Six customer computer screen pictures with associated descriptive text
naming customer and use of product.
- IntraNet Solutions web-site address: www.intranetsol.com.
<PAGE> 80
3,680,000 SHARES
[INTRANET SOLUTIONS LOGO]
COMMON STOCK
---------------------------
PROSPECTUS
---------------------------
DAIN RAUSCHER WESSELS U.S. BANCORP PIPER JAFFRAY
a division of Dain Rauscher
Incorporated
---------------------
June 3, 1999
---------------------
