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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-K
(Mark One)
[X] Annual Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 For the Fiscal Year Ended March 31, 1999
or
[ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 For the Transition Period From _______________ to
________________.
Commission file number 0-19817
IntraNet Solutions, Inc.
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(Exact name of registrant as specified in its charter)
Minnesota 41-1652566
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(State or other jurisdiction of (I.R.S. employer
incorporation or organization) identification no.)
8091 Wallace Drive
Eden Prairie, Minnesota 55344-3775
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(Address of principal executive offices) (Zip code)
(612) 903-2000
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(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act: Common
Stock, par value $.01 per share
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act
of 1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be
contained, to the best of registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form
10-K or any amendment to this Form 10-K. [X]
The aggregate market value of the registrant's common stock held by
non-affiliates of the registrant as of June 21, 1999 was $88,796,663
based on the closing sale price for the registrant's common stock on that
date as reported by The Nasdaq Stock Market. For purposes of determining
such aggregate market value, all officers and directors of the registrant
are considered to be affiliates of the registrant, as well as shareholders
holding 10% or more of the outstanding common stock as reflected on
Schedules 13D or 13G filed with the registrant. This number is provided
only for the purpose of this report on Form 10-K and does not represent an
admission by either the registrant or any such person as to the status of
such person.
As of June 21, 1999 the registrant had 14,571,811 shares of common
stock issued and outstanding.
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DOCUMENTS INCORPORATED BY REFERENCE
Portions of the registrant's definitive Proxy Statement dated for the
annual meeting of Shareholders to be held on September 22, 1999 and the Annual
Report to Shareholders for the year ended March 31, 1999 are incorporated by
reference in Parts II, III and IV of this Annual Report on Form 10-K. (The
Compensation Committee Report and the stock performance graph contained in the
registrant's Proxy Statement are expressly not incorporated by reference in this
Annual Report on Form 10-K). The Proxy Statement will be filed within 120 days
after the end of the fiscal year ended March 31, 1999.
PART I
ITEM 1. BUSINESS
FORWARD-LOOKING STATEMENTS
The information presented in this Annual Report on Form 10-K under the
headings "Item 1. Business" and "Item 2. Properties" and incorporated by
reference under "Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations" contains forward-looking statements within
the meaning of the safe harbor provisions of Section 21E of the Securities
Exchange Act of 1934, as amended. Such statements are subject to risks and
uncertainties, including those discussed under "Risk Factors" below beginning on
page 16 of this Annual Report on Form 10-K, that could cause actual results to
differ materially from those projected. Because actual results may differ,
readers are cautioned not to place undue reliance on these forward-looking
statements.
OVERVIEW
IntraNet Solutions, Inc., or 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.
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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 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
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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 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
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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, 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.
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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.
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.
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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 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
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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 service capabilities in order
to extend our range of services and more completely address areas such as
business strategy, project management 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
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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.
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.
<TABLE>
<CAPTION>
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Intra.doc! Management System
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Access ODMA Publish E-Commerce
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<S> <C> <C> <C>
- Forms - ODMA - CD Publisher - Softgoods
- Extensions
- Legacy - PDF Publisher
- Archiver/
- Enterprise - Replicator - AutoCAD
- Search - Conversion
- PDF Watermark
- Batchloading - TIFF Conversion
- Report Parsing
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Intra.doc! Developer's Kit
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Intra.net hosting service
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</TABLE>
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
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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 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.
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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. 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
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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 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.
<TABLE>
<CAPTION>
-----------------------------------------------------------------
Database Database
and Microsoft Access Operating System
Operating Microsoft SQL Server Windows NT or Unix
Systems or Oracle
-----------------------------------------------------------------
-----------------------------------------------------------------
<S> <C> <C> <C>
Intra.doc! Server
Intra.doc! ------------------------------------ Intra.doc!
Intra.doc! Document Refinery
Processes ------------------------------------
Library & Index Refinery
Add-on ------------------------------------
Modules Web Layout Editor Website
-----------------------------------------------------------------
-----------------------------------------------------------------
Java Server Java Virtual Machine
-----------------------------------------------------------------
-----------------------------------------------------------------
Bus HTTP
-----------------------------------------------------------------
-----------------------------------------------------------------
Clients ODMA, Legacy, Admin Applets
-----------------------------------------------------------------
-----------------------------------------------------------------
Users Browsers
-----------------------------------------------------------------
</TABLE>
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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.
Our research and development expenditures for fiscal 1997, 1998 and 1999
were approximately $1.1 million, $1.2 million and $1.3 million, respectively. 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.
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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.
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.
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
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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 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
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<PAGE> 16
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.
RISK FACTORS
Certain statements made in this Annual Report on Form 10-K are
forward-looking statements based on our current expectations, assumptions,
estimates and projections about our business and our industry. These
forward-looking statements involve risks and uncertainties. Our business,
financial condition and results of operations could differ materially from those
anticipated in these forward-looking statements as a result of certain factors,
as more fully described below and elsewhere in this Form 10-K. You should
consider carefully the risks and uncertainties described below, which are not
the only ones facing our Company. Additional risks and uncertainties also may
impair our business operations. We undertake no obligation to update publicly
any forward-looking statements for any reason, even if new information becomes
available or other events occur in the future.
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;
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- 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
- 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
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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, 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
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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 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 of approximately $23.5 million from our
recent offering of common stock 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
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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 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,
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operating results and financial condition.
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; o 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, holds
approximately 24% of our outstanding common stock. Accordingly, Mr. Olson will
be able to exercise significant control over the affairs of IntraNet Solutions.
Additionally, our directors and executive officers beneficially own
approximately 27% of our common stock. These persons effectively control
IntraNet Solutions and will 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.
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
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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.
ITEM 2. PROPERTIES
IntraNet Solutions is headquartered in Minneapolis, Minnesota, where we
lease approximately 15,000 square feet pursuant to a seven-year lease expiring
in 2005. Management believes that the Company's facilities are suitable and
adequate for current office, research, and storage requirements.
ITEM 3. LEGAL PROCEEDINGS
The Company is not a party to any material legal proceeding.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matter was submitted to a vote of the Company's security holders during
the fourth quarter of the fiscal year ended March 31, 1999.
22
<PAGE> 23
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Incorporated herein by reference is the information appearing under the
heading "Market For Registrant's Common Equity and Related Stockholder Matters"
in the Company's Annual Report to Shareholders for the year ended March 31, 1999
(the "1999 Annual Report").
ITEM 6. SELECTED FINANCIAL DATA
Incorporated herein by reference is the information appearing under the
heading "Selected Consolidated Financial Data" in the 1999 Annual Report.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Incorporated herein by reference is the information appearing under the
heading "Management's Discussion and Analysis of Financial Condition and Results
of Operations" in the 1999 Annual Report.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Incorporated herein by reference is the information appearing under the
heading "Quantitative and Qualitative Disclosures About Market Risk" in the
1999 Annual Report.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Incorporated herein by reference is the information appearing under the
headings "Consolidated Balance Sheets", "Consolidated Statements of Operations",
"Consolidated Statement of Shareholders' Equity (Deficit), "Consolidated
Statements of Cash Flows", "Notes to Consolidated Financial Statement", "Report
of Independent Certified Public Accountants", and "Report of Independent
Accountants" in the 1999 Annual Report.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
23
<PAGE> 24
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Incorporated herein by reference is the information appearing under the
headings "Election of Directors" and "Section 16(a) Beneficial Ownership
Reporting Compliance" in the Company's definitive Proxy Statement for the annual
meeting of Shareholders to be held on September 22, 1999 (the "Proxy
Statement").
The Executive Officers of the Company are:
NAME AGE POSITION
Robert F. Olson 43 President, Chief Executive
Officer and Chairman of the Board of
Directors
Gregg A. Waldon 38 Chief Financial Officer, Secretary,
Treasurer and Director
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.
Officers of the Company are chosen by and serve at the discretion of the
Board of Directors. There are no family relationships among any of the
directors or executive officers of the Company.
ITEM 11. EXECUTIVE COMPENSATION
Incorporated herein by reference is the information appearing under the
headings "Report of the Compensation Committee", "Executive Compensation" and
"Comparative Stock Performance" in the Company's Proxy Statement.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Incorporated herein by reference is the information appearing under the
heading "Security Ownership of Principal Shareholders and Management" in the
Company's Proxy Statement.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Incorporated herein by reference is the information appearing under the
heading "Certain Relationships and Related Transactions" in the Company's Proxy
Statement.
24
<PAGE> 25
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) Documents filed as part of this report:
1. Financial Statements:
The consolidated financial statements of the Company are incorporated
herein by reference from the information appearing under the headings
"Consolidated Balance Sheets", "Consolidated Statements of
Operations", "Consolidated Statement of Shareholders' Equity
(Deficit)", "Consolidated Statements of Cash Flows", "Notes to
Consolidated Financial Statements", "Report of Independent Certified
Public Accountants" and "Report of Independent Accountants" in the
1999 Annual Report.
The following consolidated financial statement schedules of the Company are
included in Item 14(d):
Schedule II Valuation and Qualifying Accounts
(b) Reports on Form 8-K
No reports on Form 8-K were filed for the quarter ended March 31, 1999.
(c) Exhibits:
The following exhibits are filed as part of this Annual Report on Form
10-K for the year ended March 31, 1999.
NUMBER DESCRIPTION
3.1 Amended and Restated Articles of Incorporation (incorporated
by reference to Exhibit 3.1 of the Registrant's registration
statement on Form SB-2, File No. 333-13175).
3.2 Bylaws (incorporated by reference to Exhibit 3.2 of the
Registrant's registration statement on Form SB-2, File
No. 333-14175).
3.3 Articles of Amendment to Articles of Incorporation, as dated
June 20, 1997 (incorporated by reference to Exhibit 3.3 of
the Registrant's Form 10-KSB for the fiscal year ended
March 31, 1997).
4.1 Certificate of Designation of Series B Preferred Stock
(incorporated by reference of Exhibit 4.1 of the Registrant's
registration statement on Form S-3, File No. 333-57181).
4.2 Securities Purchase Agreement, dated May 6, 1998, by and
among the Registrant, Stark International and Shepherd
Investments International, Ltd. (incorporated by reference
to Exhibit 4.2 of the Registrant's registration statement
on Form S-3, File No. 333-57181).
25
<PAGE> 26
4.3 Registration Rights Agreement, dated May 6, 1998, by and
among the Registrant, Stark International and Shepherd
Investments International, Ltd. (incorporated by reference to
Exhibit 4.3 of the Registrant's registrations statement on
Form S-3, No. 333-57181.
4.4 Certificate of Designation of Series A convertible
preferred stock (incorporated by reference to Exhibit 3
(i) (A) of the Registrant's Form 10QSB for the three
months ended June 30, 1997).
4.5 Form of Stock Purchase Warrant issued to purchases of units
containing the Registrant's Series A convertible preferred
stock and Stock Purchase Warrants (incorporated by
reference to Exhibit 4.1 of the Registrant's Form 10-QSB
for the three months ended June 30, 1997).
4.6 Form of Registration Rights Agreement entered into by and
between the Registrant and purchasers of units containing
the Registrant's Series A convertible preferred stock and
Stock Purchase Warrants (incorporated by reference to
Exhibit 10.1 Registrant's Form 10-QSB for the three months
ended June 30, 1997).
10.1 Lease Agreement dated, April 24, 1996, by and between CSM
Investors, Inc. and Registrant (incorporated by reference to
Exhibit 10.1 of the Registrant's registration statement on
Form SB-2, File No. 333-14175).
10.2 Credit and Security Agreement, dated March 14, 1995, by and
between Diversified Business Credit, Inc. and the Registrant
(incorporated by reference to Exhibit 10.2 of the
Registrant's registration statement on Form SB-2, file No.
333-14175).
10.3 Term Loan supplement to Credit Agreement, dated March 14,
1995, by and between the Registrant and Diversified Business
Credit, Inc. (incorporated by reference to Exhibit 10.3 of
the Registrant's registration statement on Form SB-2, File
No. 333-14175).
10.4 IntraNet Solutions, Inc. 1994-1997 Stock Option and
Compensation Plan (incorporated by reference to Exhibit
10.4 of the Registrant's registration statement on Form
SB-2, File No. 333-14175).
10.5 Employment Agreement, dated July 30, 1996, by and between
the Registrant and Robert F. Olson (incorporated by
reference to Exhibit 10.5 of the Registrant's registration
statement on Form SB-2, File No. 333-14175).
10.6 Employment Agreement, dated July 30, 1996, by and between
the Registrant and Jeffrey J. Sjobeck (incorporated by
reference to Exhibit 10.6 to the Registrant's Form 10-KSB
for the fiscal year ended March 31, 1997).
10.7 Promissory Note, dated December 23, 1996, made by the
Registrant in favor of Circle F. Ventures, LLC (incorporated
by reference to Exhibit 10.7 of the Registrant's Form 10-KSB
for the fiscal year ended March 31, 1997).
26
<PAGE> 27
10.8 Amendment, dated March 4, 1997, to the Promissory Note made
by the Registrant in favor of Circle F Ventures, LLC dated
December 23, 1996 (incorporated by reference to Exhibit 10.8
of the Registrant's Form 10KSB for the fiscal year ended
March 31, 1997).
10.9 Lease Agreement dated April 22, 1998, by and between Lake
Corporate Center LLC and the Registrant (incorporated by
reference to Exhibit 10.9 of the Registrant's registration
statement on Form 10-KSB for the fiscal year ended March 31,
1998).
10.10 Stock Purchase Warrant Agreement, dated December 23, 1996,
by and between the Company and Circle F. Ventures, LLC
(incorporated by reference to Exhibit 10.10 of the
Registrant's Form 10-KSB for the fiscal year ended March 31,
1997).
10.11 Security Agreement, dated December 23, 1996, by and between
the Registrant and Circle F. Ventures, LLC (incorporated by
reference to Exhibit 10.11 of the Registrant's Form 10-KSB
for the fiscal year ended March 31, 1997).
10.12 Subordination Agreement, dated December 23, 1996, by and
between the Registrant Diversified Business Credit, Inc. and
Circle F. Ventures, LLC (incorporated by reference to
Exhibit 10.12 of the Registrant's Form 10-KSB for the fiscal
year ended March 31, 1997).
10.13 Promissory Note, dated March 18, 1997, made by the
Registrant in favor of Circle F Ventures, LLC (incorporated
by reference to Exhibit 10.13 of the Registrant's Form
10-KSB for the fiscal year ended March 31, 1997).
10.14 Sublease Agreement, dated April 22, 1998, by and between
CSM Investors, Inc., Digital River, Inc. and the Registrant
(incorporated by reference to Exhibit 10.14 of the
Registrant's Form 10-KSB for the fiscal year ended March 31,
1997).
10.15 Stock Purchase Warrant Agreement, dated March 18, 1997, by
and between the Registrant and Circle F Ventures, LLC
(incorporated by reference to Exhibit 10.15 of the
Registrant's Form 10-KSB for the fiscal year ended March 31,
1997).
10.16 Schedule identifying certain material details of documents
substantially identical to those set forth in Exhibits
10.17, 10.18, 10.19 and 10.20 (incorporated by reference to
Exhibit 10.16 of the Registrant's Form 10-KSB for the fiscal
year ended March 31, 1997).
10.17 Promissory Note, dated December 20, 1996, made by the
Registrant in favor of Rita M. Olson (incorporated to
Exhibit 10.17 of the Registrant's Form 10KSB for the fiscal
year ended March 31, 1997).
10.18 Amendment, dated March 4, 1997, to the Promissory Note made
by the Registrant in favor of Rita M. Olson dated
December 20, 1996 (incorporated by reference to Exhibit
10.18 of the Registrant's Form 10KSB for the fiscal year
ended March 31, 1997).
27
<PAGE> 28
10.19 Amendment, dated June 5, 1997, by and between the
Registrant and Rita M. Olson dated December 20, 1996
(incorporated by reference to Exhibit 10.19 of the
Registrant's Form 10-KSB for the fiscal year ended March 31,
1997).
10.20 Stock Purchase Warrant Agreement, dated December 20, 1996,
by and between the Registrant and Rita M. Olson
(incorporated by reference to Exhibit 10.20 of the
Registrant's Form 10-KSB for the fiscal year ended March 31,
1997).
10.21 Note Conversion and Subscription Agreement, dated June 6,
1997, by and between the Registrant and Rita M. Olson
(incorporated by reference to Exhibit 10.21 of the
Registrant's Form 10-KSB for the fiscal year ended March 31,
1997).
10.22 Note Conversion and Subscription Agreement, dated June 6,
1997, by and between the Registrant and Wayne W. Mills
(incorporated by reference to Exhibit 10.22 of the
Registrant's Form 10-KSB for the fiscal year ended March 31,
1997).
10.23 Asset Purchase Agreement, dated as of March 30, 1998, by and
among Midwest Graphics & Response Systems, Inc., Stephen M.
Krenz, and IntraNet Distribution Group, Inc. (incorporated
by reference to Exhibit 10.23 of the Registrant's Form
10-QSB for the three months ended September 30, 1998).
10.24 Asset Purchase Agreement, dated August 13, 1998, by and
among Intranet Solutions, Inc., IntraNet Distribution Group,
Inc, and Communication Connections, Inc. (incorporated by
reference to Exhibit 10.24 of the Registrant's Form 10-QSB
for the three months ended September 30, 1998).
10.25 Asset Purchase Agreement, dated effective as of
September 30, 1998, by and between Osage Systems Group,
Inc., Osage Systems Group Minneapolis, Inc. and IntraNet
Solutions, Inc. (incorporated by reference to Exhibit 10.25
of the Registrant's Form 10-QSB for the three months ended
September 30, 1998).
10.26 Employment Agreement, dated April 1, 1999, by and between
the Registrant and Gregg A. Waldon. (incorporated by
reference to Exhibit 10.26 of the Registrant's statement on
Form S-1, File No. 333-77389).
10.27 Credit and Security Agreement, dated April 11, 1999, by and
between the Registrant and Diversified Business Credit, Inc.
(incorporated by reference to Exhibit 10.27 of Registrant's
statement on Form S-1, File No. 333-77389).
13.1 1999 Annual Report to Shareholders.
21 Subsidiaries of Registrant (incorporated by reference to
Exhibit 21 of the Registrant's registration statement on
Form SB-2, File No. 333-14175).
23.1 Consent of Grant Thornton LLP.
28
<PAGE> 29
23.2 Consent of Ernst & Young LLP.
24.1 Powers of Attorney (set forth on signature page).
27 Financial Data Schedule.
(d) Schedule IntraNet Solutions, Inc and Subsidiaries
<TABLE>
<CAPTION>
Schedule II
Valuation and Qualifying Accounts
COLUMN A COLUMN B COLUMN C COLUMN D COLUMN E
------------- ------------- ------------- ------------- --------------
BALANCE AT BALANCE
BEGINNING AT END OF
DESCRIPTION OF PERIOD ADDITIONS DEDUCTIONS PERIOD
-------------- ------------- ------------- ------------- --------------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Deducted From Assets:
Allowance for doubtful accounts:
Year ended March 31, 1997 $ 20 $ 60 $ -- $ 80
==== ==== ==== ====
Year ended March 31, 1998 $ 80 $328 $ -- $408
==== ==== ==== ====
Year ended March 31, 1999 $408 $692 $790 $310
==== ==== ==== ====
</TABLE>
29
<PAGE> 30
REPORT OF INDEPENDENT CERTIFIED PUBLIC
ACCOUNTANTS ON SCHEDULE
To the Board of Directors and Shareholders
IntraNet Solutions, Inc.
In connection with our audits of the consolidated financial statements of
IntraNet Solutions, Inc and subsidiaries referred to in our report dated
April 14, 1999 (except for Note 15, as to which the date is June 9, 1999), which
is included in the Annual Report to shareholders and incorporated by reference,
we have also audited Schedule II for each of the two years in the period ended
March 31, 1999. In our opinion, this schedule presents fairly, in all material
respects, the information required to be set forth therein for each of the two
years in the period ended March 31, 1999.
/S/ GRANT THORNTON LLP
Minneapolis, Minnesota
April 14, 1999 (except for Note 15,
as to which the date is June 9, 1999)
30
<PAGE> 31
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned thereunto duly authorized, on June 29, 1999.
INTRANET SOLUTIONS, INC.
By /s/ Robert F. Olson
-----------------------------------------------
Robert F. Olson, President, Chief Executive
Officer and Chairman of the Board of Directors
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant and in the capacities indicated on June 29, 1999.
/s/ Robert F. Olson
-----------------------------------------------
Robert F. Olson, President, Chief Executive
Officer and Chairman of the Board of Directors
(Principal Executive Officer)
/s/ Gregg A. Waldon
----------------------------------------------
Gregg A. Waldon, Chief Financial Officer,
Secretary, Treasurer (Principal Financial
Officer and Principal Accounting Officer) and
Director
/s/ Ronald E. Eibensteiner
----------------------------------------------
Ronald E. Eibensteiner, Director
/s/ Kenneth H. Holec
----------------------------------------------
Kenneth H. Holec, Director
/s/ Steven C. Waldron
----------------------------------------------
Steven C. Waldron, Director
31
<PAGE> 32
EXHIBIT INDEX
NUMBER DESCRIPTION
3.1 Amended and Restated Articles of Incorporation (incorporated
by reference to Exhibit 3.1 of the Registrant's registration
statement on Form SB-2, File No. 333-13175).
3.2 Bylaws (incorporated by reference to Exhibit 3.2 of the
Registrant's registration statement on Form SB-2, File No.
333-14175).
3.3 Articles of Amendment to Articles of Incorporation, as dated
June 20, 1997 (incorporated by reference to Exhibit 3.3 of
the Registrant's Form 10-KSB for the fiscal year ended
March 31, 1997).
4.1 Certificate of Designation of Series B Preferred Stock
(incorporated by reference of Exhibit 4.1 of the Registrant's
registration statement on Form S-3, File No. 333-57181).
4.2 Securities Purchase Agreement, dated May 6, 1998, by and
among the Registrant, Stark International and Shepherd
Investments International, Ltd. (incorporated by reference to
Exhibit 4.2 of the Registrant's registration statement on
Form S-3, File No. 333-57181).
4.3 Registration Rights Agreement, dated May 6, 1998, by and
among the Registrant, Stark International and Shepherd
Investments International, Ltd. (incorporated by reference to
Exhibit 4.3 of the Registrant's registrations statement on
Form S-3, No. 333-57181.
4.4 Certificate of Designation of Series A convertible preferred
stock (incorporated by reference to Exhibit 3 (i) (A) of the
Registrant's Form 10QSB for the three months ended June 30,
1997).
4.5 Form of Stock Purchase Warrant issued to purchases of units
containing the Registrant's Series A convertible preferred
stock and Stock Purchase Warrants (incorporated by reference
to Exhibit 4.1 of the Registrant's Form 10-QSB for the three
months ended June 30, 1997).
4.6 Form of Registration Rights Agreement entered into by and
between the Registrant and purchasers of units containing the
Registrant's Series A convertible preferred stock and Stock
Purchase Warrants (incorporated by reference to Exhibit 10.1
Registrant's Form 10-QSB for the three months ended June 30,
1997).
10.1 Lease Agreement dated, April 24, 1996, by and between CSM
Investors, Inc. and Registrant (incorporated by reference to
Exhibit 10.1 of the Registrant's registration statement on
Form SB-2, File No. 333-14175).
10.2 Credit and Security Agreement, dated March 14, 1995, by and
between Diversified Business Credit, Inc. and the Registrant
(incorporated by reference to Exhibit 10.2 of the
Registrant's registration statement on Form SB-2, file
No. 333-14175).
32
<PAGE> 33
10.3 Term Loan supplement to Credit Agreement, dated March 14,
1995, by and between the Registrant and Diversified Business
Credit, Inc. (incorporated by reference to Exhibit 10.3 of
the Registrant's registration statement on Form SB-2, File
No. 333-14175).
10.4 IntraNet Solutions, Inc. 1994-1997 Stock Option and
Compensation Plan (incorporated by reference to Exhibit 10.4
of the Registrant's registration statement on Form SB-2, File
No. 333-14175).
10.5 Employment Agreement, dated July 30, 1996, by and between the
Registrant and Robert F. Olson (incorporated by reference to
Exhibit 10.5 of the Registrant's registration statement on
Form SB-2, File No. 333-14175).
10.6 Employment Agreement, dated July 30, 1996, by and between the
Registrant and Jeffrey J. Sjobeck (incorporated by reference
to Exhibit 10.6 to the Registrant's Form 10-KSB for the
fiscal year ended March 31, 1997).
10.7 Promissory Note, dated December 23, 1996, made by the
Registrant in favor of Circle F. Ventures, LLC (incorporated
by reference to Exhibit 10.7 of the Registrant's Form 10-KSB
for the fiscal year ended March 31, 1997).
10.8 Amendment, dated March 4, 1997, to the Promissory Note made
by the Registrant in favor of Circle F Ventures, LLC dated
December 23, 1996 (incorporated by reference to Exhibit 10.8
of the Registrant's Form 10KSB for the fiscal year ended
March 31, 1997).
10.9 Lease Agreement dated April 22, 1998, by and between Lake
Corporate Center LLC and the Registrant (incorporated by
reference to Exhibit 10.9 of the Registrant's registration
statement on Form 10-KSB for the fiscal year ended March 31,
1998).
10.10 Stock Purchase Warrant Agreement, dated December 23, 1996, by
and between the Company and Circle F. Ventures, LLC
(incorporated by reference to Exhibit 10.10 of the
Registrant's Form 10-KSB for the fiscal year ended March 31,
1997).
10.11 Security Agreement, dated December 23, 1996, by and between
the Registrant and Circle F. Ventures, LLC (incorporated by
reference to Exhibit 10.11 of the Registrant's Form 10-KSB
for the fiscal year ended March 31, 1997).
10.12 Subordination Agreement, dated December 23, 1996, by and
between the Registrant Diversified Business Credit, Inc. and
Circle F. Ventures, LLC (incorporated by reference to Exhibit
10.12 of the Registrant's Form 10-KSB for the fiscal year
ended March 31, 1997).
10.13 Promissory Note, dated March 18, 1997, made by the Registrant
in favor of Circle F Ventures, LLC (incorporated by reference
to Exhibit 10.13 of the Registrant's Form 10-KSB for the
fiscal year ended March 31, 1997).
10.14 Sublease Agreement, dated April 22, 1998, by and between CSM
Investors, Inc., Digital River, Inc. and the Registrant
(incorporated by reference to Exhibit 10.14 of the
Registrant's Form 10-KSB for the fiscal year ended March 31,
1997).
10.15 Stock Purchase Warrant Agreement, dated March 18, 1997, by
and between the Registrant and Circle F Ventures, LLC
(incorporated by reference to Exhibit 10.15 of the
Registrant's Form 10-KSB for the fiscal year ended March 31,
1997).
33
<PAGE> 34
10.16 Schedule identifying certain material details of documents
substantially identical to those set forth in Exhibits 10.17,
10.18, 10.19 and 10.20 (incorporated by reference to Exhibit
10.16 of the Registrant's Form 10-KSB for the fiscal year
ended March 31, 1997).
10.17 Promissory Note, dated December 20, 1996, made by the
Registrant in favor of Rita M. Olson (incorporated to Exhibit
10.17 of the Registrant's Form 10KSB for the fiscal year
ended March 31, 1997).
10.18 Amendment, dated March 4, 1997, to the Promissory Note made
by the Registrant in favor of Rita M. Olson dated
December 20, 1996 (incorporated by reference to Exhibit 10.18
of the Registrant's Form 10KSB for the fiscal year ended
March 31, 1997).
10.19 Amendment, dated June 5, 1997, by and between the Registrant
and Rita M. Olson dated December 20, 1996 (incorporated by
reference to Exhibit 10.19 of the Registrant's Form 10-KSB
for the fiscal year ended March 31, 1997).
10.20 Stock Purchase Warrant Agreement, dated December 20, 1996, by
and between the Registrant and Rita M. Olson (incorporated by
reference to Exhibit 10.20 of the Registrant's Form 10-KSB
for the fiscal year ended March 31, 1997).
10.21 Note Conversion and Subscription Agreement, dated June 6,
1997, by and between the Registrant and Rita M. Olson
(incorporated by reference to Exhibit 10.21 of the
Registrant's Form 10-KSB for the fiscal year ended March 31,
1997).
10.22 Note Conversion and Subscription Agreement, dated June 6,
1997, by and between the Registrant and Wayne W. Mills
(incorporated by reference to Exhibit 10.22 of the
Registrant's Form 10-KSB for the fiscal year ended March 31,
1997).
10.23 Asset Purchase Agreement, dated as of March 30, 1998, by and
among Midwest Graphics & Response Systems, Inc., Stephen M.
Krenz, and IntraNet Distribution Group, Inc. (incorporated by
reference to Exhibit 10.23 of the Registrant's Form 10-QSB
for the three months ended September 30, 1998).
10.24 Asset Purchase Agreement, dated August 13, 1998, by and among
Intranet Solutions, Inc., IntraNet Distribution Group, Inc,
and Communication Connections, Inc. (incorporated by
reference to Exhibit 10.24 of the Registrant's Form 10-QSB
for the three months ended September 30, 1998).
10.25 Asset Purchase Agreement, dated effective as of September 30,
1998, by and between Osage Systems Group, Inc., Osage Systems
Group Minneapolis, Inc. and IntraNet Solutions, Inc.
(incorporated by reference to Exhibit 10.25 of the
Registrant's Form 10-QSB for the three months ended
September 30, 1998).
10.26 Employment Agreement, dated April 1, 1999, by and between the
Registrant and Gregg A. Waldon. (incorporated by reference to
Exhibit 10.26 of the Registrant's registration statement on
Form S-1, File No. 333-77389).
10.27 Credit and Security Agreement, dated April 11, 1999, by and
between the Registrant and Diversified Business Credit, Inc.
(incorporated by reference to Exhibit 10.27 of the
Registrant's registration statement on Form S-1, File
No. 333-77389).
13.1 1999 Annual Report to Shareholders.
34
<PAGE> 35
21 Subsidiaries of Registrant (incorporated by reference to
Exhibit 21 of the Registrant's registration statement on Form
SB-2, File No. 333-14175).
23.1 Consent of Grant Thornton LLP.
23.2 Consent of Ernst & Young LLP.
24.1 Powers of Attorney (set forth on signature page).
27 Financial Data Schedule.
35
<PAGE> 1
EXHIBIT 13.1
INTRANET SOLUTIONS, INC.
INDEX TO FINANCIAL INFORMATION
1999
<TABLE>
<CAPTION>
<S> <C>
PAGE
Management's Discussion and Analysis of Financial Condition and Results of Operations............. 1
Quantitative and Qualitative Disclosures About Market Risk........................................14
Consolidated Balance Sheets.......................................................................15
Consolidated Statements of Operations.............................................................16
Consolidated Statements of Shareholders' Equity (Deficit).........................................17
Consolidated Statements of Cash Flows.............................................................18
Notes to Consolidated Financial Statements........................................................19
Report of Independent Certified Public Accountants................................................30
Report of Independent Accountants.................................................................31
Selected Consolidated Financial Data..............................................................32
Market for Registrant's Common Equity and Related Stockholder Matters.............................33
</TABLE>
<PAGE> 2
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
FORWARD-LOOKING STATEMENTS
The information presented in this Annual Report to Shareholders for the
year ended March 31, 1999 (the "Annual Report") contains forward-looking
statements within the meaning of the safe harbor provisions of Section 21E of
the Securities Exchange Act of 1934, as amended (the "Exchange Act"). Such
statements are subject to risks and uncertainties, including those discussed
below under "Disclosure Regarding Forward-Looking Statements" and in the
Company's Annual Report on Form 10-K for the year ended March 31, 1999 ("Form
10-K") under "Risk Factors", that could cause actual results to differ
materially from those projected. Because actual results may differ, readers are
cautioned not to place undue reliance on these forward-looking statements. 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 Form 10-K.
DISCLOSURE REGARDING FORWARD-LOOKING STATEMENTS
This Annual Report to Shareholders contains certain forward looking
statements within the meaning of Section-21E of the Exchange Act. Such
forward-looking statements are based on the beliefs of the Company's management
as well as on assumptions made by and information currently available to the
Company at the time such statements were made. When used in this Annual Report,
the words "anticipate", "believe", "estimate", "expect", "intend" and similar
expressions, as they relate to the Company, are intended to identify such
forward-looking statements. Although the Company believes these statements are
reasonable, readers of this Annual Report should be aware that actual results
could differ materially from those projected by such forward-looking statements
as a result of the risk factors listed below and set forth in the Company's Form
10-K under the caption "Risk Factors." Readers of this Annual Report should
consider carefully the factors listed below and under the caption "Risk Factors"
in the Company's Form 10-K, as well as the other information and data contained
in this Annual Report. The Company cautions the reader, however, that such list
of factors under the caption "Risk Factors" in the Company's Form 10-K and
listed below may not be exhaustive and that those or other factors, many of
which are outside of the Company's control, could have a material adverse effect
on the Company and its results of operations. All forward-looking statements
attributable to the Company or persons acting on its behalf are expressly
qualified in their entirety by the cautionary statements set forth hereunder and
under the caption "Risk Factors" in the Company's Form 10-K.
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.
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<PAGE> 3
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.
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,
2
<PAGE> 4
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.
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.
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<PAGE> 5
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.
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
4
<PAGE> 6
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 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,
5
<PAGE> 7
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.
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.
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<PAGE> 8
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 Form 10-K. 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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<PAGE> 9
<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)
CONSOLIDATED STATEMENTS OF
OPERATIONS DATA:
<S> <C> <C> <C> <C> <C> <C> <C> <C>
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
======== ========= ========= ========= ========= ========= ========= ========
<CAPTION>
AS A PERCENTAGE OF TOTAL REVENUES:
<S> <C> <C> <C> <C> <C> <C> <C> <C>
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;
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<PAGE> 11
- costs related to possible acquisitions of technology or businesses;
- general economic conditions; and
- 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
Form 10-K.
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
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<PAGE> 12
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 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.
On June 9,1999 the company completed a public offering of 3,230,000 shares
of its common stock and received net proceeds of approximately $23,500,000. The
proceeds from the offering will be used for working capital and general
corporate purposes.
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 certain product versions, as well as
validation
11
<PAGE> 13
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 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.
12
<PAGE> 14
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.
13
<PAGE> 15
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company has no history of, and does not anticipate in the future,
investing in derivative financial instruments. Most transactions with
international customers are entered into in U.S. dollars, precluding the need
for foreign currency hedges. Any transactions that are currently entered into in
foreign currency are not deemed material to the financial statements. Thus, the
exposure to market risk is not material.
14
<PAGE> 16
INTRANET SOLUTIONS, INC.
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
MARCH 31,
----------------------------------------
1998 1999
------------------ ------------------
ASSETS
<S> <C> <C>
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.
15
<PAGE> 17
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.
16
<PAGE> 18
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
PREFERRED STOCK PREFERRED STOCK COMMON STOCK
--------------- --------------- ------------
SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT
------ ------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C> <C>
Balance at
April 1, 1996 -- $ -- -- $ -- 4,318,583 $43,186
Grant of
compensatory
stock options -- -- -- -- -- --
Exercise of stock
options and
warrants -- -- -- -- 60,926 609
Stock option
compensation earned -- -- -- -- -- --
Conversion of
promissory notes -- -- -- -- 158,346 1,583
Shares issued in
reverse acquisition -- -- -- -- 2,940,587 29,406
Shares issued in
conjunction with
acquisition -- -- -- -- 45,161 452
Warrants issued in
conjunction with
promissory notes -- -- -- -- -- --
Net loss -- -- -- -- -- --
-------- -------- -------- -------- --------- --------
Balance at
March 31, 1997 -- -- -- 7,523,603 75,236
Exercise of stock
options and
warrants -- -- -- -- 541,034 5,411
Conversion of
promissory notes -- -- -- -- 71,428 714
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
Record non-cash
deemed dividend -- (1,570,000) -- -- -- --
Record deemed
dividend accretion -- 1,570,000 -- -- -- --
Dividends paid on
convertible
preferred stock -- -- -- -- -- --
Net loss -- -- -- -- -- --
Other -- -- -- -- -- --
-------- -------- -------- -------- -------- --------
Balance at
March 31, 1998 450,000 2,003,844 -- -- 8,607,445 86,075
Exercise of stock
options and
warrants -- -- -- -- 334,381 3,343
Cancellation of
compensatory stock
options -- -- -- -- -- --
Issuance of common
stock -- -- -- -- 29,057 291
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
Record non-cash
deemed dividend -- -- -- (570,000) -- --
Record deemed
dividend accretion -- -- -- 570,000 -- --
Dividends paid of
convertible
preferred stock -- -- -- -- -- --
Net loss -- -- -- -- -- --
Other -- -- -- -- -- --
-------- -------- -------- -------- ---------- --------
Balance at
March 31, 1999 75,000 $333,969 -- $ -- 10,803,500 $108,035
======== ======== ======== ======== ========== ========
</TABLE>
<TABLE>
<CAPTION>
RETAINED TOTAL
ADDITIONAL EARNINGS SHAREHOLDERS'
PAID-IN (ACCUMULATE UNEARNED EQUITY
CAPITAL DEFICIT) COMPENSATION (DEFICIT)
--------- ----------- ------------ -------------
<S> <C> <C> <C> <C>
Balance at
April 1, 1996 $(51,793) $ 3,631 $ (16,207) $ (21,183)
Grant of
compensatory
stock options 241,222 -- (241,222) --
Exercise of stock
options and
warrants 66,610 -- -- 67,219
Stock option
compensation earned -- -- 26,309 26,309
Conversion of
promissory notes 548,417 -- -- 550,000
Shares issued in
reverse acquisition 2,583,352 -- -- 2,612,758
Shares issued in
conjunction with
acquisition 349,548 -- -- 350,000
Warrants issued in
conjunction with
promissory notes 90,000 -- -- 90,000
Net loss -- (3,748,464) -- (3,748,464)
--------- ---------- --------- -----------
Balance at
March 31, 1997 3,827,356 (3,744,833) (231,120) (73,361)
Exercise of stock
options and warrants 1,625,082 -- -- 1,630,493
Conversion of
promissory notes 249,286 -- -- 250,000
Issuance of
convertible
preferred stock -- -- -- 3,562,395
Conversion of
preferred stock to
common Stock 1,553,837 -- -- --
Record non-cash
deemed dividend 1,570,000 -- -- --
Record deemed
dividend accretion -- (1,570,000) -- --
Dividends paid on
convertible
preferred stock -- (94,889) -- (94,889)
Net loss -- (3,654,972) -- (3,654,972)
Other (64,581) -- 112,847 48,266
---------- ---------- --------- -----------
Balance at
March 31, 1998 8,760,980 (9,064,694) (118,273) 1,667,932
Exercise of stock
options and
warrants 1,370,814 -- -- 1,374,157
Cancellation of
compensatory stock
options (90,760) -- 90,760 --
Issuance of common
stock 119,709 -- -- 120,000
Issuance of
convertible
preferred stock -- -- -- 2,851,264
Conversion of
preferred stock to
common stock 4,502,813 -- -- --
Record non-cash
deemed dividend 570,000 -- -- --
Record deemed
dividend accretion -- (570,000) -- --
Dividends paid of
convertible
preferred stock 14,088 (148,333) -- (134,245)
Net loss -- (854,139) -- (854,139)
Other 48,333 -- 2,584 50,917
----------- --------- -------- ----------
Balance at
March 31, 1999 $15,295,977 $(10,637,166) $(24,929) $5,075,886
=========== ============ ======== ==========
</TABLE>
The accompanying notes are an integral part of the financial statements.
17
<PAGE> 19
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.
18
<PAGE> 20
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.
19
<PAGE> 21
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.
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.
20
<PAGE> 22
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
$516,934 has been recorded in the statement of operations as other income.
Revenues, cost of revenues, and gross profit for the hardware integration
and support unit are as follows:
<TABLE>
<CAPTION>
YEAR ENDED MARCH 31,
--------------------------------------------------
1997 1998 1999
------------ ----------- ------------
<S> <C> <C> <C>
Revenues:
Hardware integration................................$ 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>
21
<PAGE> 23
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>
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.
22
<PAGE> 24
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 net worth. The
agreement automatically renews annually unless the Company provides 60 days
notice to cancel or demand is made by the lender.
23
<PAGE> 25
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 -- 77,323
equipment...........................................................
Contract payable, due in monthly installments of $10,300 with no -- 164,800
interest, through July 30, 2000..................................... 406,795 --
Notes payable to bank............................................... 427,801 --
Other notes......................................................... ----------- ----------
862,096 262,123
Total long-term debt................................................ 663,631 177,631
Less current maturities............................................. ---------- ----------
$ 198,465 $ 84,492
========== ==========
Future maturities of long-term obligations are as follows:
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 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.
24
<PAGE> 26
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 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.
25
<PAGE> 27
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.
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
============ =====
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>
26
<PAGE> 28
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>
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>
27
<PAGE> 29
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 (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.
28
<PAGE> 30
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 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.
15. SUBSEQUENT EVENT
On June 9, 1999 the company completed a public offering of 3,230,000 shares
of its common stock and received net proceeds of approximately $23,500,000. The
proceeds from the offering will be used for working capital and general
corporate purposes.
29
<PAGE> 31
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 (except for Note 15, as to which
the date is June 9, 1999)
30
<PAGE> 32
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
31
<PAGE> 33
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 Form 10-K.
<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)
======== ======= ======= ======= =======
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
<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>
32
<PAGE> 34
MARKET FOR REGISTRANT'S COMMON EQUITY
AND RELATED STOCKHOLDER MATTERS
Our common stock, par value $.01 per share, is traded on the Nasdaq National
Market tier of The Nasdaq Stock Market under the symbol INRS. At June 21, 1999,
the number of holders of the common stock was approximately 1,617 consisting of
117 record holders and an estimated 1,500 Shareholders whose stock is being held
by a bank, broker or other nominee. On June 21, 1999, the closing sale price of
a share of the common stock was $8.31.
The high and low sale prices per share of the common stock for the four
quarters during the years ended March 31, 1999 and 1998 were as follows:
<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 21, 1999) 13.38 6.03
</TABLE>
The Company has never paid cash dividends on the common stock. The Board of
Directors does not anticipate paying cash dividends in the foreseeable future.
RECENT SALES OF UNREGISTERED SECURITIES
During the year ended March 31, 1999, the Company has sold the following
equity securities pursuant to exemptions from registration under the Securities
Act of 1933, as amended (the "Securities Act"). All such sales were made in
reliance upon the exemptions from registration provided under Sections 3(b) and
4(2) of the Securities Act.
In April and June 1998, the Company issued five-year warrants to purchase
12,500 and 8,800 shares of common stock at $6.00 and $4.50, respectively, for
services performed by Andcor Companies, Inc. The warrants were valued at fair
market value on the date of grant.
33
<PAGE> 1
EXHIBIT 23.1
CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
We have issued our report dated April 14, 1999 (except for Note 15, as
to which the date is June 9, 1999) accompanying the consolidated financial
statements and schedule included in the Annual Report of IntraNet Solutions,
Inc. and subsidiaries on Form 10-K for the year ended March 31, 1999. We hereby
consent to the incorporation by reference of said report in the Registration
Statement of IntraNet Solutions, Inc. and subsidiaries on Form S-8
No. 333-11489, Form S-3 No.333-14175, Form S-3 No. 333-333437 and Form S-3
No. 333-57181.
/s/ GRANT THORNTON LLP
Minneapolis, Minnesota
June 29, 1999
<PAGE> 1
EXHIBIT 23.2
CONSENT OF INDEPENDENT AUDITORS
We consent to the incorporation by reference in the Registration Statements
(Form S-8 No. 333-11489) pertaining to the 1994 - 1997 Stock Option and
Compensation Plan of IntraNet Solutions Inc., (Form S-3 No. 333-14175)
pertaining to the registration of 562,635 shares of IntraNet Solutions Inc.
common stock, (Form S-3 No. 333-33437) pertaining to the registration of
2,204,033 shares of IntraNet Solutions Inc. common stock and (Form S-3 No.
333-57181) pertaining to the registration of 1,945,900 shares of IntraNet
Solutions, Inc. common stock, of our report dated June 30, 1997, with respect to
the consolidated financial statements of IntraNet Solutions Inc., for the year
ended March 31, 1997 included in this Annual Report (Form 10-KSB).
Our audit included the financial statement schedule of IntraNet Solutions,
Inc. listed in Item 14(a). This schedule is the responsibility of the Company's
management. Our responsibility is to express an opinion based on our audits. In
our opinion, the financial statement schedule referred to above, when considered
in relation to the basic consolidated financial statements taken as a whole,
presents fairly in all material respects the information set forth therein.
/S/ ERNST & YOUNG LLP
Minneapolis, Minnesota
June 29, 1999
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> MAR-31-1999
<PERIOD-END> MAR-31-1999
<CASH> 1,950,893
<SECURITIES> 0
<RECEIVABLES> 4,038,833
<ALLOWANCES> 309,601
<INVENTORY> 52,001
<CURRENT-ASSETS> 6,428,028
<PP&E> 1,660,780
<DEPRECIATION> 894,271
<TOTAL-ASSETS> 7,299,985
<CURRENT-LIABILITIES> 2,139,607
<BONDS> 0
0
333,969
<COMMON> 108,035
<OTHER-SE> 4,633,882
<TOTAL-LIABILITY-AND-EQUITY> 7,299,985
<SALES> 14,058,316
<TOTAL-REVENUES> 14,058,316
<CGS> 6,266,025
<TOTAL-COSTS> 6,266,025
<OTHER-EXPENSES> 8,587,077
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 54,823
<INCOME-PRETAX> (332,675)
<INCOME-TAX> 0
<INCOME-CONTINUING> (332,675)
<DISCONTINUED> (521,464)
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (854,139)
<EPS-BASIC> (0.09)
<EPS-DILUTED> (0.09)
</TABLE>
