<PAGE> 1
U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-QSB
[X] Quarterly report under Section 13 or 15(d) of the Securities Exchange Act of
1934
For the quarterly period ended December 31, 1998.
[ ] Transition report under Section 13 or 15(d) of the Securities Exchange Act
of 1934
For the transition period from to .
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Commission file number 0-19817
----------------------
INTRANET SOLUTIONS, INC.
- --------------------------------------------------------------------------------
(Exact Name of Registrant as Specified in Its Chapter)
Minnesota 41-1652566
- --------------------------------- ------------------------------------
(State or Other Jurisdiction of (I.R.S. Employer Identification No.)
Incorporation or Organization)
8091 Wallace Road, Eden Prairie, Minnesota 55344
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(Address of Principal Executive Offices)
(612) 903-2000
- --------------------------------------------------------------------------------
(Issuer's Telephone Number, Including Area Code)
- --------------------------------------------------------------------------------
(Former Name, Former Address and Former Fiscal Year,
If Changed Since Last Report)
Check whether the issuer: (1) filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such
shorter period that the registrant was required to file such reports), and (2)
has been subject to such filing requirements for the past 90 days.
Yes X No
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State the number of shares outstanding of each of the issuer's classes
of common equity, as of the latest practicable date: At February 9, 1999 there
were 10,673,364 shares of common stock, $0.01 par value outstanding.
Page 1 of 15
<PAGE> 2
INTRANET SOLUTIONS, INC.
Form 10-QSB Index
December 31, 1998
Part I Financial Information
Item 1. Financial Statements
Condensed Consolidated Balance Sheets -
December 31, 1998 and March 31, 1998 3
Condensed Consolidated Statements of Operations -
for the three and nine months ended December 31,
1998 and 1997 4
Condensed Consolidated Statements of Cash Flows -
for the three and nine months ended December 31,
1998 and 1997 5
Notes to Condensed Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 9
Part II: Other Information
Item 6. Exhibits and Reports on Form 8-K 14
Page 2 of 15
<PAGE> 3
INTRANET SOLUTIONS, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
<TABLE>
<CAPTION>
ASSETS
DECEMBER 31, MARCH 31,
1998 1998
----------------- ------------------
<S> <C> <C>
CURRENT ASSETS:
Cash $ 1,658,539 $ 994,526
Accounts receivable, net 3,437,440 4,925,301
Current portion of notes receivable 625,018 61,793
Inventories 54,417 233,121
Prepaid expenses and other current assets 809,467 540,472
----------------- ------------------
Total current assets 6,584,881 6,755,213
NOTES RECEIVABLE, NET OF CURRENT PORTION 123,946 215,910
PROPERTY AND EQUIPMENT, NET 739,877 776,088
NET ASSETS OF DISCONTINUED OPERATIONS -- 709,128
----------------- ------------------
$7,448,704 $8,456,339
================= ==================
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Revolving credit facility $1,345,650 $2,246,122
Current portion of long-term debt 20,000 663,631
Accounts payable 604,570 2,906,293
Deferred revenues 500,306 210,110
Accrued expenses 495,108 563,786
----------------- ------------------
Total current liabilities 2,965,634 6,589,942
LONG-TERM DEBT, NET OF CURRENT PORTION -- 156,250
OTHER 205,260 42,215
----------------- ------------------
Total liabilities 3,170,894 6,788,407
----------------- ------------------
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY:
Series A Preferred stock, $.01 par value, $5.00 stated value,
1,000,000 shares authorized, 80,000 and 450,000 shares
issued and outstanding, respectively 356,234 2,003,844
Common stock, $.01 par value, 24,000,000 shares authorized,
10,620,226 and 8,607,445 issued and outstanding, respectively 106,202 86,075
Additional paid-in capital 14,515,964 8,760,980
Accumulated deficit (10,653,611) (9,064,694)
Unearned compensation (46,979) (118,273)
----------------- ------------------
Total stockholders' equity 4,277,810 1,667,932
----------------- ------------------
$7,448,704 $8,456,339
================= ==================
</TABLE>
See accompanying notes to condensed consolidated financial statements.
Page 3 of 15
<PAGE> 4
INTRANET SOLUTIONS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
------------------------------------- --------------------------------------
DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31,
1998 1997 1998 1997
----------------- ---------------- ---------------- -----------------
<S> <C> <C> <C> <C>
REVENUES:
Hardware integration -- $ 3,119,082 $ 4,357,809 $ 9,675,921
Software, technical services and support $ 2,543,937 1,894,859 6,610,604 4,894,877
----------------- ---------------- ---------------- -----------------
Total revenues 2,543,937 5,013,941 10,968,413 14,570,798
----------------- ---------------- ---------------- -----------------
COST OF REVENUES:
Hardware integration -- 2,656,069 3,711,929 8,179,881
Software, technical services and support 515,944 725,055 1,936,015 2,291,556
----------------- ---------------- ---------------- -----------------
Total cost of revenues 515,944 3,381,124 5,647,944 10,471,437
----------------- ---------------- ---------------- -----------------
Gross profit 2,027,993 1,632,817 5,320,469 4,099,361
----------------- ---------------- ---------------- -----------------
OPERATING EXPENSES:
Sales and marketing 1,114,013 776,621 3,160,412 2,114,926
General and administrative 689,244 581,405 1,996,277 1,756,278
Research and development 345,850 305,933 974,820 942,904
----------------- ---------------- ---------------- -----------------
Total operating expenses 2,149,107 1,663,959 6,131,509 4,814,108
----------------- ---------------- ---------------- -----------------
Loss from operations (121,114) (31,142) (811,040) (714,747)
OTHER
Gain on sale of hardware integration unit -- -- 516,934 --
Interest expense, net (10,943) (91,126) (60,966) (287,269)
----------------- ---------------- ---------------- -----------------
LOSS FROM CONTINUING OPERATIONS (132,057) (122,268) (355,072) (1,002,016)
DISCONTINUED OPERATIONS
Loss from operations of Distribution Group -- (474,093) (410,361) (1,424,457)
Loss on sale of discontinued Distribution
Group -- -- (111,103) --
----------------- ---------------- ---------------- -----------------
NET LOSS (132,057) (596,361) (876,536) (2,426,473)
PREFERRED STOCK DIVIDENDS AND ACCRETION 80,102 640,000 142,381 1,620,000
----------------- ---------------- ---------------- -----------------
LOSS ATTRIBUTABLE TO COMMON SHAREHOLDERS ($ 212,159) ($ 1,236,361) ($ 1,018,917) ($ 4,046,473)
================= ================ ================ =================
EARNINGS PER SHARE - BASIC AND DILUTED:
Loss from continuing operations
per common share ($ 0.01) ($ 0.02) ($ 0.04) ($ 0.13)
Net loss per common share ($ 0.01) ($ 0.08) ($ 0.10) ($ 0.31)
Loss attributable to common
shareholders per common share ($ 0.02) ($ 0.16) ($ 0.11) ($ 0.52)
Weighted average shares - basic and diluted 9,863,683 7,928,910 9,099,659 7,712,353
</TABLE>
See accompanying notes to the condensed consolidated financial statements
Page 4 of 15
<PAGE> 5
INTRANET SOLUTIONS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
-------------------------------------- -------------------------------------
DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31,
1998 1997 1998 1997
----------------- ----------------- ---------------- -----------------
<S> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss ($ 132,057) ($ 596,361) ($ 876,536) ($2,426,473)
Adjustments to reconcile net loss
to cash flows from operating activities -
Depreciation and amortization 71,581 72,698 222,500 200,342
Stock option compensation earned 12,875 16,865 28,867 51,122
Discount amortization -- 14,883 194 68,835
Gain on sale of hardware integration unit -- -- (516,934) --
Discontinued operations -- 122,156 709,128 97,835
Changes in operating assets and liabilities (131,298) (14,013) (1,125,302) (1,540,054)
----------------- ----------------- ---------------- -----------------
Cash flows from operating activities (178,899) (383,772) (1,558,083) (3,548,393)
----------------- ----------------- ---------------- -----------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from notes receivable 1,021,138 414,755 1,021,138 662,977
Purchases of fixed assets (118,213) (217,584) (351,887) (339,384)
----------------- ----------------- ---------------- -----------------
Cash flows from investing activities 902,925 197,171 669,251 323,593
----------------- ----------------- ---------------- -----------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net advances from revolving credit facility (843,590) (1,417,236) (900,472) (774,673)
Payments on long-term debt (42,400) (106,149) (790,606) (319,199)
Payments on capital leases (3,885) (2,600) (9,469) (6,790)
Payments on other long-term liabilities (30,344) (21,441) (75,730) (93,701)
Repurchase of treasury stock 525 550 (8,425) (8,250)
Issuance of preferred stock -- (7,651) 2,852,571 3,521,373
Payment of dividends on preferred stock (68,069) (50,000) (128,293) (50,000)
Proceeds from stock options and warrants 459,916 722,984 613,269 938,842
----------------- ----------------- ---------------- -----------------
Cash flows from financing activities (527,847) (881,543) 1,552,845 3,207,602
----------------- ----------------- ---------------- -----------------
NET INCREASE (DECREASE) IN CASH 196,179 (1,068,144) 664,013 (17,198)
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 1,462,360 1,172,744 994,526 121,798
----------------- ----------------- ---------------- -----------------
CASH AND CASH EQUIVALENTS, END OF PERIOD $1,658,539 $104,600 $1,658,539 $104,600
================= ================= ================ =================
NON-CASH TRANSACTIONS:
Conversion of debt to common stock -- -- -- $ 250,000
Conversion of debt to preferred stock -- -- -- $ 150,000
Issuance of common stock as dividends $ 12,033 -- $ 14,088 --
Issuance of common stock as advance royalties $ 120,000 -- $ 120,000 --
SUPPLEMENTAL DISCLOSURE OF CASH FLOWS
INFORMATION:
Cash paid for interest $ 10,418 $ 69,716 $ 77,678 $ 229,732
Cash paid for income taxes $ 4,325 $4,500 $ 5,312 $8,031
DETAIL OF CHANGES IN OPERATING ASSETS AND LIABILITIES:
Accounts receivable $2,127,290 $ 737,160 $1,281,910 ($1,648,667)
Inventories 24,114 84,946 35,824 50,011
Prepaid expenses and other current assets (139,422) (236,745) (113,346) (445,146)
Accounts payable (2,025,226) (429,941) (2,309,866) 625,212
Accrued expenses and other current liabilities (118,054) (169,433) (19,824) (121,464)
----------------- ----------------- ---------------- -----------------
Net changes in operating assets and liabilities ($ 131,298) ($ 14,013) ($1,125,302) ($1,540,054)
================= ================= ================ =================
</TABLE>
See accompanying notes to the condensed consolidated financial statements.
Page 5 of 15
<PAGE> 6
INTRANET SOLUTIONS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NINE MONTHS ENDED DECEMBER 31, 1998 AND 1997
(UNAUDITED)
(1) BASIS OF FINANCIAL STATEMENT PRESENTATION
The accompanying unaudited condensed consolidated financial statements
have been prepared by the Company pursuant to the rules and regulations of the
Securities and Exchange Commission. Certain information and footnote disclosures
normally included in financial statements prepared in accordance with generally
accepted accounting principles have been condensed or omitted pursuant to such
rules and regulations. Although management believes that the disclosures are
adequate to make the information presented not misleading, it is suggested that
these interim consolidated financial statements be read in conjunction with the
Company's most recent audited consolidated financial statements and notes
thereto. In the opinion of management, all adjustments (which include only
normal recurring adjustments) necessary for a fair presentation of the financial
position, results of operations and cash flows for the interim period presented
have been made. Operating results for the nine months ended December 31, 1998
are not necessarily indicative of the results that may be expected for the year
ending March 31, 1999.
(2) NET INCOME (LOSS) PER COMMON SHARE
Statement of Financial Accounting Standards No. 128, "Earnings per
Share," requires presentation of "basic" and " diluted" earnings per share
amounts, as defined. "Basic" earnings per share replaces primary earnings per
share under APB Opinion No. 15, and excludes the dilutive effects of common
stock equivalents, if any, from the calculation. Fully diluted earnings per
share has not changed significantly but has been named "diluted" earnings per
share. Statement No. 128 became effective for fiscal years ending after December
15, 1997. All earnings per share prior to 1998 have been restated, where
applicable, to comply with this statement.
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 all periods presented, the Company incurred net
losses and therefore basic and diluted share amounts are the same.
(3) SERIES B CONVERTIBLE PREFERRED STOCK
In May, 1998, the Company issued $3,000,000 of Series B 4% Convertible
Preferred Stock. The preferred stock is 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. 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
income (loss), but has no net effect on total stockholders' equity.
During the quarter ended December 31, 1998, all remaining outstanding
shares of Series B Convertible Preferred Stock were converted into common shares
at prices ranging from $2.45 to $3.18.
Page 6 of 15
<PAGE> 7
(4) SALE OF HARDWARE INTEGRATION UNIT
Effective September 30, 1998, the Company sold the operations of its
hardware integration unit to Osage Systems Group, Inc. The sale was completed
for a purchase price of $1.6 million, and certain future financial
consideration, dependent on the performance of the unit over the next two years.
The purchase price was to be paid in three installments, totaling $1,535,000,
including $750,000 on October 16, 1998, $250,000 on November 16, 1998, and
$535,000 on January 15, 1999. As of December 31, 1998, the October and November
installments were received by the Company and the $535,000 January installment
was included in notes receivable. On January 13, 1999, the Company received the
final installment.
The remaining $65,000 in proceeds was deducted from the purchase price
as a cost of the transaction, and will be paid by Osage directly to certain
former IntraNet employee's on or before October 15, 1999.
In conjunction with the sale of the 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 $516,000 has been recorded net of transaction costs and the
aforementioned provision in the statement of operations as other income. The
Company is now solely dependent on the sale of its proprietary software products
and related services for its revenue. The Company no longer relies on its supply
contract with Sun Microsystems, Inc. as a source of revenue.
(5) NOTES RECEIVABLE
The Company has a note receivable as of December 31, 1998 in the amount
of $213,964, related to the sale of the its Minneapolis Distribution Group
operations during the year ended March 31, 1998. The note is to be paid in
quarterly installments of $27,100 including accrued interest. The Company also
has a note receivable as of December 31, 1998 in the amount of $535,000, as
discussed in Note 4 above. The note is to be paid in one payment on January 15,
1999. The payment due on January 15, 1999 has been paid.
Future maturities of notes receivable balances are as follows:
<TABLE>
<CAPTION>
<S> <C>
1999 $625,018
2000 99,445
2001 24,501
--------
Total $748,964
========
</TABLE>
(6) RECENTLY ISSUED ACCOUNTING PRINCIPLES
In October, 1997, the American Institute of Certified Public
Accountants ("AICPA") issued Statement of Position No. 97-2 ("SOP 97-2"),
"Software Revenue Recognition", which the Company has adopted for transactions
entered into during the fiscal year beginning April 1, 1998. SOP 97-2 provides
guidance for recognizing revenue on software transactions and supersedes SOP
91-1, "Software Revenue Recognition". In March 1998, the AICPA issued Statement
of Position No. 98-4 ("SOP 98-4"), "Deferral of the Effective Date of a
Provision of SOP 97-2, Software Revenue Recognition". SOP 98-4 defers, for one
year, the application of certain passages in SOP 97-2 which limit what is
considered vendor-specific objective evidence ("VSOE") necessary to recognize
revenue for software licenses in multiple-element arrangements when undelivered
elements exist. Additional guidance is expected to be provided prior to adoption
of the deferred provision of SOP 97-2. The Company will determine the impact, if
any, the additional guidance will have on current revenue recognition practices
when issued. Adoption of the remaining provisions of SOP 97-2 did not have a
material impact on revenue recognition during the nine months ended December 31,
1998.
Page 7 of 15
<PAGE> 8
On April 1, 1998, the Company adopted Statement of Financial Accounting
Standards (SFAS) No. 130, "Reporting Comprehensive Income." Comprehensive income
includes certain changes in equity that are currently excluded from net
earnings. The adoption of this statement did not impact the Company's
consolidated financial statements; historically there have been no differences
between net earnings and comprehensive income.
In June 1997, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 131, "Disclosures About Segments of An
Enterprise and Related Information"("SFAS 131"). SFAS 131 revises information
regarding the reporting of operating segments. It also establishes standards for
related disclosures about products and services, geographic areas and major
customers. The Company will adopt SFAS 131 for the fiscal year ending March 31,
1999 and has not yet completed the evaluation of the impact of such adoption on
the notes to its consolidated financial statements.
(7) ROYALTY AGREEMENTS
During the quarter ended December 31, 1998, the Company entered into exclusive
royalty agreements to acquire certain source code and intellectual property of
Activedoc Corporation and Softgoods Development, Inc. The agreements required
initial advance royalty amounts of $100,000 each and subsequent advance royalty
payments not to exceed a maximum of $150,000 and $145,000 respectively.
Royalties are earned and expensed at the contract royalty rates of seven to ten
percent, of the applicable product sale.
(8) DISCONTINUED OPERATIONS
In September 1997, the Company formally adopted a plan of disposition
for its on-demand publishing distribution business. During the quarter ended
June 30, 1998, the Company sold its remaining on-demand publishing distribution
operation. The Company incurred a loss of approximately $100,000 on the sale of
those assets. The financial statements for all periods presented reflect the
operating results of the on-demand publishing distribution business as a
discontinued operation.
Revenue from discontinued operations for the three months ended
December 31, 1997 was $1,260,530. For the nine months ended December 31, 1998
and 1997, revenue from discontinued operations was $729,111 and $3,769,297,
respectively. Interest expense allocated to discontinued operations includes
interest expense directly attributable or related to the discontinued
operations. For the three months ended December 31, 1997 interest expense
allocated to discontinued operations was $59,480. For the nine months ended
December 31, 1998 and 1997, interest expense allocated to discontinued
operations was $35,329 and $181,933, respectively.
(9) RECLASSIFICATIONS
Certain accounts in the prior year financial statements have been
reclassified for comparative purposes to conform with the presentation in the
current year financial statements. These reclassifications had no effect on net
loss or stockholders' equity as previously reported.
Page 8 of 15
<PAGE> 9
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
OVERVIEW
IntraNet Solutions, Inc. ("IntraNet" or the "Company") develops and
implements integrated solutions for the management and distribution of critical
business information. IntraNet offers its customers proprietary intranet
document and content management software, and related services. The evolution of
Web technology as a tool for storing, managing and distributing information,
coupled with the Company's experience in designing systems and creating custom
software applications, has created an opportunity for the Company to develop a
line of document and content management software products utilizing Web
technology.
Effective September 30, 1998, the Company sold its hardware integration
unit to Osage Systems Group, Inc. The Company is now solely dependent on the
sale of its proprietary software products and related services for its revenues.
The Company no longer relies on its supply contract with Sun Microsystems, Inc.
as a source of its revenues.
The Company's revenues are derived from (i) the sale of proprietary and
non-proprietary software products, (ii) the sale of maintenance and support
contracts, and (iii) the sale of technical and other services. Revenue from the
sale of software is recognized in accordance with AICPA Statement of Position
97-2 Software Revenue Recognition. Accordingly, revenue is recognized at the
time of product shipment if no significant Company obligations remain, fees are
fixed and determinable, and collection of the resulting sale price is probable.
In instances where a significant vendor obligation exists, revenue recognition
is deferred until the obligation has been satisfied. Revenue from maintenance
and support contracts is generally recognized ratably over the term of the
contract. Revenue from contracts with original durations of one year or less is
recognized at the time of sale if the Company does not expect to have material
future obligations to service the contracts. Revenue from technical and other
services are recognized as the related services are performed and collectibility
is deemed probable. Revenue from the sale of all other products and services is
recognized at the time of delivery to the customer.
RESULTS OF OPERATIONS FOR THE QUARTER ENDED DECEMBER 31, 1998
COMPARED TO THE QUARTER ENDED DECEMBER 31, 1997
REVENUES
Total revenues decreased to $2.5 million for the quarter ended December
31, 1998 from $5.0 million for the quarter ended December 31, 1997, or $2.5
million (49.3%). This decrease related to the sale of the Company's hardware
integration business during the quarter ended September 30, 1998.
Hardware Integration. Hardware integration revenues decreased a total
of $3.1 million or 100% for the quarter ended December 31, 1998 compared to the
quarter ended December 31, 1997 (zero in 1998 compared to $3.1 million in 1997).
The decrease in hardware integration revenue was due to the sale of this unit.
Software, Technical Services and Support. Software, technical services
and support revenues increased a total of $600,000 or 34.3% for the quarter
ended December 31, 1998 compared to the quarter ended December 31, 1997 ($2.5
million in 1998 compared to $1.9 million in 1997). The growth in revenue was
primarily attributable to the Company's proprietary software products.
COST OF REVENUES AND GROSS PROFIT
Total cost of revenues decreased to $500,000 for the quarter ended
December 31, 1998 from $3.4 million for the quarter ended December 31, 1997.
Gross profit increased to $2.0 million for the quarter ended December 31, 1998
compared to $1.6 million for the quarter ended December 31, 1997. Total gross
profit as a percent of total revenues was 79.7% in 1998 compared to 32.6% in
1997. The increase in gross profit was attributable to increased revenue
contributions from the sale of proprietary software and the discontinuation of
the sale of lower margin hardware integration products.
Page 9 of 15
<PAGE> 10
Hardware Integration. Cost of hardware integration revenues decreased
to zero for the quarter ended December 31, 1998 from $2.7 million for the
quarter ended December 31, 1997. Gross profit from hardware integration was
zero for the quarter ended December 31, 1998 compared to 14.8% for the quarter
ended December 31, 1997.
Software, Technical Services and Support. Cost of software, technical
services and support revenues decreased to $500,000 for the quarter ended
December 31, 1998 from $700,000 for the quarter ended December 31, 1997. Gross
profit on software, technical services and support was 79.7% for the quarter
ended December 31, 1998 compared to 61.7% for the quarter ended December 31,
1997. The increase in gross profit was primarily attributable to the increase in
sales of higher margin proprietary software.
OPERATING EXPENSES
Sales and Marketing. Sales and marketing expenses increased to $1.1
million for the quarter ended December 31, 1998 compared to $800,000 for the
quarter ended December 31, 1997. Sales and marketing expenses as a percent of
total revenues were 43.8% in 1998 compared to 15.5% in 1997. Sales and marketing
increased as a percent of revenues primarily due to expansion of the marketing
efforts for the Company's proprietary software products and a lower base of
total revenues. Additional marketing efforts include the addition of marketing
personnel, advertising and direct marketing programs, and public relations.
General and Administrative. General and administrative expenses
increased to $700,000 for the quarter ended December 31, 1998 compared to
$600,000 for the quarter ended December 31, 1997. General and administrative
expenses as a percent of total revenue were 27.1% in 1998 compared to 11.6% in
1997. General and administrative expenses increased as a percent of revenues
primarily due to a lower base of total revenues.
Research and Development. Research and development expenses were
$300,000 for each of the quarters ended December 31, 1998 and 1997. Research and
development expenses as a percent of total revenue were 13.6% in 1998 compared
to 6.1% in 1997. Research and development expenses increased as a percent of
revenues due to a lower base of total revenues.
RESULTS OF OPERATIONS FOR THE NINE MONTHS ENDED DECEMBER 31, 1998
COMPARED TO THE NINE MONTHS ENDED DECEMBER 31, 1997
REVENUES
Total revenues decreased to $11.0 million for the nine months ended
December 31, 1998 from $14.6 million for the six months ended December 31, 1997,
or $3.6 million (24.7%). This decrease related to a decrease in the Company's
hardware integration business and the sale of the hardware integration business
during the quarter ended September 30, 1998.
Hardware Integration. Hardware integration revenues decreased a total
of $5.3 million or 55.0% for the nine months ended December 31, 1998 compared to
the nine months ended December 31, 1997 ($4.4 million in 1998 compared to $9.7
million in 1997). The decrease in hardware integration revenue was principally
due to an ongoing emphasis on the Company's proprietary software business and
the sale of this unit during the quarter ended September 30, 1998.
Software, Technical Services and Support. Software, technical services
and support revenues increased a total of $1.7 million or 35.1% for the nine
months ended December 31, 1998 compared to the nine months ended December 31,
1997 ($6.6 million in 1998 compared to $4.9 million in 1997). The growth in
revenue was primarily attributable to an increase in sales of the Company's
proprietary software products.
Page 10 of 15
<PAGE> 11
COST OF REVENUES AND GROSS PROFIT
Total cost of revenues decreased to $5.6 million for the nine months
ended December 31, 1998 from $10.5 million for the nine months ended December
31, 1997. Gross profit increased to $5.3 million for the nine months ended
December 31, 1998 compared to $4.1 million for the nine months ended December
31, 1997. Total gross profit as a percent of total revenues was 48.5% in 1998
compared to 28.1% in 1997. The increase in gross profit was attributable to
increased revenue contributions from the sale of proprietary software and the
discontinuation of the sale of lower margin hardware integration products.
Hardware Integration. Cost of hardware integration revenues decreased
to $3.7 million for the nine months ended December 31, 1998 from $8.2 million
for the nine months ended December 31, 1997. Gross profit from hardware
integration was 14.8% for the nine months ended December 31, 1998 compared to
15.5% for the nine months ended December 31, 1997.
Software, Technical Services and Support. Cost of software, technical
services and support revenues decreased to $1.9 million for the nine months
ended December 31, 1998 from $2.3 million for the nine months ended December 31,
1997. Gross profit on software, technical services and support was 70.7% for the
nine months ended December 31, 1998 compared to 53.2% for the nine months ended
December 31, 1997. The increase in gross profit was primarily attributable to
the increase in sales of higher margin proprietary software.
OPERATING EXPENSES
Sales and Marketing. Sales and marketing expenses increased to $3.1
million for the nine months ended December 31, 1998 compared to $2.1 million for
the nine months ended December 31, 1997. Sales and marketing expenses as a
percent of total revenues were 28.9% in 1998 compared to 14.5% in 1997. Sales
and marketing increased as a percent of revenues primarily due to expansion of
the marketing efforts for the Company's proprietary software products and a
lower base of total revenues. Additional marketing efforts include the addition
of marketing personnel, advertising and direct marketing programs, and public
relations.
General and Administrative. General and administrative expenses
increased to $2.0 million for the nine months ended December 31, 1998 compared
to $1.8 million for the nine months ended December 31, 1997. General and
administrative expenses as a percent of total revenue were 18.2% in 1998
compared to 12.1% in 1997. General and administrative expenses increased as a
percent of revenues primarily due to a lower base of total revenues.
Research and Development. Research and development expenses increased
to $1.0 million for the nine months ended December 31, 1998 compared to $900,000
for the nine months ended December 31, 1997. Research and development expenses
as a percent of total revenue were 8.9% in 1998 compared to 6.5% in 1997.
Research and development expenses increased as a percent of revenues primarily
due to a lower base of total revenues.
LIQUIDITY AND CAPITAL RESOURCES
Since its inception, the Company has financed its operations primarily
through revolving working capital and term loans from banking institutions
together with the sale of stock and subordinated debt. In December 1996, the
Company issued $1.0 million of 9% promissory notes. During the fourth quarter of
fiscal 1997, the Company issued an additional $500,000 of 9% promissory notes.
During the year ended March 31, 1998, $250,000 of those notes were converted
into approximately 71,000 shares of common stock, $150,000 were converted into
preferred stock and $850,000 were paid at maturity. Additionally, in April 1998,
$250,000 of these notes were paid. In consideration of these borrowings, the
Company issued the lenders warrants to acquire an aggregate of 300,000 shares of
Common Stock at an exercise price of $4.00.
Page 11 of 15
<PAGE> 12
During July 1997, the Company issued $4,000,000 of Series A 5%
Convertible Preferred Stock. The Company issued 800,000 units, each consisting
of one share of $.01 par value preferred stock and a warrant to acquire one
share of the Company's common stock at an exercise price of $5.18. The preferred
stock is convertible into the Company's common stock at a price equal to 75% 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 quarter
ended December 31, 1998, 190,000 shares of Series A Preferred Stock were
converted into 404,384 shares of common stock.
In May, 1998, the Company issued $3,000,000 of Series B 4% Convertible
Preferred Stock. The preferred stock is convertible into the Company's current
stock at a price equal to 84% of market value at the date of conversion with a
maximum conversion price of $7.56 and a minimum conversion price of $1.81. In
connection with this transaction, the Company 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. During the quarter ended December 31, 1998, the remaining 285 shares of
Series B Preferred Stock were converted into 977,332 shares of common stock.
Effective September 30, 1998, the Company sold the operations of its
hardware integration unit to Osage Systems Group, Inc. The sale was completed
for a purchase price of $1.6 million, and certain future financial
consideration, dependent on the performance of the unit over the next two years.
The purchase price is to be paid in three installments, including $750,000 on
October 16, 1998, $250,000 on November 16, 1998, and $535,000 on January 15,
1999. The total amount of these installments, $1,535,000, was recorded as a note
receivable in the balance sheet as of September 30, 1998. The remaining $65,000
in proceeds, which has been deducted from the purchase price as a cost of the
transaction, will be paid by Osage directly to former IntraNet employees on or
before October 15, 1999. All installments on the note receivable have been paid.
The Company has a note receivable as of December 31, 1998 in the amount
of $213,964, related to the sale of the its Minneapolis Distribution Group
operations during the year ended March 31, 1998. The note is to be paid in
quarterly installments of $27,100 including accrued interest.
Accounts receivable decreased to $3.4 million as of December 31, 1998
from $5.5 million as of September 30, 1998. Accounts receivable as of December
31, 1998 includes several extended term and hardware integration related
accounts that are expected to be collected during the quarter ending March 31,
1999.
The Company's revolving working capital line of credit allows for
borrowings of up to $3.85 million based on available collateral at the bank's
base lending rate plus 2.5%. At December 31, 1998, the Company had advances of
$1.3 million, which are due on demand. At December 31, 1998 the Company also had
a demand note payable to its principal stockholder in the amount of $20,000
which accrues interest at a rate of 12%.
As of December 31, 1998 the Company had cash of approximately $1.7
million. Capital expenditures for the quarters ended December 31, 1998 and 1997,
including equipment financed with capital lease obligations, were $118,200 and
$217,600, respectively.
The Company has entered into certain operating leases for facilities
and equipment. These leases require total monthly payments, net of related
sublease arrangements, of $34,500. The Company also has a long-term consulting
agreement with a former stockholder that requires monthly payments of $10,300
through July 2000.
Page 12 of 15
<PAGE> 13
The Company's capital requirements in connection with its development
and marketing activities have been and will continue to be significant. While
the Company believes it has adequate capital to meet its cash requirements for
the next twelve months, this is dependent upon many factors, including the
ability of the Company to achieve its anticipated future operating results.
Future operating results will depend upon many factors, including the demand for
the Company's products, the level of product and price competition, the ability
of the Company to develop and market new products and product enhancements, the
growth and activity on the Internet, the World Wide Web and private intranets,
the success of the Company in attracting and retaining motivated and qualified
personnel, the ability of the Company to control its costs, and general economic
conditions. It may be advantageous for the Company to seek additional capital in
order to strengthen its competitive position and provide additional flexibility
in order to swiftly take advantage of market opportunities for both internal and
external expansion. Therefore, as a normal course of business, the Company is
always evaluating future financing opportunities. It is likely that the Company
would seek additional capital for its long-term capital requirements. Future
financings, if necessary, may be dilutive to shareholders or may contain
restrictive terms or covenants. There can be no assurance that additional
financings will be available to the Company on commercially reasonable terms, or
at all.
YEAR 2000 COMPLIANCE
The Company has initiated a project to prepare its products and
computer systems for the year 2000 impact on its business operations, product
offerings, customers, and suppliers. The Company has completed the awareness
phase of the project and is currently in various stages of the assessment,
remediation and internal testing phases. The project is expected to be completed
by the end of the third quarter of calendar year 1999. Accordingly, management
believes the year 2000 issue will not have a significant impact on its business.
If necessary modification and conversions are not completed on a timely basis,
the year 2000 issue could have an adverse effect on the Company's business. At
this time, the Company believes it is unnecessary to adopt a contingency plan
covering the possibility that the project will not be completed in a timely
manner, but as part of the overall project, the Company will continue to assess
the need for a contingency plan.
The costs associated with the year 2000 issues are being expensed
during the period in which they are incurred. The financial impact to the
Company of implementing any necessary changes to become year 2000 compliant has
not and is not anticipated to be material to the Company's business. However,
uncertainties that could impact actual costs and timing of becoming year 2000
compliant do exist. Factors that could affect the Company's estimates include,
but are not limited to, the availability and cost of trained personnel, the
ability to identify all systems and programs that are not year 2000 compliant,
the nature and amount of programming necessary to replace or upgrade affected
programs or systems, and the success of the Company's suppliers and customers to
address these issues. The Company will continue to assess and evaluate cost
estimates and target completion dates of the project on a periodic basis.
PRIVATE SECURITIES LITIGATION REFORM ACT
The Private Securities Litigation Reform Act of 1995 provides a "safe
harbor" for forward-looking statements. Certain information included in this
Form 10-QSB and other materials filed or to be filed by the Company with the
Securities and Exchange Commission (as well as information included in oral
statements or other written statements made or to be made by the Company)
contain statements that are forward-looking, such as statements relating to
plans for future expansion, product development, market acceptance of new
products, and other business development activities as well as other capital
spending, financing sources and the effects of regulation and competition. Such
forward-looking information involves important risks and uncertainties that
could significantly affect anticipated results in the future and, accordingly,
such results may differ from those expressed in any forward-looking statements
made by or on behalf of the Company. These risks and uncertainties include, but
are not limited to, those relating to product development and market acceptance
of new products, dependence on existing management, leverage and debt service
(including sensitivity to fluctuations in interest rates), domestic or global
economic conditions, changes in federal or state tax laws or the administration
of such laws.
Page 13 of 15
<PAGE> 14
PART II
OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.
The Company is not a party to any material pending legal
proceedings and, to the best of its knowledge, its properties are
not the subject of any such proceedings.
ITEM 2. CHANGES IN SECURITIES.
None
ITEM 3. DEFAULTS UPON SENIOR SECURITIES.
None
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY-HOLDERS.
None
ITEM 5. OTHER INFORMATION.
None
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits.
27 Financial Data Schedule (filed herewith)
(b) Report on Form 8-K
On October 30, 1998, the Company filed a report on Form 8-K,
reporting the sale of the the Company's hardware systems
integration business to Osage Systems Group, Inc. on October 15,
1998.
Page 14 of 15
<PAGE> 15
SIGNATURES
In accordance with the requirements of the Exchange Act, the Registrant has duly
caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
INTRANET SOLUTIONS, INC.
(the "Registrant" or "Company")
Dated February 12, 1999 By: /s/ Robert F. Olson
--------------------------------------
Robert F. Olson
Its: Chief Executive Officer
--------------------------------------
(Principal Executive Officer)
Dated February 12, 1999 By: /s/ Jeffrey J. Sjobeck
--------------------------------------
Jeffrey J. Sjobeck
Its: Chief Financial Officer
--------------------------------------
(Principal Financial Officer)
Page 15 of 15
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