<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[x] Quarterly Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 For the Quarterly Period Ended September 30, 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 Road
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)
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(Former name, former address and former fiscal year,
if changed since last report)
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 the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date. Common Stock, $.01 par value -
17,099,257 shares as of November 10, 1999.
1
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INDEX
INTRANET SOLUTIONS, INC.
<TABLE>
<CAPTION>
Page
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PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheets - March 31, 1999 and September 30, 1999....................................3
Consolidated Statements of Operations - Three and six months ended
September 30, 1998 and 1999............................................................................4
Consolidated Statements of Cash Flows - Six months ended
September 30, 1998 and 1999............................................................................5
Notes to Consolidated Financial Statements.............................................................6
Item 2. Management's Discussion and Analysis
of Financial Condition and Results of Operations......................................................10
Item 3. Quantitative and Qualitative Disclosures About Market Risk............................................21
PART II. OTHER INFORMATION
Item 2. Changes in Securities and Use of Proceeds.............................................................22
Item 4. Submission of Matters to a Vote of Security-Holders...................................................22
Item 6. Exhibits and Reports on Form 8-K......................................................................22
SIGNATURES......................................................................................................26
</TABLE>
2
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PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
INTRANET SOLUTIONS, INC.
CONSOLIDATED BALANCE SHEETS
(Unaudited)
<TABLE>
<CAPTION>
MARCH 31, SEPTEMBER 30,
1999 1999
ASSETS -------------- -------------
<S> <C> <C>
Current assets:
Cash and cash equivalents........................................................... $ 2,177,042 $ 3,261,601
Short-term investments.............................................................. -- 25,858,354
Accounts receivable, net............................................................ 3,994,519 4,942,582
Current maturities of notes receivable.............................................. 113,959 97,000
Inventories......................................................................... 112,376 191,739
Prepaid royalties................................................................... 391,579 687,278
Prepaid expenses and other current assets........................................... 414,277 308,582
------------ ------------
Total current assets.................................................................. 7,203,752 35,347,136
Notes receivable, net of current maturities........................................... 105,448 52,244
Property and equipment, net........................................................... 918,137 1,371,573
Software licenses, net ............................................................... 236,331 191,304
Other ................................................................................ -- 495,800
------------ ------------
Total assets.......................................................................... $ 8,463,668 $ 37,458,057
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Revolving credit facility........................................................... $ 421,685 $ --
Current maturities of long-term obligations......................................... 622,246 195,551
Accounts payable.................................................................... 583,660 663,022
Deferred revenues................................................................... 726,511 1,110,674
Commissions payable................................................................. 230,228 322,205
Deferred compensation .............................................................. 238,170 30,705
Accrued acquisition costs .......................................................... -- 1,625,618
Accrued expenses.................................................................... 667,557 536,700
============= =============
Total current liabilities............................................................. 3,490,057 4,484,475
Long-term obligations, net of current maturities...................................... 107,782 35,768
Deferred revenue, net of current portion.............................................. 146,944 55,694
------------- -------------
Total liabilities..................................................................... 3,744,783 4,575,937
------------- -------------
Commitments and contingencies ........................................................ -- --
Shareholders' equity:
Series A convertible preferred stock, $0.01 par value
$5.00 stated value, 75,000 shares issued and outstanding at March 31,
1999, none at September 30, 1999.............................................. 333,969 --
Common stock, $0.01 par value, 12,450,736 and 16,912,382 shares issued and
outstanding at March 31, 1999 and September 30, 1999, respectively............ 124,507 169,124
Additional paid-in capital.......................................................... 17,254,923 46,890,832
Accumulated deficit ................................................................ (12,994,514) (14,177,836)
------------- -------------
Total shareholders' equity.......................................................... 4,718,885 32,882,120
------------- -------------
Total liabilities and shareholders' equity............................................ $ 8,463,668 $ 37,458,057
============= =============
</TABLE>
See accompanying notes.
3
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INTRANET SOLUTIONS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
-------------------------------------------------------------------------
1998 1999 1998 1999
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<S> <C> <C> <C> <C>
Revenues:
Product licenses........................................ $ 2,115,283 $ 3,548,554 $ 3,390,956 $ 7,023,595
Services................................................ 417,781 1,025,325 812,219 1,997,448
Hardware integration and support........................ 2,414,307 -- 5,629,621 --
------------- -------------- ------------- --------------
Total revenues........................................... 4,947,371 4,573,879 9,832,796 9,021,043
------------- ------------- ------------- --------------
Cost of revenues:
Product licenses........................................ 143,175 401,059 280,207 725,167
Services................................................ 233,389 552,725 413,903 964,984
Hardware integration and support........................ 2,030,514 -- 4,600,683 --
------------- -------------- ------------- --------------
Total cost of revenues................................... 2,407,078 953,784 5,294,793 1,690,151
------------- ------------- ------------- --------------
Gross profit............................................. 2,540,293 3,620,095 4,538,003 7,330,892
------------- ------------- ------------- --------------
Operating expenses:
Sales and marketing..................................... 1,516,715 2,054,156 2,804,188 3,995,460
General and administrative.............................. 871,217 863,290 1,625,907 1,777,557
Research and development................................ 553,294 575,054 1,057,836 1,146,933
Acquisition costs....................................... -- 1,972,204 -- 1,972,204
------------- ------------- ------------- -------------
Total operating expenses................................. 2,941,226 5,464,704 5,487,931 8,892,154
------------- ------------- ------------- -------------
Loss from operations..................................... (400,933) (1,844,609) (949,928) (1,561,262)
Other:
Gain on sale of hardware integration unit............... 516,934 -- 516,934 --
Interest income (expense), net ......................... (71,887) 360,891 (132,216) 394,194
-------------- ------------- -------------- -------------
Income (loss) from continuing operations................. 44,114 (1,483,718) (565,210) (1,167,068)
Discontinued operations:
Loss on sale of distribution group..................... -- -- (111,103) --
Loss from operations of distribution group............. -- -- (410,361) --
------------- ------------- -------------- -------------
Net income (loss) ....................................... 44,114 (1,483,718) (1,086,674) (1,167,068)
Preferred stock dividends and accretion.................. 29,245 -- 632,279 --
------------- ------------- ------------- -------------
Income (loss) attributable to common shareholders ....... $ 14,869 $ (1,483,718) $ (1,718,953) $ (1,167,068)
============= ============== ============== ==============
Income (loss) per common share - basic:
Continuing operations.................................. $ 0.00 $ (0.09) $ (0.05) $ (0.08)
Net income (loss) ..................................... $ 0.00 $ (0.09) $ (0.10) $ (0.08)
Income (loss) attributable to common shareholders...... $ 0.00 $ (0.09) $ (0.17) $ (0.08)
Income (loss) per common share - diluted:
Continuing operations.................................. $ 0.00 $ (0.09) $ (0.05) $ (0.08)
Net income (loss) ..................................... $ 0.00 $ (0.09) $ (0.10) $ (0.08)
Income (loss) attributable to common shareholders...... $ 0.00 $ (0.09) $ (0.17) $ (0.08)
Weighted average common shares outstanding - basic....... 10,417,378 16,695,444 10,356,393 15,087,877
Weighted average common shares outstanding - diluted..... 12,905,267 16,695,444 10,356,393 15,087,877
</TABLE>
See accompanying notes.
4
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INTRANET SOLUTIONS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
SEPTEMBER 30,
------------------------------------
1998 1999
------------------------------------
<S> <C> <C>
OPERATING ACTIVITIES:
Net loss............................................................................... $ (1,086,674) $ (1,167,068)
Adjustments to reconcile net loss to cash used in operating activities:
Depreciation and amortization........................................................ 198,301 331,969
Gain on sale of hardware integration unit............................................ (516.934) --
Discontinued operations.............................................................. 709,128 --
Changes in operating assets and liabilities.......................................... (1,176,040) 1,135,987
Other.................................................................................. 16,186 13,186
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Net cash flows used in operating activities............................................ (1,856,033) 314,074
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INVESTING ACTIVITIES:
Purchases of short-term investments.................................................... -- (58,522,248)
Maturities and sales of short-term investments......................................... -- 32,663,894
Proceeds from note receivable.......................................................... -- 70,163
Purchases of fixed assets.............................................................. (267,992) (764,892)
------------- --------------
Net cash used for investing activities................................................. (267,992) (26,553,083)
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FINANCING ACTIVITIES:
Net advances (repayments) from revolving credit facility............................... (56,882) (421,685)
Payments on long-term obligations ..................................................... (475,319) (676,890)
Proceeds from long-term obligations ................................................... -- 100,000
Issuance of preferred stock, net of offering expenses.................................. 2,852,571 --
Issuance of common stock, net of offering expenses..................................... -- 26,956,269
Payment of dividends on preferred stock................................................ (60,224) --
Proceeds from stock options and warrants............................................... 355,217 2,027,534
Other.................................................................................. 65,748 (504,750)
------------- --------------
Net cash flows provided by financing activities........................................ 2,681,111 27,480,478
------------- -------------
Net increase in cash...................................................................... 557,086 1,241,469
Cash and cash equivalents, beginning of period........................................... 1,031,047 2,020,132
------------- -------------
Cash and cash equivalents, end of period.................................................. $ 1,588,133 $ 3,261,061
============= =============
SUPPLEMENTAL DISCLOSURE OF CASH FLOWS INFORMATION:
Cash paid for interest $ 180,330 $ 115,804
Cash paid for income taxes 987 4,287
NON-CASH TRANSACTIONS:
Investments $ -- $ 159,800
Prepaid assets -- 300,000
DETAIL OF CHANGES IN OPERATING ASSETS AND LIABILITIES:
Accounts receivable $ (929,258) $ (543,005)
Inventories 18,568 (83,889)
Prepaid expenses and other current assets (179,748) (176,540)
Accounts payable (357,990) 188,300
Accrued expenses and other current liabilities 272,388 1,751,121
------------- -------------
Net changes in operating assets and liabilities $ (1,176,040) $ 1,135,987
============= =============
</TABLE>
See accompanying notes.
5
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INTRANET SOLUTIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. NATURE OF THE BUSINESS
IntraNet Solutions, Inc., (the "Company") is a leading provider of
Web-based content management solutions for intranet, extranet and Internet
applications that offer customers the ability to rapidly access, manage and
publish business data to the Web. IntraNet Solutions' Xpedio Content Management
System is the industry's first single source, end-to-end content management
solution. The Company's customers are primarily located throughout the United
States and in Europe. In September 1999, the Company acquired InfoAccess, Inc.
("InfoAccess"), a Web-based software company in a transaction accounted for
using the pooling-of-interests method. Accordingly, the financial information
for the three and six month periods ended September 30, 1998 and 1999 has been
restated to include the results of operations of InfoAccess for all periods
presented. All share and per share amounts are also restated.
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 suite of products and related services. Product license
revenue is recognized when evidence of a purchase arrangement exists, the
product has been shipped, the fee is determinable and collectible, 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.
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.
Short-term Investments: Investments in debt securities with a remaining
maturity of three months or less at the date of purchase are classified as
short-term investments. Management determines the appropriate classification of
debt securities at the time of purchase and reevaluates such designation as of
each balance sheet date. The book value of the investments approximates their
estimated market value. As of September 30, 1999 the Company's investments were
in commercial paper and U.S. Government Agency securities. All investments have
a contractual maturity of three months or less and are held to maturity.
Inventories: Inventories, consisting primarily of computer software,
are valued at the lower of cost (first-in, first-out) or market value.
6
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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.
Reclassifications: Certain reclassifications have been made to the
three and six month periods ending September 30, 1998 to conform with the
presentation used in the September 30, 1999 financial statements. The
reclassifications did not effect net loss or shareholders' equity as previously
reported.
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 the three and six
months periods ended September 30, 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).
3. DISCONTINUED OPERATIONS
During the quarter ended June 30, 1998, 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 consisted
substantially of the purchaser's assumption of liabilities. The Company incurred
a loss on the sale of the related assets of $111,103.
4. PROPERTY AND EQUIPMENT
Property and equipment consists of the following:
<TABLE>
<CAPTION>
MARCH 31, SEPTEMBER 30,
1999 1999
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<S> <C> <C>
Equipment and furniture $ 2,152,996 $ 2,185,149
Leasehold improvements 85,741 88,386
Other 18,333 391,836
------------------- -------------------
2,257,070 2,665,371
Less: accumulated depreciation 1,338,933 1,293,798
------------------- -------------------
$ 918,137 $ 1,371,573
=================== ===================
</TABLE>
7
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5. SHAREHOLDERS' EQUITY
Common stock offering: The Company consummated a common stock offering
(the "Offering") on June 3, 1999, consisting of 3,230,000 shares of common stock
at an $8.00 per share price to the public. The net proceeds of the Offering,
after underwriting discounts, commissions and offering costs of approximately
$2.3 million, was approximately $23.5 million. In July 1999, the underwriters'
exercised their 15% over-allotment, resulting in the sale of an additional
484,500 shares of common stock. The net proceeds from the exercise of the
over-allotment were approximately $3.6 million.
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 was 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 quarters ended June 30,
1998 and September 30, 1998, the Company paid $33,034 and $29,245, respectively,
in preferred stock dividends. Pursuant to the terms of the Series A preferred
stock, all shares remaining outstanding upon the completion of the Offering were
converted into shares of common stock without further action of the holders.
Series B convertible preferred stock: In May 1998, the Company issued
$3.0 million of Series B 4% convertible preferred stock. This series of
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 quarter ended June
30, 1998, 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.
6. REVOLVING CREDIT FACILITY
On April 1, 1999 the Company renewed its revolving credit agreement
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 levels of net
worth. The agreement automatically renews annually unless the Company provides
60 days notice to cancel or demand is made by the lender. In July 1999, the
Company terminated the revolving line-of-credit facility.
7. ACQUISITION
On September 29, 1999, the Company completed its acquisition of
InfoAccess, using the pooling-of-interests method of accounting. Each share of
InfoAccess common stock outstanding at the time of the merger was converted
into the right to receive 0.31230 shares of common stock of the Company in
accordance with the merger agreement. An aggregate of 1,803,385 shares of
common stock of the Company were issued in exchange for the 5,774,530 shares of
common stock of InfoAccess outstanding at the time of the acquisition. In
addition, the Company converted 1,237,830 outstanding options to purchase
InfoAccess common stock into 386,548 options to acquire the Company's common
stock, on substantially the same terms as the original option agreement, which
reflects the exchange ratio adjustment of 0.31230 shares described above.
8
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Condensed combining information of the Company and InfoAccess prior to the
merger is as follows:
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
SEPTEMBER 30, 1999 SEPTEMBER 30, 1999
-------------------- ------------------
<S> <C> <C>
REVENUE:
IntraNet Solutions, Inc. $ 3,666,737 $ 7,169,814
InfoAccess, Inc. 907,142 1,851,229
-------------------- ------------------
Total revenue $ 4,573,879 $ 9,021,043
==================== ==================
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
SEPTEMBER 30, 1999 SEPTEMBER 30, 1999
------------------ ------------------
<S> <C> <C>
NET INCOME (LOSS):
IntraNet Solutions, Inc. $ (738,727) $ (619,767)
InfoAccess, Inc. (744,991) (547,301)
-------------------- -------------------
Net income (loss) $ (1,483,718) $ (1,167,068)
==================== ===================
</TABLE>
The net losses for each period include one-time acquisition costs
totaling approximately $2 million. The above information, for the three and six
months ended September 30, 1999, in the opinion of management materially
represents the activity of the individual companies prior to the merger.
9
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PART I - FINANCIAL INFORMATION
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
FORWARD-LOOKING STATEMENTS
The information presented in this Item 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,
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., is a leading provider of Web-based
content management solutions for intranet, extranet and Internet applications
that offers customers the ability to rapidly access, manage and publish business
data to the Web. 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 document and content
management software, on-demand publishing and hardware integration services. In
September 1999, the Company acquired InfoAccess, Inc., a Web-based software
company, in a transaction accounted for using the pooling-of-interests method.
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 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 document 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 content. Accordingly, certain
reclassifications have been made to the categories of revenues and cost of
revenues presented in the three and six month periods ended September 30, 1998
financial statements to conform with the presentation used in the September 30,
1999 financial statements. These reclassifications had no effect on losses from
continuing operations or net losses as previously reported. In September 1999 we
acquired InfoAccess, a web-based software Company in a transaction accounted for
using the pooling-of-interest method, which further enhanced our ability to
publish business data to the Web. Accordingly, the financial information for
the three and six month periods ended September 30, 1998 and 1999 has been
restated to include the results of operations of InfoAccess for all periods
presented. All share and per share amounts are also restated.
We currently derive all of our revenues from licenses of our 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 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
approximately $14.2 million at September 30, 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.
RESULTS OF OPERATIONS - FOR THE THREE MONTHS ENDED SEPTEMBER 30, 1999 AND 1998
Revenues
Total revenues decreased by $373,000, or 8%, to $4.6 million for the
three months ended September 30, 1999 from $4.9 million for the three months
ended September 30, 1998. This decrease resulted from the sale of our hardware
integration business, partially offset by increased revenues for product
licenses.
Product Licenses. Revenues for product licenses increased by $1.4
million, or 68%, to $3.5 million for the three months ended September 30, 1999
from $2.1 million for the three months ended September 30, 1998. The growth in
revenues for product licenses was attributable to the expansion of our customer
base and increased sales to existing customers.
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<PAGE> 11
Services. Revenues for services increased by $608,000, or 145%, to $1.0
million for the three months ended September 30, 1999 from $418,000 for the
three months ended September 30, 1998. The increase in revenues for services was
primarily attributable to a larger installed base of products and the associated
maintenance contracts.
Hardware Integration and Support. Revenues for hardware integration and
support decreased by $2.4 million, or 100%, to zero for the three months ended
September 30, 1999 as compared to the three months ended September 30, 1998. The
decrease in revenues for hardware integration was due to the sale of the
hardware integration business during the quarter ended September 30, 1998.
Cost of Revenues and Gross Profit
Total cost of revenues decreased by $1.5 million, or 60%, to $954,000
for the three months ended September 30, 1999 from $2.4 million for the three
months ended September 30, 1998. Total cost of revenues as a percentage of total
revenues was 21% for the three months ended September 30, 1999 compared to 49%
for the three months ended September 30, 1998. Gross profit increased by $1.1
million, or 43%, to $3.6 million for the three months ended September 30, 1999
from $2.5 million for the three months ended September 30, 1998. Total gross
profit as a percentage of total revenues was 79% for the three months ended
September 30, 1999 compared to 51% for the three months ended September 30,
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.
Product Licenses. Cost of revenues for product licenses increased by
$258,000, or 180%, to $401,000 for the three months ended September 30, 1999
from $143,000 for the three months ended September 30, 1998. Gross profit as a
percentage of revenues for product licenses was 89% for the three months ended
September 30, 1999 compared to 93% for the three months ended September 30,
1998. The fluctuations of the gross profit between quarters is due primarily to
the product mix of servers and modules.
Services. Cost of revenues for services increased by $319,000, or 137%,
to $553,000 for the three months ended September 30, 1999 from $234,000 for the
three months ended September 30, 1998. Gross profit as a percentage of revenues
for services was 46% for the three months ended September 30, 1999 compared to
44% for the three months ended September 30, 1998.
Hardware Integration and Support. Cost of revenues for hardware
integration and support decreased by $2.0 million, or 100%, to zero for the
three months ended September 30, 1999 from $2.0 million for the three months
ended September 30, 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.
Operating Expenses
Sales and Marketing. Sales and marketing expenses increased by
$537,000, or 35%, to $2.1 million for the three months ended September 30, 1999
from $1.5 million for the three months ended September 30, 1998. Sales and
marketing expenses as a percentage of total revenues were 45% for the three
months ended September 30, 1999 compared to 31% for the three months ended
September 30, 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 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
decreased by $8,000, or 1%, to $863,000 for the three months ended September 30,
1999 from $871,000 for the three months ended
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September 30, 1998. General and administrative expenses as a percentage of total
revenues were 19% for the three months ended September 30, 1999 compared to 18%
for the three months ended September 30, 1998.
Research and Development. Research and development expenses increased
by $22,000, or 4%, to $575,000 for the three months ended September 30, 1999
from $553,000 for the three months ended September 30, 1998. Research and
development expenses as a percentage of total revenue were 13% for the three
months ended September 30, 1999 compared to 11% for the three months ended
September 30, 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.
Acquisition costs. Acquisition costs of $2 million consisted primarily
of financial advisory, legal, accounting, and other costs of combining
operations of the separate companies for the three months ended September 30,
1999.
Interest Income (Expense)
Interest income was $361,000 for the three months ended September 30,
1999 compared to interest expense of $72,000 for the three months ended
September 30, 1998. Interest income for the three months ended September 30,
1999 was due primarily to the short-term investments purchased with the proceeds
received from the follow-on public stock offering completed in June 1999.
Interest expense for the three months ended September 30, 1998 was due to the
balance maintained on our revolving line-of-credit.
Discontinued Operations
Total losses on discontinued operations were zero for the three months
periods ended September 30, 1999 and September 30, 1998. The three months ended
June 30, 1998 was the final quarter for which discontinued operations relating
to our on-demand publishing group were reported.
RESULTS OF OPERATIONS - FOR THE SIX MONTHS ENDED SEPTEMBER 30, 1999 AND 1998
Revenues
Total revenues decreased by $812,000, or 8%, to $9.0 million for the
six months ended September 30, 1999 from $9.8 million for the six months ended
September 30, 1998. This decrease related primarily to the sale of our hardware
integration business, partially offset by increased revenues for product
licenses.
Product Licenses. Revenues for product licenses increased by $3.6
million, or 107%, to $7.0 million for the six months ended September 30, 1999
from $3.4 million for the six months ended September 30, 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 increased by $1.2 million, or 146%, to
$2.0 million for the six months ended September 30, 1999 from $812,000 for the
six months ended September 30, 1998. The increase in revenues for services was
primarily attributable to a larger installed base of products and the associated
maintenance contracts.
Hardware Integration and Support. Revenues for hardware integration and
support decreased by $5.6 million, or 100%, to zero for the six months ended
September 30, 1999 from $5.6 million for the six months ended September 30,
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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Cost of Revenues and Gross Profit
Total cost of revenues decreased by $3.6 million, or 68%, to $1.7
million for the six months ended September 30, 1999 from $5.3 million for the
six months ended September 30, 1998. Total cost of revenues as a percentage of
total revenues was 19% for the six months ended September 30, 1999 compared to
54% for the six months ended September 30, 1998. Gross profit increased by $2.8
million, or 62%, to $7.3 million for the six months ended September 30, 1999
from $4.5 million for the six months ended September 30, 1998. Total gross
profit as a percentage of total revenues was 81% for the six months ended
September 30, 1999 compared to 46% for the six months ended September 30, 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.
Product Licenses. Cost of revenues for product licenses increased by
$445,000, or 159%, to $725,000 for the six months ended September 30, 1999 from
$280,000 for the six months ended September 30, 1998. Gross profit as a
percentage of revenues for product licenses was 90% for the six months ended
September 30, 1999 compared to 92% for the six months ended September 30, 1998.
Services. Cost of revenues for services increased by $551,000, or 133%,
to $965,000 for the six months ended September 30, 1999 from $414,000 for the
six months ended September 30, 1998. Gross profit as a percentage of revenues
for services was 52% for the six months ended September 30, 1999 compared to 49%
for the six months ended September 30, 1998.
Hardware Integration and Support. Cost of revenues for hardware
integration and support decreased by $4.6 million, or 100%, to zero for the six
months ended September 30, 1999 from $4.6 million for the six months ended
September 30, 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.
Operating Expenses
Sales and Marketing. Sales and marketing expenses increased by $1.2
million, or 42%, to $4.0 million for the six months ended September 30, 1999
from $2.8 million for the six months ended September 30, 1998. Sales and
marketing expenses as a percentage of total revenues were 44% for the six months
ended September 30, 1999 compared to 29% for the six months ended September 30,
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 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 $152,000, or 9%, to $1.8 million for the six months ended September
30, 1999 from $1.6 million for the six months ended September 30, 1998. General
and administrative expenses as a percentage of total revenues were 20% for the
six months ended September 30, 1999 compared to 17% for the six months ended
September 30, 1998.
Research and Development. Research and development expenses increased
by $89,000, or 8%, to $1.1 million for the six months ended September 30, 1999
from $1.0 million for the six months ended September 30, 1998. Research and
development expenses as a percentage of total revenue were 13% for the six
months ended September 30, 1999 compared to 11% for the six months ended
September 30, 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.
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Acquisition costs. Acquisition costs of $2 million consisted primarily
of financial advisory, legal, accounting, and other costs of combining
operations of the separate companies for the six months ended September 30,
1999.
Interest Income (Expense)
Interest income was $394,000 for the six months ended September 30,
1999 compared to interest expense of $132,000 for the six months ended September
30, 1998. Interest income for the six months ended September 30, 1999 was due
primarily to the short-term investments purchased with the proceeds received
from the follow-on public stock offering completed in June 1999. Interest
expense for the six months ended September 30, 1998 was due to the balance
maintained on our revolving line-of-credit.
Discontinued Operations
Total losses on discontinued operations was zero for the six months
ended September 30, 1999 compared to $521,000 for the six months ended September
30, 1998. The three months ended June 30, 1998 was the final period for which
discontinued operations were reported.
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 placement and public offerings of debt and equity
securities and proceeds from the sale of assets related to prior lines of
business. Net cash provided by operating activities was $ 114,000 for the six
months ended September 30, 1999, compared to net cash used in operating
activities of $1.9 million for the six months ended September 30, 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 six months ended September 30, 1999 and 1998 were
$765,000 and $268,000, 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 September 30, 1999, we
did not have any material commitments for capital expenditures.
As of September 30, 1999, we had $3.3 million in cash and cash
equivalents and $31 million in working capital. Net cash provided by financing
activities was $27.5 million for the six months ended September 30, 1999 and
$2.7 million for the six months ended September 30, 1998. In June 1999, the
Company consummated a common stock offering to the public which raised
approximatley $23.5 million, net of offering costs of approximately $2.3
million. In July 1999, the underwriters exercised their 15% over-allotment,
raising additional proceeds of approximately $3.6 million. In July 1999, we
closed our revolving line-of-credit facility with Diversified Business Credit,
Inc.
We currently believe that the cash and cash equivalents on hand 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.
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
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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 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.
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
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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.
DISCLOSURE REGARDING FORWARD-LOOKING STATEMENTS
This Form 10-Q for the second quarter and six months ended September 30, 1999
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 Form 10-Q, 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 Form 10-Q 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 Annual Report on Form 10-K for 1999 ("Form 10-K") under the caption
"Risk Factors." Readers of this Form 10-Q 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 Form 10-Q. The Company
cautions the reader, however, that such list of factors under the caption "Risk
Factors" in the Company's Form 10-K 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.
RISK FACTORS
Certain statements made in this Form 10-Q 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. 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.
OUR SUCCESS DEPENDS ON OUR ABILITY TO SUCCESSFULLY INTEGRATE INFOACCESS WITH OUR
OPERATIONS.
On September 29, 1999, InfoAccess became a wholly-owned subsidiary in a
transaction accounted for as a pooling-of-interests. We are currently
integrating the business and products of InfoAccess with our existing business
and products. We may incur unanticipated costs in the course of this
integration. In addition, integration of InfoAccess with our operations involves
the following risks:
- Failure to develop complementary product offerings and marketing
strategies;
- Failure to maintain the customer relationships of InfoAccess;
- Failure to retain the employees of InfoAccess;
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- Failure to coordinate product development efforts; and
- Diversion of management's time and attention from other aspects of
our business.
We cannot be sure that we will be successful in integrating the
business and products of InfoAccess with our business and products. If we are
not, our business, operating results and financial condition may be materially
adversely affected.
FLUCTUATIONS IN OUR OPERATING RESULTS MAY MAKE IT DIFFICULT TO PREDICT OUR
FUTURE PERFORMANCE.
Our revenues and operating results are difficult to predict and may
fluctuate significantly from quarter to quarter. If our quarterly revenues or
operating results fall below the expectations of investors or securities
analysts, the price of our common stock could fall substantially. A large part
of our sales typically occur in the last month of a quarter. If these sales were
delayed from one quarter to the next for any reason, our operating results could
fluctuate dramatically. In addition, certain of our products have long sales
cycles, making the timing of sales difficult to predict. Furthermore, our
infrastructure costs are generally fixed. As a result, modest fluctuations in
revenues between quarters may cause large fluctuations in operating results.
These factors all tend to make the timing of revenues unpredictable and may lead
to high period-to-period fluctuations in operating results.
Our quarterly revenues and operating results may fluctuate for several
additional reasons, many of which are outside of our control, including the
following:
- demand for our products and services;
- the timing of new product introductions and sales of our products and
services;
- unexpected delays in introducing new products and services;
- increased expenses, whether related to sales and marketing, research
and development or administration;
- changes in the rapidly evolving market for data and content
management solutions;
- 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.
Our revenues may not grow in future periods, may not grow at past rates
and we may not sustain our recent two consecutive quarters of 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
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pricing pressure, reduced sales and margins, or prevent our products from
gaining and sustaining market acceptance. Many of our current and potential
competitors have greater name recognition, access to larger customer bases, and
substantially more resources than we have. Competitors with greater resources
than ours may be able to respond more quickly than we can to new opportunities,
changing technology, product standards or customer requirements.
WE MAY HAVE DIFFICULTY MANAGING OUR GROWTH.
Any failure to properly manage our growth may have a material adverse
effect on our business, operating results and financial condition. The rapid
growth that we have experienced places significant challenges on our management,
administrative and operational resources. To properly manage this growth, we
must, among other things, implement and improve additional and existing
administrative, financial and operational systems, procedures and controls on a
timely basis. We will also need to expand our finance, administrative and
operations staff. We may not be able to complete the improvements to our
systems, 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 SUITE OF PRODUCTS
FOR OUR REVENUES.
We currently derive much of our revenues from product licenses and
services associated with our 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 products for the foreseeable future.
Our success will largely depend on our ability to increase sales from existing
products and generate sales from product enhancements and new products.
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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
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
$27.1 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 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
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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. InfoAccess has been issued
trademarks for the InfoAccess mark, the HTML Transit mark, and the Transit
Central mark.
We are not certain whether any trademarks that have been applied for
will be issued. In the absence of trademark protection, we may be unable to take
advantage of the brand name recognition we are attempting to build. In addition,
even if all trademarks applied for are issued, we cannot be sure that such
trademarks will prove valuable to us.
WE COULD BE SUBJECT TO PRODUCT LIABILITY CLAIMS IF OUR CUSTOMERS' DATA IS
DAMAGED THROUGH THE USE OF OUR PRODUCTS.
If software errors or design defects in our products cause damage to
customers' data and our agreements do not protect us from related product
liability claims, our business, operating results and financial condition may be
materially adversely affected. Our software products are complex and
sophisticated and may contain design defects or software errors that are
difficult to detect and correct. Errors, bugs or viruses may result in the loss
of market acceptance or the loss of customer data. Our agreements with customers
that attempt to limit our exposure to product liability claims may not be
enforceable in certain jurisdictions where we operate.
SIGNIFICANT FLUCTUATION IN THE MARKET PRICE OF OUR COMMON STOCK COULD RESULT IN
SECURITIES LITIGATION AGAINST US.
In the past, securities class action litigation has been brought
against publicly held companies following periods of volatility in the price of
their securities. If we were subject to such litigation due to volatility in our
stock price, we may incur substantial costs. Such litigation could divert the
attention of our senior management away from our business, which could have a
material adverse effect on our business, operating results and financial
condition.
The market price of our common stock has fluctuated significantly in
the past and may do so in the future. The market price of our common stock may
be affected by each of the following factors, many of which are outside of our
control:
- variations in quarterly operating results;
- changes in estimates by securities analysts;
- changes in market valuations of companies in our industry;
20
<PAGE> 21
- 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 22% 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 25% 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 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 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company's market risk for such items as investments, debt, and
foreign currency transactions is unlikely to have a material adverse effect on
the Company's business, results of operations or financial condition.
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<PAGE> 22
PART II. OTHER INFORMATION
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
The Company has issued 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.
On September 29, 1999, the Company completed its acquisition of
InfoAccess, Inc. using the pooling-of-interests method of accounting. An
aggregate of 1,803,385 shares of common stock of the Company were issued in the
acquisition.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY-HOLDERS.
On September 22, 1999, the Company held its Annual Meeting of the
Shareholders to consider and vote upon the following proposals. The tabulation
of the votes, in favor, against, and abstaining with regard to the proposals is
set forth below.
<TABLE>
<CAPTION>
BROKER
PROPOSAL IN FAVOR AGAINST ABSTAIN NON VOTES
<S> <C> <C> <C> <C>
1. Election of Directors: --
Robert F. Olson 13,222,868 54,574 0 --
Gregg A. Waldon 13,222,118 55,324 0 --
Ronald E. Eibensteiner 13,221,618 55,824 0 --
Kenneth H. Holec 13,222,868 54,574 0 --
Steven C. Waldron 13,222,868 54,574 0 --
2. Adoption of the IntraNet Solutions,
Inc. Employee Stock Purchase Plan
and reservation of 750,000 shares for
issuance thereunder. 12,796,044 206,868 93,847 180,683
3. Approval of Amendment to Articles of
Incorporation to increase the number
of shares of capital stock issuable by
the Company to 50,000,000. 12,034,224 1,173,534 69,684 0
</TABLE>
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a.) EXHIBITS
<TABLE>
<CAPTION>
NUMBER DESCRIPTION
------ -----------
<S> <C>
3.1Amended and Restated Articles of Incorporation
(incorporated by reference to Exhibit 3.1 of the
Registrant's registration statement on Form SB-2,
File No. 333-14175).
3.2Bylaws (incorporated by reference to Exhibit A of the
Registrant's registration statement on Definitive
Proxy Statement Schedule 14A filed with the
Securities and Exchange Commission July 22, 1997,
File No. 0-19817).
3.3Articles 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).
4.1Certificate 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).
4.2Securities 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).
4.3Registration 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).
4.4Certificate 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).
4.5Form 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).
4.6Form 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).
</TABLE>
22
<PAGE> 23
<TABLE>
<S> <C>
10.1Lease 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).
10.2Credit 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).
10.3Term 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).
10.4IntraNet 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).
10.5Employment 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).
10.6Employment 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).
10.7Promissory 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).
10.8Amendment, 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).
10.9Lease 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).
10.10Stock 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).
10.11Security 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).
10.12Subordination 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).
10.13Promissory 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).
10.14Sublease 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).
</TABLE>
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<PAGE> 24
<TABLE>
<S> <C>
10.15Stock 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).
10.16Schedule 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).
10.17Promissory 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).
10.18Amendment, 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).
10.19Amendment, 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).
10.20Stock 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).
10.21Note 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).
10.22Note 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).
10.23Asset 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).
10.24Asset 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).
10.25Asset 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).
10.26Employment 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).
10.27Credit 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).
10.28InfoAccess, Inc. 1990 Stock Option Plan, as amended
September 29, 1999 (incorporated by reference to
Exhibit 99.1 of Registrant's statement on Form S-8,
File No. 333-90843)
10.29InfoAccess, Inc. 1995 Stock Option Plan, as amended
September 29, 1999 (incorporated by reference to
Exhibit 99.2 of Registrant's statement on Form S-8,
File No. 333-90843)
10.30Employment Agreement, dated August 1, 1999, by and
between the Registrant and Robert F. Olson.
10.31IntraNet Solutions, Inc. 1999 Employee Stock Option and
compensation Plan.
11.1Statement RE: Computation of Earnings per Common Share.
</TABLE>
24
<PAGE> 25
<TABLE>
<S> <C>
21Subsidiaries of Registrant (incorporated by reference to
Exhibit 21 of the Registrant's registration statement
on Form SB-2, File No. 333-14175).
27.1Financial Data Schedule for six months ended September
30, 1999.
27.2Financial Data Schedules (restated) for the six months
ended September 30, 1998.
</TABLE>
(b) REPORTS ON FORM 8-K
Two reports on Form 8-k have filed for the quarter ended September 30,
1999 relating to the acquisition of InfoAccess, Inc.
25
<PAGE> 26
SIGNATURES
Pursuant to the requirements 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.
IntraNet Solutions, Inc.
------------------------
(Registrant)
Date: November 15, 1999 By: /s/ Robert F. Olson
-------------------
Robert F. Olson,
Chairman, President and Chief Executive
Officer
(Principal Executive Officer)
Date: November 15, 1999 By: /s/ Gregg A. Waldon
-------------------
Gregg A. Waldon
Chief Financial Officer, Secretary and
Treasurer
(Principal Financial and Accounting
Officer)
26
<PAGE> 1
EXHIBIT 10.30
EMPLOYMENT AGREEMENT
THIS AGREEMENT made and entered into as of August 1, 1999, by and between
IntraNet Solutions, Inc., a Minnesota corporation (hereinafter referred to as
the "Company") and Robert F. Olson, residing at 6842 Lillian Lane, Eden Prairie,
Minnesota 55344 (hereinafter referred to as "Executive").
WITNESSETH:
WHEREAS, the Company desires to assure itself of the services of Executive;
and
WHEREAS, Executive desires to be employed by the Company.
NOW, THEREFORE, in consideration of the covenants and agreements herein
contained, the parties hereto agree as follows:
1. Employment. The Company agrees to employ Executive and Executive agrees to
accept such employment upon the terms and conditions hereinafter set forth.
2. Duties. Executive shall serve in an executive capacity as the President
and Chief Executive Officer of the Company, performing such duties and
services as determined by the Company's Board of Directors of the Company
(the "Board") in a manner reasonably expected of a Chief Executive Officer
of the Company.
3. Terms. This Agreement shall commence on August 1, 1999 and terminate on
April 1, 2000, subject, however, to prior termination as provided in
Section 7 set forth below. Unless Executive's employment has terminated
pursuant to Section 7, the term of this Agreement shall be renewed for
successive one-year terms unless the Company gives written notice of
termination under Section 7d below.
4. Base Salary. In consideration for Executive's services under this
Agreement, the Company agrees to pay Executive an annual base salary of Two
Hundred Thousand Dollars ($200,000) (the "Base Salary"). Executive will
receive an annual performance review and the Base Salary may be increased
at such time in the sole discretion of the Compensation Committee of the
Board. The Base Salary shall be subject to any withholding required by law
and shall be payable in accordance with the normal payroll practices of the
Company.
5. Bonus. Executive will be eligible for an annual bonus of up to Twenty Five
Thousand Dollars ($25,000) to be paid quarterly at six thousand two hundred
fifty dollars ($6,250) to be calculated using a formula agreed upon by
Executive and the Board. The annual bonus may be increased at any time at
the discretion of the Board.
<PAGE> 2
6. Additional Benefits and Working Facilities.
(a) The Company shall furnish Executive with the equipment, office space,
secretarial support and such other items related to his employment
that Executive and the Company determine are necessary, useful, and
appropriate to him for the duties required by his employment.
(b) The Company shall provide Executive health and dental insurance,
401(k), and any other benefits included in its corporate benefit
program. In addition, Executive shall have the benefit of such other
employee benefit plans that the Company may, from time to time,
establish and in which employee would be entitled to participate
pursuant to the terms thereof. THE COMPANY SHALL HAVE THE RIGHT IN
ITS SOLE DISCRETION TO CHANGE OR DISCONTINUE SUCH PLANS.
(c) Executive shall be entitled to annual paid vacation of four weeks per
year and otherwise consistent with the Company's vacation policy as in
effect from time to time.
(d) In addition to Section 6(c) above, Executive shall be entitled to six
(6) personal days per year. Any personal days not used within one
year following accrual shall lapse.
(e) The Company shall reimburse Executive for all reasonable expenses
incurred by Executive in connection with the Company's business, upon
presentation of itemized statements therefor.
(f) Executive shall be entitled to a reasonable automobile allowance.
7. Events of Termination. This Agreement may be terminated as follows:
(a) By mutual written agreement of the parties;
(b) Upon Executive's death;
(c) Without notice, by the Company, for cause. "Cause" shall mean only a
determination by the Board that Executive has: (i) committed a felony;
(ii) committed theft or embezzlement of Company property or committed
similar acts involving moral turpitude; or (iii) failed, refused or is
unable to perform his duties hereunder, other than as a result of
illness or disability, which failure is not cured within 30 days after
written notice from the Chairman of the Board specifying the act of
nonperformance or within such longer period (but no longer than
90 days in any event) as is reasonably required to cure such
nonperformance. Notwithstanding the foregoing, Executive shall not be
deemed to have been terminated for Cause unless and until there shall
have been delivered to Executive a copy of a resolution duly adopted
by the affirmative vote of the Board at a meeting of the Board called
and held for this specific purpose; or
(d) At the Company's option, without cause, upon thirty (30) days written
notice to Executive.
2
<PAGE> 3
8. Inventions.
(a) "Inventions" shall mean any discoveries, improvements, and ideas
(whether or not they are in writing or reduced to practice) or works
of authorship (whether or not they can be patented or copyrighted)
that Executive makes, authors, or conceives (either alone or with
others) and that:
(i) concern directly the Company's business or the Company's
present or demonstratably anticipated future research or
development;
(ii) result from any work that Executive performs for the
Company;
(iii) use the Company's equipment, supplies, facilities, or trade
secret information; or
(iv) Executive develops during the time Executive is performing
employment duties for the Company.
(b) Executive agrees that all Inventions made by Executive during the term
of this Agreement will be the Company's sole and exclusive property
and that Executive will, with respect to any Invention:
(i) keep current, accurate, and complete records, which will
belong to the Company and be kept and stored on the
Company's premises while Executive is employed by
the Company;
(ii) promptly and fully disclose the existence and describe the
nature of the Invention to the Company in writing
(and without request);
(iii) assign (and Executive does hereby assign) to the Company all
of his rights to the Invention, any applications he makes
for patents or copyrights in any country, and any patents or
copyrights granted to him in any country; and
(iv) acknowledge and deliver promptly to the Company any written
instruments and perform any other acts necessary in the
Company's opinion to preserve property rights in the
Invention against forfeiture, abandonment, or loss and to
obtain and maintain letters patent and/or copyrights on the
invention and to vest the entire right to title in the
Invention in the Company.
The requirements of this subsection 8(b) do not apply to any Invention
for which no equipment or trade secret information of the Company was
used, which was developed on Executive's own time and: (1) which does
not relate directly to the Company's business or to the Company's
actual or demonstrably anticipated research or development; or
(2) which does not result in any way from any work Executive performed
for the Company. Except as previously disclosed to the Company in
writing, prior to the commencement of employment hereunder, Executive
does not have and will
3
<PAGE> 4
not assert any claims to or rights under any discoveries,
improvements, ideas or works of authorship which are within the scope
of the Company's business. With respect to obligations performed by
Executive under this subsection 8(b) following termination of
employment, the Company will pay Executive reasonable hourly
compensation (consistent with the last Base Salary) and will pay or
reimburse all reasonable out-of-pocket expenses.
9. Confidential Information.
(a) "Confidential Information" means information that is not generally
known and that is proprietary. Any information that Executive
reasonably should consider Confidential Information, or the Company
designates as Confidential Information, will be presumed to be
Confidential Information (whether Executive or others originated it
and regardless of how Executive obtained it).
(b) Except as specifically permitted by the Board or by written Company
policies, Executive will never, either during or after his employment
by the Company, use Confidential Information for any purpose other
than the business of the Company or disclose it to any person who is
not also an employee of the Company. When Executive's employment with
the Company ends, Executive will promptly deliver to the Company all
records and any compositions, articles, devices, apparatus and other
items that disclose, describe, or embody Confidential Information,
including all copies, reproductions and specimens of the Confidential
Information in Executive's possession, regardless of who prepared
them, and will promptly return any other property of the Company in
Executive's possession, whether or not Confidential Information.
10. Conflicts of Interest. Executive agrees that he will not, directly or
indirectly, transact business with the Company personally, or as agent,
owner, partner or shareholder of any other entity; provided, however, that
any such transaction may be entered into if knowingly approved by all of
the disinterested members of the Board.
11. Non-Competition Agreement. During the full term hereof, and on the
termination of Executive's employment for any reason, Executive shall not,
for a period of one (1) year from the date of such termination:
(a) directly or indirectly, anywhere in the United States, own, manage,
operate or control, or participate in the ownership, management,
operation or control of, or be connected with, or have any interest
in, as a stockholder, direction, officer, employee, agent, advisor,
consultant, partner, or otherwise: (a) any "business" which
manufactures, produces, sells, markets or distributes any products or
services that have been manufactured, produced, marketed, sold or
distributed by the Company; or (b) any other business which is
competitive with any business currently or hereafter conducted by
Company; provided, however, that nothing contained herein shall
prohibit Executive from owning less than 3% of any class of securities
listed on a national securities exchange or traded publicly in the
over-the-counter market. Executive acknowledges and agrees that the
provisions of this Section are both reasonable and valid in
geographical and temporal scope and in all other respects. If any of
the provisions of this Section are held to be unenforceable
4
<PAGE> 5
because of the scope, duration or area of its applicability, the court
making such determination shall have the power to modify such scope,
duration or area or all of them, and such provision shall then be
applicable in such modified form.
(b) either directly or indirectly, alone or with others, solicit or assist
anyone else in the solicitation of, any of the employees employed by
the Company at the time of Executive's termination of employment with
the Company, to terminate their employment with the Company and to
become employed by any business enterprise with which Executive may
then be associated, affiliated or connected.
Executive will, prior to accepting employment, consulting or a similar
arrangement with any third party, inform that party of this Agreement and
provide that party with a copy of this Agreement.
Executive acknowledges and agrees that as additional consideration for this
Agreement, Company shall reduce to one year the period after termination of
his employment in which the non- competition agreement shall be in force.
As further consideration for this Agreement, Company agrees to pay
Executive his Base Salary for one year after the termination of his
employment (i) by the Company under paragraph 7d above, or (ii) by
Executive for good reason. For purposes of this paragraph, "good reason"
shall mean either demotion of Executive from his position, or material
reduction of Executive's responsibilities, or relocation of Executive
outside the Twin Cities metropolitan area.
12. No Adequate Remedy. Employee understands and acknowledges that if
Executive fails to fulfill Executive's obligations under Section 8, 9, 10
or 11 of this Agreement, the damages to the Company would be very difficult
to determine. Therefore, in addition to any other rights or remedies
available to the Company at law, in equity, or by statute, Executive hereby
consents to the specific enforcement of the provisions of those Sections by
the Company through an injunction or restraining order issued by an
appropriate court.
13. Additional Documents. The parties shall each, without further
consideration, execute such additional documents as may be reasonably
required in order to carry out the purpose and intent of this Agreement and
to fulfill each of their obligations hereunder.
14. Waiver. Any waiver of any term or condition of this Agreement shall not
operate as a waiver of any other breach of such term or condition, or of
any other term or condition, nor shall any failure to enforce a provision
hereof operate as a waiver of such provision or of any other provision
hereof.
15. Notices. All communications with respect to this Agreement shall be
considered given if delivered or sent by first class certified mail,
postage prepaid, return receipt requested, at the following addresses:
If to Executive, to: Robert F. Olson
6842 Lillian Lane Eden
Prairie, MN 55344
If to the Company, to: IntraNet Solutions, Inc.
8091 Wallace Road
Eden Prairie, MN 55344
5
<PAGE> 6
With a copy to: William M. Mower
Maslon Edelman Borman & Brand, LLP
3300 Norwest Center
90 South 7th Street
Minneapolis, MN 55402-4140
or mailed to such other address as the parties hereto may designate by
notice given in like manner. Notice shall be effective upon personal
delivery or three (3) calendar days after mailing.
16. Entire Agreement. This Agreement, together with all exhibits and writings
required or contemplated hereby, constitutes the entire Agreement between
the parties hereto with respect to the transaction contemplated hereby and
no party shall be liable or bound to another in any manner by and
warranties, representations, or guarantees, except as specifically set
forth herein.
17. Modification, Amendments and Waivers. The parties hereto at any time may,
by written Agreement: (i) extend the time for the performance of any of the
obligations or other acts of the parties hereto; (ii) waive any
inaccuracies in the representations and warranties contained in this
Agreement or in any exhibit, schedule, letter, certificate, or other
instrument delivered pursuant hereto; (iii) waive compliance with any of
the covenants or agreements contained in this Agreement; or (iv) make any
other modifications to this Agreement. This Agreement shall not be altered
or otherwise amended except pursuant to an instrument in writing executed
by both parties hereto.
18. Severability. No finding or adjudication that any provision of this
Agreement is invalid or unenforceable shall affect the validity or
enforceability of the remaining provision herein, and this Agreement shall
be construed as through such invalid or unenforceable provisions were
omitted.
19. Miscellaneous.
(a) The terms and conditions of this Agreement shall inure to the benefit
of and be binding upon the parties hereto and the respective legal
representatives, successors, and assigns of both of the parties
hereto.
(b) This Agreement is made pursuant to and shall be construed under the
laws of the State of Minnesota.
(c) This Agreement may be executed in counterparts, but each of these
counterparts shall, for all purposes, be deemed to be an original, but
both counterparts shall together constitute one and the same
instrument.
6
<PAGE> 7
IN WITNESS WHEREOF, the parties have executed this Agreement effective the
date set forth above.
INTRANET SOLUTIONS, INC.
By ____________________________ ______________________________
ROBERT F. OLSON
Its ________________________
7
<PAGE> 1
EXHIBIT 10.31
INTRANET SOLUTIONS, INC.
1999 EMPLOYEE STOCK OPTION AND COMPENSATION PLAN
1. Purpose. The purpose of the 1999 Employee Stock Option and
Compensation Plan (the "Plan") of IntraNet Solutions, Inc. (the "Company")
is to increase shareholder value and to advance the interests of the Company by
attracting, retaining and motivating employees and certain key consultants of
the Company by furnishing opportunities to purchase or receive shares of common
stock, $.01 par value, of the Company (collectively, "Incentives") pursuant
to the Plan.
2. Administration. The Plan shall be administered by the Board of
Directors or by a stock option committee (the "Committee") of the Board of
Directors of the Company. The Committee shall consist of not less than two
directors who shall be appointed from time to time by the Board. The Board of
Directors of the Company may from time to time appoint members of the Committee
in substitution for, or in addition to, members previously appointed, and may
fill vacancies, however caused, in the Committee. The Committee shall select one
of its members as its chairman and shall hold its meetings at such times and
places as it shall deem advisable. A majority of the Committee's members shall
constitute a quorum. All action of the Committee shall be taken by the majority
of its members. Any action may be taken by a written instrument signed by
majority of the members and actions so taken shall be fully effective as if it
had been made by a majority vote at a meeting duly called and held. The
Committee may appoint a secretary, shall keep minutes of its meetings and shall
make such rules and regulations for the conduct of its business as it shall deem
advisable. The Committee shall have complete authority to award Incentives under
the Plan, to interpret the Plan, and to make any other determination which it
believes necessary and advisable for the proper administration of the Plan. The
Committee's decisions and matters relating to the Plan shall be final and
conclusive on the Company and its participants.
3. Eligible Participants. Employees of the Company or its subsidiaries
who are not also officers or directors of the Company, and consultants to the
Company or its subsidiaries shall be eligible to receive Incentives under the
Plan when designated by the Committee. A Plan Participant who becomes an
officer or director of the Company may retain all Incentives awarded through the
date of his or her promotion, but may not receive additional Incentives under
the Plan unless and until he or she is no longer an officer or directors.
Participants may be designated individually or by groups or categories (for
example, by position) as the Committee deems appropriate.
4. Types of Incentives. Incentives under the Plan may be granted in any
one or a combination of the following forms: (a) incentive stock options and
non-statutory stock options (section 6); (b) stock appreciation rights ("SARs")
(section 7); (c) stock awards (section 8); (d) restricted stock (section 8); and
(e) performance shares (section 9).
5. Shares Subject to the Plan.
5.1. Number of Shares. Subject to adjustment as provided in
Section 10.6, the number of shares of common stock which may be issued under the
Plan shall not exceed one million (1,000,000) shares of common stock.
1
<PAGE> 2
5.2. Cancellation. To the extent that cash in lieu of shares of
common stock is delivered upon the exercise of a SAR pursuant to Section 7.4,
the Company shall be deemed, for purposes of applying the limitation on the
number of shares, to have issued the greater of the number of shares of common
stock which it was entitled to issue upon such exercise or on the exercise of
any related option. In the event that a stock option or SAR granted hereunder
expires or is terminated or canceled unexercised as to any shares of common
stock, such shares may again be issued under the Plan either pursuant to stock
options, SARs or otherwise. In the event that shares of common stock are issued
as restricted stock or pursuant to a stock award and thereafter are forfeited or
reacquired by the Company pursuant to rights reserved upon issuance thereof,
such forfeited and reacquired shares may again be issued under the Plan, either
as restricted stock, pursuant to stock awards or otherwise. The Committee may
also determine to cancel, and agree to the cancellation of, stock options in
order to make a participant eligible for the grant of a stock option at a lower
price than the option to be canceled.
5.3. Type of Common Stock. Common stock issued under the Plan in
connection with stock options, SARs, performance shares, restricted stock or
stock awards, may be authorized and unissued shares.
6. Stock Options. A stock option is a right to purchase shares of common
stock from the Company. Each stock option granted by the Committee under this
Plan shall be subject to the following terms and conditions:
6.1. Price. The option price per share shall be determined by
the Committee, provided that such price shall not be below the Fair Market Value
of the common stock subject to the adjustment under Section 10.6.
6.2. Number. The number of shares of common stock subject to the
option shall be determined by the Committee, subject to adjustment as provided
in Section 10.6. The number of shares of common stock subject to a stock option
shall be reduced in the same proportion that the holder thereof exercises a SAR
if any SAR is granted in conjunction with or related to the stock option.
6.3. Duration and Time for Exercise. Subject to earlier
termination as provided in Section 10.4, the term of each stock option shall be
determined by the Committee but shall not exceed ten years and one day from the
date of grant. Each stock option shall become exercisable at such time or times
during its term as shall be determined by the Committee at the time of grant.
The Committee may accelerate the exercisability of any stock option. Subject to
the foregoing and with the approval of the Committee, all or any part of the
shares of common stock with respect to which the right to purchase has accrued
may be purchased by the Company at the time of such accrual or at any time or
times thereafter during the term of the option.
6.4. Manner of Exercise. A stock option may be exercised, in
whole or in part, by giving written notice to the Company, specifying the number
of shares of common stock to be purchased and accompanied by the full purchase
price for such shares. The option price shall be payable in United States
dollars upon exercise of the option and may be paid by cash; uncertified or
certified check; bank draft; by delivery of shares of common stock in payment of
all or any part of the option price, which shares shall be valued for this
purpose at the Fair Market Value on the date such option is exercised; by
instructing the Company to withhold from the shares of common stock issuable
upon exercise of the stock option shares of common stock in payment of all or
any part of the option price, which shares shall be valued for this purpose at
the Fair Market Value or in such other manner as may be authorized from time to
time by the Committee. Prior to the issuance of shares of common stock upon the
exercise of a stock option, a participant shall have no rights as a shareholder.
2
<PAGE> 3
6.5. Incentive Stock Options. Notwithstanding anything in the
Plan to the contrary, the following additional provisions shall apply to the
grant of stock options which are intended to qualify as Incentive Stock Options
(as such term is defined in Section 422 of the Internal Revenue Code of 1986, as
amended):
(a) The aggregate Fair Market Value (determined as of
the time the option is granted) of the shares of common stock with respect to
which Incentive Stock Options are exercisable for the first time by any
participant during any calendar year (under all of the Company's plans) shall
not exceed $100,000.
(b) Any Incentive Stock Option certificate authorized
under the Plan shall contain such other provisions as the Committee shall deem
advisable, but shall in all events be consistent with and contain all provisions
required in order to qualify the options as Incentive Stock Options.
(c) All Incentive Stock Options must be granted within
ten years from the earlier of the date on which this Plan was adopted by Board
of Directors or the date this Plan was approved by the shareholders.
(d) Unless sooner exercised, all Incentive Stock
Options shall expire no later than 10 years after the date of grant.
(e) The option price for Incentive Stock Options shall
be not less than the Fair Market Value of the common stock subject to the option
on the date of grant.
(f) No Incentive Stock Options shall be granted to any
participant who, at the time such option is granted, would own (within the
meaning of Section 422 of the Code) stock possessing more than 10% of the total
combined voting power of all classes of stock of the employer corporation or of
its parent or subsidiary corporation.
7. Stock Appreciation Rights. A SAR is a right to receive, without
payment to the Company, a number of shares of common stock, cash or any
combination thereof, the amount of which is determined pursuant to the formula
set forth in Section 7.4. A SAR may be granted (a) with respect to any stock
option granted under this Plan, either concurrently with the grant of such stock
option or at such later time as determined by the Committee (as to all or any
portion of the shares of common stock subject to the stock option), or (b)
alone, without reference to any related stock option. Each SAR granted by the
Committee under this Plan shall be subject to the following terms and
conditions:
7.1. Number. Each SAR granted to any participant shall relate to
such number of shares of common stock as shall be determined by the Committee,
subject to adjustment as provided in Section 10.6. In the case of an SAR granted
with respect to a stock option, the number of shares of common stock to which
the SAR pertains shall be reduced in the same proportion that the holder of the
option exercises the related stock option.
7.2. Duration. Subject to earlier termination as provided in
Section 10.4, the term of each SAR shall be determined by the Committee but
shall not exceed ten years and one day from the date of grant. Unless otherwise
provided by the Committee, each SAR shall become exercisable at such time or
times, to such extent and upon such conditions as the stock option, if any, to
which it relates is exercisable. No SAR may be exercised during the first twelve
months of its term. Except as provided in the preceding sentence, the Committee
may in its discretion accelerate the exercisability of any SAR.
3
<PAGE> 4
7.3. Exercise. A SAR may be exercised, in whole or in part, by
giving written notice to the Company, specifying the number of SARs which the
holder wishes to exercise. Upon receipt of such written notice, the Company
shall, within 90 days thereafter, deliver to the exercising holder certificates
for the shares of common stock or cash or both, as determined by the Committee,
to which the holder is entitled pursuant to Section 7.4.
7.4. Payment. Subject to the right of the Committee to deliver
cash in lieu of shares of common stock, the number of shares of common stock
which shall be issuable upon the exercise of a SAR shall be determined by
dividing:
(a) the number of shares of common stock as to which
the SAR is exercised multiplied by the amount of the appreciation in such shares
(for this purpose, the "appreciation" shall be the amount by which the Fair
Market Value of the shares of common stock subject to the SAR on the exercise
date exceeds (1) in the case of a SAR related to a stock option, the purchase
price of the shares of common stock under the stock option or (2) in the case of
a SAR granted alone, without reference to a related stock option, an amount
which shall be determined by the Committee at the time of grant, subject to
adjustment under Section 10.6); by
(b) the Fair Market Value of a share of common stock
on the exercise date.
In lieu of issuing shares of common stock upon the exercise of a SAR, the
Committee may elect to pay the holder of the SAR cash equal to the Fair Market
Value on the exercise date of any or all of the shares which would otherwise be
issuable. No fractional shares of common stock shall be issued upon the
exercise of a SAR; instead, the holder of the SAR shall be entitled to receive a
cash adjustment equal to the same fraction of the Fair Market Value of a share
of common stock on the exercise date or to purchase the portion necessary to
make a whole share at its Fair Market Value on the date of exercise.
8. Stock Awards and Restricted Stock. A stock award consists of the
transfer by the Company to a participant of shares of common stock, without
other payment therefor, as additional compensation for services to the Company.
A share of restricted stock consists of shares of common stock which are sold or
transferred by the Company to a participant at a price determined by the
Committee (which price shall be at least equal to the minimum price required by
applicable law for the issuance of a share of common stock) and subject to
restrictions on their sale or other transfer by the participant. The transfer
of common stock pursuant to stock awards and the transfer and sale of restricted
stock shall be subject to the following terms and conditions:
8.1. Number of Shares. The number of shares to be transferred or
sold by the Company to a participant pursuant to a stock award or as restricted
stock shall be determined by the Committee.
8.2. Sale Price. The Committee shall determine the price, if
any, at which shares of restricted stock shall be sold to a participant, which
may vary from time to time and among participants and which may be below the
Fair Market Value of such shares of common stock at the date of sale.
8.3. Restrictions. All shares of restricted stock transferred or
sold hereunder shall be subject to such restrictions as the Committee may
determine, including, without limitation any or all of the following:
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<PAGE> 5
(a) a prohibition against the sale, transfer, pledge
or other encumbrance of the shares of restricted stock, such prohibition to
lapse at such time or times as the Committee shall determine (whether in annual
or more frequent installments, at the time of the death, disability or
retirement of the holder of such shares, or otherwise);
(b) a requirement that the holder of shares of
restricted stock forfeit, or (in the case of shares sold to a participant)
resell back to the Company at his or her cost or other specified amount as the
Committee shall determine, all or a part of such shares in the event of
termination of his or her employment or consulting engagement during any period
in which such shares are subject to restrictions;
(c) such other conditions or restrictions as the
Committee may deem advisable.
8.4. Escrow. In order to enforce the restrictions imposed by the
Committee pursuant to Section 8.3, the participant receiving restricted stock
shall enter into an agreement with the Company setting forth the conditions of
the grant. Shares of restricted stock shall be registered in the name of the
participant and deposited, together with a stock power endorsed in blank, with
the Company. Each such certificate shall bear a legend in substantially the
following form:
The shares represented by this certificate have not been registered under
the Securities Act of 1933 or the securities law of any state. The shares
have been acquired for investment and without a view to their distribution
and may not be sold or otherwise disposed of in the absence of any
effective registration statement for the shares under the Securities Act of
1933 or unless an exemption from registration is available under the
securities laws. The transferability of this certificate and the shares of
common stock represented by it are subject to the terms and conditions
(including conditions of forfeiture) contained in the 1999 Employee Stock
Option and Compensation Plan of IntraNet Solutions, Inc. (the "Company"),
and an agreement entered into between the registered owner and the Company.
A copy of the Plan and the agreement is on file in the office of the
secretary of the Company.
8.5. End of Restrictions. Subject to Section 10.5, at the end of
any time period during which the shares of restricted stock are subject to
forfeiture and restrictions on transfer, such shares will be delivered free of
all restrictions to the participant or to the participant's legal
representative, beneficiary or heir.
8.6. Shareholder. Subject to the terms and conditions of the
Plan, each participant receiving restricted stock shall have all the rights of a
shareholder with respect to shares of stock during any period in which such
shares are subject to forfeiture and restrictions on transfer, including without
limitation, the right to vote such shares. Dividends paid in cash or property
other than common stock with respect to shares of restricted stock shall be paid
to the participant currently.
9. Performance Shares. A performance share consists of an award which
shall be paid in shares of common stock, as described below. The grant of a
performance share shall be subject to such terms and conditions as the Committee
deems appropriate, including the following:
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<PAGE> 6
9.1. Performance Objectives. Each performance share will be
subject to performance objectives for the Company or one of its operating units
to be achieved by the end of a specified period. The number of performance
shares granted shall be determined by the Committee and may be subject to such
terms and conditions, as the Committee shall determine. If the performance
objectives are achieved, each participant will be paid in shares of common stock
or cash. If such objectives are not met, each grant of performance shares may
provide for lesser payments in accordance with formulas established in the
award.
9.2. Not Shareholder. The grant of performance shares to a
participant shall not create any rights in such participant as a shareholder of
the Company, until the payment of shares of common stock with respect to an
award.
9.3. No Adjustments. No adjustment shall be made in performance
shares granted on account of cash dividends which may be paid or other rights
which may be issued to the holders of common stock prior to the end of any
period for which performance objectives were established.
9.4. Expiration of Performance Share. If any participant's
employment or consulting engagement with the Company is terminated for any
reason other than normal retirement, death or disability prior to the
achievement of the participant's stated performance objectives, all the
participant's rights on the performance shares shall expire and terminate unless
otherwise determined by the Committee. In the event of termination of employment
by reason of death, disability, or normal retirement, the Committee, in its own
discretion may determine what portions, if any, of the performance shares should
be paid to the participant.
10. General.
10.1. Effective Date. The Plan will become effective on
November 1, 1999.
10.2. Duration. The Plan shall remain in effect until all
Incentives granted under the Plan have either been satisfied by the issuance of
shares of common stock or the payment of cash or been terminated under the terms
of the Plan and all restrictions imposed on shares of common stock in connection
with their issuance under the Plan have lapsed. No Incentives may be granted
under the Plan after the tenth anniversary of the date the Plan is approved by
the shareholders of the Company.
10.3. Non-transferability of Incentives. No stock option, SAR,
restricted stock or performance award may be transferred, pledged or assigned by
the holder thereof (except, in the event of the holder's death, by will or the
laws of descent and distribution to the limited extent provided in the Plan or
in the Incentive) or pursuant to a qualified domestic relations order as defined
by the Code or Title I of the Employee Retirement Income Security Act, or the
rules thereunder, and the Company shall not be required to recognize any
attempted assignment of such rights by any participant. Notwithstanding the
preceding sentence, stock options may be transferred by the holder thereof to
Employee's spouse, children, grandchildren or parents (collective, the "Family
Members"), to trusts for the benefit of Family Members, to partnerships or
limited liability companies in which Family Members are the only partners or
shareholders, or to entities exempt from federal income tax pursuant to Section
501(c)(3) of the Internal Revenue Code of 1986, as amended. During a
participant's lifetime, an Incentive may be exercised only by him or her, by his
or her guardian or legal representative or, in the case of stock options, by the
transferees permitted by the preceding sentence.
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<PAGE> 7
10.4. Effect of Termination of Employment or Death. In the event
that a participant ceases to be an employee of or consultant to the Company for
any reason, including death, any Incentives may be exercised or shall expire
at such times as may be determined by the Committee.
10.5. Additional Condition. Notwithstanding anything in this Plan
to the contrary: (a) the Company may, if it shall determine it necessary or
desirable for any reason, at the time of award of any Incentive or the issuance
of any shares of common stock pursuant to any Incentive, require the recipient
of the Incentive, as a condition to the receipt thereof or to the receipt of
shares of common stock issued pursuant thereto, to deliver to the Company a
written representation of present intention to acquire the Incentive or the
shares of common stock issued pursuant thereto for his own account for
investment and not for distribution; and (b) if at any time the Company further
determines, in its sole discretion, that the listing, registration or
qualification (or any updating of any such document) of any Incentive or the
shares of common stock issuable pursuant thereto is necessary on any securities
exchange or under any federal or state securities or blue sky law, or that the
consent or approval of any governmental regulatory body is necessary or
desirable as a condition of, or in connection with the award of any Incentive,
the issuance of shares of common stock pursuant thereto, or the removal of any
restrictions imposed on such shares, such Incentive shall not be awarded or such
shares of common stock shall not be issued or such restrictions shall not be
removed, as the case may be, in whole or in part, unless such listing,
registration, qualification, consent or approval shall have been effected or
obtained free of any conditions not acceptable to the Company.
10.6. Adjustment. In the event of any merger, consolidation or
reorganization of the Company with any other corporation or corporations, there
shall be substituted for each of the shares of common stock then subject to the
Plan, including shares subject to restrictions, options, or achievement of
performance share objectives, the number and kind of shares of stock or other
securities to which the holders of the shares of common stock will be entitled
pursuant to the transaction. In the event of any recapitalization, stock
dividend, stock split, combination of shares or other change in the common
stock, the number of shares of common stock then subject to the Plan, including
shares subject to restrictions, options or achievements of performance shares,
shall be adjusted in proportion to the change in outstanding shares of common
stock. In the event of any such adjustments, the purchase price of any option,
the performance objectives of any Incentive, and the shares of common stock
issuable pursuant to any Incentive shall be adjusted as and to the extent
appropriate, in the discretion of the Committee, to provide participants with
the same relative rights before and after such adjustment.
10.7. Incentive Plans and Agreements. Except in the case of stock
awards or cash awards, the terms of each Incentive shall be stated in a plan or
agreement approved by the Committee. The Committee may also determine to enter
into agreements with holders of options to reclassify or convert certain
outstanding options, within the terms of the Plan, as Incentive Stock Options or
as non-statutory stock options and in order to eliminate SARs with respect to
all or part of such options and any other previously issued options.
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<PAGE> 8
10.8. Withholding.
(a) The Company shall have the right to withhold from
any payments made under the Plan or to collect as a condition of payment, any
taxes required by law to be withheld. At any time when a participant is
required to pay to the Company an amount required to be withheld under
applicable income tax laws in connection with a distribution of common stock or
upon exercise of an option or SAR, the participant may satisfy this obligation
in whole or in part by electing (the "Election") to have the Company withhold
from the distribution shares of common stock having a value up to the amount
required to be withheld. The value of the shares to be withheld shall be based
on the Fair Market Value of the common stock on the date that the amount
of tax to be withheld shall be determined ("Tax Date").
(b) Each Election must be made prior to the Tax Date.
The Committee may disapprove of any Election, may suspend or terminate the right
to make Elections, or may provide with respect to any Incentive that the right
to make Elections shall not apply to such Incentive. An Election is irrevocable.
(c) If a participant is an officer or director of the
Company within the meaning of Section 16 of the 1934 Act, then an Election must
comply with all of the requirements of the 1934 Act.
10.9. No Continued Employment, Engagement or Right to
Corporate Assets. No participant under the Plan shall have any right, because of
his or her participation, to continue in the employ of, or to continue his or
her consulting engagement for, the Company for any period of time or to any
right to continue his or her present or any other rate of compensation. Nothing
contained in the Plan shall be construed as giving an employee, a consultant,
such person's beneficiaries or any other person any equity or interests of any
kind in the assets of the Company or creating a trust of any kind or a fiduciary
relationship of any kind between the Company and any such person.
10.10. Deferral Permitted. Payment of cash or
distribution of any shares of common stock to which a participant is entitled
under any Incentive shall be made as provided in the Incentive. Payment may be
deferred at the option of the participant if provided in the Incentive.
10.11. Amendment of the Plan. The Board may amend or
discontinue the Plan at any time. However, no such amendment or discontinuance
shall, subject to adjustment under Section 10.6, (a) change or impair, without
the consent of the recipient, an Incentive previously granted, (b) increase the
maximum number of shares of common stock which may be issued to all participants
under the Plan, (c) change or expand the types of Incentives that may be granted
under the Plan, (d) change the class of persons eligible to receive Incentives
under the Plan, or (e) materially increase the benefits accruing to participants
under the Plan.
10.12. Immediate Acceleration of Incentives.
Notwithstanding any provision in this Plan or in any Incentive to the contrary,
(a) the restriction on all shares of restricted stock award shall lapse
immediately, (b) all outstanding options and SARs will become exercisable
immediately, and (c) all performance shares shall be deemed to be met and
payment made immediately. If any of the following events occur unless otherwise
determined by the Board of Directors and a majority of the Continuing Directors
(as defined below):
(i) any person or group of persons becomes
the beneficial owner of 30% or more of the voting power of the Company entitled
to vote for the election of directors;
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<PAGE> 9
(ii) a majority of the members of the Board
of Directors of the Company is replaced within the period of less than two years
by directors not nominated and approved by the Board of Directors; or
(iii) the shareholders of the Company approve
an agreement to merge or consolidate with or into another corporation (unless,
after such merger or consolidation, the former shareholders of the Company own
51 percent or more of the successor entity's voting equity securities) or an
agreement to sell or otherwise dispose of all or substantially all of the
Company's assets (including a plan of liquidation).
For purposes of this Section 10.12, beneficial ownership by a person or
group of persons shall be determined in accordance with Regulation 13D (or any
similar successor regulation) promulgated by the Securities and Exchange
Commission pursuant to the 1934 Act. Beneficial ownership of more than 30% of an
equity security may be established by any reasonable method, but shall be
presumed conclusively as to any person who files a Schedule 13D report with the
Securities and Exchange Commission reporting such ownership. If the restrictions
and forfeitability periods are eliminated by reason of provision (1), the
limitations of this Plan shall not become applicable again should the person
cease to own 30% or more of any equity security of the Company.
For purposes of this Section 10.12, "Continuing Directors" are directors
(a) who were in office prior to the time of any of provisions (1), (2) or (3)
occurred or any person publicly announced an intention to acquire 20% or more of
any equity security of the Company, (b) directors in office for a period of more
than two years, and (c) directors nominated and approved by the Continuing
Directors.
10.13. Definition of Fair Market Value. For purposes of this Plan,
the "Fair Market Value" of a share of common stock at a specified date shall,
unless otherwise expressly provided in this Plan, be the amount which the
Committee determines in good faith to be 100 percent of the fair market value of
such a share as of the date in question; provided, however, that notwithstanding
the foregoing, if such shares are listed on a U.S. securities exchange or are
quoted on the Nasdaq National Market System or Nasdaq SmallCap Stock Market
("Nasdaq"), then Fair Market Value shall be determined by reference to the last
sale price of a share of common stock on such U.S. securities exchange or Nasdaq
on the applicable date. If such U.S. securities exchange or Nasdaq is closed for
trading on such date, or if the common stock does not trade on such date, then
the last sale price used shall be the one on the date the common stock last
traded on such U.S. securities exchange or Nasdaq.
9
<PAGE> 1
EXHIBIT 11.1 - COMPUTATION OF EARNINGS PER COMMON SHARE.
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------------------ -----------------------------
1998 1999 1998 1999
------------- ------------- ----------- ------------
<S> <C> <C> <C> <C>
Numerator:
Income (loss) from continuing operations $ 44,114 $ (1,483,718) $ (565,210) $(1,167,068)
Discontinued operations -- -- (521,464) --
------------- ------------- ------------ ------------
Net income (loss) 44,114 (1,483,718) (1,086,674) (1,167,068)
Preferred stock dividends and accretion 29,245 -- 632,279 --
------------- ------------- ------------ ------------
Numerator for basic and diluted earnings per
share - income (loss) attributable to
common shareholders $ 14,869 $ (1,483,718) $(1,718,953) $(1,167,068)
============= ============= =========== ============
Denominator:
Denominator for basic earnings per share
weighted average shares 10,417,378 16,695,444 10,356,393 15,087,877
Effect of dilutive securities:
Employee stock options 618,432 -- -- --
Warrants 142,918 -- -- --
Convertible preferred stock 1,726,539 -- -- --
------------- ------------- ------------ ------------
Dilutive potential common shares 2,487,889 -- -- --
Denominator for diluted earnings per share
adjusted weighted average shares and
assumed conversions 12,905,267 16,695,444 10,356,393 15,087,877
============= ============= ============ ============
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
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<FISCAL-YEAR-END> MAR-31-2000
<PERIOD-END> SEP-30-1999
<CASH> 3,261,601
<SECURITIES> 25,858,354
<RECEIVABLES> 5,297,572
<ALLOWANCES> 354,990
<INVENTORY> 191,739
<CURRENT-ASSETS> 35,347,136
<PP&E> 2,665,371
<DEPRECIATION> 1,293,798
<TOTAL-ASSETS> 37,458,057
<CURRENT-LIABILITIES> 4,484,475
<BONDS> 0
0
0
<COMMON> 169,124
<OTHER-SE> 32,712,996
<TOTAL-LIABILITY-AND-EQUITY> 37,458,057
<SALES> 9,021,043
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<NET-INCOME> (1,167,068)
<EPS-BASIC> (0.08)
<EPS-DILUTED> (0.08)
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<RESTATED>
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> MAR-31-1999
<PERIOD-END> SEP-30-1998
<CASH> 1,588,133
<SECURITIES> 0
<RECEIVABLES> 8,293,780
<ALLOWANCES> 548,705
<INVENTORY> 163,277
<CURRENT-ASSETS> 10,262,363
<PP&E> 2,201,555
<DEPRECIATION> 1,334,920
<TOTAL-ASSETS> 11,136,123
<CURRENT-LIABILITIES> 7,185,988
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0
0
<COMMON> 107,449
<OTHER-SE> 3,607,607
<TOTAL-LIABILITY-AND-EQUITY> 11,136,123
<SALES> 9,832,796
<TOTAL-REVENUES> 9,832,796
<CGS> 5,294,793
<TOTAL-COSTS> 5,294,793
<OTHER-EXPENSES> 5,487,931
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 132,216
<INCOME-PRETAX> (565,210)
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<INCOME-CONTINUING> (565,210)
<DISCONTINUED> (521,464)
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<NET-INCOME> (1,086,674)
<EPS-BASIC> (0.10)
<EPS-DILUTED> (0.10)
</TABLE>
