<PAGE> 1
PROSPECTUS
4,300,000 SHARES
[INTRANET SOLUTIONS LOGO]
COMMON STOCK
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IntraNet Solutions, Inc. is offering 2,305,000 shares and the selling
shareholders are offering 1,995,000 shares.
IntraNet Solutions' common stock is listed on the Nasdaq National Market under
the symbol "INRS." On March 9, 2000, the last reported sale price of our common
stock was $47.63 per share.
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PRICE $46.00 PER SHARE
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<TABLE>
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PER SHARE TOTAL
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<S> <C> <C>
Public offering price............................. $46.00 $197,800,000
Underwriting discounts............................ $ 2.30 $ 9,890,000
Proceeds, before expenses, to IntraNet
Solutions....................................... $43.70 $100,728,500
Proceeds, before expenses, to the selling
shareholders.................................... $43.70 $ 87,181,500
</TABLE>
The underwriters may also purchase up to 645,000 additional shares from IntraNet
Solutions at the public offering price, less the underwriting discount, within
30 days from the date of the final prospectus to cover over-allotments.
The shares of common stock will be ready for delivery in Minneapolis, Minnesota
on or about March 15, 2000.
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INVESTING IN THE COMMON STOCK INVOLVES RISKS. SEE "RISK FACTORS" ON PAGE 6.
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Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved of these securities or passed upon the
adequacy or accuracy of this prospectus. Any representation to the contrary is a
criminal offense.
----------------------------
DAIN RAUSCHER WESSELS
U.S. BANCORP PIPER JAFFRAY
WIT SOUNDVIEW
CRAIG-HALLUM CAPITAL GROUP
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March 9, 2000
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INSIDE FRONT COVER GRAPHICS:
- Caption: "End-to-End Web Content Management Solution" followed by Xpedio
logo.
- Graphic depicting the content management functionality of Xpedio
products.
- Depiction of disorganized content in native formats.
- Description of document analysis functionality of Xpedio captioned
"Abstraction."
- List of processing functions of Xpedio captioned "Intelligence &
Behavior."
- List of style-related customization functions of Xpedio captioned "Look
& Feel."
- Graphic of computer screen with content displayed in an organized
manner.
- "Xpedio offers a complete platform for automating the deployment and
management of business-critical Web sites and applications -- eliminating
Webmaster bottlenecks."
- IntraNet Solutions logo and Web site address: www.intranetsolutions.com.
<PAGE> 3
TABLE OF CONTENTS
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PAGE
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Prospectus Summary.............. 4
Risk Factors.................... 6
Forward-Looking Statements...... 12
Use of Proceeds................. 13
Dividend Policy................. 13
Price Range of Common Stock..... 13
Capitalization.................. 14
Dilution........................ 15
Selected Consolidated Financial
Data.......................... 16
Management's Discussion and
Analysis of Financial
Condition and Results of
Operations.................... 18
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PAGE
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Business........................ 32
Management...................... 44
Principal and Selling Shareholders... 46
Shares Eligible for Future
Sale.......................... 47
Underwriting.................... 48
Where You Can Find More
Information................... 50
Incorporation by Reference...... 50
Legal Matters................... 51
Experts......................... 51
Index to Consolidated Financial
Statements.................... F-1
</TABLE>
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You should rely only on the information contained in this prospectus. We
have not, and the underwriters have not, authorized any other person to provide
you with different information. This prospectus is not an offer to sell, nor is
it seeking an offer to buy, these securities in any state where the offer or
sale is not permitted. The information in this prospectus is complete and
accurate as of the date on the front cover, but the information may have changed
since that date.
IntraNet Solutions and Intra.doc! are trademarks registered to IntraNet
Solutions, Inc. We have applied for trademark registration for the Xpedio mark.
This prospectus also contains trademarks of companies other than IntraNet
Solutions.
Except as otherwise stated, all information presented in this prospectus
assumes no exercise of the underwriters' over-allotment option.
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PROSPECTUS SUMMARY
This summary highlights only selected information contained elsewhere in
this prospectus. Before making an investment in our common stock, you should
read the entire prospectus, including the Consolidated Financial Statements and
related Notes, all of which should be consulted when reading this summary. This
prospectus contains forward-looking statements. The outcome of the events
described in these forward-looking statements is subject to risks and actual
results could differ materially.
INTRANET SOLUTIONS, INC.
IntraNet Solutions is a leading provider of Web content management
solutions for intranets, extranets and the Internet. Our Xpedio Content
Management Suite offers customers the ability to simplify and automate
management of Web content from all sources. We address an organization's complex
needs in publishing, updating and maintaining its Web sites by providing a
comprehensive solution that eliminates administrative bottlenecks and
automatically publishes content from native formats directly to the Web.
Xpedio gives every content contributor in an organization the ability to
automatically Web-publish content to Hypertext Markup Language (HTML) and
Extensible Markup Language (XML) Web sites from native desktop formats. Our
solution is based on open Web standards and Java server architecture and
integrates with an organization's existing security model. Xpedio keeps Web
content current and gives it the desired "look and feel," while maintaining the
source content in both Web and native formats. By allowing content contributors
to directly participate in the Web publishing process, Xpedio automates the
manual content conversion and publication tasks usually required of Webmasters.
This reduces errors, provides information more rapidly to users and allows
Webmasters to focus on site architecture and "look and feel" enhancements.
The market for our products is growing quickly as Web content increases
rapidly in both amount and importance with the expansion of the Internet. Web
content, including graphics, audio and video clips, hyperlinked text and
executable software, is the basis for every Web page and most e-commerce
applications. International Data Corporation, or IDC, estimates that the number
of Web pages will grow from 925 million in 1998 to 13.1 billion in 2003. In
addition, the overall market for business-to-business software tools, which
includes content management software, is projected to reach approximately $40.0
billion by 2002, according to The Delphi Group. IDC estimates that the worldwide
market for content management and document technology software will expand from
$1.4 billion in 2000 to $2.8 billion in 2003.
Our comprehensive solution, applicable across a wide variety of industries
and Web applications, enables organizations to effectively utilize their content
on the Web. Since our first Web-based software products were introduced in
fiscal 1997, they have been adopted by over 800 customers for use on one or more
of their intranet, extranet and Internet Web sites. Xpedio, which was introduced
in September 1999, has gained strong market acceptance and represented over
fifty percent of our revenues for product licenses in the third quarter of
fiscal 2000. Customer uses of our products have ranged from single workgroups to
enterprise-wide deployments. Our customers include organizations such as British
Aerospace Airbus, Ltd., Cargill Incorporated, Ericsson Telecom AB, GE Capital
Corporation and Hewlett-Packard Company.
IntraNet Solutions was incorporated in Minnesota in 1989. Our executive
offices are located at 8091 Wallace Road, Eden Prairie, Minnesota 55344; our
telephone number is 612-903-2000; and our Web site is located at
http://www.intranetsolutions.com. Information contained on our Web site is not
part of this prospectus.
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THE OFFERING
Common stock offered by IntraNet
Solutions............................... 2,305,000 shares
Common stock offered by the selling
shareholders............................ 1,995,000 shares
Common stock to be outstanding after the
offering................................ 19,894,698 shares(1)
Use of Proceeds......................... Working capital and other general
corporate purposes. See "Use of
Proceeds."
Nasdaq National Market symbol........... INRS
SUMMARY CONSOLIDATED FINANCIAL DATA
(IN THOUSANDS, EXCEPT SHARE DATA)
The amounts accompanying the line items "revenues," "cost of revenues" and
"gross profit" below relate solely to software product licenses and associated
services and exclude amounts attributable to our hardware integration and
support business, the sale of which was completed in September 1998. In
September 1999, we acquired InfoAccess, Inc. in a transaction accounted for as a
pooling-of-interests. Accordingly, the following data has been restated to
include the operations of InfoAccess in all periods presented.
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NINE MONTHS
ENDED
YEAR ENDED MARCH 31, DECEMBER 31,
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1997 1998 1999 1998 1999
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(UNAUDITED)
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CONSOLIDATED STATEMENT OF OPERATIONS DATA:
Revenues(2)........................................... $ 5,478 $ 5,734 $11,402 $ 7,337 $14,851
Cost of revenues(2)................................... 1,012 1,279 2,040 1,320 2,768
Gross profit(2)....................................... 4,466 4,455 9,362 6,017 12,083
Operating expenses (excluding acquisition costs)...... 8,598 9,802 11,533 8,239 11,444
Acquisition costs..................................... -- -- -- -- 1,972
Net loss(3)........................................... (3,407) (4,663) (1,359) (1,341) (559)
</TABLE>
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AS OF MARCH 31, 1999 AS OF DECEMBER 31, 1999
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ACTUAL ACTUAL AS ADJUSTED(4)
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(UNAUDITED)
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CONSOLIDATED BALANCE SHEET DATA:
Cash and equivalents............................... $2,177 $ 4,004 $ 4,004
Short-term investments............................. -- 25,224 126,108
Working capital.................................... 3,713 33,918 134,802
Total assets....................................... 8,464 38,920 139,804
Shareholders' equity............................... 4,719 36,150 137,034
</TABLE>
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(1) Based on the number of shares outstanding as of December 31, 1999, and
includes 140,000 shares included in this offering that are issuable upon the
exercise of outstanding stock options. This number does not include
2,417,509 shares issuable upon the exercise of other options then
outstanding, with a weighted average exercise price of $5.28 per share;
765,371 shares issuable upon the exercise of warrants, with a weighted
average exercise price of $3.74 per share; and 884,983 shares reserved for
issuance in connection with future stock options and other awards under the
1994-1997 Stock Option Plan, the 1997 Director Stock Option Plan and the
1999 Employee Stock Option and Compensation Plan. See "Capitalization" and
Note 9 of Notes to Consolidated Financial Statements.
(2) Excludes the following amounts related to our hardware integration and
support business, the sale of which was completed in September 1998:
revenues of $15,277 in 1997, $16,477 in 1998, $5,629 in 1999 and $5,629 in
the nine months ended December 31, 1998; cost of revenues of $11,894 in
1997, $12,883 in 1998, $4,601 in 1999 and $4,601 in the nine months ended
December 31, 1998; and gross profit of $3,383 in 1997, $3,594 in 1998,
$1,028 in 1999 and $1,028 in the nine months ended December 31, 1998.
(3) The information set forth above excludes the effect of dividends
attributable to our Series A and Series B convertible preferred stock. Such
dividends, $1,665 in 1998, $718 in 1999 and $712 in the nine months ended
December 31, 1998, reflect the aggregate of cash dividends paid and the
value associated with the discount conversion feature provided with each
series of preferred stock. No shares of Series A or Series B convertible
preferred stock are currently outstanding.
(4) The as adjusted amounts reflect the sale by IntraNet Solutions of 2,305,000
shares of common stock in this offering, at an offering price of $46.00 per
share, after deducting the underwriting discount and estimated offering
expenses and the issuance of 140,000 shares of common stock included in this
offering, which shares were issued to selling shareholders upon the exercise
of stock options with exercise prices ranging from $0.20 to $6.56 per share.
See "Use of Proceeds" and "Capitalization."
5
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RISK FACTORS
This offering involves a high degree of risk. You should carefully consider
the risks and uncertainties described below and the other information in this
prospectus before deciding whether to invest in shares of our common stock. Any
of the following risks may cause our business, operating results and financial
condition to be materially adversely affected. This could cause the trading
price of our common stock to decline, and you may lose part or all of your
investment.
This prospectus also contains certain forward-looking statements that
involve risks and uncertainties. These statements relate to our future plans,
objectives, expectations and intentions. These statements may be identified by
the use of words such as "believes," "expects," "may," "will," "could,"
"should," "seeks," "pro forma," "as adjusted" or "anticipates," and similar
expressions. Our actual results could differ materially from those discussed in
these statements. Factors that could contribute to these differences include
those discussed below and elsewhere in this prospectus.
WE HAVE A LIMITED OPERATING HISTORY ON WHICH TO EVALUATE OUR PROSPECTS.
Significant sales of our Xpedio Content Management Suite, which includes
Xpedio Content Server, Xpedio Content Publisher and Xpedio Web Asset Management,
began following our acquisition of InfoAccess, Inc. in September 1999.
Accordingly, we have only a limited operating history in our current product
line on which you can base your evaluation of our business and prospects. In
addition, our prospects must be considered in light of the risks and
uncertainties encountered by companies in an early stage of development in new
and rapidly evolving markets. Many of these risks are discussed under the
subheadings below.
FLUCTUATIONS IN OUR OPERATING RESULTS MAY MAKE IT DIFFICULT TO PREDICT OUR
FUTURE PERFORMANCE.
Our revenues and operating results are difficult to predict and may
fluctuate significantly from quarter to quarter. If our quarterly revenues or
operating results fall below the expectations of investors or securities
analysts, the price of our common stock could fall substantially. A large part
of our sales typically occur in the last month of a quarter. If these sales were
delayed from one quarter to the next for any reason, our operating results could
fluctuate dramatically. In addition, our sales cycles may vary, 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 Web 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;
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- 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.
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 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.
POTENTIAL ACQUISITIONS MAY BE DIFFICULT TO COMPLETE OR TO INTEGRATE AND MAY
DIVERT MANAGEMENT'S ATTENTION.
We may seek to acquire or invest in businesses, products or technologies
that are complementary to our business. If we identify an appropriate
acquisition opportunity, we may be unable to negotiate favorable terms for that
acquisition, successfully finance the acquisition or integrate the new business
or products into our existing business and operations. In addition, the
negotiation of potential acquisitions and the integration of acquired businesses
or products may divert management time and resources from our existing business
and operations. To finance acquisitions, we may use a substantial portion of our
available cash, including proceeds of this offering, or we may issue additional
securities, which would cause dilution to our shareholders.
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 quarterly profitability (excluding expenses
incurred in connection with the acquisition of InfoAccess in the quarter ended
September 30, 1999). 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.
OUR SUCCESS DEPENDS ON OUR ABILITY TO SUCCESSFULLY INTEGRATE INFOACCESS, INC.
WITH OUR OPERATIONS.
On September 29, 1999, we acquired InfoAccess, Inc. 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,
the 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;
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- failure to retain the employees of InfoAccess;
- 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.
THE INTENSE COMPETITION IN OUR INDUSTRY MAY REDUCE OUR FUTURE SALES AND PROFITS.
The market for our products is highly competitive and is likely to become
more competitive. We may not be able to compete successfully in our chosen
marketplace, which may have a material adverse effect on our business, operating
results and financial condition. Additional competition may cause pricing
pressure, reduced sales and margins, or prevent our products from gaining and
sustaining market acceptance. Many of our current and potential competitors have
greater name recognition, access to larger customer bases, and substantially
more resources than we have. Competitors with greater resources than ours may be
able to respond more quickly than we can to new opportunities, changing
technology, product standards or customer requirements.
WE MAY HAVE DIFFICULTY MANAGING OUR GROWTH.
Any failure to properly manage our growth may have a material adverse
effect on our business, operating results and financial condition. The rapid
growth that we have experienced places significant challenges on our management,
administrative and operational resources. To properly manage this growth, we
must, among other things, implement and improve additional and existing
administrative, financial and operational systems, procedures and controls on a
timely basis. We will also need to expand our finance, administrative and
operations staff. We may not be able to complete the improvements to our
systems, 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.
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WE HAVE RELIED AND EXPECT TO CONTINUE TO RELY ON SALES OF OUR CONTENT MANAGEMENT
SOFTWARE PRODUCTS FOR OUR REVENUES.
We currently derive all of our revenues from product licenses and services
associated with our suite of content management software products. The market
for content management software products is new and rapidly evolving. We cannot
be certain that a viable market for our products will emerge, or if it does
emerge, that it will be sustainable. 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 software 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. 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.
OUR SUCCESS DEPENDS ON OUR ABILITY TO PROTECT OUR PROPRIETARY TECHNOLOGY.
If we are unable to protect our intellectual property, or incur significant
expense in doing so, our business, operating results and financial condition may
be materially adversely affected. Any steps we take to protect our intellectual
property may be inadequate, time consuming and expensive. We currently have no
patents or pending patent applications. Without significant patent or copyright
protection, we may be vulnerable to competitors who develop functionally
equivalent products. We may also be subject to claims that our current products
infringe on the intellectual property rights of others. Any such claim may have
a material adverse effect on our business, operating results and financial
condition.
We anticipate that software product developers will be increasingly subject
to infringement claims due to growth in the number of products and competitors
in our industry, and the overlap in functionality of products in different
industries. Any infringement claim, regardless of its merit, could be
time-consuming, expensive to defend, or require us to enter into royalty or
licensing agreements. Such royalty or licensing agreements may not be available
on commercially favorable terms, or at all. We are not currently involved in any
intellectual property litigation. However, we have been notified by a third
party that it believes our Xpedio mark infringes its proprietary rights. Due to
the early stage of this dispute, we are unable to assess the likelihood that an
infringement claim would be successful and we have not determined how we will
respond to this notification. If we are unable to defend our Xpedio mark, we may
be required to cease the use of this mark and to develop and adopt a new mark.
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. We have been issued
trademarks for the Intranet Solutions and Intra.doc! marks, and have applied for
trademark registration for the Xpedio mark.
We are not certain whether a trademark will be issued on the Xpedio mark.
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 a
trademark is issued on the Xpedio mark, we cannot be sure that the trademark
will prove valuable to us.
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OUR PRODUCTS MAY NOT BE COMPATIBLE WITH COMMERCIAL WEB BROWSERS AND OPERATING
SYSTEMS.
Our products utilize interfaces that are compatible with commercial Web
browsers. In addition, Xpedio is a server-based system written in Java that
functions in both Windows NT and UNIX environments. We must continually modify
our products to conform to commercial Web browsers and operating systems. If our
products were to become incompatible with commercial Web browsers and operating
systems, our business would be harmed. In addition, uncertainty related to the
timing and nature of product introductions or modifications by vendors of Web
browsers and operating systems may have a material adverse effect on our
business, operating results and financial condition.
WE COULD BE SUBJECT TO PRODUCT LIABILITY CLAIMS IF OUR PRODUCTS FAIL TO PERFORM
TO SPECIFICATIONS.
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. In addition, we could be subject to product
liability claims if our security features fail to prevent unauthorized third
parties from entering our customers' intranet, extranet or Internet Web sites.
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 spread by third parties 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.
FUTURE REGULATIONS COULD BE ADOPTED THAT RESTRICT OUR BUSINESS.
Federal, state or foreign agencies may adopt new legislation or regulations
governing the use and quality of Web content. We cannot predict if or how any
future laws or regulations would impact our business and operations. Even though
these laws and regulations may not apply to our business directly, they could
indirectly harm us to the extent that they impact our customers and potential
customers.
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;
- 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.
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OUR PERFORMANCE WILL DEPEND ON THE CONTINUING GROWTH AND ACCEPTANCE OF THE WEB.
Our products are designed to be used with intranets, extranets and the
Internet. 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 Web 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 Web 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 HAVE SIGNIFICANT INFLUENCE OVER INTRANET
SOLUTIONS.
Robert F. Olson, our President and Chief Executive Officer, will hold
approximately 13.5% of our outstanding common stock after the offering and the
sale of all 450,000 shares being offered by Mr. Olson. Accordingly, Mr. Olson
will be able to exercise significant control over the affairs of IntraNet
Solutions. Additionally, our directors and executive officers will beneficially
own approximately 16.8% of our common stock upon the completion of this
offering. These persons will have significant influence over IntraNet Solutions'
affairs, including approval of the acquisition or disposition of assets, future
issuances of common stock or other securities and the authorization of dividends
on our common stock. Our directors and executive officers could use their stock
ownership to delay, defer or prevent a change in control of IntraNet Solutions,
depriving shareholders of the opportunity to sell their stock at a price in
excess of the prevailing market price.
SUBSTANTIAL SALES OF OUR COMMON STOCK COULD ADVERSELY AFFECT OUR STOCK PRICE.
The sale, or availability for sale, of substantial quantities of our common
stock may have the effect of depressing its market price by potentially
introducing a large number of sellers into an already volatile market. In
addition, the sale of these shares could impair our ability to raise capital
through the sale of additional equity securities. Following the completion of
this offering approximately 19,895,000 shares of our common stock will be
outstanding, approximately 14,918,000 of which will be freely tradable. Another
approximately 3,381,000 shares will be eligible for sale to the public under
Rule 144 of the Securities Act of 1933. We have outstanding warrants to purchase
up to an aggregate of 765,371 shares of common stock, of which approximately
660,000 shares may be resold pursuant to currently effective registration
statements. After the exercise of stock options for 140,000 shares, which shares
are included in this offering, there will be 2,417,509 shares subject to
outstanding options and 884,983 additional shares available for new grants under
our stock option plans.
Our directors, officers and selling shareholders have executed lock-up
agreements that limit their ability to sell our common stock. These individuals
have agreed not to sell or otherwise dispose of an aggregate of approximately
4,050,000 shares of our common stock for a period of at least 90 days after the
date of this prospectus without the written approval of the underwriters. When
the lock-up agreements expire, these shares will become eligible for sale. Sales
of shares of our common stock by our directors and officers will be subject to
the volume, manner of sale and notice requirements of Rule 144.
MANAGEMENT HAS BROAD DISCRETION OVER THE USE OF PROCEEDS FROM THIS OFFERING.
We have not designated any of the net proceeds anticipated from this
offering for specific uses. Consequently, management will have considerable
discretion over the use of all net proceeds from the
11
<PAGE> 12
offering. You will not have the ability to evaluate the economic, financial or
other information on which we base our decisions on how to use the proceeds.
INVESTORS WILL EXPERIENCE IMMEDIATE AND SUBSTANTIAL DILUTION IN THE BOOK VALUE
OF THEIR INVESTMENT.
The price of shares included in this offering is expected to be
substantially higher than the book value per share of the shares of common stock
outstanding after completion of the offering. If you purchase common stock in
this offering, you will experience immediate dilution of approximately $39.11
per share, measured by the excess of the offering price of $46.00 per share over
the pro forma book value following the offering.
WE CAN ISSUE SHARES OF PREFERRED STOCK WITHOUT SHAREHOLDER APPROVAL, WHICH COULD
ADVERSELY AFFECT THE RIGHTS OF COMMON SHAREHOLDERS.
Our Articles of Incorporation permit us to establish the rights,
privileges, preferences and restrictions, including voting rights, of unissued
shares of our capital stock and to issue such shares without approval from our
shareholders. The rights of holders of our common stock may suffer as a result
of the rights granted to holders of preferred stock that may be issued in the
future. In addition, we could issue preferred stock to prevent a change in
control of IntraNet Solutions, depriving shareholders of an opportunity to sell
their stock at a price in excess of the prevailing market price.
CERTAIN PROVISIONS OF MINNESOTA LAW MAY MAKE A TAKEOVER OF INTRANET SOLUTIONS
DIFFICULT, DEPRIVING SHAREHOLDERS OF OPPORTUNITIES TO SELL SHARES AT
ABOVE-MARKET PRICES.
Certain provisions of Minnesota law may have the effect of discouraging
attempts to acquire IntraNet Solutions without the approval of our Board of
Directors. Consequently, our shareholders may lose opportunities to sell their
stock for a price in excess of the prevailing market price.
FORWARD-LOOKING STATEMENTS
The information contained in this prospectus contains forward-looking
statements within the meaning of Section 27A of the Securities Act of 1933 and
Section 21E of the Securities Exchange Act of 1934 that involve a number of
risks and uncertainties. Forward-looking statements can be identified by the use
of forward-looking terminology such as "believes," "expects," "may," "will,"
"could," "should," "seeks," "pro forma," "as adjusted" or "anticipates," or
other variations thereof, including their use in the negative, or by discussions
of strategies, plans or intentions. Such statements include but are not limited
to statements under the caption "Summary," "Risk Factors," "Use of Proceeds,"
"Management's Discussion and Analysis of Financial Condition and Results of
Operations," "Business" and elsewhere in this prospectus. A number of factors
could cause our results to differ materially from those anticipated by such
forward-looking statements, including those discussed under "Risk Factors."
In addition, such forward-looking statements necessarily depend on
assumptions and estimates that may prove to be incorrect. Although we believe
the assumptions and estimates reflected in such forward-looking statements are
reasonable, we cannot guarantee that our plans, intentions or expectations will
be achieved. The information contained in this prospectus, including the section
discussing risk factors, identifies important factors that could cause such
differences.
The cautionary statements made in this prospectus are intended to be
applicable to all related forward-looking statements wherever they appear in
this prospectus. We assume no obligation to update such forward-looking
statements or to update the reasons that actual results could differ materially
from those anticipated in such forward-looking statements.
12
<PAGE> 13
USE OF PROCEEDS
Based on an offering price of $46.00 per share, we estimate that the net
proceeds to IntraNet Solutions from the sale of the 2,305,000 shares of common
stock offered by us in this offering will be approximately $100.3 million after
deducting underwriting discounts and commissions and estimated offering
expenses, all of which are payable by IntraNet Solutions. If the underwriters'
over-allotment option is exercised in full, we estimate that our net proceeds
from this offering will be $128.5 million. We anticipate that the net proceeds
will be used for working capital and general corporate purposes. We may also use
a portion of the net proceeds to acquire or invest in businesses, technologies,
product lines or service offerings that are complementary to our business. We
have no present plans, understandings or commitments in this regard. As a
result, we will have significant discretion as to the use of the net proceeds.
Pending such use, we intend to invest the net proceeds in short-term,
interest-bearing, investment-grade securities.
We will not receive any proceeds from the sale of common stock by the
selling shareholders.
DIVIDEND POLICY
We have not paid cash dividends on our common stock for several years. We
anticipate that all of our earnings, if any, will be retained for development of
our business and we do not anticipate paying any cash dividends in the
foreseeable future.
PRICE RANGE OF COMMON STOCK
Our common stock is traded on the Nasdaq National Market under the symbol
INRS. The following table presents for the periods indicated, the range of high
and low closing sale prices for our common stock as reported on the Nasdaq
SmallCap Market and the Nasdaq National Market.
<TABLE>
<CAPTION>
HIGH LOW
----- -----
<S> <C> <C>
FISCAL YEAR ENDED MARCH 31, 1998:
First Quarter............................................... $5.00 $3.38
Second Quarter.............................................. 8.38 4.38
Third Quarter............................................... 8.25 3.63
Fourth Quarter.............................................. 7.13 5.13
FISCAL YEAR ENDED MARCH 31, 1999:
First Quarter............................................... 7.13 4.56
Second Quarter.............................................. 5.50 2.75
Third Quarter............................................... 6.06 3.00
Fourth Quarter.............................................. 8.25 4.81
FISCAL YEAR ENDING MARCH 31, 2000:
First Quarter............................................... 13.06 7.63
Second Quarter.............................................. 10.31 7.06
Third Quarter............................................... 37.38 9.06
Fourth Quarter (through March 9, 2000)...................... 48.13 28.75
</TABLE>
On March 9, 2000, the last reported sale price of our common stock was
$47.63 per share. We had 99 shareholders of record and an estimated 1,600
beneficial owners of our common stock as of March 3, 2000.
13
<PAGE> 14
CAPITALIZATION
The following table presents the capitalization of IntraNet Solutions as of
December 31, 1999 and as adjusted to reflect the issuance of 140,000 shares
included in this offering, which shares are issuable to selling shareholders
upon the exercise of stock options at exercise prices ranging from $0.20 to
$6.56 per share, and the sale of 2,305,000 shares of common stock offered by
IntraNet Solutions in this offering at an offering price of $46.00 per share and
the application of the estimated net proceeds from the sale of those shares. The
information presented below should be read in conjunction with the Consolidated
Financial Statements and related Notes and with "Management's Discussion and
Analysis of Financial Condition and Results of Operations" included elsewhere in
this prospectus.
<TABLE>
<CAPTION>
AS OF DECEMBER 31, 1999
-----------------------
ACTUAL AS ADJUSTED
-------- -----------
(IN THOUSANDS)
<S> <C> <C>
Long-term obligations, net of current maturities............ $ 4 $ 4
Shareholders' equity:
Capital stock, $0.01 par value, 50,000,000 shares
authorized; 26,277,422 undesignated
Common stock, $0.01 par value, 23,722,578 shares
designated, 17,449,698 shares issued and outstanding
(19,894,698 shares as adjusted(1)).................. 174 199
Additional paid-in capital................................ 49,538 150,397
Accumulated deficit....................................... (13,553) (13,553)
Unearned compensation..................................... (9) (9)
-------- --------
Total shareholders' equity.................................. 36,150 137,034
-------- --------
Total capitalization........................................ $ 36,154 $137,038
======== ========
</TABLE>
- -------------------------
(1) Excludes options outstanding on December 31, 1999 to purchase 2,417,509
shares of our common stock at a weighted average exercise price of $5.28 per
share, warrants outstanding on December 31, 1999 to purchase 765,371 shares
of our common stock at a weighted average exercise price of $3.74, and an
additional 884,983 shares of common stock reserved for issuance in
connection with future stock options and other awards under the 1994-1997
Stock Option Plan, the 1997 Director Stock Option Plan and the 1999 Employee
Stock Option and Compensation Plan.
14
<PAGE> 15
DILUTION
The pro forma net tangible book value of our common stock as of December
31, 1999 was $36.7 million, or $2.09 per share. Pro forma net tangible book
value per share represents the amount of our total tangible assets less total
liabilities, divided by the number of shares of common stock outstanding after
giving effect to the issuance to selling shareholders of 140,000 shares included
in this offering upon the exercise of stock options at exercise prices ranging
from $0.20 to $6.56 per share. After giving effect to our issuance and sale of
2,305,000 shares of common stock in this offering at an offering price of $46.00
per share and after deducting estimated underwriting discounts and commissions
and offering expenses, our pro forma net tangible book value as of December 31,
1999 would have been $137.0 million, or $6.89 per share. This represents an
immediate increase in pro forma net tangible book value of $4.80 per share to
existing shareholders and an immediate dilution of $39.11 per share to new
investors purchasing shares of common stock in the offering. The following table
illustrates this dilution:
<TABLE>
<S> <C> <C>
Offering price per share.................................... $46.00
Pro forma net tangible book value per share as of December
31, 1999............................................... $2.09
Increase per share attributable to new investors.......... 4.80
-----
Pro forma net tangible book value per share after this
offering.................................................. 6.89
------
Dilution per share to new investors......................... $39.11
======
</TABLE>
The table above assumes no exercise of any stock options or warrants
outstanding as of December 31, 1999, except for options to purchase 140,000
shares included in this offering. As of December 31, 1999, there were options
outstanding to purchase 2,417,509 shares of our common stock at a weighted
average exercise price of $5.28 per share (excluding options held by selling
shareholders to purchase 140,000 shares) and warrants outstanding to purchase
765,371 of our common stock at a weighted average exercise price of $3.74. To
the extent that any of these options or warrants are exercised, there will be
further dilution to new investors. See "Capitalization."
15
<PAGE> 16
SELECTED CONSOLIDATED FINANCIAL DATA
The Selected Consolidated Financial Data presented below for each of the
fiscal years in the three-year period ended March 31, 1999 and as of March 31,
1998 and 1999 have been derived from our audited Consolidated Financial
Statements included elsewhere in this prospectus. The Selected Consolidated
Financial Data presented below for each of the fiscal years ended March 31, 1995
and March 31, 1996 and as of March 31, 1995 and 1996 have been derived from our
Consolidated Financial Statements and the unaudited financial statements of
InfoAccess, Inc., a company we acquired in a pooling-of-interests transaction in
September 1999, and, in the opinion of management, include all material
adjustments (consisting of normal recurring adjustments) necessary for a fair
presentation of the financial condition and results of operations for such
periods. The Selected Consolidated Financial Data presented below for the nine
months ended December 31, 1998 and December 31, 1999 and as of December 31, 1999
are derived from our unaudited Consolidated Financial Statements included
elsewhere in this prospectus and, in the opinion of management, include all
material adjustments (consisting of normal recurring adjustments) necessary for
a fair presentation of the financial condition and results of operations for
such periods. Historical results are not necessarily indicative of future
results and the results for interim periods are not necessarily indicative of
results to be expected for the entire year. The Selected Consolidated Financial
Data should be read in conjunction with "Management's Discussion and Analysis of
Financial Condition and Results of Operations" and the Consolidated Financial
Statements and the related Notes included elsewhere in this prospectus.
<TABLE>
<CAPTION>
NINE MONTHS
ENDED
YEAR ENDED MARCH 31, DECEMBER 31,
----------------------------------------------- -----------------
1995 1996 1997 1998 1999 1998 1999
------- ------- ------- ------- ------- ------- -------
(UNAUDITED) (UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C>
CONSOLIDATED STATEMENT
OF OPERATIONS DATA:
Revenues:
Product licenses................ $ 1,801 $ 1,184 $ 3,986 $ 4,501 $ 9,303 $ 6,165 $11,695
Services........................ 910 803 1,492 1,233 2,099 1,172 3,156
Hardware integration and
support...................... 9,754 12,721 15,277 16,477 5,629 5,629 --
------- ------- ------- ------- ------- ------- -------
Total revenues.................... 12,465 14,708 20,755 22,211 17,031 12,966 14,851
------- ------- ------- ------- ------- ------- -------
Cost of revenues:
Product licenses................ 196 209 489 482 811 616 1,235
Services........................ 411 261 523 797 1,229 704 1,533
Hardware integration and
support...................... 7,230 9,595 11,894 12,883 4,601 4,601 --
------- ------- ------- ------- ------- ------- -------
Total cost of revenues............ 7,837 10,065 12,906 14,162 6,641 5,921 2,768
------- ------- ------- ------- ------- ------- -------
Gross profit...................... 4,628 4,643 7,849 8,049 10,390 7,045 12,083
------- ------- ------- ------- ------- ------- -------
Operating expenses:
Sales and marketing............. 2,017 2,357 4,125 4,506 5,742 4,187 6,736
General and administrative...... 1,571 1,586 2,536 3,100 3,577 2,443 2,829
Research and development........ 793 918 1,937 2,196 2,214 1,609 1,879
Acquisition costs............... -- -- -- -- -- -- 1,972
------- ------- ------- ------- ------- ------- -------
Total operating expenses.......... 4,381 4,861 8,598 9,802 11,533 8,239 13,416
------- ------- ------- ------- ------- ------- -------
Income (loss) from operations..... 247 (218) (749) (1,753) (1,143) (1,194) (1,333)
</TABLE>
16
<PAGE> 17
<TABLE>
<CAPTION>
NINE MONTHS
ENDED
YEAR ENDED MARCH 31, DECEMBER 31,
----------------------------------------------- -----------------
1995 1996 1997 1998 1999 1998 1999
------- ------- ------- ------- ------- ------- -------
(UNAUDITED) (UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C>
CONSOLIDATED STATEMENT
OF OPERATIONS DATA (CONTINUED):
Other income (expense):
Gain on sale of hardware
integration unit............. -- -- -- -- 517 517 --
Interest income (expense) net... (72) (138) (98) (334) (212) (143) 774
Income tax benefit (expense).... (56) 46 -- -- -- -- --
------- ------- ------- ------- ------- ------- -------
Income (loss) from continuing
operations...................... 119 (310) (847) (2,087) (838) (820) (559)
Income (loss) on discontinued
operations...................... 16 (200) (2,560) (2,576) (521) (521) --
------- ------- ------- ------- ------- ------- -------
Net income (loss)................. 135 (510) (3,407) (4,663) (1,359) (1,341) (559)
Preferred stock dividends and
accretion....................... -- -- -- (1,665) (718) (712) --
------- ------- ------- ------- ------- ------- -------
Income (loss) attributable to
common shareholders............. $ 135 $ (510) $(3,407) $(6,328) $(2,077) $(2,053) $ (559)
======= ======= ======= ======= ======= ======= =======
Earnings per share -- basic and
diluted:
Loss from continuing
operations................... $ (0.01) $ (0.04) $ (0.11) $ (0.22) $ (0.08) $ (0.08) $ (0.04)
======= ======= ======= ======= ======= ======= =======
Net loss........................ $ (0.01) $ (0.07) $ (0.43) $ (0.50) $ (0.12) $ (0.12) $ (0.04)
======= ======= ======= ======= ======= ======= =======
Loss attributable to common
shareholders................. $ (0.01) $ (0.07) $ (0.43) $ (0.67) $ (0.19) $ (0.19) $ (0.04)
======= ======= ======= ======= ======= ======= =======
Weighted average common shares --
basic and diluted............... 10,199 7,324 7,980 9,422 11,151 10,742 15,859
</TABLE>
<TABLE>
<CAPTION>
AS OF MARCH 31,
------------------------------------------ AS OF DECEMBER 31,
1995 1996 1997 1998 1999 1999
------ ------ ------ ------ ------ ------------------
(UNAUDITED) (UNAUDITED)
CONSOLIDATED BALANCE SHEET DATA: (IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Cash and equivalents......... $ 442 $ 529 $ 946 $1,162 $2,177 $ 4,004
Short-term investments....... -- -- -- -- -- 25,224
Working capital (deficit).... 951 (431) (999) 232 3,713 33,918
Total assets................. 5,085 5,953 9,050 9,301 8,464 38,920
Long-term obligations, net of
current maturities........ 459 252 842 232 108 4
Total shareholders' equity... 1,354 593 744 1,613 4,719 36,150
</TABLE>
17
<PAGE> 18
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion and analysis should be read in conjunction with
"Selected Consolidated Financial Data" and our Consolidated Financial Statements
and related Notes included elsewhere in this prospectus. The discussion in this
prospectus contains forward-looking statements that involve risks and
uncertainties, such as statements of our plans, objectives, expectations and
intentions. The cautionary statements made in this prospectus should be read as
being applicable to all related forward-looking statements wherever they appear
in this prospectus. Our actual results could differ materially from those
discussed here. Factors that could cause or contribute to such differences
include those discussed in "Risk Factors," as well as those discussed elsewhere
in this prospectus.
OVERVIEW
IntraNet Solutions is a leading provider of Web content management
solutions for intranets, extranets and the Internet. The company responsible for
developing our current business was founded in 1990. In July 1996, it merged
with and into a publicly traded corporation, which was organized under Minnesota
law in November 1989. The name of the entity surviving this merger was changed
to IntraNet Solutions, Inc. Following the merger, our business included content
management software, on-demand publishing and hardware integration services.
Our experience in assisting organizations in managing their diverse
business information, such as CAD files, engineering schematics, design
specifications, audio and video clips, graphics and traditional documents, led
us to identify the need for a comprehensive and easily deployed solution for Web
content management. In fiscal 1997, we launched our first Web-based software
product. We incorporated Java server architecture into this product in January
1998 and released an enhanced enterprise-scaleable version in September 1998. In
order to focus our resources exclusively on developing and marketing Web 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
content management solutions. In September 1999, we acquired InfoAccess, Inc. in
a transaction accounted for as a pooling-of-interests. Following the
acquisition, we released the Xpedio Content Management Suite. The Xpedio Content
Management Suite combines proven features of our Web-based content management
solution with technology from InfoAccess that automatically converts content
from a source object to HTML or XML to publish a Web site.
Due to the pooling-of-interests transaction with InfoAccess, our "Summary
Consolidated Financial Data," "Selected Consolidated Financial Data," "Quarterly
Results" and Consolidated Financial Statements and related Notes, included
elsewhere in this prospectus, have been restated to include the operations of
InfoAccess in all periods presented. In addition, certain reclassifications have
been made to the categories of revenues and cost of revenues presented in our
1997 and 1998 financial statements to conform with the presentation used in the
1999 financial statements. These reclassifications had no effect on losses from
continuing operations or net losses as previously reported.
We currently derive all of our revenues from licenses of our software
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. Revenues for services
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
18
<PAGE> 19
a percentage of the product license fee. Clients purchasing maintenance
agreements receive product upgrades, Web-based technical support and telephone
hot-line support. We recognize revenues from maintenance agreements ratably over
the term of the agreement, typically one year.
Cost of revenues consists of technology royalties, costs to manufacture,
package and distribute our products and related documentation, as well as
personnel and other expenses related to providing services. Sales and marketing
expenses consist primarily of employee salaries, commissions, and costs
associated with marketing programs such as advertising, public relations and
trade shows. Research and development expenses consist primarily of salaries and
related costs associated with the development of new products, the enhancement
of existing products and the performance of quality assurance and documentation
activities. General and administrative expenses consist primarily of salaries
and other personnel-related costs for executive, financial, human resources,
information services and other administrative personnel, as well as legal,
accounting and insurance costs. Losses from discontinued operations consist
primarily of losses on the operations of our former on-demand publishing
distribution group and losses on the write-down and sale of its assets.
Since our inception, we have incurred substantial costs to develop our
technology and products, to recruit and train personnel for our sales and
marketing, research and development and services departments, and to establish
an administrative organization. As a result, we had an accumulated deficit of
$13.6 million at December 31, 1999. We anticipate that our operating expenses
will increase substantially in future quarters as we increase sales and
marketing operations, develop new distribution channels, fund greater levels of
research and development, broaden services and improve operational and financial
systems. In addition, our limited operating history makes it difficult for us to
predict future operating results. We cannot be certain that we will sustain
revenue growth or profitability.
RESULTS OF OPERATIONS -- THREE MONTHS ENDED DECEMBER 31, 1999 COMPARED TO THREE
MONTHS ENDED DECEMBER 31, 1998
REVENUES
Total revenues increased by $2.5 million, or 78%, to $5.8 million for the
three months ended December 31, 1999 from $3.3 million for the three months
ended December 31, 1998. The increase in revenues was attributable to the
expansion of our customer base, increased sales to existing customers and the
launch of our Xpedio Content Management Suite, which typically has a higher
sales price than our other products.
Product Licenses. Revenues for product licenses increased by $2.0 million,
or 71%, to $4.7 million for the three months ended December 31, 1999 from $2.7
million for the three months ended December 31, 1998. The increase in revenues
for product licenses was attributable to the expansion of our customer base,
increased sales to existing customers and the launch of our Xpedio Content
Management Suite.
Services. Revenues for services increased by $608,000, or 110%, to $1.2
million for the three months ended December 31, 1999 from $551,000 for the three
months ended December 31, 1998. The increase in revenues for services was
primarily attributable to revenues from maintenance contracts on a larger
installed base of products.
COST OF REVENUES AND GROSS PROFIT
Total cost of revenues increased by $480,000, or 80%, to $1.1 million for
the three months ended December 31, 1999 from $598,000 for the three months
ended December 31, 1998. Total cost of revenues as a percentage of total
revenues was 19% for the three months ended December 31, 1999 compared to 18%
for the three months ended December 31, 1998. Gross profit increased by
19
<PAGE> 20
$2.1 million, or 77%, to $4.8 million for the three months ended December 31,
1999 from $2.7 million for the three months ended December 31, 1998. Total gross
profit as a percentage of total revenues was 81% for the three months ended
December 31, 1999 compared to 82% for the three months ended December 31, 1998.
The increase in gross profit dollars was primarily due to increased revenues for
product licenses and services.
Product Licenses. Cost of revenues for product licenses increased by
$248,000, or 95%, to $510,000 for the three months ended December 31, 1999 from
$262,000 for the three months ended December 31, 1998. Gross profit as a
percentage of revenues for product licenses was 89% for the three months ended
December 31, 1999 compared to 90% for the three months ended December 31, 1998.
Services. Cost of revenues for services increased by $232,000, or 69%, to
$568,000 for the three months ended December 31, 1999 from $336,000 for the
three months ended December 31, 1998. Gross profit as a percentage of revenues
for services was 51% for the three months ended December 31, 1999 compared to
39% for the three months ended December 31, 1998. The increase in the gross
profit as a percentage of revenues for services was primarily due to increased
utilization of consulting services resources and a shift in the mix of revenues
for services to higher margin maintenance revenues from lower margin consulting
services.
OPERATING EXPENSES
Sales and Marketing. Sales and marketing expenses increased by $1.2
million, or 80%, to $2.7 million for the three months ended December 31, 1999
from $1.5 million for the three months ended December 31, 1998. Sales and
marketing expenses as a percentage of total revenues were 47% for the three
months ended December 31, 1999 compared to 46% for the three months ended
December 31, 1998. The increase in sales and marketing expense was primarily due
to increased staffing and marketing expenses for advertising, public relations
and trade shows.
General and Administrative. General and administrative expenses increased
by $148,000, or 16%, to $1.1 million for the three months ended December 31,
1999 from $904,000 for the three months ended December 31, 1998. General and
administrative expenses as a percentage of total revenues were 18% for the three
months ended December 31, 1999 compared to 28% for the three months ended
December 31, 1998. General and administrative expenses decreased as a percentage
of revenues due primarily to an increase in total revenues partially offset by
an increase in personnel expenses.
Research and Development. Research and development expenses increased by
$176,000, or 32%, to $731,000 for the three months ended December 31, 1999 from
$555,000 for the three months ended December 31, 1998. Research and development
expenses as a percentage of total revenues were 13% for the three months ended
December 31, 1999 compared to 17% for the three months ended December 31, 1998.
The decrease in research and development expenses as a percentage of total
revenues was primarily due to an increase in total revenues partially offset by
increases in staffing and related costs to support new products and product
enhancements.
OTHER INCOME (EXPENSE)
Interest income was $380,000 for the three months ended December 31, 1999
compared to interest expense of $64,000 for the three months ended December 31,
1998. Interest income for the three months ended December 31, 1999 was primarily
related to short-term investments purchased with the proceeds of our public
stock offering completed in June 1999. Interest expense for the three months
ended December 31, 1998 related primarily to our revolving line-of-credit.
20
<PAGE> 21
RESULTS OF OPERATIONS -- NINE MONTHS ENDED DECEMBER 31, 1999 COMPARED TO NINE
MONTHS ENDED DECEMBER 31, 1998
REVENUES
Total revenues increased by $1.9 million, or 15%, to $14.9 million for the
nine months ended December 31, 1999 from $13.0 million for the nine months ended
December 31, 1998. The increase in revenues was primarily attributable to the
expansion of our customer base, increased sales to existing customers and the
launch of our Xpedio Content Management Suite, which typically has a higher
sales price than our other products, partially offset by the sale of our
hardware integration business.
Product Licenses. Revenues for product licenses increased by $5.5 million,
or 90%, to $11.7 million for the nine months ended December 31, 1999 from $6.2
million for the nine months ended December 31, 1998. The increase in revenues
for product licenses was primarily attributable to the expansion of our customer
base, increased sales to existing customers and the launch of our Xpedio Content
Management Suite.
Services. Revenues for services increased by $2.0 million, or 169%, to $3.2
million for the nine months ended December 31, 1999 from $1.2 million for the
nine months ended December 31, 1998. The increase in revenues for services was
primarily attributable to revenues from maintenance contracts on a larger
installed base of products.
Hardware Integration and Support. There were no revenues for hardware
integration in the nine months ended December 31, 1999 compared to $5.6 million
in revenues for hardware integration for the nine months ended December 31,
1998. We sold our hardware integration business during the quarter ended
September 30, 1998.
COST OF REVENUES AND GROSS PROFIT
Total cost of revenues decreased by $3.2 million, or 53%, to $2.8 million
for the nine months ended December 31, 1999 from $5.9 million for the nine
months ended December 31, 1998. Total cost of revenues as a percentage of total
revenues was 19% for the nine months ended December 31, 1999 compared to 46% for
the nine months ended December 31, 1998. Gross profit increased by $5.0 million,
or 72%, to $12.1 million for the nine months ended December 31, 1999 from $7.0
million for the nine months ended December 31, 1998. Total gross profit as a
percentage of total revenues was 81% for the nine months ended December 31, 1999
compared to 54% for the nine months ended December 31, 1998. The increase in
gross profit was primarily attributable to a shift in product mix from hardware
integration and support to software product licenses and services.
Product Licenses. Cost of revenues for product licenses increased by
$619,000, or 101%, to $1.2 million for the nine months ended December 31, 1999
from $616,000 for the nine months ended December 31, 1998. Gross profit as a
percentage of revenues for product licenses was 89% for the nine months ended
December 31, 1999 compared to 90% for the nine months ended December 31, 1998.
Services. Cost of revenues for services increased by $829,000, or 118%, to
$1.5 million for the nine months ended December 31, 1999 from $704,000 for the
nine months ended December 31, 1998. Gross profit as a percentage of revenues
for services was 51% for the nine months ended December 31, 1999 compared to 40%
for the nine months ended December 31, 1998. The increase in the gross profit as
a percentage of revenues for services was primarily due to increased utilization
of consulting services resources and a shift in the mix of revenues for services
to higher margin maintenance revenues from lower margin consulting services.
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<PAGE> 22
Hardware Integration and Support. There were no cost of revenues for
hardware integration and support in the nine months ended December 31, 1999
compared to $4.6 million in cost of revenues for hardware integration and
support for the nine months ended December 31, 1998. We sold our hardware
integration business during the quarter ended September 30, 1998.
OPERATING EXPENSES
Sales and Marketing. Sales and marketing expenses increased by $2.5
million, or 61%, to $6.7 million for the nine months ended December 31, 1999
from $4.2 million for the nine months ended December 31, 1998. Sales and
marketing expenses as a percentage of total revenues were 45% for the nine
months ended December 31, 1999 compared to 32% for the nine months ended
December 31, 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. 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 $386,000, or 16%, to $2.8 million for the nine months ended December 31, 1999
from $2.4 million for the nine months ended December 31, 1998. General and
administrative expenses as a percentage of total revenues were 19% for both the
nine months ended December 31, 1999 and the nine months ended December 31, 1998.
General and administrative increased primarily due to increased personnel
expenses.
Research and Development. Research and development expenses increased by
$270,000, or 17%, to $1.9 million for the nine months ended December 31, 1999
from $1.6 million for the nine months ended December 31, 1998. Research and
development expenses as a percentage of total revenues were 13% for the nine
months ended December 31, 1999 compared to 12% for the nine months ended
December 31, 1998. The increase in research and development expenses was
primarily due to increased staffing and costs related to product enhancements,
partially offset by decreased expenses related to our hardware integration
operations.
Acquisition Costs. Acquisition costs of $2.0 million in the nine months
ended December 31, 1999 consisted primarily of financial advisory, legal,
accounting and other costs related to our acquisition of InfoAccess, Inc. in
September 1999.
OTHER INCOME (EXPENSE)
Interest income was $774,000 for the nine months ended December 31, 1999
compared to interest expense of $143,000 for the nine months ended December 31,
1998. Interest income for the nine months ended December 31, 1999 was primarily
related to short-term investments purchased with the proceeds of our public
stock offering completed in June 1999. Interest expense for the nine months
ended December 31, 1998 related primarily to our revolving line-of-credit.
DISCONTINUED OPERATIONS
Losses on discontinued operations of $521,000 for the nine months ended
December 31, 1998 consisted of losses on the operation and disposition of our
on-demand publishing operations, the final disposition of which occurred in June
1998.
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<PAGE> 23
RESULTS OF OPERATIONS -- FISCAL YEAR ENDED MARCH 31, 1999 COMPARED TO FISCAL
YEAR ENDED MARCH 31, 1998
REVENUES
Total revenues decreased by $5.2 million, or 23%, to $17.0 million for the
year ended March 31, 1999 from $22.2 million for the year ended March 31, 1998.
This decrease related primarily to the sale of our hardware integration
business, partially offset by increased revenues for product licenses of our Web
content management software.
Product Licenses. Revenues for product licenses, which related entirely to
our Web content management software, increased by $4.8 million, or 107%, to $9.3
million for the year ended March 31, 1999 from $4.5 million for the year ended
March 31, 1998. The growth in revenues for product licenses was attributable to
the expansion of our customer base and increased sales to existing customers.
Services. Revenues for services, which related entirely to services
associated with our Web content management software, increased by $866,000, or
70%, to $2.1 million for the year ended March 31, 1999 from $1.2 million for the
year ended March 31, 1998. The increase in revenues for services was primarily
attributable to a larger installed base of products.
Hardware Integration and Support. Revenues for hardware integration and
support decreased by $10.8 million, or 66%, to $5.6 million for the year ended
March 31, 1999 from $16.5 million for the year ended March 31, 1998. The
decrease in revenues for hardware integration was due to the sale of the
hardware integration business during the quarter ended September 30, 1998.
COST OF REVENUES AND GROSS PROFIT
Total cost of revenues decreased by $7.5 million, or 53%, to $6.7 million
for the year ended March 31, 1999 from $14.2 million for the year ended March
31, 1998. Total cost of revenues as a percentage of total revenues was 39% in
1999 compared to 64% in 1998. Gross profit increased by $2.3 million, or 29%, to
$10.4 million for the year ended March 31, 1999 from $8.0 million for the year
ended March 31, 1998. Total gross profit as a percentage of total revenues was
61% in 1999 compared to 36% in 1998. The increase in gross profit was primarily
attributable to a shift in product mix from hardware integration and support to
product licenses and services related to our Web content management software.
Product Licenses. Cost of revenues for product licenses, which related
entirely to our Web content management software, increased by $329,000, or 68%,
to $811,000 for the year ended March 31, 1999 from $482,000 for the year ended
March 31, 1998. Gross profit as a percentage of revenues for product licenses
was 91% for the year ended March 31, 1999 compared to 89% for the year ended
March 31, 1998.
Services. Cost of revenues for services, which related entirely to services
associated with our Web content management software, increased by $432,000, or
54%, to $1.2 million for the year ended March 31, 1999 from $797,000 for the
year ended March 31, 1998. Gross profit as a percentage of revenues for services
was 41% for the year ended March 31, 1999 compared to 35% for the year ended
March 31, 1998. The increase in gross profit as a percentage of revenues for
services was primarily due to increased utilization of consulting services
resources and a shift in the mix of revenues for services to higher margin
maintenance revenues from lower margin consulting services.
Hardware Integration and Support. Cost of revenues for hardware integration
and support decreased by $8.3 million, or 64%, to $4.6 million for the year
ended March 31, 1999 from $12.9 million for the year ended March 31, 1998. The
decrease in cost of revenues for hardware integration and support was due to the
sale of the hardware integration and support business during
23
<PAGE> 24
the quarter ended September 30, 1998. Gross profit as a percentage of hardware
integration revenues was 18% for the year ended March 31, 1999 compared to 22%
for the year ended March 31, 1998. The reduction in gross profit as a percentage
of hardware integration and support revenues was primarily attributable to
larger hardware integration projects with lower margins as well as to increased
competition.
OPERATING EXPENSES
Sales and Marketing. Sales and marketing expenses increased by $1.2
million, or 27%, to $5.7 million for the year ended March 31, 1999 from $4.5
million for the year ended March 31, 1998. Sales and marketing expenses as a
percentage of total revenues were 34% in 1999 compared to 20% in 1998. Sales and
marketing expenses increased as a percentage of total revenues primarily due to
decreased revenues for hardware integration and support, combined with increased
staffing and marketing expenses for advertising, public relations and trade
shows supporting our Web content management 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 $477,000, or 15%, to $3.6 million for the year ended March 31, 1999 from $3.1
million for the year ended March 31, 1998. General and administrative expenses
as a percentage of total revenues were 21% in 1999 compared to 14% in 1998.
General and administrative expenses increased primarily due to increased
personnel expenses, including hiring expenses, and increased expenses for
professional services.
Research and Development. Research and development expense remained
constant at $2.2 million for the year ended March 31, 1999 and the year ended
March 31, 1998. Research and development expenses as a percentage of total
revenues were 13% in 1999 compared to 10% in 1998.
OTHER INCOME (EXPENSE)
Other income was $305,000 for the year ended March 31, 1999 compared to
other expense of $334,000 for the year ended March 31, 1998. Other income in
1999 included a gain of $517,000 on the sale of the assets of our hardware
integration business unit, partially offset by net interest expense. Other
expense in 1998 consisted of interest expense on our revolving line of credit.
DISCONTINUED OPERATIONS
Loss on discontinued operations decreased by $2.0 million, or 80%, to
$521,000 for the year ended March 31, 1999 from $2.6 million for the year ended
March 31, 1998. The decreased losses on discontinued operations was primarily
due to 1999 including only a partial year of losses on discontinued operations,
while 1998 included a full year of losses. The loss in 1998 also includes an
adjustment of $750,000 to fully amortize goodwill associated with the
acquisition of a discontinued facility and the write-down of certain other
assets to their estimated net realizable value.
RESULTS OF OPERATIONS -- FISCAL YEAR ENDED MARCH 31, 1998 COMPARED TO FISCAL
YEAR ENDED MARCH 31, 1997
REVENUES
Total revenues increased by $1.5 million, or 7%, to $22.2 million for the
year ended March 31, 1998 from $20.8 million for the year ended March 31, 1997.
Product Licenses. Revenues for product licenses, which related entirely to
our Web content management software, increased by $515,000, or 13%, to $4.5
million for the year ended March 31, 1998 from $4.0 million for the year ended
March 31, 1997. The growth in revenues for product
24
<PAGE> 25
licenses was attributable to the expansion of our customer base and increased
sales to existing customers.
Services. Revenues for services decreased by $259,000, or 17%, to $1.2
million for the year ended March 31, 1998 from $1.5 million for the year ended
March 31, 1997. The decrease in revenues for services was primarily due to a
reduction in original equipment manufacturer, or OEM, business.
Hardware Integration and Support. Revenues for hardware integration and
support increased by $1.2 million, or 8%, to $16.5 million for the year ended
March 31, 1998 from $15.3 million for the year ended March 31, 1997. The
increase in hardware integration revenues was primarily due to the expansion of
our customer base and increased sales to existing customers.
COST OF REVENUES AND GROSS PROFIT
Total cost of revenues increased by $1.3 million, or 10%, to $14.2 million
for the year ended March 31, 1998 from $12.9 million for the year ended March
31, 1997. Total cost of revenues as a percentage of total revenues was 64% in
1998 compared to 62% in 1997. Gross profit increased by $200,000, or 3%, to $8.0
million for the year ended March 31, 1998 from $7.8 million for the year ended
March 31, 1997. Total gross profit as a percentage of total revenues was 36% in
1998 compared to 38% in 1997. The increase in gross profit was primarily
attributable to increased revenues from product licenses.
Product Licenses. Cost of revenues for product licenses, which related
entirely to our Web content management software, was $482,000 for the year ended
March 31, 1998 compared to $489,000 for the year ended March 31, 1997. Gross
profit as a percentage of product license revenues was 89% for the year ended
March 31, 1998, compared to 88% for the year ended March 31, 1997. The increase
in gross profit as a percentage of revenues was primarily attributable to a
change in product mix.
Services. Cost of revenues for services increased by $274,000, or 52%, to
$797,000 for the year ended March 31, 1998 from $523,000 for the year ended
March 31, 1997. Gross profit as a percentage of revenues for services was 35%
for the year ended March 31, 1998, compared to 65% for the year ended March 31,
1997. The decrease in gross profit as a percentage of revenues for services was
primarily due to a decreased utilization rate of consulting services resources
due to increased staffing levels and increased training for staff.
Hardware Integration and Support. Cost of revenues for hardware integration
and support increased by $1.0 million, or 8%, to $12.9 million for the year
ended March 31, 1998 from $11.9 million for the year ended March 31, 1997. Gross
profit as a percentage of hardware integration and support revenues was 22% for
the year ended March 31, 1998 compared to 22% for the year ended March 31, 1997.
OPERATING EXPENSES
Sales and Marketing. Sales and marketing expenses increased by $381,000, or
9%, to $4.5 million for the year ended March 31, 1998 from $4.1 million for the
year ended March 31, 1997. Sales and marketing expenses as a percentage of total
revenues remained constant at 20% in 1998 and 1997. The increase in the total
amount of sales and marketing expenses was primarily due to increases in
staffing and marketing expenses for advertising, public relations and trade
shows supporting our Intra.doc! suite of products partially offset by reduced
sales and marketing expense at our InfoAccess subsidiary.
General and Administrative. General and administrative expenses increased
$564,000, or 22%, to $3.1 million for the year ended March 31, 1998 from $2.5
million for the year ended March 31, 1997. General and administrative expenses
as a percentage of total revenues were 14% in 1998 compared to
25
<PAGE> 26
12% in 1997. The increase in general and administrative expenses corresponded
with the increase in revenues for the period.
Research and Development. Research and development expenses increased by
$259,000, or 13%, to $2.2 million for the year ended March 31, 1998 from $1.9
million for the year ended March 31, 1997. Research and development expenses as
a percentage of total revenue were 10% in 1998 compared to 9% in 1997.
OTHER INCOME (EXPENSE)
Other expense was $334,000 for the year ended March 31, 1998 compared to
other expense of $98,000 for the year ended March 31, 1997. The increase was
attributable to an increase in interest expense.
QUARTERLY RESULTS
The following tables present unaudited consolidated statements of
operations data both in absolute dollars and as a percentage of total revenues
for each of our last eight quarters. This data has been derived from unaudited
consolidated financial statements that have been prepared on the same basis as
the annual audited consolidated financial statements and, in our opinion,
include all normal recurring adjustments necessary for a fair presentation of
such information. These unaudited quarterly results should be read in
conjunction with the Consolidated Financial Statements and related Notes
appearing elsewhere in this prospectus. The consolidated results of operations
for any quarter are not necessarily indicative of the results for any future
period.
<TABLE>
<CAPTION>
THREE MONTHS ENDED
---------------------------------------------------------------------------------------
MAR. 31, JUNE 30, SEPT. 30, DEC. 31, MAR. 31, JUNE 30, SEPT. 30, DEC. 31,
1998 1998 1998 1998 1999 1999 1999 1999
-------- -------- --------- -------- -------- -------- --------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
CONSOLIDATED STATEMENT OF
OPERATIONS DATA:
Revenues:
Product licenses................ $ 1,577 $ 1,317 $ 2,115 $ 2,733 $ 3,138 $ 3,475 $ 3,549 $ 4,671
Services........................ 318 203 418 551 927 972 1,025 1,159
Hardware integration and
support....................... 3,519 3,215 2,414 -- -- -- -- --
------- ------- ------- ------- ------- ------- ------- -------
Total revenues.................... 5,414 4,735 4,947 3,284 4,065 4,447 4,574 5,830
------- ------- ------- ------- ------- ------- ------- -------
Cost of revenues:
Product licenses................ 202 211 143 262 195 324 401 510
Services........................ 222 135 233 336 525 412 553 568
Hardware integration and
support....................... 2,732 2,570 2,031 -- -- -- -- --
------- ------- ------- ------- ------- ------- ------- -------
Total cost of revenues............ 3,156 2,916 2,407 598 720 736 954 1,078
------- ------- ------- ------- ------- ------- ------- -------
Gross profit...................... 2,258 1,819 2,540 2,686 3,345 3,711 3,620 4,752
------- ------- ------- ------- ------- ------- ------- -------
Operating expenses:
Sales and marketing............. 1,360 1,148 1,517 1,522 1,555 1,941 2,054 2,741
General and administrative...... 770 668 871 904 1,134 914 863 1,052
Research and development........ 534 501 553 555 605 572 576 731
Acquisition costs............... -- -- -- -- -- -- 1,972 --
------- ------- ------- ------- ------- ------- ------- -------
Total operating expenses.......... 2,664 2,317 2,941 2,981 3,294 3,427 5,465 4,524
------- ------- ------- ------- ------- ------- ------- -------
Income (loss) from operations..... (406) (498) (401) (295) 51 284 (1,845) 228
Other income (expense):
Gain on sale of hardware
integration unit.............. -- -- 517 -- -- -- -- --
Interest income (expense),
net........................... (47) (7) (72) (64) (69) 33 361 380
------- ------- ------- ------- ------- ------- ------- -------
Income (loss) from continuing
operations...................... (453) (505) 44 (359) (18) 317 (1,484) 608
Loss on discontinued operations... (1,152) (521) -- -- -- -- -- --
------- ------- ------- ------- ------- ------- ------- -------
Net income (loss)................. (1,605) (1,026) 44 (359) (18) 317 (1,484) 608
Preferred stock dividends and
accretion....................... (45) (603) (29) (80) (6) -- -- --
------- ------- ------- ------- ------- ------- ------- -------
Income (loss) attributable to
common shareholders............. $(1,650) $(1,629) $ 15 $ (439) $ (24) $ 317 $(1,484) $ 608
======= ======= ======= ======= ======= ======= ======= =======
</TABLE>
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<TABLE>
<CAPTION>
THREE MONTHS ENDED
---------------------------------------------------------------------------------------
MAR. 31, JUNE 30, SEPT. 30, DEC. 31, MAR. 31, JUNE 30, SEPT. 30, DEC. 31,
1998 1998 1998 1998 1999 1999 1999 1999
-------- -------- --------- -------- -------- -------- --------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
AS A PERCENTAGE OF TOTAL REVENUES:
Revenues:
Product licenses................ 29.1% 27.8% 42.8% 83.2% 77.2% 78.1% 77.6% 80.1%
Services........................ 5.9 4.3 8.4 16.8 22.8 21.9 22.4 19.9
Hardware integration and
support....................... 65.0 67.9 48.8 -- -- -- -- --
------- ------- ------- ------- ------- ------- ------- -------
Total revenues.................... 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0
------- ------- ------- ------- ------- ------- ------- -------
Cost of revenues:
Product licenses................ 3.7 4.4 2.9 8.0 4.8 7.3 8.8 8.7
Services........................ 4.1 2.9 4.7 10.2 12.9 9.3 12.1 9.8
Hardware integration and
support....................... 50.5 54.3 41.1 -- -- -- -- --
------- ------- ------- ------- ------- ------- ------- -------
Total cost of revenues............ 58.3 61.6 48.7 18.2 17.7 16.6 20.9 18.5
------- ------- ------- ------- ------- ------- ------- -------
Gross profit...................... 41.7 38.4 51.3 81.8 82.3 83.4 79.1 81.5
------- ------- ------- ------- ------- ------- ------- -------
Operating expenses:
Sales and marketing............. 25.1 24.3 30.7 46.4 38.3 43.6 44.9 47.0
General and administrative...... 14.2 14.1 17.6 27.5 27.9 20.5 18.8 18.1
Research and development........ 9.9 10.6 11.2 16.9 14.9 12.9 12.6 12.5
Acquisition costs............... -- -- -- -- -- -- 43.1 --
------- ------- ------- ------- ------- ------- ------- -------
Total operating expenses.......... 49.2 49.0 59.5 90.8 81.1 77.0 119.4 77.6
------- ------- ------- ------- ------- ------- ------- -------
Income (loss) from operations..... (7.5) (10.6) (8.2) (9.0) 1.2 6.4 (40.3) 3.9
Other income (expense):
Gain on sale of hardware
integration unit.............. -- -- 10.5 -- -- -- -- --
Interest income (expense),
net........................... (0.9) (0.1) (1.4) (1.9) (1.7) 0.7 7.9 6.5
------- ------- ------- ------- ------- ------- ------- -------
Income (loss) from continuing
operations...................... (8.4) (10.7) 0.9 (10.9) (0.5) 7.1 (32.4) 10.4
Loss on discontinued operations... (21.3) (11.0) -- -- -- -- -- --
------- ------- ------- ------- ------- ------- ------- -------
Net income (loss)................. (29.7) (21.7) 0.9 (10.9) (0.5) 7.1 (32.4) 10.4
Preferred stock dividends and
accretion....................... (0.8) (12.7) (0.6) (2.5) (0.1) -- -- --
------- ------- ------- ------- ------- ------- ------- -------
Income (loss) attributable to
common shareholders............. (30.5)% (34.4)% 0.3% (13.4)% (0.6)% 7.1% (32.4)% 10.4%
======= ======= ======= ======= ======= ======= ======= =======
</TABLE>
Revenues. Revenues for product licenses and services, which are related
entirely to our Web-based content management software, have increased in each of
the quarters since its release, except for the quarter ended June 30, 1998. We
implemented a reorganization of our sales department during the quarter ended
June 30, 1998, which temporarily diverted the focus of the sales department,
leading to reduced sales in the quarter. A new version of our software was
launched during the quarter ended September 30, 1998, which included significant
improvements in the enterprise-scalability features of our software. This
launch, combined with the renewed efforts of our reorganized sales department,
generated a significant increase in revenues for product licenses in the quarter
ended September 30, 1998 through the quarter ended September 30, 1999. The
Xpedio Content Management Suite was launched in late September 1999. Sales of
Xpedio represented more than fifty-five percent of our revenues for product
licenses in the quarter ended December 31, 1999 and increased our average
transaction size for server licenses to approximately $100,000 during that
period.
Cost of Revenues and Gross Profit. Cost of revenues for product licenses
and services, which are related entirely to our Web content management software,
have increased in each of the quarters since its release, except for the quarter
ended June 30, 1998. The decrease in cost of revenues from the quarter ended
March 31, 1998 corresponds with the decrease in revenues experienced during the
same period. Total gross profit as a percentage of total revenues has generally
increased, on a quarter to quarter basis, from March 31, 1998 through December
31, 1998 as our product mix shifted away from hardware integration and support
to software product licenses and services. Total gross profits as a percentage
of total revenues was sharply higher in the five most recent quarters relative
to the three previous quarters because revenues in the five most recent quarters
related exclusively to sales of our Web-based content management products and
services.
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<PAGE> 28
As a result of our limited operating history, we cannot forecast operating
expenses based on historical results. Accordingly, we base our expenses in part
on projections of future revenues. Most of these expenses are fixed in the short
term, and we may not be able to quickly reduce spending if revenues are lower
than we have projected. Our ability to forecast accurately our quarterly
revenues is limited due to the sales cycle of our software products, which makes
it difficult to predict the quarter in which license sales will occur, and the
variability of client demand for professional services. We expect our business,
operating results and financial condition to be materially adversely affected if
revenues do not meet projections. We expect our revenues and operating results
may vary significantly from quarter to quarter. A number of factors are likely
to cause these variations, including:
- demand for our products and services;
- the timing of new product introductions and sales of our products and
services;
- unexpected delays in introducing new products and services;
- increased expenses, whether related to sales and marketing, research and
development or administration;
- changes in the rapidly evolving market for Web 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.
Accordingly, we believe that quarter-to-quarter comparisons of our
operating results are not necessarily meaningful. Investors should not rely on
the results of one quarter as an indication of future performance.
We plan to increase our operating expenses to expand sales and marketing
operations, develop new distribution channels, fund greater levels of research
and development, broaden services and support and improve operational and
financial systems. If our revenues do not increase along with these expenses,
our business, operating results and financial condition in a given quarter may
be materially adversely affected.
NET OPERATING LOSS CARRYFORWARDS
As of December 31, 1999, we had net operating loss carryforwards of
approximately $10.1 million. The net operating loss carryforwards will expire at
various dates beginning in 2011, if not utilized. The Tax Reform Act of 1986
imposes substantial restrictions on the utilization of net operating losses and
tax credits in the event of an "ownership change" of a corporation. Our ability
to utilize net operating loss carryforwards on an annual basis will be limited
as a result of "ownership changes" in connection with the sale of equity
securities. We have provided a full valuation allowance on the deferred tax
asset because of the uncertainty regarding its realization. Our accounting for
deferred taxes involves the evaluation of a number of factors concerning the
realizability of our deferred tax assets. In concluding that a full valuation
allowance was required, management considered such factors as our history of
operating losses, potential future losses and the nature of our
28
<PAGE> 29
deferred tax assets. See Note 11 to the Consolidated Financial Statements
included elsewhere in this prospectus.
LIQUIDITY AND CAPITAL RESOURCES
We have funded our operations and satisfied our capital expenditure
requirements primarily through revolving working capital and term loans from
banking institutions, private placements and public offerings of securities and
proceeds from the sales of assets related to prior lines of business. Net cash
used by operating activities was $2.2 million for the nine months ended December
31, 1999, compared to net cash used in operating activities of $931,000 for the
nine months ended December 31, 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 nine months ended December 31, 1999 and 1998 were $946,000
and $372,000, 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 December 31, 1999, we did not have
any material commitments for capital expenditures.
As of December 31, 1999, we had $4.0 million in cash and equivalents, $25.2
million in short-term investments and $33.9 million in working capital. Net cash
provided by financing activities was $30.8 million for the nine months ended
December 31, 1999 and $1.9 million for the nine months ended December 31, 1998.
In June 1999, we completed a public offering of our common stock that raised
approximately $23.5 million in proceeds, net of underwriting discounts and
offering costs of approximately $3.0 million. In July 1999, the underwriters
exercised their over-allotment option, raising additional net 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 together
with the proceeds of this offering will be sufficient to meet our working
capital requirements for the foreseeable future. After that time, we may require
additional funds to support our working capital requirements or for other
purposes and may seek to raise such additional funds through public or private
equity financings or from other sources. We cannot be certain that additional
financing will be available on terms favorable to us, or on any terms, or that
any additional financing will not be dilutive.
RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
We adopted the American Institute of Certified Public Accountants'
Statement of Position, or SOP, 97-2, Software Revenue Recognition, and SOP 98-4,
Deferral of the Effective Date of a Provision of SOP 97-2, Software Revenue
Recognition, as of April 1, 1998. SOP 97-2 and SOP 98-4 provide guidance for
recognizing revenue on software transactions and supersede SOP 91-1, Software
Revenue Recognition. The adoption of SOP 97-2 and SOP 98-4 did not have a
material effect on our consolidated financial statements.
In December 1998, the American Institute of Certified Public Accountants
issued SOP 98-9, Modification of SOP 97-2, Software Revenue Recognition With
Respect to Certain Transactions. SOP 98-9 amends SOP 98-4 to extend the deferral
of the application of certain passages of SOP 97-2 provided by SOP 98-4 through
fiscal years beginning on or before March 15, 1999. All other provisions of SOP
98-9 are effective for transactions entered into during fiscal years beginning
after March 15, 1999. We adopted SOP 98-9 on April 1, 1999. The adoption of SOP
98-9 did not have a material effect on our consolidated financial statements.
We adopted the American Institute of Certified Public Accountants' SOP
98-1, Accounting for the Costs of Computer Software Developed or Obtained for
Internal Use, on April 1, 1999. SOP 98-1
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establishes the accounting for costs of software products developed or purchased
for internal use, including when such costs should be capitalized. The adoption
of SOP 98-1 did not have a material effect on our consolidated financial
statements.
SFAS No. 133, Accounting for Derivative Instruments and Hedging Activities,
was issued in June 1998. We are not required to adopt SFAS No. 133 until April
1, 2001. We believe the adoption of SFAS No. 133 will not have a material effect
on our consolidated financial statements.
YEAR 2000 COMPLIANCE
The "Year 2000 issue" refers generally to the problems that some software
may have in determining the correct century. For example, software with
date-sensitive functions that are not Year 2000 compliant may not be able to
distinguish whether "00" means 1900 or 2000, which may result in system failures
or the creation of erroneous data.
We adopted a Year 2000 readiness program for the current versions of our
products prior to December 31, 1999. Our program included Year 2000 readiness
assessment and implementation of solutions to potential readiness issues.
Solutions included remediation, upgrading and replacement of certain product
versions, as well as validation testing, and contingency planning. We responded
to customer questions about prior versions of our products on a case-by-case
basis. We also tested the Year 2000 compliance of software obtained from third
parties that is incorporated into our products, and sought 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. 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. Because of the
unprecedented nature of such litigation, it is uncertain whether or to what
extent this may affect us. To date, we have received no reports of material Year
2000 problems with our products.
We also adopted a Year 2000 readiness program related to our internal
systems. Our internal systems include both our information technology, or IT,
and non-IT systems. Our readiness program included an assessment of our material
internal IT and non-IT systems, including both our own software products and
third-party software and hardware technology. To the extent that we were not
able to test the technology provided by third-party vendors, we sought
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 our internal IT and non-IT systems and arrival of 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 effects of the
Year 2000 on all of our customers. Our current and potential clients may incur
significant expenses related to the Year 2000 issue. If our clients were not
Year 2000 compliant, they may be incurring 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.
As a result, our business, operating results and financial condition may be
materially adversely affected. To date, we do not believe the Year 2000 issue
has had a material effect on demand for our products.
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We have funded our Year 2000 program from available cash and have not
separately accounted for these costs in the past. To date, we believe direct
costs for our Year 2000 program have not been material and have amounted to less
than $25,000. In addition, we have incurred expenses in amounts that are not
material associated with our salaried employees who have devoted some of their
time to our Year 2000 program. We may incur additional costs related to the Year
2000 program for unanticipated Year 2000 problems. We may experience material
problems and costs associated with Year 2000 compliance that may materially
adversely affect our business, operating results and financial condition.
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BUSINESS
OVERVIEW
IntraNet Solutions is a leading provider of Web content management
solutions for intranets, extranets and the Internet. Our Xpedio Content
Management Suite offers customers the ability to simplify and automate
management of Web content from all sources. We address an organization's complex
needs in publishing, updating and maintaining its Web sites by providing a
comprehensive solution that eliminates administrative bottlenecks and
automatically publishes content from native formats directly to the Web.
Xpedio gives every content contributor in an organization the ability to
automatically Web-publish content to Hypertext Markup Language (HTML) and
Extensible Markup Language (XML) Web sites from native desktop formats. Our
solution is based on open Web standards and Java server architecture and
integrates with an organization's existing security model. Xpedio keeps Web
content current and gives it the desired "look and feel," while maintaining the
source content in both Web and native formats. By allowing content contributors
to directly participate in the Web publishing process, Xpedio automates the
manual content conversion and publication tasks usually required of Webmasters.
This reduces errors, provides information more rapidly to users and allows
Webmasters to focus on site architecture and "look and feel" enhancements.
Our comprehensive solution, applicable across a wide variety of industries
and Web applications, enables organizations to effectively utilize their content
on the Web. Since our first Web-based software products were introduced in
fiscal 1997, they have been adopted by over 800 customers for use on one or more
of their intranet, extranet and Internet Web sites. Customer uses of our
products have ranged from single workgroups to enterprise-wide deployments. Our
customers include organizations such as British Aerospace Airbus, Ltd., Cargill
Incorporated, Ericsson Telecom AB, GE Capital Corporation and Hewlett-Packard
Company.
INDUSTRY BACKGROUND
EXPLOSIVE GROWTH OF THE INTERNET AND WEB CONTENT MANAGEMENT
As the rapid growth of the Internet has fundamentally changed the way that
businesses communicate and transact, Web content has increased dramatically in
both volume and importance. Web content, including graphics, audio and video
clips, hyperlinked text and executable software, is the basis for every Web page
and most e-commerce applications. International Data Corporation, or IDC,
estimates that the number of Web pages will grow from 925 million in 1998 to
13.1 billion in 2003. In addition, the overall market for business-to-business
software tools, which includes content management software, is projected to
reach approximately $40.0 billion by 2002, according to The Delphi Group. IDC
estimates that the worldwide market for content management and document
technology software will expand from $1.4 billion in 2000 to $2.8 billion in
2003.
RAPID ADOPTION OF CORPORATE INTRANETS AND EXTRANETS
Corporations are employing intranets and extranets in order to capitalize
on their investments in Web-based infrastructure by sharing computing resources
and facilitating communication. Intranets typically refer to secure Web-based
networks dedicated to an organization's employees, while extranets extend such
networks beyond an organization's "internal walls" to include suppliers,
vendors, partners, customers and other businesses. Intranets and extranets
utilize common Internet protocols and Web browsers to share information and
efficiently communicate among large numbers of users in the secure environment
of a private network.
Intranets provide multiple users the potential to securely and efficiently
access a wealth of data and up-to-date information in a wide variety of formats,
such as CAD files, engineering schematics,
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design specifications, audio and video clips, graphics and traditional
documents. Intranet usage has evolved beyond document access and internal
distribution of information to enable organizations to streamline, automate and
increase the productivity of everyday business processes in a wide variety of
applications. For example, at the corporate management level, the effective use
of intranets enables managers to have rapid and secure access to relevant
business data, leading to expeditious and well-informed decisions. Engineering
and manufacturing departments are also using intranets for ISO certification,
technical manual publication and quality assurance processes. Similarly,
intranets allow human resource departments to make real-time changes to policies
and procedures, perform full-text searches of resumes and facilitate
reimbursement of employee expenses.
Extranets expand intranet applications to enable organizations to
selectively share business-critical data with suppliers, vendors, partners,
customers and other businesses. Extranet applications are increasingly being
used to increase sales, cut costs and improve customer service and support.
Organizations are making large investments in these applications to create
meaningful and attractively presented content that conveys important information
to selected recipients. Extranets also provide a platform for e-commerce,
allowing businesses to efficiently execute business transactions over the
Internet.
NEED FOR COMPREHENSIVE WEB CONTENT MANAGEMENT SOLUTIONS
Many Web content management approaches target the collaborative model of
multiple Web developers manually converting content into Web formats and
publishing the content to large Internet Web sites. The limitations of these
content management systems are strongly evident in large organizations managing
multiple intranet or extranet Web sites. Many large corporations are attempting
to build and manage large numbers of business-to-business and intra-business Web
sites through manual conversion and publication of content with little process
oversight. The lack of resources makes HTML and XML conversion impractical. The
result is an inefficient environment with a lack of control over "look and
feel," outdated or untimely content and limited security. Large Internet Web
sites often have many different Web developers devoted to converting, publishing
and updating content in HTML or XML formats. However, this collaborative
approach is labor intensive and requires a great deal of oversight to ensure
consistency. In addition, even large organizations can not allocate the
necessary resources to avoid "Webmaster bottlenecks" caused by the continuous
manual coding and recoding required to make ongoing revisions to the vast amount
of information on their Web sites.
A Web content management solution should be able to meet a wide range of
needs by rapidly converting content into a Web-based format and by providing
consistent "look and feel," sophisticated security, dynamic updating and native
file management. It is critical that the integrity of the content on an
organization's intranet, extranet or Internet Web sites is constantly maintained
so that users are always utilizing the most current information. In addition,
any solution must provide scalability that allows it to effectively manage the
business-critical content for organizations with thousands of content
contributors who are often at dispersed locations. Most existing solutions
require significant human resources to address this complex range of problems.
The resulting increase in administrative needs has created delays in accessing,
publishing and managing Web content. Organizations are seeking a fast, efficient
and comprehensive means of publishing and utilizing their content in a Web
environment.
Management of Web content goes beyond HTML and XML pages to Active Server
Pages, or ASPs, PDF files, CAD files, engineering schematics, design
specifications, audio and video clips, graphics and traditional documents. Many
Web content management products do not provide an environment in which the
creation, approval, revision and release of all of these Web assets is fully
automated in one comprehensive content management system. The lack of a single
authority prevents implementation of sophisticated searching capabilities that
use meta data, or profiling information, to
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locate content by simultaneously searching multiple Web sites. Sophisticated
security is also problematic without a comprehensive system controlling access
to all of an organization's Web content across intranets, extranets and the
Internet.
Web content management solutions must provide a cost-effective and rapid
means of disseminating information to the Web for global organizations. An
effective Web content management solution must quickly publish accurate
information to the Web in the appropriate format and then dynamically update and
manage that information. The need for organizations to effectively leverage
intranets, extranets and the Internet presents a significant opportunity for a
cost-effective and comprehensive solution that enables organizations to easily
manage Web content.
OUR SOLUTION
Our solution to an organization's need for a cost-effective and
comprehensive means for managing Web content on intranets, extranets and the
Internet is the Xpedio Content Management Suite. Xpedio is a comprehensive
solution that allows customers to simplify and automate the Web management of
content from all sources. Xpedio enables automatic HTML and XML Web publication
by multiple content creators from native formats to a Web site with a consistent
"look and feel." Our solution is rapidly deployed, easily maintained and may be
configured to fit an organization's specific requirements.
Our solution has the following key benefits:
Comprehensive Solution. Xpedio provides a comprehensive solution to Web
content management needs. Our Web-based architecture utilizes the customer's
existing Internet infrastructure and provides a full range of content management
services without requiring customization. Our template-based Web publishing
technology allows customers to automatically publish well-designed and
consistent Web pages from diverse source objects. This technology also allows
customers to apply different templates to source content in order to publish all
or appropriate portions of it simultaneously to separate intranet, extranet and
Internet pages, each personalized for a specific audience. Xpedio has
enterprise-level security that integrates with the customer's existing security
framework in most cases. Attachment of meta data and security information,
authentication and replication of data, as well as updating and version control,
all have the capacity to occur automatically without the need to reconfigure
documents, thereby dramatically reducing administration by eliminating a number
of content handlers.
Scalable and Dynamic. Xpedio is a multi-tiered Web application consisting
of several independently scalable components: Xpedio Content Server, Xpedio
Content Publisher and the Web server that hosts the site. These components can
be scaled to meet the application requirements. As the volume of managed content
increases, it can be distributed across multiple Xpedio Content Servers. As the
number of Web sites being published increases, Xpedio Content Publishers can be
scaled to fit the organization's publication needs. Finally, as the amount and
frequency of information accessed by users increases, the Web servers can be
scaled appropriately. Performance is also enhanced by Xpedio's dynamic
management functions, including the ability to selectively retrieve, archive and
replicate content on an intranet, extranet or Internet site while performing
mass revisions of meta data. This allows users to quickly complete complex
reorganizations or consolidations of content. Xpedio provides dynamic
performance while minimizing costs and administration.
Easy to Install and Use. Our Xpedio solution has many features that make it
easy to install and use. Xpedio is an out-of-the box solution that can be
quickly deployed, often in a matter of days. Xpedio is a server-based product
that requires no client software other than a Web browser. Many customers can
implement Xpedio without any third-party consulting assistance. In addition, our
component level architecture and template-based publishing allow customers to
rapidly create
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a unique "look and feel" to Web sites. Once installed, Xpedio delivers Web
content access, publication and management to individual users through a
standard Web browser. This allows Xpedio to be utilized by all types of users in
organizations across diverse industries. Our automated solution enables users to
perform system administration, minimizing the involvement of information systems
departments.
Integrates with Existing Environment. Based on open Web standards, Xpedio
utilizes the existing Web infrastructure of a corporation, from Web servers,
databases and file servers to browsers. Our solution automates the publishing of
standard desktop applications, as well as CAD files, graphics and audio and
video clips. Xpedio's template-based conversion and publishing ability also
allows for easy creation of a consistent "look and feel" for Web content, in
HTML or XML. This is all accomplished in a secure environment that interacts
with the organization's existing security framework.
STRATEGY
Our objective is to enhance our position as a leading provider of
enterprise-scalable Web content management solutions. Key strategies to
achieving this objective include:
Expand Product Leadership. We will continue to focus on providing our
market-leading solution for Web content management across intranets, extranets
and the Internet. We believe that business managers prefer our solution because
it automates the management of Web content and enables direct content
contribution from the desktop. We also believe these individuals prefer our
solution because it is easier to deploy, more cost-effective, contains
sophisticated security features and utilizes an open Web-based architecture.
Xpedio can be used by organizations of nearly any size due to its scalability
and can be adopted to a wide range of content management needs because of its
modular design. These range from a complete content management solution to
supplying other applications and Web sites with managed content or Web
publishing capability. We will continue to develop both new features for our
existing products and new products to enable our customers to further leverage
their intranets and extranets, as well as the Internet.
Aggressively Penetrate Domestic and International Markets. We plan to
aggressively penetrate domestic and international markets for Web content
management solutions through the following avenues:
- Expand Direct Sales Channels. We will continue to expand our direct sales
force and sales support network to increase the rate of customer adoption
of our products in both the United States and internationally. We intend
to build world-class direct sales channels by adding high-quality direct
sales personnel and devoting increased resources to telemarketing and
pre-sales support services.
- Expand Indirect Sales Channels. To increase the distribution and
visibility of our products, we will continue to expand our indirect
channels through strategic alliances with resellers, OEMs, key systems
integrators and other channel partners in both domestic and international
markets. We believe that a multi-channel sales effort will broaden
customer awareness of our products and will allow us to more rapidly
reach a greater number of customers.
- Increase Penetration of Existing Customers. We intend to expand sales to
existing customers by increasing the direct sales and marketing efforts
targeted at these organizations. The cost-effectiveness of Xpedio allows
us to gain entry into an organization at the workgroup level while the
scalability of our solution and the ease with which it can be deployed
allows existing customers to quickly and efficiently increase the breadth
of their Xpedio use.
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Continue to Build Brand Awareness. We will continue to promote our brands
as synonymous with comprehensive, cost-effective solutions for Web content
management. In order to accelerate the acceptance and penetration of our brand,
we will continue our active public relations program, participate in trade shows
and conferences and advertise our products through traditional and on-line media
channels and our Web site. These efforts will focus on leveraging our reputation
with existing customers and product leadership to drive brand awareness in the
Web content management market.
Continue to Invest in Technology. We believe that the technical features of
Xpedio, including its open Web-based architecture, its enterprise-scalability
and the modularity of its feature sets, distinguish our products in the market.
We believe that our customers purchase our products based on their performance
characteristics and ability to rapidly solve problems encountered in the
management of Web sites. We feel that this reputation for performance will
facilitate the acceptance of enhancements and additional products into our
markets. In order to maintain our technological leadership, we will continue to
invest in research and development. We intend to focus our research and
development efforts on both enhancements to our existing solution and the
development of new products as the demands of our market evolve.
Expand Services Offerings. We have established successful relationships
with our customers by serving as a consultant in the development of their
content management systems and applications. We are expanding our services
capabilities in order to extend our range of services and more completely
address areas such as business strategy, project management and application
development. We believe that providing high-quality services will strengthen our
customer relationships and enhance our product development efforts.
PRODUCTS
XPEDIO CONTENT MANAGEMENT SUITE
The Xpedio Content Management Suite provides a cost-effective, powerful and
comprehensive Web content management solution for developing and managing
intranet, extranet and Internet Web sites. Xpedio integrates Web publishing with
source content management to effectively control the entire content management
lifecycle. This system is based upon open Web standards and utilizes an
organization's existing Internet infrastructure. Xpedio is quickly deployed and
provides sophisticated security mechanisms that integrate with mechanisms
already in place within our customers' organizations.
Xpedio automates the development, publishing and maintenance of intranet,
extranet and Internet Web sites. Xpedio automatically converts source content
into Web-based formats, which are then dynamically published to a secure Web
site on an intranet, extranet or the Internet. Xpedio's automatic process
converts content from its native format into either HTML, XML or PDF. When users
revise or add content to Xpedio, our system dynamically updates and manages the
Web site while maintaining the native file. Xpedio also provides sophisticated
security mechanisms that integrate with frameworks such as Windows NT domains
and Lightweight Directory Access Protocol, or LDAP, directories by mapping to
these security systems. This enables systems administrators to secure content
and control access while using an enterprise-level security standard. Security
can be assigned to workgroups, users, collections of content or individual Web
pages. Users maintain a single log on and password to access content no matter
how many levels of security are added within their workgroup or across their
enterprise.
The architecture of Xpedio enables easy installation and simplifies
administrative functions. Through a Web browser, systems administrators can
create Xpedio users and groups, set security options, create folders and
configure publishing parameters. The automatic nature of many Xpedio publishing
and management functions eliminates manual steps in these processes and
minimizes the
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number of content handlers. This increases efficiency and accuracy and makes
Xpedio a dynamic tool that provides the most current business-critical
information to an organization's Web sites.
The Xpedio Content Management Suite is comprised of Xpedio Content Server,
Xpedio Content Publisher and Xpedio Web Asset Manager.
Xpedio Content Server. Xpedio Content Server provides Xpedio's source
content repository and manages native files. Content Server enables content
revisions, release and expiration of specific content and the workflow
surrounding approval of source content. Individuals are able to contribute
content directly from desktop applications for Web publishing and management.
Content Server allows creators to convert content into either HTML or PDF
format. With its integrated search capability, individual users can search for
content within the Content Server using full-text or meta data searches, and
access either the native or Web version. Content Server Web-enables each piece
of content by providing a unique URL, or Web address, and file system location,
and provides a Web interface and an HTML interface to the content in the
repository.
Xpedio Content Publisher. Xpedio Content Publisher allows organizations to
further leverage the capabilities of Xpedio Content Server with dynamic Web
publishing ability. With Content Publisher, users can design and automatically
publish an HTML or XML Web site utilizing any Web standards. Content Publisher's
template-based technology allows automatic Web publication of content from
numerous native formats to HTML or XML, with a consistent treatment of layout,
navigation, behavior, colors and scripts. In addition, application of multiple
templates to a single piece of content allows the same Web content to be
personalized for several audiences. Content Publisher automatically creates
reference information, such as tables of contents, lists of figures and key word
indexes. These reference tools, as well as all hyperlinks, are automatically
updated when source content undergoes revisions.
Xpedio Web Asset Manager. Xpedio Web Asset Manager is a new product that
manages the Web assets of an organization and makes them available for use on
any Web site. Web assets include HTML pages, as well as images, PDF files,
scripts, video and audio clips, ASPs, and other forms of content. Lack of a
managed environment may result in difficulty in locating assets, improper use,
redundancy or use of expired or incorrect versions. Web Asset Manager is the
single authority that manages the contribution, approval, revision, archiving,
release and expiration of Web assets. All of these functions are performed while
making Web assets easy to locate for multiple users through meta-data driven
searches. Web Asset Manager can also version and archive entire Web sites which
can then be automatically recreated for future purposes.
INTRA.DOC! MANAGEMENT SYSTEM
Our Intra.doc! product line is a cost-effective suite of Web-based software
products for organizations requiring sophisticated content management without
the robust publishing capabilities of Xpedio. Intra.doc! is a modular solution
that can be configured for a project, workgroup or the entire enterprise. It
features the same scalability, ease of installation and use and flexible
architecture as Xpedio and additional Intra.doc! modules can easily be added as
an organization's needs evolve. These modules enhance such functions as
e-commerce sales of data and content, user profiling, archiving and replication
or conversion of paper-based legacy data into Web content. Intra.doc! provided
much of the underlying technology for the Xpedio Content Management Suite.
SERVICES
Our services organization provides solution-focused services that enable
our customers to realize the potential of our products in an open network
computing environment. We act as a business partner to our customers by
providing a broad spectrum of services, including needs assessment, software
integration, security analysis, application development and training. These
services are
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offered for fees, the amount of which depends on the nature and scope of the
project. We are currently focusing on expanding our consulting services to
increase our breadth of experience and geographic coverage.
TECHNOLOGY
We believe our advanced technology provides our customers with a
comprehensive solution for managing Web content across intranets, extranets and
the Internet in less time, at lower cost and with better results than existing
alternatives.
PRODUCT ARCHITECTURE
We believe that we have developed a unique and comprehensive architecture
for meeting the technical demands of applications designed for Web content
management through intranets, extranets and the Internet. By emphasizing open
Web standards, our products provide an efficient architecture for organizations
to build and deploy Web-publishing applications quickly and cost-effectively. We
believe this architecture also provides a strong foundation on which we can
deliver future products.
Web-based Solution. Our products are designed to seamlessly and efficiently
interface with Web browsers, eliminating the need to install additional client
software. Xpedio is a server-based system written in Java, enabling it to
function in both the Windows NT and UNIX environments. On the front end, our
products utilize interfaces that are compatible with the leading Web browsers.
Once the browser has been launched, users can automatically Web publish content,
search for content utilizing Verity's search engine or navigate to a Web page
and view authorized content via a standard browser, a plug-in or another viewing
application. In addition, each piece of content is automatically fully indexed
allowing for full-text searching through the Web browser. Xpedio also allows
contributors to dynamically update both the Web content and the native file
simultaneously. As Web architecture continues to evolve, our architecture
strategy is to continue to develop our products as Web content management
solutions that integrate seamlessly with an organization's existing intranet,
extranet and Internet infrastructure.
Content Conversion for Web-publishing. Content may be published to the Web
through the Xpedio Content Publisher or directly from the Xpedio Content Server.
When content is published through the Xpedio Content Publisher, user-established
project definition files determine where the content is published and how it
will look. The content is slotted into the appropriate pre-approved template,
converted to HTML or XML from its native format and published to the Web. When
content is published directly from the Xpedio Content Server, content is stored
in its native language, meta data is attached and the content is automatically
converted to a Web-based version without the formatting features available
through Xpedio Content Publisher. Because there is no application server,
content can be delivered very quickly, which eliminates consumer frustration
with long wait times.
Content Storage and Management. Xpedio stores data and content, including
text and graphics, in its native format in a repository and enables access and
management control features for this information. Utilizing a server-based
architecture, Xpedio can access and manage vast amounts of content across a
large number of intranet, extranet and Internet users in a geographically
dispersed environment. Depending upon the needs of the organization, this
storage can take place on a single server or across a large number of servers,
affording efficient scalability. As a content manager, Xpedio enables standard
library services such as check-in, check-out, version control and content
history. This allows users to rapidly and securely access content while
providing management functions.
Xpedio is a multi-tiered, server-based system that is written in Java. The
server layer contains all system processing logic and handles functions such as
content conversion and connection to the
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relational database. This relational database is used to store all content
profile information in the content repository. Published content is stored
directly on the Web server and all file transfers are via hypertext transfer
protocol, or HTTP. File access does not have to be processed with a common
gateway interface, or CGI, script, thereby reducing retrieval time. A security
plug-in is used on the server to reduce security complexity and speed
processing. The ability to use standard HTTP provides a number of significant
advantages such as the transfer of content through firewalls while using
standard compression, encryption and certificate servers. HTTP allows
organizations to keep their firewall configurations simple and secure.
The following diagram provides an overview of Xpedio's system architecture.
GRAPHIC DEPICTING ARCHITECTURE
The architecture of our products embodies the following concepts that make
them enterprise-scalable solutions that are easily deployable and can be
utilized by a wide range of customers:
- Ease of use and administration. Our products feature quick installation,
often in a matter of days, ease-of-use for individual users and simple
maintenance procedures for administrators. Xpedio's features automate
many tasks that are usually performed manually.
- Ease of integration. From inception, our products have been built on open
Web standards enabling seamless integration into existing corporate
environments. Our component architecture allows customers the ability to
integrate immediately with other system components. For example, our
compatibility with Windows NT domains and LDAP security frameworks allows
our customers to efficiently integrate NT or LDAP central security with
Xpedio to control and secure access to the content repository without
duplicating their efforts.
- Scalability. Our customers' business-critical information needs continue
to expand and evolve. Our understanding of the scaling of a customer's
future Web content management needs as volume and bandwidth increase
across an enterprise ensures that our customers' information investments
are protected and that they can continue to grow with our products.
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- Flexibility. With our open Web standards, multi-platform Java-based
solution, we offer customers the flexibility to address both current Web
content management problems and future needs utilizing their existing
Internet infrastructure.
We believe Xpedio is a comprehensive solution for organizations that
require rapid Web publishing and sophisticated management of their Web content
across intranets, extranets and the Internet. We believe that by fostering the
creation and adoption of automated Web content management, we will be able to
maintain and extend our technology leadership.
RESEARCH AND DEVELOPMENT
We have made substantial investments in research and development through
both internal development and technology acquisitions. The majority of our
recent research and development activity has been focused on developing our
Xpedio Content Management Suite. We expect to develop most of our technology
enhancements internally while continuing to evaluate externally developed
technologies for integration into our Xpedio product line.
In order to continue to provide product leadership in the Web content
management market, we intend to make major product releases each year. The
success of new introductions is dependent on several factors, including timely
completion and market introduction, differentiation of new products and
enhancements from those of our competitors and market acceptance of new products
and enhancements.
Our research and development expenditures for fiscal 1997, 1998 and 1999,
were approximately $1.9 million, $2.2 million and $2.2 million. For the first
nine months of fiscal 2000, our research and development expenditures were
approximately $1.9 million. We expect that we will continue to commit
significant resources to research and development in the future. All research
and development costs have been expensed as incurred.
The market for our products is characterized by rapid technological change,
frequent new product introductions and enhancements, evolving industry standards
and rapidly changing customer requirements. The introduction of products
incorporating new technologies and the emergence of new industry standards could
render existing products obsolete and unmarketable. Our future success will
depend in part on our ability to anticipate changes, enhance our current
products, develop and introduce new products that keep pace with technological
advancements and address the increasingly sophisticated needs of our customers.
We may not be successful in developing and marketing new products and
enhancements that respond to competitive and technological developments and
changing customer needs.
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CUSTOMERS
Our customer base has grown to over 800 customers representing a diverse
group of industries. Our customers range from small manufacturing firms to
Fortune 500 companies. Selected customers using Xpedio and Intra.doc! include:
AEROSPACE AND AIRLINE
AlliedSignal
Britannia Airways
British Aerospace Airbus
The Sabre Group
BANKING AND FINANCE
Cargill
Dean Witter Reynolds
Fidelity
GE Capital
GE Investments
ING Barings
KPMG
U.S. Bancorp Piper Jaffray
CONSUMER
Carlson Companies
Land O'Lakes
OfficeMax
Revlon
Target
GAS AND UTILITIES
Natural Gas Company of
Trinidad & Tobago
Sierra Pacific Power
Wisconsin Electric Power
GOVERNMENT AND EDUCATION
County of San Mateo, CA
Lawrence Livermore National Labs
Minnesota Department of
Transportation
Swiss Highway Authority
University of California
University of Minnesota
HEALTH CARE
Allina Health System
Guidant
Tufts Health Care
United Health Group
Wellmark Blue Cross Blue
Shield of Iowa
MANUFACTURING
Eaton
Ecolab
Fisher Controls
General Motors
Honeywell
Maytag
Toro
Toyota USA
TRW
Zilog
TECHNOLOGY
Agilent
Data General
Ericsson
Fujitsu
GTE Internetworking
Hewlett-Packard
IBM
Lucent Technologies
Rockwell Collins
Siemens Microelectronics
Sony
SPS Commerce
Synopsys
Xerox
SALES AND MARKETING
We market and sell our products using a combination of direct and indirect
distribution channels. Our primary distribution channel is our direct sales
force, which targets mid- and large-size organizations. Our sales approach
typically includes a technical systems evaluation performed by our pre-sales
personnel, followed by demonstrations of our products' capabilities and direct
negotiations with our sales staff. In addition, we have an internal
telemarketing operation that is responsible for customer prospecting, lead
generation and follow-up. These activities identify and develop leads for
further sales efforts by our direct sales force. As of December 31, 1999, we had
a worldwide total of 43 direct sales, sales support and marketing personnel. Our
goal is to increase both the number and geographic scope of our direct sales
force.
We also use indirect sales channels to increase the distribution and
visibility of our products through strategic alliances with resellers, OEMs, key
systems integrators and other channel partners in both domestic and
international markets. None of our distribution partners have exclusive
distribution rights.
We use a variety of marketing programs to build market awareness of our
brand name and our products, as well as to attract potential customers to our
products. A broad mix of programs is used to accomplish these goals, including
market research, product and strategy updates with industry analysts, public
relations activities, direct mail and relationship marketing programs, seminars,
trade shows, speaking engagements, Web site marketing and joint marketing
programs. Our marketing organization produces marketing materials in support of
sales to prospective customers that include
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<PAGE> 42
brochures, data sheets, white papers, presentations and demonstrations. Our
joint marketing and distribution partners include Adobe Systems, Inc. and
Verity, Inc. In addition, our Xpedio and Intra.doc! products incorporate Adobe
and Verity technology. Verity also sells our products using its own direct sales
force pursuant to a non-exclusive reseller agreement.
COMPETITION
The market for Web content management solutions is intensely competitive,
subject to rapid technological change and significantly affected by new product
introductions and other market activities of industry participants. We expect
competition to persist and intensify in the future. Our primary source of
competition is from Web content management products targeted at large Internet
Web sites, including those offered by companies such as Documentum, Inc.,
Interwoven, Inc. and Vignette Corporation. These products are oriented towards
large business-to-consumer Web sites with many collaborating Web developers.
Many of our competitors have longer operating histories and significantly
greater financial, technical, marketing and other resources than we do and thus
may be able to respond more quickly to new or changing opportunities,
technologies and customer requirements. Also, many current and potential
competitors have greater name recognition and access to larger customer bases
than we have. Such competitors may be able to undertake more extensive
promotional activities and offer more attractive terms to purchasers than we
can. In addition, current and potential competitors have established or may
establish cooperative relationships among themselves or with third parties to
enhance their products. Accordingly, it is possible that new competitors or
alliances among competitors may emerge and rapidly acquire significant market
share.
Competition in our market could materially and adversely affect our ability
to obtain revenues from software license fees from new or existing customers on
terms favorable to us. Further, competitive pressures may require us to reduce
the price of our software. In either case, we cannot be sure that we will be
able to compete successfully with existing or new competitors or that
competition will not have a material adverse effect on our business, operating
results and financial condition.
PROPRIETARY RIGHTS
We rely on a combination of copyright, trade secret, trademark,
confidentiality procedures and contractual provisions to protect our proprietary
rights. United States and international copyright laws provide limited
protections for our software, documentation and other written materials. We
license our products in object code format for limited use by customers. We
treat the source code for our products as a trade secret and we require all
employees and third-parties who need access to the source code to sign
non-disclosure agreements. We have registered the trademarks IntraNet Solutions
and Intra.doc!, in the United States and Canada and have applied for trademark
registration in the United States for the Xpedio mark.
Despite our efforts to protect our proprietary rights, unauthorized parties
may attempt to copy aspects of our products or to obtain and use information
that we regard as proprietary. Policing unauthorized use of our products is
difficult, and while we are unable to determine the extent to which piracy of
our software exists, software piracy can be expected to be a persistent problem.
Litigation may be necessary in the future to enforce our intellectual property
rights, to protect our trade secrets, to determine the validity and scope of the
proprietary rights of others or to defend against claims of infringement or
invalidity. However, the laws of many countries do not protect our proprietary
rights to as great an extent as do the laws of the United States. Any litigation
could result in substantial costs and diversion of resources and could have a
material adverse effect on our business, operating results and financial
condition. Our efforts to protect our proprietary rights may not be adequate or
our competitors may independently develop similar technology. Our failure to
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<PAGE> 43
meaningfully protect our property could have a material adverse effect on our
business, operating results and financial condition.
We have not received notice of any claims of infringement, except with
respect to our Xpedio mark as described below. We cannot be sure that third
parties will not make additional claims of infringement with respect to our
current or future products. We expect that developers of Web content management
products will increasingly be subject to infringement claims as the number of
products and competitors in our market grows and as the functionality of
products in different segments of the software industry increasingly overlaps.
Any claims, with or without merit, could be time consuming to defend, result in
costly litigation, divert management's attention and resources, cause product
shipment delays or require us to enter into royalty or licensing agreements.
Royalty or licensing agreements, if required, may not be available on terms
acceptable to us or at all. A successful claim of product infringement against
us and our failure or inability to license the infringed technology or develop
or license technology with comparable functionality could have a material
adverse effect on our business, operating results and financial condition.
We have been notified by a third party that it believes our Xpedio mark
infringes its trademark. Due to the early stage of this dispute, we are unable
to assess the likelihood that an infringement claim would be successful and we
have not determined how we will respond to this notification. If we are unable
to defend our Xpedio mark we may be required to cease the use of this mark and
to develop and adopt a new mark.
EMPLOYEES
As of December 31, 1999, we had 108 employees. Our future success will
depend in part on our ability to attract, retain, integrate and motivate highly
qualified sales, technical and management personnel, for whom competition is
intense. From time to time we also employ independent contractors to support our
services, product development, sales and marketing departments. Our employees
are not represented by any collective bargaining unit, and we have never
experienced a work stoppage. We believe our relations with our employees are
good.
LEGAL PROCEEDINGS
We are not currently a party to any material legal proceedings.
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<PAGE> 44
MANAGEMENT
EXECUTIVE OFFICERS, DIRECTORS AND KEY PERSONNEL
The following table sets forth certain information with respect to each of
the executive officers, directors and other key personnel of IntraNet Solutions,
as of the date of this prospectus.
<TABLE>
<CAPTION>
NAME AGE POSITION
---- --- --------
<S> <C> <C>
Robert F. Olson...................... 43 President, Chief Executive Officer and Chairman of
the Board
Vernon J. Hanzlik.................... 41 Vice President, Sales
Gregg A. Waldon...................... 39 Chief Financial Officer, Treasurer, Secretary and
Director
Katherine W. Bloomfield.............. 46 Vice President, Consulting Services
W. James Culbertson.................. 42 Vice President, Research and Development, Bellevue
Thomas E. Freeman.................... 45 Vice President, World Wide Alternate Channels
Patricia H. Fukasawa................. 43 Vice President, Training and Administration
Frank A. Radichel.................... 49 Vice President, Research and Development
Daniel P. Ryan....................... 40 Vice President, Marketing and Business Development
Ronald E. Eibensteiner*.............. 49 Director
Kenneth H. Holec*.................... 45 Director
Steven C. Waldron*................... 52 Director
</TABLE>
- -------------------------
* Member of Audit Committee and Compensation Committee
ROBERT F. OLSON founded our business and has served as President, Chief
Executive Officer and Chairman of the Board of IntraNet Solutions and its
predecessor company since 1990. From 1987 to 1990, he served as the General
Manager of the Greatway Communications Division of Anderberg-Lund Printing
Company, an electronic publishing sales and service organization. Prior to that
time, Mr. Olson held management and marketing positions in several electronic
publishing service organizations.
VERNON J. HANZLIK has served as our Vice President, Sales since October
1999. He has been employed by IntraNet Solutions and its predecessor company
since 1991, serving as Vice President, Strategic Development from April 1999 to
October 1999 and as Vice President, Product Marketing from June 1996 to April
1999. Prior to that time, Mr. Hanzlik held marketing and application consulting
positions with Lee Data Corporation, a computer hardware manufacturer.
GREGG A. WALDON has served as our Chief Financial Officer, Treasurer and
Secretary, and as a director, since April 1999. From 1992 to April 1999, he held
various financial management positions with GalaGen Inc., a publicly traded
nutritional ingredients company, where he served as Chief Financial Officer
since November 1994. Prior to that time, Mr. Waldon was employed by
PricewaterhouseCoopers LLP.
KATHERINE W. BLOOMFIELD has served as our Vice President, Consulting
Services since October 1998. From June 1997 to October 1998, she was a
consultant with PricewaterhouseCoopers LLP specializing in data warehousing and
the Internet. From August 1994 to June 1997, Ms. Bloomfield was a director of
professional services for Apertus Technologies Incorporated, a developer of
systems integration software. From 1992 to July 1994, she was a Project Leader
for Siemens AG, a multinational electronics company.
W. JAMES CULBERTSON has served as our Vice President, Research and
Development, Bellevue since January 2000. From 1988 to January 2000, he served
as President of InfoAccess, Inc., a Web publishing software company that we
acquired in September 1999. Prior to 1988, he held marketing
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<PAGE> 45
management positions at Intel Corporation, a computer chip manufacturer and
Microrim, Inc., a software development company.
THOMAS E. FREEMAN has served as Vice President of World Wide Alternate
Channels since our acquisition of InfoAccess in September 1999. From September
1997 to September 1999, he served as Vice President of Sales and Marketing for
InfoAccess. Prior to that time, Mr. Freeman served as Vice President of Western
Operations for PC DOCS Group International Inc., a document management software
company.
PATRICIA H. FUKASAWA has served as our Vice President, Training and
Administration since July 1996. She has been employed by IntraNet Solutions and
its predecessor company since 1990 in various marketing positions. Prior to that
time, Ms. Fukasawa held various technical support positions with Honeywell Inc.,
a multinational technology products company, and Control Data Corporation, a
computer hardware manufacturer.
FRANK A. RADICHEL has served as our Vice President, Research and
Development since March 1995. From 1990 to March 1995, he served as CALS Project
Leader and Technical Architect for Alliant TechSystems Inc., a manufacturer of
aerospace and defense technologies. Prior to that time, Mr. Radichel held
various positions in the Test Equipment Design Department of Honeywell Inc.
DANIEL P. RYAN has served as our Vice President, Marketing and Business
Development since April 1999. From September 1997 to April 1999, he served as
Vice President of Marketing for Foglight Software, Inc., a developer of
enterprise performance management solutions, which was acquired by Quest
Software, Inc. From March 1995 to September 1997, Mr. Ryan served as Director of
Marketing for Compact Devices Inc., a developer of Internet application
software. Prior to that time, Mr. Ryan was employed by Sync Research Inc., a
developer of wide-area network access solutions, as its Director of Corporate
Marketing.
RONALD E. EIBENSTEINER has served as a director of IntraNet Solutions since
March 1996. He has been President of Wyncrest Capital, Inc., a venture capital
firm that he founded, since 1990. Mr. Eibensteiner is a director of OneLink
Communications, Inc., a company that specializes in transforming raw
telecommunications data into visual business intelligence.
KENNETH H. HOLEC has served as a director of IntraNet Solutions since
February 1998. He has been President and Chief Executive Officer of ShowCase
Corporation, a supplier of data warehousing systems, since November 1993. From
1985 to 1993, Mr. Holec served as President and Chief Executive Officer of
Lawson Associates, Inc., a developer of financial and human resource management
software products.
STEVEN C. WALDRON has served as a director of IntraNet Solutions since
February 1998. He has been President and Chief Executive Officer of SPS
Commerce, Inc., a provider of e-commerce software and transaction processing
services, since November 1997. From 1992 to March 1995, he was President of
Innovex, Inc., a diversified technology company. Prior to that time, Mr. Waldron
served as President and Chief Executive Officer of Norstan, Inc., a supplier of
telecommunications hardware and software, which he co-founded.
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<PAGE> 46
PRINCIPAL AND SELLING SHAREHOLDERS
The following table presents information regarding beneficial ownership of
our common stock as of December 31, 1999, held by each person known by us to be
the beneficial owner of more than 5% of our common stock, each executive
officer, each director, each selling shareholder and all executive officers and
directors as a group. The table also presents the same information as adjusted
to reflect the sale of shares offered hereby. In accordance with the rules of
the SEC, beneficial ownership includes the shares issuable pursuant to stock
options that are exercisable within 60 days of December 31, 1999. Shares
issuable pursuant to stock options are considered outstanding for computing the
percentage of the person holding the options but are not considered outstanding
for computing the percentage of any other person. The number of shares of common
stock outstanding after this offering includes the 2,305,000 shares of common
stock being offered for sale by us in this offering and the exercise of options
to purchase 140,000 shares of common stock and the sale of those shares in this
offering by selling shareholders. The percentage of beneficial ownership for the
following table is based on 17,449,698 shares of common stock outstanding as of
December 31, 1999 and 19,894,698 shares of common stock outstanding after the
completion of this offering, assuming no exercise of the underwriters'
over-allotment option. To our knowledge, except as indicated in the footnotes to
this table, the persons named in the table have sole voting and investment power
with respect to all shares of common stock.
<TABLE>
<CAPTION>
SHARES SHARES
BENEFICIALLY OWNED BENEFICIALLY OWNED
PRIOR TO THE OFFERING SHARES AFTER THE OFFERING
---------------------- BEING ----------------------
NAME AND ADDRESS OF BENEFICIAL OWNER NUMBER PERCENTAGE OFFERED NUMBER PERCENTAGE
------------------------------------ --------- ---------- ------- --------- ----------
<S> <C> <C> <C> <C> <C>
Robert F. Olson(1)...................... 3,150,764 18.0% 450,000 2,700,764 13.5%
Vernon J. Hanzlik(2).................... 217,791 1.2 100,000 117,791 *
Gregg A. Waldon......................... -- -- -- -- --
Daniel P. Ryan(2)....................... 40,000 * 40,000 -- --
Ronald E. Eibensteiner(3)............... 514,660 2.9 -- 514,660 2.6
Kenneth H. Holec(4)..................... 20,000 * -- 20,000 *
Steven C. Waldron(2).................... 20,000 * -- 20,000 *
Culbertson Family Trust dated February
2, 1996, as amended................... 156,150 * 35,000 121,150 *
W. James Culbertson(5).................. 903,223 5.1 600,000 303,223 1.5
Richard M. Dillhoff(6).................. 903,224 5.1 700,000 203,224 1.0
Thomas E. Freeman(7).................... 85,882 * 70,000 15,882 *
All directors and executive officers as
a group (6 persons)(8)................ 3,923,215 22.1 550,000 3,373,215 16.8
</TABLE>
- -------------------------
* Less than 1% of currently outstanding common stock.
(1) Includes 35,714 shares owned by Mr. Olson's spouse and 50,000 shares
issuable upon exercise of a warrant held by Mr. Olson's spouse. Mr. Olson
disclaimed beneficial ownership of the shares owned by, or issuable upon
exercise of the warrant held by, his spouse. The address for this
shareholder is c/o: IntraNet Solutions, Inc., 8091 Wallace Road, Eden
Prairie, Minnesota 55344.
(2) Represents shares issuable upon exercise of options.
(3) Includes 423,660 shares owned by an investment fund owned and managed by Mr.
Eibensteiner and 30,000 shares issuable upon exercise of options and
warrants owned by Mr. Eibensteiner.
(4) Includes 10,000 shares issuable upon the exercise of options owned by Mr.
Holec.
(5) Includes 122,470 shares issuable upon exercise of options owned by Mr.
Culbertson. The address for this shareholder is: c/o InfoAccess, Inc., 15821
Northeast Eighth Street # 200, Bellevue, Washington 98008.
(6) Includes 122,471 shares issuable upon exercise of options owned by Mr.
Dillhoff. The address for this shareholder is: c/o InfoAccess, Inc., 15821
Northeast Eighth Street # 200, Bellevue, Washington 98008. Mr. Dillhoff was
an executive officer of InfoAccess prior to our acquisition of that company.
(7) Includes 7,807 shares issuable upon exercise of options owned by Mr.
Freeman.
(8) Includes the shares issuable upon exercise of the options and warrants
described in the footnotes above held by Messrs. Olson, Hanzlik,
Eibensteiner, Holec and Waldron.
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<PAGE> 47
SHARES ELIGIBLE FOR FUTURE SALE
Upon completion of the offering, and after giving effect to the issuance of
140,000 shares included in the offering to selling shareholders upon the
exercise of outstanding options, 19,894,698 shares of common stock will be
outstanding. Of this amount, approximately 14,918,000 shares will be freely
tradable on the public market without restriction or further registration under
the Securities Act of 1933, by persons who are not deemed to be our affiliates
or acting as underwriters as those terms are defined in the Securities Act of
1933. The approximately 3,381,000 remaining shares of common stock are subject
to the resale limitations of Rule 144 of the Securities Act of 1933. Sales of
these securities must be registered under the Securities Act of 1933 or made in
accordance with an exemption from registration, such as Rule 144.
Rule 144 provides that if at least one year has elapsed since shares of
common stock that constitute "restricted securities" were last acquired from us
or our affiliates, the holder is generally entitled to sell, within any
three-month period, a number of shares that does not exceed the greater of 1% of
the shares of common stock then outstanding or the reported average weekly
trading volume of the common stock during the four calendar weeks immediately
preceding the date on which notice of the sale is sent to the SEC. Sales under
Rule 144 are subject to certain manner of sale restrictions, notice requirements
and availability of current public information concerning us. Rule 144 also
applies the previously described limitations to unregistered sales of our common
stock by our affiliates. A person who is not our affiliate during the three
months preceding the sale, generally may sell shares without regard to the
volume limitations, manner of sale provision, notice requirements or the
availability of public information concerning us, provided that at least two
years have elapsed since the shares were last acquired from us or our
affiliates.
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<PAGE> 48
UNDERWRITING
The underwriters named below, acting through their representatives, Dain
Rauscher Incorporated, U.S. Bancorp Piper Jaffray Inc., SoundView Technology
Group, Inc. and Craig-Hallum Capital Group, Inc. have severally agreed, subject
to the terms and conditions of the underwriting agreement, to purchase from us
and the selling shareholders the number of shares of common stock listed
opposite their names below. The underwriters are committed to purchase and pay
for all such shares if any are purchased, subject to the conditions stated in
the underwriting agreement.
<TABLE>
<CAPTION>
NAME OF UNDERWRITER NUMBER OF SHARES
------------------- ----------------
<S> <C>
Dain Rauscher Incorporated.................................. 2,042,500
U.S. Bancorp Piper Jaffray Inc.............................. 1,182,500
SoundView Technology Group, Inc............................. 860,000
Craig-Hallum Capital Group, Inc............................. 215,000
---------
Total.................................................. 4,300,000
=========
</TABLE>
The representatives have advised us and the selling shareholders that the
underwriters propose to offer the shares of common stock to the public at the
offering price set forth on the cover page of this prospectus and to certain
dealers at such price less a concession of not in excess of $1.38 per share, of
which $.10 may be reallowed to other dealers. After the public offering, the
public offering price, concession and reallowance to dealers may be reduced by
the representatives. No such reduction will change the amount of proceeds to be
received by us and the selling shareholders as set forth on the cover page of
this prospectus.
The underwriting agreement contains covenants of indemnity among the
underwriters, us, and the selling shareholders against civil liabilities,
including liabilities under the Securities Act of 1933 and liabilities arising
from breaches of representations and warranties contained in the underwriting
agreement.
We have granted to the underwriters an option to purchase up to 645,000
additional shares of common stock. The option may be exercised at any time up to
30 days after the date of this prospectus. The option entitles the underwriters
to purchase the additional shares of common stock at the same price per share as
the 4,300,000 shares being sold in this offering. If the underwriters exercise
the option, each of the underwriters must purchase approximately the same
percentage of additional shares from us that they purchased in the primary
offering. If purchased, the additional shares will be sold by the underwriters
on the same terms as those on which the 4,000,000 shares are being sold.
The price of the shares of common stock purchased by the underwriters will
be the public offering price set forth on the cover page of this prospectus less
the following underwriting discounts and commissions, to be paid by us and the
selling shareholders.
<TABLE>
<CAPTION>
TOTAL WITHOUT TOTAL WITH
PER SHARE OVER-ALLOTMENT OVER-ALLOTMENT
--------- -------------- --------------
<S> <C> <C> <C>
By IntraNet Solutions.............................. $2.30 $5,301,500 $6,785,000
By the selling shareholders........................ $2.30 $4,588,500 $4,588,500
</TABLE>
In September 1999, we engaged Dain Rauscher Incorporated for a minimum
period of twelve months to act as our exclusive financial advisor and to furnish
financial advisory and investment banking services to us with respect to
possible mergers, acquisitions or similar business combinations. Pursuant to the
engagement letter, we paid Dain Rauscher Incorporated customary fees for
financial advisory services rendered in connection with our acquisition of
InfoAccess, Inc.
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<PAGE> 49
Our officers and directors and the selling shareholders have agreed not to
sell, transfer, grant any third party the right to purchase, or otherwise
dispose of any shares of our common stock or other securities of ours that they
own or acquire, other than shares of common stock sold in this offering,
acquired in open market transactions or transferred by gift or will to immediate
family members, for a period of 90 days after the date of this prospectus
without the prior written consent of Dain Rauscher Incorporated. This 90-day
period is known as the lock-up period. The representatives may, without notice
and in their sole discretion, allow any officer or director to dispose of common
stock or other securities prior to the expiration of the lock-up period. There
are however, currently no agreements between the underwriters and any of our
officers or directors allowing such sales.
In addition, we have agreed that we will not issue, sell, offer to sell, or
otherwise dispose of any shares of our common stock or other securities issued
by us during the lock-up period without the prior consent of Dain Rauscher
Incorporated. This agreement does not include shares of common stock or other
securities issued pursuant to business acquisitions, offerings exempt from the
registration requirements of the Securities Act of 1933, employee stock option
plans, employee stock purchase plans, or common stock or other securities
outstanding on the date of this prospectus. However, we have agreed that
employee stock options issued during the lock-up period to our officers and
directors may not be exercised prior to the expiration of the lock-up period.
Any shares of common stock issued to our officers and directors during the
lock-up period pursuant to the exercise of stock options shall bear a
restrictive legend restricting the transfer of such shares during the lock-up
period.
A prospectus in electronic format is being made available on an Internet
Web site maintained by Wit SoundView's affiliate, Wit Capital Corporation. Other
than the prospectus in electronic format, the information on Wit Capital
Corporation's Web site and any information contained on any other Web site
maintained by Wit Capital Corporation is not part of this prospectus or the
registration statement of which this prospectus forms a part, has not been
approved and/or endorsed by us or any underwriter in its capacity as underwriter
and should not be relied upon by investors.
The underwriters have advised us that, in connection with this offering,
certain persons participating in this offering may engage in transactions that
may have the effect of stabilizing or maintaining the market price of the common
stock at a level above that which might otherwise prevail in the open market.
These transactions may include stabilizing bids, syndicate covering transactions
and the imposition of penalty bids. A "stabilizing bid" is a bid for or the
purchase of common stock on behalf of the underwriters for the purpose of
preventing or retarding a decline in the market price of the common stock. A
"syndicate covering transaction" is the bid for or the purchase of the common
stock on behalf of the underwriters to reduce a short position incurred by the
underwriters in connection with this offering. A "penalty bid" is an arrangement
permitting the representatives to reclaim the selling concession otherwise
accruing to an underwriter or syndicate member in connection with the offering
if the common stock originally sold by such underwriter or syndicate member is
purchased by the representatives in a syndicate covering transaction and has
therefore not been effectively placed by such underwriter or syndicate member.
The representatives have advised us that such transactions may be affected on
the Nasdaq National Market or otherwise and, if commenced, may be discontinued
at any time.
As permitted by Rule 103 under the Securities Exchange Act of 1934, certain
underwriters and selling group members, if any, that are market makers ("passive
market makers") in the common stock may make bids for or purchases of common
stock in the Nasdaq National Market until a stabilizing bid has been made. Rule
103 generally provides that: (1) a passive market maker's net daily purchases of
the common stock may not exceed 30% of its average daily trading volume in such
securities for the two full consecutive calendar months, or any 60 consecutive
days ending with the 10 days, immediately preceding the filing date of the
registration statement of which this prospectus forms a part; (2) a passive
market maker may not effect transactions or display bids for common
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<PAGE> 50
stock at a price that exceeds the highest independent bid for the common stock
by persons who are not passive market makers; and (3) bids made by passive
market makers must be identified as such.
WHERE YOU CAN FIND MORE INFORMATION
We file annual, quarterly and special reports, proxy statements and other
information with the Securities and Exchange Commission. Our SEC filings are
available to the public over the Internet at the SEC's Web site at
http://www.sec.gov. You may also read and copy any document we file with the SEC
at its Public Reference Room at 450 Fifth Street, N.W., Washington, D.C. 20549.
You can also obtain copies of the documents at prescribed rates by writing to
the Public Reference Section of the SEC at 450 Fifth Street, N.W., Washington,
D.C. 20549. Please call the SEC at 1-800-SEC-0330 for further information on the
operation of its Public Reference Room. Our SEC filings are also available at
the office of the National Association of Securities Dealers, Inc. For more
information on obtaining copies of our public filings at the National
Association of Securities Dealers, Inc., you should write to National
Association of Securities Dealers, Inc., 1735 K Street, N.W., Washington, D.C.
20006.
We have filed a registration statement on Form S-3 with the SEC under the
Securities Act of 1933 with respect to the shares of common stock offered by
this prospectus. This prospectus, which constitutes a part of the registration
statement, does not contain all of the information set forth in the registration
statement and its exhibits and schedules. We have omitted certain items in
accordance with the rules and regulations of the SEC. For further information
with respect to us and the common stock offered by this prospectus, please
reference the registration statement and its exhibits and schedules. Statements
contained in this prospectus regarding the contents of any contract or any other
document to which the prospectus makes reference are not necessarily complete.
In each instance, we advise you to refer to the copy of the contract or other
document filed as an exhibit to the registration statement. Each such statement
is qualified in all respects by this reference. Copies of the registration
statement, and its exhibits and schedules, may be inspected without charge at
the public reference facilities maintained by the SEC or obtained at prescribed
rates from the Public Reference Section of the SEC at the above addresses. The
registration statement can also be accessed through the SEC's Web site.
INCORPORATION BY REFERENCE
We "incorporate by reference" into this prospectus the information we file
with the SEC, which means that we can disclose important information to you by
referring you to those documents. The information incorporated by reference is
an important part of this prospectus and information that we file subsequently
with the SEC will automatically update this prospectus. We incorporate by
reference the documents listed below and any filings we make with the SEC under
Sections 13(a), 13(c), 14 or 15(d) of the Securities Exchange Act of 1934 after
the initial filing of the registration statement that contains this prospectus
and prior to the time that all the securities offered by this prospectus are
sold:
- Annual Report on Form 10-K for the year ended March 31, 1999 (including
information specifically incorporated by reference into our Form 10-K
from our 1999 Annual Report to Shareholders and our definitive Notice and
Proxy Statement for our 1999 Annual Meeting of Shareholders);
- Quarterly Reports on Form 10-Q for the quarters ended June 30, 1999,
September 30, 1999 and December 31, 1999;
- Current Report on Form 8-K dated September 16, 1999;
50
<PAGE> 51
- Current Report on Form 8-K, as amended, dated September 29, 1999; and
- the description of our common stock contained in the registration
statement on Form 8-A filed on January 28, 1992 and any amendment or
reports filed to update that description.
You may request a copy of these filings (other than an exhibit to a filing
unless that exhibit is specifically incorporated by reference into that filing)
at no cost, by writing to or telephoning us at the following address:
Mr. Gregg A. Waldon
Chief Financial Officer, Treasurer and Secretary
IntraNet Solutions, Inc.
8091 Wallace Road
Eden Prairie, Minnesota 55344
(612) 903-2000
You should rely only on the information incorporated by reference or
presented in this prospectus. We have not authorized anyone else to provide you
with different information. We are only offering these securities in states
where the offer is permitted. You should not assume that the information in this
prospectus is accurate as of any date other than the date on the cover page of
this prospectus.
LEGAL MATTERS
The legality of the issuance of the shares offered hereby will be passed
upon for us by Faegre & Benson LLP, Minneapolis, Minnesota. Members of Faegre &
Benson LLP own 2,000 shares of our common stock. Certain legal matters will be
passed upon for the underwriters by Dorsey & Whitney LLP, Minneapolis,
Minnesota.
EXPERTS
Our consolidated financial statements as of March 31, 1999 and March 31,
1998 and for the years then ended included in this prospectus have been audited
by Grant Thornton LLP, independent certified public accountants, as indicated in
their report thereon, and are included herein in reliance upon the authority of
said firm as experts in giving said report. Our consolidated financial
statements for the year ended March 31, 1997 were audited by Ernst & Young LLP,
independent auditors, as indicated in their report thereon, and are included
herein in reliance upon the authority of said firm as experts in giving said
report.
51
<PAGE> 52
INTRANET SOLUTIONS, INC.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<S> <C>
Report of Independent Certified Public Accountants -- Grant
Thornton LLP.............................................. F-2
Report of Independent Accountants -- Ernst & Young LLP...... F-3
Report of Independent Certified Public
Accountants -- InfoAccess -- Grant Thornton LLP........... F-4
Consolidated Balance Sheets as of March 31, 1998 and 1999
and December 31, 1999..................................... F-5
Consolidated Statements of Operations for the years ended
March 31, 1997, 1998 and 1999 and for the nine months
ended December 31, 1998 and 1999.......................... F-6
Consolidated Statements of Shareholders' Equity (Deficit)
for the years ended March 31, 1997, 1998 and 1999 and for
the nine months ended December 31, 1999................... F-7
Consolidated Statements of Cash Flows for the years ended
March 31, 1997, 1998 and 1999 and for the nine months
ended December 31, 1998 and 1999.......................... F-8
Notes to Consolidated Financial Statements.................. F-10
</TABLE>
F-1
<PAGE> 53
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
To the Board of Directors and Shareholders
IntraNet Solutions, Inc.
We have audited the accompanying consolidated balance sheets of IntraNet
Solutions, Inc. and subsidiaries as of March 31, 1999 and 1998, and the related
consolidated statements of operations, shareholders' equity (deficit) and cash
flows for each of the two years in the period ended March 31, 1999. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the consolidated financial position of IntraNet
Solutions, Inc. and subsidiaries as of March 31, 1999 and 1998 and the
consolidated results of their operations and their consolidated cash flows for
each of the two years in the period ended March 31, 1999 in conformity with
generally accepted accounting principles.
We previously audited and reported on the consolidated balance sheets of
IntraNet Solutions, Inc. and subsidiaries as of March 31, 1999 and 1998 and the
related statements of operations, shareholders' equity (deficit), and cash flows
for each of the two years in the period ended March 31, 1999, prior to their
restatement for a pooling of interests transaction which occurred in September
1999. The contribution of IntraNet Solutions, Inc. and subsidiaries to total
assets, revenues, and net loss represented 86 percent, 83 percent and 63 percent
of the respective related totals as of March 31, 1999 and 91 percent, 88 percent
and 78 percent as of March 31, 1998. Separate financial statements of the other
company included in the March 31, 1999 and March 31, 1998 restated consolidated
balance sheets and statements of operations and cash flows were audited and
reported on separately by us. We also audited the combination of the
accompanying consolidated balance sheets, statements of operations,
shareholders' equity and cash flows for the years ended March 31, 1999 and 1998,
after restatement for the September 1999 pooling of interests; in our opinion,
such consolidated statements have been properly combined on the basis described
in Note 1 of notes to consolidated financial statements.
/s/ GRANT THORNTON LLP
Minneapolis, Minnesota
April 14, 1999 (except for Note 1, as to which the date is September 29, 1999,
Note 7, as to which the date is July 1, 1999, and Note 14, as to which the date
is July 8, 1999)
F-2
<PAGE> 54
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Shareholders
IntraNet Solutions, Inc.
We have audited the consolidated statements of operations, shareholders'
equity, and cash flows of IntraNet Solutions, Inc. and subsidiaries for the year
ended March 31, 1997. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audit. We did not audit the 1997 financial
statements of InfoAccess, Inc., which statements reflect total revenues
constituting 22% of the related consolidated totals. Those statements were
audited by other auditors whose report has been furnished to us, and our
opinion, insofar as it relates to data included for InfoAccess, Inc., is based
solely on the report of the other auditors.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit and the report of other auditors provide a reasonable
basis for our opinion.
Since the date of completion of our audit of the accompanying consolidated
financial statements and initial issuance of our report thereon dated June 30,
1997, which report contained an explanatory paragraph regarding the Company's
ability to continue as a going concern, the Company, as discussed in Note 9, has
completed an issuance of its preferred stock and the exercise of stock options
and warrants resulting in net proceeds of $5,151,867 and $4,225,421 in 1998 and
1999, respectively. Therefore, the conditions that raised substantial doubt
about whether the Company will continue as a going concern no longer exist.
In our opinion, based on our audit and the report of other auditors, the
financial statements referred to above present fairly, in all material respects,
the consolidated results of operations and cash flows of IntraNet Solutions,
Inc. for the year ended March 31, 1997, in conformity with generally accepted
accounting principles.
/s/ Ernst & Young LLP
Minneapolis, Minnesota
June 30, 1997, except for Note 9, as to which the date is
April 28, 1999, and except for Note 1, as to which the date
is February 10, 2000
F-3
<PAGE> 55
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
Board of Directors
InfoAccess, Inc.
We have audited the balance sheets of InfoAccess, Inc. as of December 31,
1998 and 1997, and the related statements of operations, shareholders' equity
(deficit), and cash flows for each of the three years in the period ended
December 31, 1998 which are not contained herein. These financial statements are
the responsibility of the Company's management. Our responsibility is to express
an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of InfoAccess, Inc. as of
December 31, 1998 and 1997, and the results of its operations and its cash flows
for each of the three years in the period ended December 31, 1998 in conformity
with generally accepted accounting principles.
/s/ GRANT THORNTON LLP
Minneapolis, Minnesota
September 10, 1999 (except for note K to the financial statements not contained
herein as to which the date is September 29, 1999)
F-4
<PAGE> 56
INTRANET SOLUTIONS, INC.
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
MARCH 31,
------------------- DECEMBER 31,
1998 1999 1999
-------- -------- ------------
(UNAUDITED)
<S> <C> <C> <C>
ASSETS
Current assets:
Cash and equivalents.................................... $ 1,162 $ 2,177 $ 4,004
Short-term investments.................................. -- -- 25,224
Accounts receivable, net................................ 5,270 3,995 6,235
Current maturities of notes receivable.................. 62 114 97
Inventories............................................. 289 112 217
Prepaid royalties....................................... 308 392 440
Prepaid expenses........................................ 295 413 427
-------- -------- --------
Total current assets............................ 7,386 7,203 36,644
Notes receivable, net of current maturities............... 216 106 52
Property and equipment, net............................... 950 900 1,375
Software licenses, net accumulated amortization........... 16 236 176
Other assets.............................................. 24 19 673
Net assets of discontinued operations..................... 709 -- --
-------- -------- --------
$ 9,301 $ 8,464 $ 38,920
======== ======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Revolving credit facility and note payable.............. $ 2,246 $ 822 $ --
Current maturities of long-term obligations............. 714 222 176
Accounts payable........................................ 3,005 584 465
Deferred revenues....................................... 478 726 935
Commissions payable..................................... 182 256 494
Accrued expenses........................................ 529 880 656
-------- -------- --------
Total current liabilities....................... 7,154 3,490 2,726
Long-term obligations, net of current maturities.......... 232 108 4
Deferred revenue, net of current portion.................. 302 147 40
-------- -------- --------
Total liabilities............................... 7,688 3,745 2,770
-------- -------- --------
Commitments and contingencies
Shareholders' equity:
Capital stock, $0.01 par value, 25,000 shares authorized
at March 31, 1998 and 1999; 50,000 shares authorized
at December 31, 1999
Series A convertible preferred stock................. 2,004 334 --
Series B convertible preferred stock................. -- -- --
Common stock......................................... 102 124 174
Additional paid-in capital.............................. 10,768 17,509 49,538
Accumulated deficit..................................... (11,143) (13,223) (13,553)
Unearned compensation................................... (118) (25) (9)
-------- -------- --------
1,613 4,719 36,150
-------- -------- --------
$ 9,301 $ 8,464 $ 38,920
======== ======== ========
</TABLE>
The accompanying notes are an integral part of the financial statements.
F-5
<PAGE> 57
INTRANET SOLUTIONS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEAR ENDED MARCH 31, DECEMBER 31,
--------------------------- -----------------
1997 1998 1999 1998 1999
------- ------- ------- ------- -------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Revenues:
Product licenses.......................... $ 3,986 $ 4,501 $ 9,303 $ 6,165 $11,695
Services.................................. 1,492 1,233 2,099 1,172 3,156
Hardware integration and support.......... 15,277 16,477 5,629 5,629 --
------- ------- ------- ------- -------
Total revenues.............................. 20,755 22,211 17,031 12,966 14,851
------- ------- ------- ------- -------
Cost of revenues:
Product licenses.......................... 489 482 811 616 1,235
Services.................................. 523 797 1,229 704 1,533
Hardware integration and support.......... 11,894 12,883 4,601 4,601 --
------- ------- ------- ------- -------
Total cost of revenues...................... 12,906 14,162 6,641 5,921 2,768
------- ------- ------- ------- -------
Gross profit................................ 7,849 8,049 10,390 7,045 12,083
------- ------- ------- ------- -------
Operating expenses:
Sales and marketing....................... 4,125 4,506 5,742 4,187 6,736
General and administrative................ 2,536 3,100 3,577 2,443 2,829
Research and development.................. 1,937 2,196 2,214 1,609 1,879
Acquisition costs......................... -- -- -- -- 1,972
------- ------- ------- ------- -------
Total operating expenses.................... 8,598 9,802 11,533 8,239 13,416
------- ------- ------- ------- -------
Loss from operations........................ (749) (1,753) (1,143) (1,194) (1,333)
Other income (expense):
Gain on sale of hardware integration
unit................................... -- -- 517 517 --
Interest income (expense), net............ (98) (334) (212) (143) 774
------- ------- ------- ------- -------
Loss from continuing operations............. (847) (2,087) (838) (820) (559)
Discontinued operations:
Loss on sale of distribution group........ -- -- (111) (111) --
Loss from operations of distribution
group.................................. (2,560) (2,576) (410) (410) --
------- ------- ------- ------- -------
Net loss.................................... (3,407) (4,663) (1,359) (1,341) (559)
Preferred stock dividends and accretion..... -- (1,665) (718) (712) --
------- ------- ------- ------- -------
Loss attributable to common shareholders.... $(3,407) $(6,328) $(2,077) $(2,053) $ (559)
======= ======= ======= ======= =======
Loss per common share -- basic and diluted:
Continuing operations..................... $ (0.11) $ (0.22) $ (0.08) $ (0.08) $ (0.04)
Discontinued operations................... (0.32) (0.27) (0.05) (0.05) --
Net loss.................................. (0.43) (0.50) (0.12) (0.12) (0.04)
Loss attributable to common
shareholders........................... (0.43) (0.67) (0.19) (0.19) (0.04)
======= ======= ======= ======= =======
Weighted average common shares
outstanding............................... 7,980 9,422 11,151 10,742 15,859
======= ======= ======= ======= =======
</TABLE>
The accompanying notes are an integral part of the financial statements.
F-6
<PAGE> 58
INTRANET SOLUTIONS, INC.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (DEFICIT)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
SERIES A SERIES B
CONVERTIBLE CONVERTIBLE RETAINED
PREFERRED STOCK PREFERRED STOCK COMMON STOCK ADDITIONAL EARNINGS
---------------------- -------------------- --------------------- PAID-IN (ACCUMULATED
SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT CAPITAL DEFICIT)
-------- ----------- ------ ----------- ---------- -------- ---------- ------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance at April 1,
1996....................... -- $ -- -- $ -- 5,880 $ 59 $ 1,706 $ (1,162)
Grant of compensatory stock
options.................... -- -- -- -- -- -- 241 --
Exercise of stock options
and warrants............... -- -- -- -- 99 1 94 --
Stock option compensation
earned..................... -- -- -- -- -- -- -- --
Conversion of promissory notes... -- -- -- -- 158 2 548 --
Shares issued in reverse
acquisition................ -- -- -- -- 2,941 29 2,584 --
Common stock repurchased and
canceled................... -- -- -- -- (38) -- (28) (33)
Shares issued in conjunction
with acquisition........... -- -- -- -- 45 -- 350 --
Warrants issued in
conjunction with promissory
notes...................... -- -- -- -- -- -- 90 --
Other....................... -- -- -- -- -- -- -- (100)
Net loss.................... -- -- -- -- -- -- -- (3,407)
-------- ----------- ---- ----------- ---------- -------- ------- --------
Balance at March 31, 1997... -- -- -- -- 9,085 91 5,585 (4,702)
Exercise of stock options
and warrants............... -- -- -- -- 541 5 1,625 --
Conversion of promissory notes... -- -- -- -- 71 1 249 --
Issuance of convertible
preferred stock............ 800 3,562 -- -- -- -- -- --
Conversion of preferred
stock to common stock...... (350) (1,558) -- -- 472 4 1,554 --
Issuance of common stock.... -- -- -- -- 78 1 249 --
Record non-cash deemed
dividend................... -- (1,570) -- -- -- -- 1,570 --
Record deemed dividend
accretion.................. -- 1,570 -- -- -- -- -- (1,570)
Dividends paid on
convertible preferred
stock...................... -- -- -- -- -- -- -- (95)
Other....................... -- -- -- -- -- -- (64) (113)
Net loss.................... -- -- -- -- -- -- -- (4,663)
-------- ----------- ---- ----------- ---------- -------- ------- --------
Balance at March 31,
1998....................... 450 2,004 -- -- 10,247 102 10,768 (11,143)
Exercise of stock options
and warrants............... -- -- -- -- 343 4 1,378 --
Cancellation of compensatory
stock options.............. -- -- -- -- -- -- (91) --
Common stock repurchased and
canceled................... -- -- -- -- (1) -- (1) (3)
Issuance of common stock.... -- -- -- -- 29 -- 120 --
Issuance of warrants........ -- -- -- -- -- -- 200 --
Issuance of convertible
preferred stock............ -- -- -- 2,851 -- -- -- --
Conversion of preferred
stock to common stock...... (375) (1,670) -- (2,851) 1,832 18 4,503 --
Record non-cash deemed
dividend................... -- -- -- (570) -- -- 570 --
Record deemed dividend
accretion.................. -- -- -- 570 -- -- -- (570)
Dividends paid on
convertible preferred
stock...................... -- -- -- -- -- -- 14 (148)
Other....................... -- -- -- -- -- -- 48 --
Net loss.................... -- -- -- -- -- -- -- (1,359)
-------- ----------- ---- ----------- ---------- -------- ------- --------
Balance at March 31,
1999....................... 75 334 -- -- 12,450 124 17,509 (13,223)
Exercise of stock options
and warrants (unaudited)... -- -- -- -- 1,050 10 4,251 --
Issuance of common stock net
of costs of $2,980
(unaudited)................ -- -- -- -- 3,715 37 26,919 --
Conversion of preferred
stock to common
(unaudited)................ (75) (334) -- -- 101 1 333 --
Exercise of warrants
(unaudited)................ -- -- -- -- 156 2 498 --
Other (unaudited)........... -- -- -- -- (23) -- 28 229
Net loss (unaudited)........ -- -- -- -- -- -- -- (559)
-------- ----------- ---- ----------- ---------- -------- ------- --------
Balance at December 31, 1999
(unaudited)................ -- $ -- -- $ -- 17,449 $ 174 $49,538 $(13,553)
======== =========== ==== =========== ========== ======== ======= ========
<CAPTION>
TOTAL
SHAREHOLDERS'
UNEARNED EQUITY
COMPENSATION (DEFICIT)
------------ -------------
<S> <C> <C>
Balance at April 1,
1996....................... $(16) $ 587
Grant of compensatory stock
options.................... (241) --
Exercise of stock options
and warrants............... -- 95
Stock option compensation
earned..................... 26 26
Conversion of promissory not -- 550
Shares issued in reverse
acquisition................ -- 2,613
Common stock repurchased and
canceled................... -- (61)
Shares issued in conjunction
with acquisition........... -- 350
Warrants issued in
conjunction with promissory
notes...................... -- 90
Other....................... -- (100)
Net loss.................... -- (3,407)
---- -------
Balance at March 31, 1997... (231) 743
Exercise of stock options
and warrants............... -- 1,630
Conversion of promissory not -- 250
Issuance of convertible
preferred stock............ -- 3,562
Conversion of preferred
stock to common stock...... -- --
Issuance of common stock.... -- 250
Record non-cash deemed
dividend................... -- --
Record deemed dividend
accretion.................. -- --
Dividends paid on
convertible preferred
stock...................... -- (95)
Other....................... 113 (64)
Net loss.................... -- (4,663)
---- -------
Balance at March 31,
1998....................... (118) 1,613
Exercise of stock options
and warrants............... -- 1,382
Cancellation of compensatory
stock options.............. 91 --
Common stock repurchased and
canceled................... -- (4)
Issuance of common stock.... -- 120
Issuance of warrants........ -- 200
Issuance of convertible
preferred stock............ -- 2,851
Conversion of preferred
stock to common stock...... -- --
Record non-cash deemed
dividend................... -- --
Record deemed dividend
accretion.................. -- --
Dividends paid on
convertible preferred
stock...................... -- (134)
Other....................... 2 50
Net loss.................... -- (1,359)
---- -------
Balance at March 31,
1999....................... (25) 4,719
Exercise of stock options
and warrants (unaudited)... -- 4,261
Issuance of common stock net
of costs of $2,980
(unaudited)................ -- 26,956
Conversion of preferred
stock to common
(unaudited)................ -- --
Exercise of warrants
(unaudited)................ -- 500
Other (unaudited)........... 16 273
Net loss (unaudited)........ -- (559)
---- -------
Balance at December 31, 1999
(unaudited)................ $ (9) $36,150
==== =======
</TABLE>
The accompanying notes are an integral part of the financial statements.
F-7
<PAGE> 59
INTRANET SOLUTIONS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEAR ENDED MARCH 31, DECEMBER 31,
----------------------------- --------------------
1997 1998 1999 1998 1999
------- ------- ------- ------- ---------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Operating activities:
Net loss............................................ $(3,407) $(4,663) $(1,359) $(1,341) $ (559)
Adjustments to reconcile net loss to cash flows from
operating activities:
Depreciation and amortization................... 363 447 566 470 531
Gain on sale of hardware integration unit....... -- -- (517) (517) --
Non-cash special charges........................ 219 -- -- -- --
Discontinued operations......................... (868) 1,029 709 709 --
Changes in operating assets and liabilities..... (561) (1,343) (1,124) (306) (2,409)
Other........................................... 46 120 94 54 247
------- ------- ------- ------- ---------
Net cash flows used in operating activities......... (4,208) (4,410) (1,631) (931) (2,190)
------- ------- ------- ------- ---------
Investing activities:
Purchase of short-term investments.................. -- -- -- -- (148,518)
Maturities and sales of short-term investments...... -- -- -- -- 123,294
Proceeds from sale of the hardware integration
group, net of related expenses.................... -- -- 1,279 -- --
Proceeds from note receivable....................... 1,114 816 58 46 71
Purchases of software licenses...................... -- (14) (50) -- --
Purchases of fixed assets........................... (441) (456) (380) (372) (946)
Other............................................... -- -- -- -- (673)
------- ------- ------- ------- ---------
Net cash flows provided by (used in) investing
activities........................................ 673 346 907 (326) (26,772)
Financing activities:
Net advances (repayments) from revolving credit
facility.......................................... 701 509 (1,424) (600) (422)
Proceeds from long-term obligations................. 2,433 -- -- -- 100
Payments on long-term obligations................... (244) (1,331) (860) (884) (650)
Payments on other long-term liabilities............. -- (102) (62) -- --
Issuance of preferred stock......................... -- 3,521 2,851 2,853 --
Issuance of common stock............................ -- -- -- -- 26,956
Payment of dividends on preferred stock............. -- (95) (134) (129) --
Proceeds from stock options and warrants............ 95 1,880 1,381 620 4,761
Proceeds from reverse merger........................ 1,118 -- -- -- --
Other............................................... (169) (120) (13) 20 44
------- ------- ------- ------- ---------
Net cash flows provided by financing activities..... 3,934 4,262 1,739 1,880 30,789
------- ------- ------- ------- ---------
Net increase in cash................................ 399 198 1,015 623 1,827
Cash and equivalents, beginning of period............. 565 964 1,162 1,162 2,177
------- ------- ------- ------- ---------
Cash and equivalents, end of period................... $ 964 $ 1,162 $ 2,177 $ 1,785 $ 4,004
======= ======= ======= ======= =========
Supplemental disclosure of cash flows information:
Cash paid for interest.............................. $ 362 $ 351 $ 226 $ 88 $ 116
Cash paid for income taxes.......................... 1 7 7 5 8
Non-cash financing and investing activities:
Equipment acquired with capital lease obligation.... $ 328 $ -- $ 122 $ -- $ 26
Conversion of debt to common stock.................. -- 250 -- -- --
Conversion of debt to preferred stock............... -- 150 -- -- --
Common stock issued for royalties................... -- -- 120 120 --
Common stock issued on purchase of business......... 350 -- -- -- --
Note receivable from sale of discontinued
operations........................................ -- 278 -- -- --
Warrants issued as deferred financing costs......... -- -- 200 200 --
Capitalized software licenses payable related to
license agreement................................. -- -- 200 -- --
Sale of software license for prepaid royalties...... -- -- -- -- 300
Purchase of investment for software license......... -- -- -- -- 160
</TABLE>
F-8
<PAGE> 60
<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEAR ENDED MARCH 31, DECEMBER 31,
----------------------------- --------------------
1997 1998 1999 1998 1999
------- ------- ------- ------- ---------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Detail of changes in operating assets and liabilities:
Accounts receivable................................. $ (301) $(1,766) $ 1,065 $ 1,461 $ (2,240)
Inventories......................................... (64) 75 64 150 (105)
Prepaid expenses.................................... (480) (294) 14 (71) (61)
Accounts payable.................................... (276) 750 (2,421) (2,366) (119)
Accrued expenses and other liabilities.............. 560 (108) 154 520 116
------- ------- ------- ------- ---------
Net changes in operating assets and liabilities..... $ (561) $(1,343) $(1,124) $ (306) $ (2,409)
======= ======= ======= ======= =========
</TABLE>
The accompanying notes are an integral part of the financial statements.
F-9
<PAGE> 61
INTRANET SOLUTIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
1. NATURE OF THE BUSINESS AND BASIS OF PRESENTATION
IntraNet Solutions, Inc. (the Company) is a leading provider of Web-based
content management solutions for intranets, extranets and Internet applications.
The Company's customers are primarily located throughout the United States and
in Europe.
The accompanying consolidated financial statements have been prepared to
give effect to the merger between the Company and InfoAccess, Inc. (InfoAccess)
on September 29, 1999. The merger was accounted for as a pooling-of-interests,
and accordingly, the consolidated financial statements have been restated for
all periods presented as if InfoAccess and the Company had always been combined.
In recording the combination, the Company's consolidated statements of
operations for the years ended March 31, 1997, 1998, and 1999 have been combined
with InfoAccess' statements of operations for the years ended December 31, 1996,
1997, and 1998. The consolidated balance sheets of the Company as of March 31,
1998 and 1999 have been combined with the InfoAccess' balance sheets as of
December 31, 1997 and 1998. Net income of InfoAccess for the three months ended
March 31, 1999 of $213 has been included as an other addition in the
consolidated statements of shareholders' equity (deficit) for the nine months
ended December 31, 1999.
In connection with the merger, the former shareholders and option holders
of InfoAccess common stock received shares and options of IntraNet Solutions,
Inc. common stock at the rate of .31230 shares of IntraNet Solutions, Inc.
common stock for each share of InfoAccess common stock. The Company issued a
total of 1,803 shares of IntraNet Solutions, Inc. common stock in exchange for
all outstanding shares of InfoAccess common stock and reserved 377 shares of
common stock for issuance upon the exercise of InfoAccess options the Company
assumed pursuant to the merger agreement.
All costs associated with completion of this acquisition, approximately
$1,972, were expensed as incurred. Activity previously reported by the separate
companies and the combined amounts presented in these consolidated financial
statements are summarized below.
<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEAR ENDED MARCH 31, DECEMBER 31,
--------------------------- -----------------
1997 1998 1999 1998 1999
------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C>
Revenues:
IntraNet Solutions, Inc. ............. $16,191 $19,450 $14,058 $10,968 $11,711
InfoAccess............................ 4,564 2,761 2,973 1,998 3,140
------- ------- ------- ------- -------
Combined........................... $20,755 $22,211 $17,031 $12,966 $14,851
======= ======= ======= ======= =======
Net income (loss):
IntraNet Solutions, Inc. ............. $(3,748) $(3,655) $ (854) $ (876) $ (417)
InfoAccess............................ 341 (1,008) (505) (465) (142)
------- ------- ------- ------- -------
Combined........................... $(3,407) $(4,663) $(1,359) $(1,341) $ (559)
======= ======= ======= ======= =======
</TABLE>
F-10
<PAGE> 62
INTRANET SOLUTIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
MARCH 31,
----------------
1998 1999
------ ------
<S> <C> <C>
Total assets:
IntraNet Solutions, Inc................................... $8,456 $7,300
InfoAccess................................................ 845 1,164
------ ------
Combined............................................... $9,301 $8,464
====== ======
</TABLE>
The accompanying financial statements and related footnote data as of
December 31, 1999 and for the nine months ended December 31, 1998 and 1999 are
unaudited, but in the opinion of management include all adjustments (consisting
only of normal recurring adjustments) necessary for a fair presentation thereof.
The results of operations for the nine months ended December 31, 1998, and 1999
are not necessarily indicative of the results for the full year.
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 software products and related services. Product license revenue is
recognized when a purchase order has been received, the product has been
shipped, and no significant obligations remain related to implementation.
Services revenue consists of fees from consulting and maintenance. Consulting
services include needs assessment, software integration, security analysis,
application development and training. The Company bills consulting fees either
on a time and materials basis or on a fixed-price schedule. The Company's
clients typically purchase maintenance agreements annually, and the Company
prices maintenance agreements based on a percentage of the product license fee.
Clients purchasing maintenance agreements receive product upgrades, Web-based
technical support and telephone hot-line support. The Company recognizes revenue
from maintenance agreements ratably over the term of the agreement, typically
one year.
Customer advances and billed amounts due from customers in excess of
revenue recognized are recorded as deferred revenue.
The Company adopted Statement of Position (SOP) 97-2, Software Revenue
Recognition, and SOP 98-4, Deferral of the Effective Date of a Provision of SOP
97-2, Software Revenue Recognition, as of April 1, 1998. SOP 97-2 and SOP 98-4
provide guidance for recognizing revenue on software transactions and supersede
SOP 91-1, Software Revenue Recognition. The adoption of SOP 97-2 and SOP 98-4
did not have a material effect on the Company's consolidated financial
statements.
In December 1998, the American Institute of Certified Public Accountants
issued SOP 98-9 Modification of SOP 97-2, Software Revenue Recognition, With
Respect to Certain Transactions. For the Company, SOP 98-9 amends SOP 98-4 to
extend the deferral of the application of certain passages of SOP 97-2 provided
by SOP 98-4 through March 31, 1999. All other provisions of SOP 98-9 are
effective for transactions entered into after March 31, 1999. The Company
believes the adoption of SOP 98-9 will not have a material effect on its
consolidated financial statements.
F-11
<PAGE> 63
INTRANET SOLUTIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
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. The carrying value of the investments approximates their
estimated fair market value. As of December 31, 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.
Accounts Receivable: Accounts receivable is presented net of allowances of
$413, $315 and $373 as of March 31, 1998 and 1999 and December 31, 1999,
respectively. No customer has accounted for 10% or more of the Company's
revenues in the years ended March 31, 1997, 1998 and 1999 and nine months ended
December 31, 1998 and 1999. Credit is extended based on an evaluation of the
customer's financial condition and a cash deposit is generally not required. The
Company estimates its potential losses on trade receivables on an ongoing basis
and provides for anticipated losses in the period in which the revenues are
recognized. Credit losses have historically been within management's
expectations.
Inventories: Inventories, consisting primarily of computer software,
diskettes, manuals, and packaging materials, are valued at the lower of cost
(first-in, first-out) or market value.
Property and Equipment: Property and equipment, including leasehold
improvements, are recorded at cost. Depreciation is provided using the
straight-line method over the estimated useful lives of the assets, ranging from
three to seven years, or the life of the lease for leasehold improvements,
whichever is shorter. Maintenance, repairs and minor renewals are expensed when
incurred.
Software Licenses: The Company acquired various software licenses for use
in its products. The licenses are recorded at cost, and amortized over estimated
useful lives of three to five years. The Company periodically reviews the
expected useful lives and recoverability of these assets.
Software Development Costs: Software development costs have been accounted
for in accordance with Statement of Financial Accounting Standards (SFAS) No.
86, Accounting for the Costs of Computer Software to be Sold, Leased, or
Otherwise Marketed. Under SFAS No. 86 software development costs may be
capitalized once the technological feasibility of the project is established.
The amount of software development costs that may be capitalized is subject to
limitations based on the net realizable value of the potential product. To date,
the period between achieving technological feasibility of the Company's products
and the general availability of the products has been short. Software
development costs qualifying for capitalization have, consequently, been
immaterial. Accordingly, the Company has not capitalized any software
development costs and has instead charged all such costs to research and
development expense.
Advertising: The Company expenses the cost of advertising as it is
incurred. Advertising expense for the years ended March 31, 1997, 1998, and 1999
was $696, $900 and $903, respectively, and $575 and $908 for the nine months
ended December 31, 1998 and 1999.
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
F-12
<PAGE> 64
INTRANET SOLUTIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
dividing net income (loss) by the weighted average number of outstanding common
shares and common share equivalents relating to stock options, when dilutive.
For each of the years ended March 31, 1997, 1998 and 1999 and nine months ended
December 31, 1998 and 1999, the Company incurred net losses and therefore basic
and diluted per share amounts are the same. Common stock equivalent shares
consist of convertible preferred stock (using the if converted method) and stock
options and warrants (using the treasury stock method), as follows (in
thousands):
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
----------------------- --------------
1997 1998 1999 1998 1999
----- ----- ----- ----- -----
<S> <C> <C> <C> <C> <C>
Shares related to stock options and
warrants................................... 1,475 1,224 1,927 1,349 1,964
Shares related to convertible preferred
stock...................................... -- 606 68 60 --
----- ----- ----- ----- -----
1,475 1,830 1,995 1,409 1,964
===== ===== ===== ===== =====
</TABLE>
Recently Issued Accounting Standards: In February 1998, the American
Institute of Certified Public Accountants issued Statement of Position, or SOP,
98-1, Accounting for the Costs of Computer Software Developed or Obtained for
Internal Use. SOP 98-1 establishes the accounting for costs of software products
developed or purchased for internal use, including when such costs should be
capitalized. SOP 98-1 is effective for financial statements for fiscal years
beginning after December 15, 1998. The Company believes that SOP 98-1 will not
have a material impact on its consolidated financial statements.
The Company adopted SFAS No. 130, Reporting Comprehensive Income, effective
April 1, 1998. SFAS No. 130 established standards for the reporting and display
of an amount representing comprehensive income and its components as part of the
company's basic financial statements. Comprehensive income includes certain
non-owner changes in equity that currently are excluded from net income. Because
the company historically has not experienced transactions that would be included
in comprehensive income, the adoption of SFAS No. 130 did not have any effect on
the consolidated financial statements of the Company.
SFAS No. 133, Accounting for Derivative Instruments and Hedging Activities
was issued in June 1998 and the Company is not required to adopt SFAS No 133
until April 1, 2000. The Company believes the adoption of SFAS No. 133 will not
have a material effect on its consolidated financial statements.
Stock-based Compensation: The Company utilizes the intrinsic value method
for stock-based compensation. Under this method, compensation expense is
recognized for the amount by which the market price of the common stock on the
date of grant exceeds the exercise price of an option.
Use of Estimates: The preparation of financial statements in conformity
with generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those estimates.
F-13
<PAGE> 65
INTRANET SOLUTIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
3. SALE OF HARDWARE INTEGRATION UNIT
During the fiscal year ended March 31, 1999, the Company sold the
operations of its hardware integration unit to Osage Systems Group, Inc. (Osage)
for approximately $1,600, and certain future financial consideration from Osage,
dependent on the performance of the unit over the next two years.
In conjunction with the sale of its hardware integration unit, the Company
entered into a non-competition agreement with Osage. As a result, the Company
recorded the necessary provision for the reserve or write-down of the assets and
contracts associated with the hardware integration unit to their net realizable
value. The gain on the sale of the hardware integration unit operations of $517
has been recorded in the statement of operations as other income.
Revenues, cost of revenues, and gross profit for the hardware integration
and support unit are as follows:
<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEAR ENDED MARCH 31, DECEMBER 31,
---------------------------- -------------------
1997 1998 1999 1998 1999
------- ------- ------ ------ ------
<S> <C> <C> <C> <C> <C>
Revenues:
Hardware integration.................... $10,477 $12,187 $4,358 $4,358 $ --
Support................................. 4,800 4,290 1,272 1,272 --
------- ------- ------ ------ ------
Total revenues............................ 15,277 16,477 5,630 5,630 --
------- ------- ------ ------ ------
Cost of revenues:
Hardware integration.................... 8,791 10,249 3,712 3,712 --
Support................................. 3,103 2,634 889 889 --
------- ------- ------ ------ ------
Total cost of revenues.................... 11,894 12,883 4,601 4,601 --
------- ------- ------ ------ ------
Gross profit.............................. $ 3,383 $ 3,594 $1,029 $1,029 $ --
======= ======= ====== ====== ======
</TABLE>
4. DISCONTINUED OPERATIONS
During the fiscal year ended March 31, 1998, the Company sold the
Minneapolis facility of its on-demand publishing operations for approximately
$1,600. The sale price included cash of approximately $359, a promissory note of
$278 and assumption of liabilities of approximately $1,000. The promissory note
is payable in quarterly installments of $27, including interest at 1.5% over
prime (effective rate of 9.25% at March 31, 1999) and is due in March 2001.
Future maturities of principal on this note are $114 for 2000 and $100 for 2001.
No gain or loss on the transaction was recorded.
During the fiscal year ended March 31, 1999, the Company sold substantially
all of the remaining assets of its on-demand publishing operations, located in
Phoenix, Arizona, for approximately $487. The sale price was substantially for
assumption of liabilities. The Company incurred a loss on the sale of the
related assets of $111.
F-14
<PAGE> 66
INTRANET SOLUTIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
The components of net assets of discontinued operations included in the
Company's consolidated balance sheet as of March 31, 1998 are as follows:
<TABLE>
<S> <C>
Accounts receivable......................................... $ 470
Inventories and other current assets........................ 134
Property, equipment and other assets........................ 563
------
Total assets................................................ 1,167
Accounts payable and accrued expenses....................... 263
Debt........................................................ 195
------
Total liabilities........................................... 458
------
Net assets.................................................. $ 709
======
</TABLE>
Summarized financial information for the discontinued operations are as
follows:
<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEARS ENDED MARCH 31, DECEMBER 31,
----------------------------- ---------------------
1997 1998 1999 1998 1999
------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C>
Operating revenues..................... $ 3,819 $ 5,023 $ 729 $ 729 $ --
Operating expenses..................... (6,196) (7,337) (1,104) (1,104) --
Interest............................... (183) (262) (35) (35) --
Income taxes........................... -- -- -- -- --
------- ------- ------- ------- -------
Net loss from discontinued
operations........................... $(2,560) $(2,576) $ (410) $ (410) $ --
======= ======= ======= ======= =======
</TABLE>
5. RELATED PARTY TRANSACTIONS AND NOTE PAYABLE
The Company contracts with an entity that provides programming services to
certain of its customers. This entity is beneficially controlled by a principal
stockholder of the Company. Total fees under this contract arrangement for the
years ending March 31, 1997, 1998 and 1999 were $49, $36 and $42, respectively.
The company had an uncollateralized line of credit with a related party
which provided for borrowings of up to $500 with interest at 10%. Advances under
this line were $400 at March 31, 1999 and were paid in September 1999.
F-15
<PAGE> 67
INTRANET SOLUTIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
6. PROPERTY AND EQUIPMENT
Property and equipment consists of the following:
<TABLE>
<CAPTION>
MARCH 31,
---------------- DECEMBER 31,
1998 1999 1999
------ ------ ------------
<S> <C> <C> <C>
Equipment and furniture..................................... $2,007 $2,153 $2,342
Leasehold improvements...................................... 127 86 81
Other....................................................... -- -- 449
------ ------ ------
2,134 2,239 2,872
Less accumulated depreciation............................... 1,184 1,339 1,497
------ ------ ------
$ 950 $ 900 $1,375
====== ====== ======
</TABLE>
7. REVOLVING CREDIT FACILITY
The Company has a revolving credit agreement that provides for borrowings
of up to $2,500, subject to the availability of assets securing the loan.
Advances are due on demand and accrue interest at the bank's base lending rate
plus 2.5% (effective rate of 11.0% and 10.25% on March 31, 1998 and 1999,
respectively). At March 31, 1999 the Company had borrowing availability of
approximately $2,100.
On April 1, 1999 the Company entered into a new credit agreement which
provides for borrowings of up to $2,250, subject to the availability of assets
securing the loan. Advances are due on demand and accrue interest at the bank's
lending rate plus 2.0%. Borrowings under the credit agreement were repaid and
the agreement canceled on July 1, 1999.
F-16
<PAGE> 68
INTRANET SOLUTIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
8. LONG-TERM OBLIGATIONS
Long-term obligations consist of the following:
<TABLE>
<CAPTION>
MARCH 31,
------------ DECEMBER 31,
1998 1999 1999
---- ---- ------------
<S> <C> <C> <C>
Notes payable to shareholder, due on demand, quarterly
interest payments at 12.0%, unsecured and subordinated
to bank indebtedness................................... $ 28 $ 20 $ 20
Capital lease obligation, due in monthly installments of
$4 including interest at 10.5%, through December 2000,
secured by computer equipment.......................... -- 77 47
Contract payable, due in monthly installments of $10 with
no interest, through July 30, 2000..................... -- 165 72
Notes payable to bank.................................... 476 33 --
Other notes.............................................. 442 35 41
---- ---- ----
Total long-term debt..................................... 946 330 180
Less current maturities.................................. 714 222 176
---- ---- ----
$232 $108 $ 4
==== ==== ====
</TABLE>
Future maturities of long-term obligations at March 31, 1999 are as
follows:
<TABLE>
<S> <C>
2000........................................................ $222
2001........................................................ 98
2002........................................................ 10
----
$330
====
</TABLE>
9. SHAREHOLDERS' EQUITY
Series A convertible preferred stock: During the year ended March 31, 1998,
the Company issued $4,000 of Series A 5% convertible preferred stock, $5.00
stated value, 1,000 shares designated. The Company issued 800 units, each
consisting of one share of $0.01 par value preferred stock and a warrant to
acquire one share of the Company's common stock at an exercise price of $5.18.
The preferred stock is convertible into the Company's common stock at a price
equal to 75% of market value at the time of conversion, with a maximum
conversion price of $3.71 per share and a minimum conversion price of $1.00 per
share. During the year ended March 31, 1998, 350 shares of Series A convertible
preferred stock were converted into 471 shares of common stock. During the year
ended March 31, 1999, 375 shares of Series A convertible preferred stock were
converted into 795 shares of common stock. The remaining Series A convertible
preferred stock was automatically converted into common stock upon the Company's
public sale of equity securities in June 1999.
In connection with this transaction, the Company recorded a non-cash deemed
dividend of approximately $1,600. The deemed dividend was recorded as a discount
to preferred stock with a corresponding credit to additional paid in capital.
The discount was recognized during the periods in which the shares become
eligible for conversion, which occurred ratably from issuance through
F-17
<PAGE> 69
INTRANET SOLUTIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
December 31, 1997. The accretion of the discount is reflected in the statement
of operations as an adjustment to net loss, but has no net effect on total
shareholders' equity. The Company also paid $95 and $148 in preferred stock
dividends during the years ended March 31, 1998 and 1999, respectively.
Series B convertible preferred stock: In May, 1998, the Company issued
$3,000 of Series B 4% convertible preferred stock, $10,000 state value, none
designated. This preferred stock was convertible into the Company's common stock
at a price equal to 84% of market value at the date of conversion with a maximum
conversion price of $7.56 and a minimum conversion price of $1.81. During the
year ended March 31, 1999, all the Series B convertible preferred stock,
including accrued dividends, was converted into 1,037 of shares of common stock.
In connection with this transaction, the Company recognized a non-cash
deemed dividend of $570. The deemed dividend was recorded as a discount to
preferred stock with a corresponding credit to additional paid-in capital. The
discount was recognized at the date of issue of the preferred stock, the same
date at which the shares were eligible for conversion. The accretion of the
discount is reflected in the statement of operations as an adjustment to net
loss, but has no net effect on total shareholders' equity.
Warrants: The Company had 1,286 non-redeemable stock purchase warrants with
exercise prices of $2.32 to $8.00 outstanding at March 31, 1999. At December 31,
1999, the Company had 765 non-redeemable stock purchase warrants outstanding
with exercise prices of $2.32 to $8.44. The warrants expire on various dates
through June, 2003.
In connection with the line of credit from a related party (note 5), the
Company issued a stock purchase warrant, valued at $200 and recorded deferred
financing costs. These costs are being amortized through May 1999, the life of
the related party debt. The warrant represents the right to purchase up to
156,150 shares of the Company's common stock at an exercise price of $3.20 per
share. The warrants were exercised in September 1999.
Stock options: The Company maintains the 1994-1997 Stock Option Plan, the
1997 Director Stock Option Plan and the 1999 Employee Stock Option and
Compensation Plan, (collectively, the Plan), pursuant to which options and other
awards to acquire an aggregate of 3,100, 300 and 1,000 shares, respectively, of
the Company's common stock may be granted. The Company integrated all previously
granted options into the Plan. The Plan is administered by the Board of
Directors, which has the discretion to determine the number and purchase price
of shares subject to stock options (which may be below the fair market value of
the common stock on the date thereof), the term of each option, and the terms of
exercisability.
Certain options have exercise prices less than the fair market value of the
Company's common stock on the date of the grant. The Company recognizes the
compensation element of these grants over the vesting period of the related
options, generally five years. The options generally vest over periods of one to
five years.
InfoAccess maintained two stock option plans in which all options were
converted into the right to receive shares of IntraNet Solutions, Inc. stock. As
of March 31, 1999, 260 options to purchase shares were outstanding and
exercisable under a 1990 Amended and Restated Stock Option Plan. Of those, 250
options at $.74 will expire if not exercised by November 8, 2000, and 10 options
at $1.76 per share will expire if not exercised by November 8, 2000.
F-18
<PAGE> 70
INTRANET SOLUTIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
Pro forma information regarding the fair value of stock options is
determined at the date of grant using the Black-Scholes option pricing model
with the following weighted-average assumptions:
<TABLE>
<CAPTION>
NINE MONTHS
ENDED
YEARS ENDED MARCH 31, DECEMBER 31,
----------------------- --------------
1997 1998 1999 1998 1999
----- ----- ----- ----- -----
<S> <C> <C> <C> <C> <C>
Risk free interest rates.............................. 6.0% 6.3% 5.0% 4.9% 6.8%
Dividend yield........................................ -- -- -- -- --
Volatility factor of expected market price of
company's stock..................................... 65% 75% 75% 75% 90%
Weighted average expected life of options (years)..... 8.5 8.5 8.5 8.5 5.0
</TABLE>
The Company's pro forma information, assuming the fair value method had
been used, is as follows:
<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEARS ENDED MARCH 31, DECEMBER 31,
----------------------------- ------------------
1997 1998 1999 1998 1999
------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C>
Pro forma loss from continuing operations... $(1,330) $(3,055) $(2,273) $(1,837) $(2,035)
Pro forma loss from continuing operations
per common share, basic and diluted....... (.17) (.32) (.20) (.17) (.13)
Pro forma net loss.......................... (3,890) (5,631) (2,794) (2,358) (2,035)
Pro forma net loss per common share, basic
and diluted............................... (.49) (.60) (.25) (.22) (.13)
Pro forma loss attributable to common
shareholders.............................. (3,890) (7,296) (3,513) (3,070) (2,035)
Pro forma loss attributable to common
shareholders per common share, basic and
diluted................................... (.49) (.77) (.32) (.29) (.13)
</TABLE>
These pro forma results are not representative of future effects of
applying this method, because they do not take into consideration the pro forma
effect of grants made prior to 1996.
F-19
<PAGE> 71
INTRANET SOLUTIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
A summary of the Company's stock option activity, and related information
through December 31, 1999 is as follows:
<TABLE>
<CAPTION>
WEIGHTED-
AVERAGE
SHARES EXERCISE PRICE
------ --------------
<S> <C> <C>
Outstanding as of April 1, 1996............................. 1,784 $2.45
Granted................................................... 405 5.70
Exercised................................................. (86) 0.75
Forfeited................................................. (233) 2.72
----- -----
Outstanding as of March 31, 1997............................ 1,870 2.78
Granted................................................... 1,000 5.15
Exercised................................................. (156) 2.13
Forfeited................................................. (299) 4.80
----- -----
Outstanding as of March 31, 1998............................ 2,415 3.90
Granted................................................... 435 4.29
Exercised................................................. (230) 4.48
Forfeited................................................. (321) 5.26
----- -----
Outstanding as of March 31, 1999............................ 2,299 3.68
Granted................................................... 965 7.82
Exercised................................................. (485) 3.72
Forfeited................................................. (222) 4.79
----- -----
Outstanding as of December 31, 1999......................... 2,557 $5.22
===== =====
</TABLE>
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
----------------------- -----------------
1997 1998 1999 1998 1999
----- ----- ----- ----- -----
<S> <C> <C> <C> <C> <C>
Options exercisable at end of period............. 872 1,119 1,308 1,215 1,157
===== ===== ===== ===== =====
Weighted-average fair value of options granted
during the period.............................. $6.44 $4.19 $3.52 $3.13 $5.96
===== ===== ===== ===== =====
</TABLE>
F-20
<PAGE> 72
INTRANET SOLUTIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
The following table summarizes information about the stock options
outstanding at March 31, 1999:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING
-------------------------------------------- OPTIONS EXERCISABLE
WEIGHTED- -----------------------------
WEIGHTED-AVERAGE AVERAGE WEIGHTED-
RANGE OF NUMBER REMAINING EXERCISE NUMBER AVERAGE
EXERCISE PRICE OUTSTANDING CONTRACTUAL LIFE PRICE EXERCISABLE EXERCISE PRICE
-------------- ----------- ---------------- --------- ----------- --------------
<S> <C> <C> <C> <C> <C>
$0.20-$0.56................ 323 5.6 $ 0.24 277 $ 0.24
$0.74...................... 250 1.8 .74 250 .74
$1.60-$1.76................ 18 3.8 1.67 8 1.70
$3.00-$3.99................ 641 7.8 3.24 235 3.15
$4.00-$5.99................ 827 8.5 5.01 404 4.94
$6.00-$7.99................ 132 9.1 6.29 26 6.09
$10.36..................... 108 6.9 10.26 108 10.36
----- -----
2,299 7.1 3.68 1,308 3.62
===== =====
</TABLE>
10. RETIREMENT SAVINGS PLAN
The Company maintains pre-tax salary reduction/profit sharing plans under
the provisions of Section 401(k) of the Internal Revenue Code. The plans cover
substantially all full-time employees who have reached the age of 21. Total
Company contributions to the plans for the years ended March 31, 1997, 1998 and
1999 were $56, $65 and $50, respectively, and $41 and $41 for the nine months
ended December 31, 1998 and 1999.
11. INCOME TAXES
Due to net operating losses through December 1999, the Company has recorded
no current income tax provision. The tax effects of temporary differences giving
rise to deferred income taxes consisted of the following:
<TABLE>
<CAPTION>
MARCH 31,
------------------ DECEMBER 31,
1998 1999 1999
------- ------- ------------
<S> <C> <C> <C>
Deferred tax liabilities:
Depreciation and amortization........................... $ (89) $ (44) $ (60)
Deferred tax assets:
Deferred revenue........................................ 84 214 314
Accounts receivable and other reserves.................. 212 91 114
Inventories............................................. 25 25 25
Net operating loss carryforwards........................ 2,620 3,166 4,042
Other................................................... 30 99 103
------- ------- -------
2,882 3,551 4,538
Valuation allowance....................................... (2,882) (3,551) (4,538)
------- ------- -------
$ -- $ -- $ --
======= ======= =======
</TABLE>
F-21
<PAGE> 73
INTRANET SOLUTIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
The Company's provision for income taxes differs from the expected tax
benefit amount computed by applying the statutory federal income tax rate of
34.0% to income before taxes as a result of the following:
<TABLE>
<CAPTION>
NINE MONTHS
ENDED
YEAR ENDED MARCH 31, DECEMBER 31,
----------------------- ---------------
1997 1998 1999 1998 1999
----- ----- ----- ----- ------
<S> <C> <C> <C> <C> <C>
Federal statutory rate........................ (34.0)% (34.0)% (34.0)% (34.0)% (34.0)%
State taxes, net of federal benefit........... -- 0.6 0.9 .9 --
Stock based compensation...................... (3.1) (4.3) (27.9) (3.1) (102.1)
Change in valuation allowance................. 42.4 35.4 66.8 47.2 164.2
Other......................................... (5.3) 2.3 (5.8) (11.0) (28.1)
----- ----- ----- ----- ------
--% --% --% --% --%
===== ===== ===== ===== ======
</TABLE>
Deferred tax liabilities and deferred tax assets reflect the net tax
effects of temporary differences between the carrying amounts of assets and
liabilities for financial reporting purposes and the amounts used for income tax
purposes. The valuation allowance has been established due to the uncertainty of
future taxable income, which is necessary to realize the benefits of the
deferred tax assets. The Company had net operating loss (NOL) carryforwards of
approximately $7,900 and $10,100 at March 31, 1999 and December 31, 1999, which
begin to expire in 2011. These NOL's are subject to annual utilization
limitations due to prior ownership changes.
12. COMMITMENTS AND CONTINGENCIES
Operating leases -- The Company has entered into certain non-cancelable
operating lease agreements related to office/warehouse space, equipment and
vehicles. Total rent expense under operating leases, net of sublease income, was
$487, $625 and $588 for the years ended March 31, 1997, 1998, and 1999,
respectively, and $429 and $505 for the nine months ended December 31, 1998 and
1999.
Minimum remaining rental commitments under operating leases, net of
sublease arrangements, as of March 31, 1999 are as follows:
<TABLE>
<S> <C>
For the year ended March 31,
2000........................................................ $ 597
2001........................................................ 544
2002........................................................ 500
2003........................................................ 326
2004........................................................ 204
Thereafter.................................................. 265
------
$2,436
======
</TABLE>
Software royalties -- The Company has entered into several software royalty
agreements whereby it is required to pay a royalty amount based upon
predetermined payment schedules. At March 31, 1998 and 1999 and December 31,
1999, the Company recorded advanced royalties as prepaid expense of $308 and
$392 and $440 respectively. Royalties are recognized as expense based on sales,
and
F-22
<PAGE> 74
INTRANET SOLUTIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
during the years ended March 31, 1997, 1998 and 1999 and nine months ended
December 31, 1998 and 1999 totaled $336, $301, $596, $384 and $361,
respectively.
Consulting agreement -- The Company has a consulting agreement with a
former shareholder that requires monthly payments of $10 through July 2000.
13. SEGMENTS OF BUSINESS AND GEOGRAPHIC AREA INFORMATION
Effective April 1, 1998, the Company adopted SFAS No 131, Disclosures about
Segments of an Enterprise and Related Information. SFAS No. 131 did not have a
significant effect as the Company operates as a single segment.
A summary of the Company's operations by geographic area follows:
<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEAR ENDED MARCH 31, DECEMBER 31,
----------------------------- ---------------------
1997 1998 1999 1998 1999
------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C>
Revenues:
United States........................ $19,476 $20,996 $14,118 $11,286 $12,100
Europe............................... 967 926 2,612 1,479 2,569
Canada............................... 149 289 131 104 101
Other................................ 163 -- 170 97 81
------- ------- ------- ------- -------
Total revenues.................... $20,755 $22,211 $17,031 $12,966 $14,851
======= ======= ======= ======= =======
Identifiable assets:
United States........................ $ 786 $ 939 $ 879 $ 828 $ 1,360
Europe............................... -- 11 21 23 15
------- ------- ------- ------- -------
Total............................. $ 786 $ 950 $ 900 $ 851 $ 1,375
======= ======= ======= ======= =======
</TABLE>
Sales are attributed to countries or region based on the location of the
customer.
14. SUBSEQUENT EVENT
On June 9 and July 8, 1999, the Company completed a public offering,
including the underwriters' over allotment option, of 3,715 shares of its common
stock and received net proceeds of approximately $27,000. The proceeds from the
offering will be used for working capital and general corporate purposes.
F-23
<PAGE> 75
INSIDE BACK COVER GRAPHICS
- Xpedio logo followed by: "Integration of Source Content Management and
Web site publishing."
- "XPEDIO CONTENT SERVER creates a repository of managed content and allows
users to securely contribute and access information using a browser."
- "XPEDIO CONTENT PUBLISHER allows a Web site to be designed, managed, and
published in a structured manner and with minimal Web master intervention
for content updates."
- "TOGETHER --"
- "Xpedio products provide an integrated Web content management solution.
The Content Server 'feeds' managed content to dynamic Web sites
automatically."
- Graphic depicting the interaction between Xpedio Content Server and a
content repository, the interaction between Xpedio Content Publisher and
a Dynamic Web site and the interaction between Xpedio Content Server and
Xpedio Content Publisher.
- Xpedio logo with graphic depicting Xpedio's application to intranets,
extranets and the Internet
INTRANET
- - Departmental
- - Business unit
- - Corporate initiative
- - Portals
- - Knowledge management
EXTRANET
- - Commerce
- - Customer support
- - Call center
- - Supply chain
- - Distribution channel
INTERNET
- - Corporate Web sites
- - Commerce
- Internet Solutions logo and web-site address: www.intranetsolutions.com.
<PAGE> 76
4,300,000 SHARES
[INTRANET SOLUTIONS LOGO]
COMMON STOCK
----------------------------
PRICE $46.00 PER SHARE
----------------------------
DAIN RAUSCHER WESSELS
U.S. BANCORP PIPER JAFFRAY
WIT SOUNDVIEW
CRAIG-HALLUM CAPITAL GROUP
------------------------------
MARCH 9, 2000
------------------------------
