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EXHIBIT 13.1
INTRANET SOLUTIONS, INC.
INDEX TO FINANCIAL INFORMATION
2000
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PAGE
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Management's Discussion and Analysis of Financial Condition
and Results of Operations................................. 1
Quantitative and Qualitative Disclosures About Market
Risk...................................................... 12
Consolidated Balance Sheets................................. 13
Consolidated Statements of Operations....................... 14
Consolidated Statements of Shareholders' Equity............. 15
Consolidated Statements of Cash Flows....................... 16
Notes to Consolidated Financial Statements.................. 17
Report of Independent Certified Public Accountants.......... 28
Selected Consolidated Financial Data........................ 29
Market for Registrant's Common Equity and Related
Stockholder Matters....................................... 30
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
DISCLOSURE REGARDING FORWARD-LOOKING STATEMENTS
This Annual Report to Shareholders contains certain forward looking
statements within the meaning of Section 21E of the Exchange Act. Such
forward-looking statements are based on the beliefs of the Company's management
as well as on assumptions made by and information currently available to the
Company at the time such statements were made. When used in this Annual Report,
the words "anticipate", "believe", "estimate", "expect", "intend" and similar
expressions, as they relate to the Company, are intended to identify such
forward-looking statements. Although the Company believes these statements are
reasonable, readers of this Annual Report should be aware that actual results
could differ materially from those projected by such forward-looking statements
as a result of the risk factors listed below and set forth in the Company's Form
10-K under the caption "Risk Factors". Because actual results may differ,
readers are cautioned not to place undue reliance on these forward-looking
statements. Readers of this Annual Report should consider carefully the factors
listed below and under the caption "Risk Factors" in the Company's Form 10-K, as
well as the other information and data contained in this Annual Report. The
Company cautions the reader, however, that such list of factors under the
caption "Risk Factors" in the Company's Form 10-K and listed below may not be
exhaustive and that those or other factors, many of which are outside of the
Company's control, could have a material adverse effect on the Company and its
results of operations. All forward-looking statements attributable to the
Company or persons acting on its behalf are expressly qualified in their
entirety by the cautionary statements set forth hereunder and under the caption
"Risk Factors" in the Company's Form 10-K. 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 Annual Report.
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.
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 accepted
by the customer and collection is probable. 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
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maintenance agreements based on a percentage of the product license fee. Clients
purchasing maintenance agreements receive product upgrades, Web-based technical
support and telephone hot-line support. We recognize revenues from maintenance
agreements ratably over the term of the agreement, typically one year.
Cost of revenues consists of technology royalties, costs to manufacture,
package and distribute our products and related documentation, as well as
personnel and other expenses related to providing services. Sales and marketing
expenses consist primarily of employee salaries, commissions, and costs
associated with marketing programs such as advertising, public relations and
trade shows. Research and development expenses consist primarily of salaries and
related costs associated with the development of new products, the enhancement
of existing products and the performance of quality assurance and documentation
activities. General and administrative expenses consist primarily of salaries
and other personnel-related costs for executive, financial, human resources,
information services and other administrative personnel, as well as legal,
accounting and insurance costs. Losses from discontinued operations consist
primarily of losses on the operations of our former on-demand publishing
distribution group and losses on the write-down and sale of its assets.
Since our inception, we have incurred substantial costs to develop our
technology and products, to recruit and train personnel for our sales and
marketing, research and development and services departments, and to establish
an administrative organization. As a result, we had an accumulated deficit of
$12.5 million at March 31, 2000. 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 MARCH 31, 2000 COMPARED TO THREE
MONTHS ENDED MARCH 31, 1999
REVENUES
Total revenues increased by $3.4 million, or 83%, to $7.5 million for the
three months ended March 31, 2000 from $4.1 million for the three months ended
March 31, 1999. 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 $2.7 million,
or 87%, to $5.8 million for the three months ended March 31, 2000 from $3.1
million for the three months ended March 31, 1999. The increase in revenues for
product licenses was attributable to the expansion of our customer base,
increased sales to existing customers and the continuing launch of our Xpedio
Content Management Suite.
Services. Revenues for services increased by $797,000 or 86%, to $1.7
million for the three months ended March 31, 2000 from $927,000 for the three
months ended March 31, 1999. The increase in revenues for services was primarily
attributable to a larger installed base of products.
COST OF REVENUES AND GROSS PROFIT
Total cost of revenues increased by $620,000 or 86%, to $1.3 million for
the three months ended March 31, 2000 from $720,000 for the three months ended
March 31, 1999. Total cost of revenues as a percentage of total revenues was 18%
for the three months ended March 31, 2000 and 1999. Gross profit increased by
$2.9 million, or 88%, to $6.2 million for the three months ended March 31, 2000
from $3.3 million for the three months ended March 31, 1999. Total gross profit
as a percentage of total revenues was 82% for the three months ended March 31,
2000 and 1999. 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
$278,000, or 143%, to $473,000 for the three months ended March 31, 2000 from
$195,000 for the three months ended March 31, 1999. Gross
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profit as a percentage of revenues for product licenses was 92% for the three
months ended March 31, 2000 compared to 94% for the three months ended March 31,
1999.
Services. Cost of revenues for services increased by $342,000, or 65%, to
$867,000 for the three months ended March 31, 2000 from $525,000 for the three
months ended March 31, 1999. Gross profit as a percentage of revenues for
services was 50% for the three months ended March 31, 2000 compared to 43% for
the three months ended March 31, 1999. 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 $2.2
million, or 144%, to $3.8 million for the three months ended March 31, 2000 from
$1.6 million for the three months ended March 31, 1999. Sales and marketing
expenses as a percentage of total revenues were 51% for the three months ended
March 31, 2000 compared to 38% for the three months ended March 31, 1999. 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 decreased
by $110,000, or 10%, to $1.0 million for the three months ended March 31, 2000
from $1.1 million for the three months ended March 31, 1999. General and
administrative expenses as a percentage of total revenues were 14% for the three
months ended March 31, 2000 compared to 28% for the three months ended March 31,
1999. 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
$394,000, or 65%, to $999,000 for the three months ended March 31, 2000 from
$605,000 for the three months ended March 31, 1999. Research and development
expenses as a percentage of total revenues were 13% for the three months ended
March 31, 2000 compared to 15% for the three months ended March 31, 1999. 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 $692,000 for the three months ended March 31, 2000
compared to interest expense of $69,000 for the three months ended March 31,
1999. Interest income for the three months ended March 31, 2000 was primarily
related to short-term investments purchased with the proceeds of our public
stock offerings completed in June 1999 and March 2000. Interest expense for the
three months ended March 31, 1999 related primarily to our revolving
line-of-credit.
RESULTS OF OPERATIONS -- FISCAL YEAR ENDED MARCH 31, 2000 COMPARED TO FISCAL
YEAR ENDED MARCH 31, 1999
REVENUES
Total revenues increased by $5.4 million, or 31%, to $22.4 million for the
year ended March 31, 2000 from $17.0 million for the year ended March 31, 1999.
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 $8.2 million,
or 88%, to $17.5 million for the year ended March 31, 2000 from $9.3 million for
the year ended March 31, 1999. 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.
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Services. Revenues for services increased by $2.8 million, or 133%, to
$4.9 million for the year ended March 31, 2000 from $2.1 million for the year
ended March 31, 1999. The increase in revenues for services was primarily
attributable to a larger installed base of products.
Hardware Integration and Support. There were no revenues for hardware
integration in the year ended March 31, 2000 compared to $5.6 million in
revenues for hardware integration for the year ended March 31, 1999. 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 $2.5 million, or 38%, to $4.1 million
for the year ended March 31, 2000 from $6.6 million for the year ended March 31,
1999. Total cost of revenues as a percentage of total revenues was 18% for the
year ended March 31, 2000 compared to 39% for the year ended March 31, 1999.
Gross profit increased by $7.9 million, or 76%, to $18.3 million for the year
ended March 31, 2000 from $10.4 million for the year ended March 31, 1999. Total
gross profit as a percentage of total revenues was 82% for the year ended March
31, 2000 compared to 61% for the year ended March 31, 1999. 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
$897,000, or 111%, to $1.7 million for the year ended March 31, 2000 from
$811,000 for the year ended March 31, 1999. Gross profit as a percentage of
revenues for product licenses was 90% for the year ended March 31, 2000 compared
to 91% for the year ended March 31, 1999.
Services. Cost of revenues for services increased by $1.2 million, or
100%, to $2.4 million for the year ended March 31, 2000 from $1.2 million for
the year ended March 31, 1999. Gross profit as a percentage of revenues for
services was 51% for the year ended March 31, 2000 compared to 41% for the year
ended March 31, 1999. 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.
Hardware Integration and Support. There were no cost of revenues for
hardware integration and support in the year ended March 31, 2000 compared to
$4.6 million in cost of revenues for hardware integration and support for the
year ended March 31, 1999. We sold our hardware integration business during the
quarter ended September 30, 1998.
OPERATING EXPENSES
Sales and Marketing. Sales and marketing expenses increased by $4.8
million, or 83%, to $10.5 million for the year ended March 31, 2000 from $5.7
million for the year ended March 31, 1999. Sales and marketing expenses as a
percentage of total revenues were 47% for the year ended March 31, 2000 compared
to 34% for the year ended March 31, 1999. 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 $276,000, or 8%, to $3.9 million for the year ended March 31, 2000 from $3.6
million for the year ended March 31, 1999. General and administrative expenses
as a percentage of total revenues were 17% for the year ended March 31, 2000 and
21% for the year ended March 31, 1999. General and administrative increased
primarily due to increased personnel expenses.
Research and Development. Research and development expenses increased by
$664,000, or 30%, to $2.9 million for the year ended March 31, 2000 from $2.2
million for the year ended March 31, 1999. Research and development expenses as
a percentage of total revenues were 13% for both the year ended March 31, 2000
and the year ended March 31, 1999. The increase in research and development
expenses was
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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 year ended
March 31, 2000 consisted primarily of financial advisory, legal, accounting and
other costs related to our acquisition of InfoAccess, Inc. in September 1999,
accounted for as a pooling-of-interests.
OTHER INCOME (EXPENSE)
Interest income was $1.5 million for the year ended March 31, 2000 compared
to interest expense of $212,000 for the year ended March 31, 1999. Interest
income for the year ended March 31, 2000 was primarily related to short-term
investments purchased with the proceeds of our public stock offerings completed
in June 1999 and March 2000. Interest expense for the year ended March 31, 1999
related primarily to our revolving line-of-credit.
DISCONTINUED OPERATIONS
Losses on discontinued operations of $521,000 for the year ended March 31,
1999 consisted of losses on the operation and disposition of our on-demand
publishing operations, the final disposition of which occurred in June 1998.
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
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$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 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.
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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 Annual Report. The consolidated results of
operations for any quarter are not necessarily indicative of the results for any
future period.
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THREE MONTHS ENDED
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JUNE 30, SEPT. 30, DEC. 31, MAR. 31, JUNE 30, SEPT. 30, DEC. 31, MAR. 31,
1998 1998 1998 1999 1999 1999 1999 2000
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CONSOLIDATED STATEMENT OF OPERATIONS
DATA:
Revenues:
Product licenses........................ $ 1,317 $ 2,115 $ 2,733 $ 3,138 $ 3,475 $ 3,549 $ 4,671 $ 5,785
Services.............................. 203 418 551 927 972 1,025 1,159 1,724
Hardware integration and support...... 3,215 2,414 -- -- -- -- -- --
------- ------- ------- ------- ------- ------- ------- -------
Total revenues...................... 4,735 4,947 3,284 4,065 4,447 4,574 5,830 7,509
------- ------- ------- ------- ------- ------- ------- -------
Cost of revenues:
Product licenses...................... 211 143 262 195 324 401 510 473
Services.............................. 135 233 336 525 412 553 568 867
Hardware integration and support...... 2,570 2,031 -- -- -- -- -- --
------- ------- ------- ------- ------- ------- ------- -------
Total cost of revenues.............. 2,916 2,407 598 720 736 954 1,078 1,340
------- ------- ------- ------- ------- ------- ------- -------
Gross profit............................ 1,819 2,540 2,686 3,345 3,711 3,620 4,752 6,169
------- ------- ------- ------- ------- ------- ------- -------
Operating expenses:
Sales and marketing................... 1,148 1,517 1,522 1,555 1,941 2,054 2,741 3,800
General and administrative............ 668 871 904 1,134 914 863 1,052 1,024
Research and development.............. 501 553 555 605 572 576 731 999
Acquisition costs..................... -- -- -- -- -- 1,972 -- --
------- ------- ------- ------- ------- ------- ------- -------
Total operating expenses............ 2,317 2,941 2,981 3,294 3,427 5,465 4,524 5,823
------- ------- ------- ------- ------- ------- ------- -------
Income (loss) from operations........... (498) (401) (295) 51 284 (1,845) 228 346
Other income (expense):
Gain on sale of hardware Integration
unit................................ -- 517 -- -- -- -- -- --
Interest income (expense), net........ (7) (72) (64) (69) 33 361 380 692
------- ------- ------- ------- ------- ------- ------- -------
Income (loss) from continuing
operations............................ (505) 44 (359) (18) 317 (1,484) 608 1,038
Loss on discontinued operations......... (521) -- -- -- -- -- -- --
------- ------- ------- ------- ------- ------- ------- -------
Net income (loss)....................... (1,026) 44 (359) (18) 317 (1,484) 608 1,038
Preferred stock dividends and
accretion............................. (603) (29) (80) (6) -- -- -- --
------- ------- ------- ------- ------- ------- ------- -------
Income (loss) attributable to common
shareholders.......................... $(1,629) $ 15 $ (439) $ (24) $ 317 $(1,484) $ 608 $ 1,038
======= ======= ======= ======= ======= ======= ======= =======
AS A PERCENTAGE OF TOTAL REVENUES:
Revenues:
Product licenses...................... 27.8% 42.8% 83.2% 77.2% 78.1% 77.6% 80.1% 77.0%
Services.............................. 4.3 8.4 16.8 22.8 21.9 22.4 19.9 23.0
Hardware integration and support...... 67.9 48.8 -- -- -- -- -- --
------- ------- ------- ------- ------- ------- ------- -------
Total revenues...................... 100.00 100.00 100.00 100.00 100.00 100.00 100.00 100.00
------- ------- ------- ------- ------- ------- ------- -------
Cost of revenues:
Product licenses...................... 4.4 2.9 8.0 4.8 7.3 8.8 8.7 6.3
Services.............................. 2.9 4.7 10.2 12.9 9.3 12.1 9.8 11.5
Hardware integration and support...... 54.3 41.1 -- -- -- -- -- --
------- ------- ------- ------- ------- ------- ------- -------
Total cost of revenues.............. 61.6 48.7 18.2 17.7 16.6 20.9 18.5 17.8
------- ------- ------- ------- ------- ------- ------- -------
Gross profit............................ 38.4 51.3 81.8 82.3 83.4 79.1 81.5 82.2
------- ------- ------- ------- ------- ------- ------- -------
Operating expenses:
Sales and marketing................... 24.3 30.7 46.4 38.3 43.6 44.9 47.0 50.6
General and administrative............ 14.1 17.6 27.5 27.9 20.5 18.8 18.1 13.6
Research and development.............. 10.6 11.2 16.9 14.9 12.9 12.6 12.5 13.3
Acquisition costs..................... -- -- -- -- -- 43.1 -- --
------- ------- ------- ------- ------- ------- ------- -------
Total operating expenses............ 49.0 59.5 90.8 81.1 77.0 119.4 77.6 77.5
------- ------- ------- ------- ------- ------- ------- -------
Income (loss) from operations........... (10.6) (8.2) (9.0) 1.2 6.4 (40.3) 3.9 4.7
Other income (expense):
Gain on sale of hardware integration
unit................................ -- 10.5 -- -- -- -- -- --
Interest income (expense), net........ (0.1) (1.4) (1.9) (1.7) 0.7 7.9 6.5 9.1
------- ------- ------- ------- ------- ------- ------- -------
Income (loss) from continuing
Operations............................ (10.7) 0.9 (10.9) (0.5) 7.1 (32.4) 10.4 13.8
Loss on discontinued operations......... (11.0) -- -- -- -- -- -- --
------- ------- ------- ------- ------- ------- ------- -------
Net income (loss)....................... (21.7) 0.9 (10.9) (0.5) 7.1 (32.4) 10.4 13.8
Preferred stock dividends and
accretion............................. (12.7) (0.6) (2.5) (0.1) -- -- -- --
------- ------- ------- ------- ------- ------- ------- -------
Income (loss) attributable to common
shareholders.......................... (34.4)% 0.3% (13.4)% (0.6)% 7.1% (32.4)% 10.4% 13.8%
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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 more than 70 percent of our
revenues in the quarter ended March 31, 2000 and increased our average
transaction size for server licenses to approximately $100,000 and $140,000
during those periods, respectively.
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. Total gross profit as
a percentage of total revenues has generally increased, on a quarter to quarter
basis, from June 30, 1998 through March 31, 2000 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
six most recent quarters relative to the two previous quarters because revenues
in the six most recent quarters related exclusively to sales of our Web-based
content management products and services.
As a result of our limited operating history, we cannot forecast operating
expenses based on historical results. Accordingly, we base our expenses in part
on projections of future revenues. Most of these expenses are fixed in the short
term, and we may not be able to quickly reduce spending if revenues are lower
than we have projected. Our ability to forecast accurately our quarterly
revenues is limited due to the sales cycle of our software products, which makes
it difficult to predict the quarter in which license sales will occur, and the
variability of client demand for professional services. We expect our business,
operating results and financial condition to be materially adversely affected if
revenues do not meet projections. We expect our revenues and operating results
may vary significantly from quarter to quarter. A number of factors are likely
to cause these variations, including:
- demand for our products and services;
- the timing of new product introductions and sales of our products and
services;
- unexpected delays in introducing new products and services;
- increased expenses, whether related to sales and marketing, research and
development or administration;
- changes in the rapidly evolving market for 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.
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
9
<PAGE> 11
improve operational and financial systems. If our revenues do not increase along
with these expenses, our business, operating results and financial condition in
a given quarter may be materially adversely affected.
NET OPERATING LOSS CARRYFORWARDS
As of March 31, 2000, we had net operating loss carryforwards of
approximately $35.7 million. The net operating loss carryforwards will expire at
various dates beginning in 2011, if not utilized. The Tax Reform Act of 1986
imposes substantial restrictions on the utilization of net operating losses and
tax credits in the event of an "ownership change" of a corporation. Our ability
to utilize net operating loss carryforwards on an annual basis will be limited
as a result of "ownership changes" in connection with the sale of equity
securities. We have provided a full valuation allowance on the deferred tax
asset because of the uncertainty regarding its realization. Our accounting for
deferred taxes involves the evaluation of a number of factors concerning the
realizability of our deferred tax assets. In concluding that a full valuation
allowance was required, management considered such factors as our history of
operating losses, potential future losses and the nature of our deferred tax
assets. See Note 11 to the Consolidated Financial Statements included elsewhere
in this Annual Report.
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 $1.3 million for the year ended March 31, 2000,
compared to net cash used in operating activities of $1.6 million for the year
ended March 31, 1999.
To date, we have invested our capital expenditures primarily in property
and equipment, consisting largely of computer hardware and software. Capital
expenditures for the year ended March 31, 2000 and 1999 were $534,000 and
$380,000, respectively. We have also entered into capital and operating leases
for facilities and equipment. We expect that our capital expenditures will
increase as our employee base grows. At March 31, 2000, we did not have any
material commitments for capital expenditures.
As of March 31, 2000, we had $8.9 million in cash and equivalents, $124.9
million in short-term investments and $137.1 million in working capital. Net
cash provided by financing activities was $134.5 million for the year ended
March 31, 2000 and $1.7 million for the year ended March 31, 1999. In June 1999,
we completed a public offering of our common stock that raised approximately
$27.0 million in proceeds for the Company, net of underwriting discounts and
offering costs of approximately $3.0 million. In March 2000, we completed a
public offering of our common stock that raised approximately $100.1 million in
proceeds for the Company, net of underwriting discounts and offering costs of
approximately $5.7 million. In April 2000, the underwriters exercised their
over-allotment option, raising additional net proceeds of approximately $22.7
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.
The Company continues to evaluate potential strategic acquisitions that
could utilize equity and/or cash resources. Such opportunities could develop
quickly due to market and competitive factors.
RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
FASB Interpretation 44, Interpretation of APB Opinion 25 (FIN 44) was
issues in March 2000. FIN 44 provides an interpretation of APB Opinion 25 on
accounting for employee stock compensation and describes its application to
certain transactions. FIN 44 is effective on July 1, 2000. It applies on a
prospective basis to events occurring after that date, except for certain
transactions involving options granted to nonemployees,
10
<PAGE> 12
repriced fixed options, and modifications to add reload option features, which
apply to awards granted after December 31, 1998. The provisions of FIN 44 are
not expected to have a material effect on transactions entered into through
March 31, 2000.
11
<PAGE> 13
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company's interest income on cash and cash equivalents is affected by
changes in interest rates in the United States. Through March 31, 2000, changes
in these rates have not had a material effect on the Company, and the Company
does not anticipate that future exposure to interest rate market risk will be
material.
The Company's investments are held in commercial paper which are affected
by equity price market risk and other factors. The Company does not anticipate
that exposure to these risks will have a material impact on the Company, due to
the nature of its investments.
The Company has no history of, and does not anticipate in the future,
investing in derivative financial instruments. Most transactions with
international customers are entered into in U.S. dollars, precluding the need
for foreign currency hedges. Any transactions that are currently entered into in
foreign currency are not deemed material to the financial statements. Thus, the
exposure to market risk is not material.
12
<PAGE> 14
INTRANET SOLUTIONS, INC.
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
<TABLE>
<CAPTION>
MARCH 31,
--------------------
1999 2000
---- ----
<S> <C> <C>
ASSETS
CURRENT ASSETS
Cash and equivalents...................................... $ 2,177 $ 8,859
Short-term investments.................................... -- 124,883
Accounts receivable, net.................................. 3,995 7,446
Current maturities of notes receivable.................... 114 126
Inventories............................................... 112 149
Prepaid royalties......................................... 392 1,231
Prepaid expenses and other current assets................. 413 663
-------- --------
Total current assets................................. 7,203 143,357
Notes receivable, net of current maturities................. 106 --
Property and equipment, net................................. 900 887
Other investments........................................... -- 832
Prepaid royalties, net of current portion................... -- 1,644
Software licenses, net accumulated amortization............. 236 161
Other....................................................... 19 434
-------- --------
Total assets......................................... $ 8,464 $147,315
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Revolving credit facility and related party note.......... $ 822 $ --
Current maturities of long-term obligations............... 222 115
Accounts payable.......................................... 584 2,922
Deferred revenues......................................... 726 1,433
Commissions payable....................................... 256 811
Accrued expenses.......................................... 880 964
-------- --------
Total current liabilities............................ 3,490 6,245
Long-term obligations, net of current maturities............ 108 11
Deferred revenue, net of current portion.................... 147 89
-------- --------
Total liabilities.................................... 3,745 6,345
Commitments and contingencies............................... -- --
Shareholders' equity
Capital stock, $0.01 par value, 25,000 and 50,000 shares
authorized at March 31, 1999 and 2000
Series A convertible preferred stock, 75 shares issued and
outstanding at March 31, 1999.......................... 334 --
Series B convertible preferred stock...................... -- --
Common stock, 12,450 and 20,665 shares issued and
outstanding at March 31, 1999 and 2000................. 124 207
Additional paid-in capital.................................. 17,509 153,485
Accumulated deficit......................................... (13,223) (12,533)
Unearned compensation....................................... (25) (8)
Accumulated comprehensive income............................ -- (181)
-------- --------
Total shareholders' equity........................... 4,719 140,970
-------- --------
Total liabilities and shareholders' equity........... $ 8,464 $147,315
======== ========
</TABLE>
The accompanying notes are an integral part of the financial statements.
13
<PAGE> 15
INTRANET SOLUTIONS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
1998 1999 2000
--------- --------- ---------
<S> <C> <C> <C>
Revenues
Product licenses......................................... $ 4,501 $ 9,303 $ 17,480
Services................................................. 1,233 2,099 4,880
Hardware integration and support......................... 16,477 5,629 --
--------- --------- ---------
Total revenues...................................... 22,211 17,031 22,360
Cost of revenues
Product licenses......................................... 482 811 1,708
Services................................................. 797 1,229 2,400
Hardware integration and support......................... 12,883 4,601 --
--------- --------- ---------
Total cost of revenues.............................. 14,162 6,641 4,108
--------- --------- ---------
Gross profit............................................... 8,049 10,390 18,252
Operating expenses
Sales and marketing...................................... 4,506 5,742 10,536
General and administrative............................... 3,100 3,577 3,853
Research and development................................. 2,196 2,214 2,878
Acquisition costs........................................ -- -- 1,972
--------- --------- ---------
Total operating expenses............................ 9,802 11,533 19,239
--------- --------- ---------
Loss from operations....................................... (1,753) (1,143) (987)
Other income (expense)
Gain on sale of hardware integration unit................ -- 517 --
Interest income (expense), net........................... (334) (212) 1,466
--------- --------- ---------
Income (loss) from continuing operations................... (2,087) (838) 479
Discontinued operations
Loss on sale of distribution group....................... -- (111) --
Loss from operations of distribution group............... (2,576) (410) --
--------- --------- ---------
Net income (loss).......................................... (4,663) (1,359) 479
Preferred stock dividends and accretion.................... (1,665) (718) --
--------- --------- ---------
Income (loss) attributable to common shareholders.......... $ (6,328) $ (2,077) $ 479
========= ========= =========
Earnings (loss) per common share -- basic and diluted
Continuing operations.................................... $ (0.22) $ (0.08) $ 0.03
Discontinued operations.................................. (0.27) (0.05) --
Net income (loss)........................................ (0.50) (0.12) 0.03
Income (loss) attributable to common shareholders........ (0.67) (0.19) 0.03
========= ========= =========
Weighted average shares -- basic........................... 9,422 11,151 16,462
========= ========= =========
Weighted average shares -- diluted......................... 9,422 11,151 18,057
========= ========= =========
</TABLE>
The accompanying notes are an integral part of the financial statements
14
<PAGE> 16
INTRANET SOLUTIONS, INC.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (DEFICIT)
(IN THOUSANDS)
<TABLE>
<CAPTION>
SERIES A SERIES B
CONVERTIBLE CONVERTIBLE RETAINED
PREFERRED STOCK PREFERRED STOCK COMMON STOCK ADDITIONAL EARNINGS
----------------- --------------- ---------------- PAID-IN (ACCUMULATED UNEARNED
SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT CAPITAL DEFICIT) COMPENSATION
------ -------- ------ ------ ------- ------ ---------- ------------ ------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Balance at April 1, 1997....... -- $ -- -- $ -- 9,085 $ 91 $ 5,585 $ (4,702) $(231)
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) 113
Net loss....................... -- -- -- -- -- -- -- (4,663) --
---- -------- -- ------ ------- ---- -------- -------- -----
Balance at March 31, 1998...... 450 2,004 -- -- 10,247 102 10,768 (11,143) (118)
Exercise of stock options and
warrants...................... -- -- -- -- 343 4 1,378 -- --
Cancellation of compensatory
stock options................. -- -- -- -- -- -- (91) -- 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 -- 2
Net loss....................... -- -- -- -- -- -- -- (1,359) --
---- -------- -- ------ ------- ---- -------- -------- -----
Balance at March 31, 1999...... 75 334 -- -- 12,450 124 17,509 (13,223) (25)
Exercise of stock options and
warrants...................... -- -- -- -- 2,094 22 8,130 -- --
Issuance of common stock net of
costs of $8,688............... -- -- -- -- 6,020 60 126,998 -- --
Conversion of preferred stock
to common..................... (75) (334) -- -- 101 1 333 -- --
Other.......................... -- -- -- -- -- -- 515 211 17
Net income..................... -- -- -- -- -- -- -- 479 --
---- -------- -- ------ ------- ---- -------- -------- -----
Balance at March 31, 2000...... -- -- -- -- 20,665 207 153,485 (12,533) (8)
==== ======== == ====== ======= ==== ======== ======== =====
<CAPTION>
ACCUMULATED TOTAL
COMPREHENSIVE SHAREHOLDERS' COMPREHENSIVE
INCOME EQUITY INCOME
------------- ------------- -------------
<S> <C> <C> <C>
Balance at April 1, 1997....... $ -- $ 743 $ --
Exercise of stock options and
warrants...................... -- 1,630 --
Conversion of promissory
notes......................... -- 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.......................... -- (64) --
Net loss....................... -- (4,663) --
----- -------- ----
Balance at March 31, 1998...... -- 1,613 --
Exercise of stock options and
warrants...................... -- 1,382 --
Cancellation of compensatory
stock options................. -- -- --
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.......................... -- 50 --
Net loss....................... -- (1,359) --
----- -------- ----
Balance at March 31, 1999...... -- 4,719 --
Exercise of stock options and
warrants...................... -- 8,152 --
Issuance of common stock net of
costs of $8,688............... -- 127,058 --
Conversion of preferred stock
to common..................... -- -- --
Other.......................... (181) 562 (181)
Net income..................... -- 479 479
----- -------- ----
Balance at March 31, 2000...... $(181) $140,970 $298
===== ======== ====
</TABLE>
The accompanying notes are an integral part of the financial statements.
15
<PAGE> 17
INTRANET SOLUTIONS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
YEAR ENDED MARCH 31,
-------------------------------
1998 1999 2000
---- ---- ----
<S> <C> <C> <C>
Operating activities:
Net income (loss)......................................... $(4,663) $(1,359) $ 479
Adjustments to reconcile net loss to cash flows from
operating activities:
Depreciation and amortization........................... 447 566 798
Gain on sale of hardware integration unit............... -- (517) --
Discontinued operations................................. 1,029 709 --
Non-cash license revenue................................ -- -- (160)
Non-cash marketing expense.............................. -- -- 460
Changes in operating assets and liabilities............. (1,343) (1,124) (2,829)
Other................................................... 120 94 --
------- ------- ---------
Net cash flows used in operating activities.......... (4,410) (1,631) (1,252)
------- ------- ---------
Investing activities:
Purchase of short-term investments........................ -- -- (475,139)
Maturities and sales of short-term investments............ -- -- 350,256
Proceeds from sale of the hardware integration group, net
of related expenses..................................... -- 1,279 --
Purchase of property and equipment........................ (456) (380) (534)
Purchase of intangibles................................... -- -- (357)
Other..................................................... 802 8 (759)
------- ------- ---------
Net cash flows provided by (used in) investing
activities......................................... 346 907 (126,533)
------- ------- ---------
Financing activities:
Net advances (repayments) from revolving credit
facility................................................ 509 (1,424) (822)
Payments on long-term obligations......................... (1,331) (860) (204)
Payments on other long-term liabilities................... (102) (62) --
Issuance of preferred stock............................... 3,521 2,851 --
Issuance of common stock.................................. -- -- 127,058
Payment of dividends on preferred stock................... (95) (134) --
Proceeds from stock options and warrants.................. 1,880 1,381 8,152
Other..................................................... (120) (13) 283
------- ------- ---------
Net cash flows provided by financing activities...... 4,262 1,739 134,467
------- ------- ---------
Net increase in cash........................................ 198 1,015 6,682
Cash and equivalents at beginning of period................. 964 1,162 2,177
------- ------- ---------
Cash and equivalents at end of period....................... $ 1,162 $ 2,177 $ 8,859
======= ======= =========
Supplemental disclosure of cash flows information:
Cash paid for interest.................................... $ 351 $ 226 $ 42
Cash paid for income taxes................................ 7 7 7
Non-cash financing and investing activities:
Equipment acquired with capital lease obligation.......... $ -- $ 122 $ --
Conversion of debt to common stock........................ 250 -- --
Conversion of debt to preferred stock..................... 150 -- --
Common stock issued for royalties......................... -- 120 --
Note receivable from sale of discontinued operations...... 278 -- --
Warrants issued as deferred financing costs............... -- 200 --
Capitalized software licenses payable related to license
agreement............................................... -- 200 --
Detail of changes in operating assets and liabilities:
Accounts receivable....................................... $(1,766) $ 1,065 $ (3,451)
Inventories............................................... 75 64 (37)
Prepaid expenses.......................................... (294) 14 (2,967)
Accounts payable.......................................... 750 (2,421) 2,338
Accrued expenses and other liabilities.................... (108) 154 1,288
------- ------- ---------
Net changes in operating assets and liabilities...... $(1,343) $(1,124) $ (2,829)
======= ======= =========
</TABLE>
The accompanying notes are an integral part of the financial statements.
16
<PAGE> 18
INTRANET SOLUTIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 1998, 1999 AND 2000
(IN THOUSANDS, EXCEPT PER SHARE DATA)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
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.
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 accepted by the customer, and collection is probable. Services
revenue consists of fees from consulting and maintenance. Consulting services
include needs assessment, software integration, security analysis, application
development and training. The Company bills consulting fees either on a time and
materials basis or on a fixed-price schedule. The Company's clients typically
purchase maintenance agreements annually, and the Company prices maintenance
agreements based on a percentage of the product license fee. Clients purchasing
maintenance agreements receive product upgrades, Web-based technical support and
telephone hot-line support. The Company recognizes revenue from maintenance
agreements ratably over the term of the agreement, typically one year.
Customer advances and billed amounts due from customers in excess of
revenue recognized are recorded as deferred revenue.
Cash and Equivalents: The Company considers all short-term, highly liquid
investments that are readily convertible into known amounts of cash and have
original maturities of three months or less to be cash equivalents.
Short-Term Investments: Investments in debt securities with a remaining
maturity of one year or less at the date of purchase are classified as
short-term investments. As of March 31, 2000 the Company's investments were held
in commercial paper. All investments have a contractual maturity of one year or
less, are held to maturity, and recorded at amortized cost.
Other Investments: Investments in equity securities are classified as
long-term as the Company anticipates holding them for more than one year. These
investments are deemed by management to be available for sale and are reported
at fair value with net unrealized losses reported within shareholders' equity as
accumulated comprehensive income. The original cost of these investments was
$1,013.
Accounts Receivable: Accounts receivable is presented net of allowances of
$310 and $530 as of March 31, 1999 and 2000, respectively. No customer has
accounted for 10% or more of the Company's revenues in the years ended March 31,
1999 and 2000. 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.
17
<PAGE> 19
INTRANET SOLUTIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
MARCH 31, 1998, 1999 AND 2000
(IN THOUSANDS, EXCEPT PER SHARE DATA)
Software Licenses: The Company has 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 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, 1998, 1999, and 2000
was $900, $903 and $1,290.
Net Income (Loss) per Common Share: The Company's basic net income (loss)
per share amounts have been computed by dividing net income (loss) by the
weighted average number of outstanding common shares. The Company's diluted net
income (loss) per share is computed by dividing net income (loss) by the
weighted average number of outstanding common shares and common share
equivalents relating to stock options, when dilutive. For the years ended March
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,
-----------------------
1998 1999 2000
---- ---- ----
<S> <C> <C> <C>
Shares related to stock options and warrants................ 1,224 1,927 1,595
Shares related to convertible preferred stock............... 606 68 --
----- ----- -----
1,830 1,995 1,595
===== ===== =====
</TABLE>
Options to purchase 306,049, 108,299 and 174,500 shares of common stock
were outstanding at March 31, 1998, 1999 and 2000, respectively, but were
excluded from the computation of common share equivalents because they were
antidilutive.
Recently Issued Accounting Standards: FASB Interpretation 44,
Interpretation of APB Opinion 25 (FIN 44) was issued in March 2000. FIN 44
provides an interpretation of APB Opinion 25 on accounting for employee stock
compensation and describes its application to certain transactions. FIN 44 is
effective on July 1, 2000. It applies on a prospective basis to events occurring
after that date, except for certain transactions involving options granted to
nonemployees, repriced fixed options, and modifications to add reload option
features, which apply to awards granted after December 31, 1998. The provisions
of FIN 44 are not expected to have a material effect on transactions entered
into through March 31, 2000.
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
18
<PAGE> 20
INTRANET SOLUTIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
MARCH 31, 1998, 1999 AND 2000
(IN THOUSANDS, EXCEPT PER SHARE DATA)
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
2. BUSINESS COMBINATION
On September 29, 1999, the Company merged with InfoAccess, Inc.
(InfoAccess) in a transaction accounted for as a pooling-of-interests.
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, 1998 and 1999 have been combined with InfoAccess'
statement of operations for the years ended December 31, 1997 and 1998.
InfoAccess net income of $213 for the three months ended March 31, 1999 has been
included in the Company's accumulated deficit for the year ended March 31, 2000
The consolidated balance sheet of the Company as of March 31, 1999 has been
combined with the InfoAccess balance sheet as of December 31, 1998.
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>
YEAR ENDED MARCH 31,
--------------------
1998 1999
-------- --------
<S> <C> <C>
Revenues:
IntraNet Solutions, Inc................................... $19,450 $14,058
InfoAccess................................................ 2,761 2,973
------- -------
$22,211 $17,031
======= =======
Net income (loss):
IntraNet Solutions, Inc................................... $(3,655) $ (854)
InfoAccess................................................ (1,008) (505)
------- -------
$(4,663) $(1,359)
======= =======
</TABLE>
<TABLE>
<CAPTION>
MARCH 31,
1999
---------
<S> <C>
Total assets:
IntraNet Solutions, Inc................................... $7,300
InfoAccess................................................ 1,164
------
$8,464
======
</TABLE>
19
<PAGE> 21
INTRANET SOLUTIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
MARCH 31, 1998, 1999 AND 2000
(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>
YEAR ENDED MARCH 31,
---------------------
1998 1999
--------- --------
<S> <C> <C>
Revenues:
Hardware integration...................................... $12,187 $4,358
Support................................................... 4,290 1,271
------- ------
16,477 5,629
------- ------
Cost of revenues:
Hardware integration...................................... 10,249 3,712
Support................................................... 2,634 889
------- ------
12,883 4,601
------- ------
Gross profit................................................ $ 3,594 $1,028
======= ======
</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% and 10.5% at March 31, 1999 and 2000) and is due
in March 2001. Future maturities of principal on this note are $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.
20
<PAGE> 22
INTRANET SOLUTIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
MARCH 31, 1998, 1999 AND 2000
(IN THOUSANDS, EXCEPT PER SHARE DATA)
Summarized financial information for the discontinued operations are as
follows:
<TABLE>
<CAPTION>
YEARS ENDED MARCH 31,
----------------------
1998 1999
--------- ---------
<S> <C> <C>
Operating revenues.......................................... $ 5,023 $ 729
Operating expenses.......................................... (7,337) (1,104)
Interest.................................................... (262) (35)
Income taxes................................................ -- --
------- -------
Net loss from discontinued operations....................... $(2,576) $ (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, 1998, 1999 and 2000 were $36, $42 and $11, 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.
During fiscal 2000, the Company entered into a sales agreement with a
company whose president and CEO is a member of IntraNet Solutions, Inc.'s Board
of Directors. Revenue of $340,000 was recorded under this contract during the
year ended March 31, 2000.
6. PROPERTY AND EQUIPMENT
Property and equipment consists of the following:
<TABLE>
<CAPTION>
MARCH 31,
------------------
1999 2000
------- -------
<S> <C> <C>
Equipment and furniture..................................... $ 2,153 $ 2,363
Leasehold improvements...................................... 86 91
------- -------
2,239 2,454
Less accumulated depreciation............................... (1,339) (1,567)
------- -------
$ 900 $ 887
======= =======
</TABLE>
7. REVOLVING CREDIT FACILITY
The Company had a revolving credit agreement that provided for borrowings
of up to $2,500, subject to the availability of assets securing the loan.
Advances were due on demand and accrued interest at the bank's base lending rate
plus 2.5% (effective rate of 10.25% on March 31, 1999).
On April 1, 1999 the Company entered into a new credit agreement which
provided for borrowings of up to $2,250, subject to the availability of assets
securing the loan. Advances were due on demand and accrued 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.
21
<PAGE> 23
INTRANET SOLUTIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
MARCH 31, 1998, 1999 AND 2000
(IN THOUSANDS, EXCEPT PER SHARE DATA)
8. LONG-TERM OBLIGATIONS
Long-term obligations consist of the following:
<TABLE>
<CAPTION>
MARCH 31,
------------
1999 2000
---- ----
<S> <C> <C>
Notes payable to shareholder, due on demand, quarterly
interest payments at 12.0%, unsecured and subordinated to
bank indebtedness......................................... $ 20 $ 20
Other notes and obligations, due in monthly installments of
$4 -- $10, with interest from 0 -- 10% due through
December 2000............................................. 310 106
---- ----
Total long-term debt........................................ 330 126
Less current maturities..................................... 222 115
---- ----
$108 $ 11
==== ====
</TABLE>
Future maturities of long-term obligations are as follows:
<TABLE>
<CAPTION>
<S> <C>
2001........................................................ $115
2002........................................................ 11
----
$126
====
</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 were 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 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. There were no
preferred stock dividends paid during the year ended March 31, 2000.
Series B convertible preferred stock: In May, 1998, the Company issued
$3,000 of Series B 4% convertible preferred stock. This preferred stock was
convertible into the Company's common stock at a price equal to 84% of market
value at the date of conversion with a maximum conversion price of $7.56 and a
minimum conversion price of $1.81. During the year ended March 31, 1999, all the
Series B convertible preferred stock, including accrued dividends, were
converted into 1,037 of shares of common stock.
22
<PAGE> 24
INTRANET SOLUTIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
MARCH 31, 1998, 1999 AND 2000
(IN THOUSANDS, EXCEPT PER SHARE DATA)
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.
Common Stock: On July 8, 1999, the Company completed a secondary stock
offering, including the underwriters' over allotment option of 3,715 shares of
its common stock and received net proceeds of approximately 27,000. On March 9,
2000, the Company completed a secondary offering of 2,305 shares of its common
stock and received net proceeds of approximately $100,000. The proceeds from
both offerings will be used for working capital and general corporate purposes.
On April 10, 2000, 520 shares of the underwriters' over allotment option
from the Company's March 9, 2000 secondary offering were issued for net proceeds
of approximately $22,724.
Warrants: The Company has 429 stock purchase warrants with exercise prices
of $2.32 to $8.44 outstanding at March 31, 2000. The warrants expire on various
dates through June 2004.
In February 2000, the Company issued a warrant with a five year term in
exchange for various product related marketing services. The warrant entitles
the holder to purchase 150 shares of the Company's common stock at an exercise
price of $36 per share. An independent valuation of the warrant was used to
value the marketing services received at $460.
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 were amortized through May 1999, the life of the
related party debt. The warrant represents the right to purchase up to 156
shares of the Company's common stock at an exercise price of $3.20 per share.
The warrants were exercised in September 1999.
Stock Repurchase: In April 2000, the Board of Directors authorized the
repurchase of up to $10,000 of the Company's common stock at a price not
exceeding $20 per share.
Stock options: The Company maintains the 1994-1997 Stock Option Plan, 1999
Employee Stock Option and Compensation Plan and the 1997 Director Stock Option
Plan, (collectively, the "Plan"), pursuant to which options and other awards to
acquire an aggregate of 3,100, 1,000 and 300 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, 2000, 115 options to purchase shares were outstanding and
exercisable under a 1990 Amended and Restated Stock Option Plan.
23
<PAGE> 25
INTRANET SOLUTIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
MARCH 31, 1998, 1999 AND 2000
(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>
YEARS ENDED MARCH 31,
------------------------
1998 1999 2000
---- ---- ----
<S> <C> <C> <C>
Risk free interest rates.................................... 6.3% 5.0% 6.8%
Dividend yield.............................................. -- -- --
Volatility factor of expected market price of company's
stock..................................................... 75% 75% 75%
Weighted average expected life of options (years)........... 8.5 8.5 4.0
</TABLE>
The Company's pro forma information had the fair value method been used is
as follows:
<TABLE>
<CAPTION>
YEARS ENDED MARCH 31,
-----------------------------
1998 1999 2000
------- ------- -------
<S> <C> <C> <C>
Pro forma loss from continuing operations................... $(3,055) $(2,273) $(1,359)
Pro forma loss from continuing operations per common share,
basic and diluted......................................... (.32) (.20) (.08)
Pro forma net loss.......................................... (5,631) (2,794) (1,359)
Pro forma net loss per common share, basic and diluted...... (.60) (.25) (.08)
Pro forma loss attributable to common shareholders.......... (7,296) (3,513) (1,359)
Pro forma loss attributable to common shareholders per
common share, basic and diluted........................... (.77) (.32) (.08)
</TABLE>
These pro forma results are not representative of future effects of
applying this method, because they do not take into consideration the pro forma
effect of grants made prior to 1996.
A summary of the Company's stock option activity, and related information
through March 31, 2000 is as follows:
<TABLE>
<CAPTION>
WEIGHTED-
AVERAGE
SHARES EXERCISE PRICE
------ --------------
<S> <C> <C>
Outstanding as of April 1, 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................................................... 1,159 12.70
Exercised................................................. (1,059) 3.37
Forfeited................................................. (249) 5.00
------
Outstanding as of March 31, 2000............................ 2,150 $ 8.51
======
</TABLE>
24
<PAGE> 26
INTRANET SOLUTIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
MARCH 31, 1998, 1999 AND 2000
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
MARCH 31,
-------------------------
1998 1999 2000
------ ------ -----
<S> <C> <C> <C>
Options exercisable at end of year.......................... 1,119 1,308 696
====== ====== =====
Weighted-average fair value of options granted during the
year...................................................... $ 4.19 $ 3.52 $7.13
====== ====== =====
</TABLE>
The following table summarizes information about the stock options
outstanding at March 31, 2000:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING
------------------------------------------------- OPTIONS EXERCISABLE
WEIGHTED-AVERAGE ------------------------------
RANGE OF NUMBER REMAINING WEIGHTED-AVERAGE NUMBER WEIGHTED-AVERAGE
EXERCISE PRICE OUTSTANDING CONTRACTUAL LIFE EXERCISE PRICE EXERCISABLE EXERCISE PRICE
-------------- ----------- ---------------- ---------------- ----------- ----------------
<S> <C> <C> <C> <C> <C>
$0.20-$1.99................. 155 4.1 $ 0.29 155 $ 0.29
$2.00-$3.99................. 452 6.1 3.23 323 3.16
$4.00-$5.99................. 317 7.4 4.92 131 4.78
$6.00-$7.99................. 726 9.1 7.29 30 6.15
$8.00-$9.99................. 221 9.4 8.84 -- --
$10.00-$19.99............... 79 6.9 12.04 57 10.36
$20.00-$29.99............... 29 9.9 28.40 -- --
$30.00-$39.99............... 137 9.8 34.20 -- --
$40.00-$49.99............... 34 10.0 45.25 -- --
----- ---- ------ --- ------
2,150 7.9 $ 8.51 696 $ 3.54
===== ==== ====== === ======
</TABLE>
10. EMPLOYEE BENEFIT PLANS
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, 1998, 1999, and
2000 were $65, $50 and $41.
During fiscal 2000, the Company adopted an employee stock purchase plan,
which allows eligible employees to purchase stock of the Company through elected
payroll deductions equal to between 0% and 10% of their compensation. The plan
has two purchase periods per year and allows participants to purchase shares of
stock on the last day of each purchase period at 85% of the lesser of the fair
market value of such shares on the first business day of the purchase period, or
the fair market value of such share on the last business day of the purchase
period.
25
<PAGE> 27
INTRANET SOLUTIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
MARCH 31, 1998, 1999 AND 2000
(IN THOUSANDS, EXCEPT PER SHARE DATA)
11. INCOME TAXES
Due to net operating loss carryforwards through March 2000, 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,
-------------------
1999 2000
------- --------
<S> <C> <C>
Deferred tax liabilities:
Depreciation and amortization............................. $ (44) $ (12)
Deferred tax assets:
Deferred revenue.......................................... 214 300
Accounts receivable and other reserves.................... 91 212
Inventories............................................... 25 25
Net operating loss carryforwards.......................... 3,166 14,291
Other..................................................... 99 263
------- --------
3,551 15,079
Valuation allowance......................................... (3,551) (15,079)
------- --------
$ -- $ --
======= ========
</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 $35.7 million at March 31, 2000, which begin to expire in 2011.
These NOL's are subject to annual utilization limitations due to prior ownership
changes.
The Company's provision for income taxes differs from the expected tax
expense (benefit) amount computed by applying the statutory federal income tax
rate of 34.0% to income (loss) before taxes as a result of the following:
<TABLE>
<CAPTION>
YEAR ENDED MARCH 31,
------------------------------
1998 1999 2000
---- ---- ----
<S> <C> <C> <C>
Federal statutory rate...................................... (34.0)% (34.0)% 34.0%
State taxes, net of federal benefit......................... 0.6 0.9 --
Stock based compensation.................................... (4.3) (27.9) (2,504.4)
Change in valuation allowance............................... 35.4 66.8 2,458.4
Other....................................................... 2.3 (5.8) 12.0
----- ----- --------
--% --% --%
===== ===== ========
</TABLE>
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,
$625, $588 and $710 for the years ended March 31, 1998, 1999 and 2000,
respectively.
26
<PAGE> 28
INTRANET SOLUTIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
MARCH 31, 1998, 1999 AND 2000
(IN THOUSANDS, EXCEPT PER SHARE DATA)
Minimum remaining rental commitments under operating leases net of sublease
arrangements as of March 31, 2000 are as follows:
<TABLE>
<S> <C>
For the year ended March 31,
2001...................................................... $ 802
2002...................................................... 850
2003...................................................... 720
2004...................................................... 680
2005...................................................... 685
Thereafter................................................ 188
------
$3,925
======
</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, 1999 and 2000, the Company
recorded advanced royalties as prepaid expense of $392 and $2,879. Royalties are
recognized as expense based on sales, and during the years ended March 31, 1998,
1999 and 2000 totaled $301, $596 and $1,061, 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
The Company operates in a single reporting segment. A summary of the
Company's operations by geographic area follows:
<TABLE>
<CAPTION>
YEAR ENDED MARCH 31,
-----------------------------
1998 1999 2000
------- ------- -------
<S> <C> <C> <C>
Revenues:
United States............................................. $20,996 $14,118 $18,444
Europe.................................................... 926 2,612 3,445
Canada.................................................... 289 131 320
Other..................................................... -- 170 151
------- ------- -------
Total revenues......................................... $22,211 $17,031 $22,360
======= ======= =======
Identifiable assets:
United States............................................. $ 939 $ 879 $ 874
Europe.................................................... 11 21 13
------- ------- -------
Total.................................................. $ 950 $ 900 $ 887
======= ======= =======
</TABLE>
Sales are attributed to countries or region based on the location of the
customer.
27
<PAGE> 29
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, 2000 and 1999, and the related
consolidated statements of operations, shareholders' equity and cash flows for
each of the three years in the period ended March 31, 2000. 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 auditing standards generally
accepted in the United States of America. 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, 2000 and 1999 and the
consolidated results of their operations and their consolidated cash flows for
each of the three years in the period ended March 31, 2000 in conformity with
accounting principles generally accepted in the United States of America.
/s/ GRANT THORNTON LLP
Minneapolis, Minnesota
May 5, 2000
28
<PAGE> 30
SELECTED CONSOLIDATED FINANCIAL DATA
The Selected Consolidated Financial Data presented below as of and for each
of the fiscal years in the five-year period ended March 31, 2000 have been
derived from our Consolidated Financial Statements. The Selected Consolidated
Financial Data should be read in conjunction with "Management's Discussion and
Analysis of Financial Condition and Results of Operations" and the Consolidated
Financial Statements and the related Notes included in this Annual Report.
<TABLE>
<CAPTION>
YEAR ENDED MARCH 31,
-------------------------------------------------------
1996 1997 1998 1999 2000
---- ---- ---- ---- ----
(UNAUDITED)
IN THOUSANDS
<S> <C> <C> <C> <C> <C>
CONSOLIDATED STATEMENT OF OPERATIONS DATA:
Revenues:
Product licenses................................... $1,184 $ 3,986 $ 4,501 $ 9,303 $17,480
Services........................................... 803 1,492 1,233 2,099 4,880
Hardware integration and support................... 12,721 15,277 16,477 5,629 --
------ ------- ------- ------- -------
Total revenues................................. 14,708 20,755 22,211 17,031 22,360
------ ------- ------- ------- -------
Cost of revenues:
Product licenses................................... 209 489 482 811 1,708
Services........................................... 261 523 797 1,229 2,400
Hardware integration and support................... 9,595 11,894 12,883 4,601 --
------ ------- ------- ------- -------
Total cost of revenues......................... 10,065 12,906 14,162 6,641 4,108
------ ------- ------- ------- -------
Gross profit......................................... 4,643 7,849 8,049 10,390 18,252
------ ------- ------- ------- -------
Operating expenses:
Sales and marketing................................ 2,357 4,125 4,506 5,742 10,536
General and administrative......................... 1,586 2,536 3,100 3,577 3,853
Research and development........................... 918 1,937 2,196 2,214 2,878
Acquisition costs.................................. -- -- -- -- 1,972
------ ------- ------- ------- -------
Total operating expenses....................... 4,861 8,598 9,802 11,533 19,239
------ ------- ------- ------- -------
Income (loss) from operations........................ (218) (749) (1,753) (1,143) (987)
Other income (expense):
Gain on sale of hardware integration unit.......... -- -- -- 517 --
Interest income (expense) net...................... (138) (98) (334) (212) 1,466
Income tax benefit (expense)....................... 46 -- -- --
------ ------- ------- ------- -------
Income (loss) from continuing operations............. (310) (847) (2,087) (838) 479
Income (loss) on discontinued operations............. (200) (2,560) (2,576) (521) --
------ ------- ------- ------- -------
Net income (loss).................................... (510) (3,407) (4,663) (1,359) 479
Preferred stock dividends and accretion.............. -- -- (1,665) (718) --
------ ------- ------- ------- -------
Income (loss) attributable to common shareholders.... $ (510) $(3,407) $(6,328) $(2,077) $ 479
====== ======= ======= ======= =======
Earnings (loss) per share -- basic and diluted:
Income (loss) from continuing operations........... $(0.04) $ (0.11) $ (0.22) $ (0.08) $ 0.03
Net income (loss).................................. (0.07) (0.43) (0.50) (0.12) 0.03
Income (loss) attributable to common
shareholders..................................... (0.07) (0.43) (0.67) (0.19) 0.03
====== ======= ======= ======= =======
Weighted average common shares -- basic.............. 7,324 7,980 9,422 11,151 16,462
Weighted average common shares -- diluted............ 7,324 7,980 9,422 11,151 18,057
</TABLE>
<TABLE>
<CAPTION>
AS OF MARCH 31,
-----------------------------------------------------------
1996 1997 1998 1999 2000
---- ---- ---- ---- ----
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
CONSOLIDATED BALANCE SHEET DATA:
Cash and equivalents............................. $ 529 $ 946 $ 1,162 $2,177 $ 8,859
Short-term investments........................... -- -- -- -- 124,883
Working capital (deficit)........................ (431) (999) 232 3,713 137,112
Total assets................................. 5,953 9,050 9,301 8,464 147,315
Long-term obligations, net of current
maturites...................................... 252 842 232 108 11
Total shareholders' equity................... 593 744 1,613 4,719 140,970
</TABLE>
29
<PAGE> 31
MARKET FOR REGISTRANT'S COMMON EQUITY
AND RELATED SHAREHOLDER MATTERS
Our common stock, par value $.01 per share, is traded on the Nasdaq
National Market tier of The Nasdaq Stock Market under the symbol INRS. At June
16, 2000, our common stock was held by approximately 4,714 shareholders
consisting of 100 record holders and an estimated 4,614 shareholders whose stock
was held in the name of a bank, broker or other nominee. On June 16, 2000, the
closing sale price of a share of our common stock was $28.50.
The high and low sale prices per share of our common stock for the four
quarters during the fiscal years ended March 31, 2000 and 1999 were as follows:
<TABLE>
<CAPTION>
HIGH LOW
---- ---
<S> <C> <C>
FISCAL YEAR ENDED MARCH 31, 1999:
First Quarter............................................. $ 7.38 $4.38
Second Quarter............................................ 5.50 2.75
Third Quarter............................................. 6.06 2.50
Fourth Quarter............................................ 8.75 4.81
FISCAL YEAR ENDED MARCH 31, 2000:
First Quarter............................................. $13.38 $7.25
Second Quarter............................................ 10.50 6.88
Third Quarter............................................. 39.50 7.50
Fourth Quarter............................................ 55.50 27.75
</TABLE>
The Company has never paid cash dividends on the common stock. The Board of
Directors does not anticipate paying cash dividends in the foreseeable future.
RECENT SALES OF UNREGISTERED SECURITIES
During the year ended March 31, 2000, the Company has issued the following
securities pursuant to exemptions from registration under the Securities Act of
1933, as amended (the "Securities Act"). All such sales were made in reliance
upon the exemptions from registration provided under Sections 3(b) and 4(2) of
the Securities Act.
In the quarter ended March 31, 2000, the Company issued a five-year warrant
to purchase up to 225,000 shares of common stock for services performed by
Merrill, Lynch, Pierce, Fenner & Smith. The first 150,000 shares under this
warrant were priced at $35.89, which was valued at 110% of fair market value on
the effective date of the grant. The remaining 75,000 shares under this warrant
will be priced at 110% of the fair market value on the date earned.
30
