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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[x]Quarterly Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the Quarterly Period Ended December 31, 1999.
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or
[ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the Transition Period from to
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Commission file number 0-19817.
IntraNet Solutions, Inc.
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(Exact name of registrant as specified in its charter)
Minnesota 41-1652566
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
8091 Wallace Road
Eden Prairie, Minnesota 55344-3775
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(Address of principal executive offices) (Zip Code)
(612) 903-2000
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(Registrant's telephone number, including area code)
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(Former name, former address and former fiscal year, if changed
since last report)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period
that the registrant was required to file such reports), and (2) has
been subject to such
filing requirements for the past 90 days. Yes X No
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Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date. Common Stock, $.01 par value -
17,652,821 shares as of February 10, 2000.
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INDEX
INTRANET SOLUTIONS, INC.
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Page
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PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed Consolidated Balance Sheets - December 31, 1999 and March 31, 1999...........................3
Condensed Consolidated Statements of Operations - Three and nine months ended
December 31, 1999 and 1998.............................................................................4
Condensed Consolidated Statements of Cash Flows - Nine months ended
December 31, 1999 and 1998.............................................................................5
Notes to Consolidated Financial Statements.............................................................6
Item 2. Management's Discussion and Analysis
of Financial Condition and Results of Operations.......................................................8
Item 3. Quantitative and Qualitative Disclosures about Market Risk............................................20
PART II. OTHER INFORMATION
Item 2. Changes in Securities and Use of Proceeds.............................................................20
Item 4. Submission of Matters to a Vote of Security Holders...................................................20
Item 6. Exhibits and Reports on Form 8-K......................................................................20
SIGNATURES......................................................................................................24
</TABLE>
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PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
INTRANET SOLUTIONS, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
<TABLE>
<CAPTION>
DEC. 31, MAR. 31,
1999 1999
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(unaudited)
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ASSETS
CURRENT ASSETS:
Cash and cash equivalents.................................................... $ 4,004 $ 2,177
Short-term investments....................................................... 25,224 --
Accounts receivable, net..................................................... 6,235 3,995
Current maturities of notes receivable....................................... 97 114
Inventories.................................................................. 217 112
Prepaid royalties............................................................ 440 392
Prepaid expenses and other current assets.................................... 427 414
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Total current assets..................................................... 36,644 7,204
Notes receivable, net of current maturities.................................. 52 106
Property and equipment, net.................................................. 1,375 918
Software licenses, net ...................................................... 176 236
Other investments............................................................ 673 --
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Total assets............................................................. $ 38,920 $ 8,464
============ =============
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Revolving credit facility.................................................... $ -- $ 422
Current maturities of long-term obligations.................................. 176 622
Accounts payable............................................................. 465 584
Deferred revenues............................................................ 935 727
Commissions payable.......................................................... 494 230
Deferred compensation ....................................................... -- 238
Accrued expenses............................................................. 656 667
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Total current liabilities.................................................. 2,726 3,490
Long-term obligations, net of current maturities............................. 4 108
Deferred revenue, net of current portion..................................... 40 147
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Total liabilities........................................................ 2,770 3,745
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SHAREHOLDERS' EQUITY:
Series A convertible preferred stock, $0.01 par value
$5.00 stated value, 75,000 shares issued and outstanding at March 31,
1999, none at December 31, 1999.............................................. -- 334
Common stock, $0.01 par value, 17,449,698 and 12,450,736 shares issued and
outstanding at December 31, 1999 and March 31, 1999, respectively............ 174 124
Additional paid-in capital..................................................... 49,538 17,255
Accumulated deficit ........................................................... (13,553) (12,994)
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Total shareholders' equity................................................... 36,150 4,719
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Total liabilities and shareholders' equity................................... $ 38,920 $ 8,464
============ =============
</TABLE>
See accompanying notes.
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INTRANET SOLUTIONS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
------------------------------- ------------------------------
DEC. 31, DEC. 31, DEC. 31, DEC. 31,
1999 1998 1999 1998
-------------- -------------- ------------- -------------
(unaudited) (unaudited)
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REVENUES:
Product licenses.............................................. $ 4,671 $ 2,733 $ 11,695 $ 6,165
Services...................................................... 1,159 551 3,156 1,171
Hardware integration and support.............................. -- -- -- 5,630
-------------- -------------- ------------- -------------
Total revenues.............................................. 5,830 3,284 14,851 12,966
COST OF REVENUES:
Product licenses.............................................. 510 262 1,235 616
Services...................................................... 568 336 1,533 704
Hardware integration and support.............................. -- -- -- 4,601
-------------- -------------- ------------- -------------
Total cost of revenues...................................... 1,078 598 2,768 5,921
-------------- -------------- ------------- -------------
Gross profit................................................ 4,752 2,686 12,083 7,045
OPERATING EXPENSES:
Sales and marketing........................................... 2,741 1,522 6,736 4,187
General and administrative.................................... 1,052 904 2,829 2,443
Research and development...................................... 731 555 1,879 1,609
Acquisition costs............................................. -- -- 1,972 ---
-------------- -------------- ------------- -------------
Total operating expenses..................................... 4,524 2,981 13,416 8,289
-------------- -------------- ------------- -------------
Income (loss) from operations................................. 228 (295) (1,333) (1,194)
OTHER INCOME (EXPENSE):
Gain on sale of hardware integration unit..................... -- -- -- 517
Interest income (expense), net ............................... 380 (64) 774 (143)
-------------- -------------- ------------- -------------
INCOME (LOSS) FROM CONTINUING OPERATIONS........................ 608 (359) (559) (820)
DISCONTINUED OPERATIONS:
Loss on sale of distribution group............................ -- -- -- (111)
Loss from operations of distribution group.................... -- -- -- (410)
-------------- -------------- ------------- -------------
NET INCOME (LOSS) .............................................. 608 (359) (559) (1,341)
Preferred stock dividends and accretion......................... -- 80 -- 712
-------------- -------------- ------------- -------------
Income (loss) attributable to common shareholders .............. $ 608 $ (439) $ (559) $ (2,053)
============== ============== ============= =============
EARNINGS PER SHARE - BASIC:
Income (loss) from continuing operations per common share..... $ 0.04 $ (0.03) $ (0.04) $ (0.08)
Net income (loss) per common share ........................... $ 0.04 $ (0.03) $ (0.04) $ (0.12)
Income (loss) attributable to common shareholders per common
share......................................................... $ 0.04 $ (0.04) $ (0.04) $ (0.19)
EARNINGS PER SHARE - DILUTED:
Income (loss) from continuing operations per common share..... $ 0.03 $ (0.03) $ (0.04) $ (0.08)
Net income (loss) per common share ........................... $ 0.03 $ (0.03) $ (0.04) $ (0.12)
Income (loss) attributable to common shareholders per common
share......................................................... $ 0.03 $ (0.04) $ (0.04) $ (0.19)
WEIGHTED AVERAGE SHARES - BASIC................................. 17,123 11,511 15,859 10,742
WEIGHTED AVERAGE SHARES - DILUTED............................... 19,608 11,511 15,859 10,742
</TABLE>
See accompanying notes.
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INTRANET SOLUTIONS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
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<CAPTION>
NINE MONTHS ENDED
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DEC. 31, DEC. 31,
1999 1998
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(unaudited)
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OPERATING ACTIVITIES:
Net loss.............................................................................. $ (559) $ (1,341)
Adjustments to reconcile net loss to cash used in operating activities:
Depreciation, amortization and other non-cash charges................................. 531 470
Gain on sale of hardware integration unit............................................. -- (517)
Discontinued operations............................................................... -- 709
Changes in operating assets and liabilities........................................... (2,409) (306)
Other................................................................................. 247 54
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Net cash flows used in operating activities....................................... (2,190) (931)
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INVESTING ACTIVITIES:
Purchases of short-term investments................................................... (148,518) --
Maturities and sales of short-term investments........................................ 123,294 --
Proceeds from note receivable......................................................... 71 46
Purchases of property and equipment................................................... (946) (372)
Other investments..................................................................... (673) --
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Net cash flows used in investing activities....................................... (26,772) 326
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FINANCING ACTIVITIES:
Net advances (repayments) from revolving credit facility.............................. (422) (600)
Payments on long-term obligations .................................................... (650) (884)
Proceeds from long-term obligations .................................................. 100 --
Issuance of preferred stock, net of offering expenses................................. -- 2,853
Issuance of common stock, net of offering expenses.................................... 26,956 --
Payment of dividends on preferred stock............................................... -- (129)
Proceeds from stock options and warrants.............................................. 4,761 620
Other................................................................................. 44 20
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Net cash flows used by financing activities....................................... 30,789 1,880
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Net increase in cash.................................................................. 1,827 623
Cash and cash equivalents, beginning of period........................................ 2,177 1,162
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Cash and cash equivalents, end of period.............................................. $ 4,004 $ 1,785
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SUPPLEMENTAL DISCLOSURE OF CASH FLOWS INFORMATION:
Cash paid for interest................................................................ $ 116 $ 88
Cash paid for income taxes............................................................ 8 5
NON-CASH TRANSACTIONS:
Warrants issued as deferred financing cost............................................. $ -- $ 200
Investment through issuance of software license........................................ 160 --
Issuance of stock as advance royalty................................................... -- 120
Property and equipment................................................................. 26 --
Sale of software for prepaid royalties................................................. 300 --
DETAIL OF CHANGES IN OPERATING ASSETS AND LIABILITIES:
Accounts receivable.................................................................. $ (2,240) $ 1,461
Inventories.......................................................................... (105) 150
Prepaid expenses and other current assets............................................ (61) (71)
Accounts payable..................................................................... (119) (2,366)
Accrued expenses and other current liabilities....................................... 116 520
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Net change in operating assets and liabilities..................................... $ ( 2,409) $ (306)
============= ==============
</TABLE>
See accompanying notes.
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INTRANET SOLUTIONS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
1. NATURE OF THE BUSINESS
IntraNet Solutions, Inc., (the "Company") is a leading provider of
Web-based content management solutions for intranet, extranet and Internet
applications that offer customers the ability to rapidly access, manage and
publish business data to the Web. IntraNet Solutions' Xpedio Content Management
System is the industry's first single source, end-to-end content management
solution. The Company's customers are primarily located throughout the United
States and in Europe. In September 1999, the Company acquired InfoAccess, Inc.
("InfoAccess"), a Web-based software company in a transaction accounted for
using the pooling-of-interests method. Accordingly, the financial information
for periods prior to September 30, 1999 has been restated to include the results
of operations of InfoAccess. All share and per share amounts are also restated.
2. BASIS OF PRESENTATION
The accompanying unaudited condensed consolidated financial statements
have been prepared in accordance with Regulation S-X pursuant to the rules and
regulations of the Securities and Exchange Commission. Certain information and
footnote disclosures normally included in financial statements prepared in
accordance with generally accepted accounting principles have been condensed or
omitted pursuant to such rules and regulations, although management believes
that the disclosures are adequate to make the information presented not
misleading.
In the opinion of management, the unaudited condensed consolidated
financial statements contain all adjustments (consisting of only normal
recurring adjustments) necessary to present fairly the financial position as of
December 31, 1999 and the results of operations for the three months and nine
months ended December 31, 1999 and 1998 and cash flows for the nine months ended
December 31, 1999 and 1998. The results of operations for the three months and
nine months ended December 31, 1999 are not necessarily indicative of the
results for the full year.
Principles of Consolidation: The consolidated financial statements
include the accounts of the Company and its wholly owned subsidiaries. All
significant intercompany transactions and balances have been eliminated.
Revenue Recognition: The Company currently derives all of its revenues
from licenses of its suite of products and related services. Product license
revenue is recognized when evidence of a purchase arrangement exists, the
product has been shipped, the fee is determinable and collectible, and no
significant obligations remain related to implementation. Services revenue
consists of fees from consulting and maintenance. Consulting services include
needs assessment, software integration, security analysis, application
development and training. The Company bills consulting fees either on a time and
materials basis or on a fixed-price schedule. The Company's clients typically
purchase maintenance agreements annually, and the Company prices maintenance
agreements based on a percentage of the product license fee. Clients purchasing
maintenance agreements receive product upgrades, Web-based technical support and
telephone hot-line support. The Company recognizes revenue from maintenance
agreements ratably over the term of the agreement, typically one year. Customer
advances and billed amounts due from customers in excess of revenue recognized
are recorded as deferred revenue.
Cash and Equivalents: The Company considers all short-term, highly
liquid investments that are readily convertible into known amounts of cash and
have original maturities of three months or less to be cash equivalents.
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Short-term Investments: Investments in debt securities with a remaining
maturity of three months or less at the date of purchase are classified as
short-term investments. Management determines the appropriate classification of
debt securities at the time of purchase and reevaluates such designation as of
each balance sheet date. The book value of the investments approximates their
estimated market value. As of December 31, 1999 the Company's investments were
in commercial paper and U.S. Government Agency securities. All investments have
a contractual maturity of three months or less and are held to maturity.
Reclassifications: Certain reclassifications have been made to the
three and nine month periods ending December 31, 1998 to conform with the
presentation used in the December 31, 1999 financial statements. The
reclassifications did not effect net loss or shareholders' equity as previously
reported.
Net Income (loss) per Common Share: The Company's basic net income
(loss) per share amounts have been computed by dividing net income (loss) by the
weighted average number of outstanding common shares. The Company's diluted net
income (loss) per share is computed by dividing net income (loss) by the
weighted average number of outstanding common shares and common share
equivalents relating to stock options, when dilutive. For the three month period
ended December 31, 1998 and nine month periods ended December 31, 1999 and
December 31, 1998, the Company incurred net losses and therefore basic and
diluted per share amounts are the same. Common stock equivalent shares consist
of convertible preferred stock (using the if-converted method) and stock options
and warrants (using the treasury stock method).
3. DISCONTINUED OPERATIONS
During the quarter ended June 30, 1998, the Company sold substantially
all of the remaining assets of its on-demand publishing operations, located in
Phoenix, Arizona, for approximately $487,000. The sale price consisted
substantially of the purchaser's assumption of liabilities. The Company incurred
a loss on the sale of the related assets of $111,000.
4. SHAREHOLDERS' EQUITY
Common stock offering: The Company consummated a common stock offering
(the "Offering") on June 3, 1999, consisting of 3,230,000 shares of common stock
at an $8.00 per share price to the public. The net proceeds of the Offering,
after underwriting discounts, commissions and offering costs of approximately
$2.3 million, was approximately $23.5 million. In July 1999, the underwriters'
exercised their 15% over-allotment, resulting in the sale of an additional
484,500 shares of common stock. The net proceeds from the exercise of the
over-allotment were approximately $3.6 million.
Series A convertible preferred stock: During the year ended March 31,
1998, the Company issued $4.0 million of Series A 5% convertible preferred
stock. The Company issued 800,000 units, each consisting of one share of $0.01
par value preferred stock and a warrant to acquire one share of the Company's
common stock at an exercise price of $5.18. The preferred stock was convertible
into the Company's common stock at a price equal to 75% of market value at the
time of conversion, with a maximum conversion price of $3.71 per share and a
minimum conversion price of $1.00 per share. During the quarters ended June 30,
1998, September 30, 1998 and December 31, 1998, the Company paid $33,000,
$29,000 and $80,000, respectively, in preferred stock dividends. Pursuant to the
terms of the Series A preferred stock, all shares remaining outstanding upon the
completion of the Offering were converted into shares of common stock without
further action of the holders.
Series B convertible preferred stock: In May 1998, the Company issued
$3.0 million of Series B 4% convertible preferred stock. This series of
preferred stock was convertible into the Company's common stock at a price equal
to 84% of market value at the date of conversion with a maximum conversion price
of $7.56 and a minimum conversion price of $1.81. During the quarter ended June
30, 1998, the Company
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recognized a non-cash deemed dividend of $570,000. The deemed dividend was
recorded as a discount to preferred stock with a corresponding credit to
additional paid-in capital. The discount was recognized at the date of issue of
the preferred stock, the same date at which the shares were eligible for
conversion. The accretion of the discount is reflected in the statement of
operations as an adjustment to net loss, but has no net effect on total
shareholders' equity. All Series B convertible preferred stock have been
converted to common stock.
5. REVOLVING CREDIT FACILITY
The Company had a revolving credit agreement, which provided for
borrowings up to $2.25 million, subject to the availability of assets securing
the loan. Advances were due on demand and interest was stated at the bank's
lending rate plus 2.0%. In July 1999, the Company terminated the revolving
line-of-credit facility.
6. ACQUISITION
On September 29, 1999, the Company completed its acquisition of
InfoAccess, using the pooling-of-interests method of accounting. Accordingly,
the condensed consolidated financial statements, and related notes, have been
restated to include the operations and balance sheet amounts of InfoAccess in
all periods presented. Each share of InfoAccess common stock outstanding at the
time of the merger was converted into the right to receive 0.31230 shares of
common stock of the Company in accordance with the merger agreement. An
aggregate of 1,803,385 shares of common stock of the Company were issued in
exchange for the 5,774,530 shares of common stock of InfoAccess outstanding at
the time of the acquisition. In addition, the Company converted 1,237,830
outstanding options to purchase InfoAccess common stock into 386,548 options to
acquire the Company's common stock, on substantially the same terms as the
original option agreement.
PART I - FINANCIAL INFORMATION - CONTINUED
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
FORWARD-LOOKING STATEMENTS
The information presented in this Item contains forward-looking
statements within the meaning of the safe harbor provisions of Section 21E of
the Securities Exchange Act of 1934, as amended. Such statements are subject to
risks and uncertainties, including those discussed under "Risk Factors" below,
that could cause actual results to differ materially from those projected.
Because actual results may differ, readers are cautioned not to place undue
reliance on these forward-looking statements.
OVERVIEW
IntraNet Solutions 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
products. 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
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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. ("InfoAccess") in a transaction accounted for as a
pooling-of-interests. Following the acquisition, we released the Xpedio Content
Management Suite. The Xpedio Content Management Suite combines proven features
of our Web-based content management solution with technology from InfoAccess
that automatically converts content from a source object to HTML or XML to
publish a Web site.
Due to the pooling-of-interests transaction with InfoAccess, our
condensed consolidated financial statements and related notes, included
elsewhere in this Form 10-Q, have been restated to include the operations of
InfoAccess in all periods presented. In addition, certain reclassifications have
been made to the categories of revenues and cost of revenues presented in our
1997 and 1998 financial statements to conform with the presentation used in the
1999 financial statements. These reclassifications had no effect on losses from
continuing operations or net losses as previously reported.
We currently derive all of our revenues from licenses of our software
products and related services. Revenues are recognized on product licenses when
a purchase order has been received, the product has been shipped and no
significant obligations remain related to implementation. Revenues for services
consist of fees from consulting and maintenance. Consulting services include
needs assessment, software integration, security analysis, application
development and training. We bill consulting fees either on a time and materials
basis or on a fixed price schedule. Our clients typically purchase annual
maintenance agreements, and we price maintenance agreements based on a
percentage of the product license fee. Clients purchasing maintenance agreements
receive product upgrades, Web-based technical support and telephone hot-line
support. We recognize revenues from maintenance agreements ratably over the term
of the agreement, typically one year.
Cost of revenues consists of technology royalties, costs to
manufacture, package and distribute our products and related documentation, as
well as personnel and other expenses related to providing services. Sales and
marketing expenses consist primarily of employee salaries, commissions, and
costs associated with marketing programs such as advertising, public relations
and trade shows. Research and development expenses consist primarily of salaries
and related costs associated with the development of new products, the
enhancement of existing products and the performance of quality assurance and
documentation activities. General and administrative expenses consist primarily
of salaries and other personnel-related costs for executive, financial, human
resources, information services and other administrative personnel, as well as
legal, accounting and insurance costs. Losses from discontinued operations
consist primarily of losses on the operations of our former on-demand publishing
distribution group and losses on the write-down and sale of its assets.
Since our inception, we have incurred substantial costs to develop our
technology and products, to recruit and train personnel for our sales and
marketing, research and development and services departments, and to establish
an administrative organization. As a result, we had an accumulated deficit of
$13.6 million at December 31, 1999. We anticipate that our operating expenses
will increase substantially in future quarters as we increase sales and
marketing operations, develop new distribution channels, fund greater levels of
research and development, broaden services and improve operational and financial
systems. In addition, our limited operating history makes it difficult for us to
predict future operating results. We cannot be certain that we will sustain
revenue growth or profitability.
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RESULTS OF OPERATIONS - THREE MONTHS ENDED DECEMBER 31, 1999 COMPARED TO THREE
MONTHS ENDED DECEMBER 31, 1998
Revenues
Total revenues increased by $2.5 million, or 78%, to $5.8 million for
the three months ended December 31, 1999 from $3.3 million for the three months
ended December 31, 1998. The increase in revenues was attributable to the
expansion of our customer base, increased sales to existing customers and the
launch of our Xpedio Content Management Suite, which typically has a higher
sales price than our other products.
Product Licenses. Revenues for product licenses increased by $2.0
million, or 71%, to $4.7 million for the three months ended December 31, 1999
from $2.7 million for the three months ended December 31, 1998. The increase in
revenues for product licenses was attributable to the expansion of our customer
base, increased sales to existing customers and the launch of our Xpedio Content
Management Suite.
Services. Revenues for services increased by $608,000, or 110%, to $1.2
million for the three months ended December 31, 1999 from $551,000 for the three
months ended December 31, 1998. The increase in revenues for services was
primarily attributable to revenues from maintenance contracts on a larger
installed base of products.
Cost of Revenues and Gross Profit
Total cost of revenues increased by $480,000, or 80%, to $1.1 million
for the three months ended December 31, 1999 from $598,000 for the three months
ended December 31, 1998. Total cost of revenues as a percentage of total
revenues was 19% for the three months ended December 31, 1999 compared to 18%
for the three months ended December 31, 1998. Gross profit increased by $2.1
million, or 77%, to $4.8 million for the three months ended December 31, 1999
from $2.7 million for the three months ended December 31, 1998. Total gross
profit as a percentage of total revenues was 81% for the three months ended
December 31, 1999 compared to 82% for the three months ended December 31, 1998.
The increase in gross profit dollars was primarily due to increased revenues for
product licenses and services.
Product Licenses. Cost of revenues for product licenses increased by
$248,000, or 95%, to $510,000 for the three months ended December 31, 1999 from
$262,000 for the three months ended December 31, 1998. Gross profit as a
percentage of revenues for product licenses was 89% for the three months ended
December 31, 1999 compared to 90% for the three months ended December 31, 1998.
Services. Cost of revenues for services increased by $232,000, or 69%,
to $568,000 for the three months ended December 31, 1999 from $336,000 for the
three months ended December 31, 1998. Gross profit as a percentage of revenues
for services was 51% for the three months ended December 31, 1999 compared to
39% for the three months ended December 31, 1998. The increase in the gross
profit as a percentage of revenues for services was primarily due to increased
utilization of consulting services resources and a shift in the mix of revenues
for services to higher margin maintenance revenues from lower margin consulting
services.
Operating Expenses
Sales and Marketing. Sales and marketing expenses increased by $1.2
million, or 80%, to $2.7 million for the three months ended December 31, 1999
from $1.5 million for the three months ended December 31, 1998. Sales and
marketing expenses as a percentage of total revenues were 47% for the three
months ended December 31, 1999 compared to 46% for the three months ended
December 31, 1998. The increase in sales and marketing expense was primarily due
to increased staffing and marketing expenses for advertising, public relations
and trade shows.
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General and Administrative. General and administrative expenses
increased by $148,000, or 16%, to $1.1 million for the three months ended
December 31, 1999 from $904,000 for the three months ended December 31, 1998.
General and administrative expenses as a percentage of total revenues were 18%
for the three months ended December 31, 1999 compared to 28% for the three
months ended December 31, 1998. General and administrative expenses decreased as
a percentage of revenues due primarily to an increase in total revenues
partially offset by an increase in personnel expenses.
Research and Development. Research and development expenses increased
by $176,000, or 32%, to $731,000 for the three months ended December 31, 1999
from $555,000 for the three months ended December 31, 1998. Research and
development expenses as a percentage of total revenues were 13% for the three
months ended December 31, 1999 compared to 17% for the three months ended
December 31, 1998. The decrease in research and development expenses as a
percentage of total revenues was primarily due to an increase in total revenues
partially offset by increases in staffing and related costs to support new
products and product enhancements.
Other Income (Expense)
Interest income was $380,000 for the three months ended December 31,
1999 compared to interest expense of $64,000 for the three months ended December
31, 1998. Interest income for the three months ended December 31, 1999 was
primarily related to short-term investments purchased with the proceeds of our
public stock offering completed in June 1999. Interest expense for the three
months ended December 31, 1998 related primarily to our revolving
line-of-credit.
RESULTS OF OPERATIONS - NINE MONTHS ENDED DECEMBER 31, 1999 COMPARED TO NINE
MONTHS ENDED DECEMBER 31, 1998
Revenues
Total revenues increased by $1.9 million, or 15%, to $14.9 million for
the nine months ended December 31, 1999 from $13.0 million for the nine months
ended December 31, 1998. The increase in revenues was primarily attributable to
the expansion of our customer base, increased sales to existing customers and
the launch of our Xpedio Content Management Suite, which typically has a higher
sales price than our other products, partially offset by the sale of our
hardware integration business.
Product Licenses. Revenues for product licenses increased by $5.5
million, or 90%, to $11.7 million for the nine months ended December 31, 1999
from $6.2 million for the nine months ended December 31, 1998. The increase in
revenues for product licenses was primarily attributable to the expansion of our
customer base, increased sales to existing customers and the launch of our
Xpedio Content Management Suite.
Services. Revenues for services increased by $2.0 million, or 169%, to
$3.2 million for the nine months ended December 31, 1999 from $1.2 million for
the nine months ended December 31, 1998. The increase in revenues for services
was primarily attributable to revenues from maintenance contracts on a larger
installed base of products.
Hardware Integration and Support. There were no revenues for hardware
integration in the nine months ended December 31, 1999 compared to $5.6 million
in revenues for hardware integration for the nine months ended December 31,
1998. We sold our hardware integration business during the quarter ended
September 30, 1998.
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Cost of Revenues and Gross Profit
Total cost of revenues decreased by $3.2 million, or 53%, to $2.8
million for the nine months ended December 31, 1999 from $5.9 million for the
nine months ended December 31, 1998. Total cost of revenues as a percentage of
total revenues was 19% for the nine months ended December 31, 1999 compared to
46% for the nine months ended December 31, 1998. Gross profit increased by $5.0
million, or 72%, to $12.1 million for the nine months ended December 31, 1999
from $7.0 million for the nine months ended December 31, 1998. Total gross
profit as a percentage of total revenues was 81% for the nine months ended
December 31, 1999 compared to 54% for the nine months ended December 31, 1998.
The increase in gross profit was primarily attributable to a shift in product
mix from hardware integration and support to software product licenses and
services.
Product Licenses. Cost of revenues for product licenses increased by
$619,000, or 101%, to $1.2 million for the nine months ended December 31, 1999
from $616,000 for the nine months ended December 31, 1998. Gross profit as a
percentage of revenues for product licenses was 89% for the nine months ended
December 31, 1999 compared to 90% for the nine months ended December 31, 1998.
Services. Cost of revenues for services increased by $829,000, or 118%,
to $1.5 million for the nine months ended December 31, 1999 from $704,000 for
the nine months ended December 31, 1998. Gross profit as a percentage of
revenues for services was 51% for the nine months ended December 31, 1999
compared to 40% for the nine months ended December 31, 1998. The increase in the
gross profit as a percentage of revenues for services was primarily due to
increased utilization of consulting services resources and a shift in the mix of
revenues for services to higher margin maintenance revenues from lower margin
consulting services.
Hardware Integration and Support. There were no cost of revenues for
hardware integration and support in the nine months ended December 31, 1999
compared to $4.6 million in cost of revenues for hardware integration and
support for the nine months ended December 31, 1998. We sold our hardware
integration business during the quarter ended September 30, 1998.
Operating Expenses
Sales and Marketing. Sales and marketing expenses increased by $2.5
million, or 61%, to $6.7 million for the nine months ended December 31, 1999
from $4.2 million for the nine months ended December 31, 1998. Sales and
marketing expenses as a percentage of total revenues were 45% for the nine
months ended December 31, 1999 compared to 32% for the nine months ended
December 31, 1998. Sales and marketing expenses increased as a percentage of
total revenues primarily due to decreased revenues for hardware integration and
support, combined with increased staffing and marketing expenses for
advertising, public relations and trade shows. The increase was partially offset
by decreased sales and marketing expenses related to hardware integration and
support programs.
General and Administrative. General and administrative expenses
increased by $386,000, or 16%, to $2.8 million for the nine months ended
December 31, 1999 from $2.4 million for the nine months ended December 31, 1998.
General and administrative expenses as a percentage of total revenues were 19%
for both the nine months ended December 31, 1999 and 1998. General and
administrative increased primarily due to increased personnel expenses.
Research and Development. Research and development expenses increased
by $270,000, or 17%, to $1.9 million for the nine months ended December 31, 1999
from $1.6 million for the nine months ended December 31, 1998. Research and
development expenses as a percentage of total revenues were 13% for the nine
months ended December 31, 1999 compared to 12% for the nine months ended
December 31, 1998. The increase in research and development expenses was
primarily due to increased staffing and costs related to product enhancements,
partially offset by decreased expenses related to our
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hardware integration operations.
Acquisition costs. Acquisition costs of $2.0 million in the nine months
ended December 31, 1999 consisted primarily of financial advisory, legal,
accounting and other costs related to our acquisition of InfoAccess, Inc.
in September 1999.
Other Income (Expense)
Interest income was $774,000 for the nine months ended December 31,
1999 compared to interest expense of $143,000 for the nine months ended December
31, 1998. Interest income for the nine months ended December 31, 1999 was
primarily related to short-term investments purchased with the proceeds of our
public stock offering completed in June 1999. Interest expense for the nine
months ended December 31, 1998 related primarily to our revolving
line-of-credit.
Discontinued Operations
Losses on discontinued operations of $521,000 for the nine months ended
December 31, 1998 consisted of losses on the operation and disposition of our
on-demand publishing operations, the final disposition of which occurred in June
1998.
LIQUIDITY AND CAPITAL RESOURCES
We have funded our operations and satisfied our capital expenditure
requirements primarily through revolving working capital and term loans from
banking institutions, private placements and public offerings of securities and
proceeds from the sales of assets related to prior lines of business. Net cash
used by operating activities was $2.2 million for the nine months ended December
31, 1999, compared to net cash used in operating activities of $931,000 for the
nine months ended December 31, 1998.
To date, we have invested our capital expenditures primarily in
property and equipment, consisting largely of computer hardware and software.
Capital expenditures for the nine months ended December 31, 1999 and 1998 were
$946,000 and $372,000, respectively. We have also entered into capital and
operating leases for facilities and equipment. We expect that our capital
expenditures will increase as our employee base grows. At December 31, 1999, we
did not have any material commitments for capital expenditures.
As of December 31, 1999, we had $4.0 million in cash and equivalents,
$25.2 million in short-term investments and $33.9 million in working capital.
Net cash provided by financing activities was $30.8 million for the nine months
ended December 31, 1999 and $1.9 million for the nine months ended December 31,
1998. In June 1999, we completed a public offering of our common stock that
raised approximately $23.5 million in proceeds, net of offering costs of
approximately $2.3 million. In July 1999, the underwriters exercised their
over-allotment option, raising additional proceeds of approximately $3.6
million. In July 1999, we closed our revolving line-of-credit facility with
Diversified Business Credit, Inc.
We currently believe that the cash and cash equivalents on hand will be
sufficient to meet our working capital requirements for 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.
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YEAR 2000 COMPLIANCE
The "Year 2000 issue" refers generally to the problems that some software
may have in determining the correct century. For example, software with
date-sensitive functions that are not Year 2000 compliant may not be able to
distinguish whether "00" means 1900 or 2000, which may result in system failures
or the creation of erroneous data.
We adopted a Year 2000 readiness program for the current versions of our
products prior to December 31, 1999. Our program included Year 2000 readiness
assessment and implementation of solutions to potential readiness issues.
Solutions included remediation, upgrading and replacement of certain product
versions, as well as validation testing, and contingency planning. We responded
to customer questions about prior versions of our products on a case-by-case
basis. We also tested the Year 2000 compliance of software obtained from third
parties that is incorporated into our products, and sought assurances from our
vendors that licensed software is Year 2000 compliant. Despite our testing,
testing by current and potential clients and assurances from developers of
products incorporated into our products, our products may contain undetected
errors or defects associated with Year 2000 date functions. Unknown errors or
defects in our products could result in delayed or lost revenues, diversion of
development resources, damage to our reputation or increased service and
warranty costs, any of which may have a material adverse affect on our business,
operating results and financial condition. Some commentators have predicted
significant litigation regarding Year 2000 compliance issues. Because of the
unprecedented nature of such litigation, it is uncertain whether or to what
extent this may affect us. To date, we have received no reports of material Year
2000 problems with our products.
We also adopted a Year 2000 readiness program related to our internal
systems. Our internal systems include both our information technology, or IT,
and non-IT systems. Our readiness program included an assessment of our material
internal IT and non-IT systems, including both our own software products and
third-party software and hardware technology. To the extent that we were not
able to test the technology provided by third-party vendors, we sought
assurances from the vendors that their systems are Year 2000 compliant. Although
we are not currently aware of any material operational issues or costs
associated with our internal IT and non-IT systems and arrival of the Year 2000,
we may experience material unanticipated problems and costs caused by undetected
errors or defects in the technology used in our internal IT and non-IT systems.
We do not currently have complete information concerning the effects of the
Year 2000 on all of our customers. Our current and potential clients may incur
significant expenses related to the Year 2000 issue. If our clients were not
Year 2000 compliant, they may be incurring material costs to remedy problems, or
they may face litigation costs. In either case, Year 2000 issues could reduce or
eliminate funds that current or potential customers would otherwise have had for
purchases of our products and services. Moreover, the information technology
personnel of our customers and potential customers may be required to focus
substantial efforts on addressing the Year 2000 issues of their own companies,
leaving them unable to evaluate or acquire new technology such as our products.
As a result, our business, operating results and financial condition may be
materially adversely affected. To date, we do not believe the Year 2000 issue
has had a material effect on demand for our products.
We have funded our Year 2000 program from available cash and have not
separately accounted for these costs in the past. To date, we believe direct
costs for our Year 2000 program have not been material and have amounted to
less than $25,000. In addition, we have incurred expenses in amounts that are
not material associated with our salaried employees who have devoted some of
their time our Year 2000 program. We may incur additional costs related to
the Year 2000 program for unanticipated Year 2000 problems. We may experience
material problems and costs associated with Year 2000 compliance that may
materially adversely affect our business, operating results and financial
condition.
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RISK FACTORS
Certain statements made in this Form 10-Q are forward-looking
statements based on our current expectations, assumptions, estimates and
projections about our business and our industry. These forward-looking
statements involve risks and uncertainties. Our business, financial condition
and results of operations could differ materially from those anticipated in
these forward-looking statements as a result of certain factors, as more fully
described below. You should consider carefully the risks and uncertainties
described below, which are not the only ones facing our Company. Additional
risks and uncertainties also may impair our business operations. We undertake no
obligation to update publicly any forward-looking statements for any reason,
even if new information becomes available or other events occur in the future.
WE HAVE A LIMITED OPERATING HISTORY ON WHICH TO EVALUATE OUR PROSPECTS.
Significant sales of our Xpedio Content Management Suite, which
includes Xpedio Content Server, Xpedio Content Publisher and Web Asset
Management, began in the quarter ended December 31, 1999. Accordingly, we have
only a limited operating history in our current product line on which you can
base your evaluation of our business and prospects. In addition, our prospects
must be considered in light of the risks and uncertainties encountered by
companies in an early stage of development in new and rapidly evolving markets.
Many of these risks are discussed under the subheadings below.
FLUCTUATIONS IN OUR OPERATING RESULTS MAY MAKE IT DIFFICULT TO PREDICT OUR
FUTURE PERFORMANCE.
Our revenues and operating results are difficult to predict and may
fluctuate significantly from quarter to quarter. If our quarterly revenues or
operating results fall below the expectations of investors or securities
analysts, the price of our common stock could fall substantially. A large part
of our sales typically occur in the last month of a quarter. If these sales were
delayed from one quarter to the next for any reason, our operating results could
fluctuate dramatically. Our sales cycles may vary, making the timing of sales
difficult to predict. Furthermore, our infrastructure costs are generally fixed.
as a result, modest fluctuations in revenues between quarters may cause large
fluctuations in operating results. These factors all tend to make the timing of
revenues unpredictable and may lead to high period-to-period fluctuations in
operating results.
Our quarterly revenues and operating results may fluctuate for several
additional reasons, many of which are outside of our control, including the
following:
- demand for our products and services;
- the timing of new product introductions and sales of our products
and services;
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- 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.
OUR SUCCESS DEPENDS ON OUR ABILITY TO EXPAND OUR SALES FORCE AND DISTRIBUTION
CHANNELS.
To increase our market share and revenues, we must increase the size
of our sales force and the number of our distribution channel partners. Our
failure to do so may have a material adverse affect on our business, operating
results and financial condition. There is intense competition for sales
personnel in our business, and we cannot be sure that we will be successful in
attracting, integrating, motivating and retaining new sales personnel. Our
existing or future distribution channel partners may choose to devote greater
resources to marketing and supporting the products of other companies. In
addition, we will need to resolve potential conflicts among our sales force and
distribution channel partners.
POTENTIAL ACQUISITIONS MAY BE DIFFICULT TO COMPLETE OR TO INTEGRATE AND MAY
DIVERT MANAGEMENT'S ATTENTION.
We may seek to acquire or invest in businesses, products or
technologies that are complementary to our business. If we identify an
appropriate acquisition opportunity, we may be unable to negotiate favorable
terms for that acquisition, successfully finance the acquisition or integrate
the new business or products into our existing business and operations. In
addition, the negotiation of potential acquisitions and the integration of an
acquired business or products may divert management time and resources from our
existing business and operations. To finance acquisitions, we may use a
substantial portion of our available cash, including proceeds of this offering,
or we may issue additional securities, which would cause dilution to our
shareholders.
WE MAY NOT BE PROFITABLE IN THE FUTURE.
Our revenues may not grow in future periods, may not grow at past rates
and we may not sustain our recent quarterly profitability (excluding expenses
incurred in connection with the acquisition of InfoAccess in the quarter ended
September 30, 1999. If we do not sustain our recent quarterly profitability, the
market price of our stock may fall. Our ability to sustain our recent profitable
operations depends upon many factors beyond our direct control. These factors
include, but are not limited to:
- the demand for our products;
- our ability to quickly introduce new products;
- the level of product and price competition;
- our ability to control costs; and
- general economic conditions.
OUR SUCCESS DEPENDS ON OUR ABILITY TO SUCCESSFULLY INTEGRATE INFOACCESS, INC.
WITH OUR OPERATIONS.
On September 29, 1999, we acquired InfoAccess, Inc. in a transaction
accounted for as a pooling-of-interests. We are currently integrating the
business and products of InfoAccess with our existing business and products. We
may incur unanticipated costs in the course of this integration. In addition,
the integration of InfoAccess with our operations involves the following risks:
- failure to develop complimentary product offerings and marketing
strategies;
- failure to maintain the customer relationships of InfoAccess;
- failure to retain the employees of InfoAccess;
- failure to coordinate product development efforts; and
- diversion of management's time and attention from other aspects of
our business.
We cannot be sure that we will be successful in integrating the
business and products of InfoAccess with our business and products. If we are
not, our business, operating results and financial condition may be materially
adversely affected.
THE INTENSE COMPETITION IN OUR INDUSTRY MAY REDUCE OUR FUTURE SALES AND PROFITS.
The market for our products is highly competitive and is likely to
become more competitive. We may not be able to compete successfully in our
chosen marketplace, which may have a material adverse effect on our business,
operating results and financial condition. Additional competition may cause
pricing pressure, reduced sales and margins, or prevent our products from
gaining and sustaining market acceptance. Many of our current and potential
competitors have greater name recognition, access to larger customer bases, and
substantially more resources than we have. Competitors with greater resources
than ours may be able to respond more quickly than we can to new opportunities,
changing technology, product standards or customer requirements.
WE MAY HAVE DIFFICULTY MANAGING OUR GROWTH.
Any failure to properly manage our growth may have a material adverse
effect on our business, operating results and financial condition. The rapid
growth that we have experienced places significant challenges on our management,
administrative and operational resources. To properly manage this growth, we
must, among other things, implement and improve additional and existing
administrative, financial and operational systems, procedures and controls on a
timely basis. We will also need to expand our finance, administrative and
operations staff. We may not be able to complete the improvements to our
systems, procedures and controls necessary to support our future operations in a
timely manner. Management may not be able to hire, train, integrate, retain,
motivate and manage required personnel and may not be able to successfully
identify, manage and exploit existing and potential market opportunities. In
connection with our expansion, we plan to increase our operating expenses to
expand our sales and marketing operations, develop new distribution channels,
fund greater levels of research and development, broaden services and support
and improve operational and financial systems. Our failure to generate
additional revenue commensurate with an increase in operating expenses during
any fiscal period
OUR PRODUCTS MAY NOT BE COMPATIBLE WITH COMMERCIAL WEB BROWSERS AND OPERATING
SYSTEMS.
Our products utilize interfaces that are compatible with commercial
Web browsers. In addition, Xpedio is a server-based system written in Java that
functions in both Windows NT and UNIX environments. We must continually modify
our products to comform to commercial Web browsers and operating systems. If our
products were to become incompatible with commercial Web browsers and operating
systems, our business would be harmed. In addition, uncertainty related to the
timing and nature of product introductions or modifications by vendors of Web
browsers and operating systems may have a materially adverse effect on our
business, operating results and financial conditions.
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could have a material adverse effect on our financial results for that period.
WE DEPEND ON THE INTEGRATION AND CONTINUED SERVICE OF OUR KEY PERSONNEL.
We are a small company and depend greatly on the knowledge and
experience of our senior management team, many of whom have only recently joined
us, and other key personnel. If we fail to quickly integrate our team, or lose
any of these key personnel, our business, operating results and financial
condition could be materially adversely affected. We must hire additional
employees to meet our business plan and alleviate the negative effect that the
loss of a senior manager could have on us. Our success will depend in part on
our ability to attract and retain additional personnel with the highly
specialized expertise necessary to engineer, design and support our products and
services. Like other software companies, we face intense competition for
qualified personnel. We may not be able to attract or retain such personnel.
WE HAVE RELIED AND EXPECT TO CONTINUE TO RELY ON SALES OF OUR CONTENT
MANAGEMENT SOFTWARE PRODUCTS FOR OUR REVENUES.
We currently derive all of our revenues from product licenses and
services associated with our suite of content management software products. The
market for content management software products is new and rapidly evolving. We
cannot be certain that a viable market for our products will emerge, or if it
does emerge, that it will be sustainable. If we do not continue to increase
revenues related to our existing products or generate revenues from new products
and services, our business, operating results and financial condition may be
materially adversely affected. We will continue to depend on revenues related to
new and enhanced versions of our software products for the foreseeable future.
Our success will largely depend on our ability to increase sales from existing
products and generate sales from product enhancements and new products. We
cannot be certain that we will be successful in upgrading and marketing our
existing products or that we will be successful in developing and marketing new
products and services. The market for our products is highly competitive and
subject to rapid technological change. Technological advances could make our
products less attractive to customers and adversely affect our business. In
addition, complex software product development involves certain inherent risks,
including risks that errors may be found in a product enhancement or new product
after its release, even after extensive testing, and the risk that discovered
errors may not be corrected in a timely manner.
OUR SUCCESS DEPENDS ON OUR ABILITY TO PROTECT OUR PROPRIETARY TECHNOLOGY.
If we are unable to protect our intellectual property, or incur
significant expense in doing so, our business, operating results and financial
condition may be materially adversely affected. Any steps we
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take to protect our intellectual property may be inadequate, time consuming and
expensive. We currently have no patents or pending patent applications. Without
significant patent or copyright protection, we may be vulnerable to competitors
who develop functionally equivalent products. We may also be subject to claims
that our current products infringe on the intellectual property rights of
others. Any such claim may have a material adverse effect on our business,
operating results and financial condition.
We anticipate that software product developers will be increasingly
subject to infringement claims due to growth in the number of products and
competitors in our industry, and the overlap in functionality of products in
different industries. Any infringement claim, regardless of its merit, could be
time-consuming, expensive to defend, or require us to enter into royalty or
licensing agreements. Such royalty or licensing agreements may not be available
on commercially favorable terms, or at all. We are not currently involved in any
intellectual property litigation. However, we have been notified by a
third-party it believes that our Xpedio mark infringes its proprietary rights.
Due to the early stage of the dispute, we are unable to assess the likelihood
that an infringement claim would be successful and we have not determined how we
will respond to this notification.
We rely on trade secret protection, confidentiality procedures and
contractual provisions to protect our proprietary information. Despite our
attempts to protect our confidential and proprietary information, others may
gain access to this information. Alternatively, other companies may
independently develop substantially equivalent information. We have been issued
trademarks for the IntraNet Solutions and Intra.doc! marks and have applied for
trademark registration for the Xpedio mark.
We are not certain whether a trademark on the Xpedio mark. In the
absence of trademark protection, we may be unable to take advantage of the brand
name recognition we are attempting to build. In addition, even if a trademark is
issued, we cannot be sure that the trademark will prove valuable to us.
OUR PRODUCTS MAY NOT BE COMPATIBLE WITH COMMERCIAL WEB BROWSERS AND OPERATING
SYSTEMS.
Our products utilize interfaces that are compatible with commercial Web
browsers. In addition, Xpedio is a server-based system written in Java that
functions in both Windows NT and UNIX environments. We must continually modify
our products to conform to commercial Web browsers and operating systems. If
our products were to become incompatible with commercial Web browsers and
operating systems, our business would be harmed. In addition, uncertainty
related to the timing and nature of product introductions or modifications by
vendors of Web browsers and operating systems may have a materially adverse
effect on our business, operating results and financial conditions.
WE COULD BE SUBJECT TO PRODUCT LIABILITY CLAIMS IF OUR CUSTOMERS' DATA IS
DAMAGED THROUGH THE USE OF OUR PRODUCTS.
If software errors or design defects in our products cause damage to
customers' data and our agreements do not protect us from related product
liability claims, our business, operating results and financial condition may be
materially adversely affected. In addition, we could be subject to product
liability claims if our security features fail to prevent unauthorized third
parties from entering our customers' intranet, extranet or Internet Web sites.
Our software products are complex and sophisticated and may contain design
defects or software errors that are difficult to detect and correct. Errors,
bugs or viruses spread by third parties may result in the loss of market
acceptance or the loss of customer data. Our agreements with customers that
attempt to limit our exposure to product liability claims may not be enforceable
in certain jurisdictions where we operate.
FUTURE REGULATIONS COULD BE ADOPTED THAT RESTRICT OUR BUSINESS.
Federal, state or foreign agencies may adopt new legislation or
regulations governing the use and quality of Web content. We cannot predict if
or how any future laws or regulations would impact our business and operations.
Even though these laws and regulations may not apply to our business directly,
they could indirectly harm us to the extent that they impact our customers and
potential customers.
SIGNIFICANT FLUCTUATION IN THE MARKET PRICE OF OUR COMMON STOCK COULD RESULT IN
SECURITIES LITIGATION AGAINST US.
In the past, securities class action litigation has been brought
against publicly held companies following periods of volatility in the price of
their securities. If we were subject to such litigation due to volatility in our
stock price, we may incur substantial costs. Such litigation could divert the
attention of our senior management away from our business, which could have a
material adverse effect on our business, operating results and financial
condition.
The market price of our common stock has fluctuated significantly in
the past and may do so in the future. The market price of our common stock may
be affected by each of the following factors, many of which are outside of our
control:
- variations in quarterly operating results;
- changes in estimates by securities analysts;
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- changes in market valuations of companies in our industry;
- announcements by us of significant events, such as major sales,
acquisitions of businesses or losses of major customers;
- additions or departures of key personnel; and
- sales of our equity securities.
OUR PERFORMANCE WILL DEPEND ON THE CONTINUING GROWTH AND ACCEPTANCE OF THE
WEB.
Our products are designed to be used with intranets, extranets and the
Internet and private intranets and extranets. If the use of these methods of
electronic communication does not grow, our business, operating results and
financial condition may be materially adversely affected. Continued growth in
the use of the web will require ongoing and widespread interest in its
capabilities for communication and commerce. Its growth will also require
maintenance and expansion of the infrastructure supporting its use and the
development of performance improvements, such as high-speed modems. The web
infrastructure may not be able to support the demands placed on it by continued
growth. The ongoing development of corporate intranets depends on continuation
of the trend toward network-based computing and on the willingness of businesses
to reengineer the processes used to create, store, manage and distribute their
data. All of these factors are outside of our control.
OUR EXISTING SHAREHOLDERS WILL HAVE SIGNIFICANT INFLUENCE OVER INTRANET
SOLUTIONS.
Robert F. Olson, our President and Chief Executive Officer, holds
approximately 18% of our outstanding common stock. Accordingly, Mr. Olson will
be able to exercise significant control over the affairs of IntraNet Solutions.
Additionally, our directors and executive officers beneficially own
approximately 22% of our common stock. These persons effectively control
IntraNet Solutions and will be able to direct its affairs, including approval of
the acquisition or disposition of assets, future issuance of common stock or
other securities and the authorization of dividends on our common stock. Our
directors and executive officers could use their stock ownership to delay, defer
or prevent a change in control of IntraNet Solutions, depriving shareholders of
the opportunity to sell their stock at a price in excess of the prevailing
market price.
WE CAN ISSUE SHARES OF PREFERRED STOCK WITHOUT SHAREHOLDER APPROVAL, WHICH
COULD ADVERSELY AFFECT THE RIGHTS OF COMMON SHAREHOLDERS.
Our Articles of Incorporation permit us to establish the rights,
privileges, preferences and restrictions, including voting rights, of unissued
shares of our capital stock and to issue such shares without approval from our
shareholders. The rights of holders of our common stock may suffer as a result
of the rights granted to holders of preferred stock that may be issued in the
future. In addition, we could issue preferred stock to prevent a change in
control of IntraNet Solutions, depriving shareholders of an opportunity to sell
their stock at a price in excess of the prevailing market price.
CERTAIN PROVISIONS OF MINNESOTA LAW MAY MAKE A TAKEOVER OF INTRANET SOLUTIONS
DIFFICULT, DEPRIVING SHAREHOLDERS OF OPPORTUNITIES TO SELL SHARES AT
ABOVE-MARKET PRICES.
Certain provisions of Minnesota law may have the effect of discouraging
attempts to acquire IntraNet Solutions without the approval of our Board of
Directors. Consequently, our shareholders may lose opportunities to sell their
stock for a price in excess of the prevailing market price.
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PART I - FINANCIAL INFORMATION - CONTINUED
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company invests its excess cash in commercial paper and highly rated
U.S. government agencies. All investments are held to maturity. The market risk
on such investments is minimal. Receivables from sales to foreign customers are
denominated in U.S. dollars and these transactions are unlikely to have a
material adverse effect on the Company.
PART II. OTHER INFORMATION
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY-HOLDERS.
None.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(A) EXHIBITS
<TABLE>
<CAPTION>
NUMBER DESCRIPTION
------ -----------
<S> <C>
3.1 Second Amended and Restated Articles of Incorporation (filed
electronically)
3.2 Bylaws (incorporated by reference to Exhibit A of the
Registrant's registration statement on Definitive Proxy
Statement Schedule 14A filed with the Securities and
Exchange commission July 22, 1997, File No. 0-19817).
4.1 Certificate of Designation of Series B Preferred Stock
(incorporated by reference of Exhibit 4.1 of the
Registrant's registration statement on Form S-3,
File No.333-57181).
4.2 Securities Purchase Agreement, dated May 6, 1998, by and
among the Registrant, Stark International and Shepherd
Investments International, Ltd. (incorporated by
reference to Exhibit 4.2 of the Registrant's
registration statement on Form S-3, File No. 333-57181)
4.3 Registration Rights Agreement, dated May 6, 1998, by and
among the Registrant, Stark International and Shepherd
Investments International, Ltd. (incorporated by
reference to Exhibit 4.3 of the Registrant's
registrations statement on Form S-3, No.333-57181).
4.4 Certificate of Designation of Series A convertible preferred
stock (incorporated by reference to Exhibit 3 (i) (A)
of the Registrant's Form 10-QSB for the three months
ended June 30, 1997).
4.5 Form of Stock Purchase Warrant issued to purchases of units
containing the Registrant's Series A convertible
preferred stock and Stock Purchase Warrants
(incorporated by reference to Exhibit 4.1 of the
Registrant's Form 10-QSB for the three months ended
June 30, 1997).
</TABLE>
20
<PAGE> 21
4.6 Form of Registration Rights Agreement entered into by
and between the Registrant and purchasers of units
containing the Registrant's Series A convertible
preferred stock and Stock Purchase Warrants
(incorporated by reference to Exhibit 10.1
Registrant's Form 10-QSB for the three months
ended June 30, 1997).
10.1 Lease Agreement dated, April 24, 1996, by and between
CSM Investors, Inc. and Registrant (incorporated
by reference to Exhibit 10.1 of the Registrant's
registration statement on Form SB-2, File No.
333-14175).
10.2 Credit and Security Agreement, dated March 14, 1995,
by and between Diversified Business Credit, Inc.
and the Registrant (incorporated by reference to
Exhibit 10.2 of the Registrant's registration
statement on Form SB-2, file No. 333-14175).
10.3 Term Loan supplement to Credit Agreement, dated March
14, 1995, by and between the Registrant and
Diversified Business Credit, Inc. (incorporated by
reference to Exhibit 10.3 of the Registrant's
registration statement on Form SB-2, File No.
333-14175).
10.4 IntraNet Solutions, Inc. 1994-1997 Stock Option and
Compensation Plan (incorporated by reference to
Exhibit 10.4 of the Registrant's registration
statement on Form SB-2, File No. 333-14175).
10.5 Employment Agreement, dated July 30, 1996, by and
between the Registrant and Robert F. Olson
(incorporated by reference to Exhibit 10.5 of the
Registrant's registration statement on Form SB-2,
File No. 333-14175).
10.6 Employment Agreement, dated July 30, 1996, by and
between the Registrant and Jeffrey J. Sjobeck
(incorporated by reference to Exhibit 10.6 to the
Registrant's Form 10-KSB for the fiscal year ended
March 31, 1997).
10.7 Promissory Note, dated December 23, 1996, made by the
Registrant in favor of Circle F. Ventures, LLC
(incorporated by reference to Exhibit 10.7 of the
Registrant's Form 10-KSB for the fiscal year ended
March 31, 1997).
10.8 Amendment, dated March 4, 1997, to the Promissory
Note made by the Registrant in favor of Circle F
Ventures, LLC dated December 23, 1996
(incorporated by reference to Exhibit 10.8 of the
Registrant's Form 10KSB for the fiscal year ended
March 31, 1997).
10.9 Lease Agreement dated April 22, 1998, by and between
Lake Corporate Center LLC and the Registrant
(incorporated by reference to Exhibit 10.9 of the
Registrant's registration statement on Form 10-KSB
for the fiscal year ended March 31, 1998).
10.10 Stock Purchase Warrant Agreement, dated December 23,
1996, by and between the Company and Circle F.
Ventures, LLC (incorporated by reference to
Exhibit 10.10 of the Registrant's Form 10-KSB for
the fiscal year ended March 31, 1997).
10.11 Security Agreement, dated December 23, 1996, by and
between the Registrant and Circle F. Ventures, LLC
(incorporated by reference to Exhibit 10.11 of the
Registrant's Form 10-KSB for the fiscal year ended
March 31, 1997).
10.12 Subordination Agreement, dated December 23, 1996, by
and between the Registrant Diversified Business
Credit, Inc. and Circle F. Ventures, LLC
(incorporated by reference to Exhibit 10.12 of the
Registrant's Form 10-KSB for the fiscal year ended
March 31, 1997).
21
<PAGE> 22
10.13 Promissory Note, dated March 18, 1997, made by the
Registrant in favor of Circle F Ventures, LLC
(incorporated by reference to Exhibit 10.13 of the
Registrant's Form 10-KSB for the fiscal year ended
March 31, 1997).
10.14 Sublease Agreement, dated April 22, 1998, by and
between CSM Investors, Inc., Digital River, Inc. and
the Registrant (incorporated by reference to Exhibit
10.14 of the Registrant's Form 10-KSB for the fiscal
year ended March 31, 1997).
10.15 Stock Purchase Warrant Agreement, dated March 18,
1997, by and between the Registrant and Circle F
Ventures, LLC (incorporated by reference to Exhibit
10.15 of the Registrant's Form 10-KSB for the fiscal
year ended March 31, 1997).
10.16 Schedule identifying certain material details of
documents substantially identical to those set forth
in Exhibits 10.17, 10.18, 10.19 and 10.20
(incorporated by reference to Exhibit 10.16 of the
Registrant's Form 10-KSB for the fiscal year ended
March 31, 1997).
10.17 Promissory Note, dated December 20, 1996, made by the
Registrant in favor of Rita M. Olson (incorporated to
Exhibit 10.17 of the Registrant's Form 10KSB for the
fiscal year ended March 31, 1997).
10.18 Amendment, dated March 4, 1997, to the Promissory
Note made by the Registrant in favor of Rita M. Olson
dated December 20, 1996 (incorporated by reference to
Exhibit 10.18 of the Registrant's Form 10KSB for the
fiscal year ended March 31, 1997).
10.19 Amendment, dated June 5, 1997, by and between the
Registrant and Rita M. Olson dated December 20, 1996
(incorporated by reference to Exhibit 10.19 of the
Registrant's Form 10-KSB for the fiscal year ended
March 31, 1997).
10.20 Stock Purchase Warrant Agreement, dated December 20,
1996, by and between the Registrant and Rita M. Olson
(incorporated by reference to Exhibit 10.20 of the
Registrant's Form 10-KSB for the fiscal year ended
March 31, 1997).
10.21 Note Conversion and Subscription Agreement, dated
June 6, 1997, by and between the Registrant and Rita
M. Olson (incorporated by reference to Exhibit 10.21
of the Registrant's Form 10-KSB for the fiscal year
ended March 31, 1997).
10.22 Note Conversion and Subscription Agreement, dated
June 6, 1997, by and between the Registrant and Wayne
W. Mills (incorporated by reference to Exhibit 10.22
of the Registrant's Form 10-KSB for the fiscal year
ended March 31, 1997).
10.23 Asset Purchase Agreement, dated as of March 30, 1998,
by and among Midwest Graphics & Response Systems,
Inc., Stephen M. Krenz, and IntraNet Distribution
Group, Inc. (incorporated by reference to Exhibit
10.23 of the Registrant's Form 10-QSB for the three
months ended December 30, 1998).
10.24 Asset Purchase Agreement, dated August 13, 1998, by
and among Intranet Solutions, Inc., IntraNet
Distribution Group, Inc, and Communication
Connections, Inc. (incorporated by reference to
Exhibit 10.24 of the Registrant's Form 10-QSB for the
three months ended December 31, 1998).
10.25 Asset Purchase Agreement, dated effective as of
September 30, 1998, by and between Osage Systems
Group, Inc., Osage Systems Group Minneapolis, Inc.
and IntraNet Solutions, Inc. (incorporated by
reference to Exhibit 10.25 of the Registrant's Form
10-QSB for the three months ended December 31, 1998).
22
<PAGE> 23
10.26 Employment Agreement, dated April 1, 1999, by and between the
Registrant and Gregg A. Waldon (incorporated by reference
to Exhibit 10.26 of the Registrant's statement on Form S-1,
File No. 333-77389).
10.27 Credit and Security Agreement, dated April 11, 1999, by and
between the Registrant and Diversified Business Credit, Inc.
(incorporated by reference to Exhibit 10.27 of Registrant's
statement on Form S-1, File No. 333-77389).
10.28 InfoAccess, Inc. 1990 Stock Option Plan, as amended September
29, 1999 (incorporated by reference to Exhibit 99.1 of
Registrant's statement on Form S-8, File No. 333-90843)
10.29 InfoAccess, Inc. 1995 Stock Option Plan, as amended September
29, 1999 (incorporated by reference to Exhibit 99.2 of
Registrant's statement on Form S-8, File No. 333-90843)
10.30 Employment Agreement, dated August 1, 1999, by and between the
Registrant and Robert F. Olson (incorporated by reference to
Exhibit 10.30 of Registrant's statement on Form 10-Q for the
three months ended September 30, 1999).
10.31 IntraNet Solutions, Inc. 1999 Employee Stock Option and
compensation Plan (incorporated by reference to Exhibit
10.31 of Registrant's statement on Form 10-Q for the three
months ended September 30, 1999).
11.1 Statement RE: Computation of Earnings per Common Share (filed
electronically).
21 Subsidiaries of Registrant (incorporated by reference to Exhibit
21 of the Registrant's registration statement on Form SB-2,
File No. 333-14175).
27.1 Financial Data Schedule for nine months ended December 31, 1999
(filed electronically).
27.2 Financial Data Schedules (restated) for the nine months ended
December 31, 1998 (filed electronically).
(B) REPORTS ON FORM 8-K
On October 12, 1999 the Company filed a Current Report on Form 8-K
reporting the completion of the acquisition of InfoAccess, Inc. ("InfoAccess")
on September 29, 1999.
On November 29, 1999 the Company filed an amendment to the Current Report
on Form 8-K filed on October 12, 1999 to include certain financial statements of
InfoAccess and certain pro forma combined financial statements of the Company
and InfoAccess.
23
<PAGE> 24
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
IntraNet Solutions, Inc.
------------------------
(Registrant)
Date: February 14, 2000 By: /s/ Robert F. Olson
-------------------
Robert F. Olson,
Chairman, President and Chief Executive Officer
(Principal Executive Officer)
Date: February 14, 2000 By: /s/ Gregg A. Waldon
-------------------
Gregg A. Waldon
Chief Financial Officer, Secretary and Treasurer
(Principal Financial and Accounting Officer)
24
<PAGE> 1
EXHIBIT 3.1
SECOND AMENDED AND RESTATED
ARTICLES OF INCORPORATION
OF
INTRANET SOLUTIONS, INC.
ARTICLE I.
The name of this Corporation shall be IntraNet Solutions, Inc.(the
"Corporation").
ARTICLE II.
The registered office of the Corporation in Minnesota shall be: 8091 Wallace
Road, Eden Prairie, Minnesota 55344.
ARTICLE III.
A.The Corporation is authorized to issue fifty million shares of capital stock,
having a par value of one cent per share in the case of common stock,
and having a par value as determined by the Board of Directors in the
case of preferred stock, to be held, sold and paid for at such times
and in such manner as the Board of Directors may from time to time
determine in accordance with the laws of the State of Minnesota.
B.In addition to any and all powers conferred upon the Board of Directors by the
laws of the State of Minnesota, the Board of Directors shall have the
authority to establish by resolution more than one class or series of
shares, either preferred or common, and to fix the relative rights,
restrictions and preferences of any such different classes or series,
and the authority to issue shares of a class of series to another
class or series to effectuate share dividends, splits or conversion of
the Corporation's outstanding shares.
C.The Board of Directors shall also have the authority to issue rights to
convert any of the Corporation's securities into shares of stock of any
class or classes, the authority to issue options to purchase or
subscribe for shares of stock of any class or classes, and the
authority to issue share purchase or subscription warrants or any other
evidence of such option rights which set forth the terms, provisions
and conditions thereof, including the price or prices at which such
shares may be subscribed for or purchased. Such options, warrants and
rights, may be transferable or nontransferable and separable or
inseparable from other securities of the Corporation. The Board of
Directors is authorized to fix the terms, provisions and conditions of
such options, warrants and rights, including the conversion basis or
bases and the option price or prices at which shares may be subscribed
for or purchased.
ARTICLE IV.
Shares of the Corporation acquired by the Corporation shall become authorized
but unissued shares and may be reissued as provided in these Articles of
Incorporation.
ARTICLE V.
No shareholder of this Corporation shall have any cumulative voting rights.
<PAGE> 2
ARTICLE VI.
No shareholder of this Corporation shall have any preemptive rights by virtue of
Section 302A.413 of the Minnesota Statutes (or similar provisions of future law)
to subscribe for, purchase or acquire any shares of the Corporation of any
class, whether unissued or now or hereafter authorized, or any obligations or
other securities convertible into or exchangeable for any such shares.
ARTICLE VII.
Any action required or permitted to be taken at a meeting of the Board of this
Corporation may be taken by written action signed by the number of directors
that would be required to take such action at a meeting of the Board of
Directors at which all directors are present.
ARTICLE VIII.
No director of this Corporation shall be personally liable to the Corporation or
its shareholders for monetary damages for breach of fiduciary duty by such
director as a director; provided, however, that this Article shall not eliminate
or limit the liability of a director to the extent provided by applicable law:
(i) for any breach of the director's duty of loyalty to the Corporation or its
shareholders; (ii) for acts or omissions not in good faith or which involve
intentional misconduct or a knowing violation of law; (iii) under Section
302A.559 or 80A.23 of the Minnesota Statutes, as amended; (iv) for any
transaction from which the director derived an improper personal benefit; or (v)
for any act or omission occurring prior to the effective date of this Article.
If the Minnesota Business Corporation Act hereafter is amended to authorize the
further elimination or limitation of the liability of directors, then the
liability of a director of the Corporation in addition to the limitation and
elimination of personal liability provided herein, shall be eliminated or
limited to the fullest extent permitted by the Minnesota Business Corporation
Act, as so amended. No amendment to or repeal of this Article VIII shall apply
to, or have any effect on, the liability or alleged liability of any director
for or with respect to any acts or omissions of such director occurring prior to
such amendment or repeal.
ARTICLE IX.
The Corporation shall indemnify to the fullest extent permissible under the
provisions of Chapter 302A of the Minnesota Statutes, as amended, (as now or
hereafter in effect) any person made or threatened to be made a party to or
witness in any threatened, pending, or completed civil, criminal,
administrative, arbitration, or investigative proceeding, including a proceeding
by or in the right of the Corporation by reason of the fact that he, his
testator or intestate, is or was a director or officer of the Corporation, or by
reason of the fact that such director or officer, while a director or officer of
the Corporation, is or was serving at the request of the Corporation, or whose
duties in that position involved service as a director, officer, partner,
trustee or agent of another organization or employee benefit plan, against all
judgments, penalties, fines, including, without limitation, excise taxes
assessed against the person with respect to an employee benefit plan,
settlements, and reasonable expenses, including attorneys' fees and
disbursements. Nothing contained herein shall affect any rights to
indemnification to which employees or agents of the Corporation other than
directors and officers may be entitled under the provisions of Chapter 302A of
the Minnesota Statutes, as amended. Any repeal or modification of this Article
IX shall be prospective only, and shall not adversely affect any right to
indemnification or protection of a director or officer of the Corporation
existing at the time of such repeal or modification. No amendment to or repeal
of this Article shall apply to or have any effect on the liability of or alleged
liability of any director or the Corporation for or with respect to any acts or
omissions of such director occurring prior to such amendment or repeal.
<PAGE> 3
ARTICLE X.
The shareholders of this Corporation may, by a majority vote of all shares
issued, outstanding and entitled to vote:
1. Authorize the Board of Directors to sell, lease, exchange or
otherwise dispose of all, or substantially all, of its
property and assets, including its goodwill, upon such terms
and conditions and for such consideration, which may be money,
shares, bonds, or other instruments for the payment of money
or other property, as the Board of Directors deems expedient
and in the best interests of the Corporation;
2. Amend the Articles of Incorporation of this Corporation for
any reasons or lawful purpose, and in the event that any such
amendment adversely affects the rights of holders of shares of
such different classes, the affirmative vote of a majority of
each such class shall be sufficient to adopt the amendment;and
3. Adopt and approve an agreement of merger or consolidation
presented to them by the Board of Directors.
<PAGE> 1
EXHIBIT 11.1
Exhibit 11.1 - Computation of Earnings Per Common Share.
(in thousands, except per share data)
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
DECEMBER 31, DECEMBER 31,
----------------------- ----------------------
1999 1998 1999 1998
---- ---- ---- ----
<S> <C> <C> <C> <C>
BASIC COMPUTATION
Income (loss) from continuing operations $ 608 $ (359) $ (559) $ (820)
Net income (loss) 608 (359) (559) (1,341)
Income (loss) attributable to common shareholders 608 (439) (559) (2,053)
======== ======== ======== =========
Weighted Average Shares Outstanding 17,123 11,511 15,859 10,742
Income (loss) from continuing operations per
common share $ 0.04 $ (0.03) $ (0.04) $ (0.08)
Net income (loss) per common share $ 0.04 $ (0.03) $ (0.04) $ (0.12)
Income (loss) attributable to common shareholders
per common share $ 0.04 $ (0.04) $ (0.04) $ (0.19)
DILUTED COMPUTATION
Weighted average shares 17,123 11,511 15,859 10,742
Effect of dilutive securities:
Employee stock options 1,843 -- -- --
Warrants 642 -- -- --
-------- -------- -------- ---------
19,608 11,511 15,859 10,742
Income (loss) from continuing operations per
common share $ 0.03 $ (0.03) $ (0.04) $ (0.08)
Net income (loss) per common share $ 0.03 $ (0.03) $ (0.04) $ (0.12)
Income (loss) attributable to common shareholders
per common share $ 0.03 $ (0.04) $ (0.04) $ (0.19)
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> MAR-31-2000
<PERIOD-END> DEC-31-1999
<CASH> 4,004
<SECURITIES> 25,224
<RECEIVABLES> 6,608
<ALLOWANCES> 373
<INVENTORY> 217
<CURRENT-ASSETS> 36,644
<PP&E> 2,805
<DEPRECIATION> 1,430
<TOTAL-ASSETS> 38,920
<CURRENT-LIABILITIES> 2,726
<BONDS> 0
0
0
<COMMON> 174
<OTHER-SE> 35,976
<TOTAL-LIABILITY-AND-EQUITY> 38,920
<SALES> 14,851
<TOTAL-REVENUES> 14,851
<CGS> 2,768
<TOTAL-COSTS> 2,768
<OTHER-EXPENSES> 13,416
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> (774)
<INCOME-PRETAX> (559)
<INCOME-TAX> 0
<INCOME-CONTINUING> (559)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (559)
<EPS-BASIC> (0.04)
<EPS-DILUTED> (0.04)
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<RESTATED>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> MAR-31-1999
<PERIOD-END> DEC-31-1998
<CASH> 1,785
<SECURITIES> 0
<RECEIVABLES> 4,348
<ALLOWANCES> 539
<INVENTORY> 139
<CURRENT-ASSETS> 7,352
<PP&E> 2,257
<DEPRECIATION> 1,396
<TOTAL-ASSETS> 8,344
<CURRENT-LIABILITIES> 4,153
<BONDS> 0
0
356
<COMMON> 156
<OTHER-SE> 3,474
<TOTAL-LIABILITY-AND-EQUITY> 8,344
<SALES> 12,966
<TOTAL-REVENUES> 12,966
<CGS> 5,921
<TOTAL-COSTS> 5,921
<OTHER-EXPENSES> 8,239
<LOSS-PROVISION> 517
<INTEREST-EXPENSE> 143
<INCOME-PRETAX> (820)
<INCOME-TAX> 0
<INCOME-CONTINUING> (820)
<DISCONTINUED> (521)
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (1,341)
<EPS-BASIC> (0.12)
<EPS-DILUTED> (0.12)
</TABLE>
