Document/Exhibit Description Pages Size
1: 10-K Annual Report 43 245K
2: EX-10.19 Material Contract 2 13K
3: EX-10.22 Material Contract 2 12K
4: EX-23 Consent of Experts or Counsel 1 7K
5: EX-27 Financial Data Schedule (Pre-XBRL) 2 10K
6: EX-27.1 Financial Data Schedule (Pre-XBRL) 2 10K
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SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
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FORM 10-K
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Annual Report Pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934
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For the fiscal year ended: Commission File Number:
March 31, 1998 0-14713
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INTERLEAF, INC.
(Exact name of registrant as specified in its charter)
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Massachusetts 04-2729042
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification Number)
62 Fourth Avenue
Waltham, Massachusetts 02154
(Address of principal executive offices)
Telephone No.: (781) 290-0710
(Registrant's telephone #, including area code)
-------------------------
Securities registered pursuant to Section 12(b) of the Act:
None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, par value $.01 per share
Preferred Stock Purchase Rights
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. / /
The aggregate market value of Common Stock held by non-affiliates of the
registrant at June 23, 1998 was $39,671,195 based upon the last reported sales
price of the Common Stock on the Nasdaq National Market on such date (trading
symbol: LEAF).
APPLICABLE ONLY TO CORPORATE REGISTRANTS
The number of shares of the registrant's Common Stock, $.01 par value,
outstanding at June 23, 1998 was 18,506,922 shares.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Company's Proxy Statement relating to the Company's Annual
Meeting of Shareholders to be held on August 24, 1998, which is expected to be
filed with the SEC within 120 days from the Company's fiscal year end, are
incorporated by reference in Part III (Items 10, 11 & 12).
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PART I
ITEM 1. BUSINESS
OVERVIEW
Interleaf and its subsidiaries ("Interleaf" or the "Company") develop and
market software products used in the creation, publication, management and
distribution of electronic and paper documents. The Company's software
enables customers to compose, edit, view and print documents, and to control,
manage and distribute those documents, thereby enabling the Company to offer
its customers a cost-effective and efficient means of maximizing the value
from their information assets. Interleaf is also developing new content
management products that manage documents at the reusable unit level by
adding intelligence and structure.
Traditional Products
Since its inception, Interleaf has primarily focused on the development and
marketing of electronic publishing software, traditionally used for the
authoring and publication of technical documentation. The Company expanded
its product line to include a document management system which provides
document storage in and retrieval from a robust repository. Additional
products have provided demand print, document collections and viewing,
intranet publishing and ancillary functionality. These products were
initially developed for Unix workstations, and in fiscal 1996 certain
products were released for personal computers ("PCs") running Microsoft
Windows and Windows NT.
Interleaf provides its traditional, high-end technical publishing software
and services to many of the world's largest manufacturing, industrial,
utility, transportation and financial services companies, and the Company
realized a strong revenue stream from this market in prior years. However,
growth in the technical publishing software market has slowed considerably,
due to global mergers and acquisitions among the Company's largest corporate
customers and, from the steadily-improving functionality of low-end PC-based
product competition. This consolidation and increased competition has had a
negative impact on Interleaf's revenue and business (See Item 7, Management's
Discussion and Analysis of Financial Condition and Results of Operations).
The Company intends to offset this downward pressure on its traditional
product revenue in two ways. First, the Company has announced its intention
to release new versions of its traditional products, providing additional
functionality, Year 2000 compliance and error corrections. Second, Interleaf
intends to emphasize the delivery of its products and consulting services as
an integrated package, and the Company is considering an outsourcing approach
to sales, where Interleaf would take responsibility for all aspects of its
traditional customers' technical document production process.
New Product Development
The software industry is characterized by rapid technological change, which
requires the continuing enhancement of existing products and development of
new products. In fiscal 1998, as the Internet and intranets grew in the
marketplace, the Company developed the Interleaf Xtreme product line to
enable its customers to distribute their information via the Internet and
corporate intranets.
After extensive market research and planning, Interleaf has started to shift
its corporate strategy towards an emerging market, called content management.
This market will enable Interleaf to leverage its technology expertise
(including its new Xtreme product line), custom application development
experience and customer base. Content management solutions enable a customer
to break down its
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information into reusable units, and to re-use and re-purpose those
information units in its documents (both electronic and paper) using
structure and intelligence which reflect the needs and business processes of
the customer and its extended enterprise. Industry analysts including Gartner
Group, Meta Group and CAP Ventures have identified content management as the
sharing of information across extended enterprises via the Internet and
corporate intranets, which are fast becoming the information backbone in most
organizations.
CAP Ventures estimates the content management market size was approximately
$700 million in calendar year 1997, and is growing at 187% compound annual
growth rate. Last year, Interleaf saw many of its customers accelerate the
use of the Company's Internet-based products to distribute many different
types of information via corporate intranets - a trend that the Company
expects will increase rapidly during the coming year.
While Interleaf currently offers powerful products to enable on-demand
assembly and intranet distribution of documents, a new digital standard,
eXtensible Markup Language (XML), is emerging to facilitate wider and more
effective information sharing. XML adds structure, intelligence and
formatting to document-based information so the information can be distilled,
cataloged and reused within companies and between business partners. XML will
enable the delivery of just-in-time, customized documents through the
assembly of small, easily-identifiable and compatible information components,
or elements. XML also enables document-to-document information processing,
which will facilitate electronic commerce.
In early 1998 Interleaf announced the development of a prototype XML product,
which is code-named BladeRunner, and which is scheduled for general release
during the 1998 calendar year. BladeRunner, in addition to I7, will support
Microsoft Word as the primary user authoring environment, and enable the
creation and sharing of XML document elements without requiring a technical
knowledge of XML. These features are critical to the wide adoption of
Bladerunner and Interleaf's content management solution, because users will
expect to create new content and assemble custom documents within a familiar
authoring environment.
Consulting and Outsourcing.
The Interleaf Professional Services Group (IPSG) provides custom application
and implementation services. Engagements have traditionally run from a few
days to help a customer scope and plan its Interleaf-based application
project, to several months for a turnkey delivery of a custom application.
IPSG has been particularly active in building sophisticated applications in
the manufacturing, transportation and financial services markets. As a
strategy to increase revenue from sales of its traditional products, the
Company is increasing its promotion of turnkey solutions. Interleaf is also
considering an outsourcing model, where Interleaf would take responsibility
for all aspects of the technical document production process. The Company is
currently establishing an outsourcing capability to offer to its customers,
and may consider seeking partnership opportunities with established
outsourcing companies.
Interleaf's solutions-based approach to sales is also a key aspect of the
Company's content management strategy. The Company believes that, due to the
complexity of content management and the early stage of this market and its
technology and standards, the successful implementation of a content
management solution will necessarily require a relatively large component of
services.
3
PRODUCTS
The Company currently markets a broad suite of software products which are
sold both individually and as parts of an integrated solution. These products
include Interleaf 6 for publishing, WorldView for on-line distribution of
document collections, RDM for document management, BusinessWeb Plus for
intranet publishing of Interleaf-based documents and Interleaf Xtreme for
intranet publishing of a wide range of office documents. The Company also
markets consulting and training services and provides technical support to
enable its customers to reap the maximum benefit from their investment in
Interleaf tools and applications.
Interleaf 6. Interleaf 6 ("I6"), the Company's flagship complex authoring and
publishing engine, operates on UNIX workstations, Windows NT and Windows 95
operating systems. Information-driven and collaborative publishing processes
require a publishing engine such as I6 to assimilate information from
documents originating from a variety of sources (i.e. either a single
document containing thousands of pages or a collection or library of
interrelated documents). Interleaf 6 enables customers to reuse this
information and re-purpose it for different distribution media: paper,
Internet, intranet, local area network ("LAN"), wide area network ("WAN"),
CD-ROM or for On-Demand Printing. These documents share common
characteristics such as multiple authors, controlled revisions and long life
cycles. Interleaf 6 automates complex document processes by providing tools
for creating and maintaining documentation. By leveraging 32-bit operating
environments, Interleaf 6 can execute rapid changes across large document
collections, maintaining cross references, autonumbering and pagination.
Interleaf has announced its intention to release an improved version of I6,
called Interleaf 7 or I7, which contains functional improvements, various
error corrections, and which has been tested and qualified for Year 2000
compliance.
Foreign language versions of Interleaf 6 are available in French, Italian and
German. There are a number of packaging options for Interleaf 6. The United
States list price ranges from $1,395 for the Base Edition to $10,000 for the
Developer's Edition, and is subject to volume price discounts.
WorldView. WorldView is an I6-based application suite for electronic document
distribution, which enables customers to transform various types of
electronic data into collections of interrelated information for distribution
online, by CD-ROM, diskette and other media types. Customers may merge and
assimilate documents ranging from single page reports to thousands of pages
of documentation that may originate in different formats and different
applications throughout an organization.
WorldView is available in English, French, Italian, Spanish, German and
Japanese languages. The main component of the WorldView System is WorldView
Press, which is the primary assembly engine for documents in a wide variety
of formats. The per server U.S. list price for Worldview Press is $10,000 for
UNIX and $5,000 for Microsoft Windows 95 and NT. Supporting products are
priced on a per-server or per-user basis, and vary in price. WorldView
products are subject to volume price discounts.
RDM. RDM is a robust document management solution designed for large, complex
and dynamic documentation. RDM manages document objects from a variety of
sources such as Interleaf I6, Microsoft Word and other text, CAD drawings,
spreadsheets, graphics and audio clips. RDM manages document workflow
revision cycles and serves as the basis for online publishing and document
collection updates.
RDM runs on UNIX and Microsoft Windows 95 and NT. This product has a U.S. per
user list price starting at approximately $36,000, and is subject to volume
price discounts.
4
BusinessWeb Plus. BusinessWeb Plus combines WorldView functionality with the
Company's Java viewing technology to provide a solution for Internet or
intranet access to RDM-managed knowledge repositories and Worldview Press
collections. BusinessWeb Plus enables users to immediately access their
documents through a web-browser without having to do any conversion or
reformatting. This enables corporations to rapidly exploit the advantages of
the wide reach and simple management of Internet-based information.
The base 100-user U.S. list price for BusinessWeb Plus is $25,000, and is
subject to volume discounts.
Interleaf Xtreme. Interleaf Xtreme enables businesses to publish common
office documents via corporate intranets without having to first convert the
documents to HTML. Interleaf Xtreme reduces the document backlog that
typically existed during the conversion and hosting process done by a
webmaster function. By employing Java technology, Interleaf Xtreme also
enables users to view high-quality intranet-based documents from standard Web
browsers without having to download and maintain viewing software on their
systems.
The U.S. per-server list price for Interleaf Xtreme is $15,000, and is
subject to volume discounts.
SERVICES
Consulting and Outsourcing. The Interleaf Professional Services Group (IPSG)
provides custom application and implementation services. For a discussion of
IPSG services, please see "Overview - Consulting and Outsourcing", above.
Technical Support and Training. Interleaf offers its customers maintenance
contracts that currently provide them with software upgrades, bug fixes and
technical support. Interleaf operates two main technical support centers -
one at its corporate headquarters in the United States and the other,
providing European-wide support, in Germany. Smaller support centers are also
located in Australia and Japan.
The Company also markets a wide variety of training courses to help customers
use the Interleaf tools quickly and effectively. Training is performed on a
global basis at Interleaf facilities, satellite locations and customer sites.
MARKETS AND CUSTOMERS.
Interleaf has historically directed its marketing efforts primarily to the
technical documentation segment of the electronic publishing market. Its
customers are among the largest and most highly-regarded companies in a wide
range of markets both, including process and discrete manufacturing,
financial services, government and transportation. The Company has decided to
more closely focus in the future on selected vertical markets, including
manufacturing and the financial services market. The Company's installed-base
asset provides a strong point of departure as it moves to establishing itself
as a leading content management supplier to the manufacturing and financial
services markets.
SALES AND DISTRIBUTION
United States. In the United States, Interleaf distributes its software
products and consulting services primarily through direct field sales and
telesales representatives to large corporations.
Direct Channel. Currently, the Company sells its software products and
consulting services to large organizations primarily through a direct field
sales force assigned to regional and named-account
5
territories, and through a telesales operation that supports the direct sales
force. In fiscal 1999, Interleaf plans to focus much of its direct sales
force on selling to large manufacturers, which make up the largest portion of
its installed base. The Company also operates a dedicated telesales
organization to market its complex publishing products and maintenance
services to its installed base of customers. Interleaf maintains sales and
service offices in five (5) United States locations.
Alternate Channels. The Company has agreements with a limited number of
value-added resellers (VARs) to market and distribute its software products.
During the past three fiscal years, domestic revenues attributable to VAR
sales were not significant. As part of its content management strategy moving
forward, the Company will actively pursue distribution partnerships with
solution providers who offer domain knowledge, vertical market application
expertise and who have an established market presence in their area of
concentration.
International. The Company primarily markets its software products and
services in Canada, Europe and Asia through its wholly-owned subsidiaries in
Australia, Canada, France, Germany, Japan and the United Kingdom. In Italy,
Interleaf products are sold exclusively through Interleaf Italia S.r.l. The
Company has an equity interest of approximately 30% in Interleaf Italia
S.r.l. From 1989 through June, 1997, Interleaf had been selling its products
in Latin America through an exclusive distributor. The Company has
repurchased the distribution rights and is now selling directly in Latin
America. The revenues from Interleaf Americas and Latin America have been
insignificant.
Interleaf's operations in Japan and Australia have experienced a decrease in
revenue, which is due in part to the general economic downturn in Japan and
the Asia-Pacific region. This economic downturn has affected the purchasing
power and patterns of Interleaf's customers, which in turn affects
Interleaf's revenue in the region.
MANUFACTURING
The Company outsources its manufacturing operations, which include the
duplication of tapes, diskettes, CDs, and printed documents, assembling, and
final packaging.
BACKLOG
The Company generally manufactures its software on the basis of its forecast
of near-term demand and generally ships to end users within thirty (30) days
after receipt of the order. Consequently, the Company's product backlog is
not indicative of future sales levels. The Company does not regard the amount
of backlog to be material to a current understanding of its business. The
Company does have a material backlog in consulting services, which represents
projects which are underway or scheduled for commencement in the future.
COMPETITION
The electronic publishing, distribution, viewing and document management
markets are highly competitive, as is the emerging content management market.
Some of the competitors are larger and have greater resources than the
Company. Many new competitors emerged in the electronic publishing, viewing
and document management market in fiscal 1998. The introduction and market
acceptance of new technologies, such as the Internet and Intranet, have also
offered new forms of opportunity and competition for the Company's existing
products.
In the electronic publishing and viewing market, the Company competes
primarily with Adobe Systems
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Inc. In the document management market, the Company competes with numerous
companies, including Documentum, Inc. and PC Docs, Inc. Principal competitive
factors in these markets include product functionality, custom application
development expertise, customer support, ease of use, integration, and price.
The Company's products, integrated with each other, blended with specialized
services, and used across different hardware platforms, are its principal
competitive advantages in a market that is fragmented with many companies
offering only separate parts of a solution. The Company also believes that
its ability to provide content management solutions for customer-specific
business problems will increasingly distinguish the Company from its
competitors.
RESEARCH AND DEVELOPMENT
The Company spent $10.6 million on research and development in fiscal 1998.
This amount was spent on the continued enhancement of the Company's existing
products, and the development of new products.
EMPLOYEES
As of March 31, 1998, the Company, worldwide, employed 300 full-time
employees, of whom 54 were employed in research and development, which
includes quality assurance and technical documentation, 94 in domestic sales
operations, including services, 30 in domestic customer support, 9 in
corporate marketing, 40 in finance and administration, and 73 in the
Company's international operations. The Company's success will depend in
large part on its ability to attract and retain qualified personnel, who are
in demand throughout the industry. None of the Company's employees are
represented by a labor union. Interleaf believes that its employee relations
are good.
PRODUCT PROTECTION
The Company relies on a combination of trade secret, patent, copyright and
trademark laws, license agreements and technical measures to protect its
rights in and to its software. However, for the reasons discussed below under
"Risk Factors - Dependence on Proprietary Technology", and due to rapid
technological change in the software industry, the Company believes that
patent, trade secret and copyright protection are less significant than
factors such as the knowledge, ability and experience of employees as well as
name recognition.
The Company obtained U.S. Patent No. 5,579,519, covering an "Extensible
Electronic Document Processing System For Creating New Classes of Active
Documents", which provides the Company with exclusive rights to certain
inventions which are reduced to practice in its I6 and RDM products.
The Company has obtained trademark registrations of INTERLEAF in the United
States and certain foreign jurisdictions. In addition, I5, I6, I7, WORLDVIEW,
RDM, BUSINESSWEB, XTREME AND BLADERUNNER are trademarks of the Company.
Aside from its patent rights as described above, the Company relies primarily
on copyright laws of the United States and other jurisdictions, and on
written software license agreements, to protect its intellectual property
rights in its software products. Although the Company's license agreements
prohibit both the unauthorized use, copying or distribution of the Company's
products, and the disclosure of the proprietary aspects of its products, it
is technically possible for competitors to copy aspects of its products in
violation of the Company's rights.
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ITEM 2. PROPERTIES
The Company's principal executive, administrative and research and
development operations are located in two adjacent buildings, cumulatively
totaling approximately 40,900 square-feet in Waltham, Massachusetts, both of
which the Company occupies under leases expiring in November 1999 and
December 2000.
The Company also leases sales and support offices in five (5) locations in
the United States and six (6) foreign locations for its subsidiaries.
ITEM 3. LEGAL PROCEEDINGS
There are no material legal proceedings to which the Company is a party or to
which any of its property is subject.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matter was submitted to a vote of security holders during the fourth
quarter of the fiscal year covered by this report
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PART II
ITEM 5. MARKET FOR THE COMPANY'S COMMON STOCK AND RELATED SECURITY HOLDER
MATTERS
The Company's common stock is listed on the Nasdaq National Market of The
NASDAQ Stock Market, Inc. ("NASDAQ") under the symbol LEAF. On June 23, 1998,
there were 785 holders of record of the Company's common stock. This number
does not reflect persons or entities who hold their stock in nominee or
"street name" through various brokerage firms.
FISCAL 1998 Common stock prices:
[Download Table]
Quarter ended June 30 September 30 December 31 March 31
High ................... 1 11/16 3 1/2 3 31/32 3 3/4
Low .................... 29/32 1 7/16 2 5/8 2 3/4
FISCAL 1997 Common stock prices:
[Download Table]
Quarter ended June 30 September 30 December 31 March 31
High ................... 8 7/8 5 3/8 3 3/8 2 7/16
Low .................... 6 1/2 2 3/8 1 7/8 1 3/8
Through the end of its 1998 fiscal year, the Company had never paid cash
dividends.
ITEM 6. SELECTED FIVE-YEAR FINANCIAL DATA
[Enlarge/Download Table]
(In thousands except for per share amounts)
Year ended March 31 1998 1997a 1996b 1995c 1994d
--------------------------------------------------------- ------------ ----------- ------------ ------------ ------------
Total revenues .......................................... $ 52,577 $ 64,823 $ 88,557 $ 87,856 $ 111,229
Net income (loss) ....................................... 2,436 (29,550) 311 (48,362) (8,448)
Net income (loss) applicable to common stockholders ..... 1,978 (29,550) 311 (48,362) (8,448)
Net income (loss) per share: Basic ......... $ 0.11 $ (1.70) $ 0.02 $ (3.47) $ (0.63)
Diluted ....... $ 0.09 $ (1.70) $ 0.02 $ (3.47) $ (0.63)
Shares used in computing net income
(loss) per share: Basic ......... 17,857 17,344 15,557 13,938 13,384
Diluted ....... 24,808 17,344 18,495 13,938 13,384
Total assets ............................................ $ 39,388 $ 37,900 $ 48,916 $ 50,793 $ 96,884
Long-term obligations ................................... 2,063 2,955 773 625 1,565
Total shareholders' equity (deficit) .................... $ 9,310 $ (772) $ 15,419 $ 10,615 $ 56,632
Common shares outstanding ............................... 18,155 17,459 16,698 14,203 13,631
a. Fiscal 1997 results include $10.9 million of restructuring charge for
restructuring of the Company's worldwide operations, a $2.3 million
write-off of intangible assets, and a $2.5 million write-off of capitalized
software, inventory and prepaid royalties.
b. Fiscal 1996 results include a $1.2 million benefit from the settlement of a
dispute with a joint venture partner.
c. Fiscal 1995 results include a $15.2 million write-off of goodwill related
to the acquisition of distributorships in Canada, France and Germany, a
$7.1 million charge for restructuring the Company's worldwide operations, a
$2.0 million write-off of capitalized software development costs, and a
$1.9 million charge for revaluation of the Company's deferred tax asset.
d. Fiscal 1994 results include a $4 million charge for acquired in-process
research and development in connection with the acquisition of Avalanche
Development Company in June 1993, a $3 million charge for restructuring the
Company's worldwide operations, and a $1.9 million benefit upon adoption of
Statement of Financial Accounting Standards No. 109, "Accounting for Income
Taxes," effective April 1, 1993.
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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The information provided below contains forward-looking information. The
Company's actual future results may differ materially from the projections or
suggestions made in such forward-looking information and may fluctuate
between operating periods. Certain factors that might cause such differences
and fluctuations include the factors discussed below under "Risk Factors".
Results of Operations
Overview: The Company reported net income of $2.4 million on total revenues
of $52.6 million in fiscal 1998. This compares with a net loss of $29.6
million on revenues of $64.8 million, and net income of $0.3 million on
revenues of $88.6 million in fiscal 1997 and 1996, respectively. Much of the
decline in total revenue during the periods is due to a decrease in product
revenue, and the related impact on maintenance and service revenue caused by
the ongoing maturation of the market for complex authoring products and the
increasing popularity of low-end versions of Windows-based authoring
software. The Company has continued its efforts in fiscal 1998 to focus on
developing and supporting a new family of publishing products (Xtreme) based
on Internet technologies, targeted toward its customers' extended enterprise.
The return to profitability in fiscal 1998 was primarily due to the impact of
significant reductions to the cost structure of the Company during the
second, third and fourth quarters of fiscal 1997. During these three quarters
of fiscal 1997, headcount was reduced, facilities were closed or downsized,
and various cost control measures were implemented.
In early 1998, Interleaf entered the content management marketplace, an
emerging market centered around the disassembly and re-purposing of
information at a reusable unit level, and improving information sharing
through the Internet and corporate intranets. The Company intends to
introduce content management products in this market during fiscal 1999.
REVENUES
Product: In the fiscal years ended March 31, 1998, 1997 and 1996, worldwide
product revenues were $13.3 million, $18.8 million, and $34.8 million,
respectively, representing 25%, 29% and 39%, respectively, of the Company's
total revenues. There was a decrease in total product revenue of $5.5 million
(29%) in fiscal 1998 from fiscal 1997, and a decrease of $16.0 million (46%)
in fiscal 1997 from fiscal 1996. Revenue declined in all geographic regions.
The continued decline in product license revenue was due to the following
factors. The first factor was the increasing popularity of Windows-based
publishing software. Second, there was considerable consolidation in the
aerospace/defense industry, where the Company had historically derived most
of its authoring product license revenue. In addition, this industry became
saturated with high-end authoring software.
The Company is refocusing its business strategy on providing a new family of
content management products targeted toward specific vertical markets. While
the Company has built well-accepted integrated document publishing solutions
for individual customers, it has not yet demonstrated the ability to develop,
market and sell content management products. There is no assurance that the
Company will be successful in implementing this strategy. Therefore, the
Company is unable to predict if or when product revenues will stabilize or
grow. Additionally, since the Company's services and maintenance revenues are
largely dependent on new product licenses, these revenue components have also
experienced downward pressure, which may continue.
Maintenance: In the fiscal years ended March 31, 1998, 1997 and 1996,
worldwide maintenance revenues were $26.1 million, $29.0 million, and $32.3
million, respectively, representing 50%, 45% and 36%, respectively, of the
Company's total revenues. There was a decrease in total maintenance revenue
of $2.9 million (10%) in fiscal 1998 from fiscal 1997, and a decrease of $3.3
million (10%) in fiscal 1997 from fiscal 1996. Revenue declined in all
geographic regions. Future maintenance revenue is dependent on the Company's
ability to maintain its existing customer base, to release new versions of
its traditional products, and to increase maintenance contract volume related
to the new content
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management products.
Services: Services revenue consists of revenue from consulting and customer
training. During the fiscal years ended March 31, 1998, 1997 and 1996,
worldwide revenues from services were approximately $13.2 million, $17.0
million, and $21.5 million respectively, representing approximately 25%, 26%
and 24% respectively, of the Company's total revenues. There was a decrease
in services revenue of $3.8 million (23%) in fiscal 1998 from fiscal 1997,
and a decrease of $4.5 million (21%) in fiscal 1997 from fiscal 1996. Service
revenue declined in all geographic regions. Future services revenue is
dependent on the Company's ability to maintain its existing customer base and
to increase consulting and training contracts based on the successful
introduction of new products.
North America: Revenues in North America were approximately $36.3 million
(69%), $41.8 million (64%), and $57.1 million (64%) of total revenues during
fiscal 1998, 1997, and 1996, respectively. The decline in fiscal 1998 was
primarily due to a decrease in product license and maintenance revenues. The
decline in fiscal 1997 was primarily due to a decrease in product license and
consulting revenues.
International: Revenues from the Company's international operations were
approximately $16.3 million (31%), $23.0 million (36%), and $31.5 million
(36%) during fiscal 1998, 1997, and 1996 respectively. The declines in fiscal
1998 and fiscal 1997 were primarily due to lower product revenue compared to
the prior fiscal years.
Fiscal 1999: During fiscal 1999, the Company plans to develop and release
several upgrades to its traditional products. The Company also plans to
develop product offerings which address at least two vertical segments of the
content management market. Growth in revenues during fiscal 1999 and fiscal
2000 will be largely dependent on the introduction and customer acceptance of
the new and enhanced software products planned to be released in fiscal 1999
and the following year, and the Company's success in leveraging software
products with services to provide web-based content management solutions to
its customers, improving sales force productivity and the effectiveness of
the Company's investment in marketing and lead generation programs. If the
Company is unable to grow or stabilize its revenues in fiscal 1999, further
expense reductions will be necessary in order to sustain operations.
COSTS OF REVENUES
Cost of product revenues includes amortization of capitalized software
development costs, product media, documentation materials, packaging and
shipping costs, and royalties paid for licensed technology. In the fiscal
years ended March 31, 1998, 1997 and 1996, worldwide cost of product revenues
were $4.0 million, $7.5 million and $6.4 million, respectively, representing
30%, 40% and 18%, respectively, of the Company's total product revenues.
Total cost of product revenue decreased by $3.5 million (47%) in fiscal 1998
from fiscal 1997, and there was an increase of $1.1 million (17%) in fiscal
1997 from fiscal 1996. The increase in costs of product revenues from fiscal
1996 to fiscal 1997, and the decline the following year is due to a write-off
of capitalized software development costs that occurred in fiscal 1997, and
the lower annual amortization that resulted in fiscal 1998. This write-off
was related to the Company's fiscal 1997 restructuring.
In the fiscal years ended March 31, 1998, 1997 and 1996, worldwide cost of
maintenance revenues were $3.7 million, $4.6 million and $5.2 million,
respectively, representing 14%, 16% and 16% respectively, of the Company's
total maintenance revenues. Total cost of maintenance revenue decreased by
$.9 million (20%) in fiscal 1998 from fiscal 1997, and by $.6 million (12%)
in fiscal 1997 from fiscal 1996. The major reason for the decreases was a
reduction in customer support personnel associated with the fiscal year 1995
and 1997 restructuring.
In the fiscal years ended March 31, 1998, 1997 and 1996, worldwide cost of
services revenue were $11.3 million, $16.0 million and $18.3 million,
respectively, representing 86%, 94% and 85%, respectively, of the Company's
total services revenue. Total cost of services revenue decreased by $4.7
million (29%) in fiscal 1998 from fiscal 1997, and by $2.3 million (13%) in
fiscal 1997 from fiscal 1996. The decreases in both fiscal 1998 and fiscal
1997 from fiscal 1996 were related to the decline in product and services
11
revenues, and the fiscal year 1997 restructuring.
OPERATING EXPENSES
Selling, General and Administrative ("SG&A"): SG&A expenses decreased by
$14.8 million (40%) in fiscal 1998 from fiscal 1997, and by $5.6 million
(13%) in fiscal 1997 from fiscal 1996. The decline was primarily due to
significant personnel and facilities expense reductions related to the
Company's fiscal 1995 and 1997 restructurings.
Research and Development ("R&D"): R&D expenses consist primarily of personnel
expenses to support product development net of by capitalized software
development costs. During the fiscal years ended March 31, 1998, 1997 and
1996, the Company's product development and engineering expenses, including
the amortization of software development costs, were approximately $10.6
million, $20.0 million, and $19.1 million respectively, representing 20%, 31%
and 22% respectively, of the Company's total revenues. R&D expenses decreased
by $6.1 million (41%) in fiscal 1998 from fiscal 1997, and by $0.9 million
(6%) in fiscal 1997 from 1996. There were no software development costs
capitalized in fiscal 1998.
INCOME TAXES
In fiscal 1998, an alternative minimum tax provision was provided. For fiscal
year 1997, no tax provision was required due to the losses sustained during
the year. In fiscal 1996, the effective tax rate was reduced by net operating
loss carryforwards.
The Company has net operating loss carryforwards of approximately $63 million
in several tax jurisdictions to offset future taxable income. In addition,
the Company has tax credit carryforwards of approximately $7 million to
offset federal and state income tax liabilities. Therefore, the Company
expects to pay minimal income taxes for the foreseeable future.
Liquidity and Capital Resources
The Company had approximately $21.1 million of cash and cash equivalents at
March 31, 1998, an increase of approximately $3.8 million from March 31,
1997. The net increase was the result of $6.8 million in cash received from
the private placement described below and in Note 10 to the Consolidated
Financial Statements, partially offset by $3.1 million in restructuring
payments as described in Note 8 to the Consolidated Financial Statements. At
March 31, 1998 and March 31, 1997, the Company had approximately $1.1 million
of cash restricted for potential payment of a withholding tax assessment on
its German subsidiary related to payments remitted to the United States from
Germany in 1990. The Company is appealing this assessment.
On September 30, 1997, the Company completed a private placement resulting in
net proceeds to the Company of $6.8 million from the issuance of 7,625 shares
of 6% Convertible Preferred Stock and placement agent warrants to purchase
763 additional shares of 6% Convertible Preferred Stock. See Risk Factors and
Note 10 to the Consolidated Financial Statements.
For the year ended March 31, 1998, the Company paid approximately $3.1
million, net of sublease receipts, related to the fiscal 1997 and 1995
restructurings, compared to $4.9 million paid during the same period in
fiscal 1997. Cash payments related to these restructurings, the majority of
which are related to operating lease payments, net of subleases, are
anticipated to continue until December 2000. All significant vacant space
under lease has been subleased.
In August 1997, the Company's revolving line of credit and $0.7 million
equipment letter of credit with a major commercial lender expired. This
revolving line of credit was never utilized in either fiscal 1997 or 1998,
but any borrowed amounts would have been secured by substantially all
domestic assets of the Company. At March 31, 1998, the Company has obtained
from another major commercial lender a new equipment letter of credit for
$0.6 million, which is secured by the equivalent amount of cash.
12
During fiscal year 1997, the Company experienced a substantial decline in
revenues and a substantial loss from operations which resulted in a
shareholders' deficit at March 31, 1997. In response to the downward trend in
revenues, management took appropriate expense control actions relating to
operations, which restored the Company to profitability through fiscal 1998.
While the Company showed a modest profit in fiscal 1998, no assurances can be
given that profitable operations can be sustained. Management is committed to
taking all appropriate and necessary actions to effect timely cost reductions
in the event that anticipated revenue levels are not achieved.
The Company believes its current cash balances and cash generated from
operations, offset by restructuring payments, will be sufficient to meet the
Company's liquidity needs for fiscal 1999.
The Company has undertaken a comprehensive evaluation of its internal
information systems in order to evaluate those modifications which will be
required in order to address Year 2000 functionality and other operational
deficiencies. This review is substantially complete, and the Company has
estimated that the cost or risk which may be associated with its Year 2000 or
other internal operational issues is not material. The Company expects to
upgrade certain hardware and software during the next fiscal year in order to
become compliant. The estimated cost of these upgrades is less than $.5
million.
Risk Factors
The following risk factors should be carefully considered in evaluating the
Company and its business.
Declining Revenue and Mature Product Market. Since the Company's inception,
it has focused primarily on the development and marketing of electronic
publishing software for the technical documentation marketplace. The market
for high-end technical publishing and document management software has
matured and is largely saturated. The decline in revenue over recent years is
due to the decrease in product revenue and related maintenance and service
revenue caused by maturation of the market for these products, and the
increased popularity of low cost versions of Windows-based authoring
software. Unless the Company develops new products and markets, revenues
could be expected to continue to decline.
Dependence on New Products and Emerging Markets. The Company's strategy for
future growth will depend, in significant part, on the successful
development, introduction and customer acceptance of new and enhanced
products, particularly content management products and services. New markets
in the software industry are characterized by evolving industry standards,
rapid technological change, unknown and changing customer requirements, all
of which may cause delays in development or market acceptance of the
Company's new products. In addition, the market for content management
products and services is just beginning to emerge, is intensely competitive,
highly fragmented and subject to rapid change. There can be no assurance that
the content management market will coalesce and continue to grow, that the
Company will successfully develop content management software or that such
software will be accepted in the marketplace.
Uncertainty of Future Operating Results; Fluctuations in Quarterly Operating
Results. Future operating results will depend upon many factors, including
the demand for the Company's existing products, the ability of the Company to
develop and market new products, market acceptance of the Company's new
products, the timing of new product introductions and product enhancements by
the Company and its competitors, the level of product and price competition,
the length of the Company's sales cycle, the size and timing of individual
license transactions, the delay or deferral of customer implementation of new
software and services, the budget cycles of the Company's customers, the mix
of products and services sold, activities of competitors, changes in foreign
currency exchange rates, and general domestic and international economic and
political conditions.
13
The Company typically ships a substantial amount of its products in the final
weeks, or even days, of each quarter. Certain of these end-of-quarter license
sales may reflect a relatively high amount of revenues per order, and the
loss or delay of individual orders could have a significant impact on the
revenues and quarterly results of the Company. In addition, the timing of
license revenue is difficult to predict because of the length of the
Company's sales cycle. Because the Company's operating expenses are based on
anticipated revenue trends and because a high percentage of the Company's
expenses are relatively fixed, any shortfall from anticipated revenue or a
delay in the recognition of revenue from a limited number of license
transactions could cause significant variations in operating results from
quarter to quarter. As a result of these factors, the Company believes that
period-to-period comparisons of its results of operations are not necessarily
meaningful and should not be relied upon as indications of future
performance. Due to all of the foregoing factors, it is likely that in some
quarters the Company's operating results will be below the expectations of
public market analysts or investors. In such event, the market price of the
Company's common stock would likely be materially adversely affected.
Intense Competition. The market for the Company's existing technical
documentation products is intensely competitive, subject to rapid change and
significantly affected by new product introductions and other market
activities of industry participants. Several competitors have greater market
penetration and acceptance, significantly greater financial, technical,
marketing and other resources, significantly greater name recognition and a
larger installed base of customers than the Company. While it is not yet
clear who the Company's competitors will be in the emerging content
management market, it is likely that competition will be intense in that
market also.
Reliance on Certain Relationships. The Company is seeking to establish
strategic relationships with companies with outsourcing or service bureau
businesses, and with companies that have presence and publishing expertise in
the financial services market. The Company has relationships with various
technology providers, including Microsoft Corporation and Microstar Software,
Ltd., which are important to the Company's entrance into the content
management market. All of these relationships will be important to the
Company's worldwide sales, marketing and support activities. The failure of
the Company to establish and/or maintain these relationships, or to establish
additional future relationships have a material adverse effect on the
Company's business, financial condition and results of operations.
Dependence Upon Key Personnel. The Company's ability to compete effectively
will require the Company to train and manage its employee work force.
Competition for qualified personnel in the software industry is very intense,
and there can be no assurance that the Company will be able to attract,
assimilate or retain key employees. See "Business - - Employees."
Dependence on Proprietary Technology; Risks of Infringement. The Company's
success is heavily dependent upon proprietary technology. The Company relies
primarily on a combination of copyright and trademark laws, trade secrets,
patents, contractual provisions and technical measures to protect its
proprietary rights. The Company seeks to protect its software, documentation
and other written materials under trade secret and copyright laws, which
afford only limited protection. Despite the Company's efforts to protect its
proprietary rights, unauthorized parties may attempt to copy aspects of the
Company's products or to obtain and use information that the Company regards
as proprietary. Policing unauthorized use of the Company's products is
difficult, and while the Company is unable to determine the extent to which
piracy of its software products exists, some software piracy can be expected.
In addition, the laws of some foreign countries do not protect the Company's
proprietary rights to as great an extent as do the laws of the United States.
There can be no assurance that the Company's means of protecting its
proprietary rights will be adequate or that the Company's competitors will
not independently develop similar technology. The Company is not aware that
any of its products infringe the proprietary rights of third parties. There
can be no assurance, however, that third parties will not
14
claim infringement by the Company with respect to current or future products.
Any such claims could be time-consuming, result in costly litigation, cause
product shipment delays or require the Company to enter into costly royalty
or licensing agreements.
Risks of Dilution. The Company issued in September 1997 shares of Series D
preferred stock, which are convertible into shares of Common Stock, as
described below in "Notes to Consolidated Financial Statements Note 10".
Given the recent trading volume of the Common Stock on the Nasdaq National
Market System, the conversion of Series D shares into Common Stock, and the
subsequent sale of such newly issued Common Stock over a short period of time
would cause significant downward pressure on the price of the Company's
Common Stock.While as of March 31, 1998 the conversion of Series D shares
would have been anti-dilutive, such conversion will be dilutive in the
future. In June, 1998, 60% of the Series D shares (5,032 shares, including
shares issuable upon exercise of the placement agent warrants) were eligible
for conversion into approximately 2,200,000 shares of Common Stock,
representing potential dilution of approximately 8.7%. In October, 1998, all
(100%) of the Series D shares become convertible. Assuming that the Company's
stock price remains stable at its June 1998 level, in October 1998 the Series
D shares will be convertible into shares of Common Stock representing
potential dilution of approximately 15%. In the event that all or a
significant portion of the Series D shares are converted into shares of
Common Stock, and sold on the Nasdaq National Market System over a relatively
short period of time, the market price of the Company's common stock would
likely be materially adversely affected. See "Notes to Consolidated Financial
Statements -Note 10 and Note 15".
Product Liability - Year 2000. The Company has undertaken a systematic review
and planning process concerning the requirements and abilities of its
standard products (including embedded third party products) to handle date
information and to function appropriately from and after January 1, 2000. The
Company intends to discontinue its support of certain products which it
considers obsolete without regard to Year 2000 concerns. Although the Company
believes that the effort required to adapt its supported standard products to
the Year 2000 will not have a materially adverse impact on the Company's
financial performance, currently unforeseen difficulties, delays or
requirements could cause this assessment to change. Many of the Company's
customers have implemented custom applications which rely on the Company's
standard products to operate, and the Company does not believe that it has
the obligation to modify those applications for the Year 2000. It is possible
that unforeseen liabilities may arise with respect to discontinued products
or custom applications.
Risks Associated with Acquisitions. As part of its business strategy, the
Company is investigating the possibility of making acquisitions of, or
significant investments in, businesses that offer complementary products and
technologies. Such future acquisitions could expose the Company to the risks
commonly encountered in acquisitions of businesses. Such risks include, among
others, difficulty of assimilating the operations; information systems and
personnel of the acquired businesses; the potential disruption of the
Company's ongoing business; the inability of management to maximize the
financial and strategic position of the Company through the successful
incorporation of acquired employees and customers; the maintenance of uniform
standards, controls, procedures and policies; and the impairment of
relationships with employees and customers as a result of any integration of
new management personnel. There can be no assurance that any potential
acquisition will be consummated or, if consummated, that it will not have a
material adverse effect on the Company's business, financial condition and
results of operations.
15
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
INTERLEAF, INC.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULE
The following consolidated financial statements and schedules of Interleaf, Inc.
and subsidiaries, and report, are included herein:
[Enlarge/Download Table]
Description Page
Report of Management ...................................................................................... 17
Consolidated Statements of Operations for the Years Ended March 31, 1998, 1997, and 1996 .................. 18
Consolidated Balance Sheets at March 31, 1998 and 1997 .................................................... 19
Consolidated Statements of Changes in Shareholders' Equity (Deficit) for the Years Ended March 31,
1998, 1997, and 1996 ...................................................................................... 20
Consolidated Statements of Cash Flows for the Years Ended March 31, 1998, 1997, and 1996 .................. 21
Notes to Consolidated Financial Statements ................................................................ 22
Report of Independent Auditors ............................................................................ 36
Schedule II - Valuation and Qualifying Accounts ........................................................... 37
Supplemental Financial Information ........................................................................ 38
All other schedules for which provision is made in the applicable accounting
regulation of the Securities and Exchange Commission are not required under the
related instructions or are inapplicable, and therefore have been omitted.
16
Report of Management
The financial statements, including all related financial information presented
in the Annual Report, were prepared by management, and management is responsible
for their fairness, integrity and objectivity. These statements have been
prepared in accordance with generally accepted accounting principles, and
include amounts that are based on management's best estimates and judgement and
incorporate accounting policies that are reasonable and prudent for the
Company's business environment. The financial statements have been audited by
our independent public accountants, Ernst & Young LLP, and their report is
included elsewhere herein.
The Company maintains accounting and control systems that are subject to
modification based on recommendations from Ernst & Young LLP. Management
believes the internal control systems in use are sufficient to provide
reasonable assurance that assets are safeguarded against material loss and are
properly accounted for, and that transactions are properly recorded in the
financial records used in preparing the financial statements.
The Company has distributed throughout the organization its policies for
financial control. Management believes that its policies and the monitoring of
compliance with these policies provide reasonable assurance that its operations
are adhering to prescribed financial policy.
The Board of Directors carries out its responsibility for these financial
statements through its Audit Committee, composed of non-employee Directors. The
Audit Committee reviews the financial statements before they are released for
publication. The Audit Committee meets periodically with the senior financial
officers and Ernst & Young LLP. It reviews the audit scope, significant
financial transactions, major accounting issues and recommendations of Ernst &
Young LLP. Ernst & Young LLP has full and free access to the Audit Committee and
meets with its members, with and without management being present, to discuss
internal control, auditing and financial reporting matters.
/s/ Jaime W. Ellertson
Jaime W. Ellertson,
President and Chief Executive Officer
/s/ Peter J. Rice
Peter J. Rice, Vice President,
Finance and Administration and Chief Financial Officer
17
CONSOLIDATED STATEMENTS OF OPERATIONS
[Enlarge/Download Table]
(In thousands except for per share amounts)
Year ended March 31 1998 1997 1996
------------------------------------------------------- ------------- ------------ ------------
REVENUES
Products ............................................ $ 13,335 $ 18,821 $ 34,786
Maintenance ......................................... 26,083 28,972 32,281
Service ............................................. 13,159 17,030 21,490
----------- ----------- ------------
Total Revenues ........................................ 52,577 64,823 88,557
----------- ----------- ------------
COST OF REVENUES
Products .............................................. 3,966 7,502 6,443
Maintenance ........................................... 3,747 4,561 5,179
Services .............................................. 11,324 16,041 18,270
---------- ----------- ------------
Total Costs of Revenues ............................... 19,037 28,104 29,892
---------- ----------- ------------
Gross Margin .......................................... 33,540 36,719 58,665
---------- ----------- ------------
OPERATING EXPENSES
Selling, general and administrative ................... 22,281 37,114 42,674
Research and development .............................. 8,897 14,994 15,875
Write-down of intangible assets ....................... -- 2,288 --
Restructuring charge .................................. -- 10,942 --
---------- ----------- ------------
Total operating expenses .............................. 31,178 65,338 58,549
---------- ----------- ------------
Income (loss) from operations ......................... 2,362 (28,619) 116
Other income (expense) ................................ 153 (931) 225
---------- ----------- ------------
Income (loss) before income taxes ..................... 2,515 (29,550) $ 341
Provision for income taxes ............................ 79 -- 30
---------- ----------- ------------
Net Income (loss) ..................................... $ 2,436 $(29,550) $ 311
Dividends on preferred stock .......................... (458) -- --
Net income (loss) applicable to common stockholders ... $ 1,978 $(29,550) $ 311
---------- ----------- -----------
INCOME (LOSS) PER SHARE: ................... Basic $ 0.11 $ ( 1.70) $ 0.02
Diluted $ 0.09 $ ( 1.70) $ 0.02
---------- ----------- -----------
Shares used in computing income (loss) per share: Basic 17,857 17,344 15,557
Diluted 24,808 17,344 18,495
---------- ----------- -----------
See Notes to Consolidated Financial Statements.
18
CONSOLIDATED BALANCE SHEETS
[Enlarge/Download Table]
(in thousands except for share and per share amounts)
MARCH 31 1998 1997
---------------------------------------------------------------------------------------------- ---------- ----------
Assets
CURRENT ASSETS
Cash and cash equivalents .................................................................... $ 21,112 $ 17,349
Accounts receivable, net of reserve for doubtful accounts of $1,364 in 1998 and $1,371 in 1997 12,706 11,359
Prepaid expenses and other current assets .................................................... 838 1,504
-------- --------
TOTAL CURRENT ASSETS ......................................................................... 34,656 30,212
Property and equipment, net .................................................................. 3,321 4,963
Intangible assets, net ....................................................................... 583 2,281
Other assets ................................................................................. 828 444
-------- --------
TOTAL ASSETS ................................................................................. $ 39,388 $ 37,900
-------- --------
Liabilities and Shareholders' Equity (Deficit)
CURRENT LIABILITIES
Accounts payable ............................................................................. $ 2,079 $ 1,774
Accrued expenses ............................................................................. 11,657 14,455
Unearned revenue ............................................................................. 12,136 15,102
Accrued restructuring ........................................................................ 2,143 4,386
-------- --------
TOTAL CURRENT LIABILITIES .................................................................... 28,015 35,717
Long-term restructuring ...................................................................... 2,063 2,955
-------- --------
TOTAL LIABILITIES ............................................................................ 30,078 38,672
-------- --------
SHAREHOLDERS' EQUITY (DEFICIT)
Preferred stock, par value $.10 per share, authorized 5,000,000 shares:
Series A Junior participating, none issued and outstanding
Senior Series B convertible, issued and outstanding 861,911 in 1998 and 1997
(liquidation value $7 per share)................. 86 86
Senior Series C convertible, issued and outstanding 1,010,348 in 1998
and 1,006,220 in 1997 (liquidation value $9.95 per share).............................. 101 101
6% Convertible, issued and outstanding 7,625 in 1998 ....................................... 1 --
Common Stock, par value $0.1 per share, authorized 50,000,000 shares, issued and
outstanding 18,155,309 in 1998 and 17,459,219 in 1997 ................................. 182 175
Additional paid-in capital ................................................................... 93,369 85,513
Retained earnings (deficit) .................................................................. (84,072) (86,508)
Cumulative translation adjustment ............................................................ (357) (139)
--------- --------
TOTAL SHAREHOLDERS' EQUITY (DEFICIT) ......................................................... 9,310 (772)
--------- --------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIT) ......................................... $ 39,388 $ 37,900
--------- --------
See Notes to Consolidated Financial Statements.
19
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY (DEFICIT)
[Enlarge/Download Table]
(In thousands) Retained Cumulative Total
Preferred Preferred Preferred Common Additional Earnings Translation Shareholders'
Stock Stock Stock 6% Stock Paid-in (Deficit) Adjustment Equity
Senior Senior Convertible capital (Deficit)
Series B Series C
------------------------- ----------- ------------ ------------ ------------ ------------ ------------ ------------- ------------
Balances at March 31, 1995 $ 173 $ -- $ -- $ 142 $ 67,382 $ (57,269) $ 187 $ 10,615
Net Income -- -- -- -- -- 311 -- 311
Conversion of Senior
Series B Convertible
Preferred stock into
common stock (81) -- -- 11 70 -- -- --
Common stock issued in
connection with stock
options exercised by
employees -- -- -- 7 2,087 -- -- 2,094
Common stock issued in
connection with employee
stock purchase plan -- -- -- 1 685 -- -- 686
Income tax benefit related to
exercise of stock options -- -- -- -- 30 -- -- 30
Common stock issued in
connection with warrants
exercise -- -- -- 4 (4) -- -- --
Common stock issued in
connection with acquisition -- -- -- 2 2,098 -- -- 2,100
Equity adjustment for foreign
currency translation -- -- -- -- -- -- (417) (417)
--------- ------------ ------------- ------------- ------------ ------------ ------------- ----------
Balances at March 31, 1996 92 -- -- 167 72,348 (56,958) (230) 15,419
Net Loss -- -- -- -- -- (29,550) -- (29,550)
Conversion of Senior Series
B Convertible Preferred
stock into common stock (6) -- -- 1 5 -- -- --
Issuance and obligations of
Senior series C Convertible
Preferred stock -- 101 -- -- 9,289 -- -- 9,390
Common stock issued in
connection with stock options
exercised by employees -- -- -- 2 447 -- -- 449
Common stock issued in
connection with employee
stock purchase plan -- -- -- 2 737 -- -- 739
Common stock issued in
connection with acquisition -- -- -- 3 2,687 -- -- 2,690
Equity adjustment for foreign
currency translation -- -- -- -- -- -- 91 91
--------- ------------- ------------ -------------- ----------- ------------ ------------- ----------
Balances at March 31, 1997 86 101 -- 175 85,513 (86,508) (139) (772)
Net Income -- -- -- -- -- 2,436 -- 2,436
Common stock issued in
connection with stock options
exercised by employees -- -- -- 4 1,271 -- -- 1,275
Issuance of Preferred C -- -- -- -- 29 -- -- 29
Common stock issued in
connection with employee
stock purchase plan -- -- -- 3 218 -- -- 221
Issuance of 6% Convertible
Preferred Stock -- -- 1 -- 6,796 -- -- 6,797
Dividends on Preferred Stock -- -- -- -- (458) -- -- (458)
Equity adjustment for foreign
currency translation -- -- -- -- -- -- (218) (218)
---------- ------------ ------------ -------------- ------------ ------------ ------------ ----------
Balances at March 31, 1998 $ 86 $ 101 $ 1 $ 182 $ 93,369 $(84,072) $ (357) $ 9,310
---------- ------------ ------------ -------------- ------------ ------------ ------------ ----------
See Notes to Consolidated Financial Statements.
20
CONSOLIDATED STATEMENTS OF CASH FLOWS
[Enlarge/Download Table]
(In thousands)
Year ended March 31 1998 1997 1996
--------------------------------------------------------- ------------ -------------- ------------
CASH FLOWS FROM OPERATING ACTIVITIES
Net income (loss) $ 2,436 $ (29,550) $ 311
Adjustments to reconcile net income (loss) to net cash
provided by (used in) operating activities:
Write-off of intangible assets -- 2,288 --
Restructuring charge -- 10,942 --
Gain from settlement of legal dispute -- -- (1,230)
Depreciation and amortization expense 4,174 9,706 7,754
Loss from disposal of property and equipment -- 212 11
Income tax benefit from stock options exercised -- -- 30
Changes in assets and liabilities:
(Increase) decrease in accounts receivable, net (1,712) 8,126 2,950
(Increase) decrease in other assets (322) 309 97
Decrease in accounts payable and accrued expenses (1,519) (172) (1,068)
Increase (decrease) in unearned revenue (2,737) (730) 507
Decrease in other liabilities (2,970) (4,379) (2,532)
Other, net -- 410 76
----------- ------------- -------------
Net cash provided by (used in) operating activities (2,650) (2,838) 6,906
----------- ------------- -------------
CASH FLOWS FROM INVESTING ACTIVITIES
Capital expenditures (1,151) (1,816) (1,597)
Capitalized software development costs -- (1,113) (4,138)
----------- ------------- -------------
Net cash used in investing activities (1,151) (2,929) (5,735)
----------- ------------- -------------
CASH FLOWS FROM FINANCING ACTIVITIES
Net proceeds from issuance of preferred stock -- 9,390 --
Net proceeds from issuance of 6% preferred stock 6,796 -- --
Net proceeds from issuance of common stock 1,496 1,250 2,780
Repayment of long-term debt and capital leases (6) (18) (1,688)
----------- ------------- -------------
Net cash provided by financing activities 8,286 10,622 1,092
----------- ------------- -------------
Effect of exchange-rate changes on cash (722) (231) 21
----------- ------------- -------------
Net increase (decrease) in cash and cash equivalents 3,763 4,624 2,284
Cash and cash equivalents at beginning of year 17,349 12,725 10,441
----------- ------------- -------------
Cash and cash equivalents at end of year $ 21,112 $ 17,349 $ 12,725
----------- ------------- -------------
See Notes to Consolidated Financial Statements.
21
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1 The Company
Interleaf, Inc. and its subsidiaries (the "Company") develop and market software
for the electronic assembly, management, retrieval, publishing and distribution
of business-critical documents and information, and it is focusing its efforts
for growth on content management and information publishing software and
services.
Note 2 Summary of Significant Accounting Policies
Principles of Consolidation. The consolidated financial statements include the
accounts of Interleaf, Inc. and its subsidiaries. All significant intercompany
balances and transactions have been eliminated in consolidation.
Revenue Recognition. Revenue from the license of software products is recognized
when the products are shipped, provided there are no significant vendor
obligations remaining and collection of the receivable is considered probable.
Costs associated with insignificant vendor obligations are accrued. The Company
also maintains a reserve for sales allowances to provide for possible product
returns or allowances resulting from a lack of sell through of products by
resellers. In the fourth quarter of fiscal 1997, the Company recorded a charge
of $1.5 million to provide for anticipated allowances expected to be granted.
Maintenance revenue is recognized ratably over the contract period. Services
(consulting and training) revenue is recognized as the related services are
performed on either a time and materials basis or pro-rata based on project or
contract completion. Unearned revenue represents the remaining amount of revenue
to be recognized in future periods primarily related to maintenance and service
contracts.
Cash and Cash Equivalents. Cash equivalents, consisting primarily of commercial
paper and treasury bills, represent highly liquid investments with maturities at
date of purchase of three months or less. These investments are stated at cost,
which approximates market value. See Note 13 on restricted cash.
Property and Equipment. Property and equipment are stated at cost. Depreciation
and amortization are determined on the straight-line method over the estimated
useful lives of the related assets. The estimated useful lives generally range
from 3 to 5 years. Expenditures for repairs and maintenance are charged to
operations as incurred.
Capitalized Software Development Costs. Costs incurred in the research, design
and development of software for sale to others are charged to expense until
technological product feasibility is established, after which remaining software
development costs are capitalized. These costs are amortized as part of the cost
of revenue beginning when the product is available for general release to
customers. Such amounts are amortized over the estimated remaining useful life
of the product not to exceed three years. The Company continually compares the
unamortized portion of capitalized software development costs to the net
realizable value of the related product. The net realizable value is the
estimated future gross revenues from that product reduced by the estimated
future costs of completing and disposing of that product. The amount by which
the unamortized capitalized costs exceed the net realizable value is
written-off. See Note 4 for discussion of Intangible Asset write-downs recorded
during fiscal 1997.
Foreign Currency Translation. The translation of assets and liabilities of
foreign subsidiaries is made at year-end rates of exchange, and revenues and
expenses are recorded at average rates of exchange. The resulting translation
adjustments are excluded from net income and are accumulated as a separate
component of shareholders' equity. Realized and unrealized exchange gains or
losses from foreign currency transactions are reflected in the statements of
operations. The exchange loss for fiscal year 1998 and 1997 was $180,000 and
$531,000, respectively and was not material for fiscal year 1996.
Income Taxes. Income taxes have been provided for using the liability method in
accordance with FASB Statement No. 109, "Accounting for Income Taxes".
22
Income (Loss) per Share. In 1997, the Financial Accounting Standards Board
issued Statement No. 128, "Earnings Per Share," which is required to be adopted
for fiscal years ending after December 15, 1997. All income (loss) per share
amounts for all periods presented have been restated to conform to the SFAS 128
requirements. See Note 15 for the computation of basic and diluted income (loss)
per share.
Stock-Based Compensation. Statement of Financial Accounting Standards No. 123,
"Accounting for Stock-Based Compensation," encourages but does not require
companies to record compensation cost for stock-based employee compensation
plans at fair value. The Company has chosen to continue to account for
stock-based employee compensation using the intrinsic value method prescribed in
Accounting Principles Board (APB) Opinion No. 25, "Accounting for Stock Issued
to Employees," and related interpretations. Accordingly, compensation cost for
stock options granted to employees is measured as the excess, if any, of the
quoted market price of the Company's stock at the date of the grant over the
amount an employee must pay to acquire the stock.
Long-Lived Assets. Effective April 1, 1996, the Company adopted Financial
Accounting Standards Board (FASB) Statement of Financial Accounting Standards
No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to Be Disposed Of," which requires impairment losses to be recorded on
long-lived assets used in operations, such as property, equipment and
improvements, and intangible assets, when indicators of impairment are present
and the undiscounted cash flows estimated to be generated by those assets are
less than the carrying amount of the assets.
Concentrations of Credit Risk. Financial instruments which potentially subject
the Company to concentrations of credit risk consist principally of cash
investments and accounts receivable. The Company places its cash investments in
investment grade instruments with maturities of three months or less and limits
the amount of investment with any one financial institution. The credit risk
associated with accounts receivable is limited due to the Company's credit
evaluation process and the large number of customers and their dispersion over
different industries and geographic areas.
Use of Accounting Estimates. The preparation of financial statements in
conformity with generally accepted accounting principles requires management to
make estimates and assumptions that effect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues and expenses
during the reporting period. Significant estimates include adequacy of
restructuring accruals, collectibility of accounts receivable, and
recoverability of depreciable assets and intangible assets. Actual results could
differ from these estimates.
Basis of Presentation. The accompanying financial statements have been presented
assuming that the Company will continue as a going concern. During 1997, the
Company experienced a substantial decline in revenues and a substantial loss
from operations, resulting in a shareholders' deficit at March 31, 1997. In
response to these matters, the Company developed detailed plans relating to its
fiscal 1998 operations which restored the Company to profitable operations
despite a continued decline in revenues. Management is committed to continue
taking all appropriate and necessary actions to effect timely cost reductions in
the event that anticipated revenue levels are not achieved during fiscal 1999.
In the event such actions are not successful in achieving breakeven or
profitable operations, additional financing will be needed. Under such
circumstances, no assurance can be given that such financing could be obtained
or that it could be obtained at commercially reasonable terms or without
incurring substantial dilution to existing shareholders. The financial
statements do not include any adjustments to reflect the possible effects of
these uncertainties. Management believes that, based on its 1999 operating plan
and existing cash balances, the Company will have sufficient cash to support
operations during fiscal 1999.
23
Pending Accounting Pronouncements:
The Financial Accounting Standards Board issued Statement No. 129, "Disclosure
of Information about Capital Structures" in 1997. This Statement does not change
the Company's disclosure requirements.
In 1997, the Financial Accounting Standards Board issued Statement No. 130
"Reporting Comprehensive Income" and Statement No. 131 "Disclosures about
Segments of an Enterprise and Related Information", which will become effective
for the Company in fiscal 1999. The Company is currently evaluating the effects
of implementing these standards.
Also in 1997, the AICPA issued SOP 97-2, Software Revenue Recognition, which
changes the requirements for revenue recognition effective for transactions that
the Company will enter into beginning April 1, 1998. The Company believes that
the adoption of SOP 97-2 will not have a material impact on its financial
statements.
Note 3 Property and Equipment
Property and Equipment at March 31 consisted of the following:
[Enlarge/Download Table]
(in thousands) 1998 1997
------------------------------------------------------- ---------------- ----------------
Office, demonstration and other equipment $ 27,252 $ 27,739
Development equipment 12,815 12,654
Furniture 3,740 3,799
Leasehold improvements 1,819 1,637
---------------- ---------------
45,626 45,829
Less allowances for depreciation and amortization 42,305 40,866
---------------- ---------------
$ 3,321 $ 4,963
---------------- ---------------
Note 4 Intangible Assets
The Company's intangible assets have historically consisted of purchased
goodwill and capitalized software development costs. The Company's policy has
been to amortize purchased goodwill to selling, general and administrative
expense, and to amortize capitalized software development costs to cost of
revenue. In fiscal year 1997, the Company wrote off goodwill of approximately
$2.3 million related to the acquisition of The Learning Alliance (see Note 12).
As a result of a strategic product review, in fiscal year 1997 the Company wrote
off capitalized software development costs of $2.0 million in costs were
associated with discontinued products or products with limited future revenue
potential. The unamortized portion of capitalized software development costs was
$0.6 million and $2.3 million at March 31, 1998 and 1997, respectively.
Amortization and write-downs to net realizable value of capitalized software
development costs were approximately $1.7 million, $5.0 million, and $3.2
million during fiscal 1998, 1997, and 1996, respectively.
Note 5 Credit Agreement
In August 1997, the Company's revolving line of credit with a major commercial
lender expired and was not renewed. Although this credit facility was not
utilized in either fiscal 1998 or 1997, available credit would have been secured
by substantially all domestic assets of the Company. At March 31, 1998, the
Company has a letter of credit for $0.6 million, which is secured by the same
amount of cash, from another major commercial lender which expires on July 31,
1998.
24
Note 6 Accrued Expenses
Accrued expenses at March 31 consisted of the following:
[Download Table]
(in thousands) 1998 1997
-------------------------------------- ------- -------
Accrued compensation and related items $ 3,159 $ 4,987
Taxes, other than income 754 2,414
Royalties 1,255 1,030
Rent 893 1,228
Other 5,596 4,796
------- -------
$11,657 $14,455
------- -------
Note 7 Lease Commitments
The Company leases its headquarters and sales offices, and certain equipment
under various operating leases, which expire through the year 2003. Rent expense
amounted to approximately $2.9 million, $5.1 million, and $6.6 million during
fiscal 1998, 1997, and 1996, respectively.
Future minimum lease commitments on noncancelable operating leases and sublease
income are as follows:
[Enlarge/Download Table]
(in thousands) Year ended March 31 1999 2000 2001 2002 2003 Thereafter
-------------------------------------------------------- ------ ------ ------ ---- ---- ----------
Future minimum lease commitments on noncancelable leases $6,327 $5,860 $4,154 $286 $282 $---
Future minimum sublease income 3,918 3,816 2,884 $--- $--- $---
These future minimum lease commitments include approximately $2.4 million, net
of sublease income, related to facilities the Company has elected to abandon or
downsize in connection with the restructuring and acquisition-related
initiatives.
Note 8 Restructurings
Restructuring charges include costs associated with employee termination
benefits and facility closures and related costs. Employee termination benefits
include severance, wage continuation, notice pay and related fringe benefits.
Facility closure and related costs include lease payments, lease buyout costs,
disposal of property and equipment, and related costs.
In fiscal year 1998, the Company paid approximately $3.1 million, net of
sublease receipts, related to the fiscal 1997 and 1995 restructurings, compared
to $4.9 million paid during fiscal 1997. Expenditures for facility closures,
primarily lease payments, net of sublease receipts, are expected to continue
through December 2000. The Company continues to monitor its cost structure in
light of current and future revenue levels.
In the second quarter of fiscal 1997, as a result of a significant decline in
product revenue, the Company announced a restructuring plan and recorded a
charge of $4.8 million to reduce employment by approximately 75 people, to close
or reduce space in seven sales offices, and to implement the second and final
stage of relocating corporate headquarters to smaller and less expensive space.
The employee terminations affected all groups throughout the organization.
Approximately $1.3 million of the restructuring charge was for employee
termination benefits and $3.5 million for facility closures and related costs.
In the third quarter of fiscal 1997, the Company announced another restructuring
plan and recorded a charge of $3.7 million to further reduce employment by
approximately 100 people at a cost of $1.8 million and to close or reduce space
in six sales offices at a cost of $1.9 million. The employee
25
terminations affected all groups throughout the organization. In the fourth
quarter of fiscal 1997, the Company recorded an additional charge of $2.4
million to reflect changes in cost and timing assumptions relating to previously
restructured facilities.
In connection with the Company's restructuring initiatives, the Company paid
approximately $.6 million, $2.7 million, and $.7 million for employee
termination benefits during fiscal 1998, 1997, and 1996, respectively. Payments
for facility closures and related costs, net of sublease receipts, were
approximately $1.9 million, $1.4 million, and $1.3 million during fiscal 1998,
1997, and 1996, respectively. Expenditures for facility closures, primarily
lease payments, are anticipated to continue through the fiscal year 2001.
Note 9 Income Taxes
The provision for income taxes is composed of the following:
[Download Table]
(in thousands) 1998 1997 1996
-------------- ------- ------- -------
Current:
Federal $79 $ -- $30
State -- -- --
Foreign -- -- --
------- ------- -------
Total Current 79 -- 30
------- ------- -------
Deferred:
Federal -- -- --
State -- -- --
------- ------- -------
Total Deferred -- -- --
------- ------- -------
$79 $ -- $30
------- ------- -------
The provision for income taxes is based on the following amounts of income
(loss) before income taxes:
[Download Table]
(in thousands) 1998 1997 1996
-------------- ------- ------- -------
Domestic: $ 4,458 $(21,586) $ 3,793
Foreign (2,022) (7,964) (3,452)
------- ------- -------
$ 2,436 $(29,550) $ 341
------- ------- -------
26
Total income taxes reported are different from the amount that would have been
computed applying the federal statutory tax rate to income before income taxes.
The difference is attributable to the following:
[Download Table]
(in thousands) 1998 1997 1996
------------------------------------------ -------- -------- --------
Computed at federal statutory rate $ 814 $(10,047) $ 116
Loss for which no tax benefit was realized -- 9,151 --
Nondeductible amortization -- -- 51
Nondeductible write-downs -- 778 --
Other nondeductible expenses 102 118 66
Benefit of net operating loss carryforwards (837) -- (195)
Other, net -- -- (8)
-------- -------- --------
$ 79 $ -- $ 30
-------- -------- --------
Deferred taxes result from temporary differences in the recognition of revenues
and expenses for tax and financial reporting purposes. The components of the
Company's deferred tax assets and liabilities as of March 31 are as follows:
[Download Table]
(in thousands) 1998 1997 1996
------------------------------------------ -------- -------- --------
Deferred tax assets
Net operating loss carryforwards $ 24,138 $ 22,897 $ 14,919
Tax credit carryforwards 7,376 7,150 7,120
Accrued rent 344 473 601
Reserve for doubtful accounts receivable,
vacation and other accruals 950 864 401
Restructuring 1,384 2,555 392
-------- -------- --------
Total deferred tax assets 34,192 33,939 23,433
Deferred tax asset valuation allowance (34,079) (33,619) (21,294)
-------- -------- --------
113 320 2,139
-------- -------- --------
Deferred tax liabilities:
Capitalized software development costs (113) (320) (1,891)
Depreciation -- -- (225)
Other -- -- (23)
-------- -------- --------
Total deferred tax liabilities (113) (320) (2,139)
-------- -------- --------
Net deferred tax asset $ -- $ -- $ --
-------- -------- --------
Realization of total deferred tax assets is contingent upon future taxable
income. A 100% valuation allowance of net deferred tax assets has been
established due to the uncertainty of realization of these tax benefits. The
deferred tax asset valuation allowance increased $0.4 million and $12.3 million
during fiscal 1998 and 1997, respectively.
At March 31, 1998, the Company and its subsidiaries had net operating loss
carryforwards of approximately $63 million that are available to offset future
taxable income. The loss carryforwards are attributable to operations in several
tax jurisdictions and expire in fiscal 1999 and thereafter. In addition, the
Company has research and development and other tax credit carryforwards of
approximately $7 million, which are available to reduce future federal and state
income tax liabilities. The tax credit carryforwards expire in fiscal 1999 and
thereafter. No tax payments were made in fiscal 1998 or fiscal 1997. During
fiscal 1996, the Company made income tax payments of approximately $0.3 million.
27
Note 10 Shareholders' Equity
Series A
On July 15, 1988, the Company declared a dividend distribution of one Preferred
Stock Purchase Right (a Right) for each outstanding share of the Company's
common stock to shareholders of record on July 25, 1988 and for shares of the
Company's common stock issued and outstanding thereafter. Each Right entitles
the holder to purchase a unit consisting of one-hundredth of a share (a Unit) of
Series A Junior Participating Preferred Stock, $.10 par value ("Series A"), at a
purchase price of $65.00 in cash. The Rights initially trade with the shares of
common stock and are not exercisable. The Rights will separate from the common
stock and become exercisable 10 days after a public announcement that a person
or group (an Acquiring Person) acquires beneficial ownership of 20% or more of
the outstanding shares of common stock, or 10 business days after commencement
of a tender offer that would result in a person or group beneficially owning 30%
or more of the outstanding shares of common stock. In the event that the Company
is not the surviving corporation in a merger with an Acquiring Person, or the
acquisition of 25% of common stock by any person (except pursuant to a tender
offer for all shares of common stock determined to be fair by certain directors
of the Company), or upon certain self-dealing transactions or increases in an
Acquiring Person's ownership of common stock, each holder of an outstanding
Right other than an Acquiring Person will receive, upon exercise of a Right, the
number of shares of the Company's common stock that equals the exercise price of
the Right divided by one half of the current market price of the Company's
common stock. In the event that the Company is not the surviving corporation in
a merger, or if more than 50% of its assets or earning power is sold or
transferred after any person has become an Acquiring Person, each holder of an
outstanding Right other than any Acquiring Person will receive, upon exercise of
a Right, the number of shares of common stock of the acquiring Company that
equals the exercise price of the Right divided by one half of the current market
price of the acquiring Company's common stock. The Rights are non-voting, expire
on July 15, 1998 and may be redeemed at any time prior to becoming exercisable
at a price of $.01 per Right.
Series B
The Company issued 2,142,857 shares of its Senior Series B Convertible Preferred
Stock ("Series B"), at $7.00 per share. Under the terms of the Series B, the
holders have a liquidation preference of $7.00 per share over the holders of
Common Stock, but this preference is subordinate to the liquidation preference
of the holders of Series C and D, described below. Thereafter, all other
shareholders are entitled to receive, on a per share basis, an amount equal to
$15 million divided by the total number of shares of common stock that the
Series B holders would have been entitled to receive upon conversion. Finally,
the Series B holders and common shareholders share ratably in the remainder, if
any, with each share of Series B being deemed to have been converted to common
stock. Series B holders are entitled to vote as a single class on all matters
submitted to the common shareholders, receiving the number of votes equal to the
number of common shares that they would have received upon conversion, except
that the Series B holders are entitled to elect one director, and the Company
needs the approval of the majority of the Series B holders on certain
significant events.
Each Series B share is convertible into 1.34375 shares of common stock. Series B
holders converted 0, 61,393 and 805,269 shares of Series B Convertible Preferred
Stock into shares of the Company's common stock during fiscal 1998, 1997, and
1996, respectively.
The Series B stock may be redeemed at any time by the Company at $21.00 per
share, provided at least 20% of the then outstanding shares of Senior Series B
Convertible Preferred Stock are redeemed. Preferred shareholders shall share
ratably in any dividends declared on the common stock as if each Series B share
had been converted to common stock.
Series C
On October 15, 1996, the Company issued 1,004,904 shares of newly authorized
Series C Convertible Preferred Stock ("Series C") at a price of $9.9512 per
share, receiving net proceeds of $9.4 million. In
28
accordance with the Series C investment agreement, the Company issued an
additional 5,444 Series C shares. Each Series C share is initially convertible
into 4 shares of common stock, which rate is adjustable upon certain issuances
of common stock by the Company. Dividends of $0.24878 per share are payable on
April 15, 1998 and October 15, 1998, and $0.49756 per share on each April 15 and
October 15 thereafter. Holders of outstanding shares of Series C are entitled to
the number of votes equal to one-half the number of shares of common stock into
which the Series C shares are convertible. Series C holders are entitled to
receive upon liquidation an amount equal to $9.9512 per share plus any declared
or accrued but unpaid dividends, which amount is payable prior to any payments
to holders of the Series B and common stock, and pari passu with the Series D
holders (described below). Series C shareholders must convert their shares into
common stock upon the consolidation, merger or sale of substantially all assets
of the Company or, subject to certain conditions, if the Company's common stock
trades for twenty consecutive days above $3.7317.
The Company has registered sufficient shares of common stock to satisfy the
conversion requirements of the Series C.
The Company may, at its option, redeem the Series C shares on or after October
16, 1999. The redemption premium is initially 25%, and decreases 5% per year
each October until 2004. As part of the Series C issuance, the Company issued
warrants to purchase 74,929 shares of common stock at an exercise price of $2.67
per share to its investment banking firm. These warrants are exercisable until
October 15, 2001.
Series D
On September 30, 1997, the Company sold, in a private placement, 7,625 shares of
Series 6% Convertible Preferred Stock ("Series D") at a price of $1,000 per
share, receiving proceeds of $6.8 million, net of placement agent fees and
transaction costs. In addition, the Company issued to the placement agent
warrants to purchase 763 Series D shares at an exercise price of $1,000 per
share. These warrants are exercisable for a period of five years commencing
September 30, 1997.
The Company has registered sufficient shares of common stock to satisfy the
conversion requirements of the Series D.
Pursuant to its agreements with the Series D holders and with NASDAQ, the
Company on December 17, 1997 received shareholder approval of the issuance of
the Series D shares.
Each Series D share is entitled to receive dividends, payable annually on
September 30 of each year, when and as declared by the Company's Board of
Directors, at the rate of 6% per annum in preference to any payment made on any
shares of Common Stock or any other class or series of capital stock of the
Company other than the Series C , which has rights to dividends pari passu with
the Series D. Such dividends accrue from day to day whether or not earned or
declared. Any dividend payable after the date of issuance of the Series D may be
paid (i) in additional Series D shares valued at $1,000.00 per share, or (ii)
upon proper notice, in cash. Each Series D share is also entitled to a
liquidation preference of $1,000.00 per share, plus any accrued but unpaid
dividends in preference to any other class or series of capital stock of the
Company (except the Series C , which is pari passu with the Series D). Except as
otherwise provided by applicable law, Series D holders have no voting rights.
Commencing on December 29, 1997, at least 10% and up to 25% (depending upon the
price at which the Common Stock is trading) of the number of Series D shares
held of record by each holder on such day became convertible into shares of
Common Stock, and thereafter on the successive monthly anniversaries of such day
additional Series D shares shall become convertible (with the additional amount
varying from 10% to 25% of the number of Series D shares held of record by such
holder on such day depending upon the price at which Common Stock is trading)
except that in any month when the highest of the Common Stock's daily low
trading prices is $2.50 or less, not more than 10% of each holder's Series D
shares held of record on such day shall be convertible.
29
The number of shares of Common Stock issuable upon conversion of Series D shares
will equal the liquidation preference of the shares being converted divided by
the then-effective conversion price (the "Conversion Price"). The Conversion
Price through April 30, 1998 was $5.50. The Conversion Price between May 1, 1998
and January 31, 1999 shall be the lowest trading price of the Common Stock
during the twenty-two (22) consecutive trading days immediately preceding the
date of conversion, reduced by the Applicable Percentage, described below,
except that the Conversion Price shall be not less than $1.50 prior to November
1, 1998. The "applicable percentage" is dependent upon the time which has passed
from original issuance to the date of measurement, being 9.8% starting on May 1,
1998 and increasing in each subsequent month to 11.1%, 12.4%, 13.7%, and 15%. At
any date after February 1, 1999, the Conversion Price will be the lesser of (a)
85% of the average of low daily trading price of the Common Stock for all the
trading days during November 1998 through January 1999 (provided that in no
event shall this amount be less than $2.8126), or (b) 85% of the average of the
lowest daily trading price of the Common Stock during the twenty-two (22)
consecutive trading days immediately preceding the date of conversion (the
"Conversion Cap"). The Conversion Price is at all times also subject to
adjustment for customary anti-dilution events such as stock splits, stock
dividends, reorganizations and certain mergers affecting the Common Stock. On
September 30, 2003, all of the then outstanding Series D shares will be
automatically converted into shares of Common Stock at the then-applicable
Conversion Price. No Series D holder will be entitled to convert any Series D
shares into shares of Common Stock if, following such conversion, the holder and
its affiliates (within the meaning of the Securities Exchange Act of 1934) will
be the beneficial owners (as defined in Rule 13d-3 thereunder) of 10% or more of
the outstanding shares of Common Stock.
Following conversion of Series D shares into shares of Common Stock, the holders
of such shares of Common Stock have agreed to be limited on resales of such
shares to the greatest of: (i) 10% of the average daily trading volume of the
Common Stock for the five trading days preceding any such sales; (ii) 12,000
shares; or (iii) 10% of the trading volume for the Common Stock on the date of
any such sale. Furthermore, the Company has the right, upon proper notice, if
the Conversion Price falls below Three Dollars ($3.00) (or such other price as
is set by the Company in accordance with certain notice provisions), and subject
to certain other conditions, to honor any conversion request by a cash payment
in lieu of the issuance of Common Stock in an amount equal to the proceeds which
would otherwise have been received by the holder if conversion were in fact made
into Common Stock and such Common Stock were sold at the high trade price on the
trading day immediately preceding the date that the conversion notice is
received (the "Green Floor").
Warrants
In prior years, the Company had issued warrants to purchase the Company's common
stock at various prices in connection with certain research and development
agreements and exclusive distribution agreements. The Company issued 366,113
shares of common stock in connection with the exercise of warrants during fiscal
1996. The Company received no proceeds upon the conversion of the warrants into
common stock.
Stock Option Plans
The Company has stock option plans that provide for the granting of
non-qualified and incentive stock options to employees, consultants, officers
and directors. The Board of Directors determines the option price, the option
term, and the vesting period for options granted. Incentive stock options are
granted at a price not less than the fair market value on the date of grant. In
June 1993, the Board of Directors adopted the 1993 Stock Option Plan (the "1993
Plan"), which initially provided for a maximum of 750,000 shares of common stock
to be issued and sold under the plan. In August 1995, August 1997 and February
1998 the Board of Directors approved amendments to the 1993 Plan to increase the
number of shares available for issuance under the plan by 750,000, 600,000 and
1,300,000 shares, respectively. On July 14, 1994, the Board of Directors adopted
the 1994 Employee Stock Option Plan (the "1994 Plan"), which initially provided
for a maximum of 750,000 shares of common stock to be issued and sold under the
1994 Plan. In May 1996 and October 1996 the Board of Directors approved
amendments to the 1994 Plan to increase the number of shares available for
issuance under the plan by 750,000 and 1,000,000
30
shares, respectively. In February 1998, the Board of Directors resolved that no
additional shares would be issued under the 1994 Plan, that all future option
grants would be issued under the 1993 Plan, and that the 1993 Plan would be
administered in a broadly based fashion. In January 1997 and February 1998 the
Company adopted the 1997 Key Man Stock Option Plan and Agreement, and the 1998
Key Man Stock Option Plan and Agreement, which provided for a maximum of 950,000
shares of common stock to be issued and sold. As of March 31, 1998, options to
purchase an aggregate of 950,000 shares had been granted, and no further shares
were available for grant
On September 12, 1996, the Board of Directors authorized a repricing program
which allowed employees to elect to reprice all or some of their outstanding
options, ranging in exercise price from $2.75 to $10.75 per share, to the
September 12, 1996 closing price of $2.5625. Any options repriced may not be
exercised until March 12, 1997. Options for approximately 2.1 million shares
were repriced. On August 3, 1994, the Board of Directors authorized the
repricing of approximately 746,000 stock options and the cancellation and
re-grant of approximately 297,000 stock options ranging in price from $4.00 to
$19.38 to the fair market value of $2.75 on that date. On June 20, 1997, the
Board of Directors authorized a repricing program which allowed employees to
elect to reprice all or some of their outstanding options, ranging in price from
$2.00 to $8.25 per share, to the June 20, 1997 closing price of $1.25.
Approximately 1.2 million shares were repriced.
A summary of activity for these stock option plans is as follows:
[Enlarge/Download Table]
Price Range Weighted Average
(in thousands, except price range of shares) Number of Shares of Shares Price per Share
------------------------------------------------------- --------------------- --------------------- ---------------------
Outstanding at March 31, 1995 1,960 $2.75 - 10.75 $ ---
Granted 798 5.50 - 7.38 6.25
Exercised (689) 2.75 - 5.75 3.10
Cancelled (250) 2.75 - 10.63 8.75
------ ------------- ---------
Outstanding at March 31, 1996 1,819 2.75 - 10.75 $ 4.50
Granted 2,813 2.05 - 2.56 2.44
Exercised (154) 2.75 - 4.50 2.90
Cancelled (1,539) 2.50 - 10.63 5.95
------ ------------- ---------
Outstanding at March 31, 1997 2,939 2.05 - 10.75 $ 2.75
Granted 2,282 .94 - 3.63 2.17
Exercised (448) .94 - 5.50 2.82
Cancelled (942) .94 - 10.75 3.25
------ ------------- ---------
Outstanding at March 31, 1998 3,831 $ .94 - 7.37 $ 3.07
------ ------------- ---------
At March 31, 1998, there were approximately 1,797,000 shares available for
grant. Options exercisable at March 31, 1998, 1997, and 1996 were approximately
335,000, 1,238,000, and 912,000, respectively. The Company also has stock option
plans for non-employee directors. In September 1993, the Board of Directors
approved, with subsequent ratification by the shareholders, the Company's 1993
Director Stock Option Plan, Under which options are granted at the fair market
value at date of grant and are exercisable one year later. Each non-employee
director received a grant of 5,000 options at the inception of the 1993 Director
Stock Option Plan. Under that plan, each newly elected non-employee director
received a grant of 5,000 options as of the first date of his or her election as
a director. Every April 1, each non-employee director automatically received a
grant of 5,000 additional options. In December 1997, the Board of Directors
amended this plan, subject to shareholder approval, to provide that newly
elected non-employee directors will receive a grant of 25,000 shares, and on
each April 1 each non-employee director will automatically receive a grant of an
additional 7,500 shares. During fiscal 1998 and 1997, no options were exercised.
At March 31, 1998, there were options outstanding to purchase 145,000 shares and
no shares were available for grant. Options exercisable at March 31, 1998, 1997,
and 1996 were 15,000, 70,000, and 105,000, respectively.
31
Pro Forma Disclosure of the Effects of Stock-Based Compensation Plans: The
Company accounts for stock-based compensation using the method prescribed in
Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to
Employees." The Company has adopted the disclosure-only provisions of Statement
of Financial Accounting Standards No. 123 (SFAS No. 123), "Accounting for
Stock-Based Compensation." Accordingly, no compensation cost has been recognized
for the Company's stock option plans and employee stock purchase plan.
Had compensation cost been determined based on the fair value at the grant dates
for awards under those plans in fiscal 1998, 1997 and 1996 on a basis consistent
with the provisions of SFAS No. 123, the Company's net income and earnings per
share on a fully diluted basis would have been as indicated below:
[Download Table]
(in thousands, except per share amounts) 1998 1997 1996
------------------------------------------------- --------- ---------- -------
Net income (loss) - as reported $ 2,436 $ (29,550) $ 311
Net income (loss) - pro forma 1,651 (29,858) 228
Earnings (loss) per share - as reported - Basic 0.11 (1.70) 0.02
Earnings (loss) per share - pro forma - Basic 0.09 (1.72) 0.02
As reported - diluted (except when anti-dilutive) 0.09 (1.70) 0.01
Pro forma-diluted (except when anti-dilutive) 0.07 (1.72) 0.01
Because SFAS No. 123 is only applicable to options granted subsequent to March
31, 1995, its pro forma effects will not be fully reflected until 1998. The fair
value of options at date of grant was estimated using the Black-Scholes option
pricing model with the following weighted average assumptions:
[Download Table]
Expected life (years) 4 4 4
Risk-free interest rate 5.47% - 6.83% 6.38% 5.79%
Volatility 78.9% 73.8% 73.8%
Dividend yield -- -- --
The weighted-average grant-date fair value of options granted during 1998, 1997
and 1996 was $1.11, $1.84 and $3.12, respectively. The following table
summarizes information about stock options outstanding at March 31, 1998:
[Enlarge/Download Table]
(in thousands, except price range of shares) Options Outstanding Options Exercisable
------------------------------------------------------------- ------------------- ---------------------------------------
Weighted Average
Number Outstanding Remaining Number
Range of Exercise at 3/31/98 Contractual Life Weighted Average Exercisable at Weighted Average
Price (in years) Exercise Price 3/31/98 Exercise Price
-------------------- -------------------- ------------------- ------------------- ------------------- -------------------
$ 0.94 615 9.1 0.94 --- ---
$1.19 - 1.25 2001 8.8 1.25 181 1.25
$2.50 - 2.75 737 7.5 2.69 139 2.58
$3.13 - 3.63 461 9.7 3.27 --- ---
$7.37 - 8.25 17 8.0 7.99 15 8.10
Employee Stock Purchase Plan: The Company's Employee Stock Purchase Plan allows
eligible officers and employees to withhold up to 10% of their total
compensation to purchase shares of the Company's common stock. The purchase
price is 85% of the fair market value of the stock on the date a one-year
offering commences or the date an offering terminates, whichever is lower. On
April 9, 1998, this plan was amended by the Board of Directors to provide that
the final offering period will terminate on November 5, 1998, rather than April
30, 1999 as originally provided. Shares issued to employees during fiscal 1998,
1997, and 1996 were approximately 251,000, 183,000, and 157,000, respectively.
At March 31, 1997, approximately 16,944,000 shares of common stock were reserved
for issuance, primarily related to the Series B, Series C and Series D, various
stock option plans, warrants, and the Employee Stock Purchase Plan.
32
Note 11 Employee Benefit Plans
The Company's retirement savings plan (401(k) plan) allows eligible employees to
make tax-deferred contributions. Participants in the 401(k) plan may contribute
up to 15% of their total annual compensation, not to exceed the specified
statutory limit. Participants are 100% vested in their own contributions. The
401(k) plan permits, but does not require, the Company to make contributions to
the 401(k) plan. The Company made no contributions during fiscal 1998, 1997 and
1996.
Note 12 Acquisition
On May 1, 1996, the Company purchased all of the outstanding equity securities
of The Learning Alliance, Inc. ("TLA") for 341,500 shares of common stock,
valued at $2.7 million. TLA provided sales training services and develops and
markets related software for the sales force automation and integration
marketplace. The acquisition was accounted for using the purchase method of
accounting, whereby the purchase price was allocated to the assets acquired and
liabilities assumed based on their respective estimated fair values. The
acquisition resulted in goodwill of approximately $2.6 million. In December
1996, in order to allow the Company's management to focus on development of its
core businesses, the Company decided to divest itself of TLA. TLA was sold in
January 1997 for future royalty considerations and foregone severance payments.
As a result of this decision, in December 1996 the Company recorded a write-down
of approximately $2.3 million of goodwill which had been recorded in connection
with the acquisition. The operating results of TLA, which were not material,
have been included in the consolidated financial statements from the date of the
acquisition to the date of disposition. Pro forma presentations have not been
included as the acquisition was not material to the results of operations of the
Company.
Note 13 Contingencies
In the ordinary course of its business activities, the Company is subject to
various investigations, claims and legal proceedings. Each of these matters is
subject to various uncertainties, and it is possible that some of these matters
may be resolved unfavorably to the Company. Management believes that the
ultimate resolution of these matters will not have a material adverse effect on
the financial position or results of operations of the Company.
Interleaf's German subsidiary, Interleaf GmbH, has been notified that it is
liable for certain German withholding taxes related to payments remitted to the
United States from Germany. The Company is appealing this assessment; however,
approximately $1.1 million of the cash and cash equivalents balance at March 31,
1998 and 1997 has been restricted for potential payment of the German
withholding taxes. The Company believes the final outcome will not have a
material adverse effect on the financial position or results of operations of
the Company.
33
Note 14 Industry Segment and Geographic Information
The Company operates in a single industry segment: developing and marketing
integrated document publishing software and services worldwide. Information
regarding geographic areas at March 31, 1998, 1997 and 1996, and for the years
then ended is as follows:
[Enlarge/Download Table]
(In thousands)
March 31, 1998 and for the year then ended U.S. Non-U.S. Eliminations Total
------------------------------------------------- ----------------- ----------------- ----------------- -----------------
Sales to unaffiliated customers $34,582 $17,080 $915 $52,577
Intercompany royalties and transfers 4,610 4 (4,614) ---
Net revenues 39,192 17,084 (3,699) 52,577
Income (loss) from operations 3,231 (1,784) 915 2,362
Identifiable assets 66,044 16,824 (43,480) 39,388
------ ------ ------- ------
[Enlarge/Download Table]
(in thousands)
March 31, 1997 and for the year then ended U.S. Non-U.S. Eliminations Total
------------------------------------------------- ----------------- ----------------- ----------------- -----------------
Sales to unaffiliated customers $39,558 $25,265 $--- $64,823
Intercompany royalties and transfers 6,547 201 (6,748) ---
Net revenues 46,105 25,466 (6,748) 64,823
Income (loss) from operations (21,025) (7,594) --- (28,619)
Identifiable assets 58,575 19,288 (39,963) 37,900
------ ------ ------- ------
[Enlarge/Download Table]
(in thousands)
March 31, 1996 and for the year then ended U.S. Non-U.S. Eliminations Total
------------------------------------------------- ----------------- ----------------- ----------------- -----------------
Sales to unaffiliated customers $54,953 $33,604 $--- $88,557
Intercompany royalties and transfers 8,770 --- (8,770) ---
Net revenues 63,723 33,604 (8,770) 88,557
Income (loss) from operations 2,797 (2,764) 83 116
Identifiable assets 63,734 17,590 (32,408) 48,916
------ ------ ------- ------
Intercompany transfers between geographic areas are accounted for at prices that
approximate prices charged to unaffiliated customers.
34
Note 15 Income (Loss) Per Share
The following table sets forth the computation of basic and diluted income
(loss) per share:
[Download Table]
1998 1997 1996
---- ---- ----
Numerator:
Net Income $2,436 $(29,550) $311
Preferred Stock Dividends:
Senior Series C Convertible (230) --- ---
6% Convertible (228) --- ---
------ -------- ------
(458) --- ---
------ -------- ------
Numerator for basic income (loss) per share:
income (loss) available to common
stockholders 1,978 (29,550) 311
Effect of dilutive securities
Senior Series C Convertible 230 --- ---
------ -------- ------
Numerator for diluted income (loss) per share:
income (loss) available to common
stockholders after assumed conversion $2,208 $(29,550) $311
------ -------- ------
Denominator:
Denominator for basic income (loss) per share:
Weighted average shares 17,857 17,344 15,557
Effect of dilutive securities:
Employee stock options 1,646 --- 1,005
Director stock options --- --- 24
Employee stock purchase plan 101 --- 54
Warrants 13 --- 97
Senior Series B Convertible Preferred Stock 1,158 --- 1,758
Senior Series C Convertible Preferred Stock 4,033 --- ---
------ -------- ------
Dilutive potential common shares 6,951 --- 2,938
Denominator for diluted income (loss) per share:
adjusted weighted average shares and assumed
conversions 24,808 17,344 18,495
------ -------- ------
------ -------- ------
Basic income (loss) per share $0.11 $(1.70) $0.02
------ -------- ------
------ -------- ------
Diluted income (loss) per share $0.09 $(1.70) $0.02
------ -------- ------
------ -------- ------
For additional disclosures regarding outstanding preferred stock, employee and
director stock options, the employee stock purchase plan, and the warrants see
Note 10.
Options to purchase 2,185,000 shares of common stock were outstanding at March
31, 1998 but were not included in the computation of diluted earnings per share
because the options' exercise prices were greater than the average market price
of the common shares and, therefore, the effect would be antidilutive. In 1998,
the Series D was not included in the computation of diluted earnings per share
because the effect would be antidilutive. In 1997, no dilutive securities were
included in the computation of diluted earnings per share because the Company
had a net loss, and the effect would have been antidilutive.
35
REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
Board of Directors
Interleaf, Inc.
We have audited the accompanying consolidated balance sheets of Interleaf,
Inc. as of March 31, 1998 and 1997, and the related consolidated statements
of operations, changes in shareholders' equity (deficit), and cash flows for
each of the three years in the period ended March 31, 1998. Our audits also
included the financial statement schedule listed in the Index at Item 14(a).
These financial statements and schedule are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of
Interleaf, Inc. at March 31, 1998 and 1997, and the consolidated results of its
operations and its cash flows for each of the three years in the period ended
March 31, 1998, in conformity with generally accepted accounting principles.
Also, in our opinion, the related financial statement schedule, when considered
in relation to the basic financial statements taken as a whole, present fairly
in all material respects the information set forth therein.
/s/ Ernst & Young LLP
---------------------
Boston, Massachusetts
May 13, 1998
36
SCHEDULE II
Valuation and Qualifying Accounts
(In thousands)
[Enlarge/Download Table]
COL. A COL. B COL. C. COL. D COL. E COL. F
---------------------------------- ----------------- ---------------- ----------------- ---------------- ----------------
Description Balance at Additions to
Beginning of Costs and Other Additions Deductions Balance at
Period Expenses - Describe (1) Describe (2) End of Period
Year ended March 31, 1996:
Deducted from asset accounts
Allowance for doubtful accounts $1,953 $630 $300 $(1,188) $1,695
------ ---- ---- ------- ------
Year ended March 31, 1997:
Deducted from asset accounts
Allowance for doubtful accounts $1,695 $304 $--- $ (628) $1,371
------ ---- ---- ------- ------
Year ended March 31, 1998:
Deducted from asset accounts
Allowance for doubtful accounts $1,371 $224 $--- $ (231) $1,364
------ ---- ---- ------- ------
--------------------
(1) Reclassified to allowance for doubtful accounts from accrued expenses
(2) Write-off of uncollectible accounts receivable and effect of foreign
exchange rate fluctuations
37
SUPPLEMENTAL FINANCIAL INFORMATION (Unaudited)
The following summarizes unaudited selected quarterly results of operations for
the years ended March 31, 1998 and 1997 and the market range for the Company's
common stock for those periods:
[Enlarge/Download Table]
(in thousands except for per share amounts)
Quarter ended June 30 September 30 December 31 March31 Year
FISCAL 1998
Revenues $12,826 $13,118 $13,424 $13,209 $52,577
------- ------- ------- ------- -------
Gross Margin 8,311 8,277 8,440 8,512 33,540
----- ----- ----- ----- ------
Net income 386 449 726 875 2,436
--- --- --- --- -----
Net income per share: Basic 0.02 0.03 0.04 0.04 0.11
Diluted 0.02 0.02 0.03 0.03 0.09
---- ---- ---- ---- ----
Common stock prices:
High 1 11/16 3 1/2 3 31/32 3 3/4
Low 29/32 1 7/16 2 5/8 2 3/4
---- ------ ------- -----
FISCAL 1997
Revenues $19,054 $16,585 $15,348 $13,836 d $64,823
------- ------- ------- ------- -------
Gross Margin 11,920 9,405 8,842 6,552 36,719
------ ----- ----- ----- ------
Net income (loss) (3,800) (10,327)a (9,509)a, b (5,914)a, c (29,550)
------ ------- ------ ------ -------
Net income per share: Basic (0.22) (0.59) (0.54) (0.35) (1.70)
Diluted (0.22) (0.59) (0.54) (0.35) (1.70)
----- ----- ----- ----- -----
Common stock prices:
High 8 7/8 5 3/8 3 3/8 2 7/16
Low 6 1/2 2 3/8 1 7/8 1 3/8
------ ------ ------ ------ -------
Notes to Supplemental Financial Information
a. Includes restructuring charges of $4.8 million, $3.7 million, and $2.4
million for the second, third, and fourth quarter, respectively. These
restructuring charges were to reduce worldwide employment and facility
costs.
b. Includes a $2.3 million write-off of goodwill related to the TLA
acquisition.
c. Includes a $2.2 million write-off of capitalized software development
costs, inventory, and prepaid royalties for discontinued products and
products with limited future revenue potential.
d. Includes a $1.5 million reserve for sales allowances during the quarter.
38
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information required by this item is contained in part under the caption
"Executive Officers of the Company" in Part I hereof and the remainder is
incorporated herein by reference to "Election of Directors" (except for the
information contained under the subheadings "Compensation Committee Report"
and "Stock Performance Graph") in the Company's Proxy Statement for the
Company's Annual Meeting of Shareholders to be held on August 24, 1998 (the
"1998 Proxy Statement") to be filed with the SEC within 120 days from fiscal
year end.
ITEM 11. EXECUTIVE COMPENSATION
The information required by this item is incorporated herein by reference to
"Executive Compensation," "Severance Plan and Change in Control," "Directors'
Compensation," and "Ratification and Approval of the Amendment to the
Company's 1993 Stock Option Plan" contained in the 1998 Proxy Statement to be
filed with the SEC within 120 days from fiscal year end.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by this item is incorporated herein by reference to
information contained in the table appearing under the heading "Principal
Shareholders" contained in the 1998 Proxy Statement to be filed with the SEC
within 120 days from fiscal year end.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this item is incorporated herein by reference to
"Certain Relationships and Related Transactions" contained in the 1998 Proxy
Statement to be filed with the SEC within 120 days from fiscal year end.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES and REPORTS ON FORM 8-K
(a)
1. Financial Statements. The financial statements are listed in the Index to
Consolidated Financial Statements and Financial Statement Schedule filed as
part of this Annual Report on Form 10-K.
2. Financial Statement Schedule. The financial statement schedule is listed in
the Index to Consolidated Financial Statements and Financial Statement
Schedule filed as part of this Annual Report on Form 10-K.
3. Exhibits. The exhibits listed in the accompanying Exhibit Index are filed
as part of this Annual Report on Form 10-K.
(b) Reports on Form 8-K
None.
39
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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.
INTERLEAF, INC.
By: /s/ Jaime W. Ellertson
------------------------
Jaime W. Ellertson, President and Chief Executive Officer
Dated: June 29, 1998
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
[Enlarge/Download Table]
Signature Capacity Date
--------- -------- ----
-----------------------------
/s/ Jaime W. Ellertson President and Chief Executive Officer and June 29, 1998
Jaime W. Ellertson a Director (Principal Executive Officer)
-----------------------------
/s/ Peter J. Rice Vice President of Finance and Administration June 29, 1998
Peter J. Rice Chief Financial Officer and Treasurer
(Principal Financial and Accounting Officer)
-----------------------------
/s/ Rory J. Cowan Chairman of the Board of Directors June 29, 1998
Rory J. Cowan
-----------------------------
/s/ Frederick B. Bamber Director June 29, 1998
Frederick B. Bamber
-----------------------------
/s/ David A. Boucher Director June 29, 1998
David A. Boucher
-----------------------------
/s/ Marcia J. Hooper Director June 29, 1998
Marcia J. Hooper
-----------------------------
/s/ John A. Lopiano Director June 29, 1998
John A. Lopiano
-----------------------------
/s/ George D. Potter, Jr. Director June 29, 1998
George D. Potter, Jr.
40
EXHIBIT INDEX
[Enlarge/Download Table]
Exhibit Number Description Method of Filing
----------------------- --------------------------------------------------------------------------- ------------------------
3(a) Restated Articles of Organization of the Company, as amended [xi]
3(b) By-Laws of the Company, as amended [v]
4(a) Specimen Certificate for Shares of the Company's Common Stock [ix]
4(b) Rights Agreement, dated July 15, 1988, between the Company and the First
National Bank of Boston [x]
10.01 1994 Employee Stock Option Plan, as amended [viii]
10.02 1993 Incentive Stock Option Plan, as amended [vi]
10.03 Company's 1987 Employee Stock Purchase Plan, as amended [viii]
10.04 Company's 1989 Officer and Employee Severance Benefit Plans [i]
10.05 Company's 1993 Director Stock Option Plan [v]
10.06 Exclusive Marketing and Licensing Agreement, between Interleaf South
America, Ltd. and the Company, and related Option Agreement, dated March
31, 1989. [i]
10.07 Distribution and License Agreement between Interleaf Italia, S.r.l. and
the Company, and related Joint Venture Agreement, dated October 31, 1988.
[i]
10.08 Preferred Stock Purchase Agreements, for the issuance of 2,142,857 shares
of the Company's Senior Series B Convertible Preferred Stock, dated
September 29, 1989. [ii]
10.09 Notification to Preferred Shareholder of increase in conversion ratio,
dated May 18, 1992. [iii]
10.10 Lease of Prospect Place, Waltham, MA, between Prospect Place Limited
Partnership and Interleaf, Inc., and related Agreements, dated March 30,
1990. [iv]
10.11 Net Lease, dated August 14, 1995, between Principal Mutual Insurance
Company and the Company. [vii]
10.12 Sublease, dated September 15, 1995, between Parametric Technology
Corporation and the Company. [vii]
10.13 Series C Preferred Stock Agreement between Interleaf, Inc. and Lindner
Investments, dated October 14, 1996. [viii]
41
[Enlarge/Download Table]
10.14 Resignation Agreement and Release and Employment Agreement between Ed
Koepfler, the Company's former President and Chief Executive Officer, and
the Company, dated November 15, 1996, concerning his employment and
severance with the Company. [xi]
10.15 Resignation Agreement and Release and Employment Agreement between G.
Gordon M. Large, the Company's former Executive Vice President of
Finance and Administration and Chief Financial Officer, and the Company,
dated November 12, 1996, concerning his employment and severance with the
Company. [xi]
10.16 Resignation Agreement and Release and Employment Agreement between Stan
Douglas, the Company's former Vice President of Engineering Operation,
and the Company, dated November 15, 1996, concerning his employment and
severance with the Company. [xi]
10.17 Terms of Engagement between the Company and Robert R. Langer, Vice
President of Finance and Administration and Chief Financial Officer,
dated December 30, 1996, concerning his employment with the Company. [xi]
10.18 Offer Letter and Acceptance between Jaime W. Ellertson, the Company's
President and Chief Executive Officer, and the Company, dated January 9,
1997. [xi]
10.19 Offer Letter and Acceptance between Craig Newfield, the Company's Vice
President, General Counsel and Clerk, and the Company, dated October 3,
1997. Included
10.20 1997 Key Man Stock Option Plan and Agreement dated January 10, 1997 [xii]
10.21 1998 Key Man Stock Option Plan and Agreement dated February 23, 1998 [xii]
10.22 Offer Letter and Acceptance between Peter J. Rice, the Company's Vice
President, Chief Financial Officer and Treasurer, and the Company, dated
February 23, 1998. Included
21 Subsidiaries of the Company [xiv]
23 Consent of Independent Auditors Included
27 Financial Data Schedule (Including fiscal years 1997 and 1996 restated) Included
27.1 Financial Data Schedule (Restated for fiscal year 1995) Included
--------------------
[i] Incorporated herein by reference is the applicable Exhibit to Company's
Annual Report on Form 10-K for the year ended March 31, 1989, File
Number 0-14713.
[ii] Incorporated herein by reference is the applicable Exhibit to Company's
Annual Report on Form 10-K for the year ended March 31, 1990, File
Number 0-14713.
42
[iii] Incorporated herein by reference is the applicable Exhibit to Company's
Annual Report on Form 10-K for the year ended March 31, 1992, File
Number 0-14713.
[iv] Incorporated herein by reference is the applicable Exhibit to Company's
Report on Form 8-K filed April 13, 1990, File Number 0-14713.
[v] Incorporated herein by reference is the applicable Exhibit to Company's
Annual Report on Form 10-K for the year ended March 31, 1994, File
Number 0-14713.
[vi] Incorporated herein by reference is the applicable Exhibit to Company's
Annual Report on Form 10-K for the year ended March 31, 1995, File
Number 0-14713.
[vii] Incorporated herein by reference is the applicable Exhibit to Company's
Registration Statement on Form S-2, File Number 33-63785.
[viii] Incorporated herein by reference is the applicable Exhibit to Company's
Report on Form 10-Q for the quarter ended September 30, 1996, File
Number 0-14713.
[ix] Incorporated herein by reference is the applicable Exhibit to Company's
Registration Statement on Form S-1, File Number 33-5743.
[x] Incorporated herein by reference is Exhibit 1 to Company's Registration
Statement on Form 8-A, filed July 27, 1988.
[xi] Incorporated herein by reference is the applicable Exhibit to Company's
Report on Form 10-Q for the quarter ended December 31, 1996, File
Number 0-14713.
[xii] Incorporated herein by reference is the applicable Exhibit to the
Company's Registration Statement on Form S-8, filed June 5, 1998, File
Number 333-56145.
[xiii] Incorporated herein by reference is the applicable Exhibit to Company's
Report on Form 10-Q for the quarter ended December 31, 1997, File
Number 0-14713.
[xiv] Incorporated herein by reference is Exhibit 21 to the Company's Annual
Report on Form 10-K for the year ended March 31, 1997, File Number
0-14713.
43
Dates Referenced Herein and Documents Incorporated by Reference
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