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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-Q
QUARTERLY REPORT UNDER SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED DECEMBER 31, 1994
COMMISSION FILE NUMBER 0-14713
[Interleaf Logo]
Interleaf, Inc.
(exact name of registrant as specified in its charter)
MASSACHUSETTS 04-2729042
(State or other jurisdiction (I.R.S. employer identification number)
of incorporation or organization)
PROSPECT PLACE, 9 HILLSIDE AVE., WALTHAM, MA 02154
(address of principal executive offices) (Zip Code)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes X No
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Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of December 31, 1994:
COMMON STOCK, PAR VALUE $.01 13,993,659
(Title of each class) (number of shares)
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INTERLEAF, INC.
TABLE OF CONTENTS
PART I - FINANCIAL INFORMATION PAGE
Consolidated balance sheets at December 31, 1994 and March 31, 1994.......... 3
Consolidated statements of operations for the three and nine months
ended December 31, 1994 and 1993............................................. 4
Consolidated statements of cash flows for the nine months ended
December 31, 1994 and 1993................................................... 5
Notes to consolidated financial statements................................... 6
Management's Discussion and Analysis of Financial Condition
and Results of Operations.................................................... 7
PART II - OTHER INFORMATION.................................................. 9
EXHIBIT INDEX............................................................... 10
1
INTERLEAF, INC.
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
CONSOLIDATED BALANCE SHEETS
December 31, 1994 March 31, 1994
In thousands, except share amounts (unaudited) (Note)
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 13,836 $ 23,364
Accounts receivable, net 20,145 34,932
Inventories 200 129
Other current assets 2,728 2,377
------------ ------------
TOTAL CURRENT ASSETS 36,909 60,802
Property and equipment, net 11,326 10,156
Other assets 8,512 11,093
Excess of purchase price over net assets 14,709 15,435
of businesses acquired ------------ ------------
$ 71,456 $ 97,486
------------ ------------
------------ ------------
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable $ 3,805 $ 3,200
Current portion of capital lease obligations 1,786 4,260
Unearned service revenues 13,921 14,626
Other current liabilities 19,788 19,098
------------ ------------
TOTAL CURRENT LIABILITIES 39,300 39,747
Other liabilities 2,263 1,107
SHAREHOLDERS' EQUITY
Preferred stock, par value $.10 per share, authorized 5,000,000 shares: 173 179
Series A Junior Participating, none issued and outstanding
Senior Series B Convertible, issued and outstanding, 1,728,573
shares and 1,785,715, respectively
Common stock, par value $.01 per share, authorized 140 136
30,000,000 shares, issued and outstanding 13,993,659
and 13,630,657, respectively
Additional paid-in capital 66,959 65,551
Retained earnings deficit (37,399) (8,907)
Equity adjustment for foreign currency translation 20 (327)
------------ ------------
29,893 56,632
------------ ------------
$ 71,456 $ 97,486
------------ ------------
------------ ------------
NOTE: THE BALANCE SHEET AT MARCH 31, 1994 HAS BEEN DERIVED FROM THE AUDITED
FINANCIAL STATEMENTS AT THAT DATE BUT DOES NOT INCLUDE ALL OF THE INFORMATION
AND FOOTNOTES REQUIRED BY GENERALLY ACCEPTED ACCOUNTING PRINCIPLES FOR COMPLETE
FINANCIAL STATEMENTS.
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
2
INTERLEAF, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
In thousands, except for per share amounts Three months ended Nine months ended
December 31 December 31
(unaudited) (unaudited)
1994 1993 1994 1993
---- ---- ---- ----
REVENUES:
Products $ 7,400 $ 15,816 $ 24,862 $ 44,770
Maintenance 8,197 7,725 23,076 23,032
Services 6,226 4,874 16,137 14,476
---------- ---------- --------- ----------
TOTAL REVENUES 21,823 28,415 64,075 82,278
COSTS OF SALES:
Products 1,396 1,773 3,959 4,140
Maintenance 1,685 1,706 4,920 5,446
Services 5,153 4,962 14,915 15,269
---------- ---------- --------- ---------
TOTAL COST OF SALES 8,234 8,441 23,794 24,855
---------- ---------- --------- ---------
Gross Margin 13,589 19,974 40,281 57,423
OPERATING EXPENSES:
Selling, general and administrative 14,110 14,361 43,287 44,841
Research and development 5,081 5,348 15,760 15,865
Charge for purchased research and development - - - 3,985
Restructuring expense - - 7,109 3,000
---------- ---------- --------- ---------
TOTAL OPERATING EXPENSES 19,191 19,709 66,156 67,691
---------- ---------- --------- ---------
Loss from operations (5,602) 265 (25,875) (10,268)
Interest income, net 15 17 228 187
Other expense, net (242) (242) (726) (740)
---------- ---------- --------- ---------
Loss before income taxes and cumulative (5,829) 40 (26,373) (10,821)
effect of change in accounting principle
Provision for income taxes (48) - 2,118 169
---------- ---------- --------- ---------
Loss before cumulative effect of change (5,781) 40 (28,491) (10,990)
in accounting principle
Cumulative effect of change in accounting - - - 1,900
principle-accounting for income taxes ---------- ---------- --------- ---------
NET LOSS $ (5,781) $ 40 $ (28,491) $ (9,090)
---------- ---------- --------- ---------
---------- ---------- --------- ---------
PRIMARY AND FULLY DILUTED LOSS PER SHARE:
Loss before cumulative effect of $ (.41) $ .00 $ (2.05) $ (.82)
change in accounting principle ---------- ---------- --------- ---------
---------- ---------- --------- ---------
Cumulative effect of change in accounting principle: $ - $ - $ - $ .14
---------- ---------- --------- ---------
---------- ---------- --------- ---------
Net loss: $ (.41) $ .00 $ (2.05) $ (.68)
---------- ---------- --------- ---------
Shares used in computing loss per share:
Primary 13,971 16,655 13,887 13,310
---------- ---------- --------- ---------
---------- ---------- --------- ---------
Fully diluted 13,971 16,697 13,887 13,310
---------- ---------- --------- ---------
---------- ---------- --------- ---------
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
3
INTERLEAF, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
Nine months ended December 31
In thousands (unaudited)
1994 1993
---- ----
OPERATING ACTIVITIES
Net loss $ (28,491) $ (9,090)
Change in accounting principle-accounting for income taxes - (1,900)
Change in tax estimate 1,860
Charge for purchased research and development - 3,985
Restructuring expense 7,109 3,000
Depreciation and amortization expense 8,113 7,909
Loss from disposal of property and equipment 142 86
Changes in current accounts, excluding the effects of acquisitions:
Decrease in unearned revenue (920) (1,901)
(Increase) decrease in accounts receivable, net 15,338 (29)
Increase in inventories (53) (13)
Increase in other current assets (310) (335)
Decrease in accounts payable and other current liabilities (1,915) (45)
Decrease in accrued restructuring costs (3,051) (1,129)
Other, net (61) -
------------ -----------
Net cash provided by (used in) operating activities (2,239) 538
INVESTING ACTIVITIES
Decrease in marketable securities - 4,070
Additions to property and equipment (4,548) (4,264)
Capitalized software development costs (3,062) (3,048)
Increase in other non-current assets (180) (448)
Payment for acquisition of business, net of cash acquired - (5,342)
----------- ------------
Net cash used in investing activities (7,790) (9,032)
FINANCING ACTIVITIES
Net proceeds from issuance of common stock 1,408 1,818
Proceeds from capital leases 652 1,028
Repayment of capital leases (1,703) (1,777)
----------- ------------
Net cash provided by financing activities 357 1,069
Effect of exchange-rate changes on cash 144 (17)
----------- ------------
Net decrease in cash and cash equivalents (9,528) (7,442)
Cash and cash equivalents at beginning of period 23,364 26,402
----------- ------------
Cash and cash equivalents at end of period $ 13,836 $ 18,960
----------- ------------
----------- ------------
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
4
INTERLEAF, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Basis of Presentation
The accompanying unaudited consolidated financial statements have been
prepared in accordance with generally accepted accounting principles for interim
financial information and with the instructions to Form 10-Q and Rule 10-01 of
Regulation S-X. Accordingly, they do not include all information and footnotes
required by generally accepted accounting principles for complete financial
statements.
The results of operations for the period reported are not necessarily
indicative of those that may be expected for the full year. The accompanying
financial information is unaudited; however, in the opinion of management, all
adjustments (consisting of normal recurring accruals) necessary for a fair
presentation of the operating results of the period, have been included.
For further information, refer to the consolidated financial statements and
footnotes thereto included in Interleaf, Inc.'s ("the Company's") annual report
on Form 10-K for the year ended March 31, 1994.
2. Earnings/Loss per share
Earnings/loss per share are computed based on the weighted average number
of common shares and common stock equivalents (when dilutive) outstanding during
the period. Common stock equivalents are attributable to convertible preferred
stock, stock options and common stock warrants.
3. PruTech Research and Development Partnership III
Commencing in the third quarter of fiscal year 1994, PruTech Research and
Development Partnership III ("PruTech") reviewed and audited the PruTech-
Interleaf Joint Venture ("Joint Venture"). As previously disclosed, PruTech
alleges that it is entitled to a mandatory royalty of 30% of the Joint Venture's
sales. PruTech also alleges that certain Joint Venture technology is being used
by the Company without compensating the Joint Venture. In March 1994, PruTech
submitted this dispute to mandatory arbitration. The Company believes that
PruTech's position is without merit and, in any event, believes that the outcome
of the arbitration will not have a material adverse effect on the operations and
financial position of the Company. Commencing February 1, 1992, and for each
quarter thereafter, PruTech can purchase the Company's interest in the Joint
Venture at a price equal to ten times the Joint Venture's net profits for the
previous quarter. In such event, the Company will lose the right to market the
products owned by the Joint Venture including WorldView on IBM-compatible
personal computers.
5
INTERLEAF, INC.
ITEM 2.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
Three Months Ended December 31, 1994
For the third quarter of fiscal 1995, ended December 31, 1994, the Company
recorded revenue of approximately $21.8 million resulting in a net loss of
approximately $5.8 million. The net loss includes a $1.8 million write-off of a
customer contract due to the Company's and customer's mutual decision to change
their respective business models. For the same period a year ago, the Company
recorded revenue of approximately $28.4 million with income of approximately $40
thousand.
Nine Months Ended December 31, 1994
For the first three (3) quarters of fiscal 1995, revenues totalled approximately
$64 million, with a loss of approximately $28.5 million compared with revenue of
approximately $82 million with a loss of approximately $9 million for the same
period a year ago. During this period in fiscal 1995 the Company recorded a
restructuring charge of $7.1 million; for the same period a year ago, the
Company recorded a restructuring charge of $3 million.
Revenue
These operating results reflect a continuing decline in the Company's software
revenue, which in fiscal years 1991 through 1994 accounted for over 50% of the
Company's total revenue. For the quarter ended December 31, 1994, software
revenue accounted for approximately 33% of total revenue. Product revenue from
the Company's authoring product, Interleaf 5/6, has been declining for the past
two years, as some of the Company's customers have increasingly been migrating
toward the Microsoft Windows and Windows NT operating system, which the Company
does not expect to support until early fiscal 1996, and away from the Unix
operating system, which the Company has historically supported. The Company is
currently implementing a new alternate channel strategy to enable the Company's
products to be distributed more cost effectively and generate incremental
revenue. Secondly, the Company, during fiscal 1995, has not entered into any
large multi-year procurements as it did during fiscal 1994, which generated
approximately 20% of fiscal 1994 revenue. Finally, during the past fiscal year,
the Company's electronic viewing product, WorldView, has experienced declining
growth due to increased competition and longer sales cycles involved in the
document distribution area.
The Company's consulting revenue for the quarter did experience strong growth,
as its revenue increased to $6.2 million, compared with $4.9 million for the
same period a year ago. This growth reflects the customers' demand for expert
services to implement document management solutions and the Company expects it
will help leverage software product sales in the future.
Expenses
In light of the Company's declining software revenue, in September 1994 the
Company recorded a $7.1 million restructuring charge to cover the costs of
reducing worldwide employment by approximately 12% and the consolidation of the
Company's North American and European sales offices.
At February 1995, the Company has closed or consolidated 3 sales offices in
Europe, with closure of an additional 2 offices expected by the end of fiscal
1995, and 15 sales offices in North America. In North
6
INTERLEAF, INC.
America, the Company will operate with 6 major sales offices. The Company's
worldwide employment is now 170 people, or 18%, lower than at the beginning of
this fiscal year due to attrition and severance. The Company expects that these
measures will ultimately result in annual savings of $8-$10 million per year.
The Company has expended approximately $3 million of its restructuring reserve.
7
INTERLEAF, INC.
FINANCIAL CONDITION
The Company's cash position at December 31, 1994 declined to approximately $13.8
million from approximately $15 million for the previous quarter, and $23.6
million for the quarter ended June 30, 1994. This decline in the Company's cash
position reflects the Company's operating performance and its implementation of
its restructuring plan announced in September 1994. The Company expects to
expend an additional $4 million to complete severance payments and fulfill its
lease obligations for its sales offices which have been closed pursuant to its
restructuring plan over the next three (3) years.
The Company failed to meet certain operating covenants under its asset leases
and has received a waiver for the period ended December 31, 1994. The Company
will either refinance these lease obligations with another financial institution
or pay off the leases during the fourth quarter. Total lease obligations are
approximately $1.8 million.
The Company will continue to closely monitor and control its expenses in light
of its software revenue performance. The Company believes that its existing cash
reserves and cash generated from ongoing operations are sufficient to meet its
liquidity needs. The Company is also in the process of exploring the
establishment of credit facilities.
8
INTERLEAF, INC.
PART II - OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
(a) The exhibits listed in the accompanying Exhibit Index are filed as
part of this Quarterly Report on Form 10-Q.
(b) No reports were filed on Form 8-K by the Company during the quarter
ended December 31, 1994.
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
INTERLEAF, INC.
February 13, 1995
Richard P. Delio
------------------------------
Richard P. Delio
Sr. Vice President of Finance and
Administration and Chief Financial
Officer (Principal Financial Officer)
9
INTERLEAF, INC.
EXHIBIT INDEX
EXHIBIT NO. DESCRIPTION PAGE
[xii] 10(a)* Company's 1983 Stock Option Plan
[xi] 10(aa)* Company's 1993 Stock Option Plan
[xiii] 10(a1)* 1994 Employee Stock Option Plan
[xiii] 10(a2)* 1993 Incentive Stock Option Plan,
amended July 14, 1994
[iii] 10(b)* Company's 1989 Director Stock Option Plan
[iii] 10(c)* Company's 1989 Officer and Employee
Severance Benefit Plans
[xii] 10(cc)* Company's 1993 Director Stock Option Plan
[iii] 10(d) Agreements between PruTech Research and Development
Partnership III and the Company, dated October 21,
1988.
[iii] 10(e) Agreement between the Company and First National Bank
of Boston, dated September 30, 1988, as amended.
[iii] 10(f) Amendments to Agreement between the Company and First
National Bank of Boston, dated September 30, 1988.
[iii] 10(g) Exclusive Marketing and Licensing Agreement, between
Interleaf South America, Ltd. and the Company, and
related Option Agreement, dated March 31, 1989.
[iii] 10(h) Distribution and License Agreement between Interleaf
Italia, S.r.l. and the Company, and related Joint
Venture Agreement, dated October 31, 1988.
[iii] 10(i) Exclusive Marketing and Licensing Agreement between
Interleaf GmbH and the Company, and related Option
Agreement, dated July 27, 1988.
[ix] 10(j) Company's Note and Stock Purchase Agreement concerning
its acquisition of Interleaf GmbH, dated July 20, 1991
(the "Germany Agreements").
[iv] 10(k) 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.
[vi] 10(l) Notification to Preferred Shareholder of increase in
conversion ratio, dated May 18, 1992
[i] 10(m) Agreements between ML Technology Ventures, L.P. and the
Company, dated March 31, 1987.
[viii] 10(n) Exercise of Purchase Option by ML Technology Ventures,
L.P., and related agreements, dated January 23, 1991.
[ii] 10(o) Lease of Davenport Building, Cambridge, MA, between
Charlesport Limited Partnership and the Company, dated
September 11, 1987.
[viii] 10(p) Lease of Prospect Place, Waltham, MA, between Prospect
Place Limited Partnership and Interleaf, Inc., and
related Agreements, dated March 30, 1990.
[x] 10(q)* Management Consulting Agreement between the Company and
David A. Boucher, dated July 15, 1992.
[xii] 10(r)* Letter Agreement between the Company and Richard P.
Delio, the Company's Sr. Vice President of Finance and
Administration and Chief Financial Officer, dated March
30, 1994, concerning his employment and severance with
the Company.
[xiii] 10(s)* Letter of Separation and Management Consulting
Agreement between the Company and Mark K. Ruport, the
Company's former President, Chief Executive Officer and
Director, dated July 25, 1994, concerning his
10
INTERLEAF, INC.
separation and consulting obligations to the Company.
[xiii] 10(t)* Letter Agreement between the Company and Richard P.
Delio, the Company's Sr. Vice President of Finance and
Administration and Chief Financial Officer and Acting
President, dated August 3, 1994, concerning his
employment and severance with the Company.
[xiii] 10(u)* Letter of Separation and Management Consulting
Agreement between the Company and Peter Cittadini, the
Company's Sr. Vice President Worldwide Operations,
dated July 27, 1994, concerning his separation and
consulting obligations to the Company.
[xiii] 10(v)* Executive Compensation Arrangement for David A.
Boucher, the Company's Chairman of the Board, dated
July 20, 1994.
[xiii] 10(w)* Letter of Separation and Management Consulting
Agreement between the Company and Lawrence S. Bohn, the
Company's Sr. Vice President, Marketing and Business
Development, dated September 20, 1994, concerning his
separation and consulting obligations to the Company.
10(x)* Employment and severance agreement between the Company
and Edward Koepfler, the Company's President, dated
October 3, 1994. 13
11 Computation of Earnings Per Share, for quarter
ended December 31, 1994 15
27 Financial Data Schedule 16
________________________
[i] Incorporated herein by reference is the applicable Exhibit to the Company's
Annual Report on Form 10-K for the year ended March 31, 1987.
[ii] Incorporated herein by reference is the applicable Exhibit to the Company's
Annual Report on Form 10-K for the year ended March 31, 1988.
[iii] Incorporated herein by reference is the applicable Exhibit to Company's
Annual Report on Form 10-K for the year ended March 31, 1989.
[iv] Incorporated herein by reference is the applicable Exhibit to Company's
Annual Report on Form 10-K for the year ended March 31, 1990.
[v] Incorporated herein by reference is the applicable Exhibit to Company's
Annual Report on Form 10-K for the year ended March 31, 1991.
[vi] Incorporated herein by reference is the applicable Exhibit to Company's
Annual Report on Form 10-K for the year ended March 31, 1992.
[vii] Incorporated herein by reference is the applicable Exhibit to Company's
Report on Form 8-K filed April 13, 1990.
[viii] Incorporated herein by reference is the applicable Exhibit to Company's
Report on Form 8-K filed January 24, 1991.
[ix] Incorporated herein by reference is the applicable Exhibit to the Company
Report on Form 8-K filed August 2, 1991, as amended by Amendment No. 1 on Form 8
filed September 23, 1991, as further amended by Amendment No. 2 on Form 8 filed
February 12, 1992, and as further amended by Amendment No. 3 on Form 8 filed
March 11, 1992.
11
INTERLEAF, INC.
[x] Incorporated herein by reference is the applicable Exhibit to Company's
Annual Report on Form 10-K for the year ended March 31, 1993.
[xi] Incorporated herein by reference is the applicable Exhibit to Company's
Report on Form 10-Q for the quarter ended December 31, 1993.
[xii] Incorporated herein by reference is the applicable Exhibit to Company's
Annual Report on Form 10-K for the year ended March 31, 1994.
[xiii] Incorporated herein by reference is the applicable Exhibit to Company's
Report on Form 10-Q for the quarter ended September 30, 1994.
*Represents a management contract, compensatory plan, or arrangement required to
be filed as an Exhibit to this Form 10-Q pursuant to Item 14(c).
12