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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED JUNE 30, 1995
COMMISSION FILE NUMBER 0-14713
[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)
(617) 290-0710
(Registrant's telephone number, including area 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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APPLICABLE ONLY TO CORPORATE ISSUERS
The number of shares outstanding of the issuer's Common Stock,
$.01 par value, as of July 31, 1995 was 14,519,924.
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INTERLEAF, INC.
TABLE OF CONTENTS
Page
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PART I - FINANCIAL INFORMATION
Item 1 - Financial Statements
Consolidated balance sheets at June 30, 1995 and March 31, 1995.......... 3
Consolidated statements of operations for the three months ended
June 30, 1995 and 1994.................................................. 4
Consolidated statements of cash flows for the three months ended
June 30, 1995 and 1994.................................................. 5
Notes to consolidated financial statements............................... 6
Item 2 - Management's Discussion and Analysis of Financial Condition and
Results of Operations................................................... 7
PART II - OTHER INFORMATION
Item 5 - Other Information............................................... 10
Item 6 - Exhibits and Reports on Form 8-K................................ 10
SIGNATURE................................................................ 10
2
INTERLEAF, INC.
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
CONSOLIDATED BALANCE SHEETS
June 30, 1995 March 31, 1995
In thousands, except for share and per share amounts (unaudited)
ASSETS
CURRENT ASSETS
Cash and cash equivalents $12,624 $10,441
Accounts receivable, net 17,766 22,766
Prepaid expenses and other current assets 2,063 2,122
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TOTAL CURRENT ASSETS 32,453 35,329
Property and equipment, net 9,966 11,058
Intangible assets 4,115 3,801
Other assets 457 605
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Total assets $46,991 $50,793
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LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable $ 2,351 $ 2,687
Accrued expenses 15,150 16,193
Unearned revenue 14,758 15,649
Other current liabilities 2,628 5,024
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Total current liabilities 34,887 39,553
Other liabilities 21 625
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TOTAL LIABILITIES 34,908 40,178
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Contingencies
SHAREHOLDERS' EQUITY
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,
1,728,573 shares 173 173
Common stock, par value $.01 per share, authorized
30,000,000 shares, issued and outstanding 14,481,459 at
June 30, 1995 and 14,203,027 at March 31, 1995 145 142
Additional paid-in capital 68,437 67,382
Retained earnings (deficit) (56,798) (57,269)
Cumulative translation adjustment 126 187
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Total shareholders' equity 12,083 10,615
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Total liabilities and shareholders' equity $46,991 $50,793
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SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
3
INTERLEAF, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
Three months ended June 30
1995 1994
(unaudited)
In thousands, except for per share amounts
REVENUES:
Products $ 9,437 $ 6,590
Maintenance 7,792 7,441
Services 5,898 5,209
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TOTAL REVENUES 23,127 19,240
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COSTS OF REVENUES:
Products 1,660 2,148
Maintenance 1,369 1,574
Services 4,809 4,737
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Total costs of revenues 7,838 8,459
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Gross Margin 15,289 10,781
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OPERATING EXPENSES:
Selling, general and administrative 10,982 14,387
Research and development 3,926 4,350
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TOTAL OPERATING EXPENSES 14,908 18,737
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Income (loss) from operations 381 (7,956)
Other income (expense) 91 (141)
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Income (loss) before income taxes 472 (8,097)
Provision for income taxes -- 56
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NET INCOME (LOSS) $ 472 $(8,153)
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Net income (loss) per share $ .03 $ (.59)
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Shares used in computing net income
(loss) per share 17,648 13,760
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SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
4
INTERLEAF, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
Three months ended June 30
1995 1994
(unaudited)
In thousands
CASH FLOWS FROM OPERATING ACTIVITIES
Net income (loss) $ 472 $ (8,153)
Adjustments to reconcile net income (loss) to net cash provided by
operating activities:
Depreciation and amortization expense 2,017 2,597
Loss from disposal of property and equipment 22 --
Changes in assets and liabilities:
Decrease in accounts receivable, net 4,927 12,338
(Increase) decrease in other assets 198 (344)
Decrease in accounts payable and accrued expenses (1,349) (3,707)
Decrease in unearned revenue (869) (561)
Decrease in other liabilities (1,340) (422)
Other, net (32) (97)
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Net cash provided by operating activities 4,046 1,651
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CASH FLOWS FROM INVESTING ACTIVITIES
Capital expenditures (196) (1,197)
Capitalized software development costs (1,066) (1,008)
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Net cash used in investing activities (1,262) (2,205)
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CASH FLOWS FROM FINANCING ACTIVITIES
Net proceeds from issuance of common stock 1,058 1,239
Repayment of long-term debt and capital leases (1,658) (504)
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Net cash provided by (used in) financing activities (600) 735
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Effect of exchange-rate changes on cash (1) 102
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Net increase in cash and cash equivalents 2,183 283
Cash and cash equivalents at beginning of period 10,441 23,364
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Cash and cash equivalents at end of period $12,624 $23,647
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SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
5
INTERLEAF, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. Basis of Presentation
The consolidated financial statements include the accounts of
Interleaf, Inc. and its subsidiaries. All significant intercompany
balances and transactions have been eliminated in consolidation.
Interleaf, Inc. and its subsidiaries are collectively referred to as
the "Company." Certain 1994 amounts have been reclassified to conform
to the 1995 method 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 financial information and
disclosures required by generally accepted accounting principles
for complete financial statements. In the opinion of management,
these financial statements include all adjustments (consisting only
of normal recurring accruals) necessary for a fair presentation of
the results of operations for the interim periods reported and of
the financial condition of the Company as of the date of the
interim balance sheet. The results of operations for interim
periods are not necessarily indicative of the results to be
expected for the full year.
These financial statements should be
read in conjunction with the Company's audited consolidated
financial statements and related notes included in the Company's
Annual Report on Form 10-K for the year ended March 31, 1995.
2. Net Income (Loss) Per Share
Per share amounts are calculated using the weighted average
number of common shares and common share equivalents
outstanding during periods of net income. Common share
equivalents are attributable to stock options, common stock
warrants and convertible preferred stock. Per share amounts are
calculated using only the weighted average number of common shares
outstanding during periods of net loss. Fully diluted earnings per
share is not materially different from reported primary earnings
per share.
3. Contingencies
Commencing in the third quarter of fiscal 1994,
PruTech Research and Development Partnership III ("PruTech")
reviewed and audited the joint venture between the
Company and PruTech. PruTech claims that it is entitled to
mandatory cash distributions of 30% of the joint venture's
revenues, that certain joint venture technology is being used by
the Company without compensating the joint venture, and that
research and development expenses incurred by the Company above
PruTech's original investment should not be allocated to the joint
venture. In March 1994, PruTech submitted this dispute to mandatory
arbitration on which no significant proceedings have occurred.
While the dispute has not been resolved, the Company believes that
PruTech's position is without merit and, in any event, believes the
outcome 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 June 30, 1995 has been
reserved 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.
6
INTERLEAF, INC.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
OVERVIEW
The Company recorded net income of approximately $472,000 for its first
quarter ended June 30, 1995, compared with a net loss of approximately
$8.2 million for the same period a year ago. The improvement in the Company's
operating results was primarily attributable to a $3.9 million (20%)
increase in total revenues and a $3.8 million (20%) reduction in operating
expenses, due to a significant decline in personnel and facility expenses
arising from the Company's fiscal 1995 restructuring. The Company's fiscal
1995 restructuring reduced worldwide employment by approximately 150 people
and eliminated 19 sales offices.
While revenue increased by 20% from the previous year, future growth in
revenues during the remainder of fiscal 1996 will be largely dependent on
customer acceptance of the Company's product upgrades and new products and
the Company's ability to leverage product license revenues with services to
provide integrated document management solutions to its customers. The majority
of these products are expected to be released beginning in the latter part of
the second quarter through the third quarter of fiscal 1996.
REVENUES
Total revenues increased by approximately $3.9 million (20%) for the first
quarter ended June 30, 1995 compared with the same period a year ago. The
Company experienced revenue growth in each of its geographic regions
(Americas, Europe, Asia Pacific Japan) and product lines (document publishing
and conversion tools, on-line document distribution, document management).
While historically the Company's first quarter revenues are generally
significantly below the previous fiscal year's fourth quarter, the major
decline in its revenues in the first quarter of fiscal 1995 resulted in the
reorganization and restructuring of the Company initiated in September 1995.
It is only in this context that the Company's 20% year-to-year increase in
total revenues can be understood. The Company believes that comparison with
the fourth quarter of fiscal 1995 provides a more meaningful benchmark of
performance. Total revenues for the first quarter ended June 30, 1995
declined only by approximately $0.7 million (3%) from the fourth quarter of
fiscal 1995.
Product license revenues included an approximately $0.9 million increase in
Japan. A majority of the product license revenue in Japan was related to
fixed fee license agreements with system integrators for upfront purchases.
Future growth in Japan depends on the ultimate success of the system
integrators in licensing the Company's products to end-user customers.
Revenue from the Company's on-line document distribution (WorldView) and
document management (RDM) products, which had declined in fiscal 1995,
increased as compared with both the first and fourth quarters of fiscal 1995.
Maintenance revenue, resulting from contracts to provide telephone support
and upgrades to the Company's software products, remained relatively stable
compared with a year ago. The majority of maintenance revenue is derived from
the Company's existing document publishing products and is largely
attributable to renewals from large, long-term customers primarily in the
aerospace/defense industry. Future maintenance revenue will become
increasingly dependent on the Company's ability to maintain its existing
customer maintenance base and to increase maintenance contract volume when
its scheduled product upgrades and new products are released. This will be
necessary to offset the general downward pricing pressure on maintenance in
the software industry.
7
Services revenue, consisting of consulting and customer training revenue,
increased approximately $0.7 million (13%) for the first quarter ended June
30, 1995 compared with the same period a year ago. This was primarily related
to price increases and increased customer demand for the Company's expert
services to implement document management solutions, partially offset by a
small decline in training services.
Revenues from the Company's international operations were approximately 36%
($8.3 million) and 31% ($5.9 million) of total revenues for the three months
ended June 30, 1995 and 1994, respectively. The increase from the prior year
was primarily related to a significant increase in product license revenue in
Japan and Europe, partially offset by a decline in revenue from Canada.
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. Cost of product
revenues declined approximately $0.5 million (23%) primarily related to
decreased amortization of capitalized software development costs. The decrease
was largely attributable to the write-down of capitalized software
development costs in the fourth quarter of fiscal 1995 associated with older
software products for which revenue projections did not support the
capitalized amounts. Also contributing to the decrease in cost of product
revenues was a decline in royalties associated with certain time-based
royalty agreements, partially offset by increased direct product, packaging
and shipping costs attributable to higher product license revenues. Cost of
maintenance revenues declined 13% primarily due to a decrease in customer
support personnel related to the Company's fiscal 1995 restructuring. Cost of
services revenue remained relatively stable from the prior year.
OPERATING EXPENSES
Selling, general and administrative ("SG&A") expenses decreased
approximately $3.4 million (24%) from last year primarily due to significant
personnel and facilities expense reductions related to the Company's fiscal
1995 restructuring. Further reductions in SG&A expenses from their current
level are not anticipated as the majority of the benefits from the
restructuring have been realized.
Research and development ("R&D") expenses consist primarily of personnel
expenses to support product development offset by capitalized software
development costs. R&D expenses decreased approximately $0.4 million (10%)
from last year primarily due to reduced personnel expenses associated with
the Company's fiscal 1995 restructuring. For the first quarters ended
June 30, 1995 and 1994, R&D expenses were approximately 17% and 23%,
respectively, of total revenues. R&D spending, which excludes the offset for
capitalized software development costs, represented approximately 22% and 28%
of total revenues, respectively. The Company is expecting to ship major
releases of most of its existing products and several new products beginning
in the latter part of the second quarter through the third quarter of fiscal
1996.
LIQUIDITY AND CAPITAL RESOURCES
The company had $12.6 million of cash and cash equivalents at June 30, 1995,
an increase of approximately $2.2 million from March 31, 1995. The increase
was primarily attributable to a decline in the accounts receivable balance,
resulting primarily from strong cash collections, and the Company's net income
for the first quarter ended June 30, 1995. Partially offsetting these
favorable cash flow items were expenditures to liquidate collateralized and
other lease obligations of approximately $1.7 million and restructuring
payments of approximately $0.7 million. Capital expenditures were $0.2
million for the three months ended June 30, 1995, a significant reduction
from the prior fiscal year. Future long-term commitments consist primarily of
operating leases related to both open and closed facilities.
8
The Company anticipates that cash and cash equivalents will decline during
the second quarter due in part to one-time cash requirements. The Company
plans to relocate part of its headquarters operations to smaller and less
expensive facilities near its present location. As part of this move, the
Company will spend approximately $1.0 million for pre-paid rent, leasehold
improvements, broker's fees, and moving costs in the next four months. The
reduction in office space and rental rate and anticipated sub-lease of the
vacated space is expected to result in annual cash and expense savings
slightly in excess of $1.0 million beginning in fiscal 1997. Interleaf's
German subsidiary, Interleaf GmbH, has been notified that it is liable for
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 June
30, 1995 has been reserved for potential payment of the German withholding
taxes. In addition, the Company's strong cash collections during the first
quarter will be difficult to maintain in the second quarter.
Accrued restructuring charges are approximately $2.6 million at June 30,
1995. This reserve should be sufficient to cover remaining expenditures,
primarily attributable to operating lease payments for closed facilities,
which are expected to continue until the year 2000. The Company is
attempting to sub-lease closed facilities to reduce future obligations.
In May 1995, the Company obtained a revolving line of credit from a major
commercial lender. Borrowings from the line of credit are secured by
substantially all domestic assets of the Company. The credit agreement
limits borrowing based upon the level of North American accounts
receivable, modified by the previous quarter's cash collections. As of July
31, 1995, the amount available for borrowings was approximately $5.0
million. The agreement contains certain financial covenants as well as
restrictions on certain additional indebtedness, acquisitions, capital
expenditures, and dividend payments. At June 30, 1995, there were no loans
outstanding under this line of credit.
The Company believes that existing cash and cash equivalents and borrowing
availability, together with cash generated from operations, will provide
sufficient funds to meet the Company's planned operations throughout fiscal
1996. The Company will continue to monitor operating results and its cost
structure.
9
INTERLEAF, INC.
PART II -- OTHER INFORMATION
Item 5. Other Information
On June 6, 1995, the Company accepted the resignation of
Richard P. Delio as Sr. Vice President of Finance
and Administration and Chief Financial Officer. Mark H. Cieplik was
appointed Vice President, Americas on May 9, 1995 and G. Gordon M.
Large was appointed Executive Vice President and Chief Financial
Officer on June 6, 1995.
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 June 30, 1995.
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.
August 11, 1995
/s/ G. Gordon M. Large
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G. Gordon M. Large
Executive Vice President and Chief
Financial Officer
(Principal Financial Officer)
10
INTERLEAF, INC.
EXHIBIT INDEX
Exhibit
Number Description Method of Filing
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10(a) Company's 1983 Stock Option Plan, as amended [vi]
10(a1) 1994 Employee Stock Option Plan [vii]
10(a2) 1993 Incentive Stock Option Plan, as amended [ix]
10(b) Company's 1989 Director Stock Option Plan [i]
10(b2) Company's 1987 Employee Stock Purchase Plan, as amended [vi]
10(c) Company's 1989 Officer and Employee Severance Benefit Plans [i]
10(cc) Company's 1993 Director Stock Option Plan [vi]
10(d) Agreements between PruTech Research and Development [ii]
Partnership III and the Company, dated October 21, 1988.
10(e) Exclusive Marketing and Licensing Agreement, between [i]
Interleaf South America, Ltd. and the Company, and related
Option Agreement, dated March 31, 1989.
10(f) Distribution and License Agreement between Interleaf [i]
Italia, S.r.l. and the Company, and related Joint
Venture Agreement, dated October 31, 1988.
10(g) Preferred Stock Purchase Agreements, for the issuance [ii]
of 2,142,857 shares of the Company's Senior Series B
Convertible Preferred Stock, dated September 29, 1989.
10(h) Notification to Preferred Shareholder of increase in [iii]
conversion ratio, dated May 18, 1992
10(i) Lease of Prospect Place, Waltham, MA, between Prospect [iv]
Place Limited Partnership and Interleaf, Inc., and related
Agreements, dated March 30, 1990.
10(j) Management Consulting Agreement between the Company and [v]
David A. Boucher, the Company's Chairman of the Board,
dated July 15, 1992.
10(k) Letter Agreement between the Company and Richard P. [vi]
Delio, the Company's former Sr. Vice President of Finance
and Administration and Chief Financial Officer, dated
March 30, 1994, concerning his employment and severance
with the Company.
10(l) Letter of Separation and Management Consulting [vii]
Agreement between the Company and Mark K. Ruport, the
Company's former President, Chief Executive Officer and
Director, dated July 25, 1994, concerning his separation
and consulting obligations to the Company.
10(m) Letter Agreement between the Company and Richard P. [vii]
Delio, the Company's former 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.
10(n) Letter of Separation and Management Consulting [vii]
Agreement between the Company and Peter Cittadini, the
Company's former Sr. Vice President Worldwide Operations,
dated July 27, 1994, concerning his separation and
consulting obligations to the Company.
10(o) Executive Compensation Arrangement for David A. [vii]
Boucher, the Company's Chairman of the Board, dated
July 20, 1994.
10(p) Letter of Separation and Management Consulting [vii]
Agreement between the Company and Lawrence S. Bohn, the
Company's former Sr. Vice President, Marketing and Business
Development, dated September 20, 1994, concerning his
separation and consulting obligations to the Company.
11
Exhibit
Number Description Method of Filing
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10(q) Employment and severance agreement between the Company [viii]
and Edward Koepfler, the Company's President, dated
October 3, 1994.
10(r) Loan and Security Agreement between the Company and Included
Foothill Capital Corporation, dated May 2, 1995.
10(s) Employment and severance agreement between the Company Included
and G. Gordon M. Large, the Company's Executive Vice
President and Chief Financial Officer, dated June 5, 1995
11 Computation of Earnings Per Share Included
27 Financial Data Schedule Included
<FN>
________________________
[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.
[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, 1993,
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, 1994,
File Number 0-14713.
[vii] Incorporated herein by reference is the applicable Exhibit to Company's
Report on Form 10-Q for the quarter ended September 30, 1994,
File Number 0-14713.
[viii] Incorporated herein by reference is the applicable Exhibit to Company's
Report on Form 10-Q for the quarter ended December 31, 1994,
File Number 0-14713.
[ix] 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.
12