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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 SEPTEMBER 30, 1997
COMMISSION FILE NUMBER 0-14713
Interleaf
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)
62 Fourth Avenue, Waltham, MA 02154
(Address of principal executive offices) (Zip Code)
(781) 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 last 90 days.
Yes |X| No |_|
APPLICABLE ONLY TO CORPORATE ISSUERS
The number of shares outstanding of the issuer's Common Stock, $.01 par
value, as of November 10, 1997 was 17,846,259.
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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 September 30, 1997, September 30, 1997
(Pro Forma) and March 31, 1997 ............................................. 3
Consolidated statements of operations for the three and six months ended
September 30, 1997 and 1996 ................................................ 4
Consolidated statements of cash flows for the three and six months ended
September 30, 1997 and 1996 ................................................ 5
Notes to consolidated financial statements ................................. 6
Item 2 - Management's Discussion and Analysis of Financial Condition
and Results of Operations .................................................. 10
PART II - OTHER INFORMATION
Item 4 - Submission of Matters to Vote of Security Holders ................. 14
Item 5 - Other Information ................................................. 14
Item 6 - Exhibits and Reports on Form 8-K .................................. 17
SIGNATURE .................................................................. 17
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Interleaf, Inc.
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
CONSOLIDATED BALANCE SHEETS
Unaudited
--------------------------------------
September 30, 1997 September 30, 1997 March 31, 1997
------------------ ------------------ --------------
In thousands, except for share and per share amounts (historical) (pro forma)
ASSETS
Current Assets
Cash and cash equivalents $ 13,378 $ 20,340 $ 17,349
Accounts receivable, net of reserve for doubtful accounts
of $1,365 at September 30, 1997 and $ 1,371 at March 31, 1997 9,260 9,260 11,359
Prepaid expenses and other current assets 1,657 1,657 1,504
------------------ ------------------ ---------------
Total Current Assets 24,295 31,257 30,212
Property and equipment, net 4,300 4,300 4,963
Intangible assets, net 1,536 1,536 2,281
Other assets 906 906 444
------------------ ------------------ ---------------
Total Assets $ 31,037 $ 37,999 $ 37,900
================== ================== ===============
LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIT)
Current Liabilities
Accounts payable $ 2,205 $ 2,205 $ 1,774
Accrued expenses 11,652 11,582 14,455
Unearned revenue 11,166 11,166 15,102
Accrued restructuring 2,042 2,042 4,386
------------------ ------------------ ---------------
Total Current Liabilities 27,065 26,995 35,717
Long-term restructuring 3,555 3,555 2,955
------------------ ------------------ ---------------
Total Liabilities 30,620 30,550 38,672
------------------ ------------------ ---------------
Shareholders' Equity (Deficit)
Preferred stock, par value $.10 per authorized 5,000,000 shares:
Series A Junior Participating, none issued and outstanding
Senior Series B convertible, shares issued and outstanding,
861,911 at September 30, 1997 and at March 31, 1997 86 86 86
Senior Series C Convertible, shares issued and outstanding,
1,010,002 at September 30, 1997 and 1,006,220 at March 31, 1997 101 101 101
Series 6% Convertible, shares issued and outstanding, 7,625 at
September 30, 1997 (pro forma) -- 1 --
Common stock, par value $.01 per share, authorized 50,000,000 shares,
issued and outstanding, 17,840,259 at September 30, 1997
and 17,459,219 at March 31, 1997 178 178 175
Additional paid-in capital 85,970 93,001 85,513
Retained earnings(deficit) (85,674) (85,674) (86,508)
Cumulative translation adjustment (244) (244) (139)
------------------ ------------------ ---------------
Total Shareholders' Equity (Deficit) 417 7,449 (772)
------------------ ------------------ ---------------
Total Liabilities and Shareholders' Equity (Deficit) $ 31,037 $ 37,999 $ 37,900
================== ================== ===============
See notes to consolidated financial statements
3
Interleaf, Inc.
CONSOLIDATED STATEMENTS OF OPERATIONS
Three months ended September 30 Six months ended September 30
------------------------------- -----------------------------
1997 1996 1997 1996
---- ---- ---- ----
(unaudited) (unaudited)
In thousands, except for per share amounts
Revenues:
Products $ 3,158 $ 4,614 $ 5,900 $ 11,660
Maintenance 6,695 7,410 13,344 14,882
Services 3,265 4,561 6,700 9,097
-------- -------- ------- --------
Total revenues 13,118 16,585 25,944 35,639
Costs of Revenues:
Products 952 1,527 1,682 3,153
Maintenance 1,012 1,291 1,958 2,599
Services 2,877 4,362 5,716 8,562
-------- -------- ------- --------
Total costs of revenues 4,841 7,180 9,356 14,314
Gross Margin 8,277 9,405 16,588 21,325
Operating Expenses:
Selling, general and administrative 5,475 10,481 11,032 21,903
Research and development 2,316 4,306 4,767 8,576
Restructuring expense -- 4,800 -- 4,800
-------- -------- ------- --------
Total operating expenses 7,791 19,587 15,799 35,279
-------- -------- ------- --------
Income (loss) from operations 486 (10,182) 789 (13,954)
Other Income (expense) (37) (145) 46 (173)
-------- -------- ------- --------
Income (loss) before income taxes 449 (10,327) 835 (14,127)
Provision for income taxes -- -- -- --
-------- -------- ------- --------
Net income (loss) $ 449 $(10,327) $ 835 $(14,127)
======== ======== ======= ========
Income (loss) Per Share: $ 0.02 $ (0.59) $ 0.03 $ (0.82)
======== ======== ======= ========
Shares used in computing
income (loss) per share 24,815 17,457 23,895 17,229
======== ======== ======= ========
See notes to consolidated financial statements
4
Interleaf, Inc.
CONSOLIDATED STATEMENTS OF CASH FLOWS
Six months ended September 30
----------------------------
In thousands (unaudited)
1997 1996
---- ----
Cash Flows from Operating Activities
Net income (loss) $ 835 $ (14,127)
Adjustments to reconcile net income (loss) to net cash provided by
(used in) operating activities:
Restructuring expense -- 4,800
Depreciation and amortization expense 2,030 3,901
Changes in assets and liabilities
Decrease in accounts receivable, net 1,888 3,942
(Increase) decrease in other assets (619) 341
Decrease in accounts payable and accrued expenses (2,310) (49)
Decrease in unearned revenue (3,769) (4,493)
Decrease in other liabilities (1,692) (1,305)
Other, net 278 113
---------- ----------
Net cash used in operating activities (3,359) (6,877)
---------- ----------
Cash Flows from Investing Activities
Capital expenditures (655) (1,736)
Capitalized software development costs -- (737)
---------- ----------
Net cash used in investing activities (655) (2,473)
---------- ----------
Cash Flows from Financing Activities
Short term borrowings, net -- 374
Net proceeds from issuance of common stock 597 1,250
Repayment of long-term debt and capital leasees (20) (4)
---------- ----------
Net cash provided by financing activities 577 1,620
---------- ----------
Effect of exchange-rate changes on cash (534) (53)
---------- ----------
Net decrease in cash and cash equivalents (3,971) (7,783)
Cash and cash equivalents at beginning of period 17,349 12,725
---------- ----------
Cash and cash equivalents at end of period $ 13,378 $ 4,942
========== ==========
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."
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, 1997.
2. Pro Forma Presentation
On September 30, 1997, the Company sold, in a private placement with
shareholder approval being sought as described below, 7,625 shares of Series
6% Convertible Preferred Stock ("6% Convertible Preferred Stock") at a price
of $1,000 per share, receiving proceeds of $6.8 million, net of placement
agent fees and transaction costs. Accordingly, the unaudited historical
balance sheet at September 30, 1997 reflects the financial position of the
Company before the private placement, and the unaudited pro forma balance
sheet reflects the completion of the transaction, net of fees and
transaction costs.
In addition, the Company issued warrants to purchase 763 shares of 6%
Convertible Preferred Stock at an exercise price of S1,000 per share to the
placement agent. These warrants are exercisable for a period of five years
commencing September 30, 1997.
6
The 6% Convertible Preferred Stock is convertible into shares of the
Company's common stock at the option of the holders after December 29,
1997, and is automatically convertible on September 30, 2002. The number of
shares of common stock issued upon conversion is equal to 1,000 divided by
the conversion price, The conversion price is $5.50 until March 31, 1998.
Thereafter, the conversion price is set monthly based on a progressive
discount to the average of the three lowest daily trading prices of the
common stock during the twenty-two trading day period immediately
proceeding the conversion.
The Company has agreed to register by December 29, 1997 sufficient shares
of common stock to satisfy the conversion requirements of the 6%
Convertible Preferred Stock.
The 6% Convertible Preferred Stock earns a cumulative annual dividend of
$60 per share payable, at the Company's option, either as cash or
additional 6% Convertible Preferred Stock. Dividends are payable in
preference to any payment made on any shares of common stock or any other
classes or series of capital stock of the Company other than Series C
Preferred Stock which has rights to dividends pari passu with the 6%
Convertible Preferred Stock.
In the event of a liquidation of the Company, the holders of outstanding
6% Convertible Preferred Stock shall be entitled to receive $1,000 per
share plus accrued dividends.
Holders of 6% Convertible Preferred Stock have no voting rights prior to
conversion.
Pursuant to its agreement with Nasdaq, the Company will reserve $1 million
from the proceeds of its sale of 6% Convertible Preferred Stock for a
period of 18 months to honor in cash any conversion request made at any
time when the conversion price is less than $3.00 per share (or such other
price determined by the Company).
7
Pursuant to its agreements with the holders of 6% Convertible Preferred
Stock and with Nasdaq, the Company intends to seek shareholder approval of
the 6% Convertible Preferred Stock private placement. It is presently
expected that this approval will be sought at a special meeting of
shareholders to be held on December 17, 1997. If shareholder approval is not
received, the Company (i) will be required to redeem a portion of the 6%
convertible Preferred Stock as necessary to comply with Nasdaq listing
requirements, and (ii) because of such redemption, the Company may not be in
compliance with other Nasdaq listing requirements and may be subject to
delisting.
3. Net Income (Loss) Per Share
Primary earnings 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. During
periods of net loss, per share amounts are calculated using only the
weighted average number of common shares outstanding. Fully diluted earnings
per share are not materially different from reported primary earnings per
share.
4. Recently Issued Accounting Standard
In February 1997, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 128, Earnings per Share (SFAS 128).
This statement attempts to simplify current standards used in the United
States for computing earnings per share and make them more comparable with
international standards. SFAS 128 replaces APB Opinion 15 and related
interpretations. SFAS 128 is effective for financial statements issued for
periods ending after December 15, 1997, including
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Interleaf, Inc.
interim periods, and earlier application is not permitted. The Company will
adopt SFAS 128 commencing with the third quarter ending December 31, 1997,
but believes it will not have a material impact on the EPS.
5. Shareholder's Equity
On August 15, 1997, the shareholders approved amendments to the Company's
Articles of Organization to increase its authorized number of shares of
Common Stock from 30,000,000 to 50,000,000 shares. Additionally, the
shareholders approved an increase in the number of shares for the Company's
Common Stock available for issuance in its 1993 Stock Option plan from
1,500,000 to 2,100,000.
6. Credit Agreement
In August 1997, the Company's revolving line of credit with a major
commercial lender expired. Although this credit facility was never utilized
in either fiscal 1997 or 1998, available credit would have been secured by
substantially all domestic assets of the Company. At September 30, 1997, the
Company has secured a new letter of credit for $0.7 million, which is
secured by the same amount of cash, from another major commercial lender
which expires on July 31, 1998.
7. Restructuring
For the six months ended September 30, 1997, the Company paid approximately
$1.4 million, net of sublease receipts, related to the fiscal 1997 and 1995
restructurings. For the six months ended September 30, 1996, the Company
paid approximately $0.9 million, net of sublease receipts, related to the
fiscal 1997 and 1995 restructurings. Expenditures for facility closures,
primarily lease payments, net of sublease receipts, are expected to continue
through December 2001.
8. Contingencies
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 in 1990. The Company is appealing this
assessment; however, approximately $1.1 million of the cash and cash
equivalents balance at September 30, 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.
9
Interleaf, Inc.
ITEM 2.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
The following information should be read in conjunction with the financial
statements and notes thereto and risk factors contained in the section entitled
"Risk Factors" on page 15 of the Company's Annual Report to Shareholders, as
incorporated by reference into Item 7 of the Company's Annual Report on Form
10-K dated June 30, 1997.
This Form 10-Q contains forward-looking statements within the meaning of Section
27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act
of 1934. The Company's actual results could differ materially from those set
forth in the forward-looking statements. Factors that might cause such a
difference are discussed in the section entitled "Risk Factors" below.
Results of Operations
Overview
The Company reported net income of $0.4 million, on total revenues of $13.1
million, for the second quarter and net income of $0.8 million on total revenues
of $25.9 million, for the six months ended September 30, 1997. This compares
with the prior year's net loss of $10.3 million on total revenues of $16.6
million for the second quarter and a net loss of $14.1 million, on total
revenues of $35.6 million, for the six months ended September 30, 1996. Much of
the decline in revenue 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 to focus on developing and supporting a new web publishing product
family, targeted toward its customers' extended enterprise. The increase in net
income for the second quarter ended September 30, 1997 compared to the same
period a year ago was primarily due to the impact of significant reductions to
the cost structure of the Company during the second and third quarters of fiscal
1997. During these two quarters in fiscal 1997, headcount was reduced,
facilities were closed or downsized, and various cost control measures were
implemented. In order to maintain its tangible net worth at the level required
for listing on the Nasdaq National Market System, the Company raised $6.8
million net of placement agent fees and transaction costs (see Item 5); and
pursuant to its agreement with Nasdaq the Company is seeking shareholder
approval of this transaction.
Revenues
Total product revenue decreased by $1.5 million (32%) and $5.7 million (49%) for
the second quarter and the six months ended September 30, 1997, respectively,
compared to the same periods in fiscal 1997. Revenue declined in all geographic
regions. The continuing trend in the reduction in product license revenue is due
to two factors. The first is the decline in licensing of the Company's
UNIX-based high-end authoring products which is primarily attributable to the
increasing popularity of Windows-based publishing software, for which the
Company did not have any offerings until January of 1996. A second factor is the
saturation of UNIX-based high-end authoring software in the aerospace/defense
industry, where the Company had historically derived most of its authoring
product license revenue.
The Company is refocusing its business strategy on providing a new family of web
publishing products targeted toward specific vertical markets. While the Company
has built well-accepted integrated document publishing based solutions for
individual customers, it has not yet demonstrated the ability to develop, market
and sell web based publishing products. There is no assurance that the Company
will be successful in implementing its strategy and, therefore, the Company is
unable to predict if or when product revenues will
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Interleaf, Inc.
stabilize or grow. Additionally, since the Company's services and maintenance
revenue is largely dependent on new product licenses, these revenue components
have also experienced downward pressure. This trend will continue unless product
revenue stabilizes.
Maintenance revenue decreased by $0.7 million (10%) and $1.5 million (10%) for
the second quarter and the six months ended September 30, 1997, respectively,
compared to the same periods in fiscal 1997. Revenue declined in all geographic
regions. Future maintenance revenue is dependent on the Company's ability to
maintain its existing customer base and to increase maintenance contract volume
related to the new web publishing products. This will be necessary to offset the
general downward pricing pressure on maintenance in the software industry and a
reduction in customers' perceived value of maintenance services.
Services revenue, consisting of consulting and customer training revenue
decreased by $1.3 million (28%) and $2.4 million (26%) for the second quarter
and the six months ended September 30, 1997, respectively, compared to the same
periods in fiscal 1997. 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
introduction and success of new products.
During fiscal 1998, the Company plans to develop several product offerings which
solve complex publishing problems in several vertical markets. Growth in
revenues during fiscal 1998 will be largely dependent on improving sales force
productivity, the effectiveness of the Company's increased investment in
marketing and lead generation programs, customer acceptance of the new and
enhanced software products planned to be released in fiscal 1998 and the
following year, and the Company's success in leveraging software products with
services to provide web publishing solutions to its customers. If the Company is
unable to grow or stabilize its revenues in fiscal 1998, 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. Cost of product
revenues decreased by $0.6 million (38%) and $1.5 million (47%) for the second
quarter and the six months ended September 30, 1997 compared to the same periods
in fiscal 1997. Cost of product revenues as a percentage of product revenues
were 30% and 29% for the second quarter and the six months ended September 30,
1997, respectively, compared to 33% and 27% for the same periods in fiscal 1997.
The cost of maintenance revenue declined by $0.3 million (22%) and $0.6 million
(25%) for the second quarter and the six months ended September 30, 1997,
respectively, compared to the same periods in fiscal 1997. Cost of maintenance
revenues as a percentage of maintenance revenues were 15% for the second quarter
and the six months ended September 30, 1997, compared to 17% for the same
periods in fiscal 1997. The cost of service revenue declined by $1.5 million
(34%) and $2.9 million (33%) for the second quarter and the six months ended
September 30, 1997, respectively, compared to the same periods in fiscal 1997.
Cost of service revenues as a percentage of service revenues were 88% and 85%
for the second quarter and the six months ended September 30, 1997,
respectively, compared to 96% and 94% for the same periods in fiscal 1997. The
decline in the costs of revenues was impacted by the year-to-year lower revenue
and the reduced expenses due to the fiscal 1997 restructuring.
Operating Expenses
Selling, general and administrative ("SG&A") expenses decreased by $5.0 million
(48%) and $10.9 million (50%) for the second quarter and the six months ended
September 30, 1997, respectively, compared to the same periods in fiscal 1997.
The decline was primarily due to significant personnel and facilities expense
reductions related to the Company's fiscal 1997 restructuring.
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 by $2.0 million (46%) and $3.8 million
(44%) for the second quarter and the six months ended September 30, 1997,
respectively, compared to the same periods in fiscal 1997.
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Interleaf, Inc.
Liquidity and Capital Resources
The Company had approximately $13.4 million of cash and cash equivalents at
September 30, 1997, a decrease of approximately $5 million from June 30, 1997,
without giving effect to the $6.8 million private placement discussed
previously. Taking the private placement into account, the Company's cash and
cash equivalents at September 30, 1997 totaled approximately $20.3 million, an
increase of approximately $3.0 million from March 31, 1997 (these amounts
include $1.0 million in cash which has been reserved to fund the exercise of the
Green Floor (defined in Part II, Item 5 below), if necessary.) The decrease was
primarily attributable to the timing of the receipt on maintenance renewals
which normally generate more cash in the Company's first and fourth quarters of
its fiscal year. 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 in 1990. The Company is appealing
this assessment. At September 30, 1997 and March 31, 1997, the Company had
approximately $1.1 million of cash restricted for potential payment of German
withholding taxes.
In August, 1997 the Company received notification from Nasdaq that due to the
Company's insufficient net tangible assets at March 31, 1997, the Company would
be delisted from the Nasdaq National Market (the "National Market") unless it
raised the necessary additional capital. Nasdaq rules require that the Company
have net tangible assets in excess of $4 million. To raise sufficient funds to
increase the Company's net tangible assets, and, in turn, maintain the Company's
listing on the National Market, the Company on September 30, 1997 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 additional shares of 6% Convertible Preferred Stock.
The Company is seeking shareholder approval of this private placement
transaction, and therefore has shown this transaction as "Pro Forma" on the
accompanying Consolidated Balance Sheets (see Item 5, below). If shareholder
approval is not received prior to December 31, 1997, the Company will be
obligated to redeem on or before January 15, 1998, at a premium price, a
sufficient number of shares of 6% Convertible Preferred Stock which, in its
reasonable judgment, will permit conversion of the remaining shares of 6%
Convertible Preferred Stock without breaching the Nasdaq Rules (see Item 5
below). Additionally, pursuant to its agreement with Nasdaq, the Company will
reserve $1 million from the 1997 Private Placement proceeds for a period of 18
months to be used solely for the purpose of funding the exercise of the Green
Floor, but there is no other restriction on the Company's use of such proceeds
(see Item 5 below).
For the six months ended September 30, 1997, the Company paid approximately $1.4
million, net of sublease receipts, related to the fiscal 1997 and 1995
restructurings, compared to $0.9 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 2001. All significant non-operating vacant space under
lease has been subleased.
In August 1997, the Company's revolving line of credit and $.7 million 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
September 30, 1997, the Company has obtained a new letter of credit for $0.7
million, which is secured by the equivalent amount of cash, from another major
commercial lender.
While the Company showed a small profit in the first half of fiscal 1998, 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. Due to the downward trend in the Company's revenues, the Company
is unable to predict future revenues and when, or if, it will achieve a
sustainable profitable level of operations. As a result, the Company developed
detailed plans relating to its fiscal 1998 operations which, if realized, will
restore the Company to profitable operations. Under such circumstances no
assurances can be given that such plans will be achieved. 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 can only fund its long-term growth through increasing revenues, combined
with tightly managed cost controls.
The Company believes its current cash balances, proceeds from the private
placement and cash generated from operations will be sufficient to meet the
Company's liquidity needs for fiscal 1998 and the forseeable future.
Risk Factors
12
Interleaf, Inc.
From time to time, information provided by the Company or statements made by its
employees may contain forward-looking information. The Company's actual future
results may differ materially from those 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.
The Company's future operating results are dependent on its ability to develop
and market integrated document publishing ("IDP") software products and services
that meet the changing needs of organizations with complex document publishing
requirements. There are numerous risks associated with this process, including
rapid technological change in the information technology industry and the
requirement to bring to market IDP applications that solve complicated business
needs in a timely manner. In addition, the existing document publishing,
electronic distribution, and document management markets are highly competitive.
Many of these competitors are larger and better funded than the Company. The
Company competes for sales of its software products on both an individual
product basis and integrated with services in large IDP solution sales.
Given the reduction in the Company's revenues and employee base over recent
periods, the Company will face difficulties in managing and implementing its
plans for growth, including without limitation difficulties in attracting and
retaining key technical, sales and executive personnel given the current
extremely competitive labor conditions, and difficulties in managing
relationships with distributors, vendors, customers and other third parties.
Sales cycles associated with IDP solution sales are long because organizations
frequently require the Company to solve complex business problems that typically
involve reengineering of their business processes. In addition, a high
percentage of the Company's product license revenues are generally realized in
the last month of a fiscal quarter and can be difficult to predict until the end
of a fiscal quarter. Accordingly, given the Company's relatively fixed cost
structure, a shortfall or increase in product license revenue can have a
significant impact on the Company's operating results and liquidity.
The Company markets its software products and services worldwide. Global and/or
regional economic factors, currency exchange rate fluctuations, and potential
changes in laws and regulations affecting the Company's business could impact
the Company's financial condition or future operating results.
The market price of the Company's common stock may be volatile at times in
response to fluctuations in the Company's quarterly operating results, changes
in analysts' earnings estimates, market conditions in the computer software
industry, as well as general economic conditions and other factors external to
the Company.
13
Interleaf, Inc.
PART II - OTHER INFORMATION
Item 4. Submission of Matters to Vote of Security Holders
At the Annual Meeting of Shareholders held on August 15, 1997 ("Annual Meeting")
the shareholders of the Company elected the following two nominees as Class I
directors of the Company whose terms shall expire at the Company's year 2000
shareholder meeting: Marcia J. Hooper, elected by the Company's Class B
Preferred shareholders by a unanimous vote of 861,911, and Rory J. Cowan, by a
vote of 15,377,385 in favor to 812,676 against. The Company also has two Class
II directors: Jaime W. Ellertson, and George D. Potter, Jr., whose terms are set
to expire at the annual shareholders' meeting in 1998, and two Class III
Directors, Frederick Bamber and David Boucher, whose terms expire at the annual
shareholders meeting in 1999. At the Annual Meeting, the shareholders ratified
and approved an amendment to the Company's 1993 Stock Option Plan to increase
the number of shares of the Company's Common Stock available for issuance from
1,500,000 to 2,100,000 under the Plan, by a vote of 13,351,965 in favor,
2,589,582 against, 80,299 abstentions, and 2,185,782 no votes. The stockholders
also approved an amendment to the Company's Restated Articles of Organization to
increase the number of authorized shares of common stock from 30,000,000 to
50,000,000 by a vote of 15,541,237 in favor, 585,958 against, 62,866
abstentions, and 2,016,968 no votes. The shareholders also ratified and approved
the selection of Ernst & Young LLP as the Company's independent auditors for
fiscal 1998, by a vote of 16,054,171 in favor, 87,790 against, 48,100
abstentions, and 2,185,787 no votes. A more complete description of these
matters appears in the Company's 1997 Proxy Statement, dated July 18, 1997.
Item 5. Other Information
Preferred Stock Private Placement
General
On September 30, 1997, Interleaf, Inc. (the "Company") completed, with
shareholder approval being sought as described below, a private placement
transaction pursuant to which it received aggregate net proceeds of
approximately $6.8 million (after cash fees to the placement agents and
estimated transaction expenses) from the issuance of shares of 6%
Convertible Preferred Stock (the "6% Convertible Preferred Stock") and
related placement agent warrants. Such transaction is referred to herein as
the "1997 Private Placement," and the related securities issuances
(including shares of Common Stock issuable upon the conversion of shares of
6%. Convertible Preferred Stock, as dividends thereon and upon exercise of
the placement agent warrants) are referred to as the "1997 Private Placement
Issuances." All of the securities sold in the 1997 Private Placement
Issuances were sold in private placements solely to accredited investors
under the Securities Act.
Summary of Transaction Terms
Set forth below is a summary of the terms of the 1997 Private Placement
Issuances, which summary is qualified by reference to the full text of the
underlying documents which have been filed as exhibits hereto.
Pursuant to the terms of the several 6% Convertible Preferred Stock
Investment Agreements, each dated as of September 30, 1997 (collectively,
the "6% Preferred Stock Investment Agreement"), the Company issued and sold
in a private placement to certain accredited investors for $1,000.00 per
share an aggregate of 7,625 restricted shares of a newly-established series
of preferred stock, designated as 6% Convertible Preferred Stock, resulting
in gross proceeds to the Company of $7.6 million in the aggregate.
14
Interleaf, Inc.
Each share of 6%. Convertible Preferred Stock 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
Preferred Stock, which has rights to dividends pari passu with the 6%
Convertible Preferred Stock. Such dividends accrue from day to day whether
or not earned or declared. Any dividend payable after the date of issuance
of the 6%. Convertible Preferred Stock may be paid (i) in additional shares
of 6% Convertible Preferred Stock valued at $1,000.00 per share, or, (ii)
upon proper notice, in cash. Each share of 6% Convertible Preferred Stock is
also entitled to a liquidation preference of $1,000.00 per share, plus any
accrued but unpaid dividends and any amounts owing as a result of a failure
by the Company to file an effective registration statement within the
prescribed period (described below), in preference to any other class or
series of capital stock of the company (except the Series C preferred Stock,
which is pari passu with the 6% Convertible Preferred Stock). Except as
otherwise provided by applicable law, holders of shares of 6% Convertible
Preferred Stock 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 shares of
6% Convertible Preferred Stock held of record by each holder on such day
shall become convertible into shares of Common Stock, and thereafter on the
successive monthly anniversaries of such day additional shares of 6%
Convertible Preferred Stock shall become convertible (with the additional
amount varying from 10% to 25% of the number of shares of 6% Convertible
Preferred Stock 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 shares of 6% Convertible Preferred Stock held
of record on such day shall be convertible.
The number of shares of Common Stock issuable upon conversion of shares of
6% Convertible Preferred Stock will equal the liquidation preference of the
shares being converted divided by the then-effective conversion price
applicable to the Common Stock (the "Conversion Price"). The Conversion
Price as of any date during the seven-month period following the date of
issuance shall be $5.50. The Conversion Price as of any date after the
seven-month period following the date of issuance and before the first day
of the sixteenth month after the date of issuance 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 the first day of the thirteenth month
after closing. The "Applicable Percentage" is dependent upon the time which
has passed from original issuance to the date of measurement, being 9.8%
starting on the first day of the eighth month and increasing in each
subsequent month to 11.1%, 12.4%, 13.7%, and 15%. At any date after the
first day of the sixteenth month after the date of issuance, 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 the 12th through
15th month (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
15
Interleaf, Inc.
adjustment for customary anti-dilution events such as stock splits, stock
dividends, reorganizations and certain mergers affecting the Common Stock.
Five years from the date of original issue, all of the then outstanding
shares of 6% Convertible Preferred Stock will be automatically converted
into shares of Common Stock at the then-applicable Conversion Price. No
holder of 6% Convertible Preferred Stock will be entitled to convert any
share of 6% Convertible Preferred Stock 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.
In addition, following conversion of the 6% Convertible Preferred Stock 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").
The Company is not obligated to issue, in the aggregate, more than 3,150,000
shares of Common Stock if issuance of a larger number of shares would
constitute a breach of the Rules or Designation Criteria of The Nasdaq Stock
Market, Inc. (the "Nasdaq Rules"), including the shareholder approval rule
described above. If shareholder approval is not received by December 31,
1997, the Company will be obligated to redeem, at a premium price, a
sufficient number of shares of 6% Convertible Preferred Stock which, in its
reasonable judgment, will permit conversion of the remaining shares of 6%
Convertible Preferred Stock without breaching the Nasdaq Rules. Any delay in
payment will cause such redemption amount to accrue interest at the rate of
0.1% per day until paid. Subject to this requirement to effect a special
redemption of the 6% Convertible Preferred Stock, if the issuance of Common
Stock upon conversion of any shares of 6% Convertible Preferred Stock would
constitute a breach of the Nasdaq Rules, then the Company has agreed to
exercise the Green Floor with respect to such issuance. Pursuant to its
agreement with Nasdaq, the Company will reserve $1 million from the 1997
Private Placement proceeds for a period of 18 months to be used solely for
the purpose of funding the exercise of the Green Floor, but there is no
other restriction on the Company's use of such proceeds. There is no
assurance that the proceeds of the 1997 Private Placement will be available
to fund any required cash redemption of 6% Convertible Preferred Stock or
exercise of the Green Floor or that the $1 million reserved by the Company
will be sufficient to fund the exercise of the Green Floor.
The Company has agreed to register the shares of Common Stock issuable upon
conversion of the 6% Convertible Preferred Stock, including shares payable
as dividends thereon, and shares issuable upon exercise of the Placement
Agent Warrants and conversion of the underlying 6% Convertible Preferred
Stock, for resale under the Securities Act no later than 90 days after
original issuance. Any delay in having the related registration statement
declared effective by the Commission beyond the applicable period, or any
unavailability to the holders of the 6% Convertible Preferred Stock of a
current prospectus after such period, will cause the Company to pay to each
holder, in cash, 3% of the total
16
Interleaf, Inc.
purchase price of the 6% Convertible Preferred Stock for each 30-day period
of the delay (pro rated for any shorter period).
Placement Agent Compensation. The placement agent for the issuances
described above was Cappello Capital Corp. (the "Placement Agent"). In
consideration for placing such securities, the Placement Agent received
aggregate cash compensation of 8.7% of the gross proceeds received by the
Company, or $663,375. Further, the Company also agreed to issue to the
Placement Agent 6% Convertible Preferred Stock Warrants to acquire an
aggregate of 763 shares of 6% Convertible Preferred Stock for a purchase
price of $1,000.00 per share (subject to the same anti-dilution protections
as are applicable to the 6% Convertible Preferred Stock). Such warrants will
be exercisable for a period of five years for shares of 6% Convertible
Preferred Stock. The Company will be obligated to register the shares of
Common Stock issuable upon exercise and conversion of the Placement Agent
warrants for resale under the Securities Act. The Placement Agent will
retain its compensation whether or not the required stockholder approval is
obtained.
Stockholder Approval
The Company intends to seek the approval of its shareholders to the 1997
Private Placement Issuances to satisfy certain stockholder approval
requirements contained in the Company's listing agreement with the Nasdaq
National Market. It is presently expected that this approval will be sought
at a special meeting of stockholders to be held on December 17, 1997.
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) A report on Form 8-K was filed by the Company on October 9, 1997, as
amended by Form 8-K/A filed on October 23, 1997.
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.
November 14, 1997
/s/ Robert R. Langer
--------------------------
Robert R. Langer,
Vice President of Finance and
Administration
and Chief Financial Officer
(Principal Financial and Accounting
Officer)
17
Interleaf, Inc.
EXHIBIT INDEX
Exhibit Method
Number Description of Filing
------ ----------- ---------
3(a) Restated Articles of Organization of the Company, as
amended [included]
3(b) By-Laws of the Company, as amended [v]
4(a) Specimen Certificate for Shares of the Company's [xiv]
Common Stock
4(b) Rights Agreement, dated July 15, 1988, between the [xv]
Company and the First National Bank of Boston
10(a) Company's 1983 Stock Option Plan, as amended [v]
10(a1) 1994 Employee Stock Option Plan, as amended [xiii]
10(a2) 1993 Incentive Stock Option Plan, as amended [included]
10(b) Company's 1989 Director Stock Option Plan [i]
10(b2) Company's 1987 Employee Stock Purchase Plan, as amended [xiii]
10(c) Company's 1989 Officer and Employee Severance [i]
Benefit Plans
10(cc) Company's 1993 Director Stock Option Plan [v]
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 [ii]
issuance 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 [iv]
Prospect Place Limited
Partnership and Interleaf, Inc., and related
Agreements, dated March 30, 1990.
10(j) Employment and severance agreement between the [vii]
Company and Edward Koepfler, the Company's President,
dated October 3, 1994.
10(k) Loan and Security Agreement between the Company and [ix]
Foothill Capital Corporation, dated May 2, 1995.
10(l) Employment and severance agreement between the [ix]
Company and G. Gordon M. Large, the Company's
Executive Vice President and Chief Financial
Officer, dated June 5, 1995.
10(m) Net Lease, dated August 14, 1995, between Principal [x]
Mutual Insurance Company and the Company.
10(n) Sublease, dated September 15, 1995, between [x]
Parametric Technology Corporation and the Company.
10(o) Employment and severance agreement between the [xi]
Company and Mark Cieplik, the Company's Vice President,
Americas, dated March 17, 1995.
10(p) Agreement between PruTech Research and Development [xii]
Partnership III and the Company, dated November 14,
1995.
18
Interleaf, Inc.
10(q) Series C Preferred Stock Agreement between [xiii]
Interleaf, Inc. and Lindner Investments, dated
October 14, 1996.
10(r) Letter Agreement between the Company and Robert M.
Stoddard, as the Company's then Vice President of [xvi]
Finance and Administration, and Chief Financial
Officer, dated November 11, 1996.
10(s) Letter Agreement between the Company and Rory J.
Cowan, the Company's President and Chief Executive [xvi]
Officer, dated November 15, 1996, concerning his
employment and compensation with the Company.
10(t) Letter Agreement between the Company and Mark H.
Cieplik, the Company's Vice President of Sales, [xvi]
dated November 15, 1996, concerning his employment
and compensation with the Company.
10(u) Letter Agreement between the Company and Michael L.
Shanker, the Company's Vice President of [xvi]
Professional Services, dated November 15, 1996,
concerning his employment and compensation with the
Company.
10(v) Letter Agreement between the Company and Stephen J.
Hill, the Company's Vice President of Europe, dated [xvi]
November 15, 1996, concerning his employment and
compensation with the Company.
10(w) Resignation Agreement and Release and Employment
Agreement between Ed Koepfler, the Company's former [xvi]
President and Chief Executive Officer, and the
Company, dated November 15, 1996, concerning his
employment and severance with the Company.
10(w1) Resignation Agreement and Release and Employment
Agreement between G. Gordon M. Large, the Company's
former Executive Vice President of Finance and [xvi]
Administration and Chief Financial Officer, and the
Company, dated November 12, 1996, concerning his
employment and severance with the Company.
10(x) Resignation Agreement and Release and Employment
Agreement between Stan Douglas, the Company's former [xvi]
Vice President of Engineering Operations, and the
Company, dated November 15, 1996, concerning his
employment and severance with the Company.
10(y) Terms of Engagement between the Company and Robert
R. Langer, Vice President of Finance and [xvi]
Administration and Chief Financial Officer, dated
December 30, 1996, concerning his employment with
the Company.
10(z) Offer Letter and Acceptance between Jaime W.
Ellertson, the Company's President and Chief [xvi]
Executive Officer, and the Company, dated January 9, 1997.
10(z1) Offer Letter and Acceptance between Michael L. [xvii]
Torto, the Company's Vice President, Marketing, and
the Company, dated March 28, 1997.
10(z2) Offer Letter and Acceptance between Robert A. [xvii]
Fisher, the Company's Vice President, Customer
Support, and the Company, dated April 17, 1997.
10(z3) Offer Letter and Acceptance between Christopher [xvii]
McKee, the Company's Vice President, Europe, Middle East,
Africa, and the Company, dated May 13, 1997.
10(z4) Offer Letter and Acceptance between Gary R. [xvii]
Phillips, the Company's Vice President, North
American Sales, and the Company, dated May 22, 1997.
10(z5) Resignation Agreement between Mark H. Cieplik, the [xvii]
Company's former Vice President, Americas, and the
Company, dated May 29, 1997, concerning his
employment and severance with the Company.
10(z6) Resignation Agreement between Stephen J. Hill, the [xvii]
Company's former Vice President,
19
Interleaf, Inc.
Europe, and the Company, dated June 5, 1997, concerning
his employment and severance with the Company.
10(z7) Offer Letter and Acceptance between Craig Newfield, Included
the Company's Vice President, General Counsel & Clerk,
and the Company, dated October 3, 1997.
10(aa) Preferred Stock Investment Agreement among the Included
Company and certain investors dated as of September
30, 1997, with exhibits.
10(bb) Stock Purchase Warrant and signature pages between Included
the Company and certain family members of the
principals of Capello Capital Corp. date as of
September 30, 1997.
11 Computation of Earnings Per Share Included
27 Financial Data Schedule 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.
[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
Report on Form 10-Q for the quarter ended September 30, 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 December 31, 1994, File Number
0-14713.
[viii] 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.
[ix] Incorporated herein by reference is the applicable Exhibit to Company's
Report on Form 10-Q for the quarter ended June 30, 1995, File Number
0-14713.
[x] Incorporated herein by reference is the applicable Exhibit to Company's
Registration Statement on Form S-2, File Number 33-63785.
[xi] Incorporated herein by reference is the applicable Exhibit to Company's
Report on Form 10-Q for the quarter ended September 30, 1995, File Number
0-14713.
[xii] Incorporated herein by reference is the applicable Exhibit to Company's
Report on Form 10-Q for the quarter ended December 31, 1995, File Number
0-14713.
[xiii] 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.
[xiv] Incorporated herein by reference is the applicable Exhibit to Company's
Registration Statement on Form S-1, File Number 33-5743.
20
Interleaf, Inc.
[xv] Incorporated herein by reference is Exhibit 1 to Company's Registration
Statement on Form 8-A, filed July 27, 1988.
[xvi] 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.
[xvii] Incorporated herein by reference is the applicable Exhibit to Company's
Report on Form 10-Q for the quarter ended June 30, 1997, File Number
0-14713.
21