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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-Q
/ X / QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934.
For the Quarterly period ended JUNE 30, 1999 .
or
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934.
For the transition period from _________________ to _____________.
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
of incorporation or organization) identification number)
62 FOURTH AVENUE, WALTHAM, MA 02451
(Address of principal executive offices) (Zip Code)
(781) 290-0710
(Registrant's telephone number,
including area code)
Indicate by check / X / 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 August 11, 1999 was 11,471,968.
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TABLE OF CONTENTS
PAGE
PART I - FINANCIAL INFORMATION
ITEM 1 - Financial Statements
Consolidated balance sheet at June 30, 1999 and March 31, 1999....................................... 3
Consolidated statement of operations for the three months ended
June 30, 1999 and 1998 ............................................................................... 4
Consolidated statement of cash flow for the three months ended
June 30, 1999 and 1998 ............................................................................... 5
Notes to consolidated financial statements ........................................................... 6
ITEM 2 - Management's Discussion and Analysis of Financial Condition
and Results of Operations .................................................................. 9
PART II - OTHER INFORMATION
ITEM 6 - Exhibits and Reports on Form 8-K ............................................................ 15
SIGNATURES ........................................................................................... 15
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PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
INTERLEAF, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
JUNE 30, 1999 MARCH 31, 1999
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(UNAUDITED)
In thousands, except for share and per share amounts
ASSETS
Current assets
Cash and cash equivalents $ 12,901 $ 16,479
Accounts receivable, net of reserve for doubtful accounts of $1,064
at June 30, 1999 and $1,123 at March 31, 1999 12,090 12,008
Prepaid expenses and other current assets 2,001 1,541
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Total Current Assets 26,992 30,028
Property and equipment, net 2,050 2,120
Intangible assets, net 7,942 5,222
Other assets 427 442
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Total Assets $ 37,411 $ 37,812
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LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities
Accounts payable $ 1,715 $ 2,224
Accrued expenses 10,358 11,184
Unearned revenue 10,742 11,492
Accrued restructuring 966 953
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Total Current Liabilities 23,781 25,853
Long-term restructuring 1,074 1,234
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Total Liabilities 24,855 27,087
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Redeemable common stock- shares issued and outstanding, none at
June 30, 1999 and 469,093 at March 31, 1999 -- 1,496
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Shareholders' Equity
Preferred stock, par value $.10 per share, authorized 5,000,000 shares:
Senior Series B Convertible, shares issued and outstanding, 726,003
at June 30, 1999 and March 31, 1999 73 73
6% Convertible, shares issued and outstanding, none at
June 30, 1999 and 1,050 at March 31, 1999 -- --
Common stock, par value $.01 per share, authorized 50,000,000 shares, issued and
outstanding, 11,463,747 at June 30, 1999 and
9,913,209 at March 31, 1999 115 99
Additional paid-in capital 98,007 94,795
Retained earnings (accumulated deficit) (84,925) (85,197)
Cumulative translation adjustment (714) (541)
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Total Shareholders' Equity 12,556 9,229
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Total Liabilities and Shareholders' Equity $ 37,411 $ 37,812
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THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED FINANCIAL
STATEMENTS.
-3-
INTERLEAF, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF OPERATIONS
Three months ended June 30
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(unaudited)
1999 1998
In thousands, except for per share amounts
Revenues:
Products $ 3,067 $ 2,227
Maintenance 5,095 5,848
Services 4,844 2,933
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Total revenues 13,006 11,008
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Costs of Revenues:
Products 516 636
Maintenance 791 825
Services 4,632 2,697
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Total costs of revenues 5,939 4,158
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Gross margin 7,067 6,850
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Operating Expenses:
Selling, general and administrative 5,802 4,970
Research and development 1,063 1,773
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Total operating expenses 6,865 6,743
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Income from operations 202 107
Other income 167 147
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Income before income taxes 369 254
Provision for income taxes 97 --
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Net Income 272 254
Dividends on Preferred Stock (2) (574)
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Net income (loss) applicable to common shareholders $ 270 $ (320)
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Income (loss) Per Share:
Basic $ 0.02 $ (0.05)
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Diluted $ 0.02 $ ( 0.05)
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Shares used in computing basic income (loss) per share 11,101 6,126
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Shares used in computing diluted income (loss) per share 12,426 6,126
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THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED FINANCIAL
STATEMENTS.
-4-
INTERLEAF, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOW
Three months ended June 30
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(unaudited)
1999 1998
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In thousands
Cash Flows from Operating Activities:
Net income $ 272 $ 254
Adjustments to reconcile net income to net cash provided by (used
in) operating activities:
Depreciation and amortization expense 665 688
Changes in assets and liabilities:
(Increase) decrease in accounts receivable, net (253) 4,306
(Increase) decrease in other assets (96) 323
Decreases in accounts payable and accrued expenses (872) (708)
Decreases in unearned revenue (773) (1,612)
Decreases in other liabilities (140) (931)
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Net cash provided by (used in) operating activities (1,197) 2,320
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Cash Flows from Investing Activities:
Capital expenditures (296) (92)
Acquisitions (783) --
Capitalized software development costs (1,570) --
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Net cash used in investing activities (2,649) (92)
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Cash Flows from Financing Activities:
Net proceeds from issuance of common stock 516 26
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Net cash provided by financing activities 516 26
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Effect of exchange-rate changes on cash (248) 120
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Net increase (decrease) in cash and cash equivalents (3,578) 2,374
Cash and cash equivalents at beginning of period 16,479 21,112
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Cash and cash equivalents at end of period $ 12,901 $ 23,486
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THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED FINANCIAL
STATEMENTS.
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INTERLEAF, INC. AND SUBSIDIARIES
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, 1999.
2. RECENTLY ISSUED ACCOUNTING STANDARDS
On June 15, 1998, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards No. 133, ACCOUNTING FOR
DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES (FAS 133). FAS 133 is
effective for all fiscal quarters of all fiscal years beginning after
June 15, 2000 (April 1, 2001 for the Company). FAS 133 requires that all
derivative instruments be recorded each period in current earnings or other
comprehensive income, depending on whether a derivative is designated as
part of a hedge transaction and, if it is, the type of hedge transaction.
The Company believes the adoption of SFAS 133 will have no material impact
to its operating results or financial position.
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3. EARNINGS PER SHARE
The following table sets forth the computation of basic and diluted earnings
(loss) per share:
THREE MONTHS ENDED
JUNE 30,
1999 1998
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In thousands, except for per share amounts
NUMERATOR:
Net Income $ 272 $ 254
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Preferred Stock Dividends:
Senior Series C Convertible -- (126)
Senior Series D Convertible (2) (112)
Preferred Stock Deemed Dividend:
Senior Series D Convertible -- (336)
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(2) (574)
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Numerator for basic and diluted income (loss) per share:
Net income (loss) available to common stockholders 270 (320)
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DENOMINATOR:
Denominator for basic earnings per share:
Weighted average shares 11,101 6,126
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Effect of dilutive securities:
Series B convertible Preferred Stock 325 --
Series C convertible Preferred Stock -- --
Series D convertible Preferred Stock -- --
Stock options 744 --
Stock purchase plan 70 --
Warrants 186 --
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Dilutive potential common shares 1,325 --
Denominator for diluted earnings per share
adjusted weighted average shares and assumed conversions 12,426 6,126
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Basic earnings (loss) per share $ 0.02 $ (0.05)
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Diluted earnings (loss) per share $ 0.02 $ (0.05)
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For the three months ended June 30, 1999, potential common shares of 53
were excluded from the computation of diluted earnings per share because
the effect would have been antidilutive. For the three months ended June
30, 1998, potential common shares of 3,327 were excluded from the
computation of diluted earnings per share because the Company had a net
loss applicable to common shareholders, and the effect would have been
antidilutive.
-7-
4. ACQUISITION
Effective April 7, 1999, the Company acquired certain assets and assumed
certain liabilities of Texcel A.B., Texcel Research, Inc. and Texcel U.K.
Limited (collectively "Texcel"). Texcel provides software and services to
corporations and government agencies that depend on information access and
efficient reuse of that information for competitive advantage. The Company
paid cash of $.5 million, excluding a loan to Texcel of $.3 million, issued
250,000 shares of common stock valued at $.8 million, and issued warrants
to purchase 200,000 shares of common stock valued at $.1 million. In
connection with the acquisition, the net liabilities to provide support
services to Texcel customers, partially offset by the fair value of fixed
assets acquired, were recorded at $.1 million. The Company also recorded
$1.5 million of goodwill which will be amortized on a straight-line basis
over an estimated useful life of 5 years.
5. SEGMENT INFORMATION
The Company develops and markets software products and services which
address two distinct markets, referred to as "e-publishing" and
"e-content". The Company's traditional solutions, which are used in the
creation, publication, management and distribution of electronic and paper
documents are targeted to the e-publishing market.
Interleaf's e-content solutions are comprised of a new software product,
called BladeRunner, and related services, and are targeted at a market
called "Content Management". During fiscal 1999, Interleaf realized that
its e-publishing and e-content segments require different resources,
strategies and investments in order to be successful, and that the
measurement of success is very different for each. As a result, during the
first quarter of fiscal 2000, the Company has dedicated separate
development, sales and support resources to its e-publishing and e-content
divisions. Consistent with the separation of resource for these two
divisions, the Company has changed its reporting segments to separately
reflect results from the e-publishing and e-content divisions.
The following summarizes the result of the Company's e-publishing and
e-content divisions for the three months ended June 30, 1999 and 1998,
respectively.
E-PUBLISHING E-CONTENT TOTAL
THREE MONTHS ENDED JUNE 30, 1999
Product $ 2,004 $ 1,063 $ 3,067
Maintenance 5,000 95 5,095
Services 4,397 447 4,844
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Total Revenue $11,401 $ 1,605 $13,006
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Operating Income 1,525 $(1,323) $ 202
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THREE MONTHS ENDED JUNE 30, 1998
Product $ 2,227 -- $ 2,227
Maintenance 5,848 -- 5,848
Services 2,933 -- 2,933
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Total Revenue $11,008 $ -- $11,008
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OPERATING INCOME $ 107 $ -- $ 107
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-8-
The following are reconciliations to corresponding totals in the accompanying
consolidated statements:
Three Months Ended
June 30,
1999 1998
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Income for reportable segments $202 107
Non-operating income 75 (4)
Interest income, net 92 151
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Income before taxes $369 $254
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6. CREDIT AGREEMENT
At June 30, 1999 and March 31, 1999, the Company had outstanding letters of
credit aggregating $.8 and $.9 million, respectively, expiring between
December 31, 1999 and October 31, 2001. These letters of credit guarantee
payments on two leases and future payments for an acquisition that occurred
in fiscal 1999. The letters of credit are secured by equal amounts of cash
and are reduced by the amount of the respective payments.
7. COMPREHENSIVE INCOME (LOSS)
Comprehensive income for the period is equal to net income plus "other
comprehensive income," which, for the Company, consists of the change in
cumulative translation adjustments during the period. Total comprehensive
income for the quarter ended June 30, 1999 was $.1 million. For the quarter
ended June 30, 1998, total comprehensive income was $.3 million.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
OVERVIEW
The Company reported net income of $.3 million on total revenues of $13.0
million for fiscal 2000 first quarter ended June 30, 1999. This compares with
net income of $.3 million on total revenues of $11.0 million for fiscal 1999
first quarter ended June 30, 1998. During the first quarter of fiscal 1999, the
Company recorded total dividends on preferred stock of $.6 million. Therefore,
after dividends on preferred stock, the Company's net loss applicable to common
stockholders was $.3 million.
The increase in total revenues of $2.0 million (18%) in the first quarter of
fiscal 2000 compared with the same period of fiscal 1999 was due to an
increase in product revenue from sales of the Company's new e-content
products and the inclusion of services revenue from PDR Automated Systems and
Publications, Inc. ("PDR") in the first quarter of fiscal 2000, neither of
which were present in the first quarter of fiscal 1999. The first quarter of
fiscal 2000 marked the initial general customer shipments of e-content
products by the Company. PDR was acquired in the second quarter of fiscal
1999, and therefore, was not included in the results for the first quarter of
fiscal 1999.
-9-
Effective April 7, 1999, the Company acquired certain assets and assumed certain
liabilities of Texcel Research, Inc. and Texcel U.K. Limited (collectively
"Texcel"). Texcel provides software and services to corporations and government
agencies that depend on information access and efficient reuse of that
information for competitive advantage. The Company paid cash of $.5 million,
excluding a loan to Texcel of $.3 million, issued 250,000 shares of common stock
valued at $.8 million, and issued warrants to purchase 200,000 shares of common
stock valued at $.1 million. In connection with the acquisition, the net
liabilities to provide support services to Texcel customers, partially offset by
the fair value of fixed assets acquired, were recorded at $.1 million. The
Company also recorded $1.5 million of goodwill which will be amortized on a
straight-line basis over an estimated useful life of 5 years.
During fiscal 1999, Interleaf realized that its e-publishing and e-content lines
of business require different resources, strategies and investments in order to
be successful, and that the measurement of success is very different for each.
As a result, during the first quarter of fiscal 2000, the Company separated them
into two divisions and dedicated separate development, sales and support
resources . Consistent with the separation of resources for these two divisions,
the Company has changed its reporting segments to separately reflect results
from the e-publishing and e-content divisions.
REVENUES
PRODUCT: Total product revenue increased by $.8 million in the first quarter of
fiscal 2000 compared with the first quarter of fiscal 1999. The increase is due
to $1.1 million in sales of the Company's new e-content products, BladeRunnerTM
and Information Manager, a product acquired from Texcel in the first quarter of
fiscal 2000 and which is being incorporated into BladeRunner. The increase in
product revenues due to sales of the e-content products was partially offset by
a decrease in sales of the Company's e-publishing products. The e-publishing
products represent the Company's legacy products in the complex publishing and
document management markets. The decrease represents a continuing trend for
these products and is mainly attributable to two factors. The first 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 second factor 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.
MAINTENANCE: Total maintenance revenue declined by $.8 million (13%) in the
first quarter of fiscal 2000 compared with the first quarter of fiscal 1999. The
decline was attributable to the Company's e-publishing segment, which accounted
for 98% of total maintenance revenues. The first quarter of fiscal 2000
represented the first general customer shipments of e-content products and,
therefore, the first maintenance revenue recognized for the segment. 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 content management products.
SERVICES: Services revenue, consisting of consulting and training revenue,
increased by $1.9 million in the first quarter of fiscal 2000 compared with the
same period of the prior year. The increase in services revenue is mainly
attributable to the acquisition of PDR, which generated $1.7 million of revenue
in the quarter. PDR was acquired in the second quarter of fiscal 1999 and,
therefore, the results of PDR's operations are not included in the Company's
operating results for the first quarter of fiscal 1999. The Company's new
e-content segment generated $.4 million of services revenue during the first
quarter of fiscal 2000 which more than offset a $.2 million decrease in services
revenue from the e-publishing segment, exclusive of PDR.
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FISCAL 2000: During fiscal 1999, the Company developed and released several
upgrades to its traditional products. In the first quarter of fiscal 2000, the
Company released the first commercially available version of its content
management software product, BladeRunner. Also, a content management product
(Information Manager) providing complementary functionality was acquired from
Texcel. Information Manager is being incorporated into BladeRunner. Growth in
revenues during fiscal 2000 will be largely dependent on the introduction and
customer acceptance of the new and enhanced software products released in fiscal
1999 and 2000, and the Company's success in leveraging software products with
services to provide content management solutions to its customers, improving
sales force productivity and the effectiveness of the Company's investment in
marketing and lead generation programs.
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 $.1 million in the first quarter of fiscal 2000 compared
with the same period of the prior year. The decrease in cost of product revenue
is mainly attributable to a decrease in capitalized software development
amortization expense and reduced costs of outsourced manufacturing in fiscal
2000. The cost of product revenue for the first quarter of fiscal 1999 included
start up costs incurred when changing outsource manufacturers. The cost of
maintenance revenue increased as a percentage of maintenance revenue from 14% in
fiscal 1999 to 16% in fiscal 2000. Savings from reduced staffing in the
Company's e-publishing business segment were offset by the additional support
staff acquired from Texcel. The cost of services revenue increased by $1.9
million in the first quarter of fiscal 2000 compared with the first quarter of
fiscal 1999. The increase is attributable to the acquisition of PDR in the
second quarter and Interleaf Italia in the fourth quarter of fiscal 1999. The
lower gross margins in the services business reflect the higher costs of
attracting staff coupled with discounted pricing being offered by the Company to
gain market share in the e-content marketplace.
OPERATING EXPENSES
Selling, general and administrative ("SG&A") expenses increased by $.8 million
in the first quarter of fiscal 2000 compared with the same period of the prior
year. The increase is due to amortization of goodwill and intangible expense of
$.2 million related to the Company's fiscal 1999 and 2000 acquisitions, the
additional SG&A expenses incurred by Interleaf Italia and PDR of $.3 million and
additional selling and marketing expenses associated with the launch of the
e-content business segment. Amortization expenses and the SG&A associated with
Interleaf Italia and PDR were not included in SG&A for the first quarter of 1999
as those acquisitions occurred subsequent to that date.
Research and Development ("R&D") expenses consist primarily of personnel
expenses to support product development, net of capitalized software development
costs. In the first quarter of fiscal 2000, the Company's total product
development and engineering expenses, including capitalized software development
costs, were $2.7 million, representing 21% of revenues. This consisted of $1.1
million charged directly to R&D expense and $1.6 million of capitalized software
development costs. In the first quarter of fiscal 1999, the Company's product
development and engineering expenses were $1.8 million, representing 16% of
revenues. There were no software development costs capitalized in the first
quarter of fiscal 1999. The increase in product development and engineering in
fiscal 2000 is attributable to development work on the Company's new content
management product, BladeRunner, and to the acquisition of certain assets from
Texcel, which increased the Company's engineering personnel and related
expenses.
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LIQUIDITY AND CAPITAL RESOURCES
The Company had $12.9 million of cash and cash equivalents at June 30, 1999, a
decrease of $3.6 million from March 31, 1999. The decrease was mainly
attributable to capitalized software development costs of $1.6 million, cash
used in operating activities to support revenue growth of $1.2 million, cash
used in the acquisition of Texcel of $.8 million, cash used for capital
expenditures of $.3 million and the effect of exchange rate changes on cash of
$.2 million. These decreases were partially offset by the cash proceeds of a
common stock warrant exercise of $.5 million.
At June 30 and at March 31, 1999, the Company had outstanding letters of credit
aggregating $.8 and $.9 million, respectively, expiring between December 31,
1999 and October 31, 2001. These letters of credit guarantee payments on two
leases and the future payments for an acquisition that occurred. The letters of
credit are secured by equal amounts of cash and are reduced by the amount of the
respective payments.
At June 30, 1999 and March 31, 1999, the Company had approximately $1.1 million
of cash restricted for potential payment of a withholding tax assessment on its
German subsidiary related to payments remitted to the United States from Germany
in 1990. The Company is appealing this assessment.
The Company believes its current cash balances and cash generated from
operations, offset by restructuring payments, will be sufficient to meet the
Company's liquidity needs for fiscal 2000. However, the Company has determined
that it needs to increase its investment in the development, marketing and
promotion of its e-content solutions, and that it is therefore necessary for the
Company to raise additional capital. The net tangible asset listing criteria for
the NASDAQ National Market and the Company's financial condition dictate that
any such financing be an equity financing. The Company is presently in the
process of seeking additional equity capital through a private placement. The
securities offered in the private placement will not have been registered under
the Securities Act and will not be offered or sold absent registration or an
applicable exemption. However, the Company cannot guarantee that financing
through this private placement, or otherwise, can be obtained or that it can be
obtained on commercially reasonable terms or without incurring substantial
dilution to existing stockholders.
YEAR 2000
BACKGROUND
Some computers, software and other equipment include programming code in which
calendar year data is abbreviated to only two digits. As a result of this design
decision, some of the systems do not properly recognize a year that begins with
"20" instead of "19". These problems are widely expected to increase in
frequency and severity as the year 2000 approaches, and are commonly referred to
as the "Millenium Bug" or "Year 2000 problem".
INTERLEAF APPROACH
Interleaf established a Year 2000 project team to address all aspects of the
Year 2000 problem in each area of its business. The project team has four areas
of focus, each with its own project manager. These four areas are: (1) the
software that is created by Interleaf and sold to customers; (2) internal
business systems; (3) the hardware and operating system software used by
employees; and (4) facilities and critical vendors other than computer
suppliers.
INTERLEAF CREATED PRODUCTS
-12-
ASSESSMENT: In 1997 Interleaf began to focus on the Year 2000 problem regarding
its software products created for sale to customers. Products that generate the
most revenue or were most likely to experience Year 2000 problems were
prioritized for testing and repair. The assessment of these products was
completed in early 1998 and the repair process begun. The Company made the
decision to discontinue sales and support for certain low volume products and
computer platforms.
CUSTOMER COMMUNICATIONS: The Company sent a description of its Year 2000 product
strategy to all of its maintenance customers. It created and is maintaining a
Year 2000 product status page as part of its web site. Interleaf distributed
another mailing to the entire maintenance base describing the status of the year
2000 releases and including a list of retired products and platforms, in the
fourth quarter of calendar year 1998.
STATUS: Most major products have been tested and modified for most of the
computer platforms that will be supported beyond the year 2000. Upgrades which
correct any known Year 2000 problems with those products are available at no
extra charge to the customers with current maintenance contracts. Year 2000
upgrades were all completed for supported products by the end of the second
calendar quarter of 1999 for all major products and platforms. The extent of the
changes required ranges from simple recompilation with Year 2000 compliant
operating systems to extensive modifications.
Testing and repair of layered applications and low volume products has begun and
will be completed by the end of September, 1999. The Company expects that the
layered applications will not require significant modifications, since initial
analysis has indicated that there is no date handling performed by these
products. Moreover, in many instances the Company created layered applications
under specific contracts with specific customers, and not for general re-sale.
The Company believes that it has no obligation to modify those applications to
address the Year 2000 problem, unless the particular customers engage Interleaf
to fix those problems. All products under development are being developed to be
Year 2000 Compliant. The Company has received notices from a small number of
customers regarding non-compliance of unsupported products, and to date the
Company has successfully resolved those issues without material cost. The
Company cannot predict whether or not claims may be asserted with respect to
non-supported products, either due to a breakdown in the customer communications
process, to contractual obligations not understood by its customer or by
Interleaf, or for other reasons.
INTERNAL BUSINESS SYSTEMS
In the United States, Interleaf contracted an independent third party to perform
Year 2000 compliance testing on its critical internal business systems. Some
problems were identified and appropriate modifications were made. The systems
were then re-tested and performed successfully. The software vital to corporate
operations has been proven by the independent third party to function without
problems related to the millenium change. The Company has investigated and
received assurances from the vendors that all critical internal business
software in North America and Europe is Year 2000 ready.
The assessment phase is now underway for business software used in Japan and
Australia. The Company intends to have compliance assured by October 1999.
HARDWARE AND OPERATING SYSTEMS SOFTWARE
Assessment of the systems used by employees began in early 1997 and has been
completed. The Company has developed a plan to upgrade or replace all critical
systems used by employees, including all hardware in the enterprise from servers
to laptops. The upgrade/replacement process began in early 1998 and is
approximately 70% complete. The entire process is expected to be complete by the
end of September 1999.
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FACILITIES AND CRITICAL VENDORS
In the fourth calendar quarter of 1998 Interleaf began discussions with facility
management of its leased office spaces to ensure that the proper actions are
taken to avoid disruption of productivity in all Interleaf facilities. Two major
elements of Interleaf's business, payroll and product manufacturing, are
outsourced. Interleaf has been assured by those service providers that operation
of these critical business areas will not be affected by the millenium change.
COST
The costs of the Interleaf Year 2000 efforts are being funded out of cash flow
from operations. The total cost associated with the required modifications and
upgrades associated with the Year 2000 projects is not expected to be material
to the Company's financial position. The process of repairing and testing the
software that Interleaf creates for sale has been done with existing budgeted
personnel. The Year 2000 testing equipment and lab environment have been created
using existing equipment and space. The capital costs associated with the
upgrade and replacement of corporate and field office computing environment is
expected to be $400,000. These expenditures began in late 1997 and will continue
through the third calendar quarter of 1999. Software maintenance costs
attributable to the Year 2000 will be approximately $50,000. Labor associated
with this process of implementing the internally used systems was provided by
existing budgeted personnel.
RISK
Interleaf has made a significant effort to address its Year 2000 issues. At this
time, there are no identifiable significant risks associated with its Year 2000
readiness, although there is a risk the unanticipated problems may arise. The
Company has prepared a contingency plan to address reasonably likely worst case
business operations scenarios.
FORWARD-LOOKING STATEMENTS
This Quarterly Report on Form 10-Q contains forward-looking statements
concerning the Company's performance and business operations. The Company wishes
to caution readers of this Quarterly Report on Form 10-Q that actual future
results may differ materially from the projections or suggestions made in such
forward-looking statements.
Factors which might cause actual future results to differ materially from those
projected in the forward-looking statements contained herein include the
following: The Company's ability to continue to develop and market new and
enhanced products and services, particularly the Company's content management
productsand services; delays in the development and introduction of such new and
enhanced products and services; failure to achieve customer and market
acceptance of the Company's new and enhanced products and services; delays in
the growth and development of market demand for content management software
products; inability to increase maintenance contract revenue related to content
management products; inability to increase revenue from consulting and training
contracts with respect to the introduction of new products; inability to improve
sales force productivity; the Company's ability to keep pace with the rapid
technological change in its industry and compete with companies which have
greater market penetration, and greater financial, technical and marketing
resources; failure to adequately protect the Company's intellectual property;
inability to establish or maintain strategic relationships with companies that
have presence and expertise in the markets and market segments targeted by the
Company; the inability of the Company to make acquisitions of, or significant
investments in, businesses that offer complementary products and technologies;
and failure to integrate the operations, information systems and personnel of
any acquired businesses. Certain of these and other
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factors which might cause actual results to differ materially from those
projected are more fully set forth under the caption "Risk Factors" on pages
20-22 of the Company's Annual Report on Form 10-K for the fiscal year ended
March 31, 1999.
PART II - OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
EXHIBIT NUMBER DESCRIPTION
3(a) Restated Articles of Organization of the
Company, as amended (incorporated herein by
reference to the applicable Exhibit in the
Company's Quarterly Report on Form 10-Q for the
quarter ended September 30, 1997)
3(b) By-Laws of the Company, as amended
(incorporated herein by reference to the
applicable Exhibit to the Company's Annual
Report on Form 10-K for the year ended March
31, 1994)
4(a) Specimen Certificate for Shares of the
Company's Common Stock (incorporated herein by
reference to Exhibit 4.01 to the Company's
Annual Report on Form 10-K for the fiscal year
ended March 31, 1999)
10 Asset Purchase Agreement dated April 7, 1999 by
and among Interleaf, Inc., Texcel International
AB, Texcel Research, Inc. and Texcel (UK)
Limited (incorporated herein by reference to
Exhibit 4.3 to the Company's Registration
Statement on Form S-3 dated May 6, 1999, File
Number 333-77907)
11 Computation of Earnings Per Share (included as
Note 3 to Financial Statements)
27 Financial Data Schedule
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
August 16, 1999
/s/ PETER J. RICE
---------------------------------------------
Peter J. Rice,
Vice President of Finance and Administration
and Chief Financial Officer and Treasurer
(Principal Financial and Accounting Officer)
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