-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, JLr7uzbgg5DHfjGSiti1b23BPeuYaMjO4/Ob1antVx81C9GoR+5MINzYRPWtzb1x CCK8Uh1aoARJbJyf0xW8Bw== 0000912057-96-025748.txt : 19961113 0000912057-96-025748.hdr.sgml : 19961113 ACCESSION NUMBER: 0000912057-96-025748 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 6 CONFORMED PERIOD OF REPORT: 19960930 FILED AS OF DATE: 19961112 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: INTERLEAF INC /MA/ CENTRAL INDEX KEY: 0000793604 STANDARD INDUSTRIAL CLASSIFICATION: SERVICES-PREPACKAGED SOFTWARE [7372] IRS NUMBER: 042729042 STATE OF INCORPORATION: MA FISCAL YEAR END: 0331 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 000-14713 FILM NUMBER: 96659845 BUSINESS ADDRESS: STREET 1: PROSPECT PLACE STREET 2: 9 HILLSIDE AVE CITY: WALTHAM STATE: MA ZIP: 02154 BUSINESS PHONE: 6172900710 10-Q 1 10-Q - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 -------------------- 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, 1996 COMMISSION FILE NUMBER 0-14713 [LOGO] INTERLEAF, INC. (exact name of registrant as specified in its charter) MASSACHUSETTS 04-2729042 (State or other jurisdiction (I.R.S. employer identification number) of incorporation or organization) 62 FOURTH AVENUE, WALTHAM, MA 02154 (Address of principal executive offices) (Zip Code) (617) 290-0710 (Registrant's telephone number, including area code) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes _X_ No ___ APPLICABLE ONLY TO CORPORATE ISSUERS The number of shares outstanding of the issuer's Common Stock, $.01 par value, as of October 31,1996 was 17,459,219. - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- INTERLEAF, INC. TABLE OF CONTENTS Page ---- PART I - FINANCIAL INFORMATION Item 1 - Financial Statements Consolidated balance sheets at September 30, 1996 and March 31, 1996 . . . . 3 Consolidated statements of operations for the three and six months ended September 30, 1996 and 1995. . . . . . . . . . . . . . . . . . . . . . 4 Consolidated statements of cash flows for the six months ended September 30, 1996 and 1995. . . . . . . . . . . . . . . . . . . . . . . . . 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 4 - Submission of Matters to Vote of Security Holders . . . . . . . . .15 Item 5 - Other Information . . . . . . . . . . . . . . . . . . . . . . . . .15 Item 6 - Exhibits and Reports on Form 8-K. . . . . . . . . . . . . . . . . .15 SIGNATURE. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .15 2 INTERLEAF, INC. PART I - FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS CONSOLIDATED BALANCE SHEETS
September 30, 1996 March 31, 1996 In thousands, except for share and per share amounts (unaudited) ASSETS CURRENT ASSETS Cash and cash equivalents $ 4,942 $ 12,725 Accounts receivable, net 15,890 19,771 Prepaid expenses and other current assets 2,013 2,112 -------- -------- TOTAL CURRENT ASSETS 22,845 34,608 Property and equipment, net 7,521 7,800 Intangible assets 7,864 6,164 Other assets 628 344 -------- -------- TOTAL ASSETS $ 38,858 $ 48,916 -------- -------- -------- -------- LIABILITIES AND SHAREHOLDERS' EQUITY CURRENT LIABILITIES Short-term borrowings $ 374 $ - Accounts payable 2,982 2,908 Accrued expenses 13,804 13,252 Unearned revenue 11,444 15,986 Other current liabilities 4,830 1,348 -------- -------- TOTAL CURRENT LIABILITIES 33,434 33,494 Other liabilities 225 3 -------- -------- TOTAL LIABILITIES 33,659 33,497 -------- -------- SHAREHOLDERS' EQUITY Preferred stock, par value $.10 per share, authorized 5,000,000 shares: Series A Junior Participating, none issued and outstanding Senior Series B Convertible, issued and outstanding 861,911 at September 30, 1996 and 923,304 at March 31, 1996 86 92 Common stock, par value $.01 per share, authorized 30,000,000 shares, issued and outstanding 17,459,219 at September 30, 1996 and 16,697,988 at March 31, 1996 175 167 Additional paid-in capital 76,224 72,348 Retained earnings (deficit) (71,085) (56,958) Cumulative translation adjustment (201) (230) -------- -------- TOTAL SHAREHOLDERS' EQUITY 5,199 15,419 -------- -------- TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 38,858 $ 48,916 -------- -------- -------- --------
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 3 INTERLEAF, INC. CONSOLIDATED STATEMENTS OF OPERATIONS
Three months ended September 30 Six months ended September 30 1996 1995 1996 1995 In thousands, except for per share amounts (unaudited) (unaudited) REVENUES: Products $ 4,614 $ 9,273 $ 11,660 $18,710 Maintenance 7,410 8,399 14,882 16,191 Services 4,561 5,639 9,097 11,537 -------- ------- -------- ------- TOTAL REVENUES 16,585 23,311 35,639 46,438 -------- ------- -------- ------- COSTS OF REVENUES: Products 1,527 1,564 3,153 3,224 Maintenance 1,291 1,314 2,599 2,683 Services 4,362 4,767 8,562 9,576 -------- ------- -------- ------- TOTAL COSTS OF REVENUES 7,180 7,645 14,314 15,483 -------- ------- -------- ------- Gross Margin 9,405 15,666 21,325 30,955 -------- ------- -------- ------- OPERATING EXPENSES: Selling, general and administrative 10,481 10,871 21,903 21,853 Research and development 4,306 3,931 8,576 7,857 Restructuring expense 4,800 - 4,800 - -------- ------- -------- ------- TOTAL OPERATING EXPENSES 19,587 14,802 35,279 29,710 -------- ------- -------- ------- Income (loss) from operations (10,182) 864 (13,954) 1,245 Other income (expense) (145) 58 (173) 149 -------- ------- -------- ------- Income (loss) before income taxes (10,327) 922 (14,127) 1,394 Provision for income taxes - - - - -------- ------- -------- ------- NET INCOME (LOSS) $(10,327) $ 922 $(14,127) $ 1,394 -------- ------- -------- ------- -------- ------- -------- ------- Net income (loss) per share $ (0.59) $ .05 $ (0.82) $ .08 -------- ------- -------- ------- -------- ------- -------- ------- Shares used in computing net income (loss) per share 17,457 18,618 17,229 18,134 -------- ------- -------- ------- -------- ------- -------- -------
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 4 INTERLEAF, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS
Six months ended September 30 1996 1995 In thousands (unaudited) (unaudited) CASH FLOWS FROM OPERATING ACTIVITIES Net income (loss) $(14,127) $ 1,394 Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities: Restructuring expense 4,800 - Depreciation and amortization expense 3,901 3,863 Loss from disposal of property and equipment - 20 Changes in assets and liabilities: Decrease in accounts receivable, net 3,942 2,573 Decrease in other assets 341 293 Decrease in accounts payable and accrued expenses (49) (1,286) Decrease in unearned revenue (4,493) (2,399) Decrease in other liabilities (1,305) (1,662) Other, net 113 (83) -------- ------- Net cash provided by (used in) operating activities (6,877) 2,713 -------- ------- CASH FLOWS FROM INVESTING ACTIVITIES Capital expenditures (1,736) (441) Capitalized software development costs (737) (2,352) -------- ------- Net cash used in investing activities (2,473) (2,793) -------- ------- CASH FLOWS FROM FINANCING ACTIVITIES Short-term borrowings, net 374 - Net proceeds from issuance of common stock 1,250 2,009 Repayment of long-term debt and capital leases (4) (1,674) -------- ------- Net cash provided by financing activities 1,620 335 -------- ------- Effect of exchange-rate changes on cash (53) (50) -------- ------- Net increase (decrease) in cash and cash equivalents (7,783) 205 Cash and cash equivalents at beginning of period 12,725 10,441 -------- ------- Cash and cash equivalents at end of period $ 4,942 $10,646 -------- ------- -------- -------
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 5 INTERLEAF, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) 1. Basis of Presentation The consolidated financial statements include the accounts of Interleaf, Inc. and its subsidiaries. All significant intercompany balances and transactions have been eliminated in consolidation. Interleaf, Inc. and its subsidiaries are collectively referred to as the "Company." Certain 1995 amounts have been reclassified to conform to the 1996 method of presentation. The accompanying unaudited consolidated financial statements have been prepared in accordance with generally accepted accounting principles for interim financial information and with the instructions to Form 10-Q and Rule 10-01 of Regulation S-X. Accordingly, they do not include all financial information and disclosures required by generally accepted accounting principles for complete financial statements. In the opinion of management, these financial statements include all adjustments (consisting only of normal recurring accruals) necessary for a fair presentation of the results of operations for the interim periods reported and of the financial condition of the Company as of the date of the interim balance sheet. The results of operations for interim periods are not necessarily indicative of the results to be expected for the full year. These financial statements should be read in conjunction with the Company's audited consolidated financial statements and related notes included in the Company's Annual Report on Form 10-K for the year ended March 31, 1996. 2. Net Income (Loss) Per Share Per share amounts are calculated using the weighted average number of common shares and common share equivalents outstanding during periods of net income. Common share equivalents are attributable to stock options, common stock warrants and convertible preferred stock. Per share amounts are calculated using only the weighted average number of common shares outstanding during periods of net loss. Fully diluted earnings per share is not materially different from reported primary earnings per share. 3. Acquisition On May 1, 1996, the Company purchased all of the outstanding equity securities of The Learning Alliance, Inc. ("TLA") for $2,690,000. The Company issued 341,500 shares of common stock to the selling shareholders of TLA for the entire purchase amount. TLA provides sales training services and develops and markets related software for the sales force automation and integration marketplace. The acquisition was accounted for using the purchase method of accounting, whereby the purchase price was allocated to the assets acquired and liabilities assumed based on their respective fair market values. The acquisition resulted in goodwill of approximately $2.6 million which is being amortized over five years and is included in Intangible Assets. The operating results of TLA have been included in the consolidated financial statements since the date of the acquisition. Pro forma presentations have not been included as the acquisition was not material to the results of operations of the Company. 6 INTERLEAF, INC. 4. Noncash Financing Activities Senior Series B Convertible Preferred Stock holders converted 61,393 and 496,429 shares of preferred stock into 82,496 and 667,077 shares of the Company's common stock during the six months ended September 30, 1996 and 1995, respectively. The Company issued 171,635 shares of common stock, during the six months ended September 30, 1995, in connection with the exercise of a warrant. The Company received no proceeds upon the conversion of the warrant into common stock. 5. Credit Agreement The Company has a revolving line of credit of up to $10 million from a major commercial lender. The credit agreement also provides for the issuance of letters of credit of up to $2 million. Borrowings from the line of credit bear interest at the higher of 9% or prime rate plus 2% and are secured by substantially all tangible and intangible domestic assets of the Company. Outstanding letters of credit bear interest at 2%. The credit agreement expires in May 1997, but may be extended annually for successive one year periods with the consent of the lender. At September 30, 1996, there was approximately $0.4 million outstanding under this line of credit. Borrowings under the credit agreement are based on the level of eligible North American accounts receivable, modified by cash collections during the previous 90 days. As of September 30, 1996, approximately $1.0 million of standby letters of credit were outstanding and the amount available for additional borrowings was approximately $1.4 million. The agreement contains certain financial covenants relating to the Company's current ratio, tangible net worth, and working capital, as well as restrictions on certain additional indebtedness, acquisitions, capital expenditures, and dividend payments. 6. Restructuring In July 1996, the Company announced a restructuring plan and recorded a charge of $4.8 million to reduce employment by approximately 75 people, to close or reduce space in seven sales offices, and to implement the second and final stage of relocating corporate headquarters to smaller and less expensive space. The employee terminations affected all groups throughout the organization. Cash outlays are anticipated to be approximately $4.1 million of the total $4.8 million restructuring charge and will require lease payments through December 2000. Approximately $1.3 million of the restructuring charge was for employee termination benefits and $3.5 million for other exit costs, primarily related to facility leases. In October 1996, the Company announced a restructuring plan to further reduce employment by approximately 100 people and to close or reduce space in six sales offices. The employee terminations affected all groups throughout the organization. During the third quarter of fiscal 1997, the Company will record a charge of approximately $3.0 million to $4.0 million to cover costs associated with the restructuring. During the six months ended September 30, 1996, the Company paid approximately $0.9 million for employee termination benefits and approximately $0.4 million, net of sublease receipts, related to the July 1996 and fiscal 1995 restructurings. 7 INTERLEAF, INC. 7. Shareholders' Equity On October 15, 1996, the Company issued 1,004,904 shares of newly authorized Series C Convertible Preferred Stock ("Series C") at a price of $9.9512 per share. The Company received net proceeds of approximately $9.4 million which will be used for working capital and general corporate purposes. Each Series C share is initially convertible into 4 shares of common stock, which rate is adjustable upon certain issuances of common stock by the Company. Dividends of $0.24878 per share are payable on April 15, 1998 and October 15, 1998, and $0.49756 per share on each April 15 and October 15 thereafter. Holders of outstanding shares of Series C Preferred Stock are entitled to the number of votes equal to one-half the number of shares of common stock into which the Series C shares are convertible. Series C shareholders are entitled to receive upon liquidation an amount equal to $9.9512 per share plus any declared or accrued but unpaid dividends, which amount is payable prior to any payments to holders of the Series B Preferred Stock and common stock. Series C shareholders must convert their shares into common stock upon the consolidation, merger or sale of substantially all assets of the Company or, subject to certain conditions, if the Company's common stock trades for twenty consecutive days above $3.7317. The Company may, at its option, redeem the Series C shares on or after October 16, 1999. The initial redemption premium is 25%, which decreases 5% annually until October 16, 2004. On September 12, 1996, the Board of Directors authorized a repricing program which allows employees to elect to reprice all or some of their outstanding options, ranging in exercise price from $2.75 to $10.75 per share, to the September 12, 1996 closing price of $2.5625. Any options repriced may not be exercised until March 12, 1997. Options for approximately 2.3 million shares are eligible to be repriced. 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. The Company is appealing this assessment, however, approximately $1.1 million of the cash and cash equivalents balance at September 30, 1996 is restricted for potential payment of the German withholding taxes. The Company believes the final outcome will not have a material adverse effect on results of operations of the Company. 8 INTERLEAF, INC. ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS RESULTS OF OPERATIONS Overview The Company recorded a net loss of approximately $10.3 million, on total revenues of $16.6 million, for the second quarter and a net loss of approximately $14.1 million, on total revenues of $35.6 million, for the six months ended September 30, 1996. This compares with net income of approximately $0.9 million, on total revenues of $23.3 million, for the second quarter and net income of approximately $1.4 million, on total revenues of $46.4 million, for the six months ended September 30, 1995. As a result of the significant decline in revenues the Company has initiated two restructuring plans, in July 1996 and October 1996, to reduce worldwide employment and facility costs. A $4.8 million restructuring charge was recorded in July 1996 and a restructuring charge of approximately $3.0 to $4.0 million will be recorded during the third quarter. Combined, these restructurings reduced employment by approximately 175 people, approximately one-third of the Company's worldwide workforce prior to the July restructuring. In addition, the Company has or will close or reduce space in 12 sales offices and implement the second and final stage of relocating corporate headquarters to smaller and less expensive space. See Note 6 to the Consolidated Financial Statements. REVENUES Total revenues decreased approximately $6.7 million (29%) and $10.8 million (23%) for the second quarter and six months ended September 30, 1996, when compared with the same periods a year ago. Revenue has declined in all geographic regions. Product revenue declined significantly during these periods as sales of the Company's stand-alone products continue to decrease. The Company has been refocusing its business strategy on providing document management applications targeted toward specific vertical and horizontal markets. While the Company has built well-accepted integrated document management ("IDM") based solutions for individual customers, it has not yet demonstrated the ability to develop, market and sell IDM applications. There is no assurance that the Company will be successful in implementing its 9 strategy, and therefore the Company is unable to predict if or when product revenues will 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, resulting from contracts to provide telephone support and upgrades to the Company's software products, declined approximately 12% and 8% during the second quarter and six months ended September 30, 1996, respectively, when compared with the same periods a year ago, primarily due to significant renewal contract volume in the second quarter of the prior year which was not duplicated this year. Services revenue, consisting of consulting and customer training revenue, decreased approximately 19% and 21% for the second quarter and six months ended September 30, 1996, respectively, when compared with the same periods a year ago. The Company leverages software product licensing with services to provide IDM solutions to its customers. In fiscal 1996, the Company had several large consulting projects, which were completed during early fiscal 1996, that have not been replaced with similar sized projects. This was primarily attributable to the decline in product licensing over the past few quarters. COSTS OF REVENUES Cost of product revenues remained relatively stable as increased amortization of capitalized software development costs was offset by lower direct product costs associated with the decrease in product license revenue. Because of the decline in product revenues, however, cost of product revenues increased as a percentage of product revenues to 33% and 27% for the second quarter and six months ended September 30, 1996, respectively, compared with approximately 17% and 17% for the corresponding periods in the prior year. Cost of maintenance revenues remained relatively stable in both amount and as a percentage of maintenance revenues relative to the prior year. Cost of services revenue decreased primarily as a result of a decline in services personnel. However, cost of services revenue increased as a percentage of services revenue to approximately 96% and 94% for the second quarter and six months ended September 30, 1996, respectively, compared with approximately 85% and 83% for the corresponding periods in the prior year, as the decline in services revenue discussed above was only partially offset by the decline in services personnel. 10 OPERATING EXPENSES Selling, general and administrative ("SG&A") expenses remained relatively stable as a decline in selling costs were offset by increased investment in marketing programs and advertising campaigns. Because of the decrease in total revenues, SG&A expenses increased as a percentage of total revenues to approximately 63% and 61% for the second quarter and six months ended September 30, 1996, respectively, compared with approximately 47% and 47% for the corresponding periods in the prior year. SG&A expenses are expected to decrease as a result of the fiscal 1997 restructuring plans. Research and development ("R&D") expenses increased approximately 10% from the prior year primarily due to a reduction in capitalized software development costs partially offset by lower personnel expenses. For the second quarters ended September 30, 1996 and 1995, R&D expenses were approximately 26% and 17%, respectively, of total revenues. R&D spending, which excludes the offset for capitalized software development costs, represented approximately 27% and 22% of total revenues for the second quarters ended September 30, 1996 and 1995, respectively. For the six months ended September 30, 1996 and 1995, R&D expenses were approximately 24% and 17%, respectively, and R&D spending was approximately 26% and 22%, respectively, of total revenues. The Company's product development plans are to focus on IDM-based product offerings as well as enhancements to existing products. R&D spending is expected to decline as a result of the fiscal 1997 restructuring plans. LIQUIDITY AND CAPITAL RESOURCES The Company had approximately $4.9 million of cash and cash equivalents at September 30, 1996, a decrease of approximately $7.8 million from March 31, 1996. The decrease was primarily attributable to the Company's operations during the first six months of fiscal 1997 and payments associated with the July 1996 restructuring. Capital expenditures of approximately $1.7 million were principally for improvements to the Company's information systems infrastructure. These cash outflows were partially offset by common stock issuances related to the Company's incentive stock option plans and employee stock purchase plan of approximately $1.2 million. 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, 1996, the Company had approximately 11 $1.1 million of cash restricted for potential payment of German withholding taxes, and approximately $0.3 million as collateral for various lease commitments. As part of the Company's strategy to develop sales force automation and integration applications, the Company acquired The Learning Alliance, Inc. ("TLA") in May 1996 for $2,690,000. The Company issued 341,500 shares of common stock to the selling shareholders of TLA for the entire purchase amount (see Note 3 to the Consolidated Financial Statements for further discussion). Total accrued restructuring charges associated with both the fiscal 1995 and July 1996 restructuring plans were approximately $4.8 million at September 30,1996. Cash payments related to these restructurings are anticipated to continue until December 2000. As previously discussed, the Company announced a further restructuring plan in October (see Note 6 to the Consolidated Financial Statements for further discussion). The Company has a revolving line of credit from a major commercial lender. Borrowings from the line of credit are secured by substantially all tangible and intangible domestic assets of the Company. At September 30, 1996, there was approximately $0.4 million outstanding under this line of credit and the amount available for additional borrowings was approximately $1.4 million. At November 8, 1996, there were no loans outstanding under this line of credit and the amount available for borrowings was approximately $1.2 million. See Note 5 to the Consolidated Financial Statements regarding borrowing limits and restrictive covenants associated with the credit agreement. In October 1996, the Company sold Series C Convertible Preferred Stock in a private placement resulting in net proceeds of approximately $9.4 million (see Note 7 to the Consolidated Financial Statements for further discussion). The Company had approximately $13.8 million in cash and cash equivalents at October 31, 1996, which included restricted cash of approximately $1.4 million, and approximately $0.7 million oustanding under the line of credit. The objectives of the Company's two restructurings in the last four months and the Series C private placement were to enable the Company to return to a sustainable profitable condition. However, due to the uncertainty among the Company's customers and employees created by the Company's two restructurings, along with the downward trend in the Company's revenue, the Company is unable to predict with 12 certainty its future revenue. The Company will continue to closely monitor revenue and manage its expenses and cost structure accordingly. While the Company believes its current cash position will meet the Company's liquidity needs for the remainder of fiscal 1997, there can be no assurance in this regard, and there can be no assurance that the Company can fund its longer term ongoing business operations. If the Company's cash resources are insufficient to fund its operations at any time, there can be no assurance that the Company will be able to obtain additional capital or, if it does so, that such capital can be obtained at commercially reasonable terms or without incurring substantial dilution to existing shareholders. The Company has retained the investment banking firm Hambrecht & Quist LLC to assist it in exploring long-term strategic alternatives. RISK FACTORS 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 as a result of various potential risks and uncertainties including, but not limited to, the factors discussed below. The Company's future operating results are dependent on its ability to develop and market integrated document management software products and services that meet the changing needs of organizations with complex document management requirements. There are numerous risks associated with this process, including the uncertainty among customers and employees created by the Company's recent financial difficulties, rapid technological change in the information technology industry and the requirement to bring to market IDM solutions that solve complex business needs in a timely manner. In addition, the existing document publishing, electronic distribution, and document management markets are highly competitive. The Company competes against a number of companies for sales of its software products on both an individual product basis and integrated with services in large IDM solution sales. Sales cycles associated with IDM solution sales are long as organizations frequently require the Company to solve complex business problems which typically involve reengineering of their business processes. In addition, a high 13 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 will have a significant impact on the Company's operating results. 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. 14 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 8, 1996 ("Annual Meeting") the shareholders of the Company elected the following three nominees as Class III directors of the Company whose terms shall expire at the Company's 1999 shareholder meeting: David A. Boucher, by a vote of 15,477,533 in favor to 1,287,369 against, Frederick B. Bamber, by a vote of 15,539,983 in favor to 1,224,919 against, and Ed Koepfler, by a vote of 15,567,271 in favor to 1,197,631 against. The Company also has two Class I directors Clinton P. Harris (as a Preferred Class I director elected by the Senior Series B Preferred Shareholders) and G. Gordon M. Large, whose terms are set to expire at the annual shareholders' meeting in 1997, and one Class III director George D. Potter, Jr., whose term is set to expire at the annual shareholders' meeting in 1998. At the Annual Meeting, the shareholders ratified and approved the amendment to the Company's 1987 Employee Stock Purchase Plan to increase the number of shares of the Company's Common Stock available for issuance from 1,750,000 to 2,500,000 under the plan, by a vote of 14,799,328 in favor, 1,619,490 against, 86,577 abstentions, and 292,507 no votes. The shareholders also ratified and approved the selection of Ernst & Young LLP as the Company's independent auditors for fiscal 1997, by a vote of 16,591,663 in favor, 98,237 against, and 75,002 abstentions. A more complete description of these matters appears in the Company's 1996 Proxy Statement, dated June 28, 1996. Item 5. Other Information Effective as of November 12, 1996, G. Gordon M. Large has resigned as the Company's Executive Vice President, Chief Financial Officer, Treasurer, and as a Company Director. Effective as of the same date, the Board of Directors has elected Robert M. Stoddard as the Company's Vice President of Finance and Administration, Chief Financial Officer, and Treasurer. Effective November 4, 1996, Frederick J. Egan resigned as the Company's Vice President for Asia/Pacific/Japan, and as an executive officer. Item 6. Exhibits and Reports on Form 8-K (a) The exhibits listed in the accompanying Exhibit Index are filed as part of this Quarterly Report on Form 10-Q. (b) No reports were filed on Form 8-K by the Company during the quarter ended September 30, 1996. SIGNATURE Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. INTERLEAF, INC. November 11, 1996 /s/ G. Gordon M. Large ----------------------------------- G. Gordon M. Large Executive Vice President and Chief Financial Officer (Principal Financial and Accounting Officer) 15 INTERLEAF, INC. EXHIBIT INDEX EXHIBIT NUMBER DESCRIPTION METHOD OF FILING 3(a) Restated Articles of Organization of the Company, as [v] amended 3(b) By-Laws of the Company, as amended [v] 4(a) Specimen Certificate for Shares of the Company's [xiii] Common Stock 4(b) Rights Agreement, dated July 15, 1988, between the [xiv] 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 Included 10(a2) 1993 Incentive Stock Option Plan, as amended [viii] 10(b) Company's 1989 Director Stock Option Plan [i] 10(b2) Company's 1987 Employee Stock Purchase Plan, as Included amended 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(k) Letter Agreement between the Company and Richard P. [v] Delio, the Company's former Sr. Vice President of Finance and Administration and Chief Financial Officer, dated March 30, 1994, concerning his employment and severance with the Company. 10(l) Letter of Separation and Management Consulting [vi] Agreement between the Company and Mark K. Ruport, the Company's former President, Chief Executive Officer and Director, dated July 25, 1994, concerning his separation and consulting obligations to the Company. 10(m) Letter Agreement between the Company and Richard P. [vi] Delio, the Company's former Sr. Vice President of Finance and Administration and Chief Financial Officer and Acting President, dated August 3, 1994, concerning his employment and severance with the Company. 10(n) Letter of Separation and Management Consulting [vi] Agreement between the Company and Peter Cittadini, the Company's former Sr. Vice President Worldwide Operations, dated July 27, 1994, concerning his separation and consulting obligations to the Company. 10(o) Executive Compensation Arrangement for David A. [vi] Boucher, the Company's Chairman of the Board, dated July 20, 1994. 16 INTERLEAF, INC. EXHIBIT NUMBER DESCRIPTION METHOD OF FILING 10(p) Letter of Separation and Management Consulting [vi] Agreement between the Company and Lawrence S. Bohn, the Company's former Sr. Vice President, Marketing and Business Development, dated September 20, 1994, concerning his separation and consulting obligations to the Company. 10(q) Employment and severance agreement between the [vii] Company and Edward Koepfler, the Company's President, dated October 3, 1994. 10(r) Loan and Security Agreement between the Company and [ix] Foothill Capital Corporation, dated May 2, 1995. 10(s) 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(t) Net Lease, dated August 14, 1995, between Principal [x] Mutual Insurance Company and the Company. 10(u) Sublease, dated September 15, 1995, between [x] Parametric Technology Corporation and the Company. 10(v) Employment and severance agreement between the [xi] Company and Mark Cieplik, the Company's Vice President, Americas, dated March 17, 1995. 10(w) Agreement between PruTech Research and Development [xii] Partnership III and the Company, dated November 14, 1995. 10(x) Series C Preferred Stock Agreement between Included Interleaf, Inc. and Lindner Investments, dated October 14, 1996 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. 17 INTERLEAF, INC. [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 Registration Statement on Form S-1, File Number 33-5743. [xiv] Incorporated herein by reference is Exhibit 1 to Company's Registration Statement on Form 8-A, filed July 27, 1988. 18 EX-10.A1 2 EX-10.A1 EXHIBIT 10(a1) INTERLEAF, INC. 1994 EMPLOYEE STOCK OPTION PLAN Adopted by Board of Directors on July 14, 1994 and Amended on May 3, 1996 1. PURPOSE. The purpose of this plan (the "Plan") is to secure for Interleaf, Inc. (the "Company") and its shareholders the benefits arising from capital stock ownership by employees, consultants or advisors to the Company (but specifically excluding officers and directors) and its parent and subsidiary corporations who are expected to contribute to the Company's future growth and success. Except where the context otherwise requires, the term "Company" shall include the parent and all present and future subsidiaries of the Company as defined in Sections 425(e) and 425(f) of the Internal Revenue Code of 1986, as amended or replaced from time to time (the "Code"). 2. TYPE OF OPTIONS AND ADMINISTRATION. (a) TYPES OF OPTIONS. Options granted pursuant to the Plan shall be authorized by action of the Board of Directors of the Company (or a Committee designated by the Board of Directors) and shall be non-statutory options which are not intended to meet the requirements of Section 422 of the Code. (b) ADMINISTRATION. The Plan will be administered by the Board of Directors of the Company, whose construction and interpretation of the terms and provisions of the Plan shall be final and conclusive. The Board of Directors may in its sole discretion grant options to purchase shares of the Company's Common Stock ("Common Stock") and issue shares upon exercise of such options as provided in the Plan. The Board shall have authority, subject to the express provisions of the Plan, to construe the respective option agreements and the Plan, to prescribe, amend and rescind rules and regulations relating to the Plan, to determine the terms and provisions of the respective option agreements, which need not be identical, and to make all other determinations in the judgment of the Board of Directors necessary or desirable for the administration of the Plan. The Board of Directors may correct any defect or supply any omission or reconcile any inconsistency in the Plan or in any option agreement in the manner and to the extent it shall deem expedient to carry the Plan into effect and it shall be the sole and final judge of such expediency. No director shall be liable for any action or determination made in good faith. The Board of Directors may, to the full extent permitted by or consistent with applicable laws or regulations, delegate any or all of its powers under the Plan to a committee (the "Committee") appointed by the Board of Directors, and if the Committee is so appointed all references to the Board of Directors in the Plan shall mean and relate to such Committee. 3. ELIGIBILITY. (a) GENERAL. Options shall be granted to persons who are, at the time of grant, employees, consultants or advisors to, the Company, but who are not officers or directors of Interleaf, Inc. at such time. A person who has been granted an option may, if he or she is otherwise eligible, be granted an additional option or options if the Board of Directors shall so determine. 4. STOCK SUBJECT TO PLAN. Subject to adjustment as provided in Section 14 below, the maximum number of shares of Common Stock of the Company which may be issued and sold under the Plan is 1,500,000 shares. If an option granted under the Plan shall expire or terminate for any reason without having been exercised in full, the unpurchased shares subject to such option shall again be available for subsequent option grants under the Plan. If shares issued upon exercise of an option under the Plan are tendered to the Company in payment of the exercise price of an option granted under the Plan, such tendered shares shall again be available for subsequent option grants under the Plan. 5. FORMS OF OPTION AGREEMENTS. As a condition to the grant of an option under the Plan, each recipient of an option shall execute an option agreement in such form not inconsistent with the Plan as may be approved by the Board of Directors. Such option agreements may differ among recipients. 6. PURCHASE PRICE. (a) GENERAL. The purchase price per share of stock deliverable upon the exercise of an option shall be determined by the Board of Directors, at the time of grant of such option. (b) PAYMENT OF PURCHASE PRICE. Options granted under the Plan may provide for the payment of the exercise price by delivery of cash or a check to the order of the Company in an amount equal to the exercise price of such options, or, to the extent provided in the applicable option agreement, (i) by delivery to the Company of shares of Common Stock of the Company already owned by the optionee having a fair market value equal in amount to the exercise price of the options being exercised, (ii) by any other means which the Board of Directors determines are consistent with the purpose of the Plan and with applicable laws and regulations (including, without limitation, Regulation T promulgated by the Federal Reserve Board) or (iii) by any combination of such methods of payment. The fair market value of any shares of the Company's Common Stock or other non-cash consideration which may be delivered upon exercise of an option shall be determined in such manner as may be prescribed by the Board of Directors. 2 7. OPTION PERIOD. Each option and all rights thereunder shall expire on such date as shall be set forth in the applicable option agreement. 8. EXERCISE OF OPTIONS. Each option granted under the Plan shall be exercisable either in full or in installments at such time or times and during such period as shall be set forth in the agreement evidencing such option, subject to the provisions of the Plan. 9. NONTRANSFERABILITY OF OPTIONS. Options granted hereunder shall not be assignable or transferable by the person to whom it is granted, either voluntarily or by operation of law, except by will or the laws of descent and distribution, and, during the life of the optionee, shall be exercisable only by the optionee. 10. EFFECT OF TERMINATION OF EMPLOYMENT OR OTHER RELATIONSHIP. The Board of Directors shall determine the period of time during which an optionee may exercise an option following (i) the termination of the optionee's employment or other relationship with the Company or (ii) the death or disability of the optionee. Such periods shall be set forth in the agreement evidencing such option. 11. ADDITIONAL PROVISIONS. (a) ADDITIONAL OPTION PROVISIONS. The Board of Directors may, in its sole discretion, include additional provisions in any option granted under the Plan, including without limitation restrictions on transfer, repurchase rights, commitments to pay cash bonuses, to make, arrange for or guaranty loans or to transfer other property to optionees upon exercise of options, or such other provisions as shall be determined by the Board of Directors; provided that such additional provisions shall not be inconsistent with any other term or condition of the Plan. (b) ACCELERATION, EXTENSION, ETC. The Board of Directors may, in its sole discretion, (i) accelerate the date or dates on which all or any particular option or options granted under the Plan may be exercised or (ii) extend the dates during which all or any particular option or options granted under the Plan may be exercised. 12. GENERAL RESTRICTIONS. (a) INVESTMENT REPRESENTATIONS. The Company may require any person to whom an option is granted, as a condition of exercising such option, to give written assurances in substance and form satisfactory to the Company to the effect that such person is acquiring the Common Stock subject to the option for his or her own account for investment and not with any present intention of selling or otherwise distributing the same, and to such other effects as the Company deems necessary or appropriate in order to comply with federal and applicable state securities laws, or with covenants or 3 representations made by the Company in connection with any public offering of its Common Stock. (b) COMPLIANCE WITH SECURITIES LAWS. Each option shall be subject to the requirement that if, at any time, counsel to the Company shall determine that the listing, registration or qualification of the shares subject to such option upon any securities exchange or under any state or federal law, or the consent or approval of any governmental or regulatory body, or that the disclosure of non-public information or the satisfaction of any other condition is necessary as a condition of, or in connection with, the issuance or purchase of shares thereunder, such option may not be exercised, in whole or in part, unless such listing, registration, qualification, consent or approval, or satisfaction of such condition shall have been effected or obtained on conditions acceptable to the Board of Directors. Nothing herein shall be deemed to require the Company to apply for or to obtain such listing, registration or qualification, or to satisfy such condition. 13. RIGHTS AS A SHAREHOLDER. The holder of an option shall have no rights as a shareholder with respect to any shares covered by the option (including, without limitation, any rights to receive dividends or non-cash distributions with respect to such shares) until the date of issue of a stock certificate to him or her for such shares. No adjustment shall be made for dividends or other rights for which the record date is prior to the date such stock certificate is issued. 14. ADJUSTMENT PROVISIONS FOR RECAPITALIZATIONS AND RELATED TRANSACTIONS. (a) GENERAL. If, through or as a result of any merger, consolidation, sale of all or substantially all of the assets of the Company, reorganization, recapitalization, reclassification, stock dividend, stock split, reverse stock split, or other similar transaction, (i) the outstanding shares of Common Stock are increased or decreased or are exchanged for a different number or kind of shares or other securities of the Company, or (ii) additional shares or new or different shares or other securities of the Company or other non-cash assets are distributed with respect to such shares of Common Stock or other securities, an appropriate and proportionate adjustment may be made in (x) the maximum number and kind of shares reserved for issuance under the Plan, (y) the number and kind of shares or other securities subject to then outstanding options under the Plan, and (z) the price for each share subject to any then outstanding options under the Plan, without changing the aggregate purchase price as to which such options remain exercisable. (b) BOARD AUTHORITY TO MAKE ADJUSTMENTS. Any adjustments under this Section 14 will be made by the Board of Directors, whose determination as to what adjustments, if any, will be made and the extent thereof will be final, binding and conclusive. No fractional shares will be issued under the Plan on account of any such adjustments. 4 15. MERGER, CONSOLIDATION, ASSET SALE, LIQUIDATION, ETC. (a) GENERAL. In the event of a consolidation or merger or sale of all or substantially all of the assets of the Company in which outstanding shares of Common Stock are exchanged for securities, cash or other property of any other corporation or business entity or in the event of a liquidation of the Company, the Board of Directors of the Company, or the board of directors of any corporation assuming the obligations of the Company, may, in its discretion, take any one or more of the following actions, as to outstanding options: (i) provide that such options shall be assumed, or equivalent options shall be substituted, by the acquiring or succeeding corporation (or an affiliate thereof), (ii) upon written notice to the optionees, provide that all unexercised options will terminate immediately prior to the consummation of such transaction unless exercised by the optionee within a specified period following the date of such notice, (iii) in the event of a merger under the terms of which holders of the Common Stock of the Company will receive upon consummation thereof a cash payment for each share surrendered in the merger (the "Merger Price"), make or provide for a cash payment to the optionees equal to the difference between (A) the Merger Price times the number of shares of Common Stock subject to such outstanding options (to the extent then exercisable at prices not in excess of the Merger Price) and (B) the aggregate exercise price of all such outstanding options in exchange for the termination of such options, and (iv) provide that all or any outstanding options shall become exercisable in full immediately prior to such event. (b) SUBSTITUTE OPTIONS. The Company may grant options under the Plan in substitution for options held by employees of another corporation who become employees of the Company, or a subsidiary of the Company, as the result of a merger or consolidation of the employing corporation with the Company or a subsidiary of the Company, or as a result of the acquisition by the Company, or one of its subsidiaries, of property or stock of the employing corporation. The Company may direct that substitute options be granted on such terms and conditions as the Board of Directors considers appropriate in the circumstances. 16. CHANGE IN CONTROL. Notwithstanding any other provision of the Plan and except as otherwise provided in the relevant option agreement, in the event of a "Change in Control of the Company" (as defined below), the exercise dates of all options then outstanding shall be accelerated in full and any restrictions on exercising outstanding options issued pursuant to the Plan prior to any given date shall terminate. For purposes of the Plan, a "Change in Control of the Company" shall occur or be deemed to have occurred only if (i) any "person," as such term is used in Sections 13(d) and 14(d) of the Securities Exchange Act of 1934, as amended (the "Exchange Act") (other than the Company, any trustee of other fiduciary holding securities under an employee benefit plan of the Company, or any corporation owned directly or indirectly by the stockholders of the Company in substantially the same proportion as their ownership of stock of the 5 Company), is or becomes the "beneficial owner" (as defined in Rule 13d-3 under the Exchange Act), directly or indirectly, of securities of the Company representing 25% or more of the combined voting power of the Company's then outstanding securities; (ii) during any period of two consecutive years ending during the term of the Plan (not including any period prior to the adoption of the Plan), individuals who at the beginning of such period constitute the Board of Directors of the Company, and any new director (other than a director designated by a person who has entered into an agreement with the Company to effect any transaction described in clause (i), (iii), or (iv) of this Section 16) whose election by the Board of Directors or nomination for election by the Company's shareholders was approved by a vote of at least two-thirds of the directors then still in office who were either directors at the beginning of the period or whose election or whose nomination for election was previously so approved (collectively, the "Disinterested Directors"), cease for any reason to constitute a majority of the Board of Directors; (iii) the shareholders of the Company approve a merger or consolidation of the Company with any other corporation, other than (A) a merger or consolidation which would result in the voting securities of the Company outstanding immediately prior thereto continuing to represent (either by remaining outstanding or by being converted into voting securities of the surviving entity) more than 80% of the combined voting power of the voting securities of the Company or such surviving entity outstanding immediately after such merger or consolidation or (B) a merger or consolidation effected to implement a recapitalization of the Company (or similar transaction) in which no "person" (as hereinabove defined) acquires more than 25% of the combined voting power of the Company's then outstanding securities; or (iv) the shareholders of the Company approve a plan of complete liquidation of the Company or an agreement for the sale or disposition by the Company of all or substantially all of the Company's assets. 17. NO SPECIAL EMPLOYMENT RIGHTS. Nothing contained in the Plan or in any option shall confer upon any optionee any right with respect to the continuation of his or her employment by the Company or interfere in any way with the right of the Company at any time to terminate such employment or to increase or decrease the compensation of the optionee. 18. OTHER EMPLOYEE BENEFITS. The amount of any compensation deemed to be received by an employee as a result of the exercise of an option or the sale of shares received upon such exercise will not constitute compensation with respect to which any other employee benefits of such employee are determined, including, without limitation, benefits under any bonus, pension, profit-sharing, life insurance or salary continuation plan, except as otherwise specifically determined by the Board of Directors. 6 19. AMENDMENT OF THE PLAN. (a) The Board of Directors may at any time, and from time to time, modify or amend the Plan in any respect. (b) The termination or any modification or amendment of the Plan shall not, without the consent of an optionee, affect his or her rights under an option previously granted to him or her. With the consent of the optionee affected, the Board of Directors may amend outstanding option agreements in a manner not inconsistent with the Plan. 20. WITHHOLDING. The Company shall have the right to deduct from payments of any kind otherwise due to the optionee any federal, state or local taxes of any kind required by law to be withheld with respect to any shares issued upon exercise of options under the Plan. Subject to the prior approval of the Company, which may be withheld by the Company in its sole discretion, the optionee may elect to satisfy such obligations, in whole or in part, (i) by causing the Company to withhold shares of Common Stock otherwise issuable pursuant to the exercise of an option or (ii) by delivering to the Company shares of Common Stock already owned by the optionee. The shares so delivered or withheld shall have a fair market value equal to such withholding obligation. The fair market value of the shares used to satisfy such withholding obligation shall be determined by the Company as of the date that the amount of tax to be withheld is to be determined. An optionee who has made an election pursuant to this Section 20 may only satisfy his or her withholding obligation with shares of Common Stock which are not subject to any repurchase, forfeiture, unfulfilled vesting or other similar requirements. 21. CANCELLATION AND NEW GRANT OF OPTIONS, ETC. The Board of Directors shall have the authority to effect, at any time and from time to time, with the consent of the affected optionees, (i) the cancellation of any or all outstanding options under the Plan and the grant in substitution therefor of new options under the Plan covering the same or different numbers of shares of Common Stock and having an option exercise price per share which may be lower or higher than the exercise price per share of the cancelled options or (ii) the amendment of the terms of any and all outstanding options under the Plan to provide an option exercise price per share which is higher or lower than the then-current exercise price per share of such outstanding options. 22. EFFECTIVE DATE AND DURATION OF THE PLAN. (a) EFFECTIVE DATE. The Plan shall become effective when adopted by the Board of Directors. Unless otherwise provided, amendments to the Plan shall become effective when adopted by the Board of Directors. Options may be granted under the Plan at any time after the effective date and before the date fixed for termination of the Plan. 7 (b) TERMINATION. Unless sooner terminated in accordance with Section 16, the Plan shall terminate on the date on which all shares available for issuance under the Plan shall have been issued pursuant to the exercise of options granted under the Plan. 23. PROVISION FOR FOREIGN PARTICIPANTS. The Board of Directors may, without amending the Plan, modify awards or options granted to participants who are foreign nationals or employed outside the United States to recognize differences in laws, rules, regulations or customs of such foreign jurisdictions with respect to tax, securities, currency, employee benefit or other matters. Adopted by the Board of Directors on July 14, 1994 and amended on May 3, 1996. 8 EX-10.B2 3 EX-10.B2 EXHIBIT 10(b2) INTERLEAF, INC. 1987 EMPLOYEE STOCK PURCHASE PLAN AMENDED EFFECTIVE AS OF MAY 1, 1989, APRIL 11, 1991, MAY 2, 1993 AND MAY 3, 1996. 1. PURPOSES. The 1987 Employee Stock Purchase Plan of Interleaf, Inc. (the "Plan") is intended to provide a method whereby employees of Interleaf, Inc. and its subsidiary corporations (hereinafter collectively referred to, unless the context otherwise requires, as "the Company") will have an opportunity to acquire a proprietary interest in the Company through the purchase of shares of the common stock of the Company ("Common Stock"). It is the intention of the Company to have the Plan qualify as an "employee stock purchase plan" under Section 423 of the Internal Revenue Code of 1986, as amended (the "Code"). The provisions of the Plan shall, accordingly, be construed so as to extend and limit participation in a manner consistent with the requirements of that Section of the Code. 2. DEFINITIONS. (a) "base pay" means regular straight-time earnings (as the same may be adjusted from time to time) but excluding payments for overtime, shift differentials, incentive compensation, bonuses and other special payments. (b) "employee" means any person who is customarily employed for 20 or more hours per week and more than five months in a calendar year by the Company or by a subsidiary corporation. (c) "Offering Commencement Date" means the applicable date on which an Offering under the Plan commences pursuant to Paragraph 4. (d) "Offering Termination Date" means the applicable date on which an Offering under the Plan terminates pursuant to Paragraph 4. (e) "subsidiary corporation" means any present or future corporation which (i) is a "subsidiary corporation" as that term is defined in Section 425 of the Internal Revenue Code of 1954 and (ii) is designated as a participant in the Plan by the Board of Directors or Committee described in Paragraph 14. (f) "total compensation" means base pay plus payments for overtime, shift differentials, incentive compensation, bonuses and other special payments. 3. ELIGIBILITY. (a) Any employee who shall have completed three months employment and shall be employed by the Company on the applicable Offering Commencement Date shall be eligible to participate in the Plan. (b) Any provision of the Plan to the contrary notwithstanding, no employee shall be granted an option to participate in the Plan: (i) if, immediately after the grant, such employee would own stock, and/or hold outstanding options to purchase stock, possessing 5% or more of the total combined voting power or value of all classes of stock of the Company 1 or of any subsidiary of the Company (for purposes of this Paragraph the rules of Section 425(d) of the Code shall apply in determining stock ownership of any employee); or (ii) which permits his or her rights to purchase stock under all employee stock purchase plans maintained by the Company and its subsidiaries to accrue at a rate which exceeds $25,000 of the fair market value of the stock (determined at the time such option is granted) for each calendar year in which such option is outstanding at any time. 4. OFFERING DATES. The Plan will be implemented by sixteen (16) offerings (referred to herein collectively as "Offerings" and individually as an "Offering"), of a maximum of 50,000 shares (subject to adjustment as provided in Paragraphs 13(a) and (18) each of Common Stock for the first four Offerings and a maximum of the total shares then remaining available to be issued and sold under the Plan for the final thirteen Offerings, as follows: (a) Offering I shall commence on May 1, 1987, and terminate on October 31, 1987. (b) Offering II shall commence on November 1, 1987, and terminate on April 30, 1988. (c) Offering III shall commence on May 1, 1988, and terminate on October 31, 1988. (d) Offering IV shall commence on November 1, 1988, and terminate on April 30, 1989. (e) Offering V shall commence on or about May 1, 1989, and terminate on or about October 31, 1989. (f) Offering VI shall commence on or about November 1, 1989, and terminate on or about April 30, 1990. (g) Offering VII shall commence on or about May 1, 1990, and terminate on or about October 31, 1990. (h) Offering VIII shall commence on or about November 1, 1990, and terminate on or about April 30, 1991. (i) Offering IX shall commence on or about May 1, 1991, and terminate on or about April 30, 1992. (j) Offering X shall commence on or about May 1, 1992, and terminate on or about April 30, 1993. (k) Offering XI shall commence on or about May 1, 1993, and terminate on or about April 30, 1994. (l) Offering XII shall commence on or about May 1, 1994, and terminate on or about April 30, 1995. (m) Offering XIII shall commence on or about May 1, 1995, and terminate on or about April 30, 1996. 2 (n) Offering XIV shall commence on or about May 1, 1996, and terminate on or about April 30, 1997. (o) Offering XV shall commence on or about May 1, 1997, and terminate on or about April 30, 1998. (p) Offering XVI shall commence on or about May 1, 1998, and terminate on or about April 30, 1999. Participation in any one or more of the sixteen (16) Offerings under the Plan shall neither limit, nor require, participation in any other Offering. 5. PARTICIPATION. All eligible employees will become participants in an Offering on the applicable Offering Commencement Date. Payroll deductions for a participant shall commence on the applicable Offering Commencement Date of the Offering and shall end on the Offering Termination Date of such Offering, unless sooner terminated pursuant to Paragraph 11. 6. PAYROLL DEDUCTIONS. (a) Participants may elect to have amounts withheld from their total compensation by completing an authorization for a payroll deduction ("Authorization") on the form provided by the Company and filing it with the Human Resources Department. At the time a participant files his Authorization for a payroll deduction, the participant shall elect to have deductions made from his or her pay on each payday during the time he or she is a participant in an Offering at the rate of 0, 1, 2, 3, 4, 5, 6, 7, 8, 9 or 10% of his or her total compensation. If a participant has not filed an Authorization for the applicable Offering at least seven (7) days prior to the applicable Offering Commencement Date, he or she shall be deemed to file an Authorization electing to withhold 0% of total compensation. (b) All payroll deductions made for a participant shall be credited to his or her account maintained by the Company under the Plan. A participant may not make any separate cash payment into such account. (c) Except as provided in Paragraphs 8(b) or 10, a participant may only make changes to the rate of deductions from his or her total compensation during an Offering by completing a new Authorization on the form provided by the Company and filing it with the Human Resources Department as provided herein. Such new Authorization shall be effective upon the commencement of the first pay period subsequent to its filing. A participant may change his or her Authorization at any time (subject to limitations on the frequency of such changes as may be imposed by rules adopted by the "Committee" (as defined in Paragraph 13)). 7. GRANTING OF OPTION. (a) For each of the Offerings, a participating employee shall be deemed to have been granted an option (the "Option") on the applicable Offering Commencement Date, to purchase a maximum number of shares of the Common Stock equal to an amount determined as follows: 85% of the market value of a share of the Company's Common Stock on the applicable Offering Commencement Date shall be divided into an amount equal to 12% of the employee's estimated annualized total compensation as 3 of such Offering Commencement Date. For all purposes of the Plan, the market value of the Company's Common Stock shall be determined as provided in clause (i) of subparagraph (b) below. Estimated annualized total compensation of participating employees shall be determined as follows: (i) in the case of full-time employees normally paid on an hourly rate, by multiplying his or her annualized base pay by 105%; (ii) in the case of salaried employees not eligible for bonuses, his or her annualized base pay; (iii) in the case of salespersons, two times annualized base pay; and (iv) in the case of employees eligible for bonuses, annualized base pay plus 80% of the maximum eligible bonuses as determined by management by objective for the current fiscal year. The annualized base pay of participating employees shall be determined as follows: (i) in the case of a full-time employee normally paid on an hourly rate, by multiplying his or her normal hourly rate of base pay by 2080, (ii) in the case of a part-time employee normally paid on an hourly rate, by multiplying his or her normal hourly rate of base pay by the product of 52 times the number hours in his or her normal work week, (iii) in the case of an employee normally paid at a bi-weekly rate, by multiplying his or her normal bi-weekly rate of base pay by 26, (iv) in the case of a part-time employee normally paid at a weekly rate, by multiplying his or her normal weekly rate of base pay by 52; and (v) in the case of an employee normally paid at a monthly rate, by multiplying his or her normal monthly rate of base pay by 12. (b) The purchase price of a share of Common Stock purchased pursuant to the Plan during each Offering (the "Option Exercise Price") shall be the lower of: (i) 85% of the last sale price of the Common Stock on the NASDAQ National Market System, as reported in THE WALL STREET JOURNAL, on the applicable Offering Commencement Date (or on the next regular business date on which shares of Common Stock shall be traded if no shares of Common Stock shall have been traded on such Offering Commencement Date); or (ii) 85% of the last sale price of Common Stock on the NASDAQ National Market System, as reported in THE WALL STREET JOURNAL, on the applicable Offering Termination Date (or on the next regular business date on which shares of Common Stock shall be traded if no shares of Common Stock shall have been traded on such Offering Termination Date). 8. EXERCISE OF OPTION. With respect to each Offering during the term of the Plan: (a) Unless a participant gives written notice of withdrawal to the Company as provided in Paragraphs 8(b) and 10, his or her Option will be deemed to have been exercised automatically on the Offering Termination Date applicable to such Offering, for the purchase of the number of full shares of Common Stock which the accumulated payroll deductions (without interest) in his or her account maintained by the Company under the Plan at that time will purchase at the applicable Option Exercise Price (but not in excess of the number of shares for which options have been granted the employee pursuant to Paragraph 7(a)), and any excess in his or her account at that time will be returned to him or her, with simple interest at the rate of 4% per annum, 4 based on the assumption that such excess comprises funds most recently deducted from the participant's pay; provided that any excess returned on account of fractional shares will not be credited with any interest. (b) By written notice to the Human Resources Department of the Company at any time prior to the Offering Termination Date applicable to any such Offering, a participant may elect to withdraw all, but not less than all, the accumulated payroll deductions in his or her account at such time, with simple interest computed at the rate of 4% per annum as aforesaid. (c) Fractional shares will not be issued under the Plan and any accumulated funds in a participant's account which would have been used to purchase a fractional shares or which are in excess of the limitations of Paragraph 7(a) shall be returned to an employee promptly following the termination of an Offering. 9. DELIVERY. As promptly as practicable after the Offering Termination Date of each Offering, the Company will deliver to each participant, as appropriate, the certificate or certificates representing the shares of Common Stock purchased upon the exercise of such participant's Option. 10. WITHDRAWAL. (a) As indicated in Paragraph 8(b), a participant may withdraw payroll deductions credited to his or her account with the Company under any Offering at any time prior to the applicable Offering Termination Date by giving written notice of withdrawal to the Human Resources Department. All of the participant's payroll deductions credited to his or her account will be paid to the participant promptly after receipt of such notice of withdrawal and no further funds will be credited to his or her account during such Offering. The Company may, at its option, treat any attempt by an employee to borrow on the security of accumulated payroll deductions as an election, under Paragraph 8(b) to withdraw such payroll deductions. (b) A participant's withdrawal from any Offering will not have any effect upon his or her eligibility to participate in any succeeding Offering or in any similar plan which may hereafter be adopted by the Company. (c) Upon termination of the participant's employment for any reason, including retirement but excluding death or disability while in the employ of the Company, the payroll deductions credited to his or her account will be returned to the participant, with simple interest at the rate of 4% per annum, or, in the case of his or her death subsequent to the termination of employment, to the person or persons entitled thereto under Paragraph 14. (d) Upon termination of the participant's employment because of disability or death, the participant or his or her beneficiary (as defined in Paragraph 14) shall have the right to elect, by written notice given to the Company's Human Resources Department prior to the expiration of the period of 30 days commencing with the date of the disability or death of the participant, either (i) to withdraw all of the funds credited to the participant's account under the Plan with simple interest at the rate of 4% per annum; or 5 (ii) to exercise the participant's Option on the Offering Termination Date next following the date of the participant's disability or death for the purchase of the number of full shares of Common Stock which the accumulated funds in the participant's account at the date of the participant's disability or death will purchase at the applicable Option Exercise Price, and any excess in such account will be returned to the participant or said beneficiary. If no such written notice of election is received by the Human Resources Department, the participant or beneficiary shall automatically be deemed to have elected to withdraw the funds credited to the participant's account at the date of the participant's disability or death and the same will be paid promptly to the participant or said beneficiary with simple interest at the rate of 4% per annum as aforesaid. 6 11. INTEREST. No interest will be paid or allowed on any money paid into the Plan or credited to the account of any participant employee except upon withdrawal as provided under Paragraphs 8(b) and 10 or upon the return of funds credited to the account as provided under Paragraph 12(a). In the event of the return of excess funds under Paragraphs 8(a) and 12(a), interest thereon, if any, shall be computed assuming that such excess comprises funds most recently deducted from the participant's pay. 12. STOCK. (a) Subject to adjustment as provided in Paragraph 17, the maximum number of shares of Common Stock of the Company which may be issued and sold under the Plan is 2,500,000 shares. Such shares may be authorized and unissued shares or may be shares issued and thereafter acquired by the Company. The maximum number of shares of Common Stock which shall be made available for sale under the Plan shall be 50,000 shares, subject to adjustment as provided in Paragraph 17, for each of the first four Offerings and the total shares then remaining available to be issued and sold under the Plan for each of the remaining Offerings. For Offerings XI, XII, XIII, XIV, XV, and XVI, such limit shall not exceed 250,000 shares of common stock for each of said Offering. If the total number of shares for which Options are exercised on any Offering Termination Date in accordance with Paragraph 8 exceeds the number of shares made available, the Company shall make a pro rata allocation of the shares available for delivery and distribution in as nearly a uniform manner as shall be practicable and as it shall determine to be equitable, and the balance of funds credited to the account of each participant under the Plan shall be returned to him or her as promptly as possible, with simple interest on such balance at the rate of 4% per annum, based on the assumption that such excess comprises funds most recently deducted from the participant's pay. If less than the number of shares made available are purchased during an Offering, the amount not purchased may be carried over to and made available during any subsequent Offering. (b) The participant will have no interest in Common Stock covered by his or her Option until such Option has been exercised. (c) Common Stock to be delivered to a participant under the Plan will be registered in the name of the participant, or, if the participant so directs, by written notice to the Company prior to the Offering Termination Date applicable thereto, in the names of the participant and one such other person as may be designated by the participant, as joint tenants with rights of survivorship, to the extent permitted by applicable law. 13. ADMINISTRATION. The Plan shall be administered by the Compensation Committee appointed by the Board of Directors of the Company (the "Committee"). The officer of the Company charged with day-to-day administration of the Plan shall, for matters involving the Plan, be an ex-officio member of that Committee. The interpretation and construction of any provision of the Plan and the adoption of rules and regulations for administering the Plan shall be made by the Committee, subject, however, at all times to the final approval of the Board of Directors of the Company. Such rules may include, without 7 limitation, restrictions on the frequency of changes in withholding rates. Determinations made by the Committee and approved by the Board of Directors of the Company with respect to any matter or provision contained in the Plan shall be final, conclusive and binding upon the Company and upon all participants, their heirs or legal representatives. Any rule or regulation adopted by the Committee shall remain in full force and effect unless and until altered, amended, or repealed by the Committee or the Board of Directors of the Company. 14. DESIGNATION OF BENEFICIARY. A participant may file a written designation of a beneficiary who is to receive any shares of Common Stock and/or cash in the event of the death of the participant prior to the delivery of such shares or cash to the participant. Such designation of beneficiary may be changed by the participant at any time by written notice to the Human Resources Department of the Company. Within 30 days after the participant's death, the beneficiary may, as provided in Paragraph 10(d), elect to exercise the participant's Option when it becomes exercisable on the Offering Termination Date of the then current Offering. Upon the death of a participant and upon receipt by the Company of proof of the identity and existence at the participant's death of a beneficiary validly designated by the participant under the Plan, and notice of election of the beneficiary to exercise the participant's Option, the Company shall deliver such stock and/or cash to such beneficiary. In the event of the death of a participant and in the absence of a beneficiary validly designated under the Plan who is living at the time of such participant's death, the Company shall deliver such cash to the executor or administrator of the estate of the participant, or if no such executor or administrator has been appointed (to the knowledge of the Company) the Company, in its discretion, may deliver such cash to the spouse or to any one or more dependents of the participant as the Company may determine. No beneficiary shall prior to the death of the participant by whom he has been designated acquire any interest in the stock or cash credited to the participant's account maintained by the Company under the Plan. 15. TRANSFERABILITY. Neither funds credited to a participant's account nor any rights with regard to the exercise of an Option or to receive stock under the Plan may be assigned, transferred, pledged, or otherwise disposed of in any way by the participant otherwise than by will or the laws of descent and distribution. Any such attempted assignment, transfer, pledge, or other disposition shall be without effect, except that the Company may treat such act as an election to withdraw funds in accordance with Paragraph 8(b). 16. USE OF FUNDS. All funds received or held by the Company under this Plan may be used by the Company for any corporate purpose and the Company shall not be obligated to segregate such funds. 17. EFFECT OF CHANGES OF COMMON STOCK. In the event of any changes of outstanding shares of the Common Stock by reason of stock dividends, subdivisions, combinations and exchanges of shares, recapitalizations, mergers in which the Company is the surviving corporation, 8 consolidations, and the like, the aggregate number and class of shares available under the Plan and the Option Exercise Price per share shall be appropriately adjusted by the Board of Directors of the Company, whose determination shall be conclusive. Any such adjustments may provide for the elimination of any fractional shares which would otherwise become subject to any Options. 9 18. AMENDMENT OR TERMINATION. The Board of Directors of the Company may at any time terminate or amend the Plan. Except as hereinafter provided, no such amendment may make any change in Options previously granted which would adversely affect the rights of any participant. In addition, no amendment may be made to the Plan without prior approval of the shareholders of the Company if such amendment would (a) materially increase the benefits accruing to participants under the Plan, (b) materially increase the number of shares which may be issued under the Plan, or (c) materially modify the requirements as to eligibility for participation under the Plan. 19. NOTICES. All notices or other communications by a participant to the Company under or in connection with the Plan shall be deemed to have been duly given when received by the Human Resources Department. 20. MERGER OR CONSOLIDATION. If the Company shall at any time merge into or consolidate with another corporation and the Company is the surviving entity, the holder of each option then outstanding will thereafter be entitled to receive at the next Offering Termination Date upon the automatic exercise of such Option under Paragraph 8(a) (unless previously withdrawn pursuant to Paragraph 10) for each share as to which such Option shall be exercised the securities or property which a holder of one share of the Common Stock was entitled to receive upon and at the time of such merger or consolidation, and the Board of Directors of the Company shall take such steps in connection with such merger or consolidation as the Board of Directors shall deem necessary to assure that the provisions of Paragraph 17 shall thereafter be applicable, as nearly as reasonably may be, to such securities or property. In the event of a merger or consolidation in which the Company is not the surviving entity, or of a sale of assets in which the Company is not the surviving entity, the Plan shall terminate, and all funds credited to participants' accounts shall be returned to them, with simple interest at the rate of 4% per annum. 21. APPROVAL OF SHAREHOLDERS. All grants of options provided under any amendments shall be conditional upon the approval of the Plan by the shareholders of the Company at its next annual meeting. If such shareholder approval is not obtained at the Company's next annual meeting of shareholders, any options previously granted under the amendment to the Plan shall terminate and no further options shall be granted. In such event, the balance of funds credited to the account of each participant under the Plan shall be returned to him or her as promptly as possible, with simple interest computed upon such balance at the rate of 4% per annum. 22. REGISTRATION AND QUALIFICATION OF THE PLAN UNDER APPLICABLE SECURITIES LAWS. No Option shall be granted under the Plan until such time as the Company has qualified or registered the shares which are subject to the Options under all applicable state and federal securities laws to the extent required by such laws. Approved by the Board of Directors on February 27, 1987. 10 Approved by the Shareholders on August 14, 1987. Amended by the Board of Directors effective May 1, 1989 and approved by the shareholders at a Special Meeting in Lieu of an Annual Meeting of Shareholders held August 11, 1989. Amended by the Board of Directors effective April 11, 1991, and approved by the Shareholders at a Special Meeting in Lieu of an Annual Meeting of Shareholders held on August 9, 1991. Amended by the Board of Directors on May 2, 1993, and approved by Shareholders at a Special Meeting in Lieu of an Annual Meeting of Shareholders held on August 5, 1993. Amended by the Board of Directors on May 3, 1996, and approved at an Annual Meeting of Shareholders held on August 8, 1996. 11 EX-10.X 4 EX-10.X EXHIBIT 10(X) _______________________________________________________________________________ SERIES C PREFERRED STOCK PURCHASE AGREEMENT between INTERLEAF, INC. and LINDNER INVESTMENTS October 14, 1996 _______________________________________________________________________________ TABLE OF CONTENTS PAGE ---- 1. Authorization and Sale of Shares.............................. 1 1.1 Authorization............................................ 1 1.2 Sale of Shares........................................... 1 1.3 Use of Proceeds.......................................... 1 2. The Closing.................................................... 1 3. Representations of the Company................................. 2 3.1 Organization and Standing................................. 2 3.2 Capitalization............................................ 2 3.3 Authorization of Transaction.............................. 3 3.4 Noncontravention.......................................... 3 3.5 Reports and Financial Statements.......................... 3 3.6 Absence of Material Adverse Changes....................... 4 3.7 Litigation................................................ 4 4. Representations of the Purchaser............................... 5 4.1 Investment................................................ 5 4.2 Authority................................................. 5 4.3 Experience................................................ 5 4.4 Access to Information..................................... 5 4.5 Status.................................................... 6 5. Covenants of the Company....................................... 6 5.1 Inspection................................................ 6 5.2 Financial Statements and Other Information................ 6 5.3 Reservation of Common Stock............................... 6 6. Transfer of Shares............................................. 6 6.1 Restricted Shares......................................... 6 6.2 Requirements for Transfer................................. 7 6.3 Legend.................................................... 7 7. Registration Rights............................................ 7 7.1 Registration of Shares.................................... 7 7.2 Limitations on Registrations.............................. 8 7.3 Registration Procedures................................... 9 7.4 Requirements of the Purchaser............................. 10 7.5 Indemnification........................................... 10 8. Miscellaneous.................................................. 10 8.1 Successors and Assigns.................................... 10 8.2 Confidentiality........................................... 11 8.3 Survival of Representations and Warranties................ 11 8.4 Notices................................................... 11 8.5 Brokers and Closing Costs................................. 12 8.6 Entire Agreement.......................................... 12 8.7 Amendments and Waivers.................................... 12 8.8 Counterparts.............................................. 12 8.9 Section Headings.......................................... 12 8.10 Severability.............................................. 13 8.11 Governing Law............................................. 13 Exhibit A Certificate of Vote of Directors Establishing a Series of a Class of Stock Exhibit B Opinion of Hale and Dorr Exhibit C Opinion of John K. Hyvner, Esq. Exhibit D Issuance of Shares ii SERIES C PREFERRED STOCK PURCHASE AGREEMENT This Agreement dated as of October 14, 1996 is entered into by and between Interleaf, Inc., a Massachusetts corporation (the "Company"), and Lindner Investments, a Massachusetts business trust (the "Purchaser"). In consideration of the mutual promises and covenants contained in this Agreement, the parties hereto agree as follows: 1. AUTHORIZATION AND SALE OF SHARES. 1.1 AUTHORIZATION. The Company has duly authorized the sale and issuance, pursuant to the terms of this Agreement, of 1,200,000 shares of its Series C Convertible Preferred Stock, $0.10 par value per share (the "Series C Preferred Stock"), having the rights, restrictions, privileges and preferences set forth in the Certificate of Vote of Directors Establishing a Series of a Class of Stock attached hereto as EXHIBIT A (the "Certificate of Vote"). The Company has adopted and will file prior to the Closing (as defined below) the Certificate of Vote with the Secretary of State of the Commonwealth of Massachusetts. 1.2 SALE OF SHARES. Subject to the terms and conditions of this Agreement, at the Closing the Company will issue and sell to the Purchaser, and the Purchaser will purchase, 1,004,904 shares of Series C Preferred Stock for the purchase price of $9.9512 per share. The shares of Series C Preferred Stock being sold under this Agreement are referred to as the "Shares." 1.3 USE OF PROCEEDS. The Company will use the proceeds from the sale of the Shares for working capital and general corporate purposes. 2. THE CLOSING. The closing ("Closing") of the sale and purchase of the Shares under this Agreement shall take place at the offices of Hale and Dorr, 60 State Street, Boston, Massachusetts at 3:00 p.m. on October 15, 1996. The date of the Closing is hereinafter referred to as the "Closing Date." At the Closing: (a) the Company shall deliver to the Purchaser a certificate, as of the most recent practicable date, as to the -1- corporate good standing of the Company issued by the Secretary of State of the Commonwealth of Massachusetts; (b) the Company shall deliver to the Purchaser the Articles of Organization of the Company, as amended and in effect as of the Closing Date (excluding the Certificate of Vote), certified by the Secretary of State of the Commonwealth of Massachusetts, and the Certificate of Vote with a stamped filing acknowledgment by the Secretary of the Commonwealth of Massachusetts; (c) Hale and Dorr, counsel for the Company, shall deliver to the Purchaser an opinion, dated the Closing Date, in substantially the form attached hereto as EXHIBIT B; (d) John K. Hyvnar, General Counsel of the Company, shall deliver to the Purchaser an opinion, dated the Closing Date, in substantially the form attached hereto as EXHIBIT C; (e) the Company shall deliver to the Purchaser certificates for the Shares being purchased by the Purchaser, registered in the name of one or more series into which the Purchaser's shares of beneficial interest have been divided, as set forth on EXHIBIT D attached hereto; (f) the Purchaser shall pay to the Company the purchase price for the Shares, by wire transfer or certified check; and (g) the Company and the Purchaser shall execute and deliver a Cross-Receipt. 3. REPRESENTATIONS OF THE COMPANY. The Company hereby represents and warrants to the Purchaser as follows as of the date hereof: 3.1 ORGANIZATION AND STANDING. The Company is a corporation duly organized, validly existing and in good standing under the laws of the Commonwealth of Massachusetts. The Company is duly qualified to do business as a foreign corporation and is in good standing in any jurisdiction in which the failure to so qualify would have a material adverse effect on the operations or financial condition of the Company. 3.2 CAPITALIZATION. The authorized capital stock of the Company at the Closing will consist of (a) 30,000,000 shares of common stock, $.01 par value per share, of which 17,459,219 shares were issued and outstanding as of September 30, 1996, and -2- (b) 5,000,000 shares of Preferred Stock, $.01 par value per share, of which (i) 200,000 shares have been designated as Series A Junior Participating Preferred Stock (none of which are issued or outstanding), (ii) 2,142,857 shares have been designated as Senior Series B Convertible Preferred Stock (of which 861,911 shares were outstanding as of September 30, 1996) and (iii) 1,200,000 shares have been designated as Series C Preferred Stock (none of which are issued and outstanding immediately prior to the Closing). At the Closing, the Common Stock and the Preferred Stock of the Company will have the voting powers, designations, preferences, rights and qualifications, and limitations or restrictions set forth in the Articles of Organization (including the Certificate of Vote). All of the issued and outstanding shares of capital stock of the Company have been duly authorized and validly issued and are fully paid and nonassessable. All of the Shares, and all of the shares of Series C Preferred Stock issued pursuant to Section 7.1(b), will be, when issued in accordance with this Agreement, duly authorized, validly issued, fully paid and nonassessable. 3.3 AUTHORIZATION OF TRANSACTION. The Company has all requisite power and authority to execute and deliver this Agreement and to perform its obligations hereunder. The execution and delivery of this Agreement by the Company and the consummation of the transactions contemplated hereby by the Company have been duly and validly authorized by all necessary corporate action on the part of the Company. The issuance, sale and delivery of the Shares in accordance with this Agreement, and the issuance and delivery of the shares of Common Stock issuable upon conversion of the Shares, have been duly authorized by all necessary corporate action on the part of the Company, and all such shares have been duly reserved for issuance. This Agreement has been duly and validly executed and delivered by the Company and constitutes a valid and binding obligation of the Company, enforceable against it in accordance with its terms. 3.4 NONCONTRAVENTION. Neither the execution and delivery of this Agreement by the Company, nor the consummation by the Company of the transactions contemplated hereby, will (a) conflict with or violate any provision of the Articles of Organization or By-laws of the Company, (b) require on the part of the Company any filing with, or permit, authorization, consent or approval of, any governmental entity (other than the filing of the Certificate of Vote), (c) conflict with, result in breach of, constitute a default under, or require any notice, consent or waiver under, any contract, agreement or other instrument to which the Company is a party or by which it is bound (other than any consent as waiver which has already been obtained), or -3- (d) violate any order, writ, injunction, decree, statute, rule or regulation applicable to the Company. 3.5 REPORTS AND FINANCIAL STATEMENTS. (a) The Company has previously furnished to the Purchaser complete and accurate copies, as amended or supplemented, of its (i) Annual Report on Form 10-K for the fiscal year ended March 31, 1996, as filed with the Securities and Exchange Commission (the "SEC"), and (ii) its Quarterly Report on Form 10-Q for the quarter ended June 30, 1996, as filed with the SEC (such reports are collectively referred to herein as the "Company Reports"). The Company Reports constitute all of the documents required to be filed by the Company under Section 13 of the Securities Exchange Act of 1934, as amended (the "Exchange Act") with the SEC since March 31, 1996. As of their respective dates, the Company Reports did not contain any untrue statement of a material fact or omit to state a material fact required to be stated therein or necessary to make the statements therein, in light of the circumstances under which they were made, not misleading. The audited financial statements and unaudited interim financial statements of the Company included in the Company Reports (i) comply as to form in all material respects with applicable accounting requirements and the published rules and regulations of the SEC with respect thereto, (ii) have been prepared in accordance with GAAP applied on a consistent basis throughout the periods covered thereby (except as may be indicated therein or in the notes thereto, and in the case of quarterly financial statements, as permitted by Form 10-Q under the Exchange Act), (iii) fairly present the consolidated financial condition, results of operations and cash flows of the Company as of the respective dates thereof and for the periods referred to therein, and (iv) are consistent with the books and records of the Company. (b) The Company has provided to the Purchaser a copy of its press release dated September 30, 1996 with respect to the financial results of the Company for the quarter then ended. The Company has also provided to and discussed with the Purchaser such information as the Purchaser has requested (to the extent available) regarding the financial results of the Company for such quarter and the current operations, financial condition (including the amount of available cash) and plans of the Company. 3.6 ABSENCE OF MATERIAL ADVERSE CHANGES. Except as disclosed by the Company to the Purchaser prior to the date hereof, since June 30, 1996, there has not been any material -4- adverse change in the assets, business, financial condition or results of operations of the Company. 3.7 LITIGATION. There is no action, suit or proceeding, or governmental inquiry or investigation, pending, or, to the best of the Company's knowledge, any basis therefor or threat thereof, against the Company, which questions the validity of this Agreement or the right of the Company to enter into it, or which might result, either individually or in the aggregate, in any material adverse change in the business, prospects, assets or condition, financial or otherwise, of the Company. 4. REPRESENTATIONS OF THE PURCHASER. The Purchaser represents and warrants to the Company as follows: 4.1 INVESTMENT. The Purchaser is acquiring the Shares, and the shares of Common Stock into which the Shares may be converted, for its own account for investment and not with a view to, or for sale in connection with, any distribution thereof, nor with any present intention of distributing or selling the same; and the Purchaser has no present or contemplated agreement, undertaking, arrangement, obligation, indebtedness or commitment providing for the disposition thereof. The Purchaser acknowledges that the Shares are restricted securities as defined under the Securities Act of 1933, as amended (the "Securities Act") and shall bear the legend set forth in Section 6.3 hereof. 4.2 AUTHORITY. The Purchaser has full power and authority to enter into and to perform this Agreement in accordance with its terms. The Purchaser represents that it has not been organized, reorganized or recapitalized specifically for the purpose of investing in the Company. This Agreement has been duly executed and delivered by the Purchaser and constitutes a valid and binding obligation of the Purchaser, enforceable against it in accordance with its terms. 4.3 EXPERIENCE. The Purchaser has carefully reviewed the representations concerning the Company contained in this Agreement and has made detailed inquiry concerning the Company, its business and its personnel; the officers of the Company have made available to the Purchaser any and all written information which it has requested and have answered to the Purchaser's satisfaction all inquiries made by the Purchaser; and the Purchaser has sufficient knowledge and experience in investing in companies similar to the Company so as to be able to evaluate the risks and merits of its investment in the Company and is able -5- financially to bear the risks thereof, including a complete loss of its investment. 4.4 ACCESS TO INFORMATION. The Purchaser acknowledges that the Company has provided to and discussed with the Purchaser such information as the Purchaser has requested (to the extent available) regarding the financial results of the Company for the quarter ended September 30, 1996 and the current operations, financial condition (including the amount of available cash) and plans of the Company. The Purchaser represents and warrants that, in making this investment, it has not relied upon any information or representations and warranties of Hambrecht & Quist LLC, including without limitation representations and warranties regarding the Company, its officers, financial condition, business and prospects, or the terms of the purchase of the Shares. 4.5 STATUS. The Purchaser is an "accredited Investor" as that term is defined in Rule 501 of Regulation D promulgated under the Securities Act. 5. COVENANTS OF THE COMPANY. 5.1 INSPECTION. So long as the Purchaser (or any of its affiliates) holds at least 25% of the Shares originally issued pursuant to this Agreement, the Company shall permit the Purchaser, or any authorized representative thereof, to visit and inspect the properties of the Company, including its corporate and financial records, and to discuss its business and finances with officers of the Company, during normal business hours following reasonable notice and as often as may be reasonably requested, without interruption of the business of the Company and subject to the confidentiality obligations of Section 8.2 hereof. 5.2 FINANCIAL STATEMENTS AND OTHER INFORMATION. So long as the Purchaser (or any of its affiliates) holds at least 25% of the Shares originally issued pursuant to this Agreement, the Company shall deliver to the Purchaser: (a) within 90 days after the end of each fiscal year of the Company, an audited balance sheet of the Company as at the end of such year, and audited statements of income and of cash flows of the Company for such year, certified by certified public accountants of established national reputation selected by the Company, and prepared in accordance with generally accepted accounting principles; -6- (b) within 45 days after the end of each fiscal quarter of the Company, an unaudited balance sheet of the Company as at the end of such quarter, and unaudited statements of income and of cash flows of the Company for such fiscal quarter and for the current fiscal year to the end of such fiscal quarter; and (c) with reasonable promptness, such other notices, information and data with respect to the Company as the Company files with the SEC or delivers to the holders of its Common Stock, and such other information and data as the Purchaser may from time to time reasonably request. 5.3 RESERVATION OF COMMON STOCK. The Company shall reserve and maintain a sufficient number of shares of Common Stock for issuance upon conversion of all of the outstanding Shares. 6. TRANSFER OF SHARES. 6.1 RESTRICTED SHARES. "Restricted Shares" means (i) the Shares, (ii) the shares of Common Stock issued or issuable upon conversion of the Shares, and (iii) any other shares of capital stock of the Company issued in respect of such shares (as a result of stock splits, stock dividends, reclassifications, recapitalizations, or similar events); PROVIDED, HOWEVER, that shares of Common Stock which are Restricted Shares shall cease to be Restricted Shares (i) upon any sale pursuant to a registration statement under the Securities Act, Section 4(1) of the Securities Act or Rule 144 under the Securities Act, or (ii) at such time as they become eligible for sale under Rule 144(k) under the Securities Act. 6.2 REQUIREMENTS FOR TRANSFER. Restricted Shares shall not be sold or transferred unless either (a) they first shall have been registered under the Securities Act, or (b) the Company first shall have been furnished with an opinion of legal counsel, reasonably satisfactory to the Company, to the effect that such sale or transfer is exempt from the registration requirements of the Securities Act. 6.3 LEGEND. Each certificate representing Restricted Shares shall bear a legend substantially in the following form: "The shares represented by this certificate have not been registered under the Securities Act of 1933, as amended, and may not be offered, sold or otherwise transferred, pledged or hypothecated unless and until such -7- shares are registered under such Act or an opinion of counsel satisfactory to the Company is obtained to the effect that such registration is not required." The foregoing legend shall be removed from the certificates representing any Restricted Shares, at the request of the holder thereof, at such time as they become eligible for resale pursuant to Rule 144(k) under the Securities Act. 7. REGISTRATION RIGHTS. 7.1 REGISTRATION OF SHARES. (a) The Company shall use its best efforts to file with the SEC, as promptly as practicable following the Closing, a registration statement on Form S-3 (the "Registration Statement") covering the resale to the public by the Purchaser of the shares of common stock of the Company issued upon conversion of the Shares (the "Registrable Shares"). The Company shall use its best efforts to cause the Registration Statement to be declared effective by the SEC as soon as practicable, but in no event later than January 15, 1997. The Company shall cause the Registration Statement to remain effective until the date three years after the Closing Date or such earlier time as all of the Registrable Shares covered by the Registration Statement have been sold pursuant thereto. (b) In the event the Registration Statement has not been declared effective under the Securities Act by the SEC by the close of business on January 15, 1997, the Company shall issue to the Purchaser within 15 days following the end of each calendar month (beginning with January 1997), until the Registration Statement is declared effective, such number of shares of Series C Preferred Stock as is equal to (i) (A) the number of shares purchased at the Closing pursuant to this Agreement multiplied by (B) $.001 multiplied by (C) the number of weeks (including fractions of a week) during such month for which the Registration Statement was not declared effective (excluding, for January 1997, any period prior to the close of business on January 15, 1997) divided by (ii) (A) the average of the daily trading volume-weighted last reported sale prices per share of the common stock of the Company on the Nasdaq National Market, as reported by Nasdaq, on the last ten trading days of such month multiplied by (B) four. Any shares of Series C Preferred Stock issuable pursuant to this Section 7.1(b) shall be considered "Shares" for purposes of Sections 4, 6 and 7 of this Agreement. The issuance by the Company of such shares of Series C Preferred -8- Stock pursuant to this Section 7.1(b) shall constitute liquidated damages with respect to the Company's failure to cause the Registration Statement to be declared effective by January 15, 1997, and shall be in lieu of any other claims or damages to which the Purchaser may be entitled with respect thereto. 7.2 LIMITATIONS ON REGISTRATIONS. (a) The Company may, by written notice to the Purchaser, (i) delay the filing or effectiveness of the Registration Statement or (ii) suspend the Registration Statement after effectiveness and require that the Purchaser immediately cease sales of shares pursuant to the Registration Statement, in the event that (A) the Company files a registration statement (other than a registration statement on Form S-8 or Form S-4 or their successor forms) with the SEC for a public offering of its securities, or (B) the Company is engaged in any activity or transaction or preparations or negotiations for any activity or transaction that the Company desires to keep confidential for business reasons, if the Company determines in good faith that the public disclosure requirements imposed on the Company under the Securities Act in connection with the Registration Statement would require disclosure of such activity, transaction, preparations or negotiations. Notwithstanding the foregoing, such right shall not be exercised more than twice in any 12-month period, and no such delay or suspension may continue for more than 30 days. (b) If the Company delays or suspends the Registration Statement or requires the Purchaser to cease sales of shares pursuant to paragraph (a) above, the Company shall, as promptly as practicable following the termination of the circumstance which entitled the Company to do so, take such actions as may be necessary to file or reinstate the effectiveness of the Registration Statement and/or give written notice to the Purchaser authorizing them to resume sales pursuant to the Registration Statement. If as a result thereof the prospectus included in the Registration Statement has been amended to comply with the requirements of the Securities Act, the Company shall enclose such revised prospectus with the notice to the Purchaser given pursuant to this paragraph (b), and the Purchaser shall make no offers or sales of shares pursuant to the Registration Statement other than by means of such revised prospectus. Moreover, if the Company delays or suspends the Registration Statement or requires the Purchaser to cease sales of shares pursuant to clause (i) of paragraph (a) above as a result of the circumstances set forth in clause (A) of such paragraph (a), the Company shall permit the Purchaser to include -9- in a registration statement filed by the Company during such period, any Registrable Shares that would have been included in the Registration Statement, subject to the right of the Company to limit the number of Registrable Shares to be included in a registration statement relating to a unwritten offering of securities of the Company if the managing underwriter of such offering determines that the inclusion of such shares in such offering would adversely affect the marketability of such offering. 7.3 REGISTRATION PROCEDURES. (a) In connection with the filing by the Company of the Registration Statement, the Company shall furnish to the Purchaser a copy of the prospectus, including a preliminary prospectus, in conformity with the requirements of the Securities Act. (b) The Company shall use its best efforts to register or qualify the Registrable Shares covered by the Registration Statement under the securities laws of such states as the Purchaser shall reasonably request. (c) If the Company has delivered preliminary or final prospectuses to the Purchaser and after having done so the prospectus is amended to comply with the requirements of the Securities Act, the Company shall promptly notify the Purchaser and, if requested by the Company, the Purchaser shall immediately cease making offers or sales of shares under the Registration Statement and return all prospectuses to the Company. The Company shall promptly provide the Purchaser with revised prospectuses and, following receipt of the revised prospectuses, the Purchaser shall be free to resume making offers and sales under the Registration Statement. (d) The Company shall pay the expenses incurred by it in complying with its obligations under this Section 7 including all registration and filing fees, exchange listing fees, fees and expenses of counsel for the Company, and fees and expenses of accountants for the Company, but excluding (i) any brokerage fees, selling commissions or underwriting discounts incurred by the Purchaser in connection with sales under the Registration Statement. 7.4 REQUIREMENTS OF THE PURCHASER. (a) The Purchaser shall furnish to the Company in writing such information regarding the Purchaser and the proposed -10- sale of Registrable Shares by the Purchaser as shall be required in connection therewith by the SEC or any state securities law authorities. (b) The Purchaser shall indemnify the Company and each of its directors and officers against, and hold the Company and each of its directors and officers harmless from, any losses, claims, damages, expenses or liabilities (including reasonable attorneys fees) to which the Company or such directors and officers may become subject by reason of any statement or omission in the Registration Statement made in reliance upon, or in conformity with, a written statement by the Purchaser furnished pursuant to this Section 7.4. (c) The Purchaser shall report to the Company sales made pursuant to the Registration Statement. 7.5 INDEMNIFICATION. The Company agrees to indemnify and hold harmless the Purchaser against any losses, claims, damages, expenses or liabilities to which the Purchaser may become subject by reason of any untrue statement of a material fact contained in the Registration Statement or any omission to state therein a fact required to be stated therein or necessary to make the statements therein not misleading, except insofar as such losses, claims, damages, expenses or liabilities arise out of or are based upon information furnished to the Company by or on behalf of the Purchaser for use in the Registration Statement. The Company shall have the right to assume the defense and settlement of any claim or suit for which the Company may be responsible for indemnification under this Section 7.5. 8. MISCELLANEOUS. 8.1 SUCCESSORS AND ASSIGNS. This Agreement, and the rights and obligations of the Purchaser hereunder, may be assigned by the Purchaser to any person or entity to which at least 10% of the Shares originally issued pursuant to this Agreement are transferred by the Purchaser, and such transferee shall be deemed a "Purchaser" for purposes of this Agreement; provided that the transferee provides to the Company a written instrument notifying the Company of such transfer and assignment and agreeing to be bound by the terms of this Agreement. 8.2 CONFIDENTIALITY. The Purchaser agrees that it will keep confidential and will not disclose or divulge any confidential, proprietary or secret information which the Purchaser may obtain from the Company pursuant to financial statements, reports and other materials submitted by the Company -11- to the Purchaser pursuant to this Agreement, or pursuant to visitation or inspection rights granted hereunder, unless such information is known, or until such information becomes known, to the public; PROVIDED, HOWEVER, that the Purchaser may disclose such information (i) to its attorneys, accountants, consultants, and other professionals to the extent necessary to obtain their services in connection with its investment in the Company, (ii) to any prospective purchaser of any Shares from the Purchaser as long as such prospective purchaser agrees in writing to be bound by the provisions of this Section, or (iii) to any affiliate of the Purchaser; subject to the agreement of such party to keep such information confidential as set forth herein. 8.3 SURVIVAL OF REPRESENTATIONS AND WARRANTIES. All agreements, representations and warranties contained herein shall survive the execution and delivery of this Agreement and the closing of the transactions contemplated hereby. 8.4 NOTICES. All notices, requests, consents, and other communications under this Agreement shall be in writing and shall be delivered by hand, sent via a reputable nationwide overnight courier service or mailed by first class certified or registered mail, return receipt requested, postage prepaid: If to the Company, at Interleaf, Inc., 62 Fourth Avenue, Waltham, Massachusetts 02154, Attn: Clerk, or at such other address or addresses as may have been furnished in writing by the Company to the Purchaser; or If to the Purchaser, at 7711 Carondelet Avenue, Suite 700, St. Louis, Missouri 63105, or at such other address or addresses as may have been furnished in writing by the Purchaser to the Company. Notices provided in accordance with this Section 8.4 shall be deemed delivered upon personal delivery, one business day after being sent via a reputable nationwide overnight courier service, or two business days after deposit in the mail. 8.5 BROKERS AND CLOSING COSTS. (a) The Company and the Purchaser each agree to indemnify and save the other harmless from and against any and all claims, liabilities or obligations with respect to brokerage or finders' fees or commissions in connection with the transactions contemplated by this Agreement asserted by any person on the basis of any agreement, statement or representation alleged to have been made by such indemnifying party. The -12- Company specifically acknowledges that it is responsible for the fees and expenses of Hambrecht & Quist LLC relating to this transaction. (b) The Company will pay all costs and expenses relating to the Closing, including the fees and expenses of counsel for the Purchaser (which shall not exceed $2,000). 8.6 ENTIRE AGREEMENT. This Agreement embodies the entire agreement and understanding between the parties hereto with respect to the subject matter hereof and supersedes all prior agreements and understandings relating to such subject matter. 8.7 AMENDMENTS AND WAIVERS. Except as otherwise expressly set forth in this Agreement, any term of this Agreement may be amended and the observance of any term of this Agreement may be waived (either generally or in a particular instance and either retroactively or prospectively), with the written consent of the Company and the Purchaser. Any amendment or waiver effected in accordance with this Section 8.7 shall be binding upon each holder of any Shares (including shares of Common Stock into which such Shares have been converted), each future holder of all such securities and the Company. No waivers of or exceptions to any term, condition or provision of this Agreement, in any one or more instances, shall be deemed to be, or construed as, a further or continuing waiver of any such term, condition or provision. 8.8 COUNTERPARTS. This Agreement may be executed in one or more counterparts, each of which shall be deemed to be an original, but all of which shall be one and the same document. 8.9 SECTION HEADINGS. The section headings are for the convenience of the parties and in no way alter, modify, amend, limit, or restrict the contractual obligations of the parties. 8.10 SEVERABILITY. The invalidity or unenforceability of any provision of this Agreement shall not affect the validity or enforceability of any other provision of this Agreement. 8.11 GOVERNING LAW. This Agreement shall be governed by and construed in accordance with the laws of the Commonwealth of Massachusetts. -13- Executed as of the date first written above. INTERLEAF, INC. By:/s/ G. Gordon M. Large ------------------------------- G. Gordon M. Large Executive Vice President and Chief Financial Officer (print name and title) LINDNER INVESTMENTS By:/s/ Larry Callahan ------------------------------- Larry Callahan Vice President (print name and title) -14- EXHIBIT A to Certificate of Vote of Directors Establishing a Series of a Class of Stock of INTERLEAF, INC. To be Designated SERIES C CONVERTIBLE PREFERRED STOCK Interleaf, Inc., a Massachusetts corporation (the "Corporation"), pursuant to authority conferred on the Board of Directors of the Corporation by the Articles of Organization and in accordance with the provisions of Section 26 of the Business Corporation Law of the Commonwealth of Massachusetts, certifies that the Board of Directors of the Corporation, at a meeting duly called and held, at which a quorum was present and acting throughout, duly voted to establish a series of Preferred Stock, $0.10 par value per share, of the Corporation and that the designation and number of shares, and the preferences, voting powers, qualifications, and special or relative rights or privileges thereof are fixed as follows: 1. DESIGNATION AND AMOUNT. The shares of such series shall be designated as "Series C Convertible Preferred Stock" (the "Series C Preferred Stock") and the number of shares constituting the Series C Preferred Stock shall be 1,200,000. 2. DIVIDENDS. The holders of shares of Series C Preferred Stock shall be entitled to receive, out of funds legally available therefor, dividends of $.24878 per share on April 15, 1998 and October 15, 1998, and $.49756 per share on each April 15 and October 15 thereafter (subject in each case to appropriate adjustment in the event of any stock dividend, stock split, combination or other similar recapitalization affecting such shares). Such dividends shall accrue and shall be cumulative, from and after October 15, 1997, whether or not declared by the Board of Directors. 3. LIQUIDATION, DISSOLUTION OR WINDING UP; CERTAIN MERGERS, CONSOLIDATIONS AND ASSET SALES. (a) In the event of any voluntary or involuntary liquidation, dissolution or winding up of the Corporation, the holders of shares of Series C Preferred Stock then outstanding shall be entitled to be paid out of the assets of the Corporation available for distribution to its stockholders, after and subject to the payment in full of all amounts required to be distributed to the holders of any other class or series of stock of the Corporation ranking on liquidation prior and in preference to the Series C Preferred Stock (collectively referred to as "Senior Preferred Stock"), but before any payment shall be made to the holders of Common Stock, Series A Preferred Stock, Series B Preferred Stock or any other class or series of stock ranking on liquidation junior to the Series C Preferred Stock (such Common Stock, Series A Preferred Stock, Series B Preferred Stock and other stock being collectively referred to as "Junior Stock") by reason of their ownership thereof, an amount equal to $9.9512 per share (subject to appropriate adjustment in the event of any stock dividend, stock split, combination or other similar recapitalization affecting such shares), plus any declared or accrued but unpaid dividends on such shares. If upon any such liquidation, dissolution or winding up of the Corporation the remaining assets of the Corporation available for distribution to its stockholders shall be insufficient to pay the holders of shares of Series C Preferred Stock the full amount to which they shall be entitled, the holders of shares of Series C Preferred Stock and any class or series of stock ranking on liquidation on a parity with the Series C Preferred Stock shall share ratably in any distribution of the remaining assets and funds of the Corporation in proportion to the respective amounts which would otherwise be payable in respect of the shares held by them upon such distribution if all amounts payable on or with respect to such shares were paid in full. (b) After the payment of all preferential amounts required to be paid to the holders of Senior Preferred Stock, Series C Preferred Stock and any other class or series of stock -2- of the Corporation ranking on liquidation on a parity with the Series C Preferred Stock, upon the dissolution, liquidation or winding up of the Corporation, the holders of shares of Junior Stock then outstanding shall be entitled to receive the remaining assets and funds of the Corporation available for distribution to its stockholders, in accordance with the terms of such Junior Stock. (c) Any merger or consolidation of the Corporation or a subsidiary into or with another corporation or a sale of all or substantially all of the assets of the Corporation shall not be deemed to be a liquidation, dissolution or winding up of the Corporation for purposes of this Section 3. 4. VOTING. (a) Each holder of outstanding shares of Series C Preferred Stock shall be entitled to the number of votes equal to one-half the number of whole shares of Common Stock into which the shares of Series C Preferred Stock held by such holder are convertible (as adjusted from time to time pursuant to Section 5 hereof) as of the record date, at each meeting of stockholders of the Corporation (and written actions of stockholders in lieu of meetings) with respect to any and all matters presented to the stockholders of the Corporation for their action or consideration. Except as provided by law or by the provisions of Subsections 3(b) or 3(c) below or by the provisions establishing any other series of stock, holders of Series C Preferred Stock and of any other outstanding series of stock shall vote together with the holders of Common Stock as a single class. (b) The Corporation shall not amend, alter or repeal the preferences, special rights or other powers of the Series C Preferred Stock so as to affect adversely the Series C Preferred Stock, without the written consent or affirmative vote of the holders of a majority of the then outstanding shares of Series C Preferred Stock, given in writing or by vote at a meeting, consenting or voting (as the case may be) separately as a class. For this purpose, without limiting the generality of the foregoing, the authorization of any shares of capital stock with preference or priority over the Series C Preferred Stock as to the right to receive either dividends or amounts distributable upon liquidation, dissolution -3- or winding up of the Corporation shall be deemed to affect adversely the Series C Preferred Stock and the authorization of any shares of capital stock on a parity with Series C Preferred Stock as to the right to receive either dividends or amounts distributable upon liquidation, dissolution or winding up of the Corporation shall not be deemed to affect adversely the Series C Preferred Stock. (c) So long as at least 251,226 shares of Series C Preferred Stock (subject to appropriate adjustment in the event of any dividend, stock split, combination or other similar recapitalization affecting such shares) are outstanding, the Corporation shall not, without the prior written consent of the holders of at least a majority of the then outstanding shares of Series C Preferred Stock, given in writing or by vote at a meeting, consenting or voting (as the case may be) separately as a class: (i) take any action that would result in the holders of the Series C Preferred Stock becoming subject to taxation under Section 305 of the Internal Revenue Code of 1986, as amended; or (ii) declare or pay any dividends on capital stock (other than dividends payable solely in capital stock). 5. OPTIONAL CONVERSION. The holders of the Series C Preferred Stock shall have conversion rights as follows (the "Conversion Rights"): (a) RIGHT TO CONVERT. Each share of Series C Preferred Stock shall be convertible, at the option of the holder thereof, at any time and from time to time, and without the payment of additional consideration by the holder thereof, into such number of fully paid and nonassessable shares of Common Stock as is determined by dividing $9.9512 by the Conversion Price (as defined below) in effect at the time of conversion. The "Conversion Price" shall initially be $2.4878. Such Conversion Price, and the rate at which shares of Series C Preferred Stock may be converted into shares of Common Stock, shall be subject to adjustment as provided below. In the event of a notice of redemption of any shares of Series C Preferred Stock pursuant to Section 7 hereof, the Conversion Right of the shares designated for redemption shall terminate at the close of business on the fifth full day preceding the date fixed for redemption, unless the redemption price is not paid when due, in which case the Conversion Right for such shares shall continue until such price is paid in full. In the event of a liquidation of the Corporation, the Conversion Right shall terminate at the close of business on the first full business day preceding the date fixed for the payment of any amounts distributable on liquidation to the holders of Series C Preferred Stock. -4- (b) FRACTIONAL SHARES. No fractional shares of Common Stock shall be issued upon conversion of the Series C Preferred Stock. In lieu of any fractional shares to which the holder would otherwise be entitled, the Corporation shall pay cash equal to such fraction multiplied by the then effective Conversion Price. (c) MECHANICS OF CONVERSION. (i) In order for a holder of Series C Preferred Stock to convert shares of Series C Preferred Stock into shares of Common Stock, such holder shall surrender the certificate or certificates for such shares of Series C Preferred Stock, at the office of the transfer agent for the Series C Preferred Stock (or at the principal office of the Corporation if the Corporation serves as its own transfer agent), together with written notice that such holder elects to convert all or any number of the shares of the Series C Preferred Stock represented by such certificate or certificates. Such notice shall state such holder's name or the names of the nominees in which such holder wishes the certificate or certificates for shares of Common Stock to be issued. If required by the Corporation, certificates surrendered for conversion shall be endorsed or accompanied by a written instrument or instruments of transfer, in form satisfactory to the Corporation, duly executed by the registered holder or his or its attorney duly authorized in writing. The date of receipt of such certificates and notice by the transfer agent (or by the Corporation if the Corporation serves as its own transfer agent) shall be the conversion date ("Conversion Date"). The Corporation shall, as soon as practicable after the Conversion Date, issue and deliver at such office to such holder of Series C Preferred Stock, or to his or its nominees, a certificate or certificates for the number of shares of Common Stock to which such holder shall be entitled, together with cash in lieu of any fraction of a share. (ii) The Corporation shall at all times when the Series C Preferred Stock shall be outstanding, reserve and keep available out of its authorized but unissued stock, for the purpose of effecting the conversion of the Series C Preferred Stock, such number of its duly authorized shares of Common Stock as shall from time to time be sufficient to effect the conversion of all outstanding Series C Preferred Stock. (iii) All shares of Series C Preferred Stock which shall have been surrendered for conversion as herein provided shall no longer be deemed to be outstanding and all -5- rights with respect to such shares, including the rights, if any, to receive notices and to vote or to receive dividends, shall immediately cease and terminate on the Conversion Date. Any shares of Series C Preferred Stock so converted shall be retired and cancelled and shall not be reissued, and the Corporation (without the need for stockholder action) may from time to time take such appropriate action as may be necessary to reduce the authorized number of shares of Series C Preferred Stock accordingly. (iv) The Corporation shall pay any and all issue and other taxes that may be payable in respect of any issuance or delivery of shares of Common Stock upon conversion of shares of Series C Preferred Stock pursuant to this Section 5. The Corporation shall not, however, be required to pay any tax which may be payable in respect of any transfer involved in the issuance and delivery of shares of Common Stock in a name other than that in which the shares of Series C Preferred Stock so converted were registered, and no such issuance or delivery shall be made unless and until the person or entity requesting such issuance has paid to the Corporation the amount of any such tax or has established, to the satisfaction of the Corporation, that such tax has been paid. (d) ADJUSTMENTS TO CONVERSION PRICE FOR DILUTING ISSUES: (i) SPECIAL DEFINITIONS. For purposes of this Subsection 5(d), the following definitions shall apply: (A) "OPTION" shall mean rights, options or warrants to subscribe for, purchase or otherwise acquire Common Stock or Convertible Securities. (B) "ORIGINAL ISSUE DATE" shall mean the date on which a share of Series C Preferred Stock was first issued. (C) "CONVERTIBLE SECURITIES" shall mean any evidences of indebtedness, shares or other securities directly or indirectly convertible into or exchangeable for Common Stock. (D) "ADDITIONAL SHARES OF COMMON STOCK" shall mean all shares of Common Stock issued (or, pursuant to Subsection 5(d)(iii) below, deemed to be issued) by the Corporation after the Original Issue Date, other than: -6- (I) shares of Common Stock issued or issuable by reason of a dividend or other distribution on shares of Common Stock that is covered by Subsection 5(e) or 5(f) below; or (II) shares of Common Stock issued or issuable to employees or directors of, or consultants to, the Corporation pursuant to plans adopted by the Board of Directors of the Corporation. (ii) NO ADJUSTMENT OF CONVERSION PRICE. No adjustment in the number of shares of Common Stock into which the Series C Preferred Stock is convertible shall be made (a) unless the consideration per share (determined pursuant to Subsection 5(d)(v)) for an Additional Share of Common Stock issued or deemed to be issued by the Corporation is less than the applicable Conversion Price in effect on the date of, and immediately prior to, the issue of such Additional Shares, or (b) if the Corporation receives written notice from the holders of at least a majority of the then outstanding shares of Series C Preferred Stock, agreeing that no such adjustment shall be made as the result of such issuance of Additional Shares of Common Stock. (iii) ISSUE OF SECURITIES DEEMED ISSUE OF ADDITIONAL SHARES OF COMMON STOCK. If the Corporation at any time or from time to time after the Original Issue Date shall issue any Options or Convertible Securities or shall fix a record date for the determination of holders of any class of securities entitled to receive any such Options or Convertible Securities, then the maximum number of shares of Common Stock (as set forth in the instrument relating thereto without regard to any provision contained therein for a subsequent adjustment of such number) issuable upon the exercise of such Options or, in the case of Convertible Securities and Options therefor, the conversion or exchange of such Convertible Securities, shall be deemed to be Additional Shares of Common Stock -7- issued as of the time of such issue or, in case such a record date shall have been fixed, as of the close of business on such record date, provided that Additional Shares of Common Stock shall not be deemed to have been issued unless the consideration per share (determined pursuant to Subsection 5(d)(v) hereof) of such Additional Shares of Common Stock would be less than the applicable Conversion Price in effect on the date of and immediately prior to such issue, or such record date, as the case may be, and provided further that in any such case in which Additional Shares of Common Stock are deemed to be issued: (A) No further adjustment in the Conversion Price shall be made upon the subsequent issue of Convertible Securities or shares of Common Stock upon the exercise of such Options or conversion or exchange of such Convertible Securities; (B) If such Options or Convertible Securities by their terms provide, with the passage of time or otherwise, for any increase in the consideration payable to the Corporation, upon the exercise, conversion or exchange thereof, the Conversion Price computed upon the original issue thereof (or upon the occurrence of a record date with respect thereto), and any subsequent adjustments based thereon, shall, upon any such increase becoming effective, be recomputed to reflect such increase insofar as it affects such Options or the rights of conversion or exchange under such Convertible Securities; (C) Upon the expiration or termination of any unexercised Option, the Conversion Price shall not be readjusted, but the Additional Shares of Common Stock deemed issued as the result of the original issue of such Option shall not be deemed issued for the purposes of any subsequent adjustment of the Conversion Price; (D) In the event of any change in the number of shares of Common Stock issuable upon the exercise, conversion or exchange of any Option or Convertible Security, including, but not limited to, a change resulting from the anti-dilution provisions thereof, the Conversion Price then in effect shall forthwith be readjusted to such Conversion Price as would have obtained had the adjustment which was made upon the issuance of such Option or Convertible Security not exercised or converted prior to such change been made upon the basis of such change; and (E) No readjustment pursuant to clause (B) or (D) above shall have the effect of increasing the Conversion Price to an amount which exceeds the lower of (i) the Conversion Price on the original adjustment date, or (ii) the Conversion Price that would have resulted from any issuances of Additional -8- Shares of Common Stock between the original adjustment date and such readjustment date. In the event the Corporation, after the Original Issue Date, amends any Options or Convertible Securities (whether such Options or Convertible Securities were outstanding on the Original Issue Date or were issued after the Original Issue Date) to increase the number of shares issuable thereunder or decrease the consideration to be paid upon exercise or conversion thereof, then such Options or Convertible Securities, as so amended, shall be deemed to have been issued after the Original Issue Date and the provisions of this Subsection 5(d)(iii) shall apply. (iv) ADJUSTMENT OF CONVERSION PRICE UPON ISSUANCE OF ADDITIONAL SHARES OF COMMON STOCK. In the event the Corporation shall at any time after the Original Issue Date issue Additional Shares of Common Stock (including Additional Shares of Common Stock deemed to be issued pursuant to Subsection 5(d)(iii), but excluding shares issued as a stock split or combination as provided in Subsection 5(e) or upon a dividend or distribution as provided in Subsection 5(f)), without consideration or for a consideration per share less than the applicable Conversion Price in effect on the date of and immediately prior to such issue, then and in such event, such Conversion Price shall be reduced, concurrently with such issue, to a price (calculated to the nearest cent) determined by multiplying such Conversion Price by a fraction, (A) the numerator of which shall be (1) the number of shares of Common Stock outstanding immediately prior to such issue plus (2) the number of shares of Common Stock which the aggregate consideration received or to be received by the Corporation for the total number of Additional Shares of Common Stock so issued would purchase at such Conversion Price; and (B) the denominator of which shall be the number of shares of Common Stock outstanding immediately prior to such issue plus the number of such Additional Shares of Common Stock so issued; PROVIDED THAT, (i) for the purpose of this Subsection 5(d)(iv), all shares of Common Stock issuable upon conversion or exercise of Convertible Securities or Options -9- outstanding immediately prior to such issue shall be deemed to be outstanding, and (ii) for the purpose of this Subsection 5(d)(iv), the number of shares of Common Stock deemed issuable upon conversion or exercise of such outstanding Convertible Securities or Options shall not give effect to any adjustments to the conversion price or conversion rate or exercise price of such Convertible Securities or Options resulting from the issuance of Additional Shares of Common Stock that is the subject of this calculation. (v) DETERMINATION OF CONSIDERATION. For purposes of this Subsection 5(d), the consideration received by the Corporation for the issue of any Additional Shares of Common Stock shall be computed as follows: (A) CASH AND PROPERTY: Such consideration shall: (I) insofar as it consists of cash, be computed at the aggregate of cash received by the Corporation, excluding amounts paid or payable for accrued interest; (II) insofar as it consists of property other than cash, be computed at the fair market value thereof at the time of such issue, as determined in good faith by the Board of Directors; and (III) in the event Additional Shares of Common Stock are issued together with other shares or securities or other assets of the Corporation for consideration which covers both, be the proportion of such consideration so received, computed as provided in clauses (I) and (II) above, as determined in good faith by the Board of Directors. (B) OPTIONS AND CONVERTIBLE SECURITIES. The consideration per share received by the Corporation for Additional Shares of Common Stock deemed to have been issued pursuant to Subsection 5(d)(iii), relating to Options and Convertible Securities, shall be determined by dividing (x) the total amount, if any, received or receivable by the Corporation as consideration for the issue of such Options or Convertible Securities, plus the minimum aggregate amount of additional consideration (as set forth in the instruments relating thereto, without regard to any provision contained therein for a subsequent adjustment of such consideration) payable to the Corporation upon the exercise of such Options or the conversion or exchange of such Convertible Securities, or in the case of Options for Convertible Securities, the exercise of such Options for Convertible Securities and the conversion or exchange of such Convertible Securities, by (y) the maximum number of shares of Common Stock (as set forth in the instruments relating thereto, -10- without regard to any provision contained therein for a subsequent adjustment of such number) issuable upon the exercise of such Options or the conversion or exchange of such Convertible Securities. (vi) MULTIPLE CLOSING DATES. In the event the Corporation shall issue on more than one date Additional Shares of Common Stock which are comprised of shares of the same series or class of Convertible Securities, and such issuance dates occur within a period of no more than 120 days, then the Conversion Price shall be adjusted only once on account of such issuances, with such adjustment to occur upon the final such issuance and to give effect to all such issuances as if they occurred on the date of the final such issuance. (e) ADJUSTMENT FOR STOCK SPLITS AND COMBINATIONS. If the Corporation shall at any time or from time to time after the Original Issue Date effect a subdivision of the outstanding Common Stock, the Conversion Price then in effect immediately before that subdivision shall be proportionately decreased. If the Corporation shall at any time or from time to time after the Original Issue Date combine the outstanding shares of Common Stock, the Conversion Price then in effect immediately before the combination shall be proportionately increased. Any adjustment under this paragraph shall become effective at the close of business on the date the subdivision or combination becomes effective. (f) ADJUSTMENT FOR CERTAIN DIVIDENDS AND DISTRIBUTIONS. In the event the Corporation at any time, or from time to time after the Original Issue Date shall make or issue, or fix a record date for the determination of holders of Common Stock entitled to receive, a dividend or other distribution payable in additional shares of Common Stock, then and in each such event the Conversion Price for the Series C Preferred Stock then in effect shall be decreased as of the time of such issuance or, in the event such a record date shall have been fixed, as of the close of business on such record date, by multiplying the Conversion Price for the Series C Preferred Stock then in effect by a fraction: (1) the numerator of which shall be the total number of shares of Common Stock issued and outstanding immediately prior to the time of such issuance or the close of business on such record date, and -11- (2) the denominator of which shall be the total number of shares of Common Stock issued and outstanding immediately prior to the time of such issuance or the close of business on such record date plus the number of shares of Common Stock issuable in payment of such dividend or distribution; provided, however, if such record date shall have been fixed and such dividend is not fully paid or if such distribution is not fully made on the date fixed therefor, the Conversion Price for the Series C Preferred Stock shall be recomputed accordingly as of the close of business on such record date and thereafter the Conversion Price for the Series C Preferred Stock shall be adjusted pursuant to this paragraph as of the time of actual payment of such dividends or distributions; and provided further, however, that no such adjustment shall be made if the holders of Series C Preferred Stock simultaneously receive a dividend or other distribution of shares of Common Stock in a number equal to the number of shares of Common Stock as they would have received if all outstanding shares of Series C Preferred Stock had been converted into Common Stock on the date of such event. (g) ADJUSTMENTS FOR OTHER DIVIDENDS AND DISTRIBUTIONS. In the event the Corporation at any time or from time to time after the Original Issue Date for the Series C Preferred Stock shall make or issue, or fix a record date for the determination of holders of Common Stock entitled to receive, a dividend or other distribution payable in securities of the Corporation other than shares of Common Stock, then and in each such event provision shall be made so that the holders of the Series C Preferred Stock shall receive upon conversion thereof in addition to the number of shares of Common Stock receivable thereupon, the amount of securities of the Corporation that they would have received had the Series C Preferred Stock been converted into Common Stock on the date of such event and had they thereafter, during the period from the date of such event to and including the conversion date, retained such securities receivable by them as aforesaid during such period, giving application to all adjustments called for during such period under this paragraph with respect to the rights of the holders of the Series C Preferred Stock; and provided further, however, that no such adjustment shall be made if the holders of Series C Preferred Stock simultaneously receive a dividend or other distribution of such securities in an amount equal to the amount of such securities as they would have received if all outstanding shares of Series C Preferred Stock had been converted into Common Stock on the date of such event. -12- (h) ADJUSTMENT FOR RECLASSIFICATION, EXCHANGE, OR SUBSTITUTION. If the Common Stock issuable upon the conversion of the Series C Preferred Stock shall be changed into the same or a different number of shares of any class or classes of stock, whether by capital reorganization, reclassification, or otherwise (other than a subdivision or combination of shares or stock dividend provided for above, or a reorganization, merger, consolidation, or sale of assets provided for below), then and in each such event the holder of each such share of Series C Preferred Stock shall have the right thereafter to convert such share into the kind and amount of shares of stock and other securities and property receivable, upon such reorganization, reclassification, or other change, by holders of the number of shares of Common Stock into which such shares of Series C Preferred Stock might have been converted immediately prior to such reorganization, reclassification, or change, all subject to further adjustment as provided herein. (i) NO IMPAIRMENT. The Corporation will not, by amendment of its Articles of Organization or through any reorganization, transfer of assets, consolidation, merger, dissolution, issue or sale of securities or any other voluntary action, avoid or seek to avoid the observance or performance of any of the terms to be observed or performed hereunder by the Corporation, but will at all times in good faith assist in the carrying out of all the provisions of this Section 5 and in the taking of all such action as may be necessary or appropriate in order to protect the Conversion Rights of the holders of the Series C Preferred Stock against impairment. (j) CERTIFICATE AS TO ADJUSTMENTS. Within 30 days after the occurrence of each adjustment or readjustment of the Conversion Price pursuant to this Section 5, the Corporation at its expense shall compute such adjustment or readjustment in accordance with the terms hereof and furnish to each holder of Series C Preferred Stock a certificate setting forth such adjustment or readjustment and showing in detail the facts upon which such adjustment or readjustment is based. The Corporation shall, upon the written request at any time of any holder of Series C Preferred Stock, furnish or cause to be furnished to such holder a similar certificate setting forth (i) such adjustments and readjustments, (ii) the Conversion Price then in effect, and (iii) the number of shares of Common Stock and the amount, if any, of other property which then would be received upon the conversion of Series C Preferred Stock. -13- (k) NOTICE OF RECORD DATE. In the event: (i) that the Corporation declares a dividend (or any other distribution) on its Common Stock payable in Common Stock or other securities of the Corporation; (ii) that the Corporation subdivides or combines its outstanding shares of Common Stock; (iii) of any reclassification of the Common Stock of the Corporation (other than a subdivision or combination of its outstanding shares of Common Stock or a stock dividend or stock distribution thereon), or of any consolidation or merger of the Corporation into or with another corporation, or of the sale of all or substantially all of the assets of the Corporation; or (iv) of the involuntary or voluntary dissolution, liquidation or winding up of the Corporation; then the Corporation shall mail to the holders of the Series C Preferred Stock at their last addresses as shown on the records of the Corporation, at least ten days prior to the date specified in (A) below or twenty days before the date specified in (B) below, a notice stating (A) the record date of such dividend, distribution, subdivision or combination, or, if a record is not to be taken, the date as of which the holders of Common Stock of record to be entitled to such dividend, distribution, subdivision or combination are to be determined, or (B) the date on which such reclassification, consolidation, merger, sale, dissolution, liquidation or winding up is expected to become effective, and the date as of which it is expected that holders of Common Stock of record shall be entitled to exchange their shares of Common Stock for securities or other property deliverable upon -14- such reclassification, consolidation, merger, sale, dissolution or winding up. 6. MANDATORY CONVERSION. (a) Effective upon either of the following times (each a "Mandatory Conversion Time"), all outstanding shares of Series C Preferred Stock shall automatically be converted into shares of Common Stock, at the then effective conversion rate: (i) Immediately prior to the consummation of any consolidation or merger of the Corporation with or into, or the sale of all or substantially all of the assets of the Corporation to, another corporation whose common stock is listed on the Nasdaq National Market or a national securities exchange; or (ii) Upon the close of business on the 20th trading day in any period of 20 consecutive trading days for which the volume-weighted average of the last reported sale prices per share of the Common Stock of the Corporation on the Nasdaq National Market, as reported by Nasdaq, is equal to or greater than $3.7317 (subject to appropriate adjustment for stock splits, stock dividends, combinations and other similar recapitalizations affecting such shares); provided that no such Mandatory Conversion Time shall be deemed to occur under this clause (ii) unless the Registration Statement (as defined in the Series C Preferred Stock Purchase Agreement between the Corporation and Lindner Investments dated October 14, 1996) is effective under the Securities Act of 1933, as amended, at all times during such 20-day period. (b) No later than 20 days prior to the Mandatory Conversion Time (in the case of a Mandatory Conversion Time under clause (i) above) or no later than 20 days after the Mandatory Conversion Time (in the case of a Mandatory Conversion Time under clause (ii) above), the Corporation shall deliver written notice of the Mandatory Conversion Time, and the conversion of the Series C Preferred Stock effected pursuant thereto, to all holders of record of shares of Series C Preferred Stock. Such notice shall be sent by first class or registered mail, postage prepaid, to each record holder of Series C Preferred Stock at such holder's address last shown on the records of the transfer agent for the Series C Preferred Stock (or the records of the Corporation, if it serves as its own transfer agent). Upon receipt of such notice, each holder of shares of Series C Preferred Stock shall promptly surrender his or its certificate or certificates for all such shares to the Corporation in -15- accordance with the instructions set forth in such notice, and shall thereafter receive certificates for the number of shares of Common Stock to which such holder is entitled pursuant to this Section 6. As of the Mandatory Conversion Time, all rights with respect to the Series C Preferred Stock so converted, including the rights, if any, to receive notices and vote (other than as a holder of Common Stock) will terminate, except only the rights of the holders thereof, upon surrender of their certificate or certificates therefor, to receive certificates for the number of shares of Common Stock into which such Series C Preferred Stock has been converted. If so required by the Corporation, certificates surrendered for conversion shall be endorsed or accompanied by written instrument or instruments of transfer, in form satisfactory to the Corporation, duly executed by the registered holder or by his or its attorney duly authorized in writing. As soon as practicable after the surrender of the certificate or certificates for Series C Preferred Stock, the Corporation shall cause to be issued and delivered to such holder, or on his or its written order, a certificate or certificates for the number of full shares of Common Stock issuable on such conversion in accordance with the provisions hereof and cash as provided in Subsection 5(b) in respect of any fraction of a share of Common Stock otherwise issuable upon such conversion. (c) All certificates evidencing shares of Series C Preferred Stock which are required to be surrendered for conversion in accordance with the provisions hereof shall, from and after the Mandatory Conversion Time, be deemed to have been retired and cancelled and the shares of Series C Preferred Stock represented thereby converted into Common Stock for all purposes, notwithstanding the failure of the holder or holders thereof to surrender such certificates on or prior to such date. Upon such mandatory conversion of the Series C Preferred Stock pursuant to this Section 6, all provisions hereof included under the caption "Series C Convertible Preferred Stock", and all references herein to the Series C Preferred Stock, shall be deleted and shall be of no further force or effect, and the Corporation may thereafter take such appropriate action (without the need for stockholder action) as may be necessary to give effect thereto. 7. OPTIONAL REDEMPTION. (a) At any time and from time to time on or after October 16, 1999, the Corporation may, at the option of its Board of Directors, redeem the Series C Preferred Stock, in whole or in part, for the following redemption prices per share (subject to -16- appropriate adjustment for stock splits, stock dividends, combinations or other similar recapitalizations affecting such shares), plus any declared or accrued but unpaid dividends thereon to the Redemption Date (as defined below), which shall be payable in cash (hereinafter referred to as the "Redemption Price"). If the Redemption Date is From October 16, 1999 through October 15, 2000 $12.43900 From October 16, 2000 through October 15, 2001 $11.94144 From October 16, 2001 through October 15, 2002 $11.44388 From October 16, 2002 through October 15, 2003 $10.94632 From October 16, 2003 through October 15, 2004 $10.44876 From and after October 16, 2004 $ 9.9512 (b) In the event of any redemption of only a part of the then outstanding Series C Preferred Stock, the Corporation shall effect such redemption pro rata among the holders thereof based on the number of shares of Series C Preferred Stock held by such holders on the date of the Redemption Notice (as defined below). (c) At least 30 days prior to the date fixed for any redemption of Series C Preferred Stock (hereinafter referred to as the "Redemption Date"), written notice shall be mailed, by first class or registered mail, postage prepaid, to each holder of record of Series C Preferred Stock to be redeemed, at his or its address last shown on the records of the transfer agent of the Series C Preferred Stock (or the records of the Corporation, if it serves as its own transfer agent), notifying such holder of the election of the Corporation to redeem such shares, specifying the Redemption Date and the time at which such holder's conversion rights (pursuant to Section 5 hereof) as to such shares terminate (which shall be the close of business on the fifth full day preceding the Redemption Date) and calling upon such holder to surrender to the Corporation, in the manner designated, his or its certificate or certificates representing the shares to be redeemed (such notice is hereinafter referred to as the "Redemption Notice"). On or prior to the Redemption Date, each holder of Series C Preferred Stock to be redeemed shall surrender his or its certificate or certificates representing such shares to the Corporation, in the manner designated in the Redemption Notice, and thereupon the Redemption Price of such shares shall be payable to the order of the person whose name appears on such certificate or certificates as the owner thereof and each surrendered certificate shall be cancelled. In the -17- event less than all the shares represented by any such certificate are redeemed, a new certificate shall be issued representing the unredeemed shares. From and after the Redemption Date, unless there shall have been a default in payment of the Redemption Price, all rights of the holders of the Series C Preferred Stock designated for redemption in the Redemption Notice as holders of Series C Preferred Stock of the Corporation (except the right to receive the Redemption Price without interest upon surrender of their certificate or certificates) shall cease with respect to such shares, and such shares shall not thereafter be transferred on the books of the Corporation or be deemed to be outstanding for any purpose whatsoever. (d) Any shares of Series C Preferred Stock so redeemed shall permanently be retired, shall no longer be deemed outstanding and shall not under any circumstances be reissued, and the Corporation may from time to time take such appropriate action as may be necessary to reduce the authorized Series C Preferred Stock accordingly. Nothing herein contained shall prevent or restrict the purchase by the Corporation, from time to time either at public or private sale, of the whole or any part of the Series C Preferred Stock at such price or prices as the Corporation may determine, subject to the provisions of applicable law. 8. WAIVER. Any of the rights of the holders of Series C Preferred Stock set forth herein may be waived by the affirmative vote of the holders of more than fifty percent (50%) of the shares of Series C Preferred Stock then outstanding. -18- EXHIBIT D Lindner Growth Fund 502,452 shares Lindner Dividend Fund 502,452 shares EX-11. 5 EXHIBIT 11 INTERLEAF, INC. EXHIBIT 11-COMPUTATION OF EARNINGS PER SHARE
Three months ended Six months ended September 30 September 30 1996 1995 1996 1995 ---- ---- ---- ---- (unaudited) (unaudited) In thousands, except for per share amounts PRIMARY Weighted average shares outstanding of Common Stock 17,457 15,084 17,229 14,725 Dilutive Senior Series B Convertible Preferred Stock -- 2,000 -- 2,160 Dilutive stock options -- 1,286 -- 1,081 Dilutive stock purchase warrants -- 203 -- 141 Dilutive stock purchase plan rights -- 45 -- 27 -------- ------- -------- ------- TOTAL 17,457 18,618 17,229 18,134 -------- ------- -------- ------- Net income (loss) $(10,327) $ 922 $(14,127) $ 1,394 -------- ------- -------- ------- Net income (loss) per share $ (0.59) $ 0.05 $ (0.82) $ 0.08 -------- ------- -------- ------- FULLY DILUTED Weighted average shares outstanding of Common Stock 17,457 15,084 17,229 14,725 Dilutive Senior Series B Convertible Preferred Stock -- 2,000 -- 2,160 Dilutive stock options -- 1,323 -- 1,366 Dilutive stock purchase warrants -- 215 -- 277 Dilutive stock purchase plan rights -- 46 -- 32 -------- ------- -------- ------- TOTAL 17,457 18,668 17,229 18,560 -------- ------- -------- ------- Net income (loss) $(10,327) $ 922 $(14,127) $ 1,394 -------- ------- -------- ------- Net income (loss) per share $ (0.59) $ 0.05 $ (0.82) $ 0.08 -------- ------- -------- -------
The dilutive effect of stock options, stock purchase warrants, and stock purchase plan rights are calculated using the treasury stock method. Under this method, these common stock equivalents are assumed to be exercised and proceeds from the exercise are assumed to be used to repurchase common stock at the average market price for primary income (loss) per share and the higher of the end of the period or average market price for fully diluted income (loss) per share. The dilutive effect of Convertible Preferred Stock is calculated using the if-converted method. EX-27 6 EXHIBIT 27 FINANCIAL DATA SCHEDULE
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE CONSOLIDATED BALANCE SHEETS AND CONSOLIDATED STATEMENTS OF OPERATIONS FOUND ON PAGES 3 AND 4 OF THE COMPANY'S FORM 10-Q FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 1996, AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 1,000 6-MOS MAR-31-1997 SEP-30-1996 4,942 0 17,435 1,545 330 28,845 50,039 42,518 38,858 33,434 0 0 86 175 4,938 38,858 11,660 35,639 3,153 14,314 35,159 120 46 (14,127) 0 (14,127) 0 0 0 (14,127) (0.82) (0.82) INCLUDES A $4.8 MILLION CHARGE FOR RESTRUCTURING OF THE COMPANY'S WORLDWIDE OPERATIONS.
-----END PRIVACY-ENHANCED MESSAGE-----