-----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, Ln+mvLgsEKcUQvB8BMWIvxw6H88Ln4aRT0OAJwCqu0eDHfs5jP65Vn9nF/3KrNfA ZJw7iLkuliyMHloiZ4zkCg== 0000912057-97-022492.txt : 19970701 0000912057-97-022492.hdr.sgml : 19970701 ACCESSION NUMBER: 0000912057-97-022492 CONFORMED SUBMISSION TYPE: 10-K405 PUBLIC DOCUMENT COUNT: 5 CONFORMED PERIOD OF REPORT: 19970331 FILED AS OF DATE: 19970630 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-K405 SEC ACT: 1934 Act SEC FILE NUMBER: 000-14713 FILM NUMBER: 97633439 BUSINESS ADDRESS: STREET 1: PROSPECT PLACE STREET 2: 9 HILLSIDE AVE CITY: WALTHAM STATE: MA ZIP: 02154 BUSINESS PHONE: 6172900710 10-K405 1 10-K405 =============================================================================== SECURITIES AND EXCHANGE COMMISSION Washington, DC 20549 ------------------------- FORM 10-K ------------------------- Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 ------------------------- For the fiscal year ended: Commission File Number: March 31, 1997 0-14713 ------------------------- INTERLEAF, INC. (Exact name of registrant as specified in its charter) ------------------------- Massachusetts 04-2729042 (State of Incorporation) (IRS employer identification number) 62 Fourth Avenue Waltham, Massachusetts 02154 (Address of principal executive offices) Telephone No.: (617) 290--0710 ------------------------- Securities registered pursuant to Section 12(b) of the Act: None Securities registered pursuant to Section 12(g) of the Act: Common Stock, par value $.01 per share Preferred Stock Purchase Rights 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 ----- ----- Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. /X/ The aggregate market value of Common Stock held by non-affiliates of the registrant at June 18, 1997 was $23,868,250 based upon the last reported sales price of the Common Stock in the National Market System, as reported by NASDAQ on such date. ------------------------- APPLICABLE ONLY TO CORPORATE REGISTRANTS The number of shares of the registrant's Common Stock, $.01 par value, outstanding at June 18, 1997 was 17,709,719. DOCUMENTS INCORPORATED BY REFERENCE 1. Portions of the Company's Proxy Statement relating to the Company's Annual Meeting of Shareholders to be held on August 15, 1997. (Part III) =============================================================================== PART I ITEM 1. BUSINESS Interleaf-Registered Trademark-, Inc. and its subsidiaries ("Interleaf" or the "Company") develop and market software that is used in the creation, publication, management, and distribution of electronic documents. The Company's software enables customers to compose, edit, view and print documents, while also facilitating their electronic management, preparation, conversion and distribution, thereby enabling the Company to offer its customers an integrated document publishing ("IDP") solution. Since the Company's inception, Interleaf has primarily focused on the development and marketing of electronic publishing software for the technical documentation segment. These products were developed on 32-bit Unix workstations ("Workstations") manufactured by International Business Machines Corporation ("IBM"), Digital Equipment Corporation ("Digital"), Sun Microsystems, Inc. ("Sun"), Hewlett-Packard Company ("HP"), and on Intel-based personal computers ("PCs"). The market for high-end technical document management products for Workstations and PCs has matured. The maturing of this market has had a negative impact on Interleaf's revenue and business. This is most evident in product revenue which declined by 46% in fiscal year 1997 from the prior year while total revenue declined by 27%. In comparison, fiscal year 1996's product revenue and total revenue remained flat compared to fiscal year 1995 (although 1995's total revenue declined by 21% from the prior year). As a response to revenue declines, the Company has reduced its asset base, employment levels, and other costs over the last three fiscal years. In fiscal years 1997 and 1995, Interleaf incurred restructuring charges of $11 million and $7 million, respectively. A major part of restructuring costs was related to facilities which amounted to $8 million and $3 million for fiscal years 1997 and 1995, respectively. Additionally, total employment declined by 47% and 25% in fiscal years 1997 and 1995, respectively. Severance costs related to the restructuring amounted to $3 million and $5 million in fiscal years 1997 and 1995, respectively. Investments in research and development, including the capitalized software development costs, were reduced by $4 million during fiscal year 1997 but averaged $19 million during the last three fiscal years. The net effect on costs from these changes is that quarterly operating expenses have been reduced by $8 million from the first to the last quarter of fiscal year 1997. While the demand for high-end technical document management products has matured, most mid to large size companies are requiring enterprise publishing solutions to assemble, integrate, control, and distribute documents as an essential part of their businesses. In fiscal year 1998, the enterprise publishing solutions market is expected to increase. The growth of the Internet and intranet account for most of this increase, and as a result, the definition of document publishing and management has changed. Solving enterprise document management problems is an enterprise-wide problem, beginning at a departmental level, e.g., Human Resources, Marketing, Sales, Engineering, Finance, etc. Interleaf plans to introduce new technologies and products in fiscal year 1998. These new technologies and products will focus on enterprise publishing solutions for complex document publishing, distribution and management across the entire enterprise. Interleaf's new technology, packaged and sold as IDP applications, will allow our customers to solve specific business problems such as enhancing corporate communication, reducing costs associated with disparate document information systems, allowing customers to offer more accurate, lower cost products and services, and substantially improving their bottom line. The Company's future revenue growth will be largely dependent on its ability to develop these new technologies and apply IDP application solutions, as well as its ability to reorganize sales and distribution channels to sell them successfully into the marketplace. PRODUCTS AND SPECIALIZED SERVICES The Company currently markets an integrated suite of software products that are sold both individually and as parts of an IDP solution. These products include Interleaf 6 for publishing, WorldView for on-line distribution of document collections, RDM for document management, and BusinessWeb for Internet and intranet publishing and document management. The Company also markets consulting and training to enable its customers to deploy their IDP solutions. Interleaf 6. Interleaf 6 operates on Sun, Digital, HP, and IBM Workstations and on Windows NT and Windows 95 operating systems. 2 Interleaf 6 is a production publishing engine that provides the capabilities to develop solutions for customers' complex document processes. Information-driven and collaborative publishing processes require a publishing engine to assimilate information from documents that originate from a variety of sources. These documents may be either a single document containing thousands of pages or a collection or library of interrelated documents. Interleaf 6 enables customers to reuse this information and re--purpose it for different distribution media: paper, Internet, intranet, local area network ("LAN"), wide area network ("WAN"), CD-ROM or for On Demand Printing. These documents share common characteristics such as multiple authors, controlled revisions and long life cycles. Interleaf 6 automates complex document processes by providing tools for creating and maintaining documentation. By leveraging 32-bit operating environments, Interleaf 6 can execute rapid changes across large document collections, maintaining cross references, autonumbering and pagination. Foreign language versions of Interleaf 6 are available in French, Japanese, Italian and German. Interleaf 6 is sold in modules. In the United States, the base module is priced at $1,395 and the complete package is $15,000. Interleaf 6 is subject to volume price discounts, depending on the amount committed to by a customer. WorldView. WorldView is a comprehensive electronic document distribution system which enables customers to transform various types of electronic data into collections of interrelated information for distribution online, by CD-ROM, diskette or other media type for viewing on PCs and Workstations and is available in English, French, Italian, Spanish, German and Japanese languages. Customers may merge and assimilate documents ranging from single page reports to thousands of pages of documentation that may originate in different formats and different applications throughout an organization, thereby allowing customers to build comprehensive electronic distribution applications designed specifically for their document processes. WorldView also offers the ability to enhance information with formatting, structure, graphical road maps and access tools. WorldView Java. WorldView Java is a server based product that transforms various types of electronic data into collections of interrelated information for distribution and viewing on Web Browsers. In fiscal year 1997, WorldView Java was released in Beta, and is expected to be ready for general availability in early fiscal 1998. These products have a list price starting at $195 in the United States. WorldView Press, the tool that customers use to prepare their documents created by either Interleaf or non-Interleaf authoring tools, for electronic viewing, starts at $5,000. WorldView is subject to volume discounts. RDM. Interleaf's RDM is a product for use on PCs and Workstations that enables users to manage documents, whether created with Interleaf 6 or other authoring products, in large document databases. RDM manages documents through the creation, revision, and approval processes. It provides users with a central document repository that manages document workflow, security, relationships and revisions, particularly relevant in regulated and quality-driven processes. This product has a list price starting at approximately $36,000 in the United States. BusinessWeb. This product offers Internet access to an RDM-managed knowledge repository using a standard Web browser. This product lists for approximately $25,000. Liaison. Liaison is an open Application Programming Interface designed to facilitate the development of IDP applications. Liaison's object-oriented framework is standards-based and makes it easy to rapidly create networked solutions that operate across applications and platforms. The price of this product begins at $499. All of the Company's core software products support documents in Hypertext Markup Language ("HTML"), the data form for Internet World Wide Web publishing. 3 SERVICES. The Company continues to implement its services strategy of providing consulting and training to its customers to enable them to deploy their IDP solutions, utilizing Interleaf's software products. During the fiscal years ended March 31, 1997, 1996 and 1995, worldwide revenues from services were approximately $17.0 million, $21.5 million, and $22.6 million respectively, representing approximately 26%, 24%, and 26% respectively, of the Company's total revenues. MARKETS AND CUSTOMERS. Interleaf has historically directed its marketing efforts primarily to the technical documentation segment of the electronic publishing market. As this segment has matured, the Company has diversified into IDP solutions, by applying its broad--based technology to vertical markets. In fiscal 1998, Interleaf will aggressively market solutions to vertical markets such as financial services, manufacturing, insurance and healthcare. SALES AND DISTRIBUTION UNITED STATES. In the United States, Interleaf distributes its software products and customized services through direct and alternate channels. Direct Channel. Currently, the Company sells its software products and consulting services to customers primarily through its direct sales force. Since the start of fiscal 1993, the Company has had a telesales operation at its corporate offices to supplement its direct sales force. In fiscal 1998, the Company will team with technology partners, VARs and systems integrators to provide a broader range of solutions to the market. Consulting services are performed by consulting engineers working out of the Company's direct sales offices or corporate headquarters. Direct Sales/Services. In the United States, the Company employs approximately 99 persons engaged in direct sales, sales support, and services activities. Services includes employees engaged in project management, customized services and pre-sales activities. Interleaf maintains sales and service offices in 7 United States locations. Alternate Channels. The Company has entered into agreements with a number of value-added resellers to market and distribute its software products. Currently, the Company has approximately 25 resellers in the United States who resell its software products. During the fiscal year ended March 31, 1997, domestic revenues attributable to VAR sales totaled approximately 2% of the domestic revenues, compared with 5% of the domestic revenue in fiscal 1996 and 5% in fiscal 1995. Overall, domestic revenue from the direct and alternate channels, including services and customer support, accounted for approximately $40 million for the fiscal year ended March 31, 1997, representing approximately 62% of the Company's revenues for such year, compared with approximately $55 million or 62% of total revenues for fiscal 1996, and $57 million or 65% of total revenues for fiscal 1995. INTERNATIONAL. The Company primarily markets its software products and services in Canada, Europe and Asia through its wholly-owned subsidiaries. In Italy, however, Interleaf products are sold exclusively through Interleaf Italia S.r.l. The Company has an equity interest of approximately 30% in Interleaf Italia S.r.l., and has the right to purchase the remaining equity at a formula price based upon investment by the other shareholders in such entity, as well as its sales and profitability. Since April 1989, Interleaf has been selling its products in Latin America through Interleaf Americas, Ltd., an exclusive distributor. The revenues from Interleaf Americas have been insignificant. In August 1992, Interleaf established a wholly owned subsidiary in Japan to market the Company's Japanese language products. This subsidiary has been primarily selling through Japanese distributors and resellers who have significant services capabilities, and not directly to end users as the Company generally does outside of Japan. Sales and support offices for these non-U.S. entities are maintained in nearly all major European cities; the Company also has offices in Ottawa, Canada; Tokyo, Japan; and Sydney, Australia. Overall, international sales, including services and customer support, accounted for approximately $26 million for the fiscal year ended March 31, 1997 or 40% of total revenues, compared with approximately $34 million or 38% of total revenues for fiscal 1996, and approximately $31 million or 36% of total revenues for fiscal 1995. As of March 31, 1997, 106 employees work in the Company's international operations. 4 CUSTOMER SUPPORT Many of Interleaf's customers enter into customer support agreements. The Company employs 25 people in customer support at its corporate headquarters, and approximately 10 outside the United States. Each customer who has entered into a standard support contract receives telephone access to the Company's customer support staff and bug fixes and upgrades to Interleaf products covered under the support contract. Worldwide revenues from customer support and maintenance were $29 million, representing approximately 45% of total revenues for fiscal year ended March 31, 1997, compared with $32.3 million or 36% of total revenues for fiscal year ended March 31, 1996, and $30.7 million, or 35% of total revenues, for the fiscal year ended March 31, 1995. In the United States, the list price for standard support for Interleaf 6 is approximately $450 per year, generally paid annually in advance, with the price increasing to $3,495 per year for Interleaf 6, with all options. Pricing for support of the Company's WorldView product is listed at 20% of end-user price, depending upon the configuration, with support for the Company's RDM product being priced at approximately 20% of end-user price. If non-standard support by a customer is required, prices will vary substantially. Standard support includes new releases (upgrades) to products. PRODUCT DEVELOPMENT AND ENGINEERING The software industry is characterized by rapid technological change which requires the continuing enhancement of existing products, development of new products and the porting of these products to new hardware platforms, operating systems, and to various industry standard graphical user interfaces and operating systems: (1) Motif-Registered Trademark-, (2) Windows, and (3) Windows NT. During fiscal 1997, the Company completed its port of Interleaf 6 to operate on the Windows NT and Windows 95 operating systems. In fiscal 1997, as the Internet and intranets grew in the marketplace, the Company developed its BusinessWeb product to enable its IDP solutions to be utilized with these emerging technologies. In fiscal 1998, the Company expects to continue to shift development and engineering resources toward the development of new, Web-based publishing products and applications. During the fiscal years ended March 31, 1997, 1996 and 1995, the Company's product development and engineering expenses, including the amortization of software development costs, were approximately $20.0 million, $19.1 million, and $22.1 million respectively, representing 31%, 22%, and 25% respectively, of the Company's total revenues. As of March 31, 1997, the Company had 62 employees engaged in product development and engineering. MANUFACTURING The Company's manufacturing operations are engaged in the duplication of tapes, diskettes, CDs, and printed documents, assembling, and final packaging. BACKLOG The Company generally manufactures its software on the basis of its forecast of near-term demand and generally ships to end users within 30 days after receipt of the order. Consequently, the Company's product backlog at this time is not indicative of future sales levels. The Company does not regard the amount of backlog at any time to be material to a current understanding of its business. 5 COMPETITION The electronic publishing, distribution, viewing, and document management markets are highly competitive. Some of these competitors are larger and have greater resources than the Company has. Many new competitors emerged in the electronic publishing, viewing, and document management market in fiscal 1997. The introduction and market acceptance of new technologies such as the Internet and intranet, have also offered new forms of competition to the Company's existing products. At the low end of the electronic publishing and viewing market, the Company competes with Adobe Systems Inc. Principal competitive factors include product functionality, customer support, ease of use, integration, and price. In the document management market, the Company competes with numerous companies, including Documentum, Inc. The Company's products, integrated with each other, blended with specialized services, and used across different hardware platforms, are its principal competitive advantages in a market that is fragmented with many companies offering only separate parts of a solution. The Company also believes that its ability to provide IDP solutions for customer specific business problems will increasingly distinguish the Company from its competitors. EMPLOYEES As of March 31, 1997, the Company, worldwide, employed 342 full-time employees, of whom 62 were employed in research and development, which includes quality assurance and technical documentation, 99 in domestic sales operations, including services, 25 in domestic customer support, 10 in corporate marketing, 40 in finance and administration, and 106 in the Company's international operations. The Company's success will depend in large part on its ability to attract and retain qualified personnel, who are in demand throughout the industry. None of the Company's employees are represented by a labor union. Interleaf believes that its employee relations are good. PRODUCT PROTECTION The Company relies on a combination of trade secret, patent, copyright and trademark laws, license agreements and technical measures to protect its rights in and to its software. Although the Company's license agreements prohibit disclosure of the proprietary aspects of its products, it is technically possible for competitors to copy aspects of its products in violation of the Company's rights. INTERLEAF is a registered trademark of the Company, WorldView and RDM are trademarks of the Company. The Company believes that, because of rapid technological change in the software industry, patent, trade secret and copyright protection are less significant than factors such as the knowledge, ability and experience of employees as well as name recognition. ITEM 2. PROPERTIES The Company's principal executive, administrative and research and development operations are located in two adjacent buildings, cumulatively totalling approximately 70,965 square-feet in Waltham, Massachusetts, both of which the Company occupies under leases expiring in December 2000. The Company also leases sales and support offices in 6 locations in the United States and 8 foreign locations for its subsidiaries. ITEM 3. LEGAL PROCEEDINGS There are no material legal proceedings to which the Company is a party or to which any of its property is subject. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS No matter was submitted to a vote of security holders during the fourth quarter of the fiscal year covered by this report. 6 EXECUTIVE OFFICERS OF THE COMPANY The current executive officers of the Company are listed below: Jaime W. Ellertson, 40, joined the Company as President, Chief Executive Officer and Director in January 1997. Prior to that date, he was Chairman of Purview Technologies, Inc., an Internet monitoring, management, and analysis software company, from July 1996 to January 1997. Mr. Ellertson was President and Chief Executive Officer of Tartan, Inc., a manufacturer of compilers, from December 1995 to June 1996. Previously, he was President and Chief Executive Officer of Openware Technologies, a software and services company, from July 1990 to December 1995. Robert A. Fisher, 48, joined the Company as Vice President, Customer Support in May 1997. Mr. Fisher was Vice President of Worldwide Customer Support at Interleaf from 1989 to 1994 and rejoined Interleaf in May of this year. Prior to rejoining Interleaf, Mr. Fisher was Vice President, Worldwide Customer Services at Open Environment Corporation/Borland, a manufacturer of middleware software, from August 1994 to May 1997. Robert R. Langer, 51, became Chief Financial Officer of the Company in January 1997. Prior to that date, Mr. Langer was interim President of Arity Corporation, a database and related development tool technology company, from February 1995 to October 1996. Mr. Langer served as Vice President and Chief Financial Officer at Phoenix Technologies, Ltd., a systems software company, from May 1990 to January 1995. Christopher McKee, 38, joined the Company in May 1997, as Vice President of Europe, Middle East, and Africa. Mr. McKee joined Interleaf from Inference Corporation, a provider of knowledge management software and services, where he was Senior Vice President, International Operations, from May 1996 to May 1997. Prior to being promoted to international vice president, Mr. McKee was Vice President for Northern Europe from February 1994 to April 1995 and held senior sales management positions with Inference Corporation from 1991 to 1994. Gary Phillips, 37, joined the Company as Vice President, Sales in June 1997. Prior to joining Interleaf, Mr. Phillips was Vice President, Sales at BBN Planet where he was responsible for Internet solutions sales, from June 1996 to June 1997. Prior to that, he was Vice President of Sales and Marketing for BBN Enterprise Networks, which provided network consulting and systems integration services, from June 1994 to June 1996. Prior to joining BBN, Mr. Phillips held the position of Vice President of Sales and Marketing for Application Systems Group, a start-up software/systems integration company, from June 1993 to June 1994. Mr. Phillips held several sales management positions, most recently as Director of Sales for U.S. Operations, at Wang Laboratories, a computer manufacturer, software applications developer, and services provider, from 1984 to June 1993. Michael L. Torto, 35, joined the Company as Vice President, Marketing in April 1997. Prior to joining Interleaf, Mr. Torto was Chief Operating Officer at Ontos, Inc., an object database and object middleware technology company, from April 1996 to April 1997. Mr. Torto served as Director of Marketing for Intersolv's data access products division, from December 1995 to April 1996. Previously, he was Vice President of TechGnosis, Inc., a European-based software company in the database middleware market, from November 1994 to December 1995. Previously, Mr. Torto was Director of Product Marketing at Trinzic Corp., a manufacturer of client server software, from October 1991 until December 1994. There is no family relationship among the foregoing individuals. Executive officers are elected on an annual basis and serve at the discretion of the Board of Directors. 7 PART II ITEM 5. MARKET FOR THE COMPANY'S COMMON STOCK AND RELATED SECURITY HOLDER MATTERS The Company's common stock is traded on the over-the-counter market and is quoted on the NASDAQ National Market tier of the NASDAQ Stock Market under the symbol LEAF. On June 18, 1997, there were 839 holders of record of the Company's common stock. This number does not reflect persons or entities who hold their stock in nominee or "street name" through various brokerage firms.
Quarter ended June 30 September 30 December 31 March 31 Year - ------------- ------- ------------ ----------- -------- ------- FISCAL 1997 Common stock prices High........................ 8 7/8 5 3/8 3 3/8 2 7/16 8 7/8 Low......................... 6 1/2 2 3/8 1 7/8 1 3/8 1 3/8 Close....................... 6 1/2 2 3/8 1 7/8 1 9/16 1 9/16 - -------------------------------------------------------------------------------------------------- FISCAL 1996 Common stock prices High........................ 8 11 12 5/8 10 3/8 12 5/8 Low......................... 4 1/4 7 1/4 7 1/4 6 1/8 4 1/4 Close....................... 7 3/8 10 10 1/8 8 7/8 8 7/8 - ----------------------------------------------------------------------------------------------------
The Company has never paid cash dividends. The Company is restricted from paying cash dividends during the term of the credit agreement. 8 ITEM 6. SELECTED FIVE-YEAR FINANCIAL DATA
(in thousands except for per share amounts) Year ended March 31 1997 a 1996 b 1995 c 1994 d 1993 - ------------------------------------------------------------------------------------------------------------------------ Total revenues $ 64,823 $88,557 $ 87,856 $111,229 $117,341 - ------------------------------------------------------------------------------------------------------------------------ Net income (loss) (29,550) 311 (48,362) (8,448) 9,303 - ------------------------------------------------------------------------------------------------------------------------ Net income (loss) per share $ (1.70) $ 0.02 $ (3.47) $ (0.63) $ 0.55 - ------------------------------------------------------------------------------------------------------------------------ Shares used in computing net income (loss) per share 17,344 18,495 13,938 13,384 16,836 - ------------------------------------------------------------------------------------------------------------------------ Total assets $ 37,900 $48,916 $ 50,793 $ 96,884 $ 99,519 - ------------------------------------------------------------------------------------------------------------------------ Long-term obligations 2,955 733 625 1,565 1,857 - ------------------------------------------------------------------------------------------------------------------------ Total shareholders' equity (deficit) $ (772) $15,419 $ 10,615 $ 56,632 $ 63,126 - ------------------------------------------------------------------------------------------------------------------------ Common stock outstanding 17,459 16,698 14,203 13,631 13,064 - ------------------------------------------------------------------------------------------------------------------------
a. Fiscal 1997 results include $10.9 million of restructuring charge for restructuring of the Company's worldwide operations, a $2.3 million write-off of intangible assets, and a $2.5 million write-off of capitalized software, inventory and prepaid royalties. b. Fiscal 1996 results include a $1.2 million benefit from the settlement of a long-term dispute with a joint venture partner. c. Fiscal 1995 results include a $15.2 million write-off of goodwill related to the acquisition of distributorships in Canada, France and Germany, a $7.1 million charge for restructuring the Company's worldwide operations, a $2.0 million write-off of capitalized software development costs, and a $1.9 million charge for revaluation of the Company's deferred tax asset. d. Fiscal 1994 results include a $4 million charge for acquired in- process research and development in connection with the acquisition of Avalanche Development Company in June 1993, a $3 million charge for restructuring the Company's worldwide operations, and a $1.9 million benefit upon adoption of Statement of Financial Accounting Standards No. 109, "Accounting for Income Taxes," effective April 1, 1993. ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Results of Operations Overview: The Company recorded a net loss of $29.6 million on revenues of $64.8 million in fiscal 1997. This compares with net income of $0.3 million on revenues of $88.6 million and a net loss of $48.4 million on revenues of $87.9 million in fiscal 1996 and 1995, respectively. Much of the decline in revenue for fiscal 1997 is due to a decrease in product revenue (46% reduction) caused by the ongoing maturation of the market for complex authoring products which is a main product line at the Company. An effort to focus on developing and supporting integrated document publishing ("IDP") applications for the extended enterprise has been initiated. As a result of the total revenue decline of 27% in fiscal year 1997 from fiscal year 1996, principally in software products, the Company underwent a comprehensive restructuring of facilities, fixed assets, and personnel during the year. The net loss of $29.6 million for fiscal 1997 was due to the impact from the decline in product revenue, charges of $2.3 million for the write-off of intangible assets from an early fiscal year 1997 acquisition, a $2.5 million write-off of capitalized software, inventory and prepaid royalties, and charges of $10.9 million for restructuring the Company's worldwide operations. In addition to the 1997 restructuring, the Company began installing a new senior management team, refocusing its business strategy, streamlining product offerings, and significantly reducing the cost structure of the Company. REVENUES Product: Total product revenue decreased by $16.0 million or 46% in fiscal 1997 compared to fiscal 1996. Revenue declined in all geographic regions. Fiscal 1996 was level with fiscal 1995. The continuing trend in the reduction in product license revenue is due to several factors. The first negative trend is the decline in licensing of the Company's UNIX-based high-end authoring products which is primarily attributable to the increasing popularity of Windows-based publishing software, for which the Company did not have any offerings until fiscal 1996. A second factor is the saturation of UNIX-based high-end authoring software in the aerospace/defense industry, where the Company had historically derived most of its authoring product license revenue. 9 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The Company is refocusing its business strategy on providing integrated document publishing (IDP) applications targeted toward specific vertical markets. While the Company has built well-accepted integrated document publishing based solutions for individual customers, it has not yet demonstrated the ability to develop, market and sell IDP applications. There is no assurance that the Company will be successful in implementing its strategy and, therefore, the Company is unable to predict if or when product revenues will 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: Maintenance revenue declined by $3.3 million or 10% in fiscal 1997 from fiscal 1996, although it was relatively stable in fiscal 1996 and 1995. This relative stability, during a time of decreasing product licensing, was largely attributable to renewals from the Company's very large, long-term customers primarily in the aerospace/defense industry. Future maintenance revenue is dependent on the Company's ability to maintain its existing customer base and to increase maintenance contract volume related to the new IDP application sales. This will be necessary to offset the general downward pricing pressure on maintenance in the software industry and customers perceived value of maintenance services. Services: Services revenue, consisting of consulting and customer training revenue, declined by $4.5 million or 21% in fiscal 1997 compared to a decrease of $1.1 million or 5% in fiscal 1996 from 1995. The Company leverages software product licenses with services to provide IDP solutions to its customers. During fiscal 1995, the Company worked on several large service projects which were completed during early fiscal 1996. The decline in fiscal 1997 and 1996 was primarily attributable to the decrease in product license revenues, a decrease in services personnel, and lower training revenue associated with the decline in authoring software product licensing. In fiscal 1997, consulting projects tended to be smaller with resultant lower margins due to lower utilization rates and there was no replacement of the large consulting projects completed in 1996 and 1995. North America: Revenues were approximately $41.8 million (64%), $57.1 million (64%), and $60.0 million (68%) of total revenues during fiscal 1997, 1996, and 1995, respectively. The decline in fiscal 1997 was primarily due to a decrease in product license and consulting revenues. The decline in fiscal 1996 was primarily due to a decrease in product license and training revenues. International: Revenues from the Company's international operations were approximately $23.0 million (36%), $31.5 million (36%), and $27.9 million (32%) of total revenues during fiscal 1997, 1996, and 1995, respectively. The decrease in fiscal 1997 was primarily due to declining product revenue compared to fiscal 1996. The increase in fiscal year 1996 from fiscal year 1995 was due to the growth in software site licenses or electronic distribution software licensing agreements in Europe and increased demand from resellers in Japan, partially offset by a decline in European service revenue. Product license revenue in Japan is volatile because the Company distributes its products through a network of large credit-worthy resellers and integrators who typically enter into upfront fixed fee license agreements. Reorders in Japan are dependent on the success of the resellers and integrators in licensing the Company's products to end-user customers. Fiscal 1998: During fiscal 1998, the Company plans to develop several Integrated Document Publishing ("IDP") application offerings which solve specific business problems in several industries. Growth in revenues during fiscal 1998 will be largely dependent on improving sales force productivity, the effectiveness of the Company's increased investment in marketing and lead generation programs, customer acceptance of the new and enhanced software products planned to be released in fiscal 1998 and the next year, and the Company's success in leveraging software products with services to provide IDP solutions to its customers. If the Company is unable to grow or stabilize its revenues in fiscal 1998, further expense reductions will be necessary in order to sustain operations. 10 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS COSTS OF REVENUES Cost of product revenues includes amortization of capitalized software development costs; product media, documentation materials, packaging and shipping costs; and royalties paid for licensed technology. Cost of product revenues increased $1.1 million or 16% in fiscal 1997 from 1996, compared to a decrease of $6.4 million (50%) in fiscal 1996 from 1995. Included in the cost of product revenues for fiscal 1997 and 1995, which was absent in fiscal 1996, were write-downs of $2.0 million and $3.2 million, respectively, of capitalized software development costs. This occurred as a result of a strategic product review by management and a decision to discontinue products and write-down old software products with limited future revenue potential. Additionally, in fiscal year 1997, there were write-offs of inventory and prepaid royalties. The cost of maintenance revenue decreased by $0.6 million or 12% in fiscal 1997 from 1996, compared to a decrease of $1.0 million or 16% in fiscal 1996 from 1995. Most of the decreases were related to a reduction in customer support personnel associated with the Company's 1997 and 1995 restructurings. The decrease in cost of services revenue of $2.2 million or 12% in fiscal 1997 from 1996, compared to a decrease of $1.3 million or 7% in fiscal 1996 from 1995, is primarily related to the downward trend in product revenue which results in less integration services. OPERATING EXPENSES Selling, General and Administrative (SG&A): SG&A expenses decreased $5.6 million or 13% in fiscal 1997 from 1996, compared to a decrease of $12.6 million or 23% in fiscal 1996 from fiscal 1995. The decline in SG&A expenses over the last two fiscal years was primarily due to significant personnel and facilities expense reductions related to the Company's fiscal 1997 and 1995 restructurings. Also contributing to lower SG&A expenses in fiscal 1996 was the settlement of a long-term dispute with a joint venture partner that resulted in a non-recurring expense reduction of approximately $1.2 million (see Note 12 to the Consolidated Financial Statements for further discussion). Further SG&A expense reductions are anticipated throughout fiscal 1998 as the full benefit of the restructuring programs are realized. In addition, the Company will continue to manage SG&A expenses to keep costs in line with revenue. Research and Development (R&D): R&D expenses consist primarily of personnel expenses to support product development offset by capitalized software development costs. R&D expenses decreased by approximately $0.9 million (6%) in fiscal 1997 from 1996, compared to a decrease of approximately $1.0 million (6%) in fiscal 1996 from fiscal 1995. The decrease in fiscal 1997 and 1996 was primarily due to reduced personnel expenses associated with the Company's fiscal 1997 and 1995 restructurings and, for fiscal 1996 versus 1995, increased capitalization of software development costs. During fiscal 1997, 1996, and 1995, R&D expenses were approximately 23%, 18%, and 19%, respectively, of total revenues. R&D spending, which excludes the offset for capitalized software development costs, represented approximately 24%, 23%, and 24% of total revenues, respectively. During fiscal 1997, the Company completed product enhancements across all of its major product lines. Functionality and additional platform support were added to Interleaf 6, WorldView, Intellecte/BusinessWeb, Liaison, and RDM in multiple localized releases for its North American, European and Asia/Pacific markets. The Company's product development plans for fiscal 1998 call for a consolidation of many individual product lines into focused integrated enterprise publishing and distribution applications. The product strategy directly aligns with the corporate strategy to refocus its efforts on database enabled electronic publishing. As part of this effort, some existing products that no longer align with its focus will be retired and a number of new products will be developed to expand the Company's ability to capture sales in new departments of its Fortune 1000 customer base, or in mid-sized firms with high growth rates. 11 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Restructuring and Other Charges: In fiscal year 1997, the Company incurred restructuring charges of approximately $10.9 million, of which $8.5 million related to the July and October 1996 restructurings. Additionally, there was a $2.4 million charge recorded in the fourth quarter to reflect changes in cost and timing assumptions for previously restructured facilities. These restructuring initiatives were taken in an effort to realign the Company's cost structure with the Company's revenues, which declined throughout fiscal 1997. In addition, the Company recorded a charge of $2.3 million to write-off intangible assets associated with the acquisition of The Learning Alliance (see further discussion in Liquidity and Capital Resources). The Company also recorded a $2.5 million expense (of which $2.2 million was recorded in the fourth quarter) for the write-off of capitalized software development costs, inventory, and prepaid royalties for discontinued products and products with limited revenue potential. In fiscal year 1995, the Company incurred restructuring charges of approximately $7.1 million due to a worldwide reorganization and a reduction in the size of its operations. During the fourth quarter of fiscal 1995, the management team performed a strategic and operational review of the Company's sales and marketing processes, distribution channels, product development plans, and customer support operations. As a consequence of this review and associated changes in the Company's business strategy and operations, the Company evaluated the carrying value of its long-lived intangible assets, principally goodwill and capitalized software development costs, which resulted in a write-down of approximately $17.2 million. INCOME TAXES For fiscal year 1997, no tax provision was required due to the losses sustained during the year. In fiscal 1996, the effective tax rate was reduced by net operating loss carryforwards. Fiscal 1995 was negatively impacted by an adjustment to the beginning deferred tax asset valuation allowance of approximately $1.9 million when an analysis of the Company's actual and anticipated operating results indicated, at that time, that the deferred tax asset established in fiscal 1994 was not expected to be realized. The Company has net operating loss carryforwards of approximately $60 million in several tax jurisdictions to offset future taxable income. In addition, the Company has tax credit carryforwards of approximately $7 million to offset federal and state income tax liabilities. Therefore, the Company expects to pay minimal income taxes for the foreseeable future. 12 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Liquidity and Capital Resources The Company had approximately $17.3 million of cash and cash equivalents at March 31, 1997, an increase of approximately $4.6 million from March 31, 1996. The increase was primarily attributable to the net proceeds from the issuance of Senior Series C Preferred Stock of $9.4 million and common stock issuances related to its stock option plans and employee stock purchase plan of approximately $1.2 million. This increase was partially offset by payments of $4.1 million related to the Company's restructurings and investments of $1.1 million in capitalized software development costs. The Company also made investments of $1.8 million in capital equipment, principally for improvements to the Company's information system infrastructure in fiscal 1997. Interleaf's German subsidiary, Interleaf GmbH, has been notified that it is liable for German withholding taxes related to payments remitted to the United States from Germany in 1990. The Company is appealing this assessment. At March 31, 1996, the Company had approximately $1.1 million of cash restricted for potential payment of German withholding taxes. As part of the Company's former strategy to develop sales force automation and integration applications, the Company acquired The Learning Alliance, Inc. ("TLA") in May 1996 for 341,500 shares of common stock valued at $2.7 million. In December 1996, in order to allow the Company's management to focus on development of its core businesses, the Company decided to divest itself of TLA. TLA was sold in January 1997 for future royalty considerations and foregone severance obligations. As a result of this decision, in December 1996, the Company recorded a $2.3 million write-off of certain intangible assets which had been recorded in connection with the acquisition. Restructuring accruals associated with both the fiscal 1997 and 1995 restructurings were approximately $7.3 million at March 31, 1997 and $1.3 million at March 31, 1996. Cash payments related to these restructurings, the majority of which are related to operating lease payments, net of subleases, are anticipated to continue until December 2000. All significant vacant space under lease has been subleased, or is the subject of a letter of understanding. Other future obligations at March 31, 1997, consist primarily of facility and equipment leases relating to the regular operations of the Company. In 1998, the Company expects to spend approximately $700,000 in capital improvements and $3.4 million in cash payments related to the restructuring accrual. In May 1995, the Company obtained a revolving line of credit from a major commercial lender. Borrowings from the line of credit are secured by substantially all domestic assets of the Company. At March 31, 1997 and 1996, there were no loans outstanding under this line of credit. However, a letter of credit for $0.8 million is issued and outstanding and, accordingly, 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). This agreement expires in August 1997 and negotiations are underway to establish a new credit facility. Management believes that they will be able to continue or replace the existing agreement by August 1997. In addition to the sale of Series C Convertible Preferred Stock (see Note 10 to the Consolidated Financial Statements), the Company also, in November 1995, issued 190,000 shares of common stock associated with an agreement between the Company and a joint venture partner (see Note 12 to the Consolidated Financial Statements). The objective of the fiscal 1997 Series C financing was to enable the Company to generate sufficient cash flow to return to a sustainable profitable condition. During 1997, the Company experienced a substantial decline in revenues and a substantial loss from operations, resulting in a shareholders' deficit at March 31, 1997. Due to the downward trend in the Company's revenues, the Company is unable to predict future revenues and when or if, it will achieve a sustainable profitable level of operations. In response to these matters, the Company developed detailed plans relating to its fiscal 1998 operations which, if realized, will restore the Company to profitable operations. Although no assurances can be given that such plans will be achieved, management is committed to taking all appropriate and necessary actions to effect timely cost reductions in the event that anticipated revenue levels are not achieved. In the event such actions are not successful in achieving breakeven or profitable operations, additional financing will be needed. Under such circumstances, no assurance can be given that such financing could be obtained or that it could be obtained at commercially reasonable terms or without incurring substantial dilution to existing shareholders. The financial statements do not include any adjustments to reflect the possible effects of these uncertainties. The Company believes its current cash balances and cash generated from operations will be sufficient to meet the Company's liquidity needs for fiscal 1998 and the foreseeable future. The Company can only fund its long- term growth through increasing revenues, combined with tightly managed cost controls. 13 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS 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 publishing software products and services that meet the changing needs of organizations with complex document publishing requirements. There are numerous risks associated with this process, including rapid technological change in the information technology industry and the requirement to bring to market IDP applications that solve complicated business needs in a timely manner. In addition, the existing document publishing, electronic distribution, and document management markets are highly competitive. Many of these competitors are larger and better funded than the Company. The Company competes for sales of its software products on both an individual product basis and integrated with services in large IDP solution sales. Sales cycles associated with IDP solution sales are long because organizations frequently require the Company to solve complex business problems that typically involve reengineering of their business processes. In addition, a high percentage of the Company's product license revenues are generally realized in the last month of a fiscal quarter and can be difficult to predict until the end of a fiscal quarter. Accordingly, given the Company's relatively fixed cost structure, a shortfall or increase in product license revenue can have a significant impact on the Company's operating results and liquidity. The Company markets its software products and services worldwide. Global and/or regional economic factors, currency exchange rate fluctuations, and potential changes in laws and regulations affecting the Company's business could impact the Company's financial condition or future operating results. The market price of the Company's common stock may be volatile at times in response to fluctuations in the Company's quarterly operating results, changes in analysts' earnings estimates, market conditions in the computer software industry, as well as general conditions and other factors external to the Company. 14 ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA INTERLEAF, INC. INDEX TO CONSOLIDATED FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULE The following consolidated financial statements and schedules of Interleaf, Inc. and subsidiaries, and report, are included herein: Description Page ------------ ---- Report of Management................................................... Report to Shareholders Consolidated Statements of Operations for the Years Ended March 31, 1997, 1996, and 1995................................... Report to Shareholders Consolidated Balance Sheets at March 31, 1997 and 1996................. Report to Shareholders Consolidated Statements of Changes in Shareholders' Equity (Deficit) for the Years Ended March 31, 1997, 1996, and 1995..................... Report to Shareholders Consolidated Statements of Cash Flows for the Years Ended March 31, 1997, 1996, and 1995..................... Report to Shareholders Notes to Consolidated Financial Statements............................. Report to Shareholders Report of Independent Auditors......................................... Report to Shareholders Supplemental Financial Information..................................... Report to Shareholders Schedule II - Valuation and Qualifying Accounts All other schedules for which provision is made in the applicable accounting regulation of the Securities and Exchange Commission are not required under the related instructions or are inapplicable, and therefore have been omitted. 15 Report of Management The financial statements, including all related financial information presented in the Annual Report, were prepared by management, and management is responsible for their fairness, integrity and objectivity. These statements have been prepared in accordance with generally accepted accounting principles, and include amounts that are based on management's best estimates and judgement and incorporate accounting policies that are reasonable and prudent for the Company's business environment. The financial statements have been audited by our independent public accountants, Ernst & Young LLP, and their report is included elsewhere herein. The Company maintains accounting and control systems that are subject to modification based on recommendations from Ernst & Young LLP. Management believes the internal control systems in use are sufficient to provide reasonable assurance that assets are safeguarded against material loss and are properly accounted for, and that transactions are properly recorded in the financial records used in preparing the financial statements. The Company has distributed throughout the organization its policies for financial control. Management believes that its policies and the monitoring of compliance with these policies provide reasonable assurance that its operations are adhering to prescribed financial policy. The Board of Directors carries out its responsibility for these financial statements through its Audit Committee, composed of nonemployee Directors. The Audit Committee reviews the financial statements before they are released for publication. The Committee meets periodically with the senior financial officers and Ernst & Young LLP. It reviews the audit scope, significant financial transactions, major accounting issues and recommendations of Ernst & Young LLP. Ernst & Young LLP has full and free access to the Audit Committee and meets with its members, with and without management being present, to discuss internal control, auditing and financial reporting matters. /s/ Jaime W. Ellertson /s/ Robert R. Langer ----------------------- -------------------- Jaime W. Ellertson Robert R. Langer President Vice President, Finance and Administration and Chief Executive Officer and Chief Financial Officer 16 CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands except for per share amounts) Year ended March 31 1997 1996 1995 - -------------------------------------------------------------------------------------------------- REVENUES Products $ 18,821 $34,786 $34,602 Maintenance 28,972 32,281 30,652 Service 17,030 21,490 22,602 - -------------------------------------------------------------------------------------------------- Total revenues 64,823 88,557 87,856 - -------------------------------------------------------------------------------------------------- COSTS OF REVENUES Products 7,502 6,443 12,866 Maintenance 4,561 5,179 6,178 Services 16,041 18,270 19,605 - -------------------------------------------------------------------------------------------------- Total costs of revenues 28,104 29,892 38,649 - -------------------------------------------------------------------------------------------------- Gross margin 36,719 58,665 49,207 - -------------------------------------------------------------------------------------------------- OPERATING EXPENSES Selling, general and administrative 37,114 42,674 55,283 Research and development 14,994 15,875 16,855 Write-down of intangible assets 2,288 -- 15,185 Restructuring charge 10,942 -- 7,109 - -------------------------------------------------------------------------------------------------- Total operating expenses 65,338 58,549 94,432 - -------------------------------------------------------------------------------------------------- Income (loss) from operations (28,619) 116 (45,225) Other income (expense) (931) 225 (1,019) - -------------------------------------------------------------------------------------------------- Income (loss) before income taxes (29,550) 341 (46,244) Provision for income taxes -- 30 2,118 - -------------------------------------------------------------------------------------------------- Net income (loss) $(29,550) $ 311 $(48,362) - -------------------------------------------------------------------------------------------------- INCOME (LOSS) PER SHARE $ (1.70) $ 0.02 $ (3.47) - -------------------------------------------------------------------------------------------------- Shares used in computing income (loss per share) 17,344 18,495 13,938 - ---------------------------------------------------------------------------------------------------
See Notes to Consolidated Financial Statements. 17 CONSOLIDATED BALANCE SHEETS
(in thousands except for share and per share amounts) MARCH 31 1997 1996 - -------------------------------------------------------------------------------------------- Assets CURRENT ASSETS Cash and cash equivalents $ 17,349 $ 12,725 Accounts receivable, net of reserve for doubtful accounts of $1,371 in 1997 and $1,695 in 1996 11,359 19,771 Prepaid expenses and other current assets 1,504 2,112 - -------------------------------------------------------------------------------------------- TOTAL CURRENT ASSETS 30,212 34,608 Property and equipment, net 4,963 7,800 Intangible assets 2,281 6,164 Other assets 444 344 - -------------------------------------------------------------------------------------------- TOTAL ASSETS $ 37,900 $ 48,916 - -------------------------------------------------------------------------------------------- - -------------------------------------------------------------------------------------------- Liabilities and Shareholders' Equity (Deficit) CURRENT LIABILITIES Accounts payable $ 1,774 $ 2,908 Accrued expenses 14,455 13,255 Unearned revenue 15,102 15,986 Accrued restructuring 4,386 615 - -------------------------------------------------------------------------------------------- TOTAL CURRENT LIABILITIES 35,717 32,764 Long-term restructuring 2,955 733 - -------------------------------------------------------------------------------------------- TOTAL LIABILITIES 38,672 33,497 - -------------------------------------------------------------------------------------------- SHAREHOLDERS' EQUITY (DEFICIT) 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 in 1997 and 923,304 in 1996 (liquidation value $7 per share) 86 92 Senior Series C convertible, issued and outstanding 1,006,220 in 1997 (liquidation value $9.95 per share) 101 -- Common stock, par value $.01 per share, authorized 30,000,000 shares, issued and outstanding 17,459,219 in 1997 and 16,697,988 in 1996 175 167 Additional paid-in capital 85,513 72,348 Retained earnings (deficit) (86,508) (56,958) Cumulative translation adjustment (139) (230) - --------------------------------------------------------------------------------------------- TOTAL SHAREHOLDERS' EQUITY (DEFICIT) (772) 15,419 - --------------------------------------------------------------------------------------------- TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIT) $ 37,900 $ 48,916 - -------------------------------------------------------------------------------------------- - --------------------------------------------------------------------------------------------
See Notes to Consolidated Financial Statements. 18 CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY (DEFICIT) (in thousands)
Total Preferred Preferred Additional Retained Cumulative Shareholders' Stock Senior Stock Senior Common Paid-in Earnings Translation Equity Series B Series C Stock Capital (Deficit) Adjustment (Deficit) - ------------------------------------------------------------------------------------------------------------------------------ Balances at March 31, 1994 $ 179 $ -- $ 136 $ 65,551 $ (8,907) $ (327) $ 56,632 Net loss -- -- -- -- (48,362) -- (48,362) Conversion of Senior Series B Convertible Preferred stock into common stock (6) -- 1 5 -- -- -- Common stock issued in connection with stock options exercised by employees -- -- 2 660 -- -- 662 Common stock issued in connection with employee stock purchase plan -- -- 2 1,167 -- -- 1,169 Common stock issued in connection with warrants exercised -- -- 1 (1) -- -- -- Equity adjustment for foreign currency translation -- -- -- -- -- 514 514 - ------------------------------------------------------------------------------------------------------------------------------ Balances at March 31, 1995 173 -- 142 67,382 (57,269) 187 10,615 Net income -- -- -- -- 311 -- 311 Conversion of Senior Series B Convertible Preferred stock into common stock (81) -- 11 70 -- -- -- Common stock issued in connection with stock options exercised by employees -- -- 7 2,087 -- -- 2,094 Common stock issued in connection with employee stock purchase plan -- -- 1 685 -- -- 686 Income tax benefit related to exercise of stock options -- -- -- 30 -- -- 30 Common stock issued in connection with warrants exercised -- -- 4 (4) -- -- -- Common stock issued in connection with acquisition -- -- 2 2,098 -- -- 2,100 Equity adjustment for foreign currency translation -- -- -- -- -- (417) (417) - ------------------------------------------------------------------------------------------------------------------------------ Balances at March 31, 1996 92 -- 167 72,348 (56,958) (230) 15,419 Net loss -- -- -- -- (29,550) -- (29,550) Conversion of Senior Series B Convertible Preferred stock into common stock (6) -- 1 5 -- -- -- Issuance and obligations of Preferred Stock Series C -- 101 -- 9,289 -- -- 9,390 Common stock issued in connection with stock options exercised by employees -- -- 2 447 -- -- 449 Common stock issued in connection with employee stock purchase plan -- -- 2 737 -- -- 739 Common stock issued in connection with acquisition -- -- 3 2,687 -- -- 2,690 Equity adjustment for foreigncurrency translation -- -- -- -- -- 91 91 - ------------------------------------------------------------------------------------------------------------------------------ Balances at March 31, 1997 $ 86 $ 101 $ 175 $ 85,513 $ (86,508) $ (139) $ (772) - ------------------------------------------------------------------------------------------------------------------------------
See Notes to Consolidated Financial Statements. 19 CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands) Year ended March 31 1997 1996 1995 - ------------------------------------------------------------------------------------------------------- CASH FLOWS FROM OPERATING ACTIVITIES Net income (loss) $(29,550) $ 311 $(48,362) Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities: Write-off of intangible assets 2,288 -- 15,185 Restructuring charge 10,942 -- 7,108 Gain from settlement of legal dispute -- (1,230) -- Depreciation and amortization expense 9,706 7,754 14,176 Loss from disposal of property and equipment 212 11 261 Deferred income taxes -- -- 1,860 Income tax benefit from stock options exercised -- 30 -- Changes in assets and liabilities: Decrease in accounts receivable, net 8,126 2,950 13,550 (Increase) decrease in other assets 309 97 (610) Decrease in accounts payable and accrued expenses (172) (1,068) (3,188) Increase (decrease) in unearned revenue (730) 507 439 Decrease in other liabilities (4,379) (2,532) (5,333) Other, net 410 76 (385) - ----------------------------------------------------------------------------------------------------- Net cash provided by (used in) operating activities (2,838) 6,906 (5,298) - ------------------------------------------------------------------------------------------------------- CASH FLOWS FROM INVESTING ACTIVITIES Capital expenditures (1,816) (1,597) (4,827) Capitalized software development costs (1,113) (4,138) (3,831) - ------------------------------------------------------------------------------------------------------- Net cash used in investing activities (2,929) (5,735) (8,658) - ------------------------------------------------------------------------------------------------------- CASH FLOWS FROM FINANCING ACTIVITIES Net proceeds from issuance of preferred stock 9,390 -- -- Net proceeds from issuance of common stock 1,250 2,780 1,831 Property and equipment financing -- -- 682 Repayment of long-term debt and capital leases (18) (1,688) (1,819) - ------------------------------------------------------------------------------------------------------- Net cash provided by financing activities 10,622 1,092 694 - ------------------------------------------------------------------------------------------------------- Effect of exchange-rate changes on cash (231) 21 339 - ------------------------------------------------------------------------------------------------------- Net increase (decrease) in cash and cash equivalents 4,624 2,284 (12,923) Cash and cash equivalents at beginning of year 12,725 10,441 23,364 - ------------------------------------------------------------------------------------------------------- Cash and cash equivalents at end of year $ 17,349 $12,725 $ 10,441 - -------------------------------------------------------------------------------------------------------
See Notes to Consolidated Financial Statements. 20 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Note 1 Company Interleaf, Inc. and its subsidiaries (the Company) develop and market integrated document publishing and management software and services worldwide for networked and Web-based business solutions. The Company's software is used for the electronic assembly, management, retrieval, publishing and distribution of business-critical documents. Note 2 Summary of Significant Accounting Policies Principles of Consolidation: The consolidated financial statements include the accounts of Interleaf, Inc. and its subsidiaries. All significant intercompany balances and transactions have been eliminated in consolidation. Revenue Recognition: Revenue from the license of software products is recognized when the products are shipped, provided there are no significant vendor obligations remaining and collection of the receivable is considered probable. The Company also maintains a reserve for a sales allowance to provide for possible product returns or allowances resulting from a lack of sell through of products by resellers. In the fourth quarter of fiscal 1997, the Company recorded a charge of $1.5 million to provide for anticipated allowances expected to be granted. Costs associated with insignificant vendor obligations are accrued. Maintenance revenue is recognized ratably over the contract period. Services (consulting and training) revenue is recognized as the related services are performed on either a time and materials basis or pro-rata based on project or contract completion. Unearned revenue represents the remaining amount of revenue to be recognized in future periods primarily related to maintenance and service contracts. Cash and Cash Equivalents: Cash equivalents, consisting primarily of bank notes, commercial paper and treasury bills, represent highly liquid investments with maturities at date of purchase of three months or less. These investments are stated at cost, which approximates market value. Property and Equipment: Property and equipment are stated at cost. Depreciation and amortization are determined on the straight-line method over the estimated useful lives of the related assets. The estimated useful lives generally range from 3 to 5 years. Expenditures for repairs and maintenance are charged to operations as incurred. Capitalized Software Development Costs: Costs incurred in the research, design and development of software for sale to others are charged to expense until technological product feasibility is established, after which remaining software development costs are capitalized. These costs are amortized as part of the cost of revenue beginning when the product is available for general release to customers. Such amounts are amortized over the estimated remaining useful life of the product not to exceed three years. The Company continually compares the unamortized portion of capitalized software development costs to the net realizable value of the related product. The net realizable value is the estimated future gross revenues from that product reduced by the estimated future costs of completing and disposing of that product. The amount by which the unamortized capitalized costs exceed the net realizable value is written-off. See Note 4 for discussion of Intangible Asset write-downs recorded during fiscal 1997 and 1995. Foreign Currency Translation: The translation of assets and liabilities of foreign subsidiaries is made at year-end rates of exchange, and revenues and expenses are recorded at average rates of exchange. The resulting translation adjustments are excluded from net income and are accumulated as a separate component of shareholders' equity. Realized and unrealized exchange gains or losses from foreign currency transactions are reflected in the statements of operations. The exchange loss for fiscal year 1997 was $531,000 and not material for fiscal years 1996 and 1995. Income Taxes: Income taxes have been provided using the liability method in accordance with FASB Statement No. 109, "Accounting for Income Taxes". 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. In February 1997, the Financial Accounting Standards Board issued Statement No. 128, Earnings per Share, which is required to be adopted on December 31, 1997. At that time, the Company will be required to change the method currently used to compute earnings per share and to restate all prior periods. Under the new requirements for calculating primary earnings per share, the dilutive effect of stock options will be excluded. The Company has not yet determined what the impact of Statement 128 will be on the calculation of fully diluted earnings per share. Stock-Based Compensation: Statement of Financial Accounting Standards No. 123 (SFAS 123), "Accounting for Stock-Based Compensation," encourages but does not require companies to record compensation cost for stock-based employee compensation plans at fair value. The Company has chosen to continue to account for stock-based employee compensation using the intrinsic value method prescribed in Accounting Principles Board (APB) Opinion No. 25, "Accounting for Stock Issued to Employees," and related interpretations. Accordingly, compensation cost for stock options granted to employees is measured as the excess, if any, of the quoted market price of the Company's stock at the date of the grant over the amount an employee must pay to acquire the stock. Long-Lived Assets: Effective April 1, 1996, the Company adopted Financial Accounting Standards Board (FASB) Statement of Financial Accounting Standards No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of," which requires impairment losses to be recorded on long-lived assets used in operations, such as property, equipment and improvements, and intangible assets, when indicators of impairment are present and the undiscounted cash flows estimated to be generated by those assets are less than the carrying amount of the assets. The adoption of this statement did not have an effect on the Company's financial statements. 21 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (con't) Note 2 Summary of Significant Accounting Policies (con't) Concentrations of Credit Risk: Financial instruments which potentially subject the Company to concentrations of credit risk consist principally of cash investments and accounts receivable. The Company places its cash investments in investment grade instruments with maturities of three months or less and limits the amount of investment with any one financial institution. The credit risk associated with accounts receivable is limited due to the Company's credit evaluation process and the large number of customers and their dispersion over different industries and geographic areas. Use of Accounting Estimates: The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Significant estimates include adequacy of restructuring accruals, collectibility of accounts receivable, and recoverability of depreciable assets and intangible assets. Actual results could differ from these estimates. Basis of Presentation: Certain 1996 and 1995 amounts have been reclassified to conform to the 1997 basis presentation. The accompanying financial statements have been presented assuming that the Company will continue as a going concern. During 1997, the Company experienced a substantial decline in revenues and a substantial loss from operations, resulting in a shareholders' deficit at March 31, 1997. In response to these matters, the Company developed detailed plans relating to its fiscal 1998 operations which, if realized, will restore the Company to profitable operations. Although no assurances can be given that such plans will be achieved, management is committed to taking all appropriate and necessary actions to effect timely cost reductions in the event that anticipated revenue levels are not achieved. In the event such actions are not successful in achieving breakeven or profitable operations, additional financing will be needed. Under such circumstances, no assurance can be given that such financing could be obtained or that it could be obtained at commercially reasonable terms or without incurring substantial dilution to existing shareholders. The financial statements do not include any adjustments to reflect the possible effects of these uncertainties. Management believes that, based on the 1998 operating plan and existing cash balances, the Company will have sufficient cash to support operations. Note 3 Property and Equipment Property and equipment at March 31 consisted of the following:
(in thousands) 1997 1996 - ---------------------------------------------------------------------------------------------- Office, demonstration and other equipment $ 27,739 $ 29,142 Development equipment 12,654 13,118 Furniture 3,799 4,296 Leasehold improvements 1,637 1,818 - ---------------------------------------------------------------------------------------------- 45,829 48,374 Less allowances for depreciation and amortization 40,866 40,574 - ---------------------------------------------------------------------------------------------- $ 4,963 $ 7,800 - ---------------------------------------------------------------------------------------------- - ----------------------------------------------------------------------------------------------
Note 4 Intangible Assets The Company's intangible assets have historically been purchased goodwill and capitalized software development costs. The Company's policy has been to amortize purchased goodwill to selling, general and administrative expense and capitalized software development costs to cost of revenue. In fiscal year 1997, the Company wrote-off goodwill of approximately $2.0 million related to the acquisition of The Learning Alliance (see Note 13). As a result of a strategic product review, the Company wrote-off capitalized software development costs of $2.0 million and $3.2 million in fiscal years 1997 and 1995, respectively. These costs were associated with discontinued products or products with limited future revenue potential. In fiscal year 1995, the Company recorded a charge to write-off goodwill of approximately $15.2 million which related to the Company's acquisition in prior years of its exclusive distributors in Canada, France and Germany. This goodwill was written-off as the Company had concluded the goodwill was permanently impaired. The unamortized portion of capitalized software development costs was $2.0 million and $6.2 million at March 31, 1997 and 1996, respectively. Amortization and write-downs to net realizable value of capitalized software development costs were approximately $5.0 million, $3.2 million, and $5.3 million during fiscal 1997, 1996 and 1995, respectively. 22 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (con't) Note 5 Credit Agreement The Company has a revolving line of credit 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 the 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 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. At March 31, 1997, there were no loans 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 March 31, 1997, approximately $0.8 million of standby letters of credit were outstanding to secure the leasing of computer equipment, and the amount available for additional borrowings is approximately $1.2 million. The current credit agreement expires in August 1997 and negotiations are underway to establish a new credit facility. Note 6 Accrued Expenses Accrued expenses at March 31 consisted of the following:
(in thousands) 1997 1996 - ---------------------------------------------------------------------------------------------- Accrued compensation and related items $ 4,987 $ 4,790 Taxes, other than income 2,414 2,460 Royalties 1,030 706 Rent 1,228 1,561 Other 4,796 3,738 - ---------------------------------------------------------------------------------------------- $ 14,455 $ 13,255 - ---------------------------------------------------------------------------------------------- - ----------------------------------------------------------------------------------------------
Note 7 Lease Commitments The Company leases its headquarters and sales offices, and certain equipment under various operating leases, which expire through the year 2001. Rent expense amounted to approximately $5.1 million, $6.6 million, and $9.4 million during fiscal 1997, 1996, and 1995, respectively. Future minimum lease commitments on noncancelable operating leases and sublease income are as follows:
(in thousands) Year ended March 31 1998 1999 2000 2001 2002 THEREAFTER - --------------------------------------------------------------------------------------------------------------------------------- Future minimum lease commitments on noncancelable leases $ 7,839 $ 6,126 $ 5,468 $ 3,841 $ -- $ -- - --------------------------------------------------------------------------------------------------------------------------------- Future minimum sublease income 2,285 2,058 1,974 1,403 -- -- - --------------------------------------------------------------------------------------------------------------------------------- - ---------------------------------------------------------------------------------------------------------------------------------
These future minimum lease commitments include approximately $10.3 million, net of sublease income, related to facilities the Company has elected to abandon or downsize in connection with the restructuring and acquisition-related initiatives. 23 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (con't) Note 8 Restructurings Restructuring charges include costs associated with employee termination benefits and facility closures and related costs. Employee termination benefits include severance, wage continuation, notice pay and related fringe benefits. Facility closure and related costs include lease payments, lease buyout costs, disposal of property and equipment, and related costs. In the second quarter of fiscal 1997, as a result of a significant decline in product revenue, 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. Approximately $1.3 million of the restructuring charge was for employee termination benefits and $3.5 million for facility closures and related costs. In the third quarter of fiscal 1997, the Company announced another restructuring plan and recorded a charge of $3.7 million to further reduce employment by approximately 100 people at a cost of $1.8 million and to close or reduce space in six sales offices at a cost of $1.9 million. The employee terminations affected all groups throughout the organization. In the fourth quarter of fiscal 1997, the Company recorded an additional charge of $2.4 million to reflect changes in cost and timing assumptions relating to previously restructured facilities. During the second quarter of fiscal 1995, as part of a Company reorganization and to reduce its size of operations, the Company recorded a restructuring charge of approximately $7.1 million. The restructuring plan was to reduce worldwide employment and to consolidate sales offices in North America and Europe. The employment reduction primarily related to the marketing, sales, general and administrative, and research and development groups. Approximately $4.6 million of the restructuring charge was for employee termination benefits and $2.5 million for facility closures and related costs. As a result of the restructuring program, worldwide employment was reduced by approximately 150 people, 19 sales offices were consolidated and a part of headquarters operations was relocated. The Company paid approximately $2.7 million, $0.7 million, and $4.4 million for employee termination benefits during fiscal 1997, 1996, and 1995, respectively. Payments for facility closures and related costs, net of sublease receipts, were approximately $1.4 million, $1.3 million, and $1.2 million during fiscal 1997, 1996, and 1995, respectively. Expenditures for facility closures, primarily lease payments, are anticipated to continue through the fiscal year 2001. Note 9 Income Taxes The provision for income taxes is composed of the following:
(in thousands) 1997 1996 1995 - ------------------------------------------------------------------------------------------------------------------- Current: Federal $ -- $ 30 $ -- State -- -- -- Foreign -- -- 258 - ------------------------------------------------------------------------------------------------------------------- Total current -- 30 258 - ------------------------------------------------------------------------------------------------------------------- Deferred: Federal -- -- 1,860 State -- -- -- - ------------------------------------------------------------------------------------------------------------------- Total deferred -- -- 1,860 - ------------------------------------------------------------------------------------------------------------------- $ -- $ 30 $ 2,118 - ------------------------------------------------------------------------------------------------------------------- - -------------------------------------------------------------------------------------------------------------------
The provision for income taxes is based on the following amounts of income (loss) before income taxes:
(in thousands) 1997 1996 1995 - ------------------------------------------------------------------------------------------------------------------- Domestic $ (21,586) $ 3,793 $ (43,607) Foreign (7,964) (3,452) (2,637) - ------------------------------------------------------------------------------------------------------------------- $ (29,550) $ 341 $ (46,244) - ------------------------------------------------------------------------------------------------------------------- - -------------------------------------------------------------------------------------------------------------------
24 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (con't) Note 9 Income Taxes (con't) Total income taxes reported are different from the amount that would have been computed applying the federal statutory tax rate to income before income taxes. The difference is attributable to the following:
(in thousands) 1997 1996 1995 - ------------------------------------------------------------------------------------------------------------------- Computed at federal statutory rate $ (10,047) $ 116 $ (15,723) Loss for which no tax benefit was realized 9,151 -- 9,051 Nondeductible amortization -- 51 397 Nondeductible write-downs 778 -- 5,021 Other nondeductible expenses 118 66 101 Benefit of net operating loss carryforward -- (195) -- Other temporary differences for which no tax benefit was realized -- -- 1,262 Adjustment to beginning of the year deferred tax asset valuation allowance -- -- 1,860 U.S. and foreign tax rate difference -- -- 123 State income taxes, net of federal tax benefit -- -- -- Other, net -- (8) 26 - -------------------------------------------------------------------------------------------------------------------- $ -- $ 30 $ 2,118 - -------------------------------------------------------------------------------------------------------------------- - --------------------------------------------------------------------------------------------------------------------
Deferred taxes result from temporary differences in the recognition of revenues and expenses for tax and financial reporting purposes. The components of the Company's deferred tax assets and liabilities as of March 31 are as follows:
(in thousands) 1997 1996 1995 - ------------------------------------------------------------------------------------------------------------------- Deferred tax assets: Net operating loss carryforwards $ 22,897 $ 14,919 $ 13,453 Tax credit carryforwards 7,150 7,120 6,950 Accrued rent 473 601 738 Reserve for doubtful accounts receivable, vacation and other accruals 864 401 475 Restructuring 2,555 392 888 - ------------------------------------------------------------------------------------------------------------------- Total deferred tax assets 33,939 23,433 22,504 Deferred tax asset valuation allowance (33,619) (21,294) (20,594) - ------------------------------------------------------------------------------------------------------------------- 320 2,139 1,910 - ------------------------------------------------------------------------------------------------------------------- Deferred tax liabilities: Capitalized software development costs (320) (1,891) (1,464) Depreciation -- (225) (422) Other -- (23) (24) - ------------------------------------------------------------------------------------------------------------------- Total deferred tax liabilities (320) (2,139) (1,910) - ------------------------------------------------------------------------------------------------------------------- Net deferred tax asset $ -- $ -- $ -- - ------------------------------------------------------------------------------------------------------------------- - -------------------------------------------------------------------------------------------------------------------
Realization of total deferred tax assets is contingent upon future taxable income. A 100% valuation allowance of net deferred tax assets has been established due to the uncertainty of realization of these tax benefits. The deferred tax asset valuation allowance increased $12,325,000 and $700,000 during fiscal 1997 and 1996, respectively. In the second quarter of fiscal 1995 the Company recorded an adjustment of approximately $1.9 million to the beginning of the year balance when an analysis of the Company's actual and anticipated operating results indicated, at that time, that utilization of the deferred tax asset was not expected to be realized. At March 31, 1997, the Company and its subsidiaries had net operating loss carryforwards of approximately $60 million that are available to offset future taxable income. The loss carryforwards are attributable to operations in several tax jurisdictions and expire in 1998 and thereafter. In addition, the Company has research and development and other tax credit carryforwards of approximately $7 million available to reduce future federal and state income tax liabilities. The tax credit carryforwards expire in 1999 and thereafter. During fiscal 1996, the Company made income tax payments of approximately $252,000. No tax payments were made in 1997 or 1995. (See Note 14.) 25 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (con't) Note 10 Shareholders' Equity On July 15, 1988, the Company declared a dividend distribution of one Preferred Stock Purchase Right (a Right) for each outstanding share of the Company's common stock to shareholders of record on July 25, 1988 and for shares of the Company's common stock issued and outstanding thereafter. Each Right entitles the holder to purchase a unit consisting of one-hundredth of a share (a Unit) of Series A Junior Participating Preferred Stock, $.10 par value (the Preferred Stock), at a purchase price of $65.00 in cash. The Rights initially trade with the shares of common stock and are not exercisable. The Rights will separate from the common stock and become exercisable 10 days after a public announcement that a person or group (an Acquiring Person) acquires beneficial ownership of 20% or more of the outstanding shares of common stock, or 10 business days after commencement of a tender offer that would result in a person or group beneficially owning 30% or more of the outstanding shares of common stock. In the event that the Company is not the surviving corporation in a merger with an Acquiring Person, or the acquisition of 25% of common stock by any person (except pursuant to a tender offer for all shares of common stock determined to be fair by certain directors of the Company), or upon certain self--dealing transactions or increases in an Acquiring Person's ownership of common stock, each holder of an outstanding Right other than an Acquiring Person will receive, upon exercise of a Right, the number of shares of the Company's common stock that equals the exercise price of the Right divided by one half of the current market price of the Company's common stock. In the event that the Company is not the surviving corporation in a merger, or if more than 50% of its assets or earning power is sold or transferred after any person has become an Acquiring Person, each holder of an outstanding Right other than any Acquiring Person will receive, upon exercise of a Right, the number of shares of common stock of the acquiring company that equals the exercise price of the Right divided by one half of the current market price of the acquiring company's common stock. The Rights are non-voting, expire on July 15, 1998 and may be redeemed at any time prior to becoming exercisable at a price of $.01 per Right. On September 29, 1989, the Company completed a private placement of 2,142,857 shares of its Senior Series B Convertible Preferred Stock, at $7.00 per share. In the event of liquidation, the Series B holders have a liquidation preference over all other shareholders of the Company and are entitled to receive $7.00 per share. Thereafter, all other shareholders are entitled to receive, on a per share basis, an amount equal to $15 million divided by the total number of shares of common stock that the Series B holders would have been entitled to receive upon conversion. Finally, the Series B holders and common shareholders share ratably in the remainder, if any, with each share of Series B being deemed to have been converted to common stock. Series B holders are entitled to vote on all matters submitted to the common shareholders as a single class with the common shareholders, receiving the number of votes equal to the number of common shares that they would have received upon conversion, except that the Series B holders are entitled to elect one director, and the Company needs the approval of the majority of the Series B holders on certain significant events. The Series B holders can convert each share of preferred stock into 1.34375 shares of common stock. Series B holders converted 61,393, 805,269, and 57,142 shares of Series B Convertible Preferred Stock into shares of the Company's common stock during fiscal 1997, 1996, and 1995, respectively. The Senior Series B Convertible Preferred Stock may be redeemed by the Company at $21.00 per share, at any time, provided at least 20% of the then outstanding shares of Senior Series B Convertible Preferred Stock are redeemed. Preferred shareholders shall share ratably in any dividends declared on the common stock, as if each Series B share had been converted to common stock. 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 receiving net proceeds of $9.4 million. In accordance with the agreement, the Company is obligated to issue an additional 1,316 shares of Series C Convertible Preferred Stock. 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. As part of the Series C issuance, the Company issued warrants to purchase 74,929 shares of common stock at an exercise price of $2.67 per share to its investment banking firm. These warrants are exercisable until October 15, 2001. In prior years, the Company had issued warrants to purchase the Company's common stock at various prices in connection with certain research and development agreements and exclusive distribution agreements. The Company issued 366,113 and 72,368 shares of common stock in connection with the exercise of warrants during fiscal 1996 and 1995, respectively. The Company received no proceeds upon the conversion of the warrants into common stock. 26 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (con't) Note 10 Shareholders' Equity (con't) Stock Option Plans: The Company has stock option plans that provide for the granting of non-qualified and incentive stock options to employees, consultants, and officers. The Board of Directors determines the option price, the option term, and the vesting period. Incentive stock options are granted at a price not less than the fair market value on the date of grant. On July 14, 1994, the Board of Directors adopted the 1994 Employee Stock Option Plan which provides for a maximum of 750,000 shares of common stock to be issued and sold under the plan. On September 12, 1996, the Board of Directors authorized a repricing program which allowed 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 2.1 million shares were repriced. On August 3, 1994, the Board of Directors authorized the repricing of approximately 746,000 stock options and the cancellation and re-grant of approximately 297,000 stock options ranging in price from $4.00 to $19.38 to the fair market value of $2.75 on that date. At the Annual Meeting of Shareholders on August 17, 1995, shareholders approved an amendment to the Company's 1993 Stock Option Plan to increase the number of shares of common stock available for issuance under the plan by 750,000. In May 1996 and October 1996, the Board of Directors approved amendments to the Company's 1994 Employee Stock Option Plan to increase the number of shares of common stock available for issuance under the plan by 750,000 and 1,000,000, respectively. A summary of activity for these stock option plans is as follows:
Number of Price Range of Weighted Average Shares Shares Price Per Share (in thousands, except price range of shares) - ------------------------------------------------------------------------------------------------------------------------------- Outstanding at March 31,1994 1,553 $1.13--$19.38 $ -- Granted 1,574 2.75-- 7.25 -- Exercised (216) 1.13-- 3.63 -- Cancelled (951) 2.75-- 15.63 -- - ------------------------------------------------------------------------------------------------------------------------------- Outstanding at March 31, 1995 1,960 2.75-- 10.75 -- Granted 798 5.50-- 7.38 6.25 Exercised (689) 2.75-- 5.75 3.10 Cancelled (250) 2.75-- 10.63 8.75 - ------------------------------------------------------------------------------------------------------------------------------- Outstanding at March 31, 1996 1,819 2.75-- 10.75 4.50 Granted 2,813 2.05-- 2.56 2.44 Exercised (154) 2.75-- 4.50 2.90 Cancelled (1,539) 2.50-- 10.63 5.95 - ------------------------------------------------------------------------------------------------------------------------------- Outstanding at March 31, 1997 2,939 $2.05--$10.75 $2.75 - ------------------------------------------------------------------------------------------------------------------------------- - -------------------------------------------------------------------------------------------------------------------------------
At March 31, 1997, there were approximately 789,000 shares available for grant. Options exercisable were approximately 1,238,000, 912,000, and 915,000 at March 31, 1997, 1996, and 1995, respectively. The Company also has stock option plans for non-employee directors. In September 1993, the Board of Directors approved, with subsequent ratification by the shareholders, the Company's 1993 Director Stock Option Plan. The 1993 Director Stock Option Plan replaced the 1989 Director Stock Option Plan. Options are granted at the fair market value at date of grant and are exercisable one year later. Each non-employee director received a grant of 5,000 options at the inception of the 1993 Director Stock Option Plan. Each newly elected non-employee director receives a grant of 5,000 options as of the first date of his or her election as a director. Every April 1, each non-employee director automatically receives a grant of 5,000 options. During fiscal 1997, no options were exercised and in fiscal 1996, 10,000 options were exercised. At March 31, 1997, there were options outstanding to purchase 70,000 shares and 45,000 shares were available for grant. Options exercisable were 70,000, 105,000, and 85,000 at March 31, 1997, 1996, and 1995, respectively. Pro Forma Disclosure of the Effects of Stock--Based Compensation Plans: The Company accounts for stock-based compensation using the method prescribed in Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees." The Company has adopted the disclosure-only provisions of Statement of Financial Accounting Standards No. 123 (SFAS No. 123), "Accounting for Stock-Based Compensation." Accordingly, no compensation cost has been recognized for the Company's stock option plans and employee stock purchase plan. 27 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (con't) Note 10 Shareholders' Equity (con't) Had compensation cost been determined based on the fair value at the grant dates for awards under those plans in fiscal 1997 and 1996 on a basis consistent with the provisions of SFAS No. 123, the Company's net income and earnings per share on a fully diluted basis would have been as indicated below:
1997 1996 (in thousands, except per share amounts) - ------------------------------------------------------------------------------------------------------- Net income (loss)--as reported $(29,550) $311 Net income (loss)--pro forma (29,858) 228 Earnings (loss) per-share--as reported (1.70) 0.02 Earnings (loss) per share--proforma (1.72) 0.01 Because SFAS No. 123 is only applicable to options granted subsequent to March 31, 1995, its pro forma effects will not be fully reflected until 1998. The fair value of options at date of grant was estimated using the Black-Scholes option pricing model with the following weighted average assumptions: - ------------------------------------------------------------------------------------------------------- Expected life (years) 4 4 Risk-free interest rate. 6.38% 5.79% Volatility 73.8% 73.8% Dividend yield -- -- - ------------------------------------------------------------------------------------------------------- - -------------------------------------------------------------------------------------------------------
The weighted-average grant-date fair value of options granted during 1997 and 1996 was $1.38 and $2.86, respectively. The following table summarizes information about stock options outstanding at March 31, 1997:
(in thousands, except price range of shares) Options Outstanding Options Exercisable - ----------------------------------------------------------------------------------------------------------------- Weighted Average Remaining Weighted Weighted Number Contractual Average Number Average Range of Exercise Outstanding Life (in Exercise Exercisable Exercise Prices at 3/31/97 Years) Price at 3/31/97 Price - ----------------------------------------------------------------------------------------------------------------- $2.00--$ 2.56 2,591 9.7 $2.38 1,115 $2.56 $2.75--$ 5.50 190 6.7 2.95 140 3.02 $6.65--$ 8.87 225 6.4 6.91 89 7.28 $9.00--$10.75 3 3.5 $9.64 3 $9.64 - -----------------------------------------------------------------------------------------------------------------
Employee Stock Purchase Plan: The Company's Employee Stock Purchase Plan allows eligible officers and employees to withhold up to 10% of their total compensation to purchase shares of the Company's common stock. The purchase price is 85% of the fair market value of the stock on the date a one-year offering commences or the date an offering terminates, whichever is lower. Shares issued to employees were approximately 183,000, 157,000, and 208,000 during fiscal 1997, 1996, and 1995, respectively. At March 31, 1997, approximately 10,235,000 shares of common stock were reserved for issuance primarily related to the Series B and C Convertible Preferred Stock, various stock option plans, warrants, and the Employee Stock Purchase Plan. Note 11 Employee Benefit Plans The Company's retirement savings plan (401(k) plan) allows eligible employees to make tax-deferred contributions. Participants in the 401(k) plan may contribute up to 15% of their total annual compensation, not to exceed the specified statutory limit. Participants are 100% vested in their own contributions. The 401(k) plan permits, but does not require, the Company to make contributions to the 401(k) plan. The Company made contributions of $100,000 during fiscal 1995; no contributions were made during fiscal 1997 and 1996. 28 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (con't) Note 12 Research and Development Agreement In October 1988, the Company entered into a joint venture (the Venture) with PruTech Research and Development Partnership III (PruTech), for the purpose of developing and marketing certain products. PruTech contributed approximately $2,950,000 in cash to the Venture; the Company licensed to the Venture certain base technology and was required to perform certain development, marketing and administrative services for the Venture. In March 1994, PruTech commenced an arbitration action against the Company, alleging, among other things, (i) that the Company had mismanaged the Venture; (ii) that PruTech was entitled to cash distributions of 30% of Venture revenues; and (iii) that certain Venture-owned technology was used in the Company's other products. In November 1995, the Company and PruTech reached an agreement. The Company paid PruTech $2.1 million (the Purchase Price) in consideration of (i) the acquisition by the Company of PruTech's interest in the Venture, and (ii) the settlement of the pending arbitration action and the release by PruTech of all claims that it may have had against the Company arising out of the formation and operation of the Venture. The Company issued to PruTech 190,000 common stock shares for payment of the Purchase Price. The settlement of the arbitration action resulted in an expense reduction of approximately $1.2 million, which is included in selling, general and administrative expenses in the Consolidated Statements of Operations. The Venture-owned technology acquired by the Company was valued at $1.4 million and is included in Intangible assets in the Consolidated Balance Sheets. The technology is being amortized in the same manner as other capitalized software development costs. Note 13 Acquisitions On May 1, 1996, the Company purchased all of the outstanding equity securities of The Learning Alliance, Inc. ("TLA") for 341,500 shares of common stock valued at $2,690,000. 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 estimated fair values. The acquisition resulted in goodwill of approximately $2.6 million. In December 1996, in order to allow the Company's management to focus on development of its core businesses, the Company decided to divest itself of TLA. TLA was sold in January 1997 for future royalty considerations and foregone severance payments. As a result of this decision, in December 1996 the Company recorded a write-down of approximately $2.3 million of goodwill which had been recorded in connection with the acquisition. The operating results of TLA, which were not material, have been included in the consolidated financial statements from the date of the acquisition to the date of disposition. Pro forma presentations have not been included as the acquisition was not material to the results of operations of the Company. Note 14 Contingencies In the ordinary course of its business activities, the Company is subject to various investigations, claims and legal proceedings. Each of these matters is subject to various uncertainties, and it is possible that some of these matters may be resolved unfavorably to the Company. Management believes that the ultimate resolution of these matters will not have a material adverse effect on the financial position or results of operations of the Company. Interleaf's German subsidiary, Interleaf GmbH, has been notified that it is liable for certain German withholding taxes related to payments remitted to the United States from Germany. The Company is appealing this assessment; however, approximately $1.1 million of the cash and cash equivalents balance at March 31, 1997 and 1996 has been restricted for potential payment of the German withholding taxes. The Company believes the final outcome will not have a material adverse effect on the financial position or results of operations of the Company. 29 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Con't) Note 15 Industry Segment and Geographic Information The Company operates in a single industry segment: developing and marketing integrated document publishing software and services worldwide. Information regarding geographic areas at March 31, 1997, 1996 and 1995, and for the years then ended is as follows:
(in thousands) March 31, 1997 and for the year then ended U.S. Non-U.S. Eliminations Total - -------------------------------------------------------------------------------------------------------------- Sales to unaffiliated customers $ 39,558 $ 25,265 $ -- $ 64,823 Intercompany royalties and transfers 6,547 201 (6,748) -- - -------------------------------------------------------------------------------------------------------------- Net revenues 46,105 25,466 (6,748) 64,823 - -------------------------------------------------------------------------------------------------------------- Income (loss) from operations (21,025) (7,594) -- (28,619) - -------------------------------------------------------------------------------------------------------------- Identifiable assets 58,575 19,288 (39,963) 37,900 - -------------------------------------------------------------------------------------------------------------- March 31, 1996 and for the year then ended U.S. Non-U.S. Eliminations Total - -------------------------------------------------------------------------------------------------------------- Sales to unaffiliated customers $ 54,953 $ 33,604 $ -- $ 88,557 Intercompany royalties and transfers 8,770 -- (8,770) -- - -------------------------------------------------------------------------------------------------------------- Net revenues 63,723 33,604 (8,770) 88,557 - -------------------------------------------------------------------------------------------------------------- Income (loss) from operations 2,797 (2,764) 83 116 - -------------------------------------------------------------------------------------------------------------- Identifiable assets 63,734 17,590 (32,408) 48,916 - -------------------------------------------------------------------------------------------------------------- March 31, 1995 and for the year then ended U.S. Non--U.S. Eliminations Total - ---------------------------------- ----------------- ----------------- ----------------- ----------------- Sales to unaffiliated customers $ 56,853 $ 31,003 $ -- $ 87,856 Intercompany royalties and transfers 7,076 18 (7,094) -- - -------------------------------------------------------------------------------------------------------------- Net revenues 63,929 31,021 (7,094) 87,856 - -------------------------------------------------------------------------------------------------------------- Income (loss) from operations (35,538) (9,687) -- (45,225) - -------------------------------------------------------------------------------------------------------------- Identifiable assets 61,679 18,877 (29,763) 50,793 - --------------------------------------------------------------------------------------------------------------
Intercompany transfers between geographic areas are accounted for at prices that approximate prices charged to unaffiliated customers. 30 REPORT OF ERNST & YOUNG LLP, IDNEPENDENT AUDITORS Board of Directors Interleaf, Inc. We have audited the accompanying consolidated balance sheets of Interleaf, Inc. as of March 31, 1997 and 1996, and the related consolidated statements of operations, changes in shareholders' equity (deficit), and cash flows for each of the three years in the period ended March 31, 1997. Our audits also included the financial statement schedule listed in the Index at Item 14(a). These financial statements and schedule are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements and schedule based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of Interleaf, Inc. at March 31, 1997 and 1996, and the consolidated results of its operations and its cash flows for each of the three years in the period ended March 31, 1997, in conformity with generally accepted accounting principles. Also, in our opinion, the related financial statement schedule, when considered in relation to the basic financial statements taken as a whole, present fairly in all material respects the information set forth therein. /s/ Ernst & Young LLP - ------------------------ Boston, Massachusetts June 16, 1997 31 SUPPLEMENTAL FINANCIAL INFORMATION The following summarizes unaudited selected quarterly results of operations for the years ended March 31, 1997 and 1996 and the market range for the Company's common stock for those periods:
(in thousands except for per share amounts) Quarter ended June 30 September 30 December 31 March 31 Year - ------------------------------------------------------------------------------------------------------------------------------- FISCAL 1997 Revenues $19,054 $16,585 $15,348 $13,836 d $64,823 - ---------------------------------------------------------------------------------------------------------------------------- Gross margin 11,920 9,405 8,842 6,552 36,719 - ---------------------------------------------------------------------------------------------------------------------------- Net income (loss) (3,800) (10,327)a (9,509)a,b (5,914)a,e (29,550) - ---------------------------------------------------------------------------------------------------------------------------- Net income (loss) per share (0.22) (0.59) (0.54) (0.35) (1.70) - ---------------------------------------------------------------------------------------------------------------------------- FISCAL 1996 Revenues $23,127 $23,311 $21,255 $20,864 $ 88,557 - ---------------------------------------------------------------------------------------------------------------------------- Gross margin 15,289 15,666 13,883 13,827 58,665 - ----------------------------------------------------------------------------------------------------------------------------- Net income (loss) 472 922 429 c (1,512) 311 - ------------------------------------------------------------------------------------------------------------------------------ Net income (loss) per share 0.03 0.05 0.02 (0.09) 0.02 - ------------------------------------------------------------------------------------------------------------------------------
Notes to Supplemental Financial Information a. Includes restructuring charges of $4.8 million, $3.7 million, and $2.4 million for the second, third, and fourth quarter, respectively. These restructuring charges were to reduce worldwide employment and facility costs. b. Includes a $2.3 million write-off of goodwill related to the TLA acquisition. c. Includes a $1.2 million benefit from the settlement of a long-term dispute with a joint venture partner. d. Includes a $1.5 million reserve for sales allowances during the quarter. e. Includes a $2.2 million write-off of capitalized software development costs, inventory, and prepaid royalties for discontinued products and products with limited future revenue potential. 32 SCHEDULE II Valuation and Qualifying Accounts (In thousands)
COL. A COL. B COL. C COL. D COL. E COL. F - ------------------------------------- ------------ ------------ ----------- ----------- ------------- Balance at Additions to Other Beginning of Costs and Additions-- Deductions Balance at Description Period Expenses Describe(1) Describe(2) End of Period - ------------------------------------- ------------ ------------ ----------- ----------- ------------- Year ended March 31, 1995: Deducted from asset accounts Allowance for doubtful accounts $1,169 $683 $1,750 $(1,649) $1,953 Year ended March 31, 1996: Deducted from asset accounts Allowance for doubtful accounts $1,953 $630 $ 300 $(1,188) $1,695 Year ended March 31, 1997: Deducted from asset accounts Allowance for doubtful accounts $1,695 $304 $ -- $(628) $1,371 - ------------------------------------- ------------ ------------ ----------- ----------- -------------
- --------------------- (1) Reclass to allowance for doubtful accounts from accrued expenses (2) Write-off of uncollectible accounts receivable and effect of foreign exchange rate fluctuations 33 ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None. PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT The information required by this item is contained in part under the caption "Executive Officers of the Company" in Part I hereof and the remainder is incorporated herein by reference to "Election of Directors" (except for the information contained under the subheadings "Compensation Committee Report" and "Stock Performance Graph") in the Company's Proxy Statement for the Company's Annual Meeting of Shareholders to be held on August 15, 1997 (the "1997 Proxy Statement"). ITEM 11. EXECUTIVE COMPENSATION The information required by this item is incorporated herein by reference to "Executive Compensation," "Severance Plan and Change in Control," "Directors' Compensation," and "Ratification and Approval of the Amendment to the Company's 1993 Stock Option Plan" contained in the 1997 Proxy Statement. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT The information required by this item is incorporated herein by reference to information contained in the table appearing under the heading "Principal Shareholders" contained in the 1997 Proxy Statement. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS The information required by this item is incorporated herein by reference to "Certain Relationships and Related Transactions" contained in the 1997 Proxy Statement. PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K (a) 1. Financial Statements. The financial statements are listed in the Index to Consolidated Financial Statements and Financial Statement Schedule filed as part of this Annual Report on Form 10-K. 2. Financial Statement Schedule. The financial statement schedule is listed in the Index to Consolidated Financial Statements and Financial Statement Schedule filed as part of this Annual Report on Form 10-K. 3. Exhibits. The exhibits listed in the accompanying Exhibit Index are filed as part of this Annual Report on Form 10-K. (b) Reports on Form 8-K None. The following trademarks are used herein: Interleaf-Registered Trademark- is a registered trademark of Interleaf, Inc. RDM and WorldView are trademarks of Interleaf, Inc. Motif-Registered Trademark- is a registered trademark of the Open Software Foundation, Inc. Microsoft Windows is a trademark of Microsoft Corporation. 34 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) 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. By: /s/ Jaime W. Ellertson --------------------------------- Jaime W. Ellertson, President and Chief Executive Officer Dated: June 30, 1997 Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
Signature Capacity Date --------- -------- ---- /s/ Jaime W. Ellertson President and Chief Executive Officer and June 30, 1997 - ----------------------------------- a Director (Principal Executive Officer) Jaime W. Ellertson /s/ Robert R. Langer Vice President of Finance and Administration June 30, 1997 - ----------------------------------- and Chief Financial Officer (Principal Financial Robert R. Langer and Accounting Officer) /s/ Rory J. Cowan Chairman of the Board of Directors June 30, 1997 - ----------------------------------- Rory J. Cowan /s/ Frederick B. Bamber Director June 30, 1997 - ----------------------------------- Frederick B. Bamber /s/ David A. Boucher Director June 30, 1997 - ----------------------------------- David A. Boucher /s/ Marcia J. Hooper Director June 30, 1997 - ----------------------------------- Marcia J. Hooper /s/ George D. Potter, Jr. Director June 30, 1997 - ----------------------------------- George D. Potter, Jr.
35 EXHIBIT INDEX Exhibit Number Description Method of Filing - ------- ----------- ---------------- 3(a) Restated Articles of Organization of the [xvi] Company, as amended 3(b) By-Laws of the Company, as amended [v] 4(a) Specimen Certificate for Shares of the [xiv] Company's Common Stock 4(b) Rights Agreement, dated July 15, 1988, [xv] between the Company and the First National Bank of Boston 10(a) Company's 1983 Stock Option Plan, as amended [v] 10(a1) 1994 Employee Stock Option Plan, as amended [xiii] 10(a2) 1993 Incentive Stock Option Plan, as amended [viii] 10(b) Company's 1989 Director Stock Option Plan [i] 10(b2) Company's 1987 Employee Stock Purchase Plan, [xiii] as 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 [ii] Development Partnership III and the Company, dated October 21, 1988. 10(e) Exclusive Marketing and Licensing Agreement, [i] between Interleaf South America, Ltd. and the Company, and related Option Agreement, dated March 31, 1989. 10(f) Distribution and License Agreement between [i] Interleaf 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 [iii] increase in conversion ratio, dated May 18, 1992. 10(i) Lease of Prospect Place, Waltham, MA, between [iv] Prospect Place Limited Partnership and Interleaf, Inc., and related Agreements, dated March 30, 1990. 10(j) Employment and severance agreement between [vii] the Company and Edward Koepfler, the Company's President, dated October 3, 1994. 10(k) Loan and Security Agreement between the [ix] Company and Foothill Capital Corporation, dated May 2, 1995. 10(l) Employment and severance agreement between [ix] the Company and G. Gordon M. Large, the Company's Executive Vice President and Chief Financial Officer, dated June 5, 1995. 10(m) Net Lease, dated August 14, 1995, between [x] Principal Mutual Insurance Company and the Company. 10(n) Sublease, dated September 15, 1995, between [x] Parametric Technology Corporation and the Company. 10(o) Employment and severance agreement between [xi] the Company and Mark Cieplik, the Company's Vice President, Americas, dated March 17, 1995. 10(p) Agreement between PruTech Research and [xii] Development Partnership III and the Company, dated November 14, 1995. 10(q) Series C Preferred Stock Agreement between [xiii] Interleaf, Inc. and Lindner Investments, dated October 14, 1996. 36 Exhibit Number Description Method of Filing - ------- ----------- ---------------- 10(r) Letter Agreement between the Company and [xvi] Robert M. Stoddard, as the Company's then Vice President of Finance and Administration, and Chief Financial Officer, dated November 11, 1996. 10(s) Letter Agreement between the Company and [xvi] Rory J. Cowan, the Company's President and Chief Executive Officer, dated November 15, 1996, concerning his employment and compensation with the Company. 10(t) Letter Agreement between the Company and [xvi] Mark H. Cieplik, the Company's Vice President of Sales, dated November 15, 1996, concerning his employment and compensation with the Company. 10(u) Letter Agreement between the Company and [xvi] Michael L. Shanker, the Company's Vice President of Professional Services, dated November 15, 1996, concerning his employment and compensation with the Company. 10(v) Letter Agreement between the Company and [xvi] Stephen J. Hill, the Company's Vice President of Europe, dated November 15, 1996, concerning his employment and compensation with the Company. 10(w) Resignation Agreement and Release and [xvi] Employment Agreement between Ed Koepfler, the Company's former President and Chief Executive Officer, and the Company, dated November 15, 1996, concerning his employment and severance with the Company. 10(w1) Resignation Agreement and Release and Employment [xvi] Agreement between G. Gordon M. Large, the Company's former Executive Vice President of Finance and Administration and Chief Financial Officer, and the Company, dated November 12, 1996, concerning his employment and severance with the Company. 10(x) Resignation Agreement and Release and Employment [xvi] Agreement between Stan Douglas, the Company's former Vice President of Engineering Operations, and the Company, dated November 15, 1996, concerning his employment and severance with the Company. 10(y) Terms of Engagement between the Company and [xvi] Robert R. Langer, Vice President of Finance and Administration and Chief Financial Officer, dated December 30, 1996, concerning his employment with the Company. 10(z) Offer Letter and Acceptance between Jaime W. [xvi] Ellertson, the Company's President and Chief Executive Officer, and the Company, dated January 9, 1997. 11 Computation of Earnings Per Share Included 21 Subsidiaries of the Company Included 23 Consent of Independent Auditors 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. 37 [iv] Incorporated herein by reference is the applicable Exhibit to Company's Report on Form 8-K filed April 13, 1990, File Number 0-14713. [v] Incorporated herein by reference is the applicable Exhibit to Company's Annual Report on Form 10-K for the year ended March 31, 1994, File Number 0-14713. [vi] Incorporated herein by reference is the applicable Exhibit to Company's Report on Form 10-Q for the quarter ended September 30, 1994, File Number 0-14713. [vii] Incorporated herein by reference is the applicable Exhibit to Company's Report on Form 10-Q for the quarter ended December 31, 1994, File Number 0-14713. [viii] Incorporated herein by reference is the applicable Exhibit to Company's Annual Report on Form 10-K for the year ended March 31, 1995, File Number 0-14713. [ix] Incorporated herein by reference is the applicable Exhibit to Company's Report on Form 10-Q for the quarter ended June 30, 1995, File Number 0-14713. [x] Incorporated herein by reference is the applicable Exhibit to Company's Registration Statement on Form S-2, File Number 33-63785. [xi] Incorporated herein by reference is the applicable Exhibit to Company's Report on Form 10-Q for the quarter ended September 30, 1995, File Number 0-14713. [xii] Incorporated herein by reference is the applicable Exhibit to Company's Report on Form 10-Q for the quarter ended December 31, 1995, File Number 0-14713. [xiii] Incorporated herein by reference is the applicable Exhibit to Company's Report on Form 10-Q for the quarter ended September 30, 1996, File Number 0-14713. [xiv] Incorporated herein by reference is the applicable Exhibit to Company's Registration Statement on Form S-1, File Number 33-5743. [xv] Incorporated herein by reference is Exhibit 1 to Company's Registration Statement on Form 8-A, filed July 27, 1988. [xvi] Incorporated herein by reference is the applicable Exhibit to Company's Report on Form 10--Q for the quarter ended December 31, 1996, File Number 0-14713. 38 EX-11 2 EXHIBIT 11 EXHIBIT 11 INTERLEAF, INC. EXHIBIT 11--COMPUTATION OF EARNINGS PER SHARE
Year Ended March 31 ---------------------------------------- 1997 1996 1995 ---------- --------- -------- (In thousands, except per share amounts) PRIMARY Average shares outstanding of Common Stock 17,344 15,557 13,938 Dilutive Senior Series B Convertible Preferred Stock -- 1,758 -- Dilutive Senior Series C Convertible Preferred Stock -- -- -- Dilutive stock options -- 1,029 -- Dilutive stock purchase warrants -- 97 -- Dilutive stock purchase plan rights -- 54 -- ---------- --------- -------- Total 17,344 18,495 13,938 ---------- --------- -------- ---------- --------- -------- Income (loss) before cumulative effect of change in accounting principle $(29,550) $ 311 $(48,362) ---------- --------- -------- ---------- --------- -------- Per share amount $ (1.70) $ 0.02 $ (3.47) ---------- --------- -------- ---------- --------- -------- Cumulative effect of change in accounting principle $ -- $ -- $ -- ---------- --------- -------- ---------- --------- -------- Per share amount $ -- $ -- $ -- ---------- --------- -------- ---------- --------- -------- Net income (loss) $(29,550) $ 311 $(48,362) ---------- --------- -------- ---------- --------- -------- Per share amount $ (1.70) $ 0.02 $ (3.47) ---------- --------- -------- ---------- --------- -------- FULLY DILUTED Average shares outstanding of Common Stock 17,344 15,557 13,938 Dilutive Senior Series B Convertible Preferred Stock -- 1,758 -- Dilutive Senior Series C Convertible Preferred Stock -- -- -- Dilutive stock options -- 1,186 -- Dilutive stock purchase warrants -- 187 -- Dilutive stock purchase plan rights -- 57 -- ---------- --------- -------- Total 17,344 18,745 13,938 ---------- --------- -------- ---------- --------- -------- Income (loss) before cumulative effect of change in accounting principle $(29,550) $ 311 $(48,362) ---------- --------- -------- ---------- --------- -------- Per share amount $ (1.70) $ 0.02 $ (3.47) ---------- --------- -------- ---------- --------- -------- Cumulative effect of change in accounting principle $ -- $ -- $ -- ---------- --------- -------- ---------- --------- -------- Per share amount $ -- $ -- $ -- ---------- --------- -------- ---------- --------- -------- Net income (loss) $(29,550) $ 311 $(48,362) ---------- --------- -------- ---------- --------- -------- Per share amount $ (1.70) $ 0.02 $ (3.47) ---------- --------- -------- ---------- --------- --------
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-21 3 EXHIBIT 21 EXHIBIT 21 SUBSIDIARIES OF INTERLEAF, INC. 1. Avalanche Development Company 2. Interleaf Australia Pty. Ltd. 3. Interleaf Benelux, N.V./S.A. 4. Interleaf Canada, Inc. 5. Interleaf Foreign Sales Corp. 6. Interleaf France, S.A. 7. Interleaf GmbH 8. Interleaf Iberica 9. Interleaf Japan, Inc. 10. Interleaf Securities Corp. 11. Interleaf Switzerland, S.A. 12. Interleaf U.K. Ltd. 13. Interleaf World Trade, Inc. EX-23 4 EXHIBIT 23 EXHIBIT 23 CONSENT OF INDEPENDENT AUDITORS We consent to the incorporation by reference in the Registration Statement (Form S-2 No. 33-63785) of Interleaf, Inc. and in the related Prospectus, the Registration Statement (Form S-3 No. 33-03761) of Interleaf, Inc. and in the related Prospectus, the Registration Statements (Forms S-8 No. 33-8933, No. 33-14529, No. 33-30218 and No. 33-59794) pertaining to the 1983 Stock Option Plan of Interleaf, Inc., the Registration Statements (Forms S-8 No. 33-13249, No. 33-30219, No. 33-40663 and No. 33-69066) pertaining to the 1987 Employee Stock Purchase Plan of Interleaf, Inc., the Registration Statement (Form S-8 No. 33-30220) pertaining to the 1989 Director Stock Option Plan of Interleaf, Inc., the Registration Statements (Forms S-8 No. 33-69068 and No. 33-61051) pertaining to the 1993 Stock Option Plan of Interleaf, Inc., the Registration Statement (Form S-8 No. 33-80864) pertaining to the 1993 Director Stock Option Plan of Interleaf, Inc., and the Registration Statement (Form S-8 No. 33-84214) pertaining to the 1994 Employee Stock Option Plan of Interleaf, Inc. of our report dated June 16, 1997, with respect to the consolidated financial statements and schedule of Interleaf, Inc. included in the Annual Report (Form 10-K) for the year ended March 31, 1997. /s/ Ernst & Young LLP Boston, Massachusetts June 30, 1997 EX-27 5 EXHIBIT 27
5 This schedule contains summary financial information extracted consolidated balance sheets and consolidated statements of operations pages 17 and 18 of the Company's Form 10-K for the year end and is qualified in its entirety by reference to such financial statements 1,000 12-MOS MAR-31-1997 MAR-31-1997 17,349 0 12,730 1,371 205 30,212 45,829 40,866 37,900 35,717 0 0 187 175 15,057 37,900 18,820 64,823 7,502 28,104 54,624 304 400 (29,550) 0 (29,550) 0 0 0 (29,550) (1.70) (1.70)
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