-----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, C2UC/dxp0eJZDX+HiRN+vEVjJGZiXlCVyDUMCTty13Bl9zDG36eubQtHb9+Y6mom 7TzhjlXg+EAFWtCrhS9Yvw== 0001005477-97-002567.txt : 19971117 0001005477-97-002567.hdr.sgml : 19971117 ACCESSION NUMBER: 0001005477-97-002567 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 8 CONFORMED PERIOD OF REPORT: 19970930 FILED AS OF DATE: 19971114 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: INTERLEAF INC /MA/ CENTRAL INDEX KEY: 0000793604 STANDARD INDUSTRIAL CLASSIFICATION: SERVICES-PREPACKAGED SOFTWARE [7372] IRS NUMBER: 042729042 STATE OF INCORPORATION: MA FISCAL YEAR END: 0331 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 000-14713 FILM NUMBER: 97719911 BUSINESS ADDRESS: STREET 1: 62 FOURTH AVE STREET 2: 9 HILLSIDE AVE CITY: WALTHAM STATE: MA ZIP: 02154 BUSINESS PHONE: 6172900710 MAIL ADDRESS: STREET 1: 62 FOURTH AVENUE CITY: WALTHAM STATE: MA ZIP: 02154 10-Q 1 FORM 10-Q ================================================================================ SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 ---------------------- FORM 10-Q QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 1997 COMMISSION FILE NUMBER 0-14713 Interleaf Interleaf, Inc. (exact name of registrant as specified in its charter) Massachusetts 04-2729042 (State or other jurisdiction (I.R.S. employer identification number) of incorporation or organization) 62 Fourth Avenue, Waltham, MA 02154 (Address of principal executive offices) (Zip Code) (781) 290-0710 (Registrant's telephone number, including area code) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the last 90 days. Yes |X| No |_| APPLICABLE ONLY TO CORPORATE ISSUERS The number of shares outstanding of the issuer's Common Stock, $.01 par value, as of November 10, 1997 was 17,846,259. ================================================================================ Interleaf, Inc. TABLE OF CONTENTS Page ---- PART I - FINANCIAL INFORMATION Item 1 - Financial Statements Consolidated balance sheets at September 30, 1997, September 30, 1997 (Pro Forma) and March 31, 1997 ............................................. 3 Consolidated statements of operations for the three and six months ended September 30, 1997 and 1996 ................................................ 4 Consolidated statements of cash flows for the three and six months ended September 30, 1997 and 1996 ................................................ 5 Notes to consolidated financial statements ................................. 6 Item 2 - Management's Discussion and Analysis of Financial Condition and Results of Operations .................................................. 10 PART II - OTHER INFORMATION Item 4 - Submission of Matters to Vote of Security Holders ................. 14 Item 5 - Other Information ................................................. 14 Item 6 - Exhibits and Reports on Form 8-K .................................. 17 SIGNATURE .................................................................. 17 2 Interleaf, Inc. PART I - FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS CONSOLIDATED BALANCE SHEETS
Unaudited -------------------------------------- September 30, 1997 September 30, 1997 March 31, 1997 ------------------ ------------------ -------------- In thousands, except for share and per share amounts (historical) (pro forma) ASSETS Current Assets Cash and cash equivalents $ 13,378 $ 20,340 $ 17,349 Accounts receivable, net of reserve for doubtful accounts of $1,365 at September 30, 1997 and $ 1,371 at March 31, 1997 9,260 9,260 11,359 Prepaid expenses and other current assets 1,657 1,657 1,504 ------------------ ------------------ --------------- Total Current Assets 24,295 31,257 30,212 Property and equipment, net 4,300 4,300 4,963 Intangible assets, net 1,536 1,536 2,281 Other assets 906 906 444 ------------------ ------------------ --------------- Total Assets $ 31,037 $ 37,999 $ 37,900 ================== ================== =============== LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIT) Current Liabilities Accounts payable $ 2,205 $ 2,205 $ 1,774 Accrued expenses 11,652 11,582 14,455 Unearned revenue 11,166 11,166 15,102 Accrued restructuring 2,042 2,042 4,386 ------------------ ------------------ --------------- Total Current Liabilities 27,065 26,995 35,717 Long-term restructuring 3,555 3,555 2,955 ------------------ ------------------ --------------- Total Liabilities 30,620 30,550 38,672 ------------------ ------------------ --------------- Shareholders' Equity (Deficit) Preferred stock, par value $.10 per authorized 5,000,000 shares: Series A Junior Participating, none issued and outstanding Senior Series B convertible, shares issued and outstanding, 861,911 at September 30, 1997 and at March 31, 1997 86 86 86 Senior Series C Convertible, shares issued and outstanding, 1,010,002 at September 30, 1997 and 1,006,220 at March 31, 1997 101 101 101 Series 6% Convertible, shares issued and outstanding, 7,625 at September 30, 1997 (pro forma) -- 1 -- Common stock, par value $.01 per share, authorized 50,000,000 shares, issued and outstanding, 17,840,259 at September 30, 1997 and 17,459,219 at March 31, 1997 178 178 175 Additional paid-in capital 85,970 93,001 85,513 Retained earnings(deficit) (85,674) (85,674) (86,508) Cumulative translation adjustment (244) (244) (139) ------------------ ------------------ --------------- Total Shareholders' Equity (Deficit) 417 7,449 (772) ------------------ ------------------ --------------- Total Liabilities and Shareholders' Equity (Deficit) $ 31,037 $ 37,999 $ 37,900 ================== ================== ===============
See notes to consolidated financial statements 3 Interleaf, Inc. CONSOLIDATED STATEMENTS OF OPERATIONS
Three months ended September 30 Six months ended September 30 ------------------------------- ----------------------------- 1997 1996 1997 1996 ---- ---- ---- ---- (unaudited) (unaudited) In thousands, except for per share amounts Revenues: Products $ 3,158 $ 4,614 $ 5,900 $ 11,660 Maintenance 6,695 7,410 13,344 14,882 Services 3,265 4,561 6,700 9,097 -------- -------- ------- -------- Total revenues 13,118 16,585 25,944 35,639 Costs of Revenues: Products 952 1,527 1,682 3,153 Maintenance 1,012 1,291 1,958 2,599 Services 2,877 4,362 5,716 8,562 -------- -------- ------- -------- Total costs of revenues 4,841 7,180 9,356 14,314 Gross Margin 8,277 9,405 16,588 21,325 Operating Expenses: Selling, general and administrative 5,475 10,481 11,032 21,903 Research and development 2,316 4,306 4,767 8,576 Restructuring expense -- 4,800 -- 4,800 -------- -------- ------- -------- Total operating expenses 7,791 19,587 15,799 35,279 -------- -------- ------- -------- Income (loss) from operations 486 (10,182) 789 (13,954) Other Income (expense) (37) (145) 46 (173) -------- -------- ------- -------- Income (loss) before income taxes 449 (10,327) 835 (14,127) Provision for income taxes -- -- -- -- -------- -------- ------- -------- Net income (loss) $ 449 $(10,327) $ 835 $(14,127) ======== ======== ======= ======== Income (loss) Per Share: $ 0.02 $ (0.59) $ 0.03 $ (0.82) ======== ======== ======= ======== Shares used in computing income (loss) per share 24,815 17,457 23,895 17,229 ======== ======== ======= ========
See notes to consolidated financial statements 4 Interleaf, Inc. CONSOLIDATED STATEMENTS OF CASH FLOWS
Six months ended September 30 ---------------------------- In thousands (unaudited) 1997 1996 ---- ---- Cash Flows from Operating Activities Net income (loss) $ 835 $ (14,127) Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities: Restructuring expense -- 4,800 Depreciation and amortization expense 2,030 3,901 Changes in assets and liabilities Decrease in accounts receivable, net 1,888 3,942 (Increase) decrease in other assets (619) 341 Decrease in accounts payable and accrued expenses (2,310) (49) Decrease in unearned revenue (3,769) (4,493) Decrease in other liabilities (1,692) (1,305) Other, net 278 113 ---------- ---------- Net cash used in operating activities (3,359) (6,877) ---------- ---------- Cash Flows from Investing Activities Capital expenditures (655) (1,736) Capitalized software development costs -- (737) ---------- ---------- Net cash used in investing activities (655) (2,473) ---------- ---------- Cash Flows from Financing Activities Short term borrowings, net -- 374 Net proceeds from issuance of common stock 597 1,250 Repayment of long-term debt and capital leasees (20) (4) ---------- ---------- Net cash provided by financing activities 577 1,620 ---------- ---------- Effect of exchange-rate changes on cash (534) (53) ---------- ---------- Net decrease in cash and cash equivalents (3,971) (7,783) Cash and cash equivalents at beginning of period 17,349 12,725 ---------- ---------- Cash and cash equivalents at end of period $ 13,378 $ 4,942 ========== ==========
See notes to consolidated financial statements 5 Interleaf, Inc. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) 1. Basis of Presentation The consolidated financial statements include the accounts of Interleaf, Inc. and its subsidiaries. All significant intercompany balances and transactions have been eliminated in consolidation. Interleaf, Inc. and its subsidiaries are collectively referred to as the "Company." The accompanying unaudited consolidated financial statements have been prepared in accordance with generally accepted accounting principles for interim financial information and with the instructions to Form 10-Q and Rule 10-01 of Regulation S-X. Accordingly, they do not include all financial information and disclosures required by generally accepted accounting principles for complete financial statements. In the opinion of management, these financial statements include all adjustments (consisting only of normal recurring accruals) necessary for a fair presentation of the results of operations for the interim periods reported and of the financial condition of the Company as of the date of the interim balance sheet. The results of operations for interim periods are not necessarily indicative of the results to be expected for the full year. These financial statements should be read in conjunction with the Company's audited consolidated financial statements and related notes included in the Company's Annual Report on Form 10-K for the year ended March 31, 1997. 2. Pro Forma Presentation On September 30, 1997, the Company sold, in a private placement with shareholder approval being sought as described below, 7,625 shares of Series 6% Convertible Preferred Stock ("6% Convertible Preferred Stock") at a price of $1,000 per share, receiving proceeds of $6.8 million, net of placement agent fees and transaction costs. Accordingly, the unaudited historical balance sheet at September 30, 1997 reflects the financial position of the Company before the private placement, and the unaudited pro forma balance sheet reflects the completion of the transaction, net of fees and transaction costs. In addition, the Company issued warrants to purchase 763 shares of 6% Convertible Preferred Stock at an exercise price of S1,000 per share to the placement agent. These warrants are exercisable for a period of five years commencing September 30, 1997. 6 The 6% Convertible Preferred Stock is convertible into shares of the Company's common stock at the option of the holders after December 29, 1997, and is automatically convertible on September 30, 2002. The number of shares of common stock issued upon conversion is equal to 1,000 divided by the conversion price, The conversion price is $5.50 until March 31, 1998. Thereafter, the conversion price is set monthly based on a progressive discount to the average of the three lowest daily trading prices of the common stock during the twenty-two trading day period immediately proceeding the conversion. The Company has agreed to register by December 29, 1997 sufficient shares of common stock to satisfy the conversion requirements of the 6% Convertible Preferred Stock. The 6% Convertible Preferred Stock earns a cumulative annual dividend of $60 per share payable, at the Company's option, either as cash or additional 6% Convertible Preferred Stock. Dividends are payable in preference to any payment made on any shares of common stock or any other classes or series of capital stock of the Company other than Series C Preferred Stock which has rights to dividends pari passu with the 6% Convertible Preferred Stock. In the event of a liquidation of the Company, the holders of outstanding 6% Convertible Preferred Stock shall be entitled to receive $1,000 per share plus accrued dividends. Holders of 6% Convertible Preferred Stock have no voting rights prior to conversion. Pursuant to its agreement with Nasdaq, the Company will reserve $1 million from the proceeds of its sale of 6% Convertible Preferred Stock for a period of 18 months to honor in cash any conversion request made at any time when the conversion price is less than $3.00 per share (or such other price determined by the Company). 7 Pursuant to its agreements with the holders of 6% Convertible Preferred Stock and with Nasdaq, the Company intends to seek shareholder approval of the 6% Convertible Preferred Stock private placement. It is presently expected that this approval will be sought at a special meeting of shareholders to be held on December 17, 1997. If shareholder approval is not received, the Company (i) will be required to redeem a portion of the 6% convertible Preferred Stock as necessary to comply with Nasdaq listing requirements, and (ii) because of such redemption, the Company may not be in compliance with other Nasdaq listing requirements and may be subject to delisting. 3. Net Income (Loss) Per Share Primary earnings share amounts are calculated using the weighted average number of common shares and common share equivalents outstanding during periods of net income. Common share equivalents are attributable to stock options, common stock warrants and convertible preferred stock. During periods of net loss, per share amounts are calculated using only the weighted average number of common shares outstanding. Fully diluted earnings per share are not materially different from reported primary earnings per share. 4. Recently Issued Accounting Standard In February 1997, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 128, Earnings per Share (SFAS 128). This statement attempts to simplify current standards used in the United States for computing earnings per share and make them more comparable with international standards. SFAS 128 replaces APB Opinion 15 and related interpretations. SFAS 128 is effective for financial statements issued for periods ending after December 15, 1997, including 8 Interleaf, Inc. interim periods, and earlier application is not permitted. The Company will adopt SFAS 128 commencing with the third quarter ending December 31, 1997, but believes it will not have a material impact on the EPS. 5. Shareholder's Equity On August 15, 1997, the shareholders approved amendments to the Company's Articles of Organization to increase its authorized number of shares of Common Stock from 30,000,000 to 50,000,000 shares. Additionally, the shareholders approved an increase in the number of shares for the Company's Common Stock available for issuance in its 1993 Stock Option plan from 1,500,000 to 2,100,000. 6. Credit Agreement In August 1997, the Company's revolving line of credit with a major commercial lender expired. Although this credit facility was never utilized in either fiscal 1997 or 1998, available credit would have been secured by substantially all domestic assets of the Company. At September 30, 1997, the Company has secured a new letter of credit for $0.7 million, which is secured by the same amount of cash, from another major commercial lender which expires on July 31, 1998. 7. Restructuring For the six months ended September 30, 1997, the Company paid approximately $1.4 million, net of sublease receipts, related to the fiscal 1997 and 1995 restructurings. For the six months ended September 30, 1996, the Company paid approximately $0.9 million, net of sublease receipts, related to the fiscal 1997 and 1995 restructurings. Expenditures for facility closures, primarily lease payments, net of sublease receipts, are expected to continue through December 2001. 8. Contingencies Interleaf's German subsidiary, Interleaf GmbH, has been notified that it is liable for certain German withholding taxes related to payments remitted to the United States from Germany in 1990. The Company is appealing this assessment; however, approximately $1.1 million of the cash and cash equivalents balance at September 30, 1997 has been restricted for potential payment of the German withholding taxes. The Company believes the final outcome will not have a material adverse effect on the financial position or results of operations of the Company. 9 Interleaf, Inc. ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following information should be read in conjunction with the financial statements and notes thereto and risk factors contained in the section entitled "Risk Factors" on page 15 of the Company's Annual Report to Shareholders, as incorporated by reference into Item 7 of the Company's Annual Report on Form 10-K dated June 30, 1997. This Form 10-Q contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. The Company's actual results could differ materially from those set forth in the forward-looking statements. Factors that might cause such a difference are discussed in the section entitled "Risk Factors" below. Results of Operations Overview The Company reported net income of $0.4 million, on total revenues of $13.1 million, for the second quarter and net income of $0.8 million on total revenues of $25.9 million, for the six months ended September 30, 1997. This compares with the prior year's net loss of $10.3 million on total revenues of $16.6 million for the second quarter and a net loss of $14.1 million, on total revenues of $35.6 million, for the six months ended September 30, 1996. Much of the decline in revenue is due to a decrease in product revenue, and the related impact on maintenance and service revenue caused by the ongoing maturation of the market for complex authoring products and the increasing popularity of low-end versions of Windows-based authoring software. The Company has continued its efforts to focus on developing and supporting a new web publishing product family, targeted toward its customers' extended enterprise. The increase in net income for the second quarter ended September 30, 1997 compared to the same period a year ago was primarily due to the impact of significant reductions to the cost structure of the Company during the second and third quarters of fiscal 1997. During these two quarters in fiscal 1997, headcount was reduced, facilities were closed or downsized, and various cost control measures were implemented. In order to maintain its tangible net worth at the level required for listing on the Nasdaq National Market System, the Company raised $6.8 million net of placement agent fees and transaction costs (see Item 5); and pursuant to its agreement with Nasdaq the Company is seeking shareholder approval of this transaction. Revenues Total product revenue decreased by $1.5 million (32%) and $5.7 million (49%) for the second quarter and the six months ended September 30, 1997, respectively, compared to the same periods in fiscal 1997. Revenue declined in all geographic regions. The continuing trend in the reduction in product license revenue is due to two factors. The first is the decline in licensing of the Company's UNIX-based high-end authoring products which is primarily attributable to the increasing popularity of Windows-based publishing software, for which the Company did not have any offerings until January of 1996. A second factor is the saturation of UNIX-based high-end authoring software in the aerospace/defense industry, where the Company had historically derived most of its authoring product license revenue. The Company is refocusing its business strategy on providing a new family of web publishing products targeted toward specific vertical markets. While the Company has built well-accepted integrated document publishing based solutions for individual customers, it has not yet demonstrated the ability to develop, market and sell web based publishing products. There is no assurance that the Company will be successful in implementing its strategy and, therefore, the Company is unable to predict if or when product revenues will 10 Interleaf, Inc. stabilize or grow. Additionally, since the Company's services and maintenance revenue is largely dependent on new product licenses, these revenue components have also experienced downward pressure. This trend will continue unless product revenue stabilizes. Maintenance revenue decreased by $0.7 million (10%) and $1.5 million (10%) for the second quarter and the six months ended September 30, 1997, respectively, compared to the same periods in fiscal 1997. Revenue declined in all geographic regions. Future maintenance revenue is dependent on the Company's ability to maintain its existing customer base and to increase maintenance contract volume related to the new web publishing products. This will be necessary to offset the general downward pricing pressure on maintenance in the software industry and a reduction in customers' perceived value of maintenance services. Services revenue, consisting of consulting and customer training revenue decreased by $1.3 million (28%) and $2.4 million (26%) for the second quarter and the six months ended September 30, 1997, respectively, compared to the same periods in fiscal 1997. Revenue declined in all geographic regions. Future services revenue is dependent on the Company's ability to maintain its existing customer base and to increase consulting and training contracts based on the introduction and success of new products. During fiscal 1998, the Company plans to develop several product offerings which solve complex publishing problems in several vertical markets. Growth in revenues during fiscal 1998 will be largely dependent on improving sales force productivity, the effectiveness of the Company's increased investment in marketing and lead generation programs, customer acceptance of the new and enhanced software products planned to be released in fiscal 1998 and the following year, and the Company's success in leveraging software products with services to provide web publishing solutions to its customers. If the Company is unable to grow or stabilize its revenues in fiscal 1998, further expense reductions will be necessary in order to sustain operations. Costs of Revenues Cost of product revenues includes amortization of capitalized software development costs, product media, documentation materials, packaging and shipping costs, and royalties paid for licensed technology. Cost of product revenues decreased by $0.6 million (38%) and $1.5 million (47%) for the second quarter and the six months ended September 30, 1997 compared to the same periods in fiscal 1997. Cost of product revenues as a percentage of product revenues were 30% and 29% for the second quarter and the six months ended September 30, 1997, respectively, compared to 33% and 27% for the same periods in fiscal 1997. The cost of maintenance revenue declined by $0.3 million (22%) and $0.6 million (25%) for the second quarter and the six months ended September 30, 1997, respectively, compared to the same periods in fiscal 1997. Cost of maintenance revenues as a percentage of maintenance revenues were 15% for the second quarter and the six months ended September 30, 1997, compared to 17% for the same periods in fiscal 1997. The cost of service revenue declined by $1.5 million (34%) and $2.9 million (33%) for the second quarter and the six months ended September 30, 1997, respectively, compared to the same periods in fiscal 1997. Cost of service revenues as a percentage of service revenues were 88% and 85% for the second quarter and the six months ended September 30, 1997, respectively, compared to 96% and 94% for the same periods in fiscal 1997. The decline in the costs of revenues was impacted by the year-to-year lower revenue and the reduced expenses due to the fiscal 1997 restructuring. Operating Expenses Selling, general and administrative ("SG&A") expenses decreased by $5.0 million (48%) and $10.9 million (50%) for the second quarter and the six months ended September 30, 1997, respectively, compared to the same periods in fiscal 1997. The decline was primarily due to significant personnel and facilities expense reductions related to the Company's fiscal 1997 restructuring. Research and development ("R&D") expenses consist primarily of personnel expenses to support product development offset by capitalized software development costs. R&D expenses decreased by $2.0 million (46%) and $3.8 million (44%) for the second quarter and the six months ended September 30, 1997, respectively, compared to the same periods in fiscal 1997. 11 Interleaf, Inc. Liquidity and Capital Resources The Company had approximately $13.4 million of cash and cash equivalents at September 30, 1997, a decrease of approximately $5 million from June 30, 1997, without giving effect to the $6.8 million private placement discussed previously. Taking the private placement into account, the Company's cash and cash equivalents at September 30, 1997 totaled approximately $20.3 million, an increase of approximately $3.0 million from March 31, 1997 (these amounts include $1.0 million in cash which has been reserved to fund the exercise of the Green Floor (defined in Part II, Item 5 below), if necessary.) The decrease was primarily attributable to the timing of the receipt on maintenance renewals which normally generate more cash in the Company's first and fourth quarters of its fiscal year. Interleaf's German subsidiary, Interleaf GmbH, has been notified that it is liable for German withholding taxes related to payments remitted to the United States from Germany in 1990. The Company is appealing this assessment. At September 30, 1997 and March 31, 1997, the Company had approximately $1.1 million of cash restricted for potential payment of German withholding taxes. In August, 1997 the Company received notification from Nasdaq that due to the Company's insufficient net tangible assets at March 31, 1997, the Company would be delisted from the Nasdaq National Market (the "National Market") unless it raised the necessary additional capital. Nasdaq rules require that the Company have net tangible assets in excess of $4 million. To raise sufficient funds to increase the Company's net tangible assets, and, in turn, maintain the Company's listing on the National Market, the Company on September 30, 1997 completed a private placement resulting in net proceeds to the Company of $6.8 million from the issuance of 7,625 shares of 6% Convertible Preferred Stock and placement agent warrants to purchase additional shares of 6% Convertible Preferred Stock. The Company is seeking shareholder approval of this private placement transaction, and therefore has shown this transaction as "Pro Forma" on the accompanying Consolidated Balance Sheets (see Item 5, below). If shareholder approval is not received prior to December 31, 1997, the Company will be obligated to redeem on or before January 15, 1998, at a premium price, a sufficient number of shares of 6% Convertible Preferred Stock which, in its reasonable judgment, will permit conversion of the remaining shares of 6% Convertible Preferred Stock without breaching the Nasdaq Rules (see Item 5 below). Additionally, pursuant to its agreement with Nasdaq, the Company will reserve $1 million from the 1997 Private Placement proceeds for a period of 18 months to be used solely for the purpose of funding the exercise of the Green Floor, but there is no other restriction on the Company's use of such proceeds (see Item 5 below). For the six months ended September 30, 1997, the Company paid approximately $1.4 million, net of sublease receipts, related to the fiscal 1997 and 1995 restructurings, compared to $0.9 million paid during the same period in fiscal 1997. Cash payments related to these restructurings, the majority of which are related to operating lease payments, net of subleases, are anticipated to continue until December 2001. All significant non-operating vacant space under lease has been subleased. In August 1997, the Company's revolving line of credit and $.7 million letter of credit with a major commercial lender expired. This revolving line of credit was never utilized in either fiscal 1997 or 1998, but any borrowed amounts would have been secured by substantially all domestic assets of the Company. At September 30, 1997, the Company has obtained a new letter of credit for $0.7 million, which is secured by the equivalent amount of cash, from another major commercial lender. While the Company showed a small profit in the first half of fiscal 1998, during fiscal year 1997, the Company experienced a substantial decline in revenues and a substantial loss from operations which resulted in a shareholders' deficit at March 31, 1997. Due to the downward trend in the Company's revenues, the Company is unable to predict future revenues and when, or if, it will achieve a sustainable profitable level of operations. As a result, the Company developed detailed plans relating to its fiscal 1998 operations which, if realized, will restore the Company to profitable operations. Under such circumstances no assurances can be given that such plans will be achieved. Management is committed to taking all appropriate and necessary actions to effect timely cost reductions in the event that anticipated revenue levels are not achieved. The Company can only fund its long-term growth through increasing revenues, combined with tightly managed cost controls. The Company believes its current cash balances, proceeds from the private placement and cash generated from operations will be sufficient to meet the Company's liquidity needs for fiscal 1998 and the forseeable future. Risk Factors 12 Interleaf, Inc. From time to time, information provided by the Company or statements made by its employees may contain forward-looking information. The Company's actual future results may differ materially from those projections or suggestions made in such forward-looking information and may fluctuate between operating periods. Certain factors that might cause such differences and fluctuations include the factors discussed below. The Company's future operating results are dependent on its ability to develop and market integrated document publishing ("IDP") software products and services that meet the changing needs of organizations with complex document publishing requirements. There are numerous risks associated with this process, including rapid technological change in the information technology industry and the requirement to bring to market IDP applications that solve complicated business needs in a timely manner. In addition, the existing document publishing, electronic distribution, and document management markets are highly competitive. Many of these competitors are larger and better funded than the Company. The Company competes for sales of its software products on both an individual product basis and integrated with services in large IDP solution sales. Given the reduction in the Company's revenues and employee base over recent periods, the Company will face difficulties in managing and implementing its plans for growth, including without limitation difficulties in attracting and retaining key technical, sales and executive personnel given the current extremely competitive labor conditions, and difficulties in managing relationships with distributors, vendors, customers and other third parties. Sales cycles associated with IDP solution sales are long because organizations frequently require the Company to solve complex business problems that typically involve reengineering of their business processes. In addition, a high percentage of the Company's product license revenues are generally realized in the last month of a fiscal quarter and can be difficult to predict until the end of a fiscal quarter. Accordingly, given the Company's relatively fixed cost structure, a shortfall or increase in product license revenue can have a significant impact on the Company's operating results and liquidity. The Company markets its software products and services worldwide. Global and/or regional economic factors, currency exchange rate fluctuations, and potential changes in laws and regulations affecting the Company's business could impact the Company's financial condition or future operating results. The market price of the Company's common stock may be volatile at times in response to fluctuations in the Company's quarterly operating results, changes in analysts' earnings estimates, market conditions in the computer software industry, as well as general economic conditions and other factors external to the Company. 13 Interleaf, Inc. PART II - OTHER INFORMATION Item 4. Submission of Matters to Vote of Security Holders At the Annual Meeting of Shareholders held on August 15, 1997 ("Annual Meeting") the shareholders of the Company elected the following two nominees as Class I directors of the Company whose terms shall expire at the Company's year 2000 shareholder meeting: Marcia J. Hooper, elected by the Company's Class B Preferred shareholders by a unanimous vote of 861,911, and Rory J. Cowan, by a vote of 15,377,385 in favor to 812,676 against. The Company also has two Class II directors: Jaime W. Ellertson, and George D. Potter, Jr., whose terms are set to expire at the annual shareholders' meeting in 1998, and two Class III Directors, Frederick Bamber and David Boucher, whose terms expire at the annual shareholders meeting in 1999. At the Annual Meeting, the shareholders ratified and approved an amendment to the Company's 1993 Stock Option Plan to increase the number of shares of the Company's Common Stock available for issuance from 1,500,000 to 2,100,000 under the Plan, by a vote of 13,351,965 in favor, 2,589,582 against, 80,299 abstentions, and 2,185,782 no votes. The stockholders also approved an amendment to the Company's Restated Articles of Organization to increase the number of authorized shares of common stock from 30,000,000 to 50,000,000 by a vote of 15,541,237 in favor, 585,958 against, 62,866 abstentions, and 2,016,968 no votes. The shareholders also ratified and approved the selection of Ernst & Young LLP as the Company's independent auditors for fiscal 1998, by a vote of 16,054,171 in favor, 87,790 against, 48,100 abstentions, and 2,185,787 no votes. A more complete description of these matters appears in the Company's 1997 Proxy Statement, dated July 18, 1997. Item 5. Other Information Preferred Stock Private Placement General On September 30, 1997, Interleaf, Inc. (the "Company") completed, with shareholder approval being sought as described below, a private placement transaction pursuant to which it received aggregate net proceeds of approximately $6.8 million (after cash fees to the placement agents and estimated transaction expenses) from the issuance of shares of 6% Convertible Preferred Stock (the "6% Convertible Preferred Stock") and related placement agent warrants. Such transaction is referred to herein as the "1997 Private Placement," and the related securities issuances (including shares of Common Stock issuable upon the conversion of shares of 6%. Convertible Preferred Stock, as dividends thereon and upon exercise of the placement agent warrants) are referred to as the "1997 Private Placement Issuances." All of the securities sold in the 1997 Private Placement Issuances were sold in private placements solely to accredited investors under the Securities Act. Summary of Transaction Terms Set forth below is a summary of the terms of the 1997 Private Placement Issuances, which summary is qualified by reference to the full text of the underlying documents which have been filed as exhibits hereto. Pursuant to the terms of the several 6% Convertible Preferred Stock Investment Agreements, each dated as of September 30, 1997 (collectively, the "6% Preferred Stock Investment Agreement"), the Company issued and sold in a private placement to certain accredited investors for $1,000.00 per share an aggregate of 7,625 restricted shares of a newly-established series of preferred stock, designated as 6% Convertible Preferred Stock, resulting in gross proceeds to the Company of $7.6 million in the aggregate. 14 Interleaf, Inc. Each share of 6%. Convertible Preferred Stock is entitled to receive dividends, payable annually on September 30 of each year, when and as declared by the Company's Board of Directors, at the rate of 6% per annum in preference to any payment made on any shares of Common Stock or any other class or series of capital stock of the Company other than the Series C Preferred Stock, which has rights to dividends pari passu with the 6% Convertible Preferred Stock. Such dividends accrue from day to day whether or not earned or declared. Any dividend payable after the date of issuance of the 6%. Convertible Preferred Stock may be paid (i) in additional shares of 6% Convertible Preferred Stock valued at $1,000.00 per share, or, (ii) upon proper notice, in cash. Each share of 6% Convertible Preferred Stock is also entitled to a liquidation preference of $1,000.00 per share, plus any accrued but unpaid dividends and any amounts owing as a result of a failure by the Company to file an effective registration statement within the prescribed period (described below), in preference to any other class or series of capital stock of the company (except the Series C preferred Stock, which is pari passu with the 6% Convertible Preferred Stock). Except as otherwise provided by applicable law, holders of shares of 6% Convertible Preferred Stock have no voting rights. Commencing on December 29, 1997, at least 10% and up to 25% (depending upon the price at which the Common Stock is trading) of the number of shares of 6% Convertible Preferred Stock held of record by each holder on such day shall become convertible into shares of Common Stock, and thereafter on the successive monthly anniversaries of such day additional shares of 6% Convertible Preferred Stock shall become convertible (with the additional amount varying from 10% to 25% of the number of shares of 6% Convertible Preferred Stock held of record by such holder on such day depending upon the price at which Common Stock is trading) except that in any month when the highest of the Common Stock's daily low trading prices is $2.50 or less, not more than 10% of each holder's shares of 6% Convertible Preferred Stock held of record on such day shall be convertible. The number of shares of Common Stock issuable upon conversion of shares of 6% Convertible Preferred Stock will equal the liquidation preference of the shares being converted divided by the then-effective conversion price applicable to the Common Stock (the "Conversion Price"). The Conversion Price as of any date during the seven-month period following the date of issuance shall be $5.50. The Conversion Price as of any date after the seven-month period following the date of issuance and before the first day of the sixteenth month after the date of issuance shall be the lowest trading price of the Common Stock during the twenty-two (22) consecutive trading days immediately preceding the date of conversion, reduced by the Applicable Percentage, described below, except that the Conversion Price shall be not less than $1.50 prior to the first day of the thirteenth month after closing. The "Applicable Percentage" is dependent upon the time which has passed from original issuance to the date of measurement, being 9.8% starting on the first day of the eighth month and increasing in each subsequent month to 11.1%, 12.4%, 13.7%, and 15%. At any date after the first day of the sixteenth month after the date of issuance, the Conversion Price will be the lesser of (a) 85% of the average of low daily trading price of the Common Stock for all the trading days during the 12th through 15th month (provided that in no event shall this amount be less than $2.8126), or (b) 85% of the average of the lowest daily trading price of the Common Stock during the twenty-two (22) consecutive trading days immediately preceding the date of conversion (the "Conversion Cap"). The Conversion Price is at all times also subject to 15 Interleaf, Inc. adjustment for customary anti-dilution events such as stock splits, stock dividends, reorganizations and certain mergers affecting the Common Stock. Five years from the date of original issue, all of the then outstanding shares of 6% Convertible Preferred Stock will be automatically converted into shares of Common Stock at the then-applicable Conversion Price. No holder of 6% Convertible Preferred Stock will be entitled to convert any share of 6% Convertible Preferred Stock into shares of Common Stock if, following such conversion, the holder and its affiliates (within the meaning of the Securities Exchange Act of 1934) will be the beneficial owners (as defined in rule 13d-3 thereunder) of 10% or more of the outstanding shares of Common Stock. In addition, following conversion of the 6% Convertible Preferred Stock into shares of Common Stock, the holders of such shares of Common Stock have agreed to be limited on resales of such shares to the greatest of: (i) 10% of the average daily trading volume of the Common Stock for the five trading days preceding any such sales; (ii) 12,000 shares; or (iii) 10% of the trading volume for the Common Stock on the date of any such sale. Furthermore, the Company has the right, upon proper notice, if the Conversion Price falls below Three Dollars ($3.00) (or such other price as is set by the Company in accordance with certain notice provisions), and subject to certain other conditions, to honor any conversion request by a cash payment in lieu of the issuance of Common Stock in an amount equal to the proceeds which would otherwise have been received by the holder if conversion were in fact made into Common Stock and such Common Stock were sold at the high trade price on the trading day immediately preceding the date that the conversion notice is received (the "Green Floor"). The Company is not obligated to issue, in the aggregate, more than 3,150,000 shares of Common Stock if issuance of a larger number of shares would constitute a breach of the Rules or Designation Criteria of The Nasdaq Stock Market, Inc. (the "Nasdaq Rules"), including the shareholder approval rule described above. If shareholder approval is not received by December 31, 1997, the Company will be obligated to redeem, at a premium price, a sufficient number of shares of 6% Convertible Preferred Stock which, in its reasonable judgment, will permit conversion of the remaining shares of 6% Convertible Preferred Stock without breaching the Nasdaq Rules. Any delay in payment will cause such redemption amount to accrue interest at the rate of 0.1% per day until paid. Subject to this requirement to effect a special redemption of the 6% Convertible Preferred Stock, if the issuance of Common Stock upon conversion of any shares of 6% Convertible Preferred Stock would constitute a breach of the Nasdaq Rules, then the Company has agreed to exercise the Green Floor with respect to such issuance. Pursuant to its agreement with Nasdaq, the Company will reserve $1 million from the 1997 Private Placement proceeds for a period of 18 months to be used solely for the purpose of funding the exercise of the Green Floor, but there is no other restriction on the Company's use of such proceeds. There is no assurance that the proceeds of the 1997 Private Placement will be available to fund any required cash redemption of 6% Convertible Preferred Stock or exercise of the Green Floor or that the $1 million reserved by the Company will be sufficient to fund the exercise of the Green Floor. The Company has agreed to register the shares of Common Stock issuable upon conversion of the 6% Convertible Preferred Stock, including shares payable as dividends thereon, and shares issuable upon exercise of the Placement Agent Warrants and conversion of the underlying 6% Convertible Preferred Stock, for resale under the Securities Act no later than 90 days after original issuance. Any delay in having the related registration statement declared effective by the Commission beyond the applicable period, or any unavailability to the holders of the 6% Convertible Preferred Stock of a current prospectus after such period, will cause the Company to pay to each holder, in cash, 3% of the total 16 Interleaf, Inc. purchase price of the 6% Convertible Preferred Stock for each 30-day period of the delay (pro rated for any shorter period). Placement Agent Compensation. The placement agent for the issuances described above was Cappello Capital Corp. (the "Placement Agent"). In consideration for placing such securities, the Placement Agent received aggregate cash compensation of 8.7% of the gross proceeds received by the Company, or $663,375. Further, the Company also agreed to issue to the Placement Agent 6% Convertible Preferred Stock Warrants to acquire an aggregate of 763 shares of 6% Convertible Preferred Stock for a purchase price of $1,000.00 per share (subject to the same anti-dilution protections as are applicable to the 6% Convertible Preferred Stock). Such warrants will be exercisable for a period of five years for shares of 6% Convertible Preferred Stock. The Company will be obligated to register the shares of Common Stock issuable upon exercise and conversion of the Placement Agent warrants for resale under the Securities Act. The Placement Agent will retain its compensation whether or not the required stockholder approval is obtained. Stockholder Approval The Company intends to seek the approval of its shareholders to the 1997 Private Placement Issuances to satisfy certain stockholder approval requirements contained in the Company's listing agreement with the Nasdaq National Market. It is presently expected that this approval will be sought at a special meeting of stockholders to be held on December 17, 1997. Item 6. Exhibits and Reports on Form 8-K (a) The exhibits listed in the accompanying Exhibit Index are filed as part of this Quarterly Report on Form 10-Q. (b) A report on Form 8-K was filed by the Company on October 9, 1997, as amended by Form 8-K/A filed on October 23, 1997. SIGNATURE Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. November 14, 1997 /s/ Robert R. Langer -------------------------- Robert R. Langer, Vice President of Finance and Administration and Chief Financial Officer (Principal Financial and Accounting Officer) 17 Interleaf, Inc. EXHIBIT INDEX Exhibit Method Number Description of Filing ------ ----------- --------- 3(a) Restated Articles of Organization of the Company, as amended [included] 3(b) By-Laws of the Company, as amended [v] 4(a) Specimen Certificate for Shares of the Company's [xiv] Common Stock 4(b) Rights Agreement, dated July 15, 1988, between the [xv] Company and the First National Bank of Boston 10(a) Company's 1983 Stock Option Plan, as amended [v] 10(a1) 1994 Employee Stock Option Plan, as amended [xiii] 10(a2) 1993 Incentive Stock Option Plan, as amended [included] 10(b) Company's 1989 Director Stock Option Plan [i] 10(b2) Company's 1987 Employee Stock Purchase Plan, as amended [xiii] 10(c) Company's 1989 Officer and Employee Severance [i] Benefit Plans 10(cc) Company's 1993 Director Stock Option Plan [v] 10(d) Agreements between PruTech Research and Development [ii] Partnership III and the Company, dated October 21, 1988. 10(e) Exclusive Marketing and Licensing Agreement, between [i] Interleaf South America, Ltd. and the Company, and related Option Agreement, dated March 31, 1989. 10(f) Distribution and License Agreement between Interleaf [i] Italia, S.r.l. and the Company, and related Joint Venture Agreement, dated October 31, 1988. 10(g) Preferred Stock Purchase Agreements, for the [ii] issuance of 2,142,857 shares of the Company's Senior Series B Convertible Preferred Stock, dated September 29, 1989. 10(h) Notification to Preferred Shareholder of increase in [iii] conversion ratio, dated May 18, 1992. 10(i) Lease of Prospect Place, Waltham, MA, between [iv] Prospect Place Limited Partnership and Interleaf, Inc., and related Agreements, dated March 30, 1990. 10(j) Employment and severance agreement between the [vii] Company and Edward Koepfler, the Company's President, dated October 3, 1994. 10(k) Loan and Security Agreement between the Company and [ix] Foothill Capital Corporation, dated May 2, 1995. 10(l) Employment and severance agreement between the [ix] Company and G. Gordon M. Large, the Company's Executive Vice President and Chief Financial Officer, dated June 5, 1995. 10(m) Net Lease, dated August 14, 1995, between Principal [x] Mutual Insurance Company and the Company. 10(n) Sublease, dated September 15, 1995, between [x] Parametric Technology Corporation and the Company. 10(o) Employment and severance agreement between the [xi] Company and Mark Cieplik, the Company's Vice President, Americas, dated March 17, 1995. 10(p) Agreement between PruTech Research and Development [xii] Partnership III and the Company, dated November 14, 1995. 18 Interleaf, Inc. 10(q) Series C Preferred Stock Agreement between [xiii] Interleaf, Inc. and Lindner Investments, dated October 14, 1996. 10(r) Letter Agreement between the Company and Robert M. Stoddard, as the Company's then Vice President of [xvi] Finance and Administration, and Chief Financial Officer, dated November 11, 1996. 10(s) Letter Agreement between the Company and Rory J. Cowan, the Company's President and Chief Executive [xvi] Officer, dated November 15, 1996, concerning his employment and compensation with the Company. 10(t) Letter Agreement between the Company and Mark H. Cieplik, the Company's Vice President of Sales, [xvi] dated November 15, 1996, concerning his employment and compensation with the Company. 10(u) Letter Agreement between the Company and Michael L. Shanker, the Company's Vice President of [xvi] Professional Services, dated November 15, 1996, concerning his employment and compensation with the Company. 10(v) Letter Agreement between the Company and Stephen J. Hill, the Company's Vice President of Europe, dated [xvi] November 15, 1996, concerning his employment and compensation with the Company. 10(w) Resignation Agreement and Release and Employment Agreement between Ed Koepfler, the Company's former [xvi] President and Chief Executive Officer, and the Company, dated November 15, 1996, concerning his employment and severance with the Company. 10(w1) Resignation Agreement and Release and Employment Agreement between G. Gordon M. Large, the Company's former Executive Vice President of Finance and [xvi] Administration and Chief Financial Officer, and the Company, dated November 12, 1996, concerning his employment and severance with the Company. 10(x) Resignation Agreement and Release and Employment Agreement between Stan Douglas, the Company's former [xvi] Vice President of Engineering Operations, and the Company, dated November 15, 1996, concerning his employment and severance with the Company. 10(y) Terms of Engagement between the Company and Robert R. Langer, Vice President of Finance and [xvi] Administration and Chief Financial Officer, dated December 30, 1996, concerning his employment with the Company. 10(z) Offer Letter and Acceptance between Jaime W. Ellertson, the Company's President and Chief [xvi] Executive Officer, and the Company, dated January 9, 1997. 10(z1) Offer Letter and Acceptance between Michael L. [xvii] Torto, the Company's Vice President, Marketing, and the Company, dated March 28, 1997. 10(z2) Offer Letter and Acceptance between Robert A. [xvii] Fisher, the Company's Vice President, Customer Support, and the Company, dated April 17, 1997. 10(z3) Offer Letter and Acceptance between Christopher [xvii] McKee, the Company's Vice President, Europe, Middle East, Africa, and the Company, dated May 13, 1997. 10(z4) Offer Letter and Acceptance between Gary R. [xvii] Phillips, the Company's Vice President, North American Sales, and the Company, dated May 22, 1997. 10(z5) Resignation Agreement between Mark H. Cieplik, the [xvii] Company's former Vice President, Americas, and the Company, dated May 29, 1997, concerning his employment and severance with the Company. 10(z6) Resignation Agreement between Stephen J. Hill, the [xvii] Company's former Vice President, 19 Interleaf, Inc. Europe, and the Company, dated June 5, 1997, concerning his employment and severance with the Company. 10(z7) Offer Letter and Acceptance between Craig Newfield, Included the Company's Vice President, General Counsel & Clerk, and the Company, dated October 3, 1997. 10(aa) Preferred Stock Investment Agreement among the Included Company and certain investors dated as of September 30, 1997, with exhibits. 10(bb) Stock Purchase Warrant and signature pages between Included the Company and certain family members of the principals of Capello Capital Corp. date as of September 30, 1997. 11 Computation of Earnings Per Share Included 27 Financial Data Schedule Included - ------------------------ [i] Incorporated herein by reference is the applicable Exhibit to Company's Annual Report on Form 10-K for the year ended March 31, 1989, File Number 0-14713. [ii] Incorporated herein by reference is the applicable Exhibit to Company's Annual Report on Form 10-K for the year ended March 31, 1990, File Number 0-14713. [iii] Incorporated herein by reference is the applicable Exhibit to Company's Annual Report on Form 10-K for the year ended March 31, 1992, File Number 0-14713. [iv] Incorporated herein by reference is the applicable Exhibit to Company's Report on Form 8-K filed April 13, 1990, File Number 0-14713. [v] Incorporated herein by reference is the applicable Exhibit to Company's Annual Report on Form 10-K for the year ended March 31, 1994, File Number 0-14713. [vi] Incorporated herein by reference is the applicable Exhibit to Company's Report on Form 10-Q for the quarter ended September 30, 1994, File Number 0-14713. [vii] Incorporated herein by reference is the applicable Exhibit to Company's Report on Form 10-Q for the quarter ended December 31, 1994, File Number 0-14713. [viii] Incorporated herein by reference is the applicable Exhibit to Company's Annual Report on Form 10-K for the year ended March 31, 1995, File Number 0-14713. [ix] Incorporated herein by reference is the applicable Exhibit to Company's Report on Form 10-Q for the quarter ended June 30, 1995, File Number 0-14713. [x] Incorporated herein by reference is the applicable Exhibit to Company's Registration Statement on Form S-2, File Number 33-63785. [xi] Incorporated herein by reference is the applicable Exhibit to Company's Report on Form 10-Q for the quarter ended September 30, 1995, File Number 0-14713. [xii] Incorporated herein by reference is the applicable Exhibit to Company's Report on Form 10-Q for the quarter ended December 31, 1995, File Number 0-14713. [xiii] Incorporated herein by reference is the applicable Exhibit to Company's Report on Form 10-Q for the quarter ended September 30, 1996, File Number 0-14713. [xiv] Incorporated herein by reference is the applicable Exhibit to Company's Registration Statement on Form S-1, File Number 33-5743. 20 Interleaf, Inc. [xv] Incorporated herein by reference is Exhibit 1 to Company's Registration Statement on Form 8-A, filed July 27, 1988. [xvi] Incorporated herein by reference is the applicable Exhibit to Company's Report on Form 10-Q for the quarter ended December 31, 1996, File Number 0-14713. [xvii] Incorporated herein by reference is the applicable Exhibit to Company's Report on Form 10-Q for the quarter ended June 30, 1997, File Number 0-14713. 21 EX-3.(A) 2 RESTATED ARTICLES OF ORGANIZATION Exhibit 3(a) THE COMMONWEALTH OF MASSACHUSETTS MICHAEL JOSEPH CONNOLLY Secretary of State Federal Identification ONE ASHBURTON PLACE, BOSTON, MA 02108 No. 04-2729042 RESTATED ARTICLES OF ORGANIZATION General Laws, Chapter 156B, Section 74 This certificate must be submitted to the Secretary of the Commonwealth within sixty days after the date of the vote of stockholders adopting the restated articles of organization. The fee for filing this certificate is prescribed by General Laws, Chapter 156B, Section 114. Make check payable to the Commonwealth of Massachusetts. We, David A. Boucher ,President, and J. John Brennan ,Clerk of Interleaf, Inc. (Name of Corporation) located at Ten Canal Park, Cambridge, MA 02141 do hereby certify that the following restatement of the articles of organization of the corporation was duly adopted at a meeting held on August 14, 1987, by vote of: 7,606,789 or more shares of Common Stock out of 11,254,990 shares outstanding, being at least two-thirds of each class of stock outstanding and entitled to vote and of each class or series of stock adversely affected thereby: 1. The name by which the corporation shall be known is: Interleaf, Inc. 2. The purposes for which the corporation is formed are as follows: See Continuation Sheet 2A Note: If the space provided under any article or item on this form is insufficient, additions shall be set forth on separate 8 1/2 x 11 sheets of paper leaving a left hand margin of at least 1 inch for binding. Additions to more than one article may be continued on a single sheet so long as each article requiring each such addition is clearly -1- indicated. 3. The total number of shares and the par value, if any, of each class of stock which the corporation os authorized to issue is as follows: - ------------------------------------------------------------------------------- WITHOUT PAR VALUE WITH PAR VALUE ----------------- -------------- - ------------------------------------------------------------------------------- CLASS OF STOCK NUMBER OF SHARES NUMBER OF SHARES PAR VALUE - -------------- ---------------- ---------------- --------- - ------------------------------------------------------------------------------- Preferred 5,000,000 $.10 - ------------------------------------------------------------------------------- Common 20,000,000 $.01 - ------------------------------------------------------------------------------- *4. If more than one class is authorized, a description of each of the different classes of stock with, if any, the preferences, voting powers, qualifications, special or relative rights or privileges as to each class thereof and any series now established: See Continuation Sheet 4A *5. The restrictions, if any, imposed by the articles of organization upon the transfer of shares of stock of any class are as follows: None *6. Other lawful provisions, if any, for the conduct and regulation of the business and affairs of the corporation, for its voluntary dissolution, or for limiting, defining, or regulating the powers of the corporation, or of its directors or stockholders, or of any class of stockholders: See Continuation Sheet 6A *If there are no such provisions, state "None." -2- CONTINUATION SHEET 2A To purchase, manufacture, produce, assemble, receive, lease or in any manner acquire, hold, own, use, operate, install, maintain, service, repair, process, alter, improve, market, import, export, sell, lease, assign, transfer and generally to trade and deal in and with communications, data processing, graphic processing, electronic and other equipment, devices, apparatus, components, parts and supplies, products, machinery, systems, goods, wares, merchandise and personal property of every kind, nature or description, tangible or intangible, used or capable to being used for any purpose whatsoever; and to engage and participate in any mercantile, manufacturing or trading business of any kind or character. To carry on any business or other activity which may be lawfully carried on by a corporation organized under the Business Corporation Law of the Commonwealth of Massachusetts, whether or not related to those referred to in the foregoing paragraph. -3- CONTINUATION SHEET 4A The Preferred Stock may be issued from time to time in one or more series. The Board of Directors of the corporation is hereby authorized, within the limitations and restrictions stated in these Articles of Organization to determine or alter the rights, preferences, powers, privileges and the restrictions, qualifications and limitations granted to or imposed upon any wholly unissued series of Preferred Stock, and the number of shares constituting any such series and the designation thereof; and to increase or decrease the number of shares constituting any such series; and to increase or decrease the number of shares of any series subsequent to the issue of shares of that series, but not below the number of shares of such series then outstanding. In case the number of shares of any series shall be so decreased, the shares then constituting such decrease shall resume the status which they had prior to the adoption of the resolution originally fixing the number of shares of such series. The authority of the Board of Directors with respect to each such series of Preferred Stock shall include, without limitation of the foregoing, the right to determine and fix: (1) The distinctive designation of such series and the number of shares to constitute such series; (2) The rate at which dividends on the shares of such series shall be declared and paid, or set aside for payment, whether dividends at the rate so determined shall be cumulative and whether the shares of such series shall be entitled to any participating or other dividends in addition to dividends at the rate so determined, and if so on what terms; (3) The right, if any, of the corporation to redeem shares of the particular series and, if redeemable, the price, terms and manner of such redemption; (4) The special and relative rights and preferences, if any, and the amount or amounts per share, which the shares of such series shall be entitled to receive upon any voluntary or involuntary liquidation, dissolution or winding up of the corporation; (5) The terms and conditions, if any, upon which shares of such series shall be convertible into, or exchangeable for, shares of stock of any other class or classes, including the price or prices or the rate or rates of conversion or exchange and the terms of adjustment, if any; (6) The obligation, if any, of the corporation to retire or purchase shares of such series pursuant to a sinking fund or fund of a similar nature or otherwise, and the terms and conditions of such obligation; (7) Voting rights, if any; (8) Limitations, if any, on the issuance of additional shares of such series or any -4- shares of any other series of Preferred Stock; and CONTINUATION SHEET 4A (CONTINUED) (9) Such other preferences or restrictions or qualifications thereof as the Board of Directors may deem advisable and not inconsistent with the law and the provisions of these Articles of Organization. -5- CONTINUATION SHEET 6A 6A. AMENDMENT OF BY-LAWS The directors may make, amend, or repeal the By-Laws of the corporation in whole or in part, except with respect to any provisions thereof which by law or these Articles of Organization or the By-Laws requires action by the stockholders. 6B. STOCKHOLDER MEETINGS Meetings of the stockholders of the corporation may be held anywhere in the United States. 6C. AUTHORITY The corporation shall have the power to be a partner in any business enterprise which this corporation would have the power to conduct by itself. 6D. LIMITATION OF DIRECTOR LIABILITY To the fullest extent permitted by Chapter 156B of the Massachusetts General Laws, as it may be amended from time to time, a director of the Corporation shall not be personally liable to the Corporation or its stockholders for monetary damages for breach of fiduciary duty as a director, notwithstanding any provision of law imposing such liability. 6E. CLASSIFIED BOARD OF DIRECTORS This Article is inserted for the management of the business and for the conduct of the affairs of the Corporation, and it is expressly provided that it is intended to be in furtherance and not in limitation or exclusion of the powers conferred by the statutes of the Commonwealth of Massachusetts. Section 1. Number of Directors. Subject to the rights of the holders of Preferred Stock of the Corporation then outstanding to elect additional directors under specified circumstances, the number of directors of the Corporation shall not be less than three nor more than thirteen (13). The exact number of directors within the minimum and maximum limitations specified in the preceding sentence shall be fixed from time to time pursuant to a resolution adopted by a majority of directors then in office, although less than a quorum. Section 2. Classes of Directors. The Board of Directors shall be and is divided into three classes: Class I, Class II and Class III. No one class shall have more than one director more than any other class. If a fraction is contained in the quotient arrived at by dividing the authorized number of directors by three, then, if such fraction is one-third, the extra director shall be a -6- member of Class III and, if such fraction is two-thirds, one of the extra directors shall be a member of Class III and one of the extra directors shall be a member of Class II, unless otherwise provided for from time to time by resolution adopted by a majority of the directors then in office, although less than a quorum. Section 3. Election of Directors. Elections of directors need not be by written ballot except as and to the extent provided in the By-Laws of the Corporation. Section 4. Terms of Office. Each director shall serve for a term ending on the date of the third annual meeting following the annual meeting at which such director was elected; provided, however, that each initial director in Class I shall serve for a term ending on the date of the Corporations's 1988 annual meeting; each initial director in Class II shall serve for a term ending on the date of the Corporation's 1989 annual meeting; and each initial director in Class III shall serve for a term ending on the date of the Corporation's 1990 annual meeting. Section 5. Allocation of Directors Among Classes in the Event of Increases or Decreases in the Number of Directors. In the event of any increase or decrease in the authorized number of directors, (i) each director then serving as such shall nevertheless continue as director of the class of which he is a member until the expiration of his current term or his prior death, retirement or resignation and (ii) the newly created or eliminated directorships resulting from such increase or decrease shall be apportioned by the Board of Directors among the three classes of directors so as to ensure that no one class has more than one director more than any other class. To the extent possible, consistent with the foregoing rule, any newly created directorships shall be added to those classes whose terms of office are to expire at the latest dates following such allocation, and any newly eliminated directorships shall be subtracted from those classes whose terms of office are to expire at the earliest dates following such allocator, unless otherwise provided for from time to time by resolution adopted by a majority of the directors then in office, although less than a quorum. Section 6. Quorum; Action of Meeting. A majority of the directors at any time in office shall constitute a quorum for the transaction of business and, if at any meeting of the Board of Directors there shall be less than such a quorum, a majority of those present may adjourn the meeting from time to time. Every act or decision done or made by a majority of the directors present at a meeting duly held at which a quorum is present shall be regarded as the act of the Board of Directors unless a greater number is required by law, by the By-Laws of the Corporation or by these Articles of Organization. Section 7. Removal. Subject to the rights of the holders of any Preferred Stock then outstanding, any director or the entire Board of Directors may be removed from office, with or without cause, at any time by the affirmative vote of the holders of at least eighty percent (80%) of the voting power of all the shares of the Corporation entitled to vote generally in the election of directors voting together as a single class. -7- Section 8. Tenure. Notwithstanding any provisions to the contrary contained herein, each director shall serve until a successor is elected and qualified or until his death, resignation or removal. Section 9. Vacancies. Subject to the rights of the holders of any Preferred Stock then outstanding, any vacancies in the Board of Directors occurring for any reason and any newly created directorships resulting from any increase in the number of directors may be filled only by the Board of Directors acting by the affirmative vote of at least a majority of the directors then in office, although less than a quorum. Each director so chosen shall hold office until the next election of the class for which such director shall have been chosen and until his successor shall be elected and qualified or until his earlier death, resignation or removal. Section 10. Stockholder Nominations and Introduction of Business, Etc. Advance notice of stockholder nominations for election of directors and other business to be brought by stockholders before a meeting of stockholders shall be given in the manner provided in the By-Laws of the Corporation and the appointment of judges of election shall be made in the manner provided in the By-Laws of the Corporation. Section 11. Amendments to Article. Notwithstanding any other provisions of law, these Articles of Organization or the By-Laws of the Corporation, and notwithstanding the fact that a lesser percentage may be specified by law, the affirmative vote of the holders of at least eighty percent (80%) of the votes which all the stockholders would be entitled to cast at any annual election of directors or class of directors shall be required to amend or repeal, or to adopt any provision inconsistent with, this Article; provided that such eighty percent (80%) vote shall not be required, and only the vote otherwise provided by law, by the By-Laws of the Corporation or by these Articles of Organization shall be required, for any amendment, repeal or adoption previously approved by the Board of Directors and by each Disinterested Director (as defined in Article 6F). 6F. FAIR PRICE PROVISION The stockholder vote required to approve Business Combinations (hereinafter defined) shall be as set forth in this Article. Section 1. Definition of "Business Combination." The term "Business Combination" as used in this Article shall mean any of the following: (a) Any merger or consolidation of the Corporation or any Subsidiary with (i) any Interested Stockholder or (ii) any other corporation (whether or not itself an Interested Stockholder) which is, or after such merger or consolidation would be, an Affiliate or Associate of an Interested Stockholder; or (b) Any sale, lease, exchange, mortgage, pledge, transfer or other disposition (in one -8- transaction or a series of transactions) to or with any Interested Stockholder or any Affiliate or Associate of any Interested Stockholder of all or a Substantial Part of the assets of the Corporation or any Subsidiary thereof; or -9- (c) The issuance, exchange or transfer by the Corporation or any Subsidiary (in one transaction or a series of transactions) of any securities of the Corporation or any Subsidiary to any Interested Stockholder or any Affiliate or Associate of any Interested Stockholder in exchange for cash, securities or other consideration (or a combination thereof) having an aggregate Fair Market Value of, equal to or in excess of a Substantial Part of the assets of the corporation; or (d) The adoption of any plan or proposal for the liquidation or dissolution of the Corporation proposed by or on behalf of an Interested Stockholder or any Affiliate or Associate of any Interested Stockholder; or (e) Any reclassification of securities (including any reverse stock split), or recapitalization of the Corporation, or any merger or consolidation of the Corporation with any of its Subsidiaries or any other transaction (whether or not with or into or otherwise involving an Interested Stockholder or any Affiliate or Associate of an Interested Stockholder) which has the effect, directly or indirectly, of increasing the proportionate share of the outstanding shares of any class of equity or convertible securities of the Corporation or any Subsidiary which is directly or indirectly owned by any Interested Stockholder or any Affiliate or Associate of any Interested Stockholder; or (f) Any agreement, contract or other arrangement with an Interested Stockholder or any Affiliate or Associate of an Interested Stockholder (or in which the Interested Stockholder or any Affiliate or Associate of an Interested Stockholder has an interest other than proportionately as a stockholder) providing for any one or more of the actions specified in subsections (a) to (e) of this Section 1. Section 2. Vote for Certain Transactions. Except where a higher vote may be required by law or these Articles of Organization, the Corporation may, by vote of a majority of the stock outstanding and entitled to vote thereon (or if there are two or more classes of stock entitled to vote as separate classes, then by vote of a majority of each such class of stock outstanding) (i) authorize the sale, lease or exchange of all or substantially all of its property and assets, including its goodwill, pursuant to Section 75 of Chapter 156B of the Massachusetts General Laws (or any successor provision thereto), as amended from time to time, (ii) approve an agreement of merger or consolidation pursuant to Section 78 of Chapter 156B of the Massachusetts General Laws (or any successor provision thereto), as amended from time to time, and (iii) authorize the dissolution of the Corporation pursuant to Section 100 of Chapter 156B of the Massachusetts General Laws (or any successor provision thereto), as amended from time to time. Section 3. Higher Vote for Business Combinations. In addition to any affirmative vote required by law, the By-Laws of the Corporation or these Articles of Organization, and except as otherwise expressly provided in Section 4 of this Article, any Business Combination shall require the affirmative vote of the holders of at least eighty percent (80%) of the votes which all -10- stockholders would be entitled to cast at any annual election of Directors or class of Directors (the "Voting Stock"). Such affirmative vote shall be required notwithstanding the fact that no vote may be required or that a lesser percentage may be specified by law or in any agreement with any securities exchange or otherwise. Section 4. When Higher Vote Is Not Required. The provisions of Section 3 of this Article shall not be applicable to any particular Business Combination, and such Business Combination shall require only such affirmative vote, if any, as is required by law and any other provision of the Articles of Organization or the By-Laws of this Corporation, if the conditions specified in either of the following subsections (a) or (b) are met: (a) Approval by Disinterested Directors. The Business Combination shall have been approved by a majority of the Disinterested Directors. (b) Price and Procedure Requirements. All of the following seven conditions shall have been met: (i) The transaction constituting the Business Combination shall provide that the holders of Common Stock receive, in exchange for their stock, per share consideration (consisting of the cash and the Fair Market Value, as of the date of the consummation of the Business Combination, of consideration other than cash) at least equal to the highest of the following: A. If applicable, the highest per share price (including any brokerage commissions, transfer taxes and soliciting dealers' fees) paid by or on behalf of the Interested Stockholder for any shares of Common Stock in connection with the direct or indirect acquisition by the Interested Stockholder of shares of Common Stock which were acquired (1) within the two-year period immediately prior to the first public announcement of the proposed Business Combination (the "Announcement Date") or (2) in the transaction in which it became an Interested Stockholder, whichever is higher; B. The Fair Market Value per share of Common Stock on the Announcement Date or on the date on which the Interested Stockholder became an Interested Stockholder (the "Determination Date"), whichever is higher; and C. If applicable, the price per share equal to the Fair Market Value per share of Common Stock determined pursuant to paragraph B immediately preceding, multiplied by the ratio of (1) the highest per share price (including any brokerage commissions, transfer -11- taxes and soliciting dealers' fees) paid by or on behalf of the Interested Stockholder for any share of Common Stock in connection with the direct or indirect acquisition by the Interested Stockholder of shares of Common Stock which were acquired within the two-year period immediately prior to the Announcement Date to (2) the Fair Market Value per share of Common Stock on the first date in such two-year period on which the Interested Stockholder beneficially owned any shares of Common Stock. All per share prices shall be adjusted to reflect any intervening stock splits, stock dividends and reverse stock splits. (ii) If the transaction constituting the Business Combination shall also provide that the holders of any class of outstanding Voting Stock, other than Common Stock, if any, are to receive consideration in exchange for their stock, the per share consideration (consisting of the cash and the Fair Market Value, as of the date of the consummation of the Business Combination, of consideration other than cash) shall be at least equal to the highest of the following (it being intended that the requirements of this subsection (b)(ii) shall be required to be met with respect to every class of outstanding Voting Stock, whether or not the Interested Stockholder beneficially owns any shares of a particular class of Voting Stock): A. If applicable, the highest per share price (including any brokerage commissions, transfer taxes and soliciting dealers' fees) paid by or on behalf of the Interested Stockholder for any share of such class of Voting Stock in connection with the direct or indirect acquisition by the Interested Stockholder of beneficial ownership of such share which was acquired (1) within the two-year period immediately prior to the Announcement Date or (2) in the transaction in which it became an Interested Stockholder, whichever is higher; B. If applicable, the highest preferential amount per share to which the holders of shares of such class of Voting Stock are entitled in the event of any voluntary or involuntary liquidation, dissolution or winding up of the Corporation, regardless of whether the Business Combination to be consummated constitutes such an event; C. The Fair Market Value per share of such class of Voting Stock on the Announcement Date or on the Determination Date, whichever is higher; and -12- D. If applicable, the price per share equal to the Fair Market Value per share of such class of Voting Stock determined pursuant to paragraph C immediately preceding, multiplied by the ratio of (1) the highest per share price (including any brokerage commissions, transfer taxes and soliciting dealers' fees) paid by or on behalf of the stockholder for any share of such class of Voting Stock in connection with the direct or indirect acquisition by the Interested Stockholder of beneficial ownership of shares which were acquired within the two-year period immediately prior to the Announcement Date to (2) the Fair Market Value per share of such class of Voting Stock on the first day in such two-year period on which the Interested Stockholder beneficially owned any shares of such class of Voting Stock. All per share prices shall be adjusted for intervening stock splits, stock dividends and reverse stock splits. (iii) The consideration to be received by holders of a particular class of outstanding Voting Stock (including Common Stock) shall be in cash or in the same form as was previously paid by or on behalf of the Interested Stockholder in connection with its direct or indirect acquisition of beneficial ownership of shares of such class of Voting Stock. If the Interested Stockholder beneficially owns shares of any class of Voting Stock which were acquired with varying forms of consideration, the form of consideration to be received by holders of such class of Voting Stock shall be either cash or the form used to acquire the largest number of shares of such class of Voting Stock beneficially owned by the Interested Stockholder. (iv) After the Interested Stockholder has become an Interested Stockholder and prior to the consummation of such Business Combination (A) except as approved by a majority of the Disinterested Directors, there shall have been no failure to declare and pay at the regular date therefor any full quarterly dividends (whether or not cumulative) on any outstanding preferred stock; (B) there shall have been (1) no reduction in the annual rate of dividends paid on the Common Stock (except as necessary to reflect any subdivision of the Common Stock) except as approved by a majority of the Disinterested Directors, and (2) an increase in such annual rate of dividends (as necessary to prevent any such reduction) in the event of any reclassification (including any reverse stock split), recapitalization, reorganization or any similar transaction which has the effect of reducing the number of outstanding shares of the Common Stock, unless the failure so to increase such annual rate is approved by a majority of the -13- Disinterested Directors; and (C) such Interested Stockholder shall not have become the beneficial owner of any shares of Voting Stock except as part of the transaction in which it became an Interested Stockholder and except in a transaction which after giving effect thereto, would not result in any increase in the Interested Stockholder's percentage beneficial ownership of any class of Voting Securities. (v) After the Interested Stockholder has become an Interested Stockholder, such Interested Stockholder shall not have received the benefit, directly or indirectly (except proportionately as a stockholder), of any loans, advances, guarantees, pledges or other financial assistance or any tax credits or other tax advantages provided by the Corporation, whether in anticipation of or in connection with such Business Combination or otherwise. (vi) A proxy or information statement describing the proposed Business Combination and complying with the requirements of the Securities Exchange Act of 1934 and the rules and regulations thereunder (or any subsequent provisions replacing such Act, rules or regulations) shall be mailed by the Interested Stockholder to all stockholders of the Corporation at least 30 days prior to the consummation of such Business Combination (whether or not such proxy or information statement is required to be mailed pursuant to such Act or subsequent provisions). (vii) Such Interested Stockholder shall not have made any major change in the Corporation's business or equity capital structure without the approval of the majority of the Disinterested Directors. Section 5. Certain Definitions. For the purposes of this Article: (a) The term "person" shall mean any individual, firm, corporation or other entity and shall include any group comprising any person and any other person with whom such person or any Affiliate or Associate of such person has any agreement, arrangement or understanding, directly or indirectly, for the purpose of acquiring, holding, voting or disposing of Voting Stock of the Corporation. (b) The term "Interested Stockholder" shall mean any person (other than the Corporation or any Subsidiary and other than any profit-sharing, employee stock ownership or other employee benefit plan of the Corporation or any Subsidiary or any trustee of or fiduciary with respect to any such plan when acting in such capacity) who or which: (i) Is at such time the beneficial owner, directly or indirectly, of shares of the -14- Corporation having more than ten percent (10%) of the voting power of the then outstanding Voting Stock; or (ii) At any time within the two-year period immediately prior to such time was the beneficial owner, directly or indirectly, of shares of the Corporation having more than ten percent (10%) of the voting power of the then outstanding Voting Stock; or (iii) Is at any time an assignee of or has otherwise succeeded to the beneficial ownership of any shares of Voting Stock which were at any time within the two-year period immediately prior to such time beneficially owned by any Interested Stockholder if such assignment or succession shall have occurred in the course of a transaction or series of transactions not involving a public offering within the meaning of the Securities Act of 1933. (c) A person shall be a "beneficial owner" of any shares of Voting Stock: (i) Which are beneficially owned, directly or indirectly, by such person or any of its Affiliates or Associates; (ii) Which such person or any of its Affiliates or Associates has (a) the right to acquire (whether or not such right is exercisable immediately) pursuant to any agreement, arrangement or understanding or upon the exercise of conversion rights, exchange rights, warrants or options or otherwise or (b) the right to vote pursuant to any agreement, arrangement or understanding; or (iii) Which are beneficially owned, directly or indirectly, by any other person with which such person or any of its Affiliates or Associates has any agreement, arrangement or understanding for the purpose of acquiring, holding, voting or disposing of any shares of Voting Stock. (d) For the purposes of determining whether a person is an Interested Stockholder pursuant to subsection 4(b), the number of shares of Voting Stock deemed to be outstanding shall include shares deemed beneficially owned by an Interested Stockholder through application of subsection 5(c) but shall not include any other shares of Voting Stock which may be issuable pursuant to any agreement, arrangement or understanding, or upon the exercise of conversion rights, exchange rights, warrants or options or otherwise. (e) "Affiliate" and "Associate" shall have the respective meanings ascribed to such terms in Rule 12b-2 of the General Rules and Regulations under the Securities Exchange Act of 1934, as in effect on June 19, 1987 (the term registrant in said -15- Rule 12b-2 meaning, in this case, the Corporation). (f) "Beneficially owned" shall have the meaning ascribed to such term in Rule 13d-3 of the General Rules and Regulations under the Securities Exchange Act of 1934, as in effect on June 19, 1987. (g) "Subsidiary" means any corporation of which a majority of any class of equity security is owned, directly or indirectly, by the Corporation. (h) "Disinterested Director" means any member of the Board of Directors of the Corporation who is unaffiliated with, and not a representative of, an Interested Stockholder or any Affiliate or Associate of an Interested Stockholder and was a member of the Board of Directors on June 19, 1987 or prior to the time that the Interested Stockholder or any Affiliate or Associate of an Interested Stockholder became an Interested Stockholder, and any successor of a Disinterested Director who is unaffiliated with, and not a representative of, the Interested Stockholder or any Affiliate or Associate of an Interested Stockholder and is recommended or elected to succeed a Disinterested Director by a majority of the Disinterested Directors then on the Board of Directors. (i) "Fair Market Value" means: (i) in the case of stock, the highest closing sale price during the 30-day period immediately preceding the date in question of a share of such stock on the Composite Tape for New York Stock Exchange Listed Stocks or, if such stock is not quoted on the Composite Tape, on the New York Stock Exchange or, if such stock is not listed on such Exchange, on the principal United States securities exchange registered under the Securities Exchange Act of 1934 on which such stock is listed or, if such stock is not listed on any such exchange, the highest closing sale price or the highest closing bid quotation, respectively, with respect to a share of such stock during the 30-day period preceding the date in question on the National Market System or the National Association of Securities Dealers, Inc. Automated Quotations System, as the case may be, or any system then in use or, if no such quotations are available, the fair market value on the date in question of a share of such stock as determined by a majority of the Disinterested Directors in good faith; and (ii) in the case of property other than cash or stock, the fair market value of such property on the date in question as determined by the Board of Directors in good faith. (j) In the event of any Business Combination in which the Corporation survives, the phrase "consideration other than cash" as used in subsection 4(b) of this Article shall include the shares of Common Stock and/or the shares of any other class of outstanding Voting Stock retained by the holders of such shares. (k) "Substantial Part" of the Corporation shall mean more than ten percent (10%) of -16- the fair market value of the total assets of the Corporation as of the end of its most recent fiscal quarter ending prior to the time the determination is made. Section 6. Determinations by Disinterested Directors. The Disinterested Directors shall have the power and duty to determine for purposes of this Article, on the basis of information known to them after reasonable inquiry, all facts necessary to determine compliance with this Article, including, without limitation, (a) whether a person is an Interested Stockholder, (b) the number of shares of Voting Stock beneficially owned by any person, (c) whether a person is an Affiliate or Associate of another, (d) whether the requirements of subsection 4(b) have been met with respect to any Business Combination and (e) whether the assets which are the subject of any Business Combination equal or exceed, or whether the consideration to be received from the issuance or transfer of securities by the Corporation or any Subsidiary in any Business Combination equals or exceeds, a Substantial Part of the assets of the Corporation. Any such determination made in good faith shall be binding and conclusive on all persons for all purposes. Section 7. No Duty to Approve Business Contributions. Nothing contained in this Article shall be construed to relieve any Interested Stockholder from any fiduciary obligation imposed by law. Section 8. Minimum Consideration. Consideration for shares to be paid to any stockholder pursuant to this Article shall be the minimum consideration payable to the stockholder and shall not limit a stockholder's right under any provision of law or otherwise to receive greater consideration for any shares of the Corporation. Section 9. Fiduciary Obligations. The fact that any Business Combination complies with the provisions of section 4 of this Article shall not be construed to impose any fiduciary duty, obligation or responsibility on the Board of Directors, or any member thereof, to approve such Business Combination or recommend its adoption or approval to the stockholders of the Corporation, nor shall such compliance limit, prohibit or otherwise restrict in any manner the Board of Directors or any member thereof with respect to evaluations of or actions and responses taken with respect to such Business Combination. Section 10. Amendments to Article. Notwithstanding any other provisions of law, these Articles of Organization or the By-Laws of the Corporation, and notwithstanding the fact that a lesser percentage may be specified by law, the affirmative vote of the holders of at least eighty percent (80%) of the votes which all the stockholders would be entitled to cast at any annual election of directors or class of directors shall be required to amend or repeal, or to adopt any provision inconsistent with, this Article; provided that such eighty percent (80%) vote shall not be required, and only the vote otherwise provided by law, by the By-Laws of the Corporation or by these Articles of Organization shall be required, for any amendment, repeal or adoption previously approved by the Board of Directors and by each Disinterested Director. -17- (Degree)We further certify that the foregoing restated articles of organization effect no amendments to the articles of organization of the corporation _____________ amended, except amendments to the following articles sixth _______________________________________________________________________. ((Degree)If there is no such amendment, state "None") Briefly describe amendments in space below: Article 6 is amended by the addition of Articles 6D, 6E and 6F. Article 6D provides for the elimination of the personal liability of directors for monetary damages, except under certain circumstances. Article 6E provides for the classification of the Board of Directors into three classes and amended procedures for changing the number of directors, removing directors and filling vacancies on the Board of Directors. Article 6F contains a "fair price" provision providing for minimum price, form of consideration and procedural requirements, or alternatively, the affirmative vote of 80% of the holders of the outstanding stock entitled to vote in connection with certain business combinations involving a 10% stockholder, or a vote of a majority of the holders of the outstanding stock entitled to vote in connection with corporate actions which satisfy or do not trigger the fair price provision. IN WITNESS WHEREOF AND UNDER THE PENALTIES OF PERJURY, we have hereto signed our names this day of September in this year 1987. _____________________________________________________ President/Vice President David A. Boucher _____________________________________________________ Clerk/Assistant Clerk J. John Brennan -18- THE COMMONWEALTH OF MASSACHUSETTS RESTATED ARTICLES OF ORGANIZATION (General Laws, Chapter 156B, Section 74) I hereby approve the within restated articles of organization and, the filing fee in the amount of $ having been paid, said articles are deemed to have been filed with me this day of , 1987. MICHAEL JOSEPH CONNOLLY Secretary of State TO BE FILLED IN BY CORPORATION Photo Copy of Restated Articles Of Organization To Be Sent To: Ellen Chiniara, Esquire ----------------------------------------------- Hale and Dorr ----------------------------------------------- 60 State Street ----------------------------------------------- Boston, MA 02109 ----------------------------------------------- -19- Telephone: (617)742-9100 -20- THE COMMONWEALTH OF MASSACHUSETTS MICHAEL JOSEPH CONNOLLY Secretary of State Federal Identification ONE ASHBURTON PLACE, BOSTON, MA 02108 No. 04-2729042 CERTIFICATE OF VOTE OF DIRECTORS ESTABLISHING A SERIES OF A CLASS OF STOCK General Laws, Chapter 156B, Section 26 ---- We, David A. Boucher ,President, and J. John Brennan ,Clerk of Interleaf, Inc. (Name of Corporation) located at Ten Canal Park, Cambridge, MA 02141 do hereby certify that at a meeting of the directors of the corporation held on July 11, 1988 , the following vote establishing and designating a series of a class of stock and determining the relative rights and preferences thereof was duly adopted: VOTED: That, pursuant to the authority conferred in the Board of Directors of the Corporation in accordance with the provisions of its Articles of Organization, a series of Preferred Stock, $.10 par value (the "Preferred Stock"), of the Corporation be, and it hereby is established, and that the designation and number of shares, and relative rights, preferences and limitations thereof are fixed as follows: (See Attachment A) Note: Votes for which the space provided above is not sufficient should be set out on continuation sheets to be -21- numbered 2A, 2B, etc. Continuation sheets must have a left-hand margin of 1 inch wide for binding and shall be 8 1/2 x 11. Only one side should be used. ATTACHMENT A to CERTIFICATE OF VOTE OF DIRECTORS ESTABLISHING A SERIES OF A CLASS OF STOCK of INTERLEAF, INC. To be designated Series A Junior Participating Preferred Stock ---------------------------------------- Interleaf, Inc., a Massachusetts corporation (the "Corporation"), pursuant to the authority conferred in the Board of Directors of the Corporation in accordance with the provisions of the Article of Organization, certifies that the Board of Directors of the Corporation, at a meeting duly called and held on July 11, 1988, duly voted to establish a series of Preferred Stock, $.10 par value (the "Preferred Stock"), of the Corporation and that the designation and number of shares, and relative rights, preferences and limitations thereof are fixed as follows: Series A Junior Participating Preferred Stock: Section 1. Designation and Amount. The shares of such series shall be designated as "Series A Junior Participating Preferred Stock" (the "Series A Preferred Stock") and the number of shares constituting the Series A Preferred Stock shall be 200,000. Such number of shares may be increased or decreased by resolution of the Board of Directors; provided, that no decrease shall reduce the number of shares of Series A Preferred Stock to a number less than the number of shares then outstanding plus the number of shares reserved for issuance upon the exercise of outstanding options, rights or warrants or upon the conversion of any outstanding securities issued by the Corporation convertible into Series A Preferred Stock. Section 2. Dividends and Distributions. (A) Subject to the rights of the holders of any shares of any series of Preferred Stock (or any similar stock) ranking prior and superior to the Series A Preferred Stock with respect to dividends, the holders of shares of Series A -22- Preferred Stock, in preference to the holders of Common Stock, par value $.0l per share (the "Common Stock"), of the Corporation, and of any other junior stock, shall be entitled to receive, when, as and if declared by the Board of Directors out of funds of the Corporation legally available for the payment of dividends, quarterly dividends payable in cash on March 31, June 30, September 30 and December 31 in each year (each such date being referred to herein as a "Quarterly Dividend Payment Date"), commencing on the first Quarterly Dividend Payment Date after the first issuance of a share or fraction of a share of Series A Preferred Stock, in an amount per share (rounded to the nearest cent) equal to the greater of (a) $1 or (b) subject to the provision for adjustment hereinafter set forth, 100 times the aggregate per share amount of all cash dividends, and 100 times the aggregate per share amount (payable in kind) of all non-cash dividends or other distributions, other than a dividend payable in shares of Common Stock or a subdivision of the outstanding shares of Common Stock (by reclassification or otherwise), declared on the Common Stock since the immediately preceding Quarterly Dividend Payment Date or, with respect to the first Quarterly Dividend Payment Date, since the first issuance of any share or fraction of a share of Series A Preferred Stock. In the event the Corporation shall at any time declare or pay any dividend on the Common Stock payable in shares of Common Stock, or effect a subdivision, combination or consolidation of the outstanding shares of Common Stock (by reclassification or otherwise than by payment of a dividend in shares of Common Stock) into a greater or lesser number of shares of Common Stock, then in each such case the amount to which holders of shares of Series A Preferred Stock were entitled immediately prior to such event under clause (b) of the preceding sentence shall be adjusted by multiplying such amount by a fraction, the numerator of which is the number of shares of Common Stock outstanding immediately after such event and the denominator of which is the number of shares of Common Stock that were outstanding immediately prior to such event. (B) The Corporation shall declare a dividend or distribution on the Series A Preferred Stock as provided in paragraph (A) of this Section immediately after it declares a dividend or distribution on the Common Stock (other than a dividend payable in shares of Common Stock) and the Corporation shall pay such dividend or distribution on the Series A Preferred Stock before the dividend or distribution declared on the Common Stock is paid or set apart; provided that, in the event no dividend or distribution shall have been declared on the Common Stock during the period between any Quarterly Dividend Payment Date and the next subsequent Quarterly Dividend Payment Date, a dividend of $1 per share on the Series A Preferred Stock shall nevertheless be payable on such subsequent Quarterly Dividend Payment Date. (C) Dividends shall begin to accrue and be cumulative on outstanding shares of Series A Preferred Stock from the Quarterly Dividend Payment Date -23- next preceding the date of issue of such shares, unless the date of issue of such shares is prior to the record date for the first Quarterly Dividend Payment Date, in which case dividends on such shares shall begin to accrue from the date of issue of such shares, or unless the date of issue is a Quarterly Dividend Payment Date or is a date after the record date for the determination of holders of shares of Series A Preferred Stock entitled to receive a quarterly dividend and before such Quarterly Dividend Payment Date, in either of which events such dividends shall begin to accrue and be cumulative from such Quarterly Dividend Payment Date. Accrued but unpaid dividends shall not bear interest. Dividends paid on the shares of Series A Preferred Stock in an amount less than the total amount of such dividends at the time accrued and payable on such shares shall be allocated pro rata on a share-by-share basis among all such shares at the time outstanding. The Board of Directors may fix a record date for the determination of holders of shares of Series A Preferred Stock entitled to receive payment of a dividend or distribution declared thereon, which record date shall be not more than 60 days prior to the date fixed for the payment thereof. Section 3. Voting Rights. The holders of shares of Series A Preferred Stock shall have the following voting rights: (A) Subject to the provision for adjustment hereinafter set forth, each share of Series A Preferred Stock shall entitle the holder thereof to 100 votes on all matters submitted to a vote of the stockholders of the Corporation. In the event the Corporation shall at any time declare or pay any dividend on the Common Stock payable in shares of Common Stock, or effect a subdivision, combination or consolidation of the outstanding shares of Common Stock (by reclassification or otherwise than by payment of a dividend in shares of Common Stock) into a greater or lesser number of shares of Common Stock, then in each such case the number of votes per share to which holders of shares of Series A Preferred Stock were entitled immediately prior to such event shall be adjusted by multiplying such number by a fraction, the numerator of which is the number of shares of Common Stock outstanding immediately after such event and the denominator of which is the number of shares of Common Stock that were outstanding immediately prior to such event. (B) Except as otherwise provided herein, in the Articles of Organization or by law, the holders of shares of Series A Preferred Stock and the holders of shares of Common Stock shall vote together as one class on all matters submitted to a vote of stockholders of the Corporation. (C) (i) If any time dividends on any Series A Preferred Stock shall be in arrears in an amount equal to six quarterly dividends thereon, the holders of the Series A Preferred Stock, voting as a separate series from all other series of -24- Preferred Stock and classes of capital stock, shall be entitled to elect two members of the Board of Directors in addition to any Directors elected by any other series, class or classes of securities and the authorized number of Directors will automatically be increased by two. Promptly thereafter, the Board of Directors of this Corporation shall, as soon as may be practicable, call a special meeting of holders of Series A Preferred Stock for the purpose of electing such members of the Board of Directors. Said special meeting shall in any event be held within 45 days of the occurrence of such arrearage. (ii) During any period when the holders of Series A Preferred Stock, voting as a separate series, shall be entitled and shall have exercised their right to elect two Directors, then and during such time as such right continues (a) the then authorized number of Directors shall be increased by two, and the holders of Series A Preferred Stock, voting as a separate series, shall be entitled to elect the additional Director so provided for, and (b) each such additional Director shall not be a member of any existing class of the Board of Directors, but shall serve until the next annual meeting of stockholders for the election of Directors, or until his successor shall be elected and shall qualify, or until his right to hold such office terminates pursuant to the provisions of this Section 3(C). (iii) A Director elected pursuant to the terms hereof may be removed with or without cause by the holders of Series A Preferred Stock entitled to vote in an election of such Director. (iv) If, during any interval between annual meetings of stockholders for the election of Directors and while the holders of Series A Preferred Stock shall be entitled to elect two Directors, there is no such Director in office by reason of resignation, death or removal, then, promptly thereafter, the Board of Directors shall cause a special meeting of the holders of Series A Preferred Stock for the purpose of filling such vacancy and such vacancy shall be filled at such special meeting. Such special meeting shall in any event be held within 45 days of the occurrence of such vacancy. (v) At such time as the arrearage is fully cured, and all dividends accumulated and unpaid on any shares of Series A Preferred Stock outstanding are paid, and, in addition thereto, at least one regular dividend has been paid subsequent to curing such arrearage, the term of office of any Director elected pursuant to this Section 3(C), or his successor, shall automatically terminate, and the authorized number of Directors shall automatically decrease by two, the rights of the holders of the shares of the Series A Preferred Stock to vote as provided in this Section 3(C) shall cease, subject to renewal from time to time upon the same terms and -25- conditions, and the holders of shares of the Series A Preferred Stock shall have only the limited voting rights elsewhere herein set forth. (D) Except as set forth herein, or as otherwise provided by law, holders of Series A Preferred Stock shall have no special voting rights and their consent shall not be required (except to the extent they are entitled to vote with holders of Common Stock as set forth herein) for taking any corporate action. -26- Section 4. Certain Restrictions. (A) Whenever quarterly dividends or other dividends or distributions payable on the Series A Preferred Stock as provided in Section 2 are in arrears, thereafter and until all accrued and unpaid dividends and distributions, whether or not declared, on shares of Series A Preferred Stock outstanding shall have been paid in full, the Corporation shall not: (i) declare or pay dividends, or make any other distributions, on any shares of stock ranking junior (either as to dividends or upon liquidation, dissolution or winding up) to the Series A Preferred Stock; (ii) declare or pay dividends, or make any other distributions, on any shares of stock ranking on a parity (either as to dividends or upon liquidation, dissolution or winding up) with the Series A Preferred Stock, except dividends paid ratably on the Series A Preferred Stock and all such parity stock on which dividends are payable or in arrears in proportion to the total amounts to which the holders of all such shares are then entitled; (iii) redeem or purchase or otherwise acquire for consideration shares of any stock ranking junior (either as to dividends or upon liquidation, dissolution or winding up) to the Series A Preferred Stock, provided that the Corporation may at any time redeem, purchase or otherwise acquire shares of any such junior stock in exchange for shares of any stock of the Corporation ranking junior (either as to dividends or upon dissolution, liquidation or winding up) to the Series A Preferred Stock; or (iv) redeem or purchase or otherwise acquire for consideration any shares of Series A Preferred Stock, or any shares of stock ranking on a parity with the Series A Preferred Stock, except in accordance with a purchase offer made in writing or by publication (as determined by the Board of Directors) to all holders of such shares upon such terms as the Board of Directors, after consideration of the respective annual dividend rates and other relative rights and preferences of the respective series and classes, shall determine in good faith will result in fair and equitable treatment among the respective series or classes. (B) The Corporation shall not permit any subsidiary of the Corporation to purchase or otherwise acquire for consideration any shares of stock of the Corporation unless the Corporation could, under paragraph (A) of this Section 4, purchase or otherwise acquire such shares at such time and in such manner. Section 5. Reacquired Shares. Any shares of Series A Preferred Stock purchased or otherwise acquired by the Corporation in any manner whatsoever shall be retired and canceled -27- promptly after the acquisition thereof. All such shares shall upon their cancellation become authorized but unissued shares of Preferred Stock and may be reissued as part of a new series of Preferred Stock subject to the conditions and restrictions on issuance set forth herein, in the Articles of Organization, or in any other Certificates of Vote of Directors Establishing a Series of a Class of Stock or as otherwise required by law. Section 6. Liquidation, Dissolution or Winding Up. (A) Upon any liquidation, dissolution or winding up of the Corporation, no distribution shall be made (1) to the holders of shares of stock ranking junior (either as to dividends or upon liquidation, dissolution or winding up) to the Series A Preferred Stock unless, prior thereto, the holders of shares of Series A Preferred Stock shall have received $100 per share, plus an amount equal to accrued and unpaid dividends and distributions thereon, whether or not declared, to the date of such payment, provided that the holders of shares of Series A Preferred Stock shall be entitled to receive an aggregate amount per share, subject to the provision for adjustment hereinafter set forth, equal to 100 times the aggregate amount to be distributed per share to holders of shares of Common Stock, or (2) to the holders of shares of stock ranking on a parity (either as to dividends or upon liquidation, dissolution or winding up) with the Series A Preferred Stock, except distributions made ratably on the Series A Preferred Stock and all such parity stock in proportion to the total amounts to which the holders of all such shares are entitled upon such liquidation, dissolution or winding up. (B) Neither the consolidation, merger or other business combination of the Corporation with or into any other corporation nor the sale, lease, exchange or conveyance of all or any part of the property, assets or business of the Corporation shall be deemed to be a liquidation, dissolution or winding up of the Corporation for purposes of this Section 6. (C) In the event the Corporation shall at any time declare or pay any dividend on the Common Stock payable in shares of Common Stock, or effect a subdivision, combination or consolidation of the outstanding shares of Common Stock (by reclassification or otherwise than by payment of a dividend in shares of Common Stock) into a greater or lesser number of shares of Common Stock, then in each such case the aggregate amount to which holders of shares of Series A Preferred Stock were entitled immediately prior to such event under the proviso in clause (1) of paragraph (A) of this Section 6 shall be adjusted by multiplying such amount by a fraction the numerator of which is the number of shares of Common Stock outstanding immediately after such event and the denominator of which is the number of shares of Common Stock that were outstanding immediately prior to such event. Section 7. Consolidation, Merger, etc. Notwithstanding anything to the contrary contained herein, in case the Corporation shall enter into any consolidation, merger, combination -28- or other transaction in which the shares of Common Stock are exchanged for or changed into other stock or securities, cash and/or any other property, then in any such case each share of Series A Preferred Stock shall at the same time be similarly exchanged or changed into an amount per share, subject to the provision for adjustment hereinafter set forth, equal to 100 times the aggregate amount of stock, securities, cash and/or any other property (payable in kind), as the case may be, into which or for which each share of Common Stock is changed or exchanged. In the event the Corporation shall at any time declare or pay any dividend on the Common Stock payable in shares of Common Stock, or effect a subdivision, combination or consolidation of the outstanding shares of Common Stock (by reclassification or otherwise than by payment of a dividend in shares of Common Stock) into a greater or lesser number of shares of Common Stock, then in each such case the amount set forth in the preceding sentence with respect to the exchange or change of shares of Series A Preferred Stock shall be adjusted by multiplying such amount by a fraction, the numerator of which is the number of shares of Common Stock outstanding immediately after such event and the denominator of which is the number of shares of Common Stock that were outstanding immediately prior to such event. Section 8. No Redemption. The shares of Series A Preferred Stock shall not be redeemable. Section 9. Rank. The Series A Preferred Stock shall rank, with respect to the payment of dividends and the distribution of assets, junior to all series of any other class of the Preferred Stock issued either before or after the issuance of the Series A Preferred Stock, unless the terms of any such series shall provide otherwise. Section 10. Amendment. The Articles of Organization of the Corporation shall not be amended in any manner which would materially alter or change the powers, preferences or special rights of the Series A Preferred Stock so as to affect them adversely without the affirmative vote of the holders of at least two-thirds of the outstanding shares of Series A Preferred Stock, voting together as a single class. Section 11. Fractional Shares. Series A Preferred Stock may be issued in fractions of a share which shall entitle the holder, in proportion to such holder's fractional shares, to exercise voting rights, receive dividends, participate in distributions and have the benefit of all other rights of holders of Series A Preferred Stock. -29- IN WITNESS WHEREOF AND UNDER THE PENALTIES OF PERJURY, we have hereto signed our names this day of July in this year 1988. _____________________________________________________ President/Vice President David A. Boucher _____________________________________________________ Clerk/Assistant Clerk J. John Brennan -30- THE COMMONWEALTH OF MASSACHUSETTS Certificate of Vote of Directors Establishing A Series of a Class of Stock (General Laws, Chapter 156B, Section 26) I hereby approve the within certificate and, the filing fee in the amount of $ having been paid, said certificate is hereby filed this day of , 19 MICHAEL JOSEPH CONNOLLY Secretary of State TO BE FILLED IN BY CORPORATION PHOTO COPY OF CERTIFICATE TO BE SENT TO: Christopher P. Holsing, Esq. ------------------------------------- Hale and Dorr ------------------------------------- 60 State Street ------------------------------------- Boston, Massachusetts 02109 ------------------------------------- Telephone: (617)742-9100 Ext. 2514 ------------------------------------- Copy Mailed -31- THE COMMONWEALTH OF MASSACHUSETTS MICHAEL JOSEPH CONNOLLY Secretary of State Federal Identification ONE ASHBURTON PLACE, BOSTON, MA 02108 No. 04-2729042 CERTIFICATE OF VOTE OF DIRECTORS ESTABLISHING A SERIES OF A CLASS OF STOCK General Laws, Chapter 156B, Section 26 ---------- We, David A. Boucher ,President, and John K. Hyvnar ,Clerk of Interleaf, Inc. (Name of Corporation) located at Ten Canal Park, Cambridge, MA 02141 do hereby certify that at a meeting of the directors of the corporation held on September 22, 1989, the following vote establishing and designating a series of a class of stock and determining the relative rights and preferences thereof was duly adopted: VOTED: That pursuant to the authority vested in the Board of Directors of the Corporation in accordance with the provisions of its Articles of Organization, as amended, a series of Preferred Stock of the Corporation be and it hereby is created, and that the designation and amount thereof and the voting powers, preferences and relative, participating, optional and other special rights of the shares of such series, and the qualifications, limitations or restrictions thereof shall be as set forth on Exhibit A attached hereto. (See Attachment A) Note: Votes for which the space provided above is not sufficient should be set out on continuation sheets to be numbered 2A, 2B, etc. Continuation sheets must have a left-hand margin of 1 inch wide for binding and shall be 8 1/2 x 11. Only one side should be used. -32- EXHIBIT A Section 1. Designation and Amount. The shares of this series of preferred stock of Interleaf, Inc. (the "Company") shall be designated as "Senior Series B Convertible Preferred Stock" ("Series B Preferred Stock") and the number of shares constituting such series shall be 2,142,857 with a par value per share of $.l0. Section 2. Dividends. No dividends shall be declared, set aside or paid upon outstanding shares of any class of Common Stock of the Company, other than a dividend to which the provisions of Section 5(d) apply, unless a dividend shall be declared, set aside or paid, as the case may be, upon the Series B Preferred Stock, such that the holder of each share of Series B Preferred Stock shall be entitled to that amount as would be declared, set aside or paid, as the case may be, on the number of shares of Common Stock into which each such share of Series B Preferred Stock could be converted pursuant to the provisions of Section 5 hereof, such number determined as of the record date for the determination of holders of Common Stock entitled to receive such dividend. Section 3. Liquidation, Dissolution or Winding Up. (a) In the event of any liquidation, dissolution or winding up of the Company, whether voluntary or involuntary, the following shall apply: (i) First, holders of outstanding shares of Series B Preferred Stock shall be entitled to be paid out of the assets of the Company available for distribution to stockholders, whether such assets are capital, surplus, or earnings, an amount equal to $7.00 per share (adjusted appropriately for stock splits, stock dividends and the like), before any payment shall be made to the holders of any class of Common Stock or of any other stock ranking on liquidation junior to the Series B Preferred Stock. If, upon any liquidation, dissolution or winding up of the Company, the amounts payable with respect to the Series B Preferred Stock and any other stock ranking as to any such distribution on a parity with the Series B Preferred Stock are not paid in full, the holders of the Series B Preferred Stock and such other stock shall share ratably in any distribution of assets in proportion to the full respective preferential amounts to which they are entitled. (ii) Second, provided the holders of the outstanding shares of Series B Preferred Stock have received all of the amounts specified in clause (i) of this subsection (a), and subject to the rights of holders of any other class or series of capital stock of the Company ranking as to liquidation preference senior to the Common Stock and junior to or on a parity with the Series B Preferred Stock, the holders of outstanding shares of Common Stock shall be entitled to be paid out of the assets of the Company available for distribution to stockholders, whether such assets are capital, surplus or earnings, an amount per share of such Common -33- Stock equal to a fraction, the numerator of which is the aggregate amount paid to the holders of the outstanding shares of Series B Preferred Stock pursuant to clause (i) of this subsection (a) and the denominator of which is equal to the number of shares of Common Stock issuable upon the conversion of the outstanding shares of Series B Preferred Stock immediately prior to any such liquidation, dissolution or winding up of the Company. (iii) Third, provided that the holders of the outstanding shares of Series B Preferred Stock have received all of the amounts specified in clause (i) of this subsection (a), and provided, further, that the holders of the outstanding shares of Common Stock have received all of the amounts specified in clause (ii) of this subsection (a), the holders of the outstanding shares of Series B Preferred Stock shall share ratably with the holders of the outstanding shares of Common Stock in the distribution of the assets of the Company remaining for distribution to stockholders, whether such assets are capital, surplus or earnings (the "Residual Assets"), as if each share of Series B Preferred Stock had been converted into the number of shares of Common Stock issuable upon the conversion of a share of Series B Preferred Stock immediately prior to any such liquidation, dissolution or winding up of the Company (taking into account the rights of holders of any other class or series of capital stock of the Company entitled to share in such distribution of the Residual Assets). (b) A consolidation or merger of the Company or a sale of all or substantially all of the assets of the Company or other similar transaction shall be regarded as a liquidation, dissolution or winding up of the affairs of the Company within the meaning of this Section 3; provided, however, that each holder of Series B Preferred Stock shall have the right to elect the benefits of the provisions of Section 5(g) hereof in lieu of receiving payment in liquidation, dissolution or winding up of the Company pursuant to this Section 3. (c) In the event of a liquidation, dissolution or winding up of the Company resulting in the availability of assets other than cash for distribution to the holders of the Series B Preferred Stock, the holders of the Series B Preferred Stock shall be entitled to a distribution of cash and/or assets equal in value to the liquidation preference and other distribution rights stated in Section 3(a). In the event that such distribution to the holders of the Series B Preferred Stock shall include any assets other than cash, the following provisions shall govern. The Board of Directors shall first determine the value of such assets for such purpose, and shall notify all holders of shares of Series B Preferred Stock of such determination. The value of such assets for purposes of the distribution under this paragraph 3(c) shall be the value as determined by the Board of Directors in good faith and with due care, unless the holders of a majority of the outstanding shares of Series B Preferred Stock shall object thereto in writing within 15 days after the date of such notice. In the event of such objection, the valuation of such assets for purposes of such distribution shall be determined by an arbitrator selected by the objecting stockholders and the Board of Directors, or in the event a single arbitrator cannot be agreed upon within 10 -34- days after the written objection sent by the objecting stockholders in accordance with the previous sentence, the valuation of such assets shall be determined by arbitration in which (i) the objecting stockholders shall name in their notice of objection one arbitrator, (ii) the Board of Directors shall name a second arbitrator within 15 days from the receipt of such notice, (iii) the two arbitrators thus selected shall select a third arbitrator, and (iv) the three arbitrators thus selected shall determine the valuation of such assets for purposes of such distribution by majority vote. The costs of such arbitration shall be borne by the Company and by the holders of the Series B Preferred Stock (on a pro rata basis out of the assets otherwise distributable to them) as follows: (i) if the valuation as determined by the arbitrators is greater than 90% of the valuation as determined by the Board of Directors, the holders of the Series B Preferred Stock shall pay the costs of the arbitration, and (ii) otherwise, the Company shall bear the costs of the arbitration. Section 4. Voting Rights. (a) Except as otherwise expressly provided herein (including without limitation the provisions of Sections 4(b) and 4(c) below) or as required by law, the holders of shares of the Series B Preferred Stock shall be entitled to vote on all matters submitted to a vote of the holders of Common Stock, voting together with the holders of Common Stock as a single class. Each share of Series B Preferred Stock shall be entitled to the number of votes equal to the number of shares of Common Stock into which such share of Series B Preferred Stock could be converted pursuant to the provisions of Section 5 hereof on the record date for determining the stockholders entitled to vote, rounded to the nearest one-tenth of a vote.. (b) So long as any shares of Series B Preferred Stock are outstanding, the consent of the holders of at least a majority of the outstanding shares of Series B Preferred Stock, given in person or by proxy, either in writing (if permitted by law) or at a special meeting called for that purpose, at which the holders of Series B Preferred Stock shall vote separately as a class, shall be necessary for effecting, validating or authorizing any one or more of the following: (i) the amendment, alteration or repeal of any of the provisions of the Articles of Organization, as amended, of the Company, or any amendment thereto or any other certificate filed pursuant to law (including any such amendment, alteration or repeal effected by any merger or consolidation to which the Company is a party), which would adversely affect any of the rights, powers, privileges or preferences of outstanding shares of Series B Preferred Stock; (ii) the authorization or issuance of any additional class of stock or equity security ranking prior to or on a parity with the Series B Preferred Stock as to liquidation preference or dividend rights or prior to the Series B Preferred Stock as to voting rights, or any increase in the authorized amount of any class of stock ranking prior to or on a parity with the Series B Preferred Stock as to liquidation preference or dividend rights (including any such authorization or increase effected by a merger or consolidation to which the Company is a party and including any increase in the authorized amount of -35- Series B Preferred Stock); provided, however, that this restriction shall not apply to any such authorization or issuance of Common stock or the Company's Series A Junior Participating Preferred Stock (the "Series A Preferred Stock") issued upon exercise of Rights issued pursuant to the Rights Agreement (as defined below); (iii) for a period of two years commencing on the date of the filing of this vote, the purchase, redemption or acquisition (or payment into or setting aside for a sinking fund for any such purpose) of any of the Common stock of any class or any other capital stock or equity security of the Company (other than the Series B Preferred Stock in accordance with the terms hereof); provided, however, that this restriction shall not apply to the repurchase of shares of Common Stock issued pursuant to the Company's employee benefit or option plan; and, provided, further, that this restriction shall not apply to redemptions of Common Stock of the Company in any 6 month period not in excess of $100,000; or (iv) the approval of a merger, consolidation, liquidation or sale of all or substantially all of the assets of the Company or other similar transaction that would result in a holder of Series B Preferred Stock receiving an amount less than (A) $14.00 per then outstanding share of Series B Preferred Stock (adjusted appropriately for stock splits, stock dividends and the like) through March 31, 1991 or (B) $18.00 per then outstanding share of Series B Preferred Stock (adjusted appropriately for stock splits, stock dividends and the like) commencing on April 1, 1991 and thereafter, in the case of (A) or (B) above, on a converted basis or otherwise. (c) So long as at least a majority of the authorized shares of the Series B Preferred Stock shall remain outstanding, the holders of the Series B Preferred Stock shall be entitled to vote as a class separately from all other classes of stock of the Company to elect one member of the Company's Board of Directors. Section 5. Conversion. (a) Subject to and in compliance with the provisions of this Section 5, shares of the Series B Preferred Stock may, at the option of the holder thereof, be converted at any time or from time to time into fully-paid and non-assessable shares of Common Stock. The number of shares of Common Stock to which a holder of the Series B Preferred Stock shall be entitled upon conversion shall be the product obtained by multiplying the Conversion Rate (determined as provided in paragraph 5(b)) by the number of shares of Series B Preferred Stock being converted. (b) The conversion rate in effect at any time with respect to the Series B Preferred Stock (the "Conversion Rate") shall equal (i) the quotient obtained by dividing the Initial Value (as hereinafter defined) by the Conversion Value, calculated as hereinafter provided or (ii) that amount calculated as set forth in Section 5(m)(ii) or 5(m)(iii), if applicable. -36- (c) The Initial Value with respect to the Series B Preferred Stock is $7.00. The Conversion Value in effect initially, and until first adjusted in accordance with Sections 5(d) or 5(m) hereof, shall be $7.00. (d) Upon the happening of an Extraordinary Common Stock Event (as defined below), the Conversion Value, simultaneously with the happening of such Extraordinary common Stock Event, shall be adjusted by dividing the then effective Conversion Value by a fraction, the numerator of which shall be the number of shares of Common Stock of all classes outstanding immediately after such Extraordinary Common Stock Event and the denominator of which shall be the number of shares of Common stock of all classes outstanding immediately prior to such Extraordinary Common Stock Event, and the quotient so obtained shall thereafter be the Conversion Value. The Conversion Value as so adjusted, shall be re-adjusted in the same manner upon the happening of any subsequent Extraordinary Common Stock Event or Events. (e) In the event the Company shall make or issue, or fix a record date for the determination of holders of Common Stock entitled to receive, a dividend or other-distribution payable in securities of the Company other than shares of Common Stock, then and in each such event lawful and adequate provision shall be made so that the holders of Series B Preferred Stock shall receive the number of securities of the Company which they would have received had their Series B Preferred Stock been converted into Common Stock pursuant to the provisions of this Section 5 on the date of such event. (f) If the Common Stock issuable upon the conversion of the Series B Preferred Stock shall be changed into the same or a different number of shares of any class or classes of stock, whether by reclassification or otherwise (other than a subdivision or combination of shares or stock dividend provided for above, or a reorganization, merger, consolidation or sale of assets provided for elsewhere in this Section 5), then and in each such event the holder of each share of Series B Preferred Stock shall have the right thereafter to convert such share into the kind and amount of shares of stock and other securities and property receivable upon such reorganization, reclassification or other change, by holders of shares of Common Stock into which such shares of Series B Preferred Stock might have been converted immediately prior to such reorganization, reclassification or change, all subject to further adjustment as provided herein. (g) If at any time or from time to time there shall be a reclassification of the Common Stock (other than a subdivision, combination, reclassification or exchange of shares provided for elsewhere in this Section 5) or a merger or consolidation of the Company with or into another corporation or the sale of all or substantially all of the Company's properties and assets to any other person, or other similar transaction, then, as a part of and as a condition to the effectiveness of such reorganization, merger, consolidation or sale, lawful and adequate provision shall be made so that each holder of Series B Preferred Stock shall thereafter be entitled to receive upon conversion of such holder's shares of Series B Preferred Stock the number of shares of stock, or the amount of other securities or property of the Company or of the successor corporation resulting from such merger or consolidation or sale, to which a holder of Common Stock deliverable upon conversion of such shares of Series B Preferred Stock would have been entitled -37- on such capital reorganization, merger, consolidation, or sale. In any such case, appropriate provisions shall be made with respect to the rights of the holders of the Series B Preferred Stock after the reorganization, merger, consolidation or sale such that the provisions of this Section 5 (including without limitation provisions for adjustment of the Conversion Value and the number of shares issuable upon conversion of the Series B Preferred Stock) shall thereafter be applicable, as near-ly as may be possible, with respect to any shares of stock, securities or assets to be deliverable thereafter upon the conversion of the Series B Preferred Stock of such series. Each holder of Series B Preferred Stock, upon the occurrence of a capital reorganization, merger or consolidation of the Company or the sale of all or substantially all its assets and properties as such events are more fully set forth in the first paragraph of this Section 5(g), shall have the option of electing treatment of his outstanding shares of Series B Preferred Stock under either this Section 5(g) or Section 3(b) hereof, notice of which election shall be submitted in writing to the Company at its principal office no later than 10 days before the effective date of such event, provided that, notwithstanding the foregoing, any such notice shall be effective if given not later than 15 days after the date of the Company's notice, pursuant to Section 8, with respect to such event. (h) In each case of an adjustment or readjustment of the Conversion Rate, the Company will furnish each holder of Series B Preferred Stock with a certificate, prepared by the principal financial officer of the Company, showing such adjustment or readjustment, and stating in detail the facts upon which such adjustment or readjustment is based. (i) To exercise his conversion privilege, a holder of Series B Preferred Stock shall surrender the certificate or certificates representing the shares being converted to the Company at its principal office, and shall give written notice to the Company at that office that such holder elects to convert such shares. Such notice shall also state the name or names (with address or addresses) in which the certificate or certificates for shares of Common Stock issuable upon such conversion shall be issued. The certificate or certificates for shares of Series B Preferred Stock surrendered for conversion shall be accompanied by proper assignment thereof to the Company or endorsed in blank. The date when such written notice is received by the Company together with the certificate or certificates representing the shares of Series B Preferred Stock being converted, shall be the "Conversion Date." As promptly as practicable after the Conversion Date, the Company shall issue and deliver to the holder of the shares of Series B Preferred Stock being converted, or on his written order, such certificate or certificates as he may request for the number of full shares of Common Stock issuable upon the conversion of such shares of Series B Preferred Stock in accordance with the provisions of-this Section 5 and cash as provided in Section 5(j), in respect of any fraction of a share of Common Stock issuable upon such conversion. Such conversion shall be deemed to have been effected immediately prior to the close of business on the Conversion Date, and at such time the rights of the holder as holder of the converted shares of Series B Preferred Stock shall cease and the person or persons in whose name or names any certificate or certificates for shares of Common Stock shall be issuable upon such conversion shall thereupon be deemed to have become the holder or holders of record of -38- shares of Common Stock represented thereby. (j) No fractional shares of Common Stock or scrip representing fractional shares shall be issued upon conversion of Series B Preferred Stock. Instead of any fractional shares of Common Stock which would otherwise be issuable upon conversion of Series B Preferred Stock, the Company shall pay to the holder of the shares of Series B Preferred Stock which were converted a cash adjustment in respect of such fraction in an amount equal to the same fraction of the market price per share of the Common Stock (as determined in a manner prescribed by the Board of Directors) at the close of business on the Conversion Date. (k) The Company shall at all times reserve and keep available out of its authorized but unissued shares of Common Stock, solely for the purpose of effecting the conversion of the shares of the Series B Preferred Stock, such number of its shares of Common Stock as shall from time to time be sufficient to effect the conversion of all outstanding shares of the Series B Preferred Stock, and if at any time the number of authorized but unissued shares of Common Stock shall not be sufficient to effect the conversion of all then outstanding shares of the Series B Preferred Stock, the Company shall take such corporate action as may, in the opinion of its counsel, be necessary to increase its authorized but unissued shares of Common Stock to such number of shares as shall be sufficient for such purpose. (l) "Extraordinary Common Stock Event" shall mean (i) the issuance of additional shares of the Common Stock as a dividend or other distribution on outstanding Common Stock, (ii) the subdivision of outstanding shares of Common Stock into a greater number of shares of Common Stock, or (iii) the combination of outstanding shares of the Common Stock of any class into a smaller number of shares of the Common Stock. (m) (i) If, for the period commencing on the first business day following the public announcement or disclosure of the Company's earnings with respect to the Company's fiscal year ending March 31, 1990 and ending on the loth business day thereafter, the average Closing Price (as defined below) of the Company's Common Stock per share (the "FY90 Average Close") is less than the then effective Conversion Value, the FY90 Average Close shall become the new Conversion Value; (ii) (A) If, for the period commencing on the first business day following the public announcement or disclosure of the Company's earnings with respect to the Company's fiscal year ending March 31, 1992 and ending on the loth business day thereafter, the average Closing Price of the Company's Common Stock per share (the "FY92 Average Close") is less than the fraction the numerator of which is $14.00 and the denominator of which is the then effective Conversion Rate, (a) the Conversion Rate in effect immediately after any adjustment required by this Section 5(m)(ii)(A) shall equal the sum of the then effective Conversion Rate plus K (as -39- defined below), and (b) the Conversion Value in effect immediately after any adjustment required by this Section 6(m)(ii)(A) shall equal the fraction the numerator of which is the Initial Value and the denominator of which is the Conversion Rate in effect immediately after any adjustment required by this Section 5(m)(ii)(A); For the purposes of this Section 5(m)(ii)(A), K shall prior to any adjustment pursuant to this sentence equal .25 and shall be adjusted simultaneously with the happening of an Extraordinary Common Stock Event, by multiplying the then effective K by a fraction, the numerator of which shall be the number of shares of Common Stock of all classes outstanding immediately after such Extraordinary Common Stock Event and the denominator of which shall be the number of shares of Common Stock of all classes outstanding immediately prior to such Extraordinary Common Stock Event, and the product so obtained shall thereafter be K. K, as so adjusted, shall be readjusted in the same manner upon the happening of any subsequent Extraordinary Common Stock Event or Events. (B) If the FY92 Average Close is (l) less than the fraction the numerator of which is $18.00 and the denominator of which is the then effective Conversion Rate and (2) greater than the fraction the numerator of which is $14.00 and the denominator of which is the then effective Conversion Rate, (a) the Conversion Rate in effect immediately after any adjustment required by this Section 5(m)(ii)(B) shall equal the sum of (1) the then effective Conversion Rate, plus (2) the product of (I) the then effective Conversion Rate divided by 16, and (II) the difference of (i) 18 divided by the then effective Conversion Rate less (ii) the FY92 Average Close and (b) the Conversion Value in effect immediately after any adjustment required by this Section 5(m)(ii)(B) shall equal the fraction the numerator of which is the Initial Value and the denominator of which is the Conversion Rate in effect immediately after any adjustment required by this Section 5(m)(ii)(B); (iii) If, for the period commencing on the first business day following the public announcement or disclosure of the Company's earnings with respect to the Company's fiscal year ending March 31, 1993 and ending on the 20th business day thereafter, the average Closing Price of the Company's Common Stock per share (the "FY93 Average Close") is less than Conversion Value in effect as of the date of issuance of the Series B Preferred Stock (adjusted for any Extraordinary Common Stock Events), and the Series B Effective -40- Price (as defined below) is greater than the FY93 Average Close, (a) the Conversion Rate then in effect shall be adjusted such that the Conversion Rate in effect immediately after any adjustment required by this Section 5(m)(iii) shall equal the fraction the numerator of which is the product of the (1) Conversion Value in effect as of the date of issuance of the Series B Preferred Stock, (adjusted for any Extraordinary Common Stock Events) and (2) 2, and the denominator of which is the sum of (1) the Series B Effective Price and (2) the lesser of (x) the Series B Effective Price and (y) the product of the FY93 Average Close times 1.1 and (b) the Conversion Value in effect immediately after any adjustment required by this Section 5(m)(iii) shall equal the fraction the numerator of which is the Initial Value and the denominator of which is the Conversion Rate in effect immediately after any adjustment required by this Section 5(m)(iii). For the purposes of this Section 5(m)(iii), Series B Effective Price shall equal the fraction the numerator of which is the Conversion Value in effect as of the date of issuance of the Series B Preferred Stock, (adjusted for any Extraordinary Common Stock Events), and the denominator of which is the Conversion Rate then in effect immediately prior to any adjustment required by this Section 5(m)(iii). For the purposes of this Section 5(m), the Closing Price for any day shall mean, for each day while such stock is listed on a national securities exchange or quoted on the National Association Securities Dealers National Market System, the last reported sale price or, in case there is no such reported sale on any day, the mean between the reported closing bid and asked prices on such day. If the Common Stock is not so listed or quoted, the Closing Price for each day shall mean the mean between the closing bid and asked prices in the over-the-counter market in which the Common Stock is traded. (n) Whenever the Company shall issue shares of Common Stock upon conversion of shares of Series B Preferred Stock as contemplated by this Section 5, the Company shall issue together with each such share of Common Stock, one right to purchase one one-hundredth of a share of Series A Preferred Stock of the Company (or other securities in lieu thereof) pursuant to the Rights Agreement dated as of July 15, 1988 (the "Rights Agreement"), between the Company and The First National Bank of Boston as Rights Agent, as such Rights Agreement may from time to time be amended, or any rights issued to holders of Common Stock of the Company in addition thereto or in replacement therefor, whether or not such rights shall be exercisable at such time, but only if such rights are issued and outstanding and held by other holders of Common Stock of the Company at such time and have not expired. -41- Section 6. Redemption at the Option of the Company. (a) Subject to the rights of each holder of Series B Preferred Stock to exercise his conversion rights as set forth in Section 5 and elsewhere in this Vote, the Company shall have the option at any time and from time to time to redeem not less than 20% of the then outstanding shares of the Series B Preferred Stock, out of funds legally available therefor, pro rata from each holder of Series B Preferred Stock at a purchase price per share of Series B Preferred Stock of $21.00 (adjusted appropriately for stock splits, stock dividends and the like with respect to the Series B Preferred Stock) (the "Redemption Price"). (b) Unless otherwise required by law, notice of redemption will be sent to the holders of Series B Preferred Stock at the address shown on the books of the Company or the transfer agent for the Series B Preferred Stock by first-class mail, postage prepaid, mailed not less than 20 nor more than 60 days prior to the redemption date. Each such notice shall state: (i) the redemption date; (ii) the redemption price; (iii) the place or places where certificates for such shares are to be surrendered for payment of the redemption price; and (iv) the conversion rights of the shares to be redeemed, the period within which conversion rights may be exercised, and the Conversion Rate and number of shares of Common Stock issuable upon conversion of a share of Series B Preferred Stock on the date such notice is sent. From and after the redemption date, so long as the holders of Series B Preferred Stock shall have received the amounts set forth in Section 6(a) or provision for the payment of such amounts has been made in a manner reasonably satisfactory to such holders, all rights of the holders of the Series B Preferred Stock with respect to those shares of Series B Preferred Stock designated for redemption in the notice (except the right to receive the Redemption Price, if not previously paid, upon surrender of the certificates for such shares so called for redemption and not previously converted (properly endorsed or assigned for transfer, if the Board of Directors of the Company shall so require and the notice shall so state)), shall cease and such shares shall not thereafter be transferred on the books of the Company or be deemed to be outstanding for any purpose whatsoever. (c) Notwithstanding anything contained in this Section 6 to the contrary, each holder of Series B Preferred Stock shall up to and including the day immediately preceding the date fixed for redemption in the redemption notice described in Section 6(b) above, have the right to convert all or any part of the shares of Series B Preferred Stock held by such holder into Common Stock in accordance with Section 5 hereof. Section 7. No Reissuance of Preferred Stock. No share or shares of the Series B Preferred Stock acquired by the Company by reason of redemption, purchase, conversion or otherwise shall be reissued, and all such shares shall be canceled, retired, and eliminated from the shares which the Company shall be authorized to issue. The Company may from time to time take such appropriate corporate action as may be necessary to reduce the authorized number of shares of the Series B Preferred Stock accordingly. Section 8. Notices of Record Date. In the event (i) the company establishes a record date -42- to determine the holders of any class of securities who are entitled to receive any dividend or other distribution, or (ii) there occurs any capital reorganization of the Company, any reclassification or recapitalization of the capital stock of the Company, any merger or consolidation of the Company, and any transfer of all or substantially all of the assets of the Company to any other corporation, or any other entity or person, or any voluntary or involuntary dissolution, liquidation or winding up of the Company, the Company shall mail to each holder of Series B Preferred Stock at least 20 days prior to the record date specified therein, a notice specifying (a) the date of such record date for the purpose of such dividend or distribution and a description of such dividend or distribution, (b) the date on which any such reorganization, reclassification, transfer, consolidation, merger, dissolution, liquidation or winding up is expected to become effective, and (c) the time, if any, that is to be fixed, as to when the holders of record of Common Stock (or other securities) shall be entitled to exchange their shares of Common Stock (or other securities) for securities or other property deliverable upon such reorganization, reclassification, transfer, consolidation, merger, dissolution, liquidation or winding up. Section 9. Other Rights. Except as otherwise provided in this Vote, shares of Series B Preferred Stock and shares of Common Stock shall be identical in all respects (each share of Series B Preferred Stock having equivalent rights to the number of shares of Common Stock into which it is then convertible), shall have the same powers, preferences and rights, without preference of any such class or share over any other such class or share, and shall be treated as a single class of stock for all purposes. Section 10. Ranking. The Series B Preferred Stock shall rank senior to the Common Stock and to the Series A Preferred Stock as to the distribution of assets on liquidation, dissolution and winding up of the Company. Section 11. Miscellaneous. (a) All notices referred to herein shall be in writing, and all notices hereunder shall be deemed to have been given upon the earlier of delivery thereof by hand delivery, by courier, or by standard form of telecommunication or three (3) business days after the mailing thereof if sent registered mail (unless first-class mail shall be specifically permitted for such notice under the terms hereof) with postage prepaid, addressed: (i) if to the Company, to its office at Ten Canal Park, Cambridge, Massachusetts 02141 (Attention: Clerk) and to the transfer agent, if any, for the Series B Preferred Stock or other agent of the Company designated as permitted hereby or (ii) if to any holder of the Series B Preferred Stock or Common Stock, as the case may be, to such holder at the address of t such holder as listed in the stock record books of the Company (which may include the records of any transfer agent for the Series B Preferred Stock or Common Stock, as the case may be) or (iii) to such other address as the Company or any such holder, as the case may be, shall have designated by notice similarly given. -43- (b) The term "Common Stock" as used in this Vote means the Company's Common Stock, $.0l par value, as the same exists at the date of filing of a Certificate of vote of Directors Establishing a Series of a Class of Stock relating to Series B Preferred Stock or any other class of stock resulting from successive changes or reclassifications of such Common Stock consisting solely of changes in par value, or from par value to no par value, or from no par value to par value. In the event that, at any time as a result of an adjustment made pursuant to Section 5 hereof, the holder of any shares of the Series B Preferred Stock upon thereafter surrendering such shares for conversion shall become entitled to receive any shares or other securities of the Company other than shares of Common Stock, the Conversion Rate in respect of such other shares or securities so receivable upon conversion of shares of Series B Preferred Stock shall thereafter be adjusted, and shall be subject to further adjustment from time to time, in a manner and on terms as nearly equivalent as practicable to the provisions with respect to Common Stock contained in Section 5 hereof, and the remaining provisions of this Vote with respect to the Common Stock shall apply on like or similar terms to any such other shares or securities. (c) The Company shall pay any and fall stock transfer and documentary stamp taxes that may be payable in respect of any issuance or delivery of shares of Series B Preferred Stock or shares of Common Stock or other securities issued on account of Series B Preferred Stock pursuant hereto or certificates representing such shares or securities. The Company shall not, however, be required to pay any such tax which may be payable in respect of any transfer involved in the issuance or delivery of shares of Series B Preferred Stock or Common Stock or other securities in a name other than that in which the shares of Series B Preferred Stock with respect to which such shares or other securities are issued or delivered were registered, or in respect of any payment to any person with respect to any such shares or securities other than a payment to the registered holder thereof, and shall not be required to make any such issuance delivery or payment unless and until the person otherwise entitled to such issuance, delivery or payment has paid to the Company the amount of any such tax or has established, to the satisfaction of the Company, that such tax has been paid or is not payable. (d) In the event that a holder of shares of Series B Preferred Stock shall not by written notice designate the name in which shares of Common Stock to be issued upon conversion of such shares should be registered or to whom payment upon redemption of shares of Series B Preferred or the address to which the certificate or representing such shares, or such payment, Company shall be entitled to register such payment, in the name of the holder of Preferred Stock as shown on the records of Stock should be made certificates should be sent, the shares, and make such Series B the Company and to send the certificate or certificates representing such shares, or such payment, to the address of such holder listed in the stock record books of the Company (which may include the records of any transfer agent for the Series B Preferred Stock or Common Stock, as the case may be). (e) The Company may appoint, and from time to time discharge and change, a transfer agent of the Series B Preferred Stock. Upon any such appointment or discharge of a -44- transfer agent, the Company shall send notice thereof by hand delivery, by courier, by standard form of telecommunication or by first class mail (postage prepaid), to each holder of record of Series B Preferred Stock. (f) Series B Preferred Stock may be issued, converted and redeemed in fractions of a share which shall entitle the holder, in proportion to such holder's fractional shares, to exercise voting rights, receive dividends, participate in distributions, exercise conversion rights and to have the benefit of all other rights of holders of Series B Preferred Stock. Fractions of a share of Series B Preferred Stock so redeemed shall be redeemed at the appropriate percentage of the per share price otherwise determined in accordance with the terms hereof. IN WITNESS WHEREOF AND UNDER THE PENALTIES OF PERJURY, we have hereto signed. our names this 28th day of September in the year 1989 -45- ________________________________________________, President/Vice President ________________________________________________, Clerk/Assistant Clerk -46- THE COMMONWEALTH OF MASSACHUSETTS Certificate of Vote of Directors Establishing A Series of a Class of Stock (General Laws, Chapter 156B, Section 26) I hereby approve the within certificate and, the filing fee in the amount of $ having been paid, said certificate is hereby filed this day of September, 1989. MICHAEL JOSEPH CONNOLLY Secretary of State TO BE FILLED IN BY CORPORATION PHOTO COPY OF CERTIFICATE TO BE SENT TO: Christopher P. Holsing, Esq. ---------------------------------- Hale and Dorr ---------------------------------- 60 State Street ---------------------------------- Boston, MA 02109 ---------------------------------- Telephone: (617)742-9100 Ext. 2514 ----------------------- -47- THE COMMONWEALTH OF MASSACHUSETTS MICHAEL JOSEPH CONNOLLY Secretary of State Federal Identification ONE ASHBURTON PLACE, BOSTON, MA 02108 No. 04-2729042 ARTICLES OF AMENDMENT General Laws, Chapter 156B, Section 72 We, Mark K. Ruport ,President, and John K. Hyvnar ,Clerk of Interleaf, Inc. (Name of Corporation) located at Prospect Place, 9 Hillside Avenue, Waltham, MA 02154 do hereby certify that these ARTICLES OF AMENDMENT affecting Articles Numbered: 3 of the Articles of Organization were duly adopted at a meeting held on August 5, 1993, by vote of: 9,401,786 shares of Common Stock out of 13,254,902 shares outstanding, 1,928,572 shares of Senior Series B Convertible out of 13, 1,928,572 shares outstanding, and _________ shares of Preferred Stock out of shares outstanding, CROSS OUT INAPPLICABLE CLAUSE voting together as a single class pursuant to Section 8(b) of M.G.L. c.156B, being at least a majority of such class outstanding and entitled to vote thereon. Each share of Common Stock carries 1 vote, and each share of Senior Series B Convertible Preferred Stock carries 1.34375 votes. Accordingly, these Articles of Amendment were approved by vote of 11,993,304 votes, out of a possible total of 15,846,420 votes. 1 For amendments adopted pursuant to Chapter 156B, Section 70. 2 For amendments adopted pursuant to Chapter 156B, Section 71. -48- Note: If the space provided under any Amendment or item on this form is insufficient, additions shall be set forth on separate 8 1/2 x 11 sheets of paper leaving a left hand margin of at least 1 inch for binding. Additions to more than one Amendment may be continued on a single sheet so long as each article requiring each such addition is clearly indicated. -49- To CHANGE the number of shares and the par value (if any) of any type, class or series of stock which the corporation is authorized to issue, fill in the following: The total presently authorized is: WITHOUT PAR VALUE STOCKS - ------------------------------------ TYPE Number of Shares - ------------------------------------ Common - ------------------------------------ Preferred - ------------------------------------ WITH PAR VALUE STOCKS - ------------------------------------------- TYPE Number of Shares Par Value - ------------------------------------------- Common 20,000,000 $.01 - ------------------------------------------- Preferred: 50,000,000 $.10 Series A Junior Participating 200,000 $.10 - ------------------------------------------- Series B Senior 2,142,857 $.10 Convertible - ------------------------------------------- Change the total authorized to: WITHOUT PAR VALUE STOCKS - ------------------------------------ TYPE Number of Shares - ------------------------------------ Common - ------------------------------------ Preferred - ------------------------------------ WITH PAR VALUE STOCKS - ------------------------------------------- TYPE Number of Shares Par Value - ------------------------------------------- Common 30,000,000 $.01 - ------------------------------------------- Preferred: 5,000,000 $.10 Series A Junior $.10 Participating 200,000 - ------------------------------------------- Series B 2,142,857 $.10 Senior Convertible - ------------------------------------------- -50- The foregoing amendment will become effective when these articles of amendment are filed in accordance with Chapter 156B, Section 6 of The General Laws unless these articles specify, in accordance with the vote adopting the amendment, a later effective date not more than thirty days after such filing, in which event the amendment will become effective on such later date. EFFECTIVE DATE:________________________________ IN WITNESS WHEREOF AND UNDER THE PENALTIES OF PERJURY, we have hereunto signed our names this day of in the year 1993. _______________________________________President/Vice President _______________________________________Clerk/Assistant Clerk -51- THE COMMONWEALTH OF MASSACHUSETTS ARTICLES OF AMENDMENT GENERAL LAWS, CHAPTER 156B, SECTION 72 I hereby approve the within articles of amendment and, the filing fee in the amount of $ having been paid, said articles are deemed to have been filed with me this day of , 1993. MICHAEL J. CONNOLLY Secretary of State TO BE FILLED IN BY CORPORATION PHOTOCOPY OF ARTICLES OF AMENDMENT TO BE SENT TO: John K. Hyvnar, General Counsel ------------------------------- Interleaf, Inc. ------------------------------- Prospect Place, 9 Hillside Avenue ------------------------------- Waltham, MA 02154 ------------------------------- Telephone: (617)290-0710 ------------------------------- -52- FEDERAL IDENTIFICATION NO. 04-2729042 THE COMMONWEALTH OF MASSACHUSETTS William Francis Galvin Secretary of the Commonwealth One Ashburton Place, Boston, Massachusetts 02108-1512 ARTICLES OF AMENDMENT (General Laws, Chapter 156B, Section 72) We, Jaime W. Ellertson, *President / [strikethrough]*Vice President [end strikethrough] and Robert R. Langer, *Clerk /[strikethrough]*Assistant Clerk[end strikethrough] of Interleaf, Inc. , ----------------------------------------------------------------------------- (Exact name of corporation) located at 62 Fourth Avenue, Waltham, MA 02154 , ------------------------------------------------------------------- (Street Address of corporation in Massachusetts) certify that these Articles of Amendment affecting articles numbered: 3 - -------------------------------------------------------------------------------- (Number those articles 1, 2, 3, 4, 5 and/or 6 being amended) of the Articles of Organization were duly adopted at a meeting held on Aug. 15 , 1997 by vote of: 14383,044 shares of Common Stock out of 17,709,719 shares outstanding, - ------------- ---------------------------------- -------------------- (type, class & series, if any) Series B Convertible 861,911 shares of Preferred Stock out of 861,911 shares outstanding, and - ------------- ---------------------------------- -------------------- (type, class & series, if any) Series C Convertible 0 shares of Preferred Stock out of 1,008,484 shares outstanding. - ------------- ---------------------------------- -------------------- (type, class & series, if any)
[strikethrough](1)**being at least a majority of each type, class or series outstanding or entitled to vote thereon. / or (2)** being at least two thirds of each type, class or series outstanding or entitled to vote thereon and of each type, series of stock whose rights are adversely affected thereby:[end strikethrough] voting together as a single class pursuant to Section 8(b) of M.G.L. c.156B, being at least a majority of such class outstanding and entitled to vote thereon. Each share of Common Stock carries 1 vote, each share of Senior Series B Convertible Preferred Stock carries 1.34375 votes, and each share of Series C Convertible Preferred Stock carries 2 votes. Accordingly, these Articles of Amendment were approved by vote of 15,541,237 votes, out of a possible total of 20,884,880 votes. * Delete the inapplicable words. ** Delete the inapplicable clause. (1) For amendments adopted pursuant to Chapter 156B, Section 70. (2) For amendments adopted pursuant to Chapter 156B, Section 71. Note: If the space provided under any Amendment or item on this form is insufficient, additions shall be set forth on one side only of separate 8 1/2 x 11 sheets of paper leaving a left hand margin of at least 1 inch. Additions to more than one article may be continued on a single sheet so long as each article requiring each such addition is clearly indicated. -53- To change the number of shares and the par value (if any) of any type, class or series of stock which the corporation is authorized to issue, fill in the following: The total presently authorized is: - -------------------------------------------------------------------------------- WITHOUT PAR VALUE STOCKS WITH PAR VALUE STOCKS - -------------------------------------------------------------------------------- TYPE NUMBER OF SHARES TYPE NUMBER OF SHARES PAR VALUE - -------------------------------------------------------------------------------- Common: Common: 30,000,000 $ .01 - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- Preferred: Preferred: 5,000,000 (1) $ .10 - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- Change the total authorized to: - -------------------------------------------------------------------------------- WITHOUT PAR VALUE STOCKS WITH PAR VALUE STOCKS - -------------------------------------------------------------------------------- TYPE NUMBER OF SHARES NUMBER OF SHARES PAR VALUE - -------------------------------------------------------------------------------- Common: 50,000,000 $ .01 - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- Preferred: 5,000,000 (1) $ .10 - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- - ---------- (1) Of the 5,000,000 authorized shares of Preferred Stock, 200,000 shares have been designated as Series A Junior Participating Preferred Stock, 2,142,857 shares have been designated as Series B Convertible Preferred Stock, and 1,200,000 shares have been designated as Series C Convertible Preferred Stock -54- The foregoing amendment will become effective when these articles of amendment are filed in accordance with Chapter 156B, Section 6 of The General Laws unless these articles specify, in accordance with the vote adopting the amendment, a later effective date not more than thirty days after such filing, in which event the amendment will become effective on such later date. Later Effective Date:________________________________ SIGNED UNDER THE PENALTIES OF PERJURY, this 11th day of September, 1997. /s/ Jaime W. Ellertson, *President/ [strikethrough]*Vice President[end strikethrough] /s/ Robert Langer, *Clerk/[strikethrough]*Assistant Clerk[end strikethrough] *Delete the inapplicable words. -55- THE COMMONWEALTH OF MASSACHUSETTS ARTICLES OF AMENDMENT (General Laws, Chapter 156B, Section 72) ================================================================================ I hereby approve the within articles of amendment and, the filing fee in the amount of $ 20,000.00 having been paid, said articles are deemed to have been filed with me this 15th day of September, 1997. Effective date:______________________________________________ WILLIAM FRANCIS GALVIN Secretary of the Commonwealth TO BE FILLED IN BY CORPORATION Photocopy of document to be sent to: John K. Hyvnar, General Counsel ------------------------------- Interleaf, Inc. 62 Fourth Avenue ------------------------------- Waltham, MA 02154 ------------------------------- -56- FEDERAL IDENTIFICATION NO. 04-2729042 THE COMMONWEALTH OF MASSACHUSETTS William Francis Galvin Secretary of the Commonwealth One Ashburton Place, Boston, Massachusetts 02108-1512 CERTIFICATE OF VOTE OF DIRECTORS ESTABLISHING A SERIES OR CLASS OF STOCK (General Laws, Chapter 156B, Section 26) We, Jaime W. Ellertson, *President/ [strikethrough]*Vice President[end strikethrough] and John K. Huvnar [strikethrough]*Clerk/[end strikethrough]*Assistant Clerk of Interleaf, Inc. , ----------------------------------------------------------------------------- (Exact name of corporation) located at 62 Fourth Avenue, Waltham, MA 02154 , ------------------------------------------------------------------- (Street Address of corporation in Massachusetts) do hereby certify that a meeting of the directors of the corporation held on September 30, 1997, the following vote establishing and designating a class or series of stock and determining the rltive rights and preferences thereof was duly adopted: That pursuant to authority conferred upon the Board of Directors of the Corporation by the provisions of the Corporation's Articles of Organization, as amended, the proper officers of the Corporation are authorized to file with the Secretary of State of The Commonwealth of Massachusetts a Certificate of Vote of Directors Establishing a Series of a Class of Stock ("Certificate of Vote of Directors"), and that of the 3,131,869 authorized and unissued share of the Corporation's preferred stock, $.10 par value (`Preferred Stock"), 11,000 shares are hereby designed at 6% Convertible Preferred Stock, $.10 par value ("6% Convertible Preferred Stock"); the relative rights, preferences, powers, privileges and restrictions, qualifications and limitations granted to or imposed upon such series of shares to be substantially as set forth in Schedule I attached hereto. 57 SCHEDULE I RESOLUTION ESTABLISHING PREFERENCES of 6% CONVERTIBLE PREFERRED STOCK RESOLVED that there shall be a series of shares of the Preferred Stock of the Corporation designated "6% Convertible Preferred Stock"; that the number of authorized shares of such series shall be 11,000 and that the rights and preferences of such series (the "6% Preferred") and the limitations or restrictions thereon, shall be as follows: 1. Dividends. (a) The holders of the 6% Preferred shall be entitled to receive out of any assets legally available therefor cumulative dividends at the rate of $60.00 per share per annum, payable annually on September 30 of each year, when and as declared by the Board of Directors, in preference and priority to any payment of any dividend on the Common Stock or any other class or series of stock of the Corporation ranking junior to the 6% Preferred and ranking pari passu with the Class C Preferred Stock of the Corporation. Such dividends shall accrue on any given share from the day of original issuance of such share and shall accrue from day to day whether or not earned or declared. If at any time dividends on the outstanding 6% Preferred at the rate set forth above shall not have been paid or declared and set apart for payment with respect to all preceding periods, the amount of the deficiency shall be fully paid or declared and set apart for payment, but without interest, before any distribution, whether by way of dividend or otherwise, shall be declared or paid upon or set apart for the shares of any other class or series of stock of the Corporation except a class or series which is entitled to priority over the 6% Preferred. (b) Dividends shall be paid in shares of 6% Preferred valued at $1,000 per share. Dividends not theretofore paid shall be paid upon conversion of any share of the 6% Preferred and shall be simultaneously converted into Common Stock together with the share on which such dividends have accrued. (c) At its option, the Corporation may elect to pay accumulated dividends in cash. The Corporation must give notice of such election in the manner provided in Section 5 hereof at least ten (10) calendar days prior to both the date of payment and the date Notice of Conversion is given by a holder. The Corporation may choose the cash election any number of times and each such election may be effective for any length of time established by the Corporation and stated in its notice of the election. 2. Liquidation Preference. (a) The liquidation rights of the 6% Preferred shall rank pari passu with the Class C Preferred Stock of the Corporation. In the event of any liquidation, dissolution or winding up of the Corporation, either voluntary or involuntary, the holders of the 6% Preferred shall be entitled to receive, prior and in preference to any distribution of any assets of the Corporation to the holders of the Common Stock or any other class or series of shares except any class or series which is entitled to priority over the 6% Preferred and except for ratable distribution to the Class C Preferred Stock, the amount of $1,000 per share plus any accrued but unpaid dividends plus any amounts accrued but unpaid under Section 1.4(b)(iv) of the Preferred Stock Investment Agreement under which shares of the 6% Preferred were originally issued (the "Liquidation Preference"). (b) Subject to the last sentence of this Section, a consolidation or merger of the Corporation with or into any other corporation or corporations, or a sale of all or substantially all of the assets of the Corporation, shall, at the option of the holders of the 6% Preferred, be deemed a liquidation, dissolution or winding up within the meaning of this Section 2 if the shares of stock of the Corporation (along with all derivative securities) outstanding immediately prior to such transaction represent immediately after such transaction less than a majority of the voting power of the surviving corporation (or of the acquirer of the Corporation's assets in the case of a sale of assets). Such option may be exercised by the vote or written consent of holders of a majority of the 6% Preferred at any time within thirty calendar days after written notice of the essential terms of such transaction shall have been given to the holders of the 6% Preferred as provided in Section 5 hereof. Such notice shall be given by the Corporation immediately following determination of such essential terms. If such option is exercised, the holders of the 6% Preferred shall be entitled to receive, in cash, immediately upon the occurrence of such 58 transaction, an amount per share equal to the Liquidation Preference divided by the difference between 100% and the Applicable Percentage determined pursuant to Section 4 hereof. This Section shall not apply to a business combination in which the Common Stock of the Corporation is converted solely into or exchanged solely for voting common stock of the corporation surviving such business combination, if (i) such common stock of the surviving corporation is listed and traded on the NASDAQ National Market, the American Stock Exchange or the New York Stock Exchange, and (ii) the Board of Directors of the Corporation determines in good faith that the conversion rights and other rights and preferences of the 6% Preferred are preserved and not rendered of less value by the terms of such business combination. 3. Mandatory Conversion. On the fifth anniversary of the date of issuance, all then outstanding shares of 6% Preferred shall be automatically converted into Common Stock at the Conversion Price on such anniversary date and otherwise pursuant to the applicable provisions set forth in Section 4 hereof. 4. Conversion. The holders of the 6% Preferred shall have optional conversion rights as follows: (a) Accrual of Conversion Rights. The Conversion Period shall commence 90 days after the date of issuance, and shall continue thereafter for the life of the issue. Each holder of record of 6% Preferred shares on the date of commencement of the Conversion Period (an "Original Holder") shall be entitled to convert in any calendar month the following percentage of the 6% Preferred shares held by such holder on the date of commencement of the Conversion Period (the "Conversion Restriction"). The percentage for each calendar month will be determined based on the highest of the daily low trading prices of the Common Stock during such month, as follows: Highest of daily low trading Percentage becoming prices during month convertible for such month $2.50 or less 10.0% $2.51 to $3.50 10.0% $3.51 to $4.00 12.5% $4.01 to $5.50 15.0% $5.51 to $6.00 17.5% $6.01 to $7.50 20.0% $7.51 to $8.50 22.5% $8.51 or more 25.0% The number of shares which may be converted in any calendar month shall include on a cumulative basis the number of shares which might have been but were not converted during earlier calendar months, except that in any month in which the highest of the daily low trading prices is $2.50 or less, the amount converted shall not exceed 10%. In the case of transfers of shares by an Original Holder the Corporation shall make such notations on its stock ownership records and on the certificates for shares issued upon transfer so as to reflect the portion (if any) of the transferred shares which have become convertible pursuant to this provision, or the Corporation may at its election issue certificates representing the 6% Preferred shares in such form, or with such annotations, as to reflect the time or times at which the shares represented by such certificates will become convertible. (b) Removal of Limitations. The limitations set forth in Section 4(a) hereof, with respect to the percentage of 6% Preferred shares which may be converted during certain time periods, shall terminate and all the 6% Preferred shares shall thereafter be fully convertible if any of the following events or conditions shall occur or exist: (i) an event described in Section 2(b) (subject to the exclusion in the last sentence of such Section) shall occur, whether or not the holders of 6% Preferred deem such event to be a liquidation; (ii) proceedings for relief under any bankruptcy or similar law for the relief of debtors are instituted by or against the Corporation or any of its significant subsidiaries and, if instituted against the Corporation or such subsidiary, are consented to or not dismissed within 30 days; (iii) the independent auditors of the Corporation shall fail or be unwilling to express within 90 days after the end of the Corporation's fiscal year a customary opinion on the financial statements of the Corporation, or shall express such opinion subject to a "going concern" qualification; (iv) the Common Stock of the Corporation shall cease to be listed on either the NASDAQ Small-Cap Market, the NASDAQ National Market, or a national securities exchange; or (v) there shall be a material breach by the Corporation of any of its obligations hereunder or under the Preferred Stock Investment Agreements pursuant to which the 6% Preferred was originally issued which has a material adverse effect on the holders of 6% Preferred. 59 (c) Right to Convert. At and after the time it has become convertible, each share of 6% Preferred shall be convertible, at the option of the holder thereof, into such number of fully paid and nonassessable shares of Common Stock as is determined by dividing (i) the liquidation preference of the 6% Preferred share determined pursuant to Section 2(a) hereof on the date the notice of conversion is given, by (ii) the Conversion Price determined as hereinafter provided in effect on said date, provided however, that a share of 6% Preferred shall not be converted into Common Stock if following such conversion the holder thereof together with affiliates of such holder would be the beneficial owners (as defined in Rule 13d-3 under the Securities Exchange Act of 1934) of 10% or more of the Common Stock of the Corporation. (d) Mechanics of Conversion. To convert shares of 6% Preferred into shares of Common Stock, the holder shall give written notice to the Corporation (which notice may be given by facsimile transmission) that such holder elects to convert the same and shall state therein the number of shares to be converted and the name or names in which such holder wishes the certificate or certificates for shares of Common Stock to be issued. Promptly thereafter the holder shall surrender the certificate or certificates representing the shares to be converted, duly endorsed, at the office of the Corporation or of any transfer agent for such shares, or at such other place designated by the Corporation. The Corporation shall, immediately upon receipt of such notice, issue and deliver to or upon the order of such holder, against delivery of the certificates representing the shares which have been converted, a certificate or certificates for the number of shares of Common Stock to which such holder shall be entitled, and a certificate representing the shares of 6% Preferred not so converted, if any. The Corporation shall effect such issuance immediately and shall transmit the certificates by messenger or overnight delivery service to reach the address designated by such holder within three trading days after the receipt of such notice. Notice of conversion may be given by a holder at any time of day up to 5:00 pm Los Angeles time, and such conversion shall be deemed to have been made immediately prior to the close of business on the date such notice of conversion is given (the "Conversion Date"). The person or persons entitled to receive the shares of Common Stock issuable upon such conversion shall be treated for all purposes as the record holder or holders of such shares of Common Stock at the close of business on the Conversion Date. (e) Determination of Conversion Price. (i) On any Conversion Date prior to the first day of the thirteenth calendar month after the Closing, the Conversion Price shall not be less than $1.50, and until the end of the seventh month following the Closing the Conversion Price shall be $5.50. Subject to the foregoing sentence and to the provisions of subsection (e)(iii) and subsection (f) of this Section, on any Conversion Date, the Conversion Price shall be the average of the three (3) lowest daily trading prices of the Common Stock for the 22 consecutive trading days ending with the trading day prior to the Conversion Date, reduced by the Applicable Percentage (as defined below) in effect on the Conversion Date. (ii) The Applicable Percentage shall be as follows: 9.8% starting on the first day of the eighth (8th) calendar month after Closing. 11.1% starting on the first day of the ninth (9th) calendar month after Closing. 12.4% starting on the first day of the tenth (10th) calendar month after Closing. 13.7% starting on the first day of the eleventh (11th) calendar month after Closing. 15.0% starting on the first day of the twelfth (12th) calendar month after Closing and thereafter. (iii) From and after the first day of the sixteenth (16th) calendar month after Closing, the Maximum Conversion Price ("Conversion Cap") shall be 85% of the average low daily trading price of the Common Stock during the period beginning on the first day of the twelfth (12th) calendar month following Closing and ending on the last day of the fifteenth (15th) calendar month following Closing. Notwithstanding the prior sentence, in no event shall the Conversion Cap be less than the greater of: i) two dollars and fifty cents ($2.50), or ii) the average daily closing price of the Common Stock for the five (5) trading days immediately prior to the Closing. (iv) The terms "low trading price" and "last sale price" of the Common Stock on any day shall mean, respectively, (A) the lowest reported sale price and the last reported sale price of the Common Stock on the principal stock exchange on which the Common Stock is listed, or (B) if the Common Stock is not listed on a stock exchange, the lowest reported sale price and the last reported sale price of the Common Stock on the principal automated securities price quotation system on which sale prices of the Common Stock are reported, or (C) if the Common Stock is not listed on a stock exchange and sale prices of the Common Stock are not reported on an automated quotation system, the lowest bid price and the last bid price for the Common Stock as reported by National Quotation Bureau Incorporated. If none of the foregoing provisions are applicable, the "low trading price" and "last sale price" of the Common Stock on a day will be the fair market value of the Common Stock on that day as determined by a member firm of the New 60 York Stock Exchange, Inc., selected by the Board of Directors of the Corporation. The term "trading day" means (x) if the Common Stock is listed on at least one stock exchange, a day on which there is trading on the principal stock exchange on which the Common Stock is listed, (y) if the Common Stock is not listed on a stock exchange but sale prices of the Common Stock are reported on an automated quotation system, a day on which trading is reported on the principal automated quotation system on which sales of the Common Stock are reported, or (z) if the foregoing provisions are inapplicable, a day on which quotations are reported by National Quotation Bureau Incorporated. The "closing price" of the Common Stock on any day means the "last sale price" as defined above. (v) In the event that during any period of consecutive trading days provided for above, the Corporation shall declare or pay any dividend on the Common Stock payable in Common Stock or in rights to acquire Common Stock, or shall effect a stock split or reverse stock split, or a combination, consolidation or reclassification of the Common Stock, then the Conversion Price and (if such event occurs during or after the 12th month after the date of issuance) the Conversion Cap shall be proportionately decreased or increased, as appropriate, to give effect to such event, and like adjustment shall be made in any price per share specified in dollars herein. (f) Green Floor. If at any time the Conversion Price falls below three dollars ($3.00) per share (the "Green Floor Price"), the Corporation may at its option, exercised by written notice ("Cash Conversion Notice") given to the holders of the 6% Preferred five days prior to the effective date specified in such Notice (the "Effective Date") honor any conversion request otherwise properly made, if at a Conversion Price lower than the Green Floor Price, by a cash payment in lieu of the issuance of Common Stock in an amount equal to the proceeds which would otherwise have been received by the holder if conversion were in fact made into Common Stock and such Common Stock were sold at the high trade price on the trading day immediately preceding the date that the conversion notice is received (the "Cash Conversion Amount"). The Cash Conversion Notice may specify an expiration date of such Notice, or may specify a limitation on the aggregate number of dollars which the Corporation will pay in Cash Conversion Amounts. When such dollar limitation is reached the Corporation shall give immediate notice to the holders of 6% Preferred that the Cash Conversion Notice is no longer in effect. The Corporation may at any time reset the Green Floor Price to any price determined by the Corporation by giving 30 days prior notice to the holders of the 6% Preferred. If notice of conversion shall be given by a holder of 6% Preferred shares on a date that a Cash Conversion Notice is in effect, the Corporation shall within 48 hours following surrender of the share certificate as provided in Section 4(d) hereof make payment of the Cash Conversion Amount to such holder by wire transfer of immediately available funds in U.S. dollars pursuant to such wire transfer instructions as may have been given by such holder, or otherwise by mailing by certified mail a bank cashiers' or certified check for the Cash Conversion Amount to the record address of such holder. A Cash Conversion Notice shall cease to be effective if the Corporation fails to make payment of the Cash Conversion Amount to any holder entitled thereto in the manner and within the time specified in the foregoing sentence, time being of the essence. If a Cash Conversion Notice ceases to be effective pursuant to the foregoing sentence, it shall not thereafter be effective as to any holder and no Cash Conversion Notice may thereafter be given by the Corporation. The number of shares that a holder is entitled to convert, determined pursuant to subsections (a) and (b) of this Section 4, shall not be affected by the giving or effectiveness of a Cash Conversion Notice. Any Cash Conversion Notice shall be given as provided in Section 5 hereof. (g) Distributions. In the event the Corporation shall at any time or from time to time make or issue, or fix a record date for the determination of holders of Common Stock entitled to receive, a dividend or other distribution payable in securities of the Corporation or any of its subsidiaries or other property, other than cash dividends from earnings or dividends of additional shares of Common Stock, then in each such event provision shall be made so that the holders of 6% Preferred shall receive, upon the conversion thereof, the securities or other property which they would have received had they been the owners on the date of such event of the number of shares of Common Stock issuable to them upon conversion. (h) Certificates as to Adjustments. Upon the occurrence of any adjustment or readjustment of the Conversion Price or the Conversion Cap pursuant to Section 4(e)(v) or Section 4(m) hereof, or any adjustment of the cash per-share prices specified herein, the Corporation at its expense shall promptly compute such adjustment or readjustment in accordance with the terms hereof and prepare and furnish to each holder of 6% Preferred a certificate setting forth such adjustment or readjustment and showing in detail the facts upon which such adjustment or readjustment is based. The Corporation shall, upon the written request at any time of any holder of 6% Preferred, furnish or cause to be furnished to such holder a like certificate prepared by the Corporation setting forth (i) such adjustments and readjustments, and (ii) the number of other securities and the amount, if any, of other property which at the time would be received upon the conversion of 6% Preferred with respect to each share of Common Stock received upon such conversion. If any holder disputes the computation of such adjustment the Corporation shall cause independent public accountants selected by the Corporation to verify and, if necessary, correct such computation. (i) Notice of Record Date. In the event of any taking by the Corporation of a record of the holders of any class of securities for the purpose of determining the holders thereof who are entitled to receive any dividend (other than a cash dividend) or other 61 distribution, any security or right convertible into or entitling the holder thereof to receive additional shares of Common Stock, or any right to subscribe for, purchase or otherwise acquire any shares of stock of any class or any other securities or property, or to receive any other right, the Corporation shall give notice to each holder of 6% Preferred at least 10 days prior to such date specifying the date on which any such record is to be taken for the purpose of such dividend, distribution, security or right and the amount and character of such dividend, distribution, security or right. (j) Issue Taxes. The Corporation shall pay any and all issue and other taxes, excluding any income, franchise or similar taxes, that may be payable in respect of any issue or delivery of shares of Common Stock on conversion of shares of 6% Preferred pursuant hereto; provided, however, that the Corporation shall not be obligated to pay any transfer taxes resulting from any transfer requested by any holder in connection with any such conversion. (k) Reservation of Stock Issuable Upon Conversion. The Corporation shall at all times reserve and keep available out of its authorized but unissued shares of Common Stock, solely for the purpose of effecting the conversion of the shares of the 6% Preferred, such number of its shares of Common Stock as shall from time to time be sufficient to effect the conversion of all outstanding shares of the 6% Preferred, and if at any time the number of authorized but unissued shares of Common Stock shall not be sufficient to effect the conversion of all then outstanding shares of the 6% Preferred, the Corporation will take such corporate action as may, in the opinion of its counsel, be necessary to increase its authorized but unissued shares of Common Stock to such number of shares as shall be sufficient for such purpose, including, without limitation, engaging in best efforts to obtain the requisite shareholder approval as promptly as practicable. (l) Fractional Shares. No fractional shares shall be issued upon the conversion of any share or shares of 6% Preferred. All shares of Common Stock (including fractions thereof) issuable upon conversion of more than one share of 6% Preferred by a holder thereof shall be aggregated for purposes of determining whether the conversion would result in the issuance of any fractional share. If, after the aforementioned aggregation, the conversion would result in the issuance of a fraction of a share of Common Stock, the Corporation shall, in lieu of issuing any fractional share, pay the holder otherwise entitled to such fraction a sum in cash equal to the fair market value of such fraction on the date of conversion (as determined in good faith by the Board of Directors of the Corporation). (m) Reorganization or Merger. In case of any reorganization or any reclassification of the capital stock of the Corporation or any consolidation or merger of the Corporation with or into any other corporation or corporations or a sale of all or substantially all of the assets of the Corporation to any other person, and the holders of 6% Preferred do not elect to treat such transaction as a liquidation, dissolution or winding up as provided in Section 2, then, as part of such reorganization, consolidation, merger or sale, provision shall be made so that each share of 6% Preferred shall thereafter be convertible into the number of shares of stock or other securities or property (including cash) to which a holder of the number of shares of Common Stock deliverable upon conversion of such share of 6% Preferred would have been entitled upon the record date of (or date of, if no record date is fixed) such event and, in any case, appropriate adjustment (as determined by the Board of Directors) shall be made in the application of the provisions herein set forth with respect to the rights and interests thereafter of the holders of the 6% Preferred, to the end that the provisions set forth herein shall thereafter be applicable, as nearly as equivalent as is practicable, in relation to any shares of stock or the securities or property (including cash) thereafter deliverable upon the conversion of the shares of 6% Preferred. The Corporation shall have no obligation to obtain the prior consent of the holders of 6% Preferred, individually or as a class, except as expressly provided herein or as provided by applicable law. 5. Notices. Any notice to be given to the holders of the 6% Preferred shall be (i) mailed by first class mail postage prepaid to each holder of 6% Preferred at the address shown on the records of the Corporation for such holder, (ii) transmitted by telecopy or facsimile transmission to any holder which has supplied a telecopy or facsimile address to the Corporation, and (iii) unless receipted for by telecopy or facsimile on the date such notice is given, shall be transmitted by an overnight delivery service or courier service for delivery at the address shown on the records of the Corporation for such holder on the first business day following the date such notice is given, or if delivery in one business day to such address cannot be effected by such delivery service, then on the earliest day on which such delivery can be made. 6. Other Provisions. For all purposes of this Resolution, the term "date of issuance" or "closing" shall mean the day on which shares of the 6% Preferred are first issued by the Corporation, and the terms "trading price", "low trading price", "closing price", "last trade price", and "trading days" shall have the meanings given them in Section 4(e) hereof. Any provision herein which conflicts with or violates any applicable usury law shall be deemed modified to the extent necessary to avoid such conflict or violation. 62 7. Restrictions and Limitations. The Corporation shall not undertake the following actions without the consent of the holders of a majority of the 6% Preferred: (i) modify its Certificate of Incorporation or Bylaws so as to amend or change any of the rights, preferences, or privileges of the 6% Preferred, (ii) authorize or issue any other equity security senior to the 6% Preferred, or (iii) purchase or otherwise acquire for value any Common Stock or other equity security of the Corporation either junior or senior to or on a parity with the 6% Preferred while there exists any arrearage in the payment of cumulative dividends hereunder. 8. Voting Rights. Except as provided herein or as provided for by law, the 6% Preferred shall have no voting rights. 9. Attorneys' Fees. Any holder of 6% Preferred shall be entitled to recover from the Corporation the reasonable attorneys' fees and expenses incurred by such holder in connection with enforcement by such holder of any obligation of the Corporation hereunder, if such holder is the prevailing party in an action or proceeding to compel such enforcement. 10. Limitation on Number of Conversion Shares. The Corporation shall not be obligated to issue, in the aggregate, more than 3,150,000 shares of Common Stock as presently constituted (the "Nasdaq Cap") upon conversion of the 6% Preferred, if issuance of a larger number of shares would constitute a breach of the Rules or Designation Criteria of the NASDAQ Stock Market (the "NASDAQ Rules"). Subject to the obligation to effect certain redemptions pursuant to the last three sentences of this Section, if further issuances of shares of Common Stock upon conversion of the 6% Preferred would constitute a breach of the NASDAQ Rules (i.e., all of the shares permitted to be issued under the Nasdaq Cap shall have been so issued), then so long thereafter as such limitation shall continue to be applicable and any shares of 6% Preferred are submitted for conversion such shares shall receive in cash an amount equal to the Cash Conversion Amount determined as provided in Section 4(f) hereof, in lieu of the Common Stock which such shares would otherwise be entitled to receive upon conversion. Payment of the Cash Conversion Amount shall be made no later than as specified in Section 4(f) and shall bear daily interest thereafter at the rate of one-tenth of one percent per day until paid. The NASDAQ Cap shall be proportionately and equitably adjusted in the event of stock splits, stock dividends, reverse stock splits, reclassifications or other such events, in such manner as the Board of Directors of the Corporation shall reasonably determine. If (A) the Corporation is unable to obtain the requisite shareholder approval concerning the issuance of shares of Common Stock upon conversion of the 6% Preferred to satisfy the NASDAQ Rules prior to December 31, 1997, then (B) the Corporation shall immediately redeem, at a "Special Redemption Price" equal to 110% of the liquidation preference of such shares, the smallest number of Shares which is sufficient, in the Corporation's reasonable judgment, such that following such redemption, conversion of the remaining shares of 6% Preferred would not constitute a breach of the Corporation's obligations under the NASDAQ Rules. Any redemption effected pursuant to the preceding sentence shall require 15 days' notice and the Redemption Date shall be not more than 15 days after the date specified in Clause A of the preceding sentence. Such redemption shall be made pro-rata. If there shall be a default in payment of the Special Redemption Price, the amount so payable shall bear daily interest from and after the Redemption Date at the rate of one-tenth of one percent per day until paid. 63 EX-10.(A2) 3 STOCK OPTION PLAN Exhibit 10(a2) INTERLEAF, INC. 1993 STOCK OPTION PLAN 1. Purpose. The purpose of this plan (the "Plan") is to secure for Interleaf, Inc. (the "Company") and its shareholders the benefits arising from capital stock ownership by employees, officers and directors of, and consultants or advisors to, the Company and its parent and subsidiary corporations who are expected to contribute to the Company's future growth and success. Except where the context otherwise requires, the term "Company" shall include the parent and all present and future subsidiaries of the Company as defined in Sections 425(e) and 425(f) of the Internal Revenue Code of 1986, as amended or replaced from time to time (the "Code"). 2. Type of Options and Administration. (a) Types of Options. Options granted pursuant to the Plan shall be authorized by action of the Board of Directors of the Company (or a Committee designated by the Board of Directors) and may be either incentive stock options ("Incentive Stock Options") meeting the requirements of Section 422 of the Code or non-statutory options which are not intended to meet the requirements of Section 422 of the Code. (b) Administration. The Plan will be administered by the Board of Directors of the Company, whose construction and interpretation of the terms and provisions of the Plan shall be final and conclusive. The Board of Directors may in its sole discretion grant options to purchase shares of the Company's Common Stock ("Common Stock") and issue shares upon exercise of such options as provided in the Plan. The Board shall have authority, subject to the express provisions of the Plan, to construe the respective option agreements and the Plan, to prescribe, amend and rescind rules and regulations relating to the Plan, to determine the terms and provisions of the respective option agreements, which need not be identical, and to make all other determinations in the judgment of the Board of Directors necessary or desirable for the administration of the Plan. The Board of Directors may correct any defect or supply any omission or reconcile any inconsistency in the Plan or in any option agreement in the manner and to the extent it shall deem expedient to carry the Plan into effect and it shall be the sole and final judge of such expediency. No director shall be liable for any action or determination made in good faith. The Board of Directors may, to the full extent permitted by or consistent with applicable laws or regulations (including, without limitation, applicable state law and Rule l6b-3 promulgated under the Securities Exchange Act of 1934 (the "Exchange Act"), or any successor rule ("Rule l6b-3"), delegate any or all of its powers under the Plan to a committee (the "Committee") appointed by the Board of Directors, and if the Committee is so appointed all references to the Board of Directors in the Plan shall mean and relate to such Committee. (c) Applicability of Rule l6b-3. Those provisions of the Plan which make express reference to Rule l6b-3 shall apply to the Company only at such time as the Company's Common Stock is registered under the Exchange Act, and then only to such persons as are required to file reports under Section 16(a) of the Exchange Act (a "Reporting Person"). 3. Eligibility. (a) General. Options shall be granted to persons who are, at the time of grant, employees, officers or directors of, or consultants or advisors to, the Company; provided, that Incentive Stock Options may be granted only to persons who are eligible to receive such options under Section 422 of the Code. A person who has been granted an option may, if he or she is otherwise eligible, be granted an additional option or options if the Board of Directors shall so determine. (b) Grant of Options to Reporting Persons. While the Company's Common Stock is registered under the Exchange Act, the selection of a Reporting Person as a participant and decisions concerning the date of grant, exercise price and amount of shares covered by an option or options to be granted to such Reporting Person shall be made either by the Board of Directors, if each member is a "disinterested person" (as hereinafter defined), or by a committee of two or more directors, each of whom is a "disinterested person." For purposes of this Plan, a person is a "disinterested person" only if such person qualifies as a "disinterested person" within the meaning of paragraph (c)(1)(2)(i) of Rule l6b-3 (or successor), as such term is interpreted from time to time. 4. Stock Subject to Plan. Subject to adjustment as provided in Section 15 below, the maximum number of shares of Common Stock of the Company which may be issued and sold under the Plan is 2,100,000 shares. If an option granted under the Plan shall expire or terminate for any reason without having been exercised in full, the unpurchased shares subject to such option shall again be available for subsequent option grants under the Plan. If shares issued upon exercise of an option under the Plan are tendered to the Company in payment of the exercise price of an option granted under the Plan, such tendered shares shall again be available for subsequent option grants under the Plan; provided, that in no event shall (i) the total number of shares issued pursuant to the exercise of Incentive Stock Options under the Plan, on a cumulative basis, exceed the maximum number of shares authorized for issuance under the Plan exclusive of shares made available for issuance pursuant to this sentence or (ii) the total number of shares issued pursuant to the exercise of options by Reporting Persons, on a cumulative basis, exceed the maximum number of shares authorized for issuance under the Plan exclusive of shares made available for issuance pursuant to this sentence. 2 5. Forms of Option Agreements. As a condition to the grant of an option under the Plan, each recipient of an option shall execute an option agreement in such form not inconsistent with the Plan as may be approved by the board of directors. Such option agreements may differ among recipients. 6. Purchase Price. (a) General. The purchase price per share of stock deliverable upon the exercise of an option shall be determined by the board of directors, provided, however, that (i) in the case of an Incentive Stock Option, the exercise price shall not be less than 100% of the fair market value of such stock, as determined by the Board of Directors, at the time of grant of such option, or less than 110% of such fair market value in the case of options described in Section 11(b), and (ii) in the case of a non-statutory option granted at a time when the Company is subject to Rule l6b-3, the exercise price shall not be less than 100% of the fair market value of such stock, as determined by the Board of Directors, at the time of grant of such option. (b) Payment of Purchase Price. Options granted under the Plan may provide for the payment of the exercise price by delivery of cash or a check to the order of the Company in an amount equal to the exercise price of such options, or, to the extent provided in the applicable option agreement, (i) by delivery to the Company of shares of Common Stock of the Company already owned by the optionee having a fair market value equal in amount to the exercise price of the options being exercised, (ii) by any other means which the Board of Directors determines are consistent with the purpose of the Plan and with applicable laws and regulations (including, without limitation, the provisions of Rule l6b-3 and Regulation T promulgated by the Federal Reserve Board) or (iii) by any combination of such methods of payment. The fair market value of any shares of the Company's Common Stock or other non-cash consideration which may be delivered upon exercise of an option shall be determined in such manner as may be prescribed by the Board of Directors. 7. Option Period. Each option and all rights thereunder shall expire on such date as shall be set forth in the applicable option agreement, except that such date, in the case of an Incentive Stock Option, shall in no case be later than ten years after the date on which the option is granted. 8. Exercise of Options. Each option granted under the Plan shall be exercisable either in full or in installments at such time or times and during such period as shall be set forth in the agreement evidencing such option, subject to the provisions of the Plan. 3 9. Nontransferability of Options. Incentive Stock Options and options granted to Reporting Persons shall not be assignable or transferable by the person to whom it is granted, either voluntarily or by operation of law, except by will or the laws of descent and distribution, and, during the life of the optionee, shall be exercisable only by the optionee. 10. Effect of Termination of Employment or Other Relationship. The Board of Directors shall determine the period of time during which an optionee may exercise an option following (i) the termination of the optionee's employment or other relationship with the Company or (ii) the death or disability of the optionee. Such periods shall be set forth in the agreement evidencing such option. 11. Incentive Stock Options. Options granted under the Plan which are intended to be Incentive Stock Options shall be subject to the following additional terms and conditions: (a) Express Designation. All Incentive Stock Options granted under the Plan shall, at the time of grant, be specifically designated as such in the option agreement covering such Incentive Stock Options. (b) 10% Shareholder. If any employee to whom an Incentive Stock Option is to be granted under the Plan is, at the time of the grant of such option, the owner of stock possessing more than 10% of the total combined voting power of all classes of stock of the Company (after taking into account the attribution of stock ownership rules of Section 425(d) of the Code), then the following special provisions shall be applicable to the Incentive Stock Option granted to such individual: (i) The purchase price per share of the Common Stock subject to such Incentive Stock Option shall not be less than 110% of the fair market value of one share of Common Stock at the time of grant; and (ii) The option exercise period shall not exceed five years from the date of grant. (c) Dollar Limitation. For so long as the Code shall so provide, options granted to any employee under the Plan (and any other incentive stock option plans of the Company) which are intended to constitute Incentive Stock Options shall not constitute Incentive Stock Options to the extent that such options, in the aggregate, become exercisable for the first time in any one calendar year for shares of Common Stock with an aggregate fair market value (determined as of the respective date or dates of grant) of more than $100,000. (d) Termination of Employment, Death or Disability. No Incentive Stock Option may be exercised unless, at the time of such exercise, the optionee is, and has been 4 continuously since the date of grant of his or her option, employed by the Company, except that: (i) an Incentive Stock Option may be exercised within the period of three months after the date the optionee ceases to be an employee of the Company (or within such lesser period as may be specified in the applicable option agreement), provided, that the agreement with respect to such option may designate a longer exercise period and that the exercise after such three-month period shall be treated as the exercise of a non-statutory option under the Plan; (ii) if the optionee dies while in the employ of the Company, or within three months after the optionee ceases to be such an employee, the Incentive Stock Option may be exercised by the person to whom it is transferred by will or the laws of descent and distribution within the period of one year after the date of death (or within such lesser period as may be specified in the applicable option agreement); and (iii) if the optionee becomes disabled (within the meaning of Section 22(e)(3) of the Code or any successor provision thereto) while in the employ of the Company, the Incentive Stock Option may be exercised within the period of one year after the date the optionee ceases to be such an employee because of such disability (or within such lesser period as may be specified in the applicable option agreement). For all purposes of the Plan and any option granted hereunder, "employment" shall be defined in accordance with the provisions of Section 1.421-7(h) of the Income Tax Regulations (or any successor regulations). Notwithstanding the foregoing provisions, no Incentive Stock Option may be exercised after its expiration date. 12. Additional Provisions. (a) Additional Option Provisions. The Board of Directors may, in its sole discretion, include additional provisions in any option granted under the Plan, including without limitation restrictions on transfer, repurchase rights, commitments to pay cash bonuses, to make, arrange for or guaranty loans or to transfer other property to optionees upon exercise of options, or such other provisions as shall be determined by the Board of Directors; provided that such additional provisions shall not be inconsistent with any other term or condition of the Plan. (b) Acceleration, Extension, Etc. The Board of Directors may, in its sole discretion, (i) accelerate the date or dates on which all or any 5 particular option or options granted under the Plan may be exercised or (ii) extend the dates during which all, or any particular option or options granted under the Plan may be exercised; provided, however, that no such extension shall be permitted if it would cause the Plan to fail to comply with Section 422 of the Code or with Rule l6b-3. 13. General Restrictions. (a) Investment Representations. The Company may require any person to whom an option is granted, as a condition of exercising such option, to give written assurances in substance and form satisfactory to the Company to the effect that such person is acquiring the Common Stock subject to the option for his or her own account for investment and not with any present intention of selling or otherwise distributing the same, and to such other effects as the Company deems necessary or appropriate in order to comply with federal and applicable state securities laws, or with covenants or representations made by the Company in connection with any public offering of its Common Stock. (b) Compliance With Securities Laws. Each option shall be subject to the requirement that if, at any time, counsel to the Company shall determine that the listing, registration or qualification of the shares subject to such option upon any securities exchange or under any state or federal law, or the consent or approval of any governmental or regulatory body, or that the disclosure of non-public information or the satisfaction of any other condition is necessary as a condition of, or in connection with, the issuance or purchase of shares thereunder, such option may not be exercised, in whole or in part, unless such listing, registration, qualification, consent or approval, or satisfaction of such condition shall have been effected or obtained on conditions acceptable to the Board of Directors. Nothing herein shall be deemed to require the Company to apply for or to obtain such listing, registration or qualification, or to satisfy such condition. 14. Rights as a Shareholder. The holder of an option shall have no rights as a shareholder with respect to any shares covered by the option (including, without limitation, any rights to receive dividends or non-cash distributions with respect to such shares) until the date of issue of a stock certificate to him or her for such shares. No adjustment shall be made for dividends or other rights for which the record date is prior to the date such stock certificate is issued. 15. Adjustment Provisions for Recapitalizations and Related Transactions. (a) General. If, through or as a result of any merger, consolidation, sale of all or substantially all of the assets of the Company, reorganization, recapitalization, reclassification, stock dividend, stock split, reverse stock split, or other similar transaction, (i) the outstanding shares of Common Stock are increased or decreased or are exchanged for a different number or kind of shares or other securities of the Company, or (ii) additional shares or new or different shares or other securities of the Company or other non-cash assets are distributed with respect to such shares of 6 Common Stock or other securities, an appropriate and proportionate adjustment may be made in (x) the maximum number and kind of shares reserved for issuance under the Plan, (y) the number and kind of shares or other securities subject to then outstanding options under the Plan, and (z) the price for each share subject to any then outstanding options under the Plan, without changing the aggregate purchase price as to which such options remain exercisable, provided that no adjustment shall be made pursuant to this Section 15 if such adjustment would cause the Plan to fail to comply with Section 422 of the Code or with Rule l6b-3. (b) Board Authority to Make Adjustments. Any adjustments under this Section 15 will be made by the Board of Directors, whose determination as to what adjustments, if any, will be made and the extent thereof will be final, binding and conclusive. No fractional shares will be issued under the Plan on account of any such adjustments. 16. Merger, Consolidation, Asset Sale, Liquidation, Etc. (a) General. In the event of a consolidation or merger or sale of all or substantially all of the assets of the Company in which outstanding shares of Common Stock are exchanged for securities, cash or other property of any other corporation or business entity or in the event of a liquidation of the Company, the Board of Directors of the Company, or the board of directors of any corporation assuming the obligations of the Company, may, in its discretion, take any one or more of the following actions, as to outstanding options: (i) provide that such options shall be assumed, or equivalent options shall be substituted, by the acquiring or succeeding corporation (or an affiliate thereof), provided that any such options substituted for Incentive Stock Options shall meet the requirements of Section 425(a) of the Code, (ii) upon written notice to the optionees, provide that all unexercised options will terminate immediately prior to the consummation of such transaction unless exercised by the optionee within a specified period following the date of such notice, (iii) in the event of a merger under the terms of which holders of the Common Stock of the Company will receive upon consummation thereof a cash payment for each share surrendered in the merger (the "Merger Price"), make or provide for a cash payment to the optionees equal to the difference between (A) the Merger Price times the number of shares of Common Stock subject to such outstanding options (to the extent then exercisable at prices not in excess of the Merger Price) and (B) the aggregate exercise price of all such outstanding options in exchange for the termination of such options, and (iv) provide that all or any outstanding options shall become exercisable in full immediately prior to such event. (b) Substitute Options. The Company may grant options under the Plan in substitution for options held by employees of another corporation who become employees of the Company, or a subsidiary of the Company, as the result of a merger or consolidation of the employing corporation with the Company or a subsidiary of the Company, or as a result of the acquisition by the Company, or one of its subsidiaries, of property or stock of the employing corporation. The Company may direct that substitute 7 options be granted on such terms and conditions as the Board of Directors considers appropriate in the circumstances. 17. Change in Control. Notwithstanding any other provision of the Plan and except as otherwise provided in the relevant option agreement, in the event of a "Change in Control of the Company" (as defined below), the exercise dates of all options then outstanding shall be accelerated in full and any restrictions on exercising outstanding options issued pursuant to the Plan prior to any given date shall terminate. For purposes of the Plan, a "Change in Control of the Company" shall occur or be deemed to have occurred only if (i) any "person," as such term is used in Sections 13(d) and 14(d) of the Securities Exchange Act of 1934, as amended (the "Exchange Act") (other than the Company, any trustee of other fiduciary holding securities under an employee benefit plan of the Company, or any corporation owned directly or indirectly by the stockholders of the Company in substantially the same proportion as their ownership of stock of the Company), is or becomes the "beneficial owner" (as defined in Rule 13d-3 under the Exchange Act), directly or indirectly, of securities of the Company representing 25% or more of the combined voting power of the Company's then outstanding securities; (ii) during any period of two consecutive years ending during the term of the Plan (not including any period prior to the adoption of the Plan), individuals who are the beginning of such period constitute the Board of Directors of the Company, and any new director (other than a director designated by a person who has entered into an agreement with the Company to effect any transaction described in clause (i), (iii), or (iv) of this Section 17) whose election by the Board of Directors or nomination for election by the Company's shareholders was approved by a vote of at least two-thirds of the directors then still in office who were either directors at the beginning of the period or whose election or whose nomination for election was previously so approved (collectively, the "Disinterested Directors"), cease for any reason to constitute a majority of the Board of Directors; (iii) the shareholders of the Company approve a merger or consolidation of the Company with any other corporation, other than (A) a merger or consolidation which would result in the voting securities of the Company outstanding immediately prior thereto continuing to represent (either by remaining outstanding or by being converted into voting securities of the surviving entity) more than 80% of the combined voting power of the voting securities of the Company or such surviving entity outstanding immediately after such merger or consolidation or (B) a merger or consolidation effected to implement a recapitalization of the company (or similar transaction) in which no "person" (as hereinabove defined) acquires more than 25% of the combined voting power of the Company's then outstanding securities; or (iv) the shareholders of the Company approve a plan of complete liquidation of the Company or an agreement for the sale or disposition by the Company of all or substantially all of the Company's assets. 8 18. No Special Employment Rights. Nothing contained in the Plan or in any option shall confer upon any optionee any right with respect to the continuation of his or her employment by the Company or interfere in any way with the right of the Company at any time to terminate such employment or to increase or decrease the compensation of the optionee. 19. Other Employee Benefits. The amount of any compensation deemed to be received by an employee as a result of the exercise of an option or the sale of shares received upon such exercise will not constitute compensation with respect to which any other employee benefits of such employee are determined, including, without limitation, benefits under any bonus, pension, profit-sharing, life insurance or salary continuation plan, except as otherwise specifically determined by the Board of Directors. 20. Amendment of the Plan. (a) The Board of Directors may at any time, and from time to time, modify or amend the Plan in any respect, except that if at any time the approval of the shareholders of the Company is required as to such modification or amendment under Section 422 of the Code or any successor provision with respect to Incentive Stock Options or under Rule l6b-3 or any successor provision with respect to options held by Reporting Persons, the Board of Directors may not effect such modification or amendment without such approval. (b) The termination or any modification or amendment of the Plan shall not, without the consent of an optionee, affect his or her rights under an option previously granted to him or her. With the consent of the optionee affected, the Board of Directors may amend outstanding option agreements in a manner not inconsistent with the Plan. The Board of Directors shall have the right to amend or modify (i) the terms and provisions of the Plan and of any outstanding Incentive Stock Options granted under the Plan to the extent necessary to qualify any or all such options for such favorable federal income tax treatment (including deferral of taxation upon exercise) as may be afforded incentive stock options under Section 422 of the Code and (ii) the terms and provisions of the Plan and of any outstanding option to the extent necessary to ensure the qualification of the Plan under Rule l6b-3 or any successor rule. 21. Withholding. (a) The Company shall have the right to deduct from payments of any kind otherwise due to the optionee any federal, state or local taxes of any kind required by law to be withheld with respect to any shares issued upon exercise of options under the Plan. Subject to the prior approval of the Company, which may be withheld by the Company in its sole discretion, the optionee may elect to satisfy such obligations, in whole or in part, (i) by causing the Company to withhold shares of Common Stock otherwise issuable pursuant to the exercise of an option or (ii) by delivering to the Company shares of Common Stock already owned by the optionee. The shares so 9 delivered or withheld shall have a fair market value equal to such withholding obligation. The fair market value of the shares used to satisfy such withholding obligation shall be determined by the Company as of the date that the amount of tax to be withheld is to be determined. An optionee who has made an election pursuant to this Section 21(a) may only satisfy his or her withholding obligation with shares of Common Stock which are not subject to any repurchase, forfeiture, unfulfilled vesting or other similar requirements. (b) Notwithstanding the foregoing, in the case of a Reporting Person, no election to use shares for the payment of withholding taxes shall be effective unless made in compliance with any applicable requirements of Rule l6b-3(e) or any successor rule under such Act. 22. Cancellation and New Grant of Options, Etc. The Board of Directors shall have the authority to effect, at any time and from time to time, with the consent of the affected optionees, (i) the cancellation of any or all outstanding options under the Plan and the grant in substitution therefor of new options under the Plan covering the same or different numbers of shares of Common Stock and having an option exercise price per share which may be lower or higher than the exercise price per share of the cancelled options or (ii) the amendment of the terms of any and all outstanding options under the Plan to provide an option exercise price per share which is higher or lower than the then-current exercise price per share of such outstanding options; provided, that in the case of a Reporting Person, the exercise price of options substituted or amended in the manner described above shall not be less than 50% of the fair market value of the underlying stock at the time of such substitution or amendment. 23. Effective Date and Duration of the Plan. (a) Effective Date. The Plan shall become effective when adopted by the Board of Directors, but no option granted under the Plan shall become exercisable unless and until the Plan shall have been approved by the Company's shareholders. If such shareholder approval is not obtained within twelve months after the date of the Board's adoption of the Plan, no options previously granted under the Plan shall be deemed to be Incentive Stock Options and no Incentive Stock Options shall be granted thereafter. Amendments to the Plan not requiring shareholder approval shall become effective when adopted by the Board of Directors; amendments requiring shareholder approval (as provided in Section 20) shall become effective when adopted by the Board of Directors, but no Incentive Stock Option issued after the date of such amendment shall become exercisable (to the extent that such amendment to the Plan was required to enable the Company to grant such Incentive Stock Option to a particular optionee) unless and until such amendment shall have been approved by the Company's shareholders. If such shareholder approval is not obtained within twelve months of the Board's adoption of such amendment, any Incentive Stock Options granted on or after the date of such amendment shall terminate to the extent that such amendment to the 10 Plan was required to enable the Company to grant such option to a particular optionee. Subject to this limitation, options may be granted under the Plan at any time after the effective date and before the date fixed for termination of the Plan. (b) Termination. Unless sooner terminated in accordance with Section 16, the Plan shall terminate, with respect to Incentive Stock Options, upon the earlier of (i) the close of business on the day next preceding the tenth anniversary of the date of its adoption by the Board of Directors, or (ii) the date on which all shares available for issuance under the Plan shall have been issued pursuant to the exercise or cancellation of options granted under the Plan. Unless sooner terminated in accordance with Section l6, the Plan shall terminate with respect to options which are not Incentive Stock Options on the date specified in (ii) above. If the date of termination is determined under (i) above, then options outstanding on such date shall continue to have force and effect in accordance with the provisions of the instruments evidencing such options. 24. Provision for Foreign Participants. The Board of Directors may, without amending the Plan, modify awards or options granted to participants who are foreign nationals or employed outside the United States to recognize differences in laws, rules, regulations or customs of such foreign jurisdictions with respect to tax, securities, currency, employee benefit or other matters. Adopted by the Board of Directors on June 2, l993, and approved by the Company's shareholders at Special Meeting in Lieu of an Annual Meeting on August 5, 1993. Amended by the Board of Directors on July 14, 1994. Approved and ratified by shareholders at Annual Meeting on August 17, 1995 and amended by the Board of Directors on April 29, 1997, and approved by shareholders at the Annual Meeting on August 15, 1997. EX-10.(Z7) 4 MATERIAL CONTRACTS Exhibit 10(z7) Via Facsimile: 617-923-5120 October 3, 1997 Mr. Craig Newfield 64 Hawthorn Avenue Needham, Massachusetts 02192 Dear Craig, I am delighted to offer you the position of Vice President and General Counsel for Interleaf, Inc. Our company is at a very important juncture. Tremendous opportunities for success are within our sights but there is work to be done. Your credentials and energy are very impressive. I am sure that you will have a positive influence on our results. The Position The General Counsel position is one of the most important officer level positions in our company. You will be responsible for all of our legal matters (both internal and external coordination) as well as their impact on both operational and strategic activities. As a direct report to the Chief Executive Officer, you will also be asked to participate in developing our long-term strategy and operating plans and participate on the senior management team. Compensation Package The base salary for the General Counsel position is $110,000 per annum and an annual incentive compensation pool of $40,000 with total on target earnings of $150,000. Your incentive compensation program is designed to reward you for both individual contributions as well as the performance of the team in meeting quarterly and annual performance goals. The incentive compensation program will provide you with a total quarterly bonus pool of $30,000 upon achievement of mutually agreed to revenue and profit targets, and an escalation bonus should you exceed the target. The incentive bonus will be distributed to you in quarterly amounts of $7,500 for 100% revenue and profit attainment; for under/over attainment the bonus payment will be made utilizing the following formula: At 70% of goal for the quarter, you will be paid $4,500 At 80% of goal for the quarter, you will be paid $5,250 At 85% of goal for the quarter, you will be paid $6,000 At 90% of goal for the quarter, you will be paid $6,750 At 95-100% of goal for the quarter, you will be paid $7,500 At each 10% above 100% of goal for the quarter, you will receive $10,000 additional bonus. In addition, for reaching 100% of our targeted annual revenue and profit as General Counsel, you will receive an additional $10,000 bonus amount. The total annual on target earnings (OTE) for this position is $150,000. The incentive compensation goals for the first half of FY1998 are similar for the entire Senior Management Team. We will be reviewing our goals for the second half of FY1998 this month and look forward to your participating in this planning process to Mr. Craig Newfield October 3, 1997 Page Two insure that the goals that are developed reflect your input. Please note that there is no limit to your incentive compensation. I fully intend to reward you for achievement above and beyond the defined targets. Equity Participation I am also delighted to offer you 125,000 stock options. The price of the options will be based upon the then current price on your start date. The options will vest over a four-year period. As we discussed, I am fully committed to having you achieve your long-term compensation goals. As we discussed, 50,000 of these stock options are cancelable if you do not reach or exceed 80% of your incentive goals for the second half of FY1998. % Achieved Cancelable ---------- ---------- 12,500 80% of Plan YTD 6 mos. after start 12,500 90% of Plan YTD 6 mos. after start 12,500 80% of Plan YTD 12 mos. after start 12,500 90% of Plan YTD 12 mos. after start ------ 50,000 Benefits Package Your compensation will also include participation in our standard corporate benefits program, a summary of which is attached. Please note that this letter does not constitute an employment agreement. In the unlikely circumstance that you are terminated without cause, the company will provide you a notice period of six (6) months and require a similar period should you wish to end your employment with the company. I am very much looking forward to your joining our team. I know that you will do an outstanding job in this critical role. Your expected start date is October 13, 1997. Please indicate your acceptance and agreement with the terms of this employment offer by signing below. Again, we look forward to your joining the team. Sincerely, Jaime W. Ellertson President and Chief Executive Officer Accepted: - ----------------------------- ----------------------- Date EX-10.(AA) 5 PREFERRED STOCK INVESTMENT AGREEMENT Exhibit 10(aa) PREFERRED STOCK INVESTMENT AGREEMENT AGREEMENT dated as of September 30, 1997 between Interleaf, Inc. (the "Company") and the investor whose name is set forth at the foot of this Agreement (the "Investor"). The parties hereto agree as follows: ARTICLE I Purchase and Sale of Preferred Stock Section I.1 Purchase and Sale of Preferred Stock. Upon the following terms and conditions, the Company shall issue and sell to the Investor shares of the Company's 6% Convertible Preferred Stock (the "Shares") having the rights, designations and preferences set forth in Schedule I hereto, and the Investor shall purchase from the Company the number of Shares designated on the signature page hereof. Section I.2 Purchase Price. The purchase price for the Shares (the "Purchase Price") shall be $1,000 per share. Section I.3 The Closing. (a) The closing of the purchase and sale of the Shares (the "Closing"), shall take place at the offices of the Company, at 10:00 a.m., local time on the later of the following: (i) the date on which the last to be fulfilled or waived of the conditions set forth in Article IV hereof and applicable to the Closing shall be fulfilled or waived in accordance herewith, or (ii) such other time and place and/or on such other date as the Investor and the Company may agree but in no event later than September 30, 1997. The date on which the Closing occurs is referred to herein as the "Closing Date." (b) On the Closing Date, the Company shall deliver to the Investor certificates representing the number of Shares being purchased by the Investor, registered in the name of the Investor, or deposit such Shares into accounts designated by the Investor, and the Investor shall deliver to the Company the Purchase Price for such Shares by cashier's check or wire transfer in immediately available funds to such account as shall be designated in writing by the Company. The Investor shall also deliver, as a condition to the Closing, a Purchaser's Questionnaire in the form supplied by the Company. In addition, each party shall deliver all documents, instruments and writings required to be delivered by such party pursuant to this Agreement at or prior to the Closing. Section I.4 Covenant to Register. (a) For purposes of this Section, the following definitions shall apply: (i) The terms "register," "registered," and "registration" refer to a registration under the Securities Act of 1933, as amended (the "Act"), effected by preparing and filing a registration statement in compliance with the Act, and the declaration or ordering of effectiveness of such registration statement, document or amendment thereto. (ii) The term "Registrable Securities" does not include the Shares but means (A) the shares of common stock issued or issuable upon conversion of the Shares, or (B) any securities of the Company or securities of any successor corporation issued pursuant to the provisions of Schedule I hereto or issuable upon the conversion or exercise of any warrant, right or other security that is issued as a dividend or other distribution with respect to, or in exchange for or in replacement of the Shares, which in either case (i) have not been resold pursuant to an effective registration statement or pursuant to Rule 144 under the Act or (ii) may not be resold pursuant to Rule 144(k) under the Act. For purposes of this Agreement, securities will be considered ineligible for resale pursuant to Rule 144(k) under the Act unless the Company's transfer agent has accepted an instruction from the Company specifying that such securities are eligible for sale pursuant to Rule 144(k). 1 (iii) The term "holder of Registrable Securities" includes any person who holds Shares which are convertible into Registrable Securities. (b) (i) The Company shall, as expeditiously as possible following the Closing, file a registration statement on Form S-3, or if Form S-3 is not then available, another appropriate form, covering the resale of all the Registrable Securities under Rule 415. The number of shares of Common Stock initially included in such registration statement shall be not less than 150% of the number which would be issuable upon conversion of the Shares if all thereof were to be converted at a conversion price equal to the average closing price of the Common Stock during the five trading days prior to the effective date of the registration statement. The Company shall use its best efforts to cause such registration statement to become effective by the 90th calendar day after the Closing Date (the "Initial Registration"). In the event such registration statement is not so declared effective or if at any time thereafter it does not include at least 120% of the number of Registrable Securities which would then be issuable upon conversion of the 6% Preferred (or any successor security) at the conversion price then in effect, any holder of Registrable Securities shall have the right to require by notice in writing that the Company register all or any part of the Registrable Securities held by such holder (a "Demand Registration") and the Company shall thereupon effect such registration in accordance herewith (which may include adding such shares to an existing shelf registration). The parties agree that if the holder of Registrable Securities demands registration of less than all of the Registrable Securities, the Company, at its option, may nevertheless file a registration statement covering all of the Registrable Securities. If such registration statement is declared effective with respect to all Registrable Securities, then so long as the Company is in compliance with its obligations under Subsection (d)(i) through (v) hereof, the demand registration rights granted pursuant to this Subsection (b) (i) shall not be applicable. If such registration statement is not declared effective with respect to all Registrable Securities, or if the Company is not in compliance with said obligations, the demand registration rights described herein shall remain in effect. The Company shall provide holders of Registrable Securities reasonable opportunity to review any such registration statement or amendment or supplement thereto prior to the filing thereof. Nothing herein shall require the Company to postpone filing the registration statement. If the Registrable Securities are registered initially on a form other than Form S-3, and thereafter the Company becomes eligible to use Form S-3, the Company will then take all action permitted by Rule 401(e) under the Act to utilize the requirements of Form S-3 thereafter. (ii) The Company shall not be obligated to effect Demand Registration under Subsection (b)(i) if all of the Registrable Securities held by the holder of Registrable Securities which are demanded to be covered by the Demand Registration are, at the time of such demand, included in an effective registration statement and the Company is in compliance with its obligations under Subsection (d) (i) through (v) hereof. (iii) The Company may suspend the effectiveness of any such registration effected pursuant to this Subsection (b) in the event, and for such period of time as, such a suspension is required by the rules and regulations of the Securities and Exchange Commission ("SEC"), and may suspend use of the prospectus included in the Registration Statement if such prospectus ceases to meet the requirements of Section 10 of the Act. The Company will immediately advise the holders of the registered securities of any such suspension, and will use its best efforts to cause such suspension to terminate at the earliest possible date. The Investor agrees that following receipt of any such notice, and until such suspension is terminated, the Investor will not make use of the suspended prospectus and will make no sales requiring delivery of such prospectus. (iv) If the registration statement covering the required number of Registrable Securities is not effective by the 90th calendar day after the Closing Date, then the Company shall pay the Investor in cash an amount equal to 3% of the total Purchase Price of the Shares purchased by the Investor for each 30 day period thereafter until such registration statement is effective (pro-rata as to a period of less than 30 days). An amount equal to 3% of the total Purchase Price of Shares and any Registrable Securities then held by Investor shall also be paid to the Investor in cash with respect to any period in excess of 30 days that the effectiveness of the Registration Statement or use of the prospectus is suspended as set forth in Section 1.4 (b)(iii) or the prospectus is otherwise unavailable for use by sellers of Registrable Securities. Any payment hereunder shall be made not later than ten days after the end of the 30-day period with respect to which such payment is due. The "Purchase Price" of Registrable Securities shall be, in the case of Registrable Securities derived from conversion or substitution of Shares, the Purchase Price of such Shares. 2 This subsection is in addition to the provisions of Section 7.2(a) hereof. (c) If the Company proposes to register (including for this purpose a registration effected by the Company for shareholders other than the Investor) any of its stock or other securities under the Act in connection with a public offering of such securities (other than a registration on Form S-4, Form S-8 or other limited purpose form) and all Registrable Securities have not theretofore been included in a registration statement under Subsection (b) which remains effective, the Company shall, at such time, promptly give all holders of Registrable Securities written notice of such registration. Upon the written request of any holder of Registrable Securities given within twenty (20) days after receipt of such notice by the holder of Registrable Securities, the Company shall use its best efforts to cause to be registered under the Act all Registrable Securities that such holder of Registrable Securities requests to be registered. However, the Company shall have no obligation under this Subsection (c) to the extent that, with respect to a public offering registration, the managing underwriter of such public offering reasonably notifies such holder(s) in writing of its determination that the Registrable Securities or a portion thereof should be excluded therefrom. The rights of the Investor and the obligations of the Company under this subsection are subject to any prior registration rights of other shareholders of the Company which are disclosed in Exhibit A hereto. (d) Whenever required under this Section to effect the registration of any Registrable Securities, including, without limitation, the Initial Registration, the Company shall, as expeditiously as reasonably possible: (i) Prepare and file with the SEC a registration statement with respect to such Registrable Securities and use its best efforts to cause such registration to become effective as provided in Section 1.4(b)(i), and keep such registration statement effective for so long as any holder of Registrable Securities desires to dispose of the securities covered by such registration statement, or, if earlier, until such Registrable Securities may be sold under Rule 144(k) (provided that the Company's transfer agent has accepted an instruction from the Company to such effect). (ii) Prepare and file with the SEC such amendments and supplements to such registration statement and the prospectus used in connection with such registration statement as may be necessary to comply with the provisions of the Act with respect to the disposition of all securities covered by such registration statement and notify the holders of the filing and effectiveness of such registration statement and any amendments or supplements. (iii) Furnish to each holder of Registrable Securities such numbers of copies of a current prospectus conforming with the requirements of the Act, copies of the registration statement, any amendment or supplement thereto and any documents incorporated by reference therein and such other documents as such holder of Registrable Securities may reasonably require in order to facilitate the disposition of Registrable Securities owned by such holder of Registrable Securities. (iv) Use its best efforts to register and qualify the securities covered by such registration statement under such securities or "Blue Sky" laws of such jurisdictions as shall be reasonably requested by a holder of Registrable Securities and keep such registration or qualification effective as long as required to permit sale of Registrable Securities thereunder, provided that the Company shall not be required in connection therewith or as a condition thereto to qualify to do business or to file a general consent to service of process in any such states or jurisdictions. (v) Notify each holder of Registrable Securities immediately of the happening of any event as a result of which the prospectus included in such registration statement, as then in effect, includes an untrue statement of material fact or omits to state a material fact required to be stated therein or necessary to make the statements therein not misleading in light of the circumstances then existing, and use its best efforts to promptly update and/or correct such prospectus. (vi) Furnish to each holder of Registrable Securities included therein (1) an opinion of counsel to the Company covering compliance of the registration statement, as to form, with the requirements of the Act and the rules thereunder, and covering the matters covered in the opinion filed as an exhibit to the registration 3 statement, and (2) a "cold comfort" letter or letters of the Company's independent public accountants in the form and of the substance customarily supplied to underwriters in connection with a public offering. (vii) Use its best efforts to list the Registrable Securities covered by such registration statement with any national market or securities exchange on which the Common Stock is then listed. (viii) Make available for inspection by the holder of Registrable Securities, upon request, all SEC Documents (as defined below) filed subsequent to the Closing and require the Company's representatives to supply all information reasonably requested by any holder of Registrable Securities in connection with such registration statement. Nothing herein shall require the Company to postpone filing the registration statement or to delay the effectiveness thereof. (e) Each holder of Registrable Securities will furnish to the Company in connection with any registration under this Section such information regarding itself, the Registrable Securities and other securities of the Company held by it, and the intended method of disposition of such securities as shall be reasonably required to effect the registration of the Registrable Securities held by such holder of Registrable Securities. The Investor shall provide such data at or prior to the Closing. The intended method of disposition (Plan of Distribution) of such securities as so provided by Investor shall be included without alteration in the Registration Statement covering the Registrable Securities and shall not be changed without written consent of the Investor. (f) (i) The Company shall indemnify, defend and hold harmless each holder of Registrable Securities which are included in a registration statement pursuant to the provisions of Subsections (b) or (c) (each, a "Selling Shareholder") and each of its officers, directors, employees, agents, partners or controlling persons (within the meaning of the Act) (each, an "indemnified party") from and against, and shall reimburse such indemnified party with respect to, any and all claims, suits, demands, causes of action, losses, damages, liabilities, costs or expenses ("Liabilities") to which such indemnified party may become subject under the Act or otherwise, arising from or relating to (A) any untrue statement or alleged untrue statement of any material fact contained in such registration statement, any prospectus contained therein or any amendment or supplement thereto, or (B) the omission or alleged omission to state therein a material fact required to be stated therein or necessary to make the statements therein, in light of the circumstances in which they were made, not misleading; provided, however, that the Company shall not be liable in any such case to the extent that any such Liability arises out of or is based upon an untrue statement or omission so made in reliance upon information furnished by such indemnified party in writing specifically for use in the registration statement; provided further, that the Company shall not be liable in any such case to the extent that any such Liability arises out of or is based upon an untrue statement or alleged untrue statement or omission or alleged omission made in any preliminary prospectus if (i) a Selling Shareholder under an obligation to send or deliver a copy of the prospectus with or prior to the delivery of written confirmation of the sale of Registrable Securities to the person asserting such Liability who purchased such Registrable Securities which are the subject thereof from such Selling Shareholder failed to do so and (ii) the prospectus would have corrected such untrue statement or omission; and provided further, that the Company shall not be liable in any such case to the extent that any Liability arises out of or is based upon an untrue statement or alleged untrue statement or omission or alleged omission in the prospectus, if such untrue statement or alleged untrue statement, omission or alleged omission is corrected in an amendment or supplement to the prospectus and if, having previously been furnished by or on behalf of the Company with copies of the prospectuses so amended or supplemented and having been obligated to deliver such prospectuses, the Selling Shareholder thereafter failed to deliver such prospectus as so amended or supplemented, prior to or concurrently with the sale of Registrable Securities to the person asserting such Liability who purchased such Registrable Securities which are the subject thereof from such Selling Shareholder. (ii) In the event of any registration under the Act of Registrable Securities pursuant to Subsections (b) or (c), each holder of such Registrable Securities hereby severally agrees to indemnify, defend and hold harmless the Company, and its officers, directors, employees, agents, partners, or controlling persons (within the meaning of the Act) (each, an "indemnified party") from and against, and shall reimburse such indemnified party with respect to, any and all Liabilities to which such indemnified party may become subject under the Act or otherwise, arising from or relating to (A) any untrue statement or alleged untrue statement of any material fact contained in such registration statement, any prospectus contained therein or any amendment or supplement thereto, or (B) the omission 4 or alleged omission to state therein a material fact required to be stated therein or necessary to make the statements therein, in light of the circumstances in which they were made, not misleading; provided, that such holders will be liable in any such case to the extent, and only to the extent, that any such Liability arises out of or is based upon an untrue statement or alleged untrue statement or omission or alleged omission made in such registration statement, prospectus or amendment or supplement thereto in reliance upon written information furnished in an instrument duly executed by such holder specifically for use in the registration statement. (iii) Promptly after receipt by any indemnified party of notice of the commencement of any action, such indemnified party shall, if a claim in respect thereof is to be made against another party (the "indemnifying party") hereunder, notify such party in writing thereof, but the omission so to notify shall not relieve the indemnifying party from any Liability which it may have to the indemnified party other than under this section and shall only relieve it from any Liability which it may have to the indemnified party under this section if and to the extent it is actually prejudiced by such omission. In case any such action shall be brought against any indemnified party and such indemnified party shall notify the indemnifying party of the commencement thereof, the indemnifying party shall be entitled to participate in and, to the extent it shall wish, to assume and undertake the defense thereof with counsel reasonably satisfactory to such indemnified party, and, after notice from the indemnifying party to the indemnified party of its election so to assume and undertake the defense thereof, the indemnifying party shall not be liable to the indemnified party under this section for any legal expenses subsequently incurred by the indemnified party in connection with the defense thereof other than reasonable costs of investigation and of liaison with counsel so selected, provided, however, that if the defendants in any such action include both the indemnifying party and such indemnified party and the indemnified party shall have reasonably concluded, based upon an opinion of counsel, that there may be reasonable defenses available to it which are different from or additional to those available to the indemnifying party or if the interests of the indemnified party reasonably may be deemed to conflict with the interests of the indemnifying party, the indemnified party shall have the right to select a separate counsel and to assume such legal defenses and otherwise to participate in the defense of such action, with (subject to the following sentence) the reasonable expenses and fees of such separate counsel and other reasonable expenses related to such participation to be reimbursed by the indemnifying party as incurred. If the Company is the indemnifying party it shall pay the reasonable expenses and fees of only one separate counsel whose selection is approved by the largest group of similarly situated indemnified parties as measured by the aggregate face value of such Registrable Securities owned by such group. Any indemnified party who chooses not to be represented by the foregoing separate counsel shall be entitled, at its own expense, to be represented by counsel of its own selection. (g) (i) With respect to the inclusion of Registrable Securities in a registration statement pursuant to Subsections (b) or (c), all fees, costs and expenses of and incidental to such registration, inclusion and public offering shall be borne by the Company; provided, however, that any Selling Shareholders participating in such registration shall bear their own share of the underwriting discounts and commissions, and transfer taxes if any, incurred by them in connection with such registration. (ii) The fees, costs and expenses of registration to be borne by the Company as provided in this Subsection (g) shall include, without limitation, all registration, filing and NASD fees, printing expenses, fees and disbursements of counsel and accountants for the Company, and all legal fees and disbursements and other expenses of complying with state securities or Blue Sky laws of any jurisdiction or jurisdictions in which securities to be offered are to be registered and qualified. Subject to appropriate agreements as to confidentiality, and upon reasonable advance notice from the holder or its counsel, the Company shall make available to counsel for the holders of Registrable Securities upon reasonable request its documents and personnel for due diligence purposes, and shall pay the reasonable fees and disbursements of one law firm (but not more than one) acting as counsel for a majority of such holders. Except as otherwise provided herein, fees and disbursements of counsel and accountants for the Selling Shareholders shall be borne by the respective Selling Shareholders. Nothing herein shall require the Company to postpone filing the registration statement or delay its effectiveness. (h) The rights to cause the Company to register all or any portion of Registrable Securities pursuant to this Section may be assigned by Investor to a transferee or assignee of all, or a portion equal to 20% or more, in the aggregate, of its Shares or the Registrable Securities derived from such Shares. Any transferee asserting registration rights hereunder shall agree to be bound by the applicable provisions of this Agreement. 5 (i) From and after the date of this Agreement, the Company shall not grant additional "piggy-back" registration rights to the holders of any securities of the Company to include any of their securities in any registration statement filed by the Company pursuant to Subsection (b) unless such inclusion will not reduce the amount of the Registrable Securities included therein. ARTICLE II Representations and Warranties Section II.1 Representations and Warranties of the Company. The Company hereby makes the following representations and warranties to the Investor: (a) Organization and Qualification. The Company is a corporation duly incorporated and existing in good standing under the laws of Massachusetts and has the requisite corporate power to own its properties and to carry on its business as now being conducted. The Company does not have any material subsidiaries except as listed in Exhibit A hereto or in the SEC Documents (as hereinafter defined). The Company and each such subsidiary, if any, is duly qualified as a foreign corporation to do business and is in good standing in every jurisdiction in which the nature of the business conducted or property owned by it makes such qualification necessary other than those in which the failure so to qualify would not have a Material Adverse Effect. "Material Adverse Effect" means any material adverse effect on the business, operations, properties, prospects, or financial condition of the Company and its subsidiaries taken as a whole. (b) Authorization; Enforcement. (i) The Company has the requisite corporate power and authority to enter into and perform this Agreement and to issue the Shares in accordance with the terms hereof, (ii) the execution and delivery of this Agreement by the Company and the consummation by it of the transactions contemplated hereby have been duly authorized by all necessary corporate action, and no further consent or authorization of the Company or its Board of Directors or stockholders is required except as contemplated by this Agreement or Schedule I hereto (including stockholder approval), (iii) this Agreement has been duly executed and delivered by the Company, and (iv) this Agreement constitutes a valid and binding obligation of the Company enforceable against the Company in accordance with its terms, except as such enforceability may be limited by applicable bankruptcy, insolvency, reorganization, moratorium, liquidation or similar laws relating to, or affecting generally the enforcement of, creditors' rights and remedies or by other equitable principles of general application. The Company's chief executive officer and chief financial officer and directors have studied and fully understand the nature of the securities being sold hereunder, and recognize that they have a potential dilutive effect. (c) Capitalization. The authorized capital stock of the Company consists of 50,000,000 shares of Common Stock and 5,000,000 shares of preferred stock; there are 17,840,259 shares of Common Stock and 1,010,002shares of Class C preferred stock issued and outstanding; and, upon issuance of the Shares in accordance with the terms hereof and pursuant to similar agreements of like tenor, there will be 17,840,259 shares of Common Stock, approximately 1,010,002 shares of Class C preferred stock, and 7,625 shares of 6% Convertible Preferred Stock issued and outstanding. All of the outstanding shares of the Company's Common Stock have been validly issued and are fully paid and nonassessable. Except as set forth in Exhibit A hereto and as described in the SEC Documents, no shares of Common Stock are entitled to preemptive rights or registration rights and there are no outstanding options, convertible securities, warrants, scrip, rights to subscribe to, calls or commitments of any character whatsoever relating to, or securities or rights convertible into, any shares of capital stock of the Company, or contracts, commitments, understandings, or arrangements by which the Company is or may become bound to issue additional shares of capital stock of the Company or options, warrants, scrip, rights to subscribe to, or commitments to purchase or acquire, any shares, or securities or rights convertible into shares, of capital stock of the Company. The Company has furnished or made available to the Investor true and correct copies of the Company's charter documents as in effect on the date hereof (the "Charter"), and the Company's By-Laws, as in effect on the date hereof (the "By-Laws"). (d) Issuance of Shares. The issuance of the Shares has been duly authorized and, when paid for or issued in accordance with the terms hereof, the Shares shall be validly issued, fully paid and non-assessable and 6 entitled to the rights and preferences set forth in Schedule I hereto. The Common Stock issuable upon conversion of the Shares will be duly authorized and reserved for issuance and, upon conversion in accordance with the Certificate of Designation to be filed by the Company to establish the rights and preferences of the Shares, will be validly issued, fully paid and non-assessable and not subject to any preemptive rights or adverse claims, and the holders shall be entitled to all rights and preferences accorded to a holder of Common Stock. (e) No Conflicts. The execution, delivery and performance of this Agreement by the Company and the consummation by the Company of the transactions contemplated hereby do not and will not (i) result in a violation of the Company's Charter or By-Laws or (ii) conflict with, or constitute a default (or an event which with notice or lapse of time or both would become a default) under, or give to others any rights of termination, amendment, acceleration or cancellation of, any agreement, indenture or instrument to which the Company or any of its subsidiaries is a party, or result in a violation of any federal, state, local or foreign law, rule, regulation, order, judgment or decree (including Federal and state securities laws and regulations) applicable to the Company or any of its subsidiaries or by which any property or asset of the Company or any of its subsidiaries is bound or affected (except as contemplated by Section 10 of Schedule I hereto and except for such conflicts, defaults, terminations, amendments, accelerations, cancellations and violations as would not, individually or in the aggregate, have a Material Adverse Effect); provided that, for purposes of such representation as to Federal, state, local or foreign law, rule or regulation, no representation is made herein with respect to any of the same applicable solely to the Investor and not to the Company. The business of the Company is not being conducted in violation of any law, ordinance or regulations of any governmental entity, except for violations which either singly or in the aggregate do not and will not have a Material Adverse Effect. The Company is not required under Federal, state or local law, rule or regulation in the United States to obtain any consent, authorization or order of, or make any filing (other than the filing of a Certificate setting forth the terms of the Shares with the Massachusetts Secretary of State) or registration with, any court or governmental agency in order for it to execute, deliver or perform any of its obligations under this Agreement or issue and sell the Shares in accordance with the terms hereof (other than any SEC, NASD or state securities filings which may be required to be made by the Company and any registration statement which may be filed pursuant hereto); provided that, for purposes of the representation made in this sentence, the Company is assuming and relying upon the accuracy of the relevant representations and agreements of the Investor herein. Purchase of the Shares by the Investor and conversion of the Shares pursuant to the provisions hereof and of Schedule I hereto, if and so long as Section 3.5 hereof is complied with, will not cause any person to become an "acquiring person" or otherwise create any remedy against the Investor under the Shareholder Rights Plan of the Company. (f) SEC Documents, Financial Statements. The Common Stock of the Company is registered pursuant to Section 12(g) of the Securities Exchange Act of 1934, as amended (the "Exchange Act") and the Company has filed all reports, schedules, forms, statements and other documents required to be filed by it with the SEC pursuant to the reporting requirements of the Exchange Act, including material filed pursuant to Section 13(a) or 15(d), in addition to one or more registration statements and amendments thereto heretofore filed by the Company with the SEC (all of the foregoing including filings incorporated by reference therein being referred to herein as the "SEC Documents"). The Company has delivered or made available to the Investor true and complete copies of the quarterly and annual (including, without limitation, proxy information and solicitation materials) SEC Documents filed with the SEC since December 31, 1995. The Company has not provided to the Investor any information which, according to applicable law, rule or regulation, should have been disclosed publicly by the Company but which has not been so disclosed, other than with respect to the transactions contemplated by this Agreement. As of their respective dates, the SEC Documents complied in all material respects with the requirements of the Exchange Act and the rules and regulations of the SEC promulgated thereunder except as set forth on Exhibit A and other federal, state and local laws, rules and regulations applicable to such SEC Documents, and none of the SEC Documents contained any untrue statement of a material fact or omitted to state a material fact required to be stated therein or necessary in order to make the statements therein, in light of the circumstances under which they were made, not misleading. The financial statements of the Company included in the SEC Documents comply as to form in all material respects with applicable accounting requirements and the published rules and regulations of the SEC or other applicable rules and regulations with respect thereto. Such financial statements have been prepared in accordance with generally accepted accounting principles applied on a consistent basis during the periods involved (except (i) as may be otherwise indicated in such financial statements or the notes thereto or (ii) in the case of unaudited interim statements, to the extent they may not include footnotes or may be condensed or summary statements) and fairly present in all material respects the financial 7 position of the Company as of the dates thereof and the results of operations and cash flows for the periods then ended (subject, in the case of unaudited statements, to normal year-end audit adjustments). (g) No Material Adverse Change. Since the date through which the most recent quarterly report of the Company on Form 10-Q has been prepared and filed with the SEC, a copy of which is included in the SEC Documents, no event which would have a Material Adverse Effect has occurred or exists with respect to the Company or its subsidiaries otherwise than in the ordinary course of business, except as otherwise disclosed or reflected in other SEC Documents prepared through or as of a date subsequent thereto, and the Company has not received any communication from the SEC or the NASD regarding any possible de-listing of the Company's Common Stock except as disclosed in the Company's report on Form 10-Q for June 30, 1997 and subsequent related communications from the NASD. (h) No Undisclosed Events or Circumstances. No event or circumstance has occurred or exists with respect to the Company or its subsidiaries or their respective businesses, properties, prospects, operations or financial condition, which, under applicable law, rule or regulation, requires public disclosure or announcement by the Company but which has not been so publicly announced or disclosed. (i) No General Solicitation. Neither the Company, nor any of its affiliates, or, to its knowledge, any person acting on its or their behalf (including Cappello Capital Corp. (the "Placement Agent")), has engaged in any form of general solicitation or general advertising (within the meaning of Regulation D under the Act) in connection with the offer or sale of the Shares. (j) No Integrated Offering. Earlier offers or discussions regarding possible sales of securities by the Company have not been such as to require registration of the Shares under the Act. (k) Approval Commitments. The Company has received binding assurance from its chief executive officer, chief financial officer and its directors and the only stockholder known to the Company that owns more than 5% of the outstanding stock of the Company, to the effect that such persons will vote all their shares in favor of such approval of the transactions contemplated hereby as may be necessary to comply with any rule or regulation of the NASD or any other regulatory agency. (l) Lender Approvals. The Company has received all consents or approvals from holders of its debt securities that are necessary to allow the Company to redeem a portion of the Shares if so required pursuant to Schedule I hereto. Section II.2 Representations and Warranties of the Investor. The Investor hereby makes the following representations and warranties to the Company: (a) Authorization, Enforcement. (i) Such Investor has the requisite power and authority to enter into and perform this Agreement and to purchase the Shares being sold hereunder, (ii) the execution and delivery of this Agreement by the Investor and the consummation by it of the transactions contemplated hereby have been duly authorized by all necessary corporate or partnership action, and (iii) this Agreement constitutes a valid and binding obligation of the Investor enforceable against the Investor in accordance with its terms, except as such enforceability may be limited by applicable bankruptcy, insolvency, reorganization, moratorium, liquidation or similar laws relating to, or affecting generally the enforcement of, creditors' rights and remedies or by other equitable principles of general application. (b) No Conflicts. The execution, delivery and performance of this Agreement and the consummation by the Investor of the transactions contemplated hereby do not and will not (i) result in a violation of the Investor's charter documents or By-Laws or (ii) conflict with any agreement, indenture or instrument to which Investor is a party, or (iii) result in a violation of any law, rule, or regulation, or any order, judgment or decree of any court or governmental agency applicable to Investor. The business of the Investor is not being conducted in violation of any law or regulation of any governmental entity, except for possible violations which either singly or in the aggregate do not and will not have a material adverse effect on the Investor. The Investor is not required to obtain any consent or 8 authorization of any governmental agency in order for it to perform its obligations under this Agreement. The data to be provided by the Investor in connection with registering the Registrable Securities under the Act will be true and correct in all material respects. (c) Investment Representation. The Investor is purchasing the Shares for its own account for investment and not with a view to distribution otherwise than in compliance with the Act. Investor has no present intention to sell the Shares and Investor has no present arrangement (whether or not legally binding) to sell the Shares to or through any person or entity; provided, however, that by making the representations herein, the Investor does not agree to hold the Shares for any minimum or other specific term and reserves the right to dispose of the Shares at any time in accordance with Federal and state securities laws applicable to such disposition. (d) Accredited Investor. The Investor is an accredited investor as defined in Rule 501 promulgated under the Act. The Investor has such knowledge and experience in financial and business matters in general, and investments in particular, so that the Investor is able to evaluate the merits and risks of an investment in the Shares and to protect its own interests in connection with such investment. In addition (but without limiting the effect of the Company's representations and warranties contained herein), the Investor has received such information as it considers necessary or appropriate for deciding whether to purchase the Shares pursuant hereto. The Investor acknowledges that no representation or warranty is made by the Placement Agent or any persons representing the Placement Agent with respect to the Company or sale of the Shares. (e) Rule 144. The Investor understands that there is no public trading market for the Shares, that none is expected to develop, and that the Shares must be held indefinitely unless such Shares or securities into which the Shares are converted are registered under the Act or an exemption from registration is available. The Investor has been advised or is aware of the provisions of Rule 144 promulgated under the Act. ARTICLE III Covenants Section III.1 Securities Compliance. (a) The Company shall notify the SEC and NASD, in accordance with their requirements, of the transactions contemplated by this Agreement, and shall take all other necessary action and proceedings as may be required and permitted by applicable law, rule and regulation, for the legal and valid issuance of the Shares and Common Stock issuable upon conversion thereof to the Investor or subsequent holder. (b) The Investor understands that the Shares are being offered and sold in reliance on a transactional exemption from the registration requirements of Federal and state securities laws and that the Company is relying upon the truth and accuracy of the representations, warranties, agreements, acknowledgments and understandings of the Investor set forth herein in order to determine the applicability of such exemptions and the suitability of the Investor to acquire the Shares. Section III.2 Registration and Listing. Until one (1) year after all Shares have been converted into Common Stock, the Company will cause its Common Stock (or other securities into which the Shares are convertible) to continue to be registered under Sections 12(b) or 12(g) of the Exchange Act, will comply in all respects with its reporting and filing obligations under said act, will comply with all requirements related to any registration statement filed pursuant to this Agreement and will not take any action or file any document (whether or not permitted by the Act or the Exchange Act or the rules thereunder) to terminate or suspend such registration or to terminate or suspend its reporting and filing obligations under said Acts, except as permitted herein. Until one (1) year after all Shares have been converted into Common Stock the Company will use its best efforts to continue the listing or trading of its Common Stock (or other securities into which the Shares are convertible) on the Nasdaq National Market or the Nasdaq Small Cap Market or a national securities exchange and will comply in all respects with the Company's reporting, filing and other obligations under the bylaws or rules of the NASD and Nasdaq. 9 Section III.3 Stockholder Approval. The Company will use its best efforts to promptly notice and hold a stockholders meeting as soon as reasonably practicable to obtain any stockholder approvals required by the Company (including those required by all applicable agreements between the Company and the NASD or Nasdaq) to allow for issuance of Common Stock upon conversion of the Shares. Section III.4 Sale Restrictions. Following conversion of the Shares into Common Stock of the Company, Investor will not on any trading day offer or sell publicly on NASDAQ or on the principal exchange on which the Common Stock is traded, or any other securities market or securities exchange, on a net basis, more than the following number of such shares of Common Stock: the greatest of (i) 10% of the average daily trading volume of the Common Stock for the five trading days immediately preceding such sale as reported by NASDAQ or by such principal exchange, (ii) 12,000 shares, or (iii) 10% of the trading volume for the Common Stock on such day, as reported by NASDAQ or by such principal exchange. This provision shall survive the final conversion date of the Shares. Section III.5 Conversion Rights. Investor shall not be entitled to convert any Share into Common Stock of the Company if following conversion of such Share the Investor and its affiliates (within the meaning of the Exchange Act) shall be the beneficial owners (as defined in Rule 13d-3 under the Exchange Act) of 10% or more of the Common Stock of the Company, or if a lesser percentage is set forth after the name of the Investor on the signature page hereof, such lesser percentage. The provisions of this Section cannot be amended. Section III.6 Hedging Restrictions. Investor agrees not to engage in any short sales, swaps, purchasing of puts, or other hedging activities that involve the direct or indirect use of the Common Stock or any derivative securities based on Common Stock to hedge its investment in the Shares. This Section shall not apply to transactions in which Investor has no beneficial interest made on behalf of third-party clients who are not holders of Shares. Section III.7 Notice of Conversion Cap. No later than 10 days after the end of the 15th full calendar month after the Closing Date the Company will deliver notice to the Investor specifying the amount of the then applicable Conversion Cap (as defined in Schedule I hereto) and the calculation thereof. ARTICLE IV Conditions Section IV.1 Conditions Precedent to the Obligation of the Company to Sell the Shares. The obligation hereunder of the Company to issue and/or sell the Shares to the Investor is subject to the satisfaction, at or before the Closing, of each of the conditions set forth below. These conditions are for the Company's sole benefit and may be waived by the Company at any time in its sole discretion. (a) Accuracy of the Investor's Representations and Warranties. The representations and warranties of the Investor shall be true and correct in all material respects when made and as of the Closing Date. (b) Performance by the Investor. The Investor shall have performed all agreements and satisfied all conditions required to be performed or satisfied by the Investor at or prior to the Closing. (c) No Injunction. No statute, rule, regulation, executive order, decree, ruling or injunction shall have been enacted, entered, promulgated or endorsed by any court or governmental authority of competent jurisdiction which prohibits the consummation of any of the transactions contemplated by this Agreement. Section IV.2 Conditions Precedent to the Obligation of the Investor to Purchase the Shares. The obligation hereunder of the Investor to acquire and pay for the Shares is subject to the satisfaction, at or before the Closing, of each of the conditions set forth below. These conditions are for the Investor's sole benefit and may be waived by the Investor at any time in its sole discretion. 10 (a) Accuracy of the Company's Representations and Warranties. The representations and warranties of the Company shall be true and correct in all material respects as of the date when made and as of the Closing Date as though made at that time (except for representations and warranties that speak as of a particular date). (b) Performance by the Company. The Company shall have performed all agreements and satisfied all conditions required to be performed or satisfied by the Company at or prior to the Closing. (c) Nasdaq. The Company's Common Stock shall be listed and trade on the Nasdaq National Market on the Closing Date. (d) No Injunction. No statute, rule, regulation, executive order, decree, ruling or injunction shall have been enacted, entered, promulgated or endorsed by any court or governmental authority of competent jurisdiction which prohibits the consummation of any of the transactions contemplated by this Agreement. (e) Opinion of Counsel, Etc. At the Closing the Investor shall have received an opinion of counsel to the Company (who may be in-house counsel) in the form attached hereto, and such other certificates and documents as the Investor or its counsel shall reasonably require incident to the Closing. ARTICLE V Legend on Stock Each certificate representing the Shares and, if appropriate, securities issued upon conversion thereof, shall be stamped or otherwise imprinted with a legend substantially in the following form: THESE SECURITIES HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933 OR ANY STATE SECURITIES LAWS. THEY MAY NOT BE SOLD OR OFFERED FOR SALE EXCEPT PURSUANT TO AN EFFECTIVE REGISTRATION STATEMENT UNDER SAID ACT AND ANY APPLICABLE STATE SECURITIES LAW OR AN APPLICABLE EXEMPTION FROM SUCH REGISTRATION REQUIREMENTS. The Company agrees to reissue certificates representing the Shares or, if applicable, the securities issued upon conversion thereof without the legend set forth above at such time as (i) in the opinion of counsel to the holder, the holder thereof is permitted to dispose of such Shares (or securities issued upon conversion thereof) pursuant to Rule 144 under the Act, (ii) the securities are sold to a purchaser or purchasers who (in the opinion of counsel to such purchasers, in form and substance reasonably satisfactory to the Company and its counsel) are able to dispose of such shares publicly without registration under the Act, or (iii) such securities are included in an effective registration statement under the Act. ARTICLE VI Termination Section VI.1 Termination by Mutual Consent. This Agreement may be terminated at any time prior to the Closing by the mutual written consent of the Company and the Investor. Section VI.2 Other Termination. This Agreement may be terminated by action of the Board of Directors or other governing body of the Investor or the Company at any time if the Closing shall not have been consummated by the fifth business day following the date of this Agreement and in no event later than September 30, 1997. Section VI.3 Automatic Termination. This Agreement shall automatically terminate without any further action of either party hereto if the Closing shall not have occurred by the tenth business day following the date of this Agreement. 11 ARTICLE VII Miscellaneous Section VII.1 Fees and Expenses. Except as otherwise set forth in Section 1.4 hereof, each party shall pay the fees and expenses of its advisers, counsel, accountants and other experts, if any, and all other expenses incurred by such party incident to the negotiation, preparation, execution, delivery and performance of this Agreement. The Company will compensate the Placement Agent and will indemnify it against certain liabilities. The Placement Agent's compensation includes a cash payment in an amount equal to 8.7% of the Purchase Price of Shares sold by the Company, and the issuance of warrants to the Placement Agent to purchase that number of Shares equal to 10% of the number of Shares sold. The Company shall pay all stamp and other taxes and duties levied in connection with the issuance of the Shares pursuant hereto. Section VII.2 Specific Enforcement, Consent to Jurisdiction. (a) The Company and the Investor acknowledge and agree that irreparable damage would occur in the event that any of the provisions of this Agreement were not performed in accordance with their specific terms or were otherwise breached. It is accordingly agreed that the parties shall be entitled to an injunction or injunctions to prevent or cure breaches of the provisions of this Agreement and to enforce specifically the terms and provisions hereof, this being in addition to any other remedy to which either of them may be entitled by law or equity. (b) Each of the Company and the Investor (i) hereby irrevocably submits to the jurisdiction of the United States District Court and other courts of the United States sitting in New York for the purposes of any suit, action or proceeding arising out of or relating to this Agreement and (ii) hereby waives, and agrees not to assert in any such suit, action or proceeding, any claim that it is not personally subject to the jurisdiction of such court, that the suit, action or proceeding is brought in an inconvenient forum or that the venue of the suit, action or proceeding is improper. Each of the Company and the Investor consents to process being served in any such suit, action or proceeding by mailing a copy thereof to such party at the address in effect for notices to it under this Agreement and agrees that such service shall constitute good and sufficient service of process and notice thereof. Nothing in this paragraph shall affect or limit any right to serve process in any other manner permitted by law. Section VII.3 Entire Agreement: Amendment. This Agreement contains the entire understanding of the parties with respect to the matters covered hereby and, except as specifically set forth herein, neither the Company nor the Investor makes any representation, warranty, covenant or undertaking with respect to such matters. No provision of this Agreement may be waived or amended other than by a written instrument signed by the party against whom enforcement of any such amendment or waiver is sought. Section VII.4 Notices. Any notice or other communication required or permitted to be given hereunder shall be in writing and shall be effective (a) upon hand delivery or delivery by telex (with correct answer back received), telecopy or facsimile at the address or number designated below (if delivered on a business day during normal business hours where such notice is to be received), or the first business day following such delivery (if delivered other than on a business day during normal business hours where such notice is to be received) or (b) on the second business day following the date of mailing by express courier service, fully prepaid, addressed to such address, or upon actual receipt of such mailing, whichever shall first occur. The addresses for such communications shall be: to the Company: Jaime W. Ellertson, President Interleaf, Inc. 62 Fourth Avenue Waltham, MA 02154 Fax: (617) 290-4977 12 with a copy to: Anil Khosla, Esq. Peabody & Arnold 50 Rowes Wharf Boston, MA 02110-21253342 Fax: (617) 951-2125 to the Investor: At the address set forth at the foot of this Agreement, with copies to Investor's counsel as set forth at the foot of this Agreement or as specified in writing by Investor with a copy to: Gerard K. Cappello Cappello Capital Corp. 1299 Ocean Avenue, Suite 306 Santa Monica, California 90401 Fax: (310) 393-4838 Any party hereto may from time to time change its address for notices by giving at least 10 days' written notice of such changed address to the other party hereto. Section VII.5 Waivers. No waiver by either party of any default with respect to any provision, condition or requirement of this Agreement shall be deemed to be a continuing waiver in the future or a waiver of any other provision, condition or requirement hereof, nor shall any delay or omission of either party to exercise any right hereunder in any manner impair the exercise of any such right accruing to it thereafter. Section VII.6 Headings. The headings herein are for convenience only, do not constitute a part of this Agreement and shall not be deemed to limit or affect any of the provisions hereof. Section VII.7 Successors and Assigns. Except as otherwise provided herein, this Agreement shall be binding upon and inure to the benefit of the parties and their successors and assigns. The parties hereto may amend this Agreement without notice to or the consent of any third party. Section VII.8 No Third Party Beneficiaries. This Agreement is intended for the benefit of the parties hereto and their respective permitted successors and assigns and is not for the benefit of, nor may any provision hereof be enforced by, any other person. Section VII.9 Governing Law. This Agreement shall be governed by and construed and enforced in accordance with the internal laws of New York without regard to such state's principles of conflict of laws. Section VII.10 Survival. The representations and warranties of the Company and the Investor contained in Article II and the agreements and covenants set forth in Articles I, III, V and VII shall survive the Closing for five years. Section VII.11 Execution. This Agreement may be executed in two or more counterparts, all of which shall be considered one and the same agreement and shall become effective when counterparts have been signed by each party and delivered to the other party, it being understood that both parties need not sign the same counterpart. In the event any signature is delivered by facsimile transmission, the party using such means of delivery shall cause the manually executed signature page(s) to be physically delivered to the other party within five days of the execution hereof. Section VII.12 Publicity. The Company agrees that it will not disclose, and will not include in any public announcement, the name of the Investor without its consent, unless and until such disclosure is required by law or applicable regulation, and then only to the extent of such requirement. 13 IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be duly executed by their respective authorized officers as of the date hereof. INTERLEAF, INC. By: ---------------------------- Name: Jaime W. Ellertson Its: President Number of Shares THE INVESTOR: By: - ----------------- ----------------------------- Name: Dollar Amount at Its: $1,000 per share Investor's address: $ Percentage limitation, - ----------------- if desired ------------ Name and address of Investor's counsel: 14 IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be duly executed by their respective authorized officers as of the date hereof. INTERLEAF, INC. By: ---------------------------- Name: Jaime W. Ellertson Its: President Number of Shares THE INVESTOR: PROFUTURES SPECIAL EQUITY FUNDS, L.P. By: Profutures Fund Management, Inc. a General Partner 125 By: - ----------------- ----------------------------- Name: Gary D. Halbert Dollar Amount at Its: President $1,000 per share Investor's address: 1310 Highway 620 South, Suite 200 $ 125,000 - ----------------- Percentage limitation, if desired: None ------- Name and address of Investor's counsel: John K. Gray Fishman, Jones, Walsh & Marsh, P.C. 1310 Highway 620 South, Suite 200 Austin, TX 78734 15 IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be duly executed by their respective authorized officers as of the date hereof. INTERLEAF, INC. By: ---------------------------- Name: Jaime W. Ellertson Its: President Number of Shares THE INVESTOR: 50 By: - ----------------- ----------------------------- Name: Gerard K. Capello Dollar Amount at Its: $1,000 per share Investor's address: 1299 Ocean Ave, #306 Santa Monica, CA 90401 $ 50,000 Percentage limitation, if desired 5%. - ------------- ----- Name and address of Investor's counsel: 16 IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be duly executed by their respective authorized officers as of the date hereof. INTERLEAF, INC. By: ---------------------------- Name: Jaime W. Ellertson Its: President Number of Shares THE INVESTOR: 50 By: - ----------------- ----------------------------- Name: Linda S. Capello Dollar Amount at Its: $1,000 per share Investor's address: 1299 Ocean Ave, #306 Santa Monica, CA 90401 $ 50,000 Percentage limitation, if desired 5%. - ------------- ----- Name and address of Investor's counsel: 17 IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be duly executed by their respective authorized officers as of the date hereof. INTERLEAF, INC. By: ---------------------------- Name: Jaime W. Ellertson Its: President Number of Shares THE INVESTOR: Crisostomo B. Garcia Trust 150 By: - ----------------- ----------------------------- Name: Crisostomo B. Garcia Dollar Amount at Its: Trustee $1,000 per share Investor's address: 19750 Circle Oriente Rancho Santa Fe, CA 92067 $ 150,000 Percentage limitation, if desired - ------------- ----- Name and address of Investor's counsel: 18 IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be duly executed by their respective authorized officers as of the date hereof. INTERLEAF, INC. By: ---------------------------- Name: Jaime W. Ellertson Its: President Number of Shares THE INVESTOR: 100 By: - ----------------- ----------------------------- Name: Theodore Meisel Dollar Amount at Its: $1,000 per share Investor's address: $ 100,000 Percentage limitation, if desired ___. - ------------- Name and address of Investor's counsel: 19 IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be duly executed by their respective authorized officers as of the date hereof. INTERLEAF, INC. By: ---------------------------- Name: Jaime W. Ellertson Its: President Number of Shares THE INVESTOR: 25 By: - ----------------- ----------------------------- Name: Barry Meisel Dollar Amount at Its: $1,000 per share Investor's address: 505 East 77th Street New York, NY 1016 $ 25,000 Percentage limitation, if desired - ------------- Name and address of Investor's counsel: 20 IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be duly executed by their respective authorized officers as of the date hereof. INTERLEAF, INC. By: ---------------------------- Name: Jaime W. Ellertson Its: President Number of Shares THE INVESTOR: NY - DBL Diamond Group 100 By: - ----------------- ----------------------------- Name: Lawrence K. Fleishman Dollar Amount at Its: Partner $1,000 per share Investor's address: 150 Vanderbilt Motor Parkway, Suite 300 Hauppauge, NY 11788 $ 100,000 Percentage limitation, if desired 4.99%. - ------------- ------- Name and address of Investor's counsel: 21 IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be duly executed by their respective authorized officers as of the date hereof. INTERLEAF, INC. By: ---------------------------- Name: Jaime W. Ellertson Its: President Number of Shares THE INVESTOR: 200 By: - ----------------- ----------------------------- Name: Laredo Capital Partners Dollar Amount at Its: $1,000 per share Investor's address: 150 Vanderbilt Motor Parkway, Suite 300 Hauppauge, NY 11788 $200,000 Percentage limitation, if desired ___. - ------------- Name and address of Investor's counsel: 22 IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be duly executed by their respective authorized officers as of the date hereof. INTERLEAF, INC. By: ---------------------------- Name: Jaime W. Ellertson Its: President Number of Shares THE INVESTOR: 1,500 By: - ----------------- ----------------------------- Name: SIL Nominees Ltd. Dollar Amount at Its: $1,000 per share Investor's address: P.O. Box 5078 Rivonia 2128 South Africa Deliver Certificate to: Slome Capital Corp. 1888 Century Park East Suite 1108 Los Angeles, CA 90067 Attn: Ansel A. Slome $1,500,000 Percentage limitation, if desired ___. - ------------- Name and address of Investor's counsel: 23 IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be duly executed by their respective authorized officers as of the date hereof. INTERLEAF, INC. By: ---------------------------- Name: Jaime W. Ellertson Its: President Number of Shares THE INVESTOR: 450 By: - ----------------- ----------------------------- Name: Nelson Partners Dollar Amount at Its: $1,000 per share Investor's address: c/o Citadel Investment Group, L.L.C. 225 West Washington Street 9th Floor Chicago, IL 60606 Deliver Certificate to: Attn: Anne Dupuy 129 Front Street Hamilton HM-12 Bermuda $450,000 Percentage limitation, if desired ___. - ------------- Name and address of Investor's counsel: 24 IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be duly executed by their respective authorized officers as of the date hereof. INTERLEAF, INC. By: ---------------------------- Name: Jaime W. Ellertson Its: President Number of Shares THE INVESTOR: 550 By: - ----------------- ----------------------------- Name: Olympus Securities, Ltd. Dollar Amount at Its: $1,000 per share Investor's address: c/o Citadel Investment Group, L.L.C. 225 West Washington Street 9th Floor Chicago, IL 60606 Deliver Certificate to: Attn: Anne Dupuy 129 Front Street Hamilton HM-12 Bermuda $550,000 Percentage limitation, if desired ___. - ------------- Name and address of Investor's counsel: 25 IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be duly executed by their respective authorized officers as of the date hereof. INTERLEAF, INC. By: ---------------------------- Name: Jaime W. Ellertson Its: President Number of Shares THE INVESTOR: 50 By: - ----------------- ----------------------------- Name: Kenneth L. Staub Dollar Amount at Its: $1,000 per share Investor's address: 325 S. Maple Drive Beverley Hills, CA 90212 $50,000 Percentage limitation, if desired ___. - ------------- Name and address of Investor's counsel: 26 IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be duly executed by their respective authorized officers as of the date hereof. INTERLEAF, INC. By: ---------------------------- Name: Jaime W. Ellertson Its: President Number of Shares THE INVESTOR: 500 By: - ----------------- ----------------------------- Name: The Tail Wind Fund Ltd. Dollar Amount at Its: $1,000 per share Investor's address: c/o EASI 4th Floor, 1 Regent Street London SW1Y 4NS United Kingdom Attn: D.A. Crook Deliver Certificate to: The Tail Wind Fund Windemere House 404 E. Bay Street Nassau, Bahamas Attn: S. Pletsher $500,000 Percentage limitation, if desired ___. - ------------- Name and address of Investor's counsel: 27 IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be duly executed by their respective authorized officers as of the date hereof. INTERLEAF, INC. By: ---------------------------- Name: Jaime W. Ellertson Its: President Number of Shares THE INVESTOR: 500 By: - ----------------- ----------------------------- Name: Deere Park Mgmt. Inc. Dollar Amount at Its: $1,000 per share Investor's address: 650 Dundee Road, Suite 460 Northbrook, IL 60062 $500,000 Percentage limitation, if desired ___. - ------------- Name and address of Investor's counsel: 28 IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be duly executed by their respective authorized officers as of the date hereof. INTERLEAF, INC. By: ---------------------------- Name: Jaime W. Ellertson Its: President Number of Shares THE INVESTOR: 200 By: - ----------------- ----------------------------- Name: Hick Investments, Ltd. Dollar Amount at Its: $1,000 per share Investor's address: c/o Angelo, Gordon & Co., L.P. 245 Park Avenue, 26th Floor New York, NY 10167 $200,000 Percentage limitation, if desired . - ------------- ------- Name and address of Investor's counsel: 29 IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be duly executed by their respective authorized officers as of the date hereof. INTERLEAF, INC. By: ---------------------------- Name: Jaime W. Ellertson Its: President Number of Shares THE INVESTOR: 400 By: - ----------------- ----------------------------- Name: Ramius Fund, Ltd. Dollar Amount at Its: $1,000 per share Investor's address: Ramius Fund, Ltd. c/o Angelo, Gordon & Co., L.P. 245 Park Avenue, 26th Floor New York, NY $400,000 Percentage limitation, if desired ____. - ------------- Name and address of Investor's counsel: 30 IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be duly executed by their respective authorized officers as of the date hereof. INTERLEAF, INC. By: ---------------------------- Name: Jaime W. Ellertson Its: President Number of Shares THE INVESTOR: 300 By: - ----------------- ----------------------------- Name: Raphael, L.P. Dollar Amount at Its: $1,000 per share Investor's address: Raphael, L.P. c/o Angelo, Gordon & Co., L.P. 245 Park Avenue, 26th Floor New York, NY $300,000 Percentage limitation, if desired ___. - ------------- Name and address of Investor's counsel: 31 IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be duly executed by their respective authorized officers as of the date hereof. INTERLEAF, INC. By: ---------------------------- Name: Jaime W. Ellertson Its: President Number of Shares THE INVESTOR: 75 By: - ----------------- ----------------------------- Name: AG Super Fund International Partners, L.P. Dollar Amount at Its: $1,000 per share Investor's address: AG Super Fund International Partners, L.P. c/o Angelo, Gordon & Co., L.P. 245 Park Avenue, 26th Floor New York, NY 10167 $75,000 Percentage limitation, if desired ___. - ------------- Name and address of Investor's counsel: 32 IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be duly executed by their respective authorized officers as of the date hereof. INTERLEAF, INC. By: ---------------------------- Name: Jaime W. Ellertson Its: President Number of Shares THE INVESTOR: 75 By: - ----------------- ----------------------------- Name: GAM Artbitrage Investments, Inc. Dollar Amount at Its: $1,000 per share Investor's address: GAM Artbitrage Investments, Inc. c/o Angelo, Gordon & Co., L.P. 245 Park Avenue, 26th Floor New York, NY 10167 $75,000 Percentage limitation, if desired ___. - ------------- Name and address of Investor's counsel: 33 IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be duly executed by their respective authorized officers as of the date hereof. INTERLEAF, INC. By: ---------------------------- Name: Jaime W. Ellertson Its: President Number of Shares THE INVESTOR: 950 By: - ----------------- ----------------------------- Name: Leonardo, L.P. Dollar Amount at Its: $1,000 per share Investor's address: Leonardo, L.P. c/o Angelo, Gordon & Co., L.P. 245 Park Avenue, 26th Floor New York, NY 10167 $950,000 Percentage limitation, if desired ___. - ------------- Name and address of Investor's counsel: 34 IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be duly executed by their respective authorized officers as of the date hereof. INTERLEAF, INC. By: ---------------------------- Name: Jaime W. Ellertson Its: President Number of Shares THE INVESTOR: 500 By: - ----------------- ----------------------------- Name: Lakeshore International Ltd. Dollar Amount at Its: $1,000 per share Investor's address: Lakeshore International Ltd. c/o Global Capital Management 601 Carlson Parkway, Suite 200 Minnetonka, MN 55305 $500,000 Percentage limitation, if desired ___. - ------------- Name and address of Investor's counsel: 35 IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be duly executed by their respective authorized officers as of the date hereof. INTERLEAF, INC. By: ---------------------------- Name: Jaime W. Ellertson Its: President Number of Shares THE INVESTOR: 250 By: - ----------------- ----------------------------- Name: Earl E. Gales, Jr. Dollar Amount at Its: $1,000 per share Investor's address: Earl E. Gales, Jr. 5933 W. Century Blvd. Suite 1000 Los Angeles, CA 90045 $250,000 Percentage limitation, if desired ___. - ------------- Name and address of Investor's counsel: 36 IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be duly executed by their respective authorized officers as of the date hereof. INTERLEAF, INC. By: ---------------------------- Name: Jaime W. Ellertson Its: President Number of Shares THE INVESTOR: 25 By: - ----------------- ----------------------------- Name: John M. Bendheim, Jr. Dollar Amount at Its: $1,000 per share Investor's address: John M. Bendheim, Jr. 1152 Sunset Vale Ave. Los Angeles, CA 90069 $25,000 Percentage limitation, if desired ___. - ------------- Name and address of Investor's counsel: 37 IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be duly executed by their respective authorized officers as of the date hereof. INTERLEAF, INC. By: ---------------------------- Name: Jaime W. Ellertson Its: President Number of Shares THE INVESTOR: 500 By: - ----------------- ----------------------------- Name: Bruce Newberg, Trustee Newberg Family Trust Dollar Amount at Its: $1,000 per share Investor's address: Newberg Family Trust UTD 12/18/90 11601 Wilshire Blvd. Suite 1940 Los Angeles, CA 90025 $500,000 Percentage limitation, if desired ___. - ------------- Name and address of Investor's counsel: 38 SCHEDULE I RESOLUTION ESTABLISHING PREFERENCES of 6% CONVERTIBLE PREFERRED STOCK RESOLVED that there shall be a series of shares of the Preferred Stock of the Corporation designated "6% Convertible Preferred Stock"; that the number of authorized shares of such series shall be 11,000 and that the rights and preferences of such series (the "6% Preferred") and the limitations or restrictions thereon, shall be as follows: 1. Dividends. (a) The holders of the 6% Preferred shall be entitled to receive out of any assets legally available therefor cumulative dividends at the rate of $60.00 per share per annum, payable annually on September 30 of each year, when and as declared by the Board of Directors, in preference and priority to any payment of any dividend on the Common Stock or any other class or series of stock of the Corporation ranking junior to the 6% Preferred and ranking pari passu with the Class C Preferred Stock of the Corporation. Such dividends shall accrue on any given share from the day of original issuance of such share and shall accrue from day to day whether or not earned or declared. If at any time dividends on the outstanding 6% Preferred at the rate set forth above shall not have been paid or declared and set apart for payment with respect to all preceding periods, the amount of the deficiency shall be fully paid or declared and set apart for payment, but without interest, before any distribution, whether by way of dividend or otherwise, shall be declared or paid upon or set apart for the shares of any other class or series of stock of the Corporation except a class or series which is entitled to priority over the 6% Preferred. (b) Dividends shall be paid in shares of 6% Preferred valued at $1,000 per share. Dividends not theretofore paid shall be paid upon conversion of any share of the 6% Preferred and shall be simultaneously converted into Common Stock together with the share on which such dividends have accrued. (c) At its option, the Corporation may elect to pay accumulated dividends in cash. The Corporation must give notice of such election in the manner provided in Section 5 hereof at least ten (10) calendar days prior to both the date of payment and the date Notice of Conversion is given by a holder. The Corporation may choose the cash election any number of times and each such election may be effective for any length of time established by the Corporation and stated in its notice of the election. 2. Liquidation Preference. (a) The liquidation rights of the 6% Preferred shall rank pari passu with the Class C Preferred Stock of the Corporation. In the event of any liquidation, dissolution or winding up of the Corporation, either voluntary or involuntary, the holders of the 6% Preferred shall be entitled to receive, prior and in preference to any distribution of any assets of the Corporation to the holders of the Common Stock or any other class or series of shares except any class or series which is entitled to priority over the 6% Preferred and except for ratable distribution to the Class C Preferred Stock, the amount of $1,000 per share plus any accrued but unpaid dividends plus any amounts accrued but unpaid under Section 1.4(b)(iv) of the Preferred Stock Investment Agreement under which shares of the 6% Preferred were originally issued (the "Liquidation Preference"). (b) Subject to the last sentence of this Section, a consolidation or merger of the Corporation with or into any other corporation or corporations, or a sale of all or substantially all of the assets of the Corporation, shall, at the option of the holders of the 6% Preferred, be deemed a liquidation, dissolution or winding up within the 39 meaning of this Section 2 if the shares of stock of the Corporation (along with all derivative securities) outstanding immediately prior to such transaction represent immediately after such transaction less than a majority of the voting power of the surviving corporation (or of the acquirer of the Corporation's assets in the case of a sale of assets). Such option may be exercised by the vote or written consent of holders of a majority of the 6% Preferred at any time within thirty calendar days after written notice of the essential terms of such transaction shall have been given to the holders of the 6% Preferred as provided in Section 5 hereof. Such notice shall be given by the Corporation immediately following determination of such essential terms. If such option is exercised, the holders of the 6% Preferred shall be entitled to receive, in cash, immediately upon the occurrence of such transaction, an amount per share equal to the Liquidation Preference divided by the difference between 100% and the Applicable Percentage determined pursuant to Section 4 hereof. This Section shall not apply to a business combination in which the Common Stock of the Corporation is converted solely into or exchanged solely for voting common stock of the corporation surviving such business combination, if (i) such common stock of the surviving corporation is listed and traded on the NASDAQ National Market, the American Stock Exchange or the New York Stock Exchange, and (ii) the Board of Directors of the Corporation determines in good faith that the conversion rights and other rights and preferences of the 6% Preferred are preserved and not rendered of less value by the terms of such business combination. 3. Mandatory Conversion. On the fifth anniversary of the date of issuance, all then outstanding shares of 6% Preferred shall be automatically converted into Common Stock at the Conversion Price on such anniversary date and otherwise pursuant to the applicable provisions set forth in Section 4 hereof. 4. Conversion. The holders of the 6% Preferred shall have optional conversion rights as follows: (a) Accrual of Conversion Rights. The Conversion Period shall commence 90 days after the date of issuance, and shall continue thereafter for the life of the issue. Each holder of record of 6% Preferred shares on the date of commencement of the Conversion Period (an "Original Holder") shall be entitled to convert in any calendar month the following percentage of the 6% Preferred shares held by such holder on the date of commencement of the Conversion Period (the "Conversion Restriction"). The percentage for each calendar month will be determined based on the highest of the daily low trading prices of the Common Stock during such month, as follows: Highest of daily low trading Percentage becoming prices during month convertible for such month $2.50 or less 10.0% $2.51 to $3.50 10.0% $3.51 to $4.00 12.5% $4.01 to $5.50 15.0% $5.51 to $6.00 17.5% $6.01 to $7.50 20.0% $7.51 to $8.50 22.5% $8.51 or more 25.0% The number of shares which may be converted in any calendar month shall include on a cumulative basis the number of shares which might have been but were not converted during earlier calendar months, except that in any month in which the highest of the daily low trading prices is $2.50 or less, the amount converted shall not exceed 10%. In the case of transfers of shares by an Original Holder the Corporation shall make such notations on its stock ownership records and on the certificates for shares issued upon transfer so as to reflect the portion (if any) of the transferred shares which have become convertible pursuant to this provision, or the Corporation may at its election issue certificates representing the 6% Preferred shares in such form, or with such annotations, as to reflect the time or times at which the shares represented by such certificates will become convertible. (b) Removal of Limitations. The limitations set forth in Section 4(a) hereof, with respect to the percentage of 6% Preferred shares which may be converted during certain time periods, shall terminate and all the 6% Preferred shares shall thereafter be fully convertible if any of the following events or conditions shall occur or exist: (i) 40 an event described in Section 2(b) (subject to the exclusion in the last sentence of such Section) shall occur, whether or not the holders of 6% Preferred deem such event to be a liquidation; (ii) proceedings for relief under any bankruptcy or similar law for the relief of debtors are instituted by or against the Corporation or any of its significant subsidiaries and, if instituted against the Corporation or such subsidiary, are consented to or not dismissed within 30 days; (iii) the independent auditors of the Corporation shall fail or be unwilling to express within 90 days after the end of the Corporation's fiscal year a customary opinion on the financial statements of the Corporation, or shall express such opinion subject to a "going concern" qualification; (iv) the Common Stock of the Corporation shall cease to be listed on either the NASDAQ Small-Cap Market, the NASDAQ National Market, or a national securities exchange; or (v) there shall be a material breach by the Corporation of any of its obligations hereunder or under the Preferred Stock Investment Agreements pursuant to which the 6% Preferred was originally issued which has a material adverse effect on the holders of 6% Preferred. (c) Right to Convert. At and after the time it has become convertible, each share of 6% Preferred shall be convertible, at the option of the holder thereof, into such number of fully paid and nonassessable shares of Common Stock as is determined by dividing (i) the liquidation preference of the 6% Preferred share determined pursuant to Section 2(a) hereof on the date the notice of conversion is given, by (ii) the Conversion Price determined as hereinafter provided in effect on said date, provided however, that a share of 6% Preferred shall not be converted into Common Stock if following such conversion the holder thereof together with affiliates of such holder would be the beneficial owners (as defined in Rule 13d-3 under the Securities Exchange Act of 1934) of 10% or more of the Common Stock of the Corporation. (d) Mechanics of Conversion. To convert shares of 6% Preferred into shares of Common Stock, the holder shall give written notice to the Corporation (which notice may be given by facsimile transmission) that such holder elects to convert the same and shall state therein the number of shares to be converted and the name or names in which such holder wishes the certificate or certificates for shares of Common Stock to be issued. Promptly thereafter the holder shall surrender the certificate or certificates representing the shares to be converted, duly endorsed, at the office of the Corporation or of any transfer agent for such shares, or at such other place designated by the Corporation. The Corporation shall, immediately upon receipt of such notice, issue and deliver to or upon the order of such holder, against delivery of the certificates representing the shares which have been converted, a certificate or certificates for the number of shares of Common Stock to which such holder shall be entitled, and a certificate representing the shares of 6% Preferred not so converted, if any. The Corporation shall effect such issuance immediately and shall transmit the certificates by messenger or overnight delivery service to reach the address designated by such holder within three trading days after the receipt of such notice. Notice of conversion may be given by a holder at any time of day up to 5:00 pm Los Angeles time, and such conversion shall be deemed to have been made immediately prior to the close of business on the date such notice of conversion is given (the "Conversion Date"). The person or persons entitled to receive the shares of Common Stock issuable upon such conversion shall be treated for all purposes as the record holder or holders of such shares of Common Stock at the close of business on the Conversion Date. (e) Determination of Conversion Price. (i) On any Conversion Date prior to the first day of the thirteenth calendar month after the Closing, the Conversion Price shall not be less than $1.50, and until the end of the seventh month following the Closing the Conversion Price shall be $5.50. Subject to the foregoing sentence and to the provisions of subsection (e)(iii) and subsection (f) of this Section, on any Conversion Date, the Conversion Price shall be the average of the three (3) lowest daily trading prices of the Common Stock for the 22 consecutive trading days ending with the trading day prior to the Conversion Date, reduced by the Applicable Percentage (as defined below) in effect on the Conversion Date. (ii) The Applicable Percentage shall be as follows: 9.8% starting on the first day of the eighth (8th) calendar month after Closing. 11.1% starting on the first day of the ninth (9th) calendar month after Closing. 12.4% starting on the first day of the tenth (10th) calendar month after Closing. 41 13.7% starting on the first day of the eleventh (11th) calendar month after Closing. 15.0% starting on the first day of the twelfth (12th) calendar month after Closing and thereafter. (iii) From and after the first day of the sixteenth (16th) calendar month after Closing, the Maximum Conversion Price ("Conversion Cap") shall be 85% of the average low daily trading price of the Common Stock during the period beginning on the first day of the twelfth (12th) calendar month following Closing and ending on the last day of the fifteenth (15th) calendar month following Closing. Notwithstanding the prior sentence, in no event shall the Conversion Cap be less than the greater of: i) two dollars and fifty cents ($2.50), or ii) the average daily closing price of the Common Stock for the five (5) trading days immediately prior to the Closing. (iv) The terms "low trading price" and "last sale price" of the Common Stock on any day shall mean, respectively, (A) the lowest reported sale price and the last reported sale price of the Common Stock on the principal stock exchange on which the Common Stock is listed, or (B) if the Common Stock is not listed on a stock exchange, the lowest reported sale price and the last reported sale price of the Common Stock on the principal automated securities price quotation system on which sale prices of the Common Stock are reported, or (C) if the Common Stock is not listed on a stock exchange and sale prices of the Common Stock are not reported on an automated quotation system, the lowest bid price and the last bid price for the Common Stock as reported by National Quotation Bureau Incorporated. If none of the foregoing provisions are applicable, the "low trading price" and "last sale price" of the Common Stock on a day will be the fair market value of the Common Stock on that day as determined by a member firm of the New York Stock Exchange, Inc., selected by the Board of Directors of the Corporation. The term "trading day" means (x) if the Common Stock is listed on at least one stock exchange, a day on which there is trading on the principal stock exchange on which the Common Stock is listed, (y) if the Common Stock is not listed on a stock exchange but sale prices of the Common Stock are reported on an automated quotation system, a day on which trading is reported on the principal automated quotation system on which sales of the Common Stock are reported, or (z) if the foregoing provisions are inapplicable, a day on which quotations are reported by National Quotation Bureau Incorporated. The "closing price" of the Common Stock on any day means the "last sale price" as defined above. (v) In the event that during any period of consecutive trading days provided for above, the Corporation shall declare or pay any dividend on the Common Stock payable in Common Stock or in rights to acquire Common Stock, or shall effect a stock split or reverse stock split, or a combination, consolidation or reclassification of the Common Stock, then the Conversion Price and (if such event occurs during or after the 12th month after the date of issuance) the Conversion Cap shall be proportionately decreased or increased, as appropriate, to give effect to such event, and like adjustment shall be made in any price per share specified in dollars herein. (f) Green Floor. If at any time the Conversion Price falls below three dollars ($3.00) per share (the "Green Floor Price"), the Corporation may at its option, exercised by written notice ("Cash Conversion Notice") given to the holders of the 6% Preferred five days prior to the effective date specified in such Notice (the "Effective Date") honor any conversion request otherwise properly made, if at a Conversion Price lower than the Green Floor Price, by a cash payment in lieu of the issuance of Common Stock in an amount equal to the proceeds which would otherwise have been received by the holder if conversion were in fact made into Common Stock and such Common Stock were sold at the high trade price on the trading day immediately preceding the date that the conversion notice is received (the "Cash Conversion Amount"). The Cash Conversion Notice may specify an expiration date of such Notice, or may specify a limitation on the aggregate number of dollars which the Corporation will pay in Cash Conversion Amounts. When such dollar limitation is reached the Corporation shall give immediate notice to the holders of 6% Preferred that the Cash Conversion Notice is no longer in effect. The Corporation may at any time reset the Green Floor Price to any price determined by the Corporation by giving 30 days prior notice to the holders of the 6% Preferred. If notice of conversion shall be given by a holder of 6% Preferred shares on a date that a Cash Conversion Notice is in effect, the Corporation shall within 48 hours following surrender of the share certificate as provided in Section 4(d) hereof make payment of the Cash Conversion Amount to such holder by wire transfer of immediately available funds in U.S. dollars pursuant to such wire transfer instructions as may have been given by such holder, or otherwise by mailing by certified mail a bank cashiers' or certified check for the Cash Conversion Amount to the record address of such holder. A Cash Conversion Notice shall cease to be effective if the Corporation fails to make payment of the Cash Conversion Amount to any holder entitled thereto in the manner and within the time specified in the foregoing sentence, time being of the essence. If a Cash Conversion Notice ceases to be effective pursuant to the 42 foregoing sentence, it shall not thereafter be effective as to any holder and no Cash Conversion Notice may thereafter be given by the Corporation. The number of shares that a holder is entitled to convert, determined pursuant to subsections (a) and (b) of this Section 4, shall not be affected by the giving or effectiveness of a Cash Conversion Notice. Any Cash Conversion Notice shall be given as provided in Section 5 hereof. (g) Distributions. In the event the Corporation shall at any time or from time to time make or issue, or fix a record date for the determination of holders of Common Stock entitled to receive, a dividend or other distribution payable in securities of the Corporation or any of its subsidiaries or other property, other than cash dividends from earnings or dividends of additional shares of Common Stock, then in each such event provision shall be made so that the holders of 6% Preferred shall receive, upon the conversion thereof, the securities or other property which they would have received had they been the owners on the date of such event of the number of shares of Common Stock issuable to them upon conversion. (h) Certificates as to Adjustments. Upon the occurrence of any adjustment or readjustment of the Conversion Price or the Conversion Cap pursuant to Section 4(e)(v) or Section 4(m) hereof, or any adjustment of the cash per-share prices specified herein, the Corporation at its expense shall promptly compute such adjustment or readjustment in accordance with the terms hereof and prepare and furnish to each holder of 6% Preferred a certificate setting forth such adjustment or readjustment and showing in detail the facts upon which such adjustment or readjustment is based. The Corporation shall, upon the written request at any time of any holder of 6% Preferred, furnish or cause to be furnished to such holder a like certificate prepared by the Corporation setting forth (i) such adjustments and readjustments, and (ii) the number of other securities and the amount, if any, of other property which at the time would be received upon the conversion of 6% Preferred with respect to each share of Common Stock received upon such conversion. If any holder disputes the computation of such adjustment the Corporation shall cause independent public accountants selected by the Corporation to verify and, if necessary, correct such computation. (i) Notice of Record Date. In the event of any taking by the Corporation of a record of the holders of any class of securities for the purpose of determining the holders thereof who are entitled to receive any dividend (other than a cash dividend) or other distribution, any security or right convertible into or entitling the holder thereof to receive additional shares of Common Stock, or any right to subscribe for, purchase or otherwise acquire any shares of stock of any class or any other securities or property, or to receive any other right, the Corporation shall give notice to each holder of 6% Preferred at least 10 days prior to such date specifying the date on which any such record is to be taken for the purpose of such dividend, distribution, security or right and the amount and character of such dividend, distribution, security or right. (j) Issue Taxes. The Corporation shall pay any and all issue and other taxes, excluding any income, franchise or similar taxes, that may be payable in respect of any issue or delivery of shares of Common Stock on conversion of shares of 6% Preferred pursuant hereto; provided, however, that the Corporation shall not be obligated to pay any transfer taxes resulting from any transfer requested by any holder in connection with any such conversion. (k) Reservation of Stock Issuable Upon Conversion. The Corporation shall at all times reserve and keep available out of its authorized but unissued shares of Common Stock, solely for the purpose of effecting the conversion of the shares of the 6% Preferred, such number of its shares of Common Stock as shall from time to time be sufficient to effect the conversion of all outstanding shares of the 6% Preferred, and if at any time the number of authorized but unissued shares of Common Stock shall not be sufficient to effect the conversion of all then outstanding shares of the 6% Preferred, the Corporation will take such corporate action as may, in the opinion of its counsel, be necessary to increase its authorized but unissued shares of Common Stock to such number of shares as shall be sufficient for such purpose, including, without limitation, engaging in best efforts to obtain the requisite shareholder approval as promptly as practicable. (l) Fractional Shares. No fractional shares shall be issued upon the conversion of any share or shares of 6% Preferred. All shares of Common Stock (including fractions thereof) issuable upon conversion of more than one share of 6% Preferred by a holder thereof shall be aggregated for purposes of determining whether the conversion would result in the issuance of any fractional share. If, after the aforementioned aggregation, the conversion would result in the issuance of a fraction of a share of Common Stock, the Corporation shall, in lieu of issuing any 43 fractional share, pay the holder otherwise entitled to such fraction a sum in cash equal to the fair market value of such fraction on the date of conversion (as determined in good faith by the Board of Directors of the Corporation). (m) Reorganization or Merger. In case of any reorganization or any reclassification of the capital stock of the Corporation or any consolidation or merger of the Corporation with or into any other corporation or corporations or a sale of all or substantially all of the assets of the Corporation to any other person, and the holders of 6% Preferred do not elect to treat such transaction as a liquidation, dissolution or winding up as provided in Section 2, then, as part of such reorganization, consolidation, merger or sale, provision shall be made so that each share of 6% Preferred shall thereafter be convertible into the number of shares of stock or other securities or property (including cash) to which a holder of the number of shares of Common Stock deliverable upon conversion of such share of 6% Preferred would have been entitled upon the record date of (or date of, if no record date is fixed) such event and, in any case, appropriate adjustment (as determined by the Board of Directors) shall be made in the application of the provisions herein set forth with respect to the rights and interests thereafter of the holders of the 6% Preferred, to the end that the provisions set forth herein shall thereafter be applicable, as nearly as equivalent as is practicable, in relation to any shares of stock or the securities or property (including cash) thereafter deliverable upon the conversion of the shares of 6% Preferred. The Corporation shall have no obligation to obtain the prior consent of the holders of 6% Preferred, individually or as a class, except as expressly provided herein or as provided by applicable law. 5. Notices. Any notice to be given to the holders of the 6% Preferred shall be (i) mailed by first class mail postage prepaid to each holder of 6% Preferred at the address shown on the records of the Corporation for such holder, (ii) transmitted by telecopy or facsimile transmission to any holder which has supplied a telecopy or facsimile address to the Corporation, and (iii) unless receipted for by telecopy or facsimile on the date such notice is given, shall be transmitted by an overnight delivery service or courier service for delivery at the address shown on the records of the Corporation for such holder on the first business day following the date such notice is given, or if delivery in one business day to such address cannot be effected by such delivery service, then on the earliest day on which such delivery can be made. 6. Other Provisions. For all purposes of this Resolution, the term "date of issuance" or "closing" shall mean the day on which shares of the 6% Preferred are first issued by the Corporation, and the terms "trading price", "low trading price", "closing price", "last trade price", and "trading days" shall have the meanings given them in Section 4(e) hereof. Any provision herein which conflicts with or violates any applicable usury law shall be deemed modified to the extent necessary to avoid such conflict or violation. 7. Restrictions and Limitations. The Corporation shall not undertake the following actions without the consent of the holders of a majority of the 6% Preferred: (i) modify its Certificate of Incorporation or Bylaws so as to amend or change any of the rights, preferences, or privileges of the 6% Preferred, (ii) authorize or issue any other equity security senior to the 6% Preferred, or (iii) purchase or otherwise acquire for value any Common Stock or other equity security of the Corporation either junior or senior to or on a parity with the 6% Preferred while there exists any arrearage in the payment of cumulative dividends hereunder. 8. Voting Rights. Except as provided herein or as provided for by law, the 6% Preferred shall have no voting rights. 9. Attorneys' Fees. Any holder of 6% Preferred shall be entitled to recover from the Corporation the reasonable attorneys' fees and expenses incurred by such holder in connection with enforcement by such holder of any obligation of the Corporation hereunder, if such holder is the prevailing party in an action or proceeding to compel such enforcement. 10. Limitation on Number of Conversion Shares. The Corporation shall not be obligated to issue, in the aggregate, more than 3,150,000 shares of Common Stock as presently constituted (the "Nasdaq Cap") upon conversion of the 6% Preferred, if issuance of a larger number of shares would constitute a breach of the Rules or Designation Criteria of the NASDAQ Stock Market (the "NASDAQ Rules"). Subject to the obligation to effect certain redemptions pursuant to the last three sentences of this Section, if further issuances of shares of Common Stock upon conversion of the 6% Preferred would constitute a breach of the NASDAQ Rules (i.e., all of the shares permitted to be issued under 44 the Nasdaq Cap shall have been so issued), then so long thereafter as such limitation shall continue to be applicable and any shares of 6% Preferred are submitted for conversion such shares shall receive in cash an amount equal to the Cash Conversion Amount determined as provided in Section 4(f) hereof, in lieu of the Common Stock which such shares would otherwise be entitled to receive upon conversion. Payment of the Cash Conversion Amount shall be made no later than as specified in Section 4(f) and shall bear daily interest thereafter at the rate of one-tenth of one percent per day until paid. The NASDAQ Cap shall be proportionately and equitably adjusted in the event of stock splits, stock dividends, reverse stock splits, reclassifications or other such events, in such manner as the Board of Directors of the Corporation shall reasonably determine. If (A) the Corporation is unable to obtain the requisite shareholder approval concerning the issuance of shares of Common Stock upon conversion of the 6% Preferred to satisfy the NASDAQ Rules prior to December 31, 1997, then (B) the Corporation shall immediately redeem, at a "Special Redemption Price" equal to 110% of the liquidation preference of such shares, the smallest number of Shares which is sufficient, in the Corporation's reasonable judgment, such that following such redemption, conversion of the remaining shares of 6% Preferred would not constitute a breach of the Corporation's obligations under the NASDAQ Rules. Any redemption effected pursuant to the preceding sentence shall require 15 days' notice and the Redemption Date shall be not more than 15 days after the date specified in Clause A of the preceding sentence. Such redemption shall be made pro-rata. If there shall be a default in payment of the Special Redemption Price, the amount so payable shall bear daily interest from and after the Redemption Date at the rate of one-tenth of one percent per day until paid. 45 Attachment to Exhibit 10(aa) September 29, 1997 To the Several Investors Who Are Parties to Preferred Stock Investment Agreements with Interleaf, Inc. Peabody & Arnold 50 Rowes Wharf Boston, Massachusetts 02110-3342 Re: Purchase of 6% Convertible Preferred Stock of Interleaf, Inc. Ladies and Gentlemen: I am the General Counsel of Interleaf, Inc. (the "Company"), a Massachusetts corporation, and have served as such in connection with the execution and delivery of a Preferred Stock Investment Agreement dated on or about September 30, 1997, between the Company and each of you (severally, the "Agreement"). Capitalized terms used without definition herein are used with the meanings attributed to such terms in the Agreement. This opinion is being rendered to you pursuant to Section 4.2(e) of the Agreement. I have examined and am familiar with, and have relied upon, the following documents: (a) the Articles of Organization of the Company, as amended; (b) a certificate dated as of a recent date of the Secretary of State of Massachusetts certifying as to the leal existence and good standing of the Company in such jurisdiction; (c) the By-Laws of the Company, as amended; (d) certified copies of resolutions of the Board of Directors of the Company authorizing the execution, delivery and performance by the Company of the Agreement and the transactions contemplated thereby; (e) and such other documents, instruments and certificates (including, but not limited to, certificates of public officials and officers of the Company) as I have considered necessary for purposes of this opinion. In my examination of the documents described in the preceding paragraph, I have assumed the genuineness of all signatures, the authenticity of all documents submitted to me as originals, the conformity to original documents of all documents submitted to me as certified or photostatic copies and the authenticity of the originals of such latter documents. Insofar as this opinion relates to factual matters, the information with respect to which is in the possession of the Company, I have relied (without independent investigation) upon representations made to me by one or more officers or employees of the Company and by the Company in the Agreement. I have assumed that the Agreement is the valid, binding and enforceable obligation of each party thereto other than the Company. This opinion is made expressly subject to the following upon which I express no opinion: a. The operation and effect of any laws and judicial decisions with respect to bankruptcy, insolvency, moratorium, reorganization, fraudulent conveyances and similar laws affecting creditors rights generally, or the operation and effect of general principles of equity or judicial decisions relating to or affecting generally the enforcement of creditors' rights or remedies for the collection of debtors' obligations; b. Judicial decisions governing the availability of specific performance, injunctive relief or other equitable remedies; c. Unenforceability under certain circumstances of contractual provisions (i) waiving broadly or vaguely stated rights or unknown future rights, or (ii) to the effect that: (a) rights or remedies are not exclusive, (b) every right or remedy is cumulative or may be exercised in addition to or with any other right or remedy, or (c) the election of some particular right or remedy does not preclude recourse to one or more remedies; d. The enforcement of provisions in the Agreement that may be restricted by the effects of state laws which provide that a court may refuse to enforce or may limit the application of a contract or any clause of a contract which the court finds to have been (i) unconscionable at the time it was made, or (ii) an adhesion contract; and e. Indemnification provisions have been held to be unenforceable under certain circumstances under federal and state securities laws. Based upon and subject to the foregoing, I am of the opinion that: 1. Performance of the Agreement by the Company will not result in a breach or violation of any of the terms and provisions of the Articles of Organization or By-Laws of the Company as in effect on the date hereof, and will not constitute a material default under any indenture, mortgage, deed of trust or other material agreement or instrument known to me and to which the Company is a party or by which it or any of its properties is bound, and will not violate or contravene any governmental statute, rule or regulation known to me to be applicable to the Company the violation of contravention of which would materially and adversely affect the Company, its subsidiaries, assets, financial condition or operations. 2. Except as disclosed in the financial statements of the Company included in the SEC Documents, or as provided in Schedule I to the Agreement, (i) the Company has no obligation to redeem or repurchase any of its equity securities; (ii) no stockholder or other persons have preemptive or other rights to acquire equity securities of the Company, except that the Company has outstanding options and warrants to purchase its Common Stock as set forth in Exhibit A to the Agreement; and (iii) the Company has no obligation to register any of its securities other than pursuant to the Agreement or as set forth in Exhibit A to the Agreement. This opinion is given as of the date hereof and I assume no obligation to advise you of changes that may hereafter be brought to my attention. This opinion is furnished solely to you at your request for your benefit in connection with the Agreement. I consider this opinion to be a confidential communication and it is not to be furnished, reproduced, distributed, relied upon or disclosed to any person without my prior written consent unless you are obligated in the opinion of counsel to disclose its contents pursuant to court order or applicable law. Very truly yours, John K. Hyvnar General Counsel Attachment to Exhibit 10(aa) October 1, 1997 To the Several Investors Who Are Parties to Preferred Stock Investment Agreements with Interleaf, Inc. Re: Purchase of 6% Convertible Preferred Stock of Interleaf, Inc. Ladies and Gentlemen: We have served as counsel to Interleaf, Inc. (the "Company"), a Massachusetts corporation, in connection with the execution and delivery of a Preferred Stock Investment Agreement dated on or about September 30, 1997, between the Company and each of you (severally, the "Agreement"). Capitalized terms used without definition herein are used with the meanings attributed to such terms in the Agreement. This opinion is being rendered to you pursuant to Section 4.2(e) of the Agreement. We have examined and are familiar with, and have relied upon, the following documents: (a) the Articles of Organization of the Company, as amended; (b) a certificate dated as of a recent date of the Secretary of State of Massachusetts certifying as to the legal existence and good standing of the Company in such jurisdiction; (c) the By-Laws of the Company; (d) certified copies of resolutions of the Board of Directors of the Company authorizing the execution, delivery and performance by the Company of the Agreement and the transactions contemplated thereby; (e) the legal opinion of even date of John K. Hyvnar, Esq., General Counsel of the Company; (f) and such other documents, instruments and certificates (including, but not limited to, certificates of public officials and officers of the Company) as we have considered necessary for purposes of this opinion. In our examination of the documents described in the preceding paragraph, we have assumed the genuineness of all signatures, the authenticity of all documents submitted to us as originals, the conformity to original documents of all documents submitted to us as certified or photostatic copies and the authenticity of the originals of such latter documents. October 1, 1997 Page 2 Insofar as this opinion relates to factual matters, the information with respect to which is in the possession of the Company, we have relied (without independent investigation) upon representations made to us by one or more officers or employees of the Company and by the Company in the Agreement. We have assumed that the Agreement is the valid, binding and enforceable obligation of each party thereto other than the Company. Our opinions expressed in paragraphs 3 and 4 below are based solely upon our review of a certificate of an officer of the Company and on the opinion of General Counsel of the Company referred to above. For the purposes of our opinions in paragraph 2 below, we are also relying upon oral confirmation from a representative of the Office of the Secretary of State of Massachusetts on September 30, 1997 that the Resolution Establishing Preferences was accepted for filing in such Office. Members of our firm are admitted to the bar of Massachusetts and we do not express any opinion as to the laws of any other jurisdiction other than the laws of the United States of America to the extent referred to specifically herein. We undertake no obligation to advise you of facts or changes in law occurring after the date hereof which might affect the opinions expressed herein. This opinion is made expressly subject to the following upon which this firm expresses no opinion: a. The operation and effect of any laws and judicial decisions with respect to bankruptcy, insolvency, moratorium, reorganization, fraudulent conveyances and similar laws affecting creditors rights generally, or the operation and effect of general principles of equity or judicial decisions relating to or affecting generally the enforcement of creditors' rights or remedies for the collection of debtors' obligations; b. Judicial decisions governing the availability of specific performance, injunctive relief or other equitable remedies; c. Unenforceability under certain circumstances of contractual provisions (i) waiving broadly or vaguely stated rights or unknown future rights, or (ii) to the effect that: (a) rights or remedies are not exclusive, (b) every right or remedy is cumulative or may be exercised in addition to or with any other right or remedy, or (c) the election of some particular right or remedy does not preclude recourse to one or more remedies; d. The enforcement of provisions in the Agreement that may be restricted by the effects of state laws which provide that a court may refuse to enforce or may October 1, 1997 Page 3 limit the application of a contract or any clause of a contract which the court finds to have been (i) unconscionable at the time it was made, or (ii) an adhesion contract; and e. Indemnification provisions have been held to be unenforceable under certain circumstances under federal and state securities laws. f. As to the securities laws of any jurisdiction outside the United States of America. Based upon and subject to the foregoing, we are of the opinion that: 1. The execution, delivery and performance of the Agreement has been duly authorized by all necessary corporate action of the Company, and no further consent or authorization of the Company or its Board of Directors or stockholders is required (except such shareholder approval as may be required pursuant to the By-Laws of the Company or the Rules of the National Association of Securities Dealers, Inc.) and, when executed and delivered, the Agreement will be a legal, valid and binding obligation of the Company, enforceable against the Company in accordance with its terms; 2. The Shares have been duly authorized by all necessary corporate action of the Company and when issued and paid for as described in the Agreement, will be validly issued, fully paid and nonassessable and entitled to the rights and preferences set forth in Schedule I to the Agreement. The Common Stock issuable upon conversion of the Shares when issued in accordance with the provisions of Schedule I to the Agreement will be duly authorized and validly issued, fully paid and nonassessable and the holders shall be entitled to all rights and preferences accorded to a holder of Common Stock; 3. Based solely upon an examination of the Agreement and a factual certificate executed and delivered to us by an officer of the Company, performance of the Agreement by the Company will not result in a breach or violation of any of the terms and provisions of the Articles of Organization or By-Laws of the Company as in effect on the date hereof, and will not constitute a material default under any indenture, mortgage, deed of trust or other material agreement or instrument known to us and to which the Company is a party or by which it or any of its properties is bound, and will not violate or contravene (A) any governmental statute, rule or regulation known to us to be applicable to the Company the violation of contravention of which would materially and adversely affect the Company, its subsidiaries, assets, financial condition or operations or the Securities Act of 1933, as amended (assuming the accuracy of the representations of the Purchaser in Section 2.2 of the Agreement, in the Purchaser Questionnaire and in the Investor Questionnaire as to state and federal securities laws), or (B) any order of a court or administrative agency binding on the Company and of which we are aware the violation or contravention of which would materially and adversely affect the Company, its subsidiaries, assets, financial condition or operations; and performance of the Agreement by the Company does not require the permission or approval of any governmental agency (except for any required October 1, 1997 Page 4 Blue Sky and foreign approvals and filings) and will not result in the imposition or creation of any lien or charge against any assets of the Company; 4. Except as disclosed in the financial statements of the Company included in the SEC Documents, or as provided in Schedule I to the Agreement, (i) the Company has no obligation to redeem or repurchase any of its equity securities; (ii) no stockholder or other persons have preemptive or other rights to acquire equity securities of the Company, except that the Company has outstanding options and warrants to purchase its Common Stock as set forth in Exhibit A to the Agreement; and (iii) the Company has no obligation to register any of its securities other than pursuant to the Agreement or as set forth in Exhibit A to the Agreement. This opinion is given as of the date hereof and we assume no obligation to advise you of changes that may hereafter be brought to our attention. This opinion is furnished solely to you at your request for your benefit in connection with the Agreement. We consider this opinion to be a confidential communication and it is not to be furnished, reproduced, distributed, relied upon or disclosed to any person without our prior written consent unless you are obligated in the opinion of counsel to disclose its contents pursuant to court order or applicable law. Very truly yours, Peabody & Arnold EX-10.(BB) 6 STOCK PURCHASE WARRANT Exhibit 10(bb) STOCK PURCHASE WARRANT WARRANT TO PURCHASE 345 SHARES of 6% CONVERTIBLE PREFERRED STOCK No. PW-1 EXPIRES AT 5:00 P.M., PACIFIC TIME, ON SEPTEMBER 30, 2002 INTERLEAF, INC. This certifies that Linda S. Capello, the registered holder hereof or assigns (the "Warrantholder") is entitled to purchase from Interleaf, Inc., a Massachusetts corporation (the "Company"), at any time before the expiration time and date shown above (the "Expiration Time") at the purchase price per share of $1,000 (the "Warrant Price"), the number of shares shown above of the 6% Convertible Preferred Stock ("6% Preferred Stock") of the Company. The number and class of shares purchasable upon exercise of this Warrant and the Warrant Price per share shall be subject to adjustment from time to time as set forth below. Section 1. Transferability and Form of Warrant. 1.1 Registration. This Warrant shall be numbered and shall be registered on the books of the Company. 1.2 Transfer. This Warrant shall be transferable on the books of the Company only upon delivery thereof duly endorsed by the Warrantholder or duly authorized attorney or representative, accompanied by proper evidence of succession, assignment or authority to transfer. Upon any registration of transfer, the Company shall execute and deliver a new Warrant to the person entitled thereto. This Warrant may be divided or combined, upon request to the Company by the Warrantholder, into a certificate or certificates representing the right to purchase the same aggregate number of shares. Unless the context indicates otherwise, the term "Warrantholder" shall include any transferee or transferees of a Warrant and the term "Warrant" shall include any and all warrants issued upon division, exchange, substitution or transfer of this Warrant. Notwithstanding the foregoing, the Warrantholder shall not transfer the Warrant or the securities underlying the Warrants in a private transaction without advance permission from the Company, except for transfers to partners or immediate family members. 1.3 Form of Warrant. The Warrant shall be executed on behalf of the Company by its President, Vice President or other authorized officer, and shall be dated as of the date of signature thereof by the Company either upon initial issuance or upon division, exchange, substitution or transfer. A Warrant bearing the signature of an individual who was at any time the proper officer of the Company shall bind the Company, notwithstanding that such individual shall have ceased to hold such office prior to the delivery of such Warrant. The form of election to exercise this Warrant and the form of assignment of this Warrant shall be substantially as attached hereto. Section 2. Payment of Taxes. The Company will pay all documentary stamp taxes, if any, attributable to the initial issuance of shares to the Warrantholder; provided, however, that the Company shall not be required to pay any tax or taxes which may be payable in respect of any secondary transfer of the Warrant or the shares. STOCK PURCHASE WARRANT WARRANT TO PURCHASE 229 SHARES of 6% CONVERTIBLE PREFERRED STOCK No. PW-2 EXPIRES AT 5:00 P.M., PACIFIC TIME, ON SEPTEMBER 30, 2002 INTERLEAF, INC. This certifies that Gerard K. Capello, the registered holder hereof or assigns (the "Warrantholder") is entitled to purchase from Interleaf, Inc., a Massachusetts corporation (the "Company"), at any time before the expiration time and date shown above (the "Expiration Time") at the purchase price per share of $1,000 (the "Warrant Price"), the number of shares shown above of the 6% Convertible Preferred Stock ("6% Preferred Stock") of the Company. The number and class of shares purchasable upon exercise of this Warrant and the Warrant Price per share shall be subject to adjustment from time to time as set forth below. Section 1. Transferability and Form of Warrant. 1.1 Registration. This Warrant shall be numbered and shall be registered on the books of the Company. 1.2 Transfer. This Warrant shall be transferable on the books of the Company only upon delivery thereof duly endorsed by the Warrantholder or duly authorized attorney or representative, accompanied by proper evidence of succession, assignment or authority to transfer. Upon any registration of transfer, the Company shall execute and deliver a new Warrant to the person entitled thereto. This Warrant may be divided or combined, upon request to the Company by the Warrantholder, into a certificate or certificates representing the right to purchase the same aggregate number of shares. Unless the context indicates otherwise, the term "Warrantholder" shall include any transferee or transferees of a Warrant and the term "Warrant" shall include any and all warrants issued upon division, exchange, substitution or transfer of this Warrant. Notwithstanding the foregoing, the Warrantholder shall not transfer the Warrant or the securities underlying the Warrants in a private transaction without advance permission from the Company, except for transfers to partners or immediate family members. 1.3 Form of Warrant. The Warrant shall be executed on behalf of the Company by its President, Vice President or other authorized officer, and shall be dated as of the date of signature thereof by the Company either upon initial issuance or upon division, exchange, substitution or transfer. A Warrant bearing the signature of an individual who was at any time the proper officer of the Company shall bind the Company, notwithstanding that such individual shall have ceased to hold such office prior to the delivery of such Warrant. The form of election to exercise this Warrant and the form of assignment of this Warrant shall be substantially as attached hereto. Section 2. Payment of Taxes. The Company will pay all documentary stamp taxes, if any, attributable to the initial issuance of shares to the Warrantholder; provided, however, that the Company shall not be required to pay any tax or taxes which may be payable in respect of any secondary transfer of the Warrant or the shares. STOCK PURCHASE WARRANT WARRANT TO PURCHASE 190 SHARES of 6% CONVERTIBLE PREFERRED STOCK No. PW-3 EXPIRES AT 5:00 P.M., PACIFIC TIME, ON SEPTEMBER 30, 2002 INTERLEAF, INC. This certifies that Lawrence K. Fleishman, the registered holder hereof or assigns (the "Warrantholder") is entitled to purchase from Interleaf, Inc., a Massachusetts corporation (the "Company"), at any time before the expiration time and date shown above (the "Expiration Time") at the purchase price per share of $1,000 (the "Warrant Price"), the number of shares shown above of the 6% Convertible Preferred Stock ("6% Preferred Stock") of the Company. The number and class of shares purchasable upon exercise of this Warrant and the Warrant Price per share shall be subject to adjustment from time to time as set forth below. Section 1. Transferability and Form of Warrant. 1.1 Registration. This Warrant shall be numbered and shall be registered on the books of the Company. 1.2 Transfer. This Warrant shall be transferable on the books of the Company only upon delivery thereof duly endorsed by the Warrantholder or duly authorized attorney or representative, accompanied by proper evidence of succession, assignment or authority to transfer. Upon any registration of transfer, the Company shall execute and deliver a new Warrant to the person entitled thereto. This Warrant may be divided or combined, upon request to the Company by the Warrantholder, into a certificate or certificates representing the right to purchase the same aggregate number of shares. Unless the context indicates otherwise, the term "Warrantholder" shall include any transferee or transferees of a Warrant and the term "Warrant" shall include any and all warrants issued upon division, exchange, substitution or transfer of this Warrant. Notwithstanding the foregoing, the Warrantholder shall not transfer the Warrant or the securities underlying the Warrants in a private transaction without advance permission from the Company, except for transfers to partners or immediate family members. 1.3 Form of Warrant. The Warrant shall be executed on behalf of the Company by its President, Vice President or other authorized officer, and shall be dated as of the date of signature thereof by the Company either upon initial issuance or upon division, exchange, substitution or transfer. A Warrant bearing the signature of an individual who was at any time the proper officer of the Company shall bind the Company, notwithstanding that such individual shall have ceased to hold such office prior to the delivery of such Warrant. The form of election to exercise this Warrant and the form of assignment of this Warrant shall be substantially as attached hereto. Section 2. Payment of Taxes. The Company will pay all documentary stamp taxes, if any, attributable to the initial issuance of shares to the Warrantholder; provided, however, that the Company shall not be required to pay any tax or taxes which may be payable in respect of any secondary transfer of the Warrant or the shares. Section 3. Mutilated or Missing Warrants. In case this Warrant shall be mutilated, lost, stolen or destroyed, the Company shall, at the request of the Warrantholder, issue and deliver in exchange and substitution for and upon cancellation of the mutilated Warrant, or in lieu of and in substitution for the lost, stolen or destroyed Warrant, a new Warrant of like tenor, but only upon receipt of evidence satisfactory to the Company of such loss, theft or destruction of such Warrant. The applicant shall also comply with such other reasonable regulations and pay such other reasonable administrative charges as the Company may prescribe. Section 4. Reservation of Shares. There has been reserved, and the Company shall at all times keep reserved so long as this Warrant remains outstanding, out of its authorized shares of capital stock, such number and class of shares as shall be subject to purchase under this Warrant. Such reserved shares shall be used solely for issuances upon exercise of this Warrant. Shares of any class issued upon exercise of this Warrant shall have all the rights and privileges of other shares of the same class, whenever issued, subject to the adjustment provisions set forth below. Section 5. Exercise of Warrant. 5.1 Exercise by Cash Payment. The Holder of this Warrant shall have the right at any time and from time to time to exercise this Warrant in full or in part by surrender of this Warrant to the Company accompanied by payment to the Company in cash or by certified or cashier's check or by wire transfer of funds of the aggregate Warrant Price for the number of shares in respect of which this Warrant is then exercised. 5.2 Cashless Exercise. This Warrant may be exercised in full or in part by surrender of this Warrant to the Company accompanied by written notice substantially in the form attached hereto of the holder's election to effect cashless exercise ("Cashless Exercise"). Upon Cashless Exercise, the holder shall be entitled to receive, in respect of each share for which this Warrant is then exercised, that number of shares of 6% Preferred Stock (or such other class of shares as may then be issuable upon exercise hereof) which, valued at Current Value, have a value equal to the Current Value of each share as to which this Warrant is then being exercised less the Warrant Price payable for such share. Current Value of a share as to which this Warrant is being exercised shall be the total Current Market Value of the number of shares of Common Stock of the Company issuable upon conversion of such share at the Conversion Price in effect on the date of such Cashless Exercise. Current Market Value of the Common Stock shall be as defined in Section 7. 5.3 Delivery of Certificates. Upon exercise of this Warrant the Company shall issue and cause to be delivered with all reasonable dispatch to or upon the written order of the Warrantholder and in such name or names as the Warrantholder may designate, a certificate or certificates for the number of full shares issuable upon such exercise together with cash, as provided in Section 7 hereof, in respect of any fractional shares. The Company shall effect such issuance immediately and shall transmit the certificates by messenger or overnight delivery service to reach the address designated by the Warrantholder within two business days after receipt of the Warrant Price or, in the case of a cashless exercise, after receipt of the Warrant. Such certificate or certificates shall be deemed to have been issued and any person so designated to be named therein shall be deemed to have become a holder of record of such shares as of the date of surrender of the Warrant and payment of the Warrant Price, as aforesaid, notwithstanding that the certificates representing such shares shall not actually have been delivered or that the stock transfer books of the Company shall then be closed. In the event of partial exercise a new Warrant evidencing the remaining portion of this Warrant will be issued by the Company. 2 5.4 Simultaneous Conversion. Subject to the applicable conversion restrictions and other terms of the 6% Preferred Stock, the Warrantholder may elect to convert the convertible securities issuable upon exercise of this Warrant simultaneously with the exercise of this Warrant and may give written notice of such election substantially in the form attached hereto. Upon such election the Company need not issue certificates representing the convertible securities issuable upon exercise of this Warrant, but shall issue and deliver as provided in the foregoing Section certificates representing the securities to which the holder is entitled upon such conversion. Section 6. Adjustment of Warrant Price and Number of Shares. 6.1 Adjustments. The number and kind of securities purchasable upon the exercise of the Warrants and the Warrant Price shall be subject to adjustment from time to time upon the happening of certain events, as follows: (a) If the shares purchasable upon exercise of the Warrants are subdivided, combined or reclassified, or if other shares of the kind so purchasable are issued in respect thereof as a dividend thereon (excluding dividends required by the charter provisions governing such shares), the number and class of shares purchasable upon exercise of the Warrants immediately prior thereto shall be adjusted so that the Warrantholder shall be entitled to receive the kind and number of shares or other securities of the Company which it would have owned or would have been entitled to receive after the happening of any of the events described above, had the Warrants been exercised immediately prior to the happening of such event or any record date with respect thereto. Any adjustment made pursuant to this paragraph (a) shall become effective immediately after the effective date of such event retroactive to the record date, if any, for such event. (b) If the shares purchasable upon exercise of the Warrants become entitled to receive a distribution of evidences of indebtedness or assets (excluding dividends required by the charter provisions governing such shares) or rights, options, warrants or convertible securities containing the right to subscribe for or purchase securities or assets of the Company, then, in each case, the number of shares thereafter purchasable upon the exercise of the Warrants shall be determined by multiplying the number of shares theretofore purchasable upon exercise of the Warrants by a fraction, of which the numerator shall be the then Current Value on the date of such distribution, and of which the denominator shall be such Current Value on such date minus the then fair value of the portion of the assets or evidence of indebtedness so distributed or of such subscription rights, options or warrants applicable to one share. Such adjustment shall be made whenever any such distribution is made and shall become effective on the date of distribution retroactive to the record date for the determination of shareholders entitled to receive such distribution. Current Value shall have the meaning set forth in Section 5.2. (c) No adjustment in the number of shares purchasable hereunder shall be required unless such adjustment would require an increase or decrease of at least one percent (1%) in the number of shares then purchasable upon the exercise of a Warrant; provided, however, that any adjustments which by reason of this paragraph (c) are not required to be made immediately shall be carried forward and taken into account in any subsequent adjustment. (d) Whenever the number or class of shares purchasable upon the exercise of a Warrant is adjusted as herein provided, a corresponding adjustment in the Warrant Price shall be made so that the aggregate Warrant Price payable upon full exercise of this Warrant shall remain the same. If such adjustment results in more than one class of security being purchasable upon exercise of this Warrant, the adjusted Warrant Price shall be allocated to such securities on the basis of their respective fair market values. (e) Whenever the number or class of shares purchasable upon the exercise of a Warrant or the Warrant Price is adjusted as herein provided, the Company shall cause to be promptly mailed to the 3 Warrantholder by first class mail, postage prepaid, notice of such adjustment or adjustments setting forth the number and class of shares purchasable upon the exercise of a Warrant and the Warrant Price after such adjustment, together with a brief statement of the facts requiring such adjustment and the computation by which such adjustment was made. If any holder disputes the computation of such adjustment the Corporation shall cause independent public accountants selected by the Corporation to verify and, if necessary, correct such computation. (f) The term "Common Stock" shall mean (i) the class of stock designated as the Common Stock of the Company at the issue date of this Warrant or (ii) any other class of stock resulting from successive changes or reclassifications of such Common Stock, and the term "6% Preferred Stock" shall mean (x) the class or series of stock which is initially purchasable upon exercise hereof, or (y) any other class or series of stock resulting from successive reclassifications or changes of such 6% Preferred Stock. In the event that at any time, as a result of an adjustment made pursuant to this Section, the Warrantholder shall become entitled to purchase any securities of the Company other than shares of 6% Preferred Stock, thereafter the number of such other securities so purchasable upon exercise of the Warrant and the Warrant Price of such securities shall be subject to adjustment from time to time in a manner and on terms as nearly equivalent as practicable to the provisions with respect to the shares contained in this Section. 6.2 No Adjustment for Dividends. Except as provided in Subsection 6.1, no adjustment in respect of any dividends shall be made during the term of the Warrant or upon the exercise of the Warrant. 6.3 Preservation of Purchase Rights upon Reclassification, Consolidation, etc. In case of any reclassification of the securities of the Company or any consolidation of the Company with or merger of the Company into another corporation or in case of any sale or conveyance to another corporation of the property, assets or business of the Company as an entirety or substantially as an entirety, the Company or such successor or purchasing corporation, as the case may be, shall provide by agreement that the Warrantholder shall have the right thereafter upon payment of the Warrant Price in effect immediately prior to such action to purchase upon exercise of the Warrant the kind and amount of shares and other securities and property which he would have owned or have been entitled to receive after the happening of such reclassification, consolidation, merger, sale or conveyance had the Warrant been exercised immediately prior to such action. Such agreement shall provide for adjustments, which shall be as nearly equivalent as may be practicable to the adjustments provided for in this Section. The provisions of this subsection shall similarly apply to successive reclassifications, consolidations, mergers, sales or conveyances. 6.4 Statement on Warrant Certificates. Irrespective of any adjustments in the Warrant Price or the number of securities purchasable upon the exercise of the Warrant, the Warrant certificate or certificates theretofore or thereafter issued may continue to express the same price and number of securities as are stated in the similar Warrant certificates initially issued. Section 7. Fractional Interests; Current Market Price; Closing Bid Price. The Company shall not be required to issue fractional shares on the exercise of the Warrant. If any fraction of a share would, except for the provisions of this Section, be issuable on the exercise of the Warrant (or specified portion thereof), the Company shall pay an amount in cash equal to the then Current Value (as defined in Section 5.2) multiplied by such fraction. The term "Current Market Price" of the Common Stock shall mean (i) if the Common Stock is traded in the over-the-counter market or on the National Association of Securities Dealers, Inc. Automated Quotations System ("NASDAQ"), the average per share closing bid prices of the Common Stock on the 20 consecutive trading days immediately preceding the date in question, as reported by NASDAQ or an equivalent generally accepted reporting service, or (ii) if the Common Stock is traded on a national securities exchange, the average for the 20 consecutive trading days immediately preceding the date in question of the daily per share closing bid prices of the Common Stock on the principal stock exchange on which it is listed, or (iii) if the Common Stock is not so listed or traded, the fair market value of the Common Stock as determined in good faith by the board of directors of the Company. The term "closing bid price" shall mean the last bid price on the day in question as reported by NASDAQ or an equivalent generally accepted reporting service or (as the case may be) as reported by the principal stock exchange on which the Common Stock is listed, or if not so reported, as reasonably 4 determined in good faith by the Board of Directors of the Company. Section 8. No Rights as Shareholder; Notices to Warrantholder. Nothing contained herein shall be construed as conferring upon the Warrantholder any rights whatsoever as a shareholder of the Company, including the right to vote, to receive dividends, to consent or to receive notices as a shareholder in respect of any meeting of shareholders for the election of directors of the Company or any other matter. If, however, at any time prior to the expiration of the Warrant and prior to its exercise, any of the following events shall occur: (a) any action which would require an adjustment pursuant to Sections 6.1 or 6.3; or (b) a dissolution, liquidation or winding up of the Company (other than in connection with a consolidation, merger or sale of its property, assets and business, as an entirety) shall be proposed; then in any one or more of said events, the Company shall give notice in writing of such event to the Warrantholder at least 10 business days prior to the date fixed as a record date or the date of closing the transfer books or other applicable date with respect thereto. Such notice shall specify such record date or the date of closing the transfer books, as the case may be. Any notice to the Warrantholder shall be given at the address of the Warrantholder appearing on the books of the Company, and if the Warrantholder has specified a telecopier address, by facsimile transmission to such address. Section 9. Registration and Indemnification. The holder of this Warrant and the holder of shares of 6% Preferred Stock issued upon exercise of this Warrant shall have the same rights and obligations with respect to registration under the Securities Act of 1933, and with respect to indemnification in connection with any such registration, as if such holder were one of the Investors under the Preferred Stock Investment Agreements entered into between the Company and the original purchasers of the 6% Preferred Stock of the Company, excluding, however, the provisions of the first sentence of Section 1.4(b)(iv) of said Agreements. Such rights and obligations shall continue until one year after the expiration or earlier exercise of this Warrant. Section 10. Expiration of Warrant. 10.1 If not theretofore exercised, this Warrant shall terminate at 5:00 p.m. Pacific time on the date shown in the caption hereof. Section 11. Successors. All the covenants and provisions of this Agreement by or for the benefit of the Company or the Warrantholder shall bind and inure to the benefit of their respective successors and assigns hereunder. Section 12. Merger or Consolidation of the Company. The Company will not merge or consolidate with or into any other corporation or sell all or substantially all of its property to another corporation, unless the provisions of Section 6.3 are complied with. Section 13. Applicable Law. This Agreement shall be deemed to be a contract made under the laws of the State of New York and for all purposes shall be construed in accordance with the laws of said State. 5 Section 14. Special Limitations. The holder agrees that until September 30, 1998 it will not exercise any Warrants without the Company's approval in any month during which, or following a month in which, the trading price of the Common Stock is at any time below $3.00 per share. Further, the holder agrees that it will consult with the Company prior to exercising any Warrants, but the Company's approval is not required except as expressly provided herein. IN WITNESS WHEREOF, the Company has caused this Warrant to be executed by a duly authorized officer of the Company. Interleaf, Inc. By: /s/ Jaime W. Ellertson ----------------------------- 6 PURCHASE FORM The undersigned hereby irrevocably elects to exercise the right of purchase represented by the within Warrant in respect of ______________ of the shares provided for therein, and requests that certificates be issued in the name of: __________________________________________________________________________ (Please Print Name, Address and Taxpayer Identification Number) __________________________________________________________________________ and, if said number of shares shall not be all the shares purchasable hereunder, that a new Warrant certificate for the balance of the shares purchasable under the within Warrant be registered in the name of the undersigned Warrantholder or his Assignee as below indicated and delivered to the address stated below. The undersigned: |_| elects to pay the full Warrant Price in cash or by certified or cashier's check or wire funds transfer |_| elects "cashless exercise" pursuant to Section 5.2 of the Warrant "Current Value" for purposes of Cashless Exercise is: $__________ Number of shares issuable on Cashless Exercise is: ___________ shares |_| elects simultaneous conversion pursuant to Section 5.4 of the Warrant Dated: ________________ _____________________________ Signature of Warrantholder The above signature must correspond with the name appearing upon the face of this Warrant in every particular, without alteration or enlargement or any change whatever. Name of Assignee, if any: ____________________________ (Please Print) ______________________________________________________ (Please print Name, Address and Taxpayer Identification Number) ______________________________________________________ Signature Guaranteed: Signature guarantee is required if certificates are to be registered in the name of any person other than the name written upon the face of the Warrant. Signature must be guaranteed by a commercial bank or trust company or a member firm of the New York Stock Exchange. 7 ASSIGNMENT (To be signed only upon assignment of Warrant) FOR VALUE RECEIVED, the undersigned hereby sells, assigns and transfers unto _________________________________________________________________ (Name and Address of Assignee Must Be Printed or Typewritten) _________________________________________________________________ (Relationship to Registered Holder) _________________________________________________________________ (Taxpayer Identification Number of Assignee) the within Warrant, hereby irrevocably constituting and appointing ____________________ Attorney to transfer said Warrant on the books of the Company, with full power of substitution in the premises. Dated: ________________, 19__ ______________________________ Signature of Registered Holder Signature Guaranteed: The above signature must correspond with the name appearing upon the face of this Warrant in every particular, without alteration or enlargement or any change whatever, and must be guaranteed by a commercial bank or trust company or a member firm of the New York Stock Exchange. 8 EX-11 7 COMPUTATION OF EARNINGS PER SHARE Interleaf, Inc. Exhibit 11 - COMPUTATION OF EARNINGS PER SHARE
Three months ended Six Months ended September 30 September 30 1997 1996 1997 1996 ---- ---- ---- ---- In thousands, except for per share amounts (unaudited) (unaudited) Primary Weighted average shares outstanding of Common Stock 17,757 17,457 17,691 17,229 Dilutive Senior Series B and Senior Series C Convertible Preferred Stock 5,178 -- 5,178 -- Dilutive stock options 1,818 -- 982 -- Dilutive stock purchase warrants -- -- -- -- Dilutive stock purchase plan rights 62 -- 44 -- ------- -------- ------- -------- Total 24,815 17,457 23,895 17,229 ====== ====== ====== ====== Net income (loss) $ 449 $(10,327) $ 835 $(14,127) ======= ======== ======= ======== Net income (loss) per share $ 0.02 $ (0.59) $ 0.03 $ (0.82) ======= ======== ======= ======== Fully Diluted Weighted average shares outstanding of Common Stock 17,757 17,457 17,691 17,229 Dilutive Senior Series B and Senior Series C Convertible Preferred Stock 5,178 -- 5,178 -- Dilutive stock options 1,971 -- 1,968 -- Dilutive stock purchase warrants -- -- -- -- Dilutive stock purchase plan rights 65 -- 59 -- ------- -------- ------- -------- Total 24,971 17,457 24,896 17,229 ======= ======== ======= ======== Net income (loss) $ 449 $(10,327) $ 835 $(14,127) ======= ======== ======= ======== Net income (loss) per share $ 0.02 $ (0.59) $ 0.03 $ (0.82) ======= ======== ======= ========
The dilutive effect of stock options, stock purchase warrants, and stock purchase plan rights are calculated using the treasury stock method. Under this method, these common stock equivalents are assumed to be exercised and proceeds from the exercise are assumed to be used to repurchase common stock at the average market price for primary income (loss) per share and the higher of the end of the period or average market price for fully diluted income (loss) per share. the dilutive effect of Convertible Preferred Stock is calculated using the if-converted method. EX-27 8 EXHIBIT 27 TO FORM 10-Q; 6 MOS ENDED SEPT. 9, 1997
5 This scedule contains summary financial information extracted from the consolidated balance sheets and consolidated statements of operations found on pages 3 and 4 of the Company's Form 10-Q for the six months ended September 30 and is qualified in its entirety by reference to such financial statements. 1000 YEAR 6-MOS MAR-31-1997 MAR-31-1997 MAR-31-1997 SEP-30-1997 17,349 13,378 0 0 12,730 10,625 1,371 1,365 205 143 30,212 24,295 45,829 46,320 40,866 42,019 37,900 31,037 35,717 27,065 0 0 0 0 187 187 175 178 (1,134) (52) 37,900 31,037 18,821 5,900 64,823 25,944 7,501 1,682 28,104 9,356 54,624 15,845 304 0 400 614 (29,550) 835 0 0 (29,550) 835 0 0 0 0 0 0 (29,550) 835 (0.17) 0.03 (0.17) 0.03
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