-----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, HJsAsX2o1MEXcajQOReYgkMMLZRpY785qWSiX8MRmuvgUz8zJqd6+Ax0KpJ7zP7Y SZdcts/IGptHCvoVkYTA/w== 0001047469-98-031588.txt : 19980817 0001047469-98-031588.hdr.sgml : 19980817 ACCESSION NUMBER: 0001047469-98-031588 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19980630 FILED AS OF DATE: 19980814 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: 98689562 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 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 JUNE 30, 1998 COMMISSION FILE NUMBER 0-14713 Interleaf, Inc. (Exact name of Registrat 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 August 11, 1998 was 18,683,754. - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- 1 TABLE OF CONTENTS
PAGE ----- PART I - FINANCIAL INFORMATION Item 1 - Financial Statements Consolidated balance sheets at June 30, 1998 and March 31, 1998...................................... 3 Consolidated statements of operations for the three months ended June 30, 1998 and 1997 ............................................................................... 4 Consolidated statements of cash flows for the three months ended June 30, 1998 and 1997 ............................................................................... 5 Notes to consolidated financial statements ........................................................... 6 Item 2 - Management's Discussion and Analysis of Financial Condition and Results of Operations ............................................................................ 8 PART II - OTHER INFORMATION Item 6 - Exhibits and Reports on Form 8-K ............................................................ 11 SIGNATURES ........................................................................................... 12
2 PART I - FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS -------------------- INTERLEAF, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS
June 30, 1998 March 31, 1998 -------------------- ------------------- In thousands, except for share and per share amounts (unaudited) ASSETS Current assets Cash and cash equivalents $ 23,486 $ 21,112 Accounts receivable, net of reserve for doubtful accounts of $1,273 at June 30, 1998 and $1,364 at March 31, 1998 8,416 12,706 Prepaid expenses and other current assets 880 838 ---------- --------- Total Current Assets 32,782 34,656 Property and equipment, net 2,605 3,321 Intangible assets, net 416 583 Other assets 417 828 ---------- ---------- Total Assets $ 36,220 $ 39,388 ---------- ---------- ---------- ---------- LIABILITIES and SHAREHOLDERS' EQUITY Current liabilities Accounts payable $ 2,012 $ 2,079 Accrued expenses 11,025 11,657 Unearned revenue 10,546 12,136 Accrued restructuring 1,353 2,143 ---------- ---------- Total Current Liabilities 24,936 28,015 Long-term restructuring 1,692 2,063 ---------- ---------- Total Liabilities 26,628 30,078 ---------- ---------- Shareholders' Equity Preferred stock, par value $.10 per share, authorized 5,000,000 shares: Series A Junior Participating, none issued and outstanding Senior Series B Convertible, shares issued and outstanding, 861,911 at June 30, 1998 and March 31, 1998 86 86 Senior Series C Convertible, shares issued and outstanding, 1,010,348 at June 30, 1998 and March 31, 1998 101 101 Senior Series D 6% Convertible, shares issued and outstanding, 7,463 at June 30, 1998 and 7,625 at March 31, 1998 1 1 Common stock, par value $.01 per share, authorized 50,000,000 shares, issued and outstanding, 18,507,993 at June 30, 1998 and 18,155,309 at March 31, 1998 185 182 Additional paid-in capital 93,393 93,369 Retained earnings (accumulated deficit) (83,818) (84,072) Cumulative translation adjustment (356) (357) ---------- --------- Total Shareholders' Equity 9,592 9,310 ---------- --------- Total Liabilities and Shareholders' Equity $ 36,220 $ 39,388 ---------- --------- ---------- ---------
See notes to consolidated financial statements 3 INTERLEAF, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS
Three months ended June 30 ------------------------------------------- 1998 1997 ---- ---- (unaudited) In thousands, except for per share amounts Revenues: Products $ 2,227 $ 2,742 Maintenance 5,848 6,650 Services 2,933 3,434 ----------- ---------- Total revenues 11,008 12,826 ----------- ---------- Costs of Revenues: Products 636 730 Maintenance 825 946 Services 2,697 2,839 ----------- ---------- Total costs of revenues 4,158 4,515 ----------- ---------- Gross margin 6,850 8,311 ----------- ---------- Operating Expenses: Selling, general and administrative 4,970 5,557 Research and development 1,773 2,451 ----------- ---------- Total operating expenses 6,743 8,008 ----------- ---------- Income from operations 107 303 Other income 147 83 ----------- ---------- Income before income taxes 254 386 Provision for income taxes -- -- ----------- ---------- Net Income 254 386 Dividends on Preferred Stock (574) --- ----------- ---------- Net income (loss) applicable to common shareholders $ (320) $ 386 ----------- ---------- ----------- ---------- Income (loss) Per Share: Basic $ (0.02) $ 0.02 ----------- ---------- ----------- ---------- Diluted $ (0.02) $ 0.02 ----------- ---------- ----------- ---------- Shares used in computing basic income (loss) per share 18,378 17,624 ----------- ---------- ----------- ---------- Shares used in computing diluted income (loss) per share 18,378 22,979 ----------- ---------- ----------- ----------
See notes to consolidated financial statements. 4 INTERLEAF, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOW
Three months ended June 30 ---------------------------------- (unaudited) 1998 1997 ------------- ------------ In thousands Cash Flows from Operating Activities: Net income $ 254 $ 386 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization expense 688 997 Changes in assets and liabilities: Decreases in accounts receivable, net 4,306 3,437 (Increase) decrease in other assets 323 (28) Decreases in accounts payable and accrued expenses (708) (1,840) Decreases in unearned revenue (1,612) (1,283) Decreases in other liabilities (931) (999) -------- --------- Net cash provided by operating activities 2,320 670 -------- --------- Cash Flows from Investing Activities: Capital expenditures, net (92) (122) -------- --------- Net cash used in investing activities (92) (122) -------- --------- Cash Flows from Financing Activities: Net proceeds from issuance of common stock 26 236 -------- -------- Net cash provided by financing activities 26 236 -------- -------- Effect of exchange-rate changes on cash 120 (102) -------- -------- Net increase in cash and cash equivalents 2,374 682 Cash and cash equivalents at beginning of period 21,112 17,349 -------- -------- Cash and cash equivalents at end of period $ 23,486 $ 18,031 --------- --------- --------- ---------
See notes to consolidated financial statements 5 INTERLEAF, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) 1. Basis of Presentation The consolidated financial statements include the accounts of Interleaf, Inc. and its subsidiaries. All significant intercompany balances and transactions have been eliminated in consolidation. Interleaf, Inc. and its subsidiaries are collectively referred to as the "Company." The accompanying unaudited consolidated financial statements have been prepared in accordance with generally accepted accounting principles for interim financial information and with the instructions to Form 10-Q and Rule 10-01 of Regulation S-X. Accordingly, they do not include all financial information and disclosures required by generally accepted accounting principles for complete financial statements. In the opinion of management, these financial statements include all adjustments (consisting only of normal recurring accruals) necessary for a fair presentation of the results of operations for the interim periods reported and of the financial condition of the Company as of the date of the interim balance sheet. The results of operations for interim periods are not necessarily indicative of the results to be expected for the full year. These financial statements should be read in conjunction with the Company's audited consolidated financial statements and related notes included in the Company's Annual Report on Form 10-K for the year ended March 31, 1998. 2. Recently Issued Accounting Standards Effective April 1, 1998, the Company adopted Statement of Position (SOP) 97-2, "Software Revenue Recognition" which provides guidance on applying generally accepted accounting principles on software transactions and supersedes SOP 91-1, "Software Revenue Recognition." The adoption of SOP 97-2 did not have a material impact on the Company's revenue recognition policies for the quarter ended June 30, 1998. Effective April 1, 1998, the Company adopted Statement of Financial Accounting Standards No. 130, "Reporting Comprehensive Income." This statement established standards for reporting comprehensive income and its components. Comprehensive income for the period is equal to net income plus "other comprehensive income," which, for the Company, consists of the change in cumulative translation adjustments during the period. Total comprehensive income for the quarter ended June 30, 1998 was $0.3 million, which was not materially different from net income. For the quarter ended June 30, 1997, total comprehensive income was $0.3 million, which also was not materially different from net income. On June 15, 1998, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards No. 133, Accounting for Derivative Instruments and Hedging Activities (FAS 133). FAS 133 is effective for all fiscal quarters of all fiscal years beginning after June 15, 1999 (April 1, 2000 for the Company). FAS 133 requires that all derivative instruments be recorded each period in current earnings or other comprehensive income, depending on whether a derivative is designated as part of a hedge transaction and, if it is, the type of hedge transaction. The Company is currently evaluating the effect of implementing this standard. 6 3. Earnings Per Share The following table sets forth the computation of basic and diluted earnings (loss) per share:
Three months ended June 30, 1998 1997 -------- ------- In thousands, except for per share amounts Numerator: Net Income $ 254 $ 386 ------- ------- Preferred Stock Dividends: Senior Series C Convertible (126) -- Senior Series D Convertible (112) -- Preferred Stock Deemed Dividend: Senior Series D Convertible (336) -- ------- ------- (574) -- ------- ------- Numerator for basic income (loss) per share: Net income (loss) available to common stockholders (320) 386 ------- ------- ------- ------- Denominator: Denominator for basic earnings per share: Weighted average shares 18,378 17,624 ------- ------- Effect of dilutive securities: Series B Convertible Preferred Stock -0- 1,158 Series C convertible Preferred Stock -0- 4,025 Stock options -0- 147 Stock purchase plan rights -0- -0- Warrants -0- 25 ------- ------- Dilutive potential common shares -0- 5,355 Denominator for diluted earnings per share adjusted weighted average shares and assumed conversions 18,378 22,979 ------- ------- ------- ------- Basic earnings (loss) per share $ (0.02) $ 0.02 ------- ------- ------- ------- Diluted earnings (loss) per share $ (0.02) $ 0.02 ------- ------- ------- -------
For the three months ended June 30, 1998, potential common shares of 9,981 were excluded from the computation of diluted earnings per share because the Company had a net loss applicable to common shareholders, and the effect would have been antidilutive. 7 4. Credit Agreement At June 30, 1998 and March 31, 1998, the Company had an equipment letter of credit for $0.5 and $0.6 million, respectively, which was secured by the equivalent amount of cash. This letter of credit expires on July 31, 1999. ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS --------------------------------------------- Results of Operations Overview The Company reported net income of $0.3 million on total revenues of $11.0 million for its first quarter ended June 30, 1998. During the first quarter of fiscal 1999, the Company recorded dividends of $0.3 million on its Senior Series C and Senior Series D preferred stock, and a non-cash deemed dividend of $0.3 million on its Senior Series D preferred stock. Therefore, after dividends on preferred stock, the Company's net loss applicable to common shareholders was $0.3 million. This compares with net income of $0.4 million on total revenues of $12.8 million for the first quarter of fiscal 1998. Since there were no dividends on preferred stock in the prior year's first quarter ending June 30, 1998, the net income applicable to common shareholders remained at $0.4 million. The decline of $1.8 million (14%) in revenue in the first quarter of fiscal 1999 compared to the same period in fiscal 1998 was due to a decrease in product revenue and the related impact on maintenance and service revenue. This revenue decline has been 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 a new content management product family, targeted toward its customers' extended enterprise. Revenues Product: Total product revenue decreased by $0.5 million (19%) in the first quarter of fiscal 1999 as compared to the same period in fiscal 1998. Product revenues represented 20% and 21% of total revenues in the first quarter of fiscal 1999 and 1998, respectively. Revenue declined in all geographic regions. The continuing trend in the reduction in product 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. The 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 content management 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 content management 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 stabilize or grow. Additionally, since the Company's services and maintenance revenue is largely dependent on new product licenses, these revenue components have also experienced downward pressure. This trend will continue unless product revenue stabilizes. Maintenance: Maintenance revenue decreased by $0.8 million (12%) in the first quarter of fiscal 1999 compared to the same period in fiscal 1998. Maintenance revenues comprised 53% and 52% of total revenues in the first quarter of fiscal 1999 and 1998, respectively. Revenue declined in all geographic regions. Future maintenance revenue is dependent on the Company's ability to maintain its existing 8 customer base and to increase maintenance contract volume related to the new content management 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: Services revenue, consisting of consulting and customer training revenue, decreased by $0.5 million (15%) in the first quarter of fiscal 1999 compared to the same period in fiscal 1998. Services revenue represented 27% of total revenues in the first quarter of both fiscal 1999 and 1998. 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. Fiscal 1999: During fiscal 1999, the Company plans to develop and release several upgrades to its traditional products. The Company also plans to develop product offerings which address at least two vertical segments of the content management market. Growth in revenues during fiscal 1999 and fiscal 2000 will be largely dependent on the introduction and customer acceptance of the new and enhanced software products planned to be released in fiscal 1999 and the following year, and the Company's success in leveraging software products with services to provide content management solutions to its customers, improving sales force productivity and the effectiveness of the Company's investment in marketing and lead generation programs. If the Company is unable to grow or stabilize its revenues in fiscal 1999, further expense reductions will be necessary in order to sustain profitable 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 $0.1 million (13%) compared to the same period in fiscal 1998. Cost of product revenues as a percentage of product revenues was 29% compared to 27% for the same period in fiscal 1998. The cost of maintenance revenue declined by $0.1 million (13%) compared to the same period in fiscal 1998. Cost of maintenance revenues as a percentage of maintenance revenues was 14% for the first quarter of both fiscal 1999 and 1998. The cost of services revenue declined by $0.1 million (5%) for the first quarter compared to the same period in fiscal 1998. Cost of services revenue as a percentage of services revenue was 92% for the first quarter compared to 83% for the same period in fiscal 1998. The decline in the costs of revenues was impacted by the year-to-year decline in product and services revenues. Operating Expenses Selling, general and administrative ("SG&A") expenses decreased by $0.6 million (11%) for the first quarter compared to the same period in fiscal 1998. The decline was primarily due to continued focus on stringent cost controls by management. Research and Development ("R&D") expenses consist primarily of personnel and related overhead expenses to support product development. R&D expenses decreased by $0.7 million (28%) for the first quarter compared to the same period in fiscal 1998. Much of the decline was caused by a reduction in facility costs when the R&D employees moved to less expensive facilities. No software development costs were capitalized in the first quarter of fiscal 1999 or in the first quarter of fiscal 1998. Liquidity and Capital Resources The Company had approximately $23.5 million of cash and cash equivalents at June 30, 1998, an increase of $2.4 million from March 31, 1998. The net increase was the result of cash provided by operations, primarily from collections of accounts receivable, partially offset by reductions in unearned revenue, other liabilities, and accounts payable and accrued expenses. At June 30, 1998 and March 31, 9 1998, the Company had approximately $1.0 million of cash restricted for potential payment of a withholding tax assessment on its German subsidiary related to payments remitted to the United States from Germany in 1990. The Company is appealing this assessment. The Company believes its current cash balances and cash generated from operations, offset by restructuring payments, will be sufficient to meet the Company's liquidity needs for fiscal 1999. Year 2000 The Company has undertaken a comprehensive evaluation of its internal information systems in order to evaluate those modifications which will be required in order to address Year 2000 functionality and other operational deficiencies. This review is substantially complete, and the Company has estimated that the cost or risk which may be associated with its Year 2000 or other internal operational issues is not material. The Company expects to upgrade certain hardware and software during fiscal year 1999 in order to become compliant. The estimated cost of these upgrades is less than $0.5 million. The Company has undertaken a systematic review and planning process concerning the requirements and abilities of its standard products (including embedded third party products) to handle date information and to function appropriately from and after January 1, 2000. The Company intends to discontinue its support of certain products which it considers obsolete without regard to Year 2000 concerns. Although the Company believes that the effort required to adapt its supported standard products to the Year 2000 will not have a materially adverse impact on the Company's financial performance, currently unforeseen difficulties, delays or requirements could cause this assessment to change. Many of the Company's customers have implemented custom applications which rely on the Company's standard products to operate, and the Company does not believe that it has the obligation to modify those applications for the Year 2000. It is possible that unforeseen liabilities may arise with respect to discontinued products or custom applications. Forward-Looking Statements This Quarterly Report on Form 10-Q contains forward-looking statements concerning the Company's performance and business operations. The Company wishes to caution readers of this Quarterly Report on Form 10-Q that actual future results may differ materially from the projections or suggestions made in such forward-looking statements. Factors which might cause actual future results to differ materially from those projected in the forward-looking statements contained herein include the following: The Company's ability to develop and market new and enhanced products, particularly the Company's content management products and services; delays in the development and introduction of such new and enhanced products and services; failure to achieve customer and market acceptance of the Company's new and enhanced products and services; delays in the growth and development of market demand for content management software products; inability to increase maintenance contract revenue related to content management products; inability to increase revenue from consulting and training contracts with respect to the introduction of new products; inability to improve sales force productivity; the Company's ability to keep pace with the rapid technological change in its industry and compete with companies which have greater market penetration, and greater financial, technical and marketing resources; failure to adequately protect the Company's intellectual property; inability to successfully leverage the Company's software products with services to provide content management solutions to its customers; inability to establish or maintain strategic relationships with companies with outsourcing or service bureau businesses and with companies that have presence and publishing expertise in the financial services market; the inability of the Company to make acquisitions of, or significant investments in, businesses that offer complementary products and technologies; and failure to integrate the operations, information systems and personnel of any acquired businesses. Certain of these and other factors which might cause actual results to differ materially from 10 those projected are more fully set forth under the caption "Risk Factors" on pages 13-15 of the Company's Annual Report on Form 10-K for the fiscal year ended March 31, 1998. PART II - OTHER INFORMATION Item 6. Exhibits and Reports on Form 8-K -------------------------------- (a) Exhibits
Exhibit Number Description -------------- ----------- 3(a) Restated Articles of Organization of the Company, as amended (incorporated herein by reference to the applicable Exhibit in the Company's Quarterly Report on Form 10-Q for the quarter ended December 31, 1996) 3(b) By-Laws of the Company, as amended (incorporated herein by reference to the applicable Exhibit to the Company's Annual Report on From 10-K for the year ended March 31, 1994) 4(a) Specimen Certificate for Shares of the Company's Common Stock (incorporated herein by reference to the applicable Exhibit to the Company's Registration Statement on Form S-1, File No. 33-5743) 4(b) Rights Agreement, dated July 15, 1998, between the Company and the First National Bank of Boston (incorporated herein by reference to Exhibit 1 to the Company's Registration Statement on Form 8-A filed July 27, 1988) 27 Financial Data Schedule
(b) A Current Report on Form 8-K was filed by the Company on July 13, 1998, reporting under Item 4 , a change in the Company's independent auditors. 11 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. August 14, 1998 /s/ Peter J. Rice -------------------------------------------- Peter J. Rice, Vice President of Finance and Administration and Chief Financial Officer and Treasurer (Principal Financial and Accounting Officer) 12 EX-27 2 EX-27
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE CONSOLIDATED BALANCE SHEETS AND CONSOLIDATED STATEMENTS OF OPERATIONS FOUND ON PAGES 3 AND 4 OF THE COMPANY'S FORM 10-Q FOR THE QUARTERLY PERIOD ENDED JUNE 30, 1998 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 1,000 3-MOS MAR-31-1999 JUN-30-1998 23,486 0 9,689 1,273 84 32,782 14,887 12,282 36,220 24,936 0 0 188 185 9,219 36,220 2,227 11,008 636 4,158 6,743 0 0 254 0 254 0 0 0 (320) (0.02) (0.02)
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