-----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, QOSc/aT3Ji8yjIR/7xl4ut+EEBlp8h3TmDX0Rt3lqVZg7uViUm28RqgQPzR5JV7l 3EuwSslXgV/ss4Ol4dHMUw== 0001047469-98-041309.txt : 19981118 0001047469-98-041309.hdr.sgml : 19981118 ACCESSION NUMBER: 0001047469-98-041309 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 7 CONFORMED PERIOD OF REPORT: 19980930 FILED AS OF DATE: 19981116 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: 98752166 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 SEPTEMBER 30, 1998 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 13, 1998 was 18,962,386. - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- TABLE OF CONTENTS
PAGE ---- PART I - FINANCIAL INFORMATION Item 1 - Financial Statements Consolidated balance sheets at September 30, 1998 and March 31, 1998................................. 3 Consolidated statements of operations for the three and six months ended September 30, 1998 and 1997 .......................................................................... 4 Consolidated statements of cash flows for the six months ended September 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 .................................................................. 9 PART II - OTHER INFORMATION Item 4 - Submission of Matters to Vote of Security Holders ........................................... 15 Item 5 - Other Information ........................................................................... 16 Item 6 - Exhibits and Reports on Form 8-K ............................................................ 16 SIGNATURES ........................................................................................... 17
2 PART I - FINANCIAL INFORMATION ITEM 1 FINANCIAL STATEMENTS INTERLEAF, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS
September 30,1998 March 31, 1998 ----------------- --------------- In thousands, except for share and per share amounts (unaudited) ASSETS Current assets Cash and cash equivalents $ 16,787 $ 21,112 Accounts receivable, net of reserve for doubtful accounts of $1,119 9,979 12,706 at September 30, 1998 and $1,364 at March 31, 1998 Prepaid expenses and other current assets 2,315 838 ----------- ----------- Total Current Assets 29,081 34,656 Property and equipment, net 2,446 3,321 Intangible assets, net 2,017 583 Other assets 398 828 ----------- ----------- Total Assets $ 33,942 $ 39,388 ----------- ----------- ----------- ----------- LIABILITIES and SHAREHOLDERS' EQUITY Current liabilities Accounts payable $ 2,334 $ 2,079 Accrued expenses 13,403 11,657 Unearned revenue 8,527 12,136 Accrued restructuring 1,202 2,143 ----------- ----------- Total Current Liabilities 25,466 28,015 Long-term restructuring 1,440 2,063 ----------- ----------- Total Liabilities 26,906 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, 86 86 861,911 at September 30, 1998 and March 31, 1998 Series C Convertible, shares issued and outstanding, 1,010,348 at 101 101 September 30, 1998 and March 31, 1998 Series D 6% Convertible, shares issued and outstanding, 6,987 at 1 1 September 30, 1998 and 7,625 at March 31, 1998 Common stock, par value $.01 per share, authorized 50,000,000 188 182 shares, issued and outstanding, 18,834,924 at September 30, 1998 and 18,155,309 at March 31, 1998 Additional paid-in capital 93,187 93,369 Retained earnings (accumulated deficit) (86,389) (84,072) Cumulative translation adjustment (138) (357) ----------- ----------- Total Shareholders' Equity 7,036 9,310 ----------- ----------- Total Liabilities and Shareholders' Equity $ 33,942 $ 39,388 ----------- ----------- ----------- -----------
See notes to consolidated financial statements 3 INTERLEAF, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS
Three months ended September 30 Six months ended September 30 ------------------------------- ----------------------------- 1998 1997 1998 1997 ---- ---- ---- ---- (unaudited) (unaudited) In thousands, except for per share amounts Revenues: Products $ 1,658 $ 3,158 $ 3,885 $ 5,900 Maintenance 5,168 6,695 11,016 13,344 Services 3,184 3,265 6,117 6,700 -------- -------- -------- -------- Total revenues 10,010 13,118 21,018 25,944 -------- -------- -------- -------- Costs of Revenues: Products 636 952 1,272 1,682 Maintenance 752 1,012 1,576 1,958 Services 2,969 2,877 5,667 5,716 -------- -------- -------- -------- Total costs of revenues 4,357 4,841 8,515 9,356 -------- -------- -------- -------- Gross margin 5,653 8,277 12,503 16,588 -------- -------- -------- -------- Operating Expenses: Selling, general and administrative 5,393 5,475 10,363 11,032 Research and development 2,059 2,316 3,832 4,767 Purchased in process research & development 990 -- 990 -- -------- -------- -------- -------- Total operating expenses 8,442 7,791 15,185 15,799 -------- -------- -------- -------- Income (loss) from operations (2,789) 486 (2,682) 789 Other income expenses 244 (37) 391 46 -------- -------- -------- -------- Income (loss) before income taxes (2,545) 449 (2,291) 835 Provision for income taxes 25 -- 25 -- -------- -------- -------- -------- Net Income (loss) $ (2,570) $ 449 $ (2,316) $ 835 Dividends on Preferred Stock (518) -- (1,092) -- -------- -------- -------- -------- Net income (loss) applicable to common shareholders $ (3,088) $ 449 $ (3,408) $ 835 -------- -------- -------- -------- -------- -------- -------- -------- INCOME PER SHARE: Basic $ (0.16) $ 0.03 $ (0.18) $ 0.05 -------- -------- -------- -------- -------- -------- -------- -------- Diluted $ (0.16) $ 0.02 $ (0.18) $ 0.03 -------- -------- -------- -------- -------- -------- -------- -------- Shares used in computing income per share Basic 18,721 17,757 18,550 17,691 -------- -------- -------- -------- -------- -------- -------- -------- Diluted 18,721 24,820 18,550 23,900 -------- -------- -------- -------- -------- -------- -------- --------
4 INTERLEAF, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOW
Six months ended September 30 ----------------------------- Unaudited --------- 1998 1997 -------- -------- In thousands Cash Flows from Operating Activities: Net income $ (2,316) $ 835 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization expense 1,377 2,030 Purchased in-process research & development 990 -- Changes in assets and liabilities, net of amounts acquired: Decreases in accounts receivable, net 3,926 1,888 Decreases in other assets (24) (619) Decreases in accounts payable and accrued expenses (378) (2,310) Decreases in unearned revenue (3,793) (3,769) Decreases in other liabilities (1,298) (1,692) Other, net (84) 278 -------- -------- Net cash used in operating activities (1,600) (3,359) -------- -------- Cash Flows from Investing Activities: Capital expenditures, net (414) (655) Acquisitions, net of cash acquired (2,731) -- -------- -------- Net cash used in investing activities (3,145) (655) -------- -------- Cash Flows from Financing Activities: Net proceeds from issuance of common stock -- 597 Repayment of long-term debt & capital leases -- (20) Dividends Paid (251) -- -------- -------- Net cash (used in) provided by financing activities (251) 577 -------- -------- Effect of exchange-rate changes on cash 671 (534) -------- -------- Net increase (decrease) in cash and cash equivalents (4,325) (3,971) Cash and cash equivalents at beginning of period 21,112 17,349 -------- -------- Cash and cash equivalents at end of period $ 16,787 $ 13,378 -------- -------- -------- --------
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 for 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 for the quarter or six month period ended September 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 September 30, 1998 was a loss of $2.4 million. For the six months ended September 30,1998, total comprehensive income was a loss of $2.1 million. For the quarter and six months ended September 30, 1997, total comprehensive income was $.3 million and $.7 million respectively. 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 (loss) earnings per share:
Three Months Six Months ended September 30, ended September 30, 1998 1997 1998 1997 ---- ---- ---- ---- In thousands, except for per share amounts Numerator: Net Income $ (2,570) $ 449 $ (2,316) $ 835 -------- -------- -------- -------- Preferred Stock Dividends: Series C Convertible (126) -- (252) -- Series D Convertible (56) -- (168) -- Preferred Stock Deemed Dividend: Series D Convertible (336) -- (672) -- -------- -------- -------- -------- (518) -- (1,092) -- -------- -------- -------- -------- Numerator for basic (loss) income per share: Net (loss) income available to common stockholders $ (3,088) $ 449 $ (3,408) $ 835 -------- -------- -------- -------- -------- -------- -------- -------- Denominator: Denominator for basic earnings per share: Weighted average shares 18,721 17,757 18,550 17,691 -------- -------- -------- -------- Effect of dilutive securities: Senior Series B Convertible Preferred Stock -- 1,158 -- 1,158 Series C Convertible Preferred Stock -- 4,025 -- 4,025 Stock options -- 1,818 -- 983 Stock purchase plan rights -- 62 -- 31 Warrants -- -- -- 13 -------- -------- -------- -------- Dilutive potential common shares -- 7,063 -- 6,209 Denominator for diluted earnings per share adjusted weighted average share and assumed conversion 18,721 24,820 18,550 23,900 -------- -------- -------- -------- -------- -------- -------- -------- Basic (loss) earnings per share $ (0.16) $ 0.03 $ (0.18) $ 0.05 -------- -------- -------- -------- -------- -------- -------- -------- Diluted (loss) earnings per share $ (0.16) $ 0.02 $ (0.18) $ 0.03 -------- -------- -------- -------- -------- -------- -------- --------
For the three and six months ended September 30, 1998, potential common shares of 10,464 and 10,222, respectively 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. Acquisitions Effective August 31, 1998, the Company purchased 100% of the outstanding common shares of PDR Automated Systems and Publications, Inc. ("PDR"). PDR provides outsourcing services for the development, management and distribution of information, and has developed certain technology surrounding image processing. The acquisition will be accounted for as a purchase business combination and, therefore, the operating results of PDR have been included in the Consolidated Statement of Operations since the date of acquisition. The Company paid cash of $2.9 million and, depending upon certain financial contingencies, may pay an additional $3.0 million or more, payable in stock, except that the Company may pay in cash under certain circumstances. A minimum contingent payment of $.7 million is included in accrued expenses in the accompanying balance sheet as part of the initial purchase price. The Company recorded costs associated with the acquisition of $.1 million related to valuation services, legal and audit fees. In connection with this acquisition, the acquired net tangible assets of PDR were recorded at $1.3 million, which approximates fair value. The Company has also recorded $1.6 million of goodwill and other intangibles, and $.8 million of purchased in-process research and development. It has been determined that technological feasibility of the in-process technology purchased has not been established and the technology has no alternative future use. Therefore, in accordance with generally accepted accounting principles, the Company has expensed the amount of the purchase price allocated to purchased research and development of approximately $.8 million. The goodwill and other intangibles will be amortized on a straight line basis over estimated useful lives ranging up to ten years. The following pro-forma results of operations combine the operations of the Company and PDR as if the combination had occurred at the beginning of each period. The results for the three and six months ended September 30, 1997 exclude the impact of $.8 million of purchased in-process research and development cost. Inclusion of this amount would have resulted in a decrease of $.05 and $.04 for basic and diluted earnings per share, respectively, for the three months ended September 30, 1997, and a decrease of $.05 and $.03 for basic and diluted earnings per share, respectively, for the six months ended September 30, 1997.
Three months ended Six months ended 9/30/98 9/30/97 9/30/98 9/30/97 Amounts in thousands, except per share ------- ------- ------- ------- Revenue $10,862 $14,673 $23,500 $28,864 ------- ------- ------- ------- ------- ------- ------- ------- Net income (loss) applicable to common stockholders $(3,111) $553 $(3,269) $1,008 ------- ------- ------- ------- ------- ------- ------- ------- Earning per share: Basic $(.17) $.03 $(.18) $.06 ------- ------- ------- ------- ------- ------- ------- ------- Diluted $(.17) $.02 $(.18) $.04 ------- ------- ------- ------- ------- ------- ------- -------
Effective September 11, 1998, the Company acquired the Panorama and CD Web Publishing product lines from Softquad Inc. for $.4 million. The acquisition provides the Company with products which are complementary to its existing complex publishing product line and in-process technologies which are expected to contribute to the development of the Company's new content management products. The total fair value of the assets acquired was approximately $.1 million. In connection with this acquisition, it has been determined that technological feasibility of the in-process technology purchased has not been established and the technology has no alternative future use. Therefore, in accordance with generally accepted accounting principles, the Company has expensed the amount of the purchase price allocated to purchased research and development of approximately $.2 million. The excess of purchase price over the fair value of the assets acquired ($.1 million) has been recorded as goodwill, and will be amortized on a straight line basis over five years. This acquisition is not considered material to the Company's financial position or results of 8 operation. 5. Credit Agreement At September 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. 6. Subsequent Events Subsequent to the end of the second quarter, the Company redeemed 100% of its Series C Convertible Preferred Stock ("Series C Stock") for $1.6 million. Additionally, dividends accrued at September 30, 1998 totaling $.3 million will not be paid. For purposes of the 1998 third quarter basic earnings per share calculation, this redemption will result in $8.7 million being added to net income to arrive at net income available to common shareholders. The $8.7 million represents the excess of the carrying amount of the Series C Stock over the fair value of the consideration paid by the Company. On November 4, 1998, the Company reached agreement with the holders of 79% of the 6% Convertible Preferred Stock ("Series D Stock") outstanding, under which all of the Series D Stock held by such persons will be converted into cash and Common Stock of the Company. There are currently 6,987 shares of Series D Stock outstanding, and the Company has reached agreement with the holders of 5,487 of such shares. Under this agreement, all 5,487 shares of the Series D Stock held by them will be converted into a total of approximately $2.2 million in cash and approximately 3.5 million shares of Common Stock. The shares of Common Stock issued upon conversion shall be held by the Series D stockholders subject to the restrictions on re-sale, prohibitions against short-selling and the other terms and conditions of the Preferred Stock Investment Agreement under which the Series D Stock was originally issued. ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Results of Operations Overview The Company reported a net loss of $2.6 million on revenues of $10.0 million for its second quarter and a net loss of $2.3 million on revenues of $21.0 million for the six months ended September 30, 1998. The Company has recorded preferred stock dividends of $.5 million and $1.1 million for the second quarter and six months ended September 30, 1998, respectively. Therefore, after dividends on preferred stock, the Company's net loss applicable to common shareholders was $3.1 million and $3.4 million for the second quarter and six months ended September 30, 1998, respectively. This compares with net income of $.4 million on revenues of $13.1 million and $.8 million on revenues of $25.9 million for the same periods during the prior year. The Company did not record dividends in the second quarter or the six months ended September 30, 1997. Therefore, net income applicable to common shareholders was $.4 million and $.8 million, respectively, for those periods. Much of the decline in revenue is due to a decrease in product revenue and the related decline in maintenance and service revenue caused by the continuing maturation and saturation 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 9 management product family, targeted to its customers' extended enterprises. Effective August 31, 1998, the Company purchased 100% of the outstanding common shares of PDR Automated Systems and Publications, Inc. ("PDR"). PDR provides outsourcing services for the development, management and distribution of information, and has developed certain technologies surrounding image processing. The acquisition will be accounted for as a purchase business combination and, therefore, the operating results of PDR have been included in the Consolidated Statement of Operations since the date of acquisition. The Company paid cash of $2.9 million and, depending upon certain financial contingencies, may pay an additional $3.0 million or more, payable in stock, except that the Company may pay in cash under certain circumstances. A minimum contingent payment of $.7 million is included in accrued expenses in the accompanying balance sheet as part of the initial purchase price. The Company recorded costs associated with the acquisition of $.1 million related to valuation services, legal and audit fees. In connection with this acquisition, the acquired net tangible assets of PDR were recorded at $1.3 million, which approximates fair value. The Company has also recorded $1.6 million of goodwill and other intangibles and $.8 million of purchased in-process research and development. It has been determined that technological feasibility of the in-process technology purchased has not been established and the technology has no alternative future use. Therefore, in accordance with generally accepted accounting principles, the Company has expensed the amount of the purchase price allocated to purchased research and development of approximately $.8 million. The goodwill and other intangibles will be amortized on a straight line basis over estimated useful lives ranging up to ten years. Effective September 11, 1998, the Company acquired the Panorama and CD Web Publishing product lines from SoftQuad Inc. for $.4 million. The acquisition provides the Company with products which are complementary to its existing complex publishing product line and in-process technologies which are expected to contribute to the development of the Company's new content management products. The total fair value of the assets acquired approximated $.1 million. In connection with this acquisition, it has been determined that technological feasibility of the in-process technology purchased has not been established and the technology has no alternative future use. Therefore, in accordance with generally accepted accounting principles, the Company has expensed the amount of the purchase price allocated to purchased research and development of approximately $.2 million. The excess of purchase price over the fair value of the assets acquired ($.1 million) has been recorded as goodwill, and will be amortized on a straight line basis over five years. This acquisition is not considered material to the Company's financial position or results of operation. Revenues Product: The product revenue decreased by $1.5 million (47%) and $2.0 million (34%) for the second quarter and six months ended September 30, 1998, respectively, compared with the same periods in fiscal 1998. The continuing trend of reduction in product revenue is due to two factors. The first factor is the saturation of UNIX-based high-end authoring software in the aerospace/defense industry, where the Company had historically derived most of its authoring product license revenue. The second factor is the decline in licensing of the Company's UNIX-based high-end authoring products which is primarily attributable to the increasing popularity of Windows-based publishing software. 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 10 product revenues will stabilize or grow. Additionally, since the Company's services and maintenance revenue are 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 $1.5 million (23%) and $2.3 million (17%) for the second quarter and six months ended September 30, 1998, respectively, compared with the same periods in fiscal 1998. Future maintenance revenue is dependent on the Company's ability to maintain its existing customer base and to increase maintenance contract volume related to the new content management products. 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: Service revenue, consisting of consulting and training revenue, decreased by $.1 million (2%) and $.6 million (9%) for the second quarter and six months ended September 30, 1998, respectively, compared with the same periods in fiscal 1998. 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 the balance of 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. As part of its strategy to increase revenues, the Company acquired PDR and acquired the Panorama and CD Web Publishing product lines of SoftQuad Inc. The acquisition of PDR also provides the Company with in-process development of certain technology surrounding image processing that is expected to result in a completed product in fiscal 2000 and may be incorporated into a content management software product currently under development. The acquisition of the Panorama and CD Web Publishing product line complements the Company's existing complex publishing products, and provides technologies and resources to be used in the development of content management products. The technologies acquired from this acquisition are expected to shorten the development cycle of the Company's new content management products. Costs of Revenues Cost of product revenue 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 $.3 million (33%) and $.4 million (24%) for the second quarter and six months ending September 30, 1998 compared to the same periods in fiscal 1998. Cost of product revenues as a percentage of product revenues were (38%) and (33%) for the second quarter and the six months ended September 30, 1998, respectively, compared with (30%) and (29%) for the same periods in fiscal 1998. The increase in cost of product revenue as a percentage of product revenue was mainly attributable to one-time start up cost associated with a change in the Company's product manufacturing vendor. The cost of maintenance revenue declined by $.3 million (26%) and $.4 million (20%) for the second quarter and the six months ended September 30, 1998, compared with the same periods in fiscal 1998. The cost of services revenue increased by $.1 million in the second quarter of fiscal 1999 compared with the second quarter of fiscal 1998 and was comparable for the six months ended September 30, 1998 compared with the same period in fiscal 1998. Cost of service revenue as a percentage of service revenue was 93% for the second quarter and six months ended September 30, 1998, respectively, compared with 11 88% and 85% for the same periods in fiscal 1998. The increase in cost of services as a percentage of revenues reflects the pricing pressure in the Company's consulting service business coupled with increasing salary and related costs of consultants. Operating Expenses Selling, general and administrative ("SG&A") expenses decreased by $.1 million (2%) and $.7 million (6%) for the second quarter and six months ended September 30, 1998, respectively, compared with the same periods in fiscal 1998. The declines were primarily due to a 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 $.3 million (11%) and $.9 million (20%) for the second quarter and the six months ended September 30, 1998, respectively, compared to the same periods in fiscal 1998. The decline can be attributed to the Company's focus on cost controls resulting in lower overhead expenses, mainly for reduced facility costs of the Company's engineering group and dedication of the Company's engineering resources to fewer development projects. In connection with the acquisition of PDR and the Panorama and CD Web Publishing product line from SoftQuad, Inc., the Company recorded charges of $.8 million and $.2 million, respectively, of purchased in-process research and development. Liquidity and Capital Resources The Company had approximately $16.8 million of cash and cash equivalents at September 30, 1998, a decrease of $4.3 million from March 31, 1998. The decrease in cash is mainly attributed to the amounts paid for the acquisition of PDR ($2.4 million net of cash acquired) and the Panorama and CD Web Publishing product line from SoftQuad, Inc. ($.3 million) coupled with the decreases in cash due to operating activities, $1.6 million, capital expenditures, $.4 million and dividend payments, $.3 million. These decreases were partially offset by the increase in cash due to the effect of exchange rate changes on cash, mainly cash held by the Company's German subsidiary of $.7 million. Subsequent to the end of the second quarter, the Company redeemed 100% of its Series C Convertible Preferred Stock for $1.6 million. Additionally, dividends accrued at September 30, 1998 totaling $.3 million will not be paid. For purposes of the 1998 third quarter basic earnings per share calculation, this redemption will result in $8.7 million being added to net income to arrive at net income available to common shareholders. The $8.7 million represents the excess of the carrying amount of the Series C preferred stock over the fair value of the consideration paid by the Company. On November 4, 1998, the Company reached agreement with the holders of 79% of the 6% Convertible Preferred Stock ("Series D Stock") outstanding, under which all of the Series D Stock held by such persons will be converted into cash and Common Stock of the Company. There are currently 6,987 shares of Series D Stock outstanding, and the Company has reached agreement with the holders of 5,487 of such shares. Under this agreement, all 5,487 shares of the Series D Stock held by them will be converted into a total of approximately $2.2 million in cash and approximately 3.5 million shares of Common Stock. The shares of Common Stock issued upon conversion shall be held by the Series D Stockholders subject to the restrictions on re-sale, prohibitions against short-selling and the other terms and conditions of the Preferred Stock Investment Agreement under which the Series D Stock was originally issued. At September 30, 1998 and March 31, 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 12 payments remitted to the United States from Germany in 1990. The Company is appealing this assessment. While 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, the Company has reached agreement in principle with potential investors regarding a private placement of common stock, subject to negotiation of definitive agreements. Year 2000 Background Some computers, software, and other equipment include programming code in which calendar year data is abbreviated to only two digits. As a result of this design decision, some of the systems do not properly recognize a year that begins with "20" instead of "19". These problems are widely expected to increase in frequency and severity as the year 2000 approaches, and are commonly referred to as the "Millenium Bug" or "Year 2000 problem". Interleaf Approach Interleaf established a Year 2000 project team to address all aspects of the Year 2000 problem in each area of its business. The project team has four areas of focus, each with its own project manager. These four areas are: (1) the software that is created by Interleaf and sold to customers; (2) internal business systems; (3) the hardware and operating system software used by employees; and (4) facilities and critical vendors other than computer suppliers. Interleaf Created Products Assessment: In 1997 Interleaf began to focus on the Year 2000 problem regarding its software products created for sale to customers. Products that generate the most revenue or create the highest risk were prioritized for testing and repair. The assessment of these products was completed in early 1998 and the repair process begun. The Company made the decision to discontinue sales and support for certain low volume products and computer platforms. Customer Communications: The Company sent a description of its Year 2000 product strategy to all of its maintenance customers. It created and is maintaining a Year 2000 product status page as part of its web site. Interleaf will distribute another mailing to the entire maintenance base with the status of the year 2000 releases and a list of retired products and platforms in the fourth calendar quarter of 1998. Status: Most major products have been tested and modified, and updates which correct any known Year 2000 problems with those products are available at no extra charge to the customers with current maintenance contracts for most of the computer platforms that will be supported beyond the year 2000. Year 2000 updates will be completed for supported products by the end of the first calendar quarter of 1999. The extent of the changes required ranges from simple recompilation with Year 2000 compliant operating systems to extensive modifications. Testing and repair of layered applications has begun and will be completed by the end of the second calendar quarter of 1999. The Company expects that the layered applications will not require significant modifications, since initial analysis has indicated that there is no date handling performed by these products. Moreover, in many instances the Company created layered applications under contracts with specific customers, and not for general re-sale, and the Company believes that it has no obligation to modify those applications to address the Year 2000 problem. All products under development are being developed to be Year 2000 compliant. 13 Internal Business Systems Interleaf contracted an independent third party to perform Year 2000 compliance testing on its critical internal business systems. Some problems were identified and appropriate modifications were made. The systems were then re-tested and performed successfully. The software vital to corporate operations has been proven by the independent third party to function without problems related to the millenium change. The assessment phase is now underway for business software used in Europe, Japan, and Australia. The Company's intent is to insure that all critical internal business software is Year 2000 compliant by the end of the first calendar quarter of 1999. Hardware and Operating Systems Software Assessment of the systems used by employees began in early 1997 and has been completed. The Company has developed a plan to upgrade or replace all critical systems used by employees, including all hardware in the enterprise from servers to laptops. The upgrade/replacement process began in early 1998 and is approximately 40% complete. The entire process is anticipated to be complete by the end of the third calendar quarter of 1999. Facilities and Critical Vendors In the fourth calendar quarter of 1998 Interleaf will begin discussions with facility management of its leased office spaces to ensure that the proper actions are taken to avoid disruption of productivity in all Interleaf facilities. Two major elements of Interleaf's business, payroll and manufacturing, are outsourced. Interleaf is currently working with those service providers to insure that operations of these critical business areas will not be affected by the Millenium change. Cost The costs of the Interleaf Year 2000 efforts are being funded out of cash flow from operations. The total cost associated with the required modifications and upgrades associated with the Year 2000 projects is not expected to be material to the Company's financial position. The process of repairing and testing the software that Interleaf creates for sale has been done with existing personnel. The Year 2000 testing equipment and lab environment have been created using existing equipment and space. The capital costs associated with the upgrade and replacement of corporate and field office computing environments is budgeted to be approximately $250,000. These expenditures began in late 1997 and will continue through the third calendar quarter of 1999. Software maintenance costs attributable to the Year 2000 process will be approximately $50,000. Labor associated with this process of implementing the internally used systems comes from the existing budgeted personnel. Risk Interleaf has made a significant effort to address its Year 2000 issues. At this time, there are no identifiable significant risks associated with its Year 2000 readiness, although there is a risk that unanticipated problems may arise. The Company intends to begin preparing a contingency plan to address reasonably likely worst case scenarios in the second calendar quarter of 1999. Euro Conversion. On January 1, 1999, 11 of the 15 member countries of the European Union are scheduled to establish fixed conversion rates between their existing sovereign currencies and the Euro. The transition to the Euro will be complete as of January 1, 2002. The Company has significant operations within the European Union and is currently preparing for the Euro conversion. The issues that the Company is addressing include preparing its information systems for the Euro, analyzing the benefit of decreased exchange rate risk in cross border transactions involving participating countries and assessing the potential impact of increased price transparency. In addition, the Euro is expected to affect general economic conditions within the participating countries. For example, this has already caused a convergence of interest rates among the Euro block countries. The Company is analyzing the impact of the Euro 14 with a view to minimizing the impact of the Company's operations. The Company does not expect the costs of upgrading its systems for the Euro to be material. Forward-Looking Statements This Report contains forward-looking statements concerning the Company's performance and business operations. The Company cautions readers 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; reliance by the Company on third party development partners who are engaged in developing a portion of the Company's content management products and the Company's dependence on the quality and timeliness of performance of those vendors for on-time and high quality delivery of the Company's content management products; 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 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 4. Submission of Matters to Vote of Security Holders At the Annual Meeting of Shareholders held on August 24, 1998 ("Annual Meeting"), the shareholders of the Company elected Mr. Jaime W. Ellertson as a Class II director of the Company whose term shall expire at the Company's year 2001 shareholder meeting, by a vote of 18,896,700 in favor with 206,928 votes being withheld. The Company also has three Class I directors: Marcia J. Hooper, Rory J. Cowan and John A. Lopiano, whose terms are set to expire at the annual shareholders' meeting in the year 2000, and two Class III Directors, Frederick B. Bamber and David A. Boucher, whose terms expire at the annual shareholders meeting in 1999. At the Annual Meeting, the shareholders approved amendments to the Company's 1993 Director Stock Option Plan to increase the number of shares of the Company's Common Stock available for issuance under the Plan from 150,000 to 325,000, and to amend such plan in certain other respects, by a vote of 8,877,576 in favor, 800,493 against and with 92,776 abstentions. The shareholders also approved the adoption of the Company's 1998 Employee Stock Purchase Plan, under which employees of the Company are eligible to purchase during the ten year term of this plan an aggregate of 2,500,000 shares of Common Stock at a 15% discount, by a vote of 8,273,390 in favor, 1,317,305 against and with 73,960 abstentions. The shareholders also ratified and approved the selection 15 of PricewaterhouseCoopers LLP as the Company's independent auditors for fiscal 1999, by a vote of 18,998,804 in favor, 58,425 against and with 46,399 abstentions. A more complete description of these matters appears in the Company's 1998 Proxy Statement, dated July 28, 1997. Item 5. Other Information Subsequent to the end of the second quarter, the Company redeemed 100% of its Series C Convertible Preferred Stock for $1.6 million. Additionally, dividends accrued at September 30, 1998 totaling $.3 million will not be paid. For purposes of the 1998 third quarter basic earnings per share calculation, this redemption will result in $8.7 million being added to net income to arrive at net income available to common shareholders. The $8.7 million represents the excess of the carrying amount of the Series C preferred stock over the fair value of the consideration paid by the Company. On November 4, 1998, the Company reached agreement with the holders of 79% of the 6% Convertible Preferred Stock ("Series D Stock") outstanding, under which all of the Series D Stock held by such persons will be converted into cash and Common Stock of the Company. There are currently 6,987 shares of Series D Stock outstanding, and the Company has reached agreement with the holders of 5,487 of such shares. Under this agreement, all 5,487 shares of the Series D Stock held by them will be converted into a total of approximately $2.2 million in cash and approximately 3.5 million shares of Common Stock. The shares of Common Stock issued upon conversion shall be held by the Series D stockholders subject to the restrictions on re-sale, prohibitions against short-selling and the other terms and conditions of the Preferred Stock Investment Agreement under which the Series D Stock was originally issued. The Company is financing the redemption of the Series C Shares and the cash portion of the conversion of the Series D Shares out of its existing working capital and the proposed sale of Common Stock to investors in a private placement. The holders of the Series D Stock who have converted their Series D Stock into cash and Common Stock have the right to participate in such a sale. Item 6. Exhibits and Reports on Form 8-K (a) Exhibits
Exhibit Number Description -------------- ------------ 3(a) Restated Articles of Organization of the Company, as amended (incorporated herein by reference to the applicable Exhibit in the Company's Quarterly Report on Form 10-Q for the quarter ended September 30, 1997)
16 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) 10(a) Letter Agreement among Interleaf, Inc., the Lindner Growth Fund and the Lindner Dividend Fund dated as of August 19, 1998 10(b) Letter Agreement dated October 26, 1998, amending the August 19, 1998 Letter Agreement 10(c) Form of Letter Agreements among Interleaf, Inc., and certain holders of the 6% Convertible Preferred Stock, dated as of October 27, 1998 10(d) Form of Closing Letter dated November 4, 1998 with respect to the conversion of 6% Convertible Preferred Stock 10(e) Letter Agreement between the Company and Amanda Radice dated November 2, 1998, regarding the employment of Ms. Radice by the Company 11 Computation of Earnings Per Share (included as Note 3 to Financial Statements) 27 Financial Data Schedule
(b) A Current Report on Form 8-K was filed by the Company on September 24, 1998, as amended pursuant to Form 8-K/A filed on November 12, 1998, reporting under Item 5 the acquisition by the Company of all of the outstanding capital stock of PDR Automated Systems and Publications, Inc. 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. November 16, 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) 17 EX-10.(A) 2 EXHIBIT 10(A) Exhibit 10.(a) August 19, 1998 Via Facsimile and Airborne Express Mr. Robert A. Lange Sr. Vice President Lindner Funds 7711 Carendolet Avenue, Suite 700 St. Louis MO 63105 Re: Redemption of Series C Preferred Stock Dear Mr. Lang: This Letter Agreement set forth the terms and conditions under which the parties have agreed for Interleaf to redeem the Series C Preferred Stock. Reference is made to the Series C Preferred Stock Purchase Agreement between Lindner Investments and Interleaf, Inc. ("Interleaf" or the "Company") dated October 14, 1996 (the "Investment Agreement") pursuant to which Interleaf issued and sold 1,010,348 shares of Series C Preferred Stock, $.10 par value (the "Series C Shares") to the Lindner Growth Fund (505,174 shares) and the Lindner Dividend Fund (505,174 shares) (collectively, the "Lindner Funds"). Our agreement is as follows: 1) Redemption. Interleaf agrees to redeem and purchase, and the Lindner Funds agree to sell, the Series C Shares at a price of $3.04 per share, or $3,071,458 in the aggregate (the "Purchase Price"). 2) Closing. The Purchase Price shall be paid to the Lindner Funds and the Series C Shares shall be transferred to Interleaf within forty-five (45) days following the date on which the Company's Board of Directors approves the terms of this Agreement, but no later than October 9, 1998. The closing of this transaction (the "Closing") may be effected via courier, wire transfer or other means of exchange, as agreed. 3) Release: Upon delivery of the Series C Shares to Interleaf and payment of the Purchase Price to the Lindner Funds, each of Interleaf and the Lindner Funds agrees (i) that the Investment Agreement shall be terminated and of no further force or effect, and (ii) to release and discharge the other party and its respective directors, officers, employees, agents and representatives from and against any and all liabilities, costs, obligations, claims, damages and expenses of every kind and nature arising under, or in connection with the transactions contemplated, by the Investment Agreement. Mr. Robert Lange August 19, 1998 Page 2 4) Acknowledgement. Each of the Lindner Funds acknowledges and agrees: a) It has received or obtained and had the opportunity to review copies of all reports and other materials which have been filed by the Company pursuant to the Securities Exchange Act of 1934 since the date of the Investment Agreement, including without limitation copies of Interleaf's 1998 Annual Report to Shareholders, Annual Report on Form 10-K for the year ended March 31, 1998, Quarterly Report on Form 10-Q for the quarter ended June 30, 1998, and its Proxy Statement dated July 28, 1998. b) It has had full and adequate opportunity to investigate the condition of the Company and its business, and they are satisfied with the results of its inquiries. Interleaf has provided to and discussed with the Lindner Funds such information as the Lindner Funds has requested (to the extent available) regarding the financial results of Interleaf for the quarter ended June 30,1998, and the current operations, financial condition and plans of Interleaf. Each of the Lindner Funds represents and warrants that, in selling the Series C Shares, it has not relied on any information or representations or warranties of Interleaf or its directors, officers or agents regarding the Company, its officers, financial condition, business and prospects, or the terms of its sale of the Series C Shares. c) It is an "accredited investor" within the meaning of Rule 501 of Regulation D promulgated under the Securities Act of 1933, as amended. d) It has full and sufficient power and authority and has obtained all approvals required, and has complied with all requirements and all reporting obligations applicable under the Federal securities laws, with respect to this transaction. 5) Miscellaneous. a) Each party will keep the terms, conditions and existence of this Letter Agreement strictly confidential, and not disclose such information to any person for any reason except to such of their respective accountants, attorneys and advisors to whom such disclosure is necessary in order to consummate this transaction, and who have agreed in writing to protect such confidentiality. Provided, that Interleaf may issue a press release or otherwise disclose the terms of this Agreement as and when Interleaf determines such disclosure is required under applicable securities laws. b) As part of the Closing, the parties will execute such instruments of transfer, mutual releases and other documents and agreements as are necessary or appropriate in connection with this transaction. Mr. Robert Lange August 19, 1998 Page 3 c) This Letter Agreement is the legal, valid and binding obligation of Interleaf and each of the Lindner Funds, enforceable in accordance with its terms. Provided, however, Interleaf's obligations are subject to approval of its Board of Directors, scheduled for August 24, 1998. d) This Letter Agreement amends and, to the extent inconsistent with, supercedes the Investment Agreement. In the event of any conflict between the terms of this Letter Agreement and the terms of the Investment Agreement, the terms of this Letter Agreement shall control. e) This Letter Agreement shall be governed by the laws of the Commonwealth of Massachusetts. Each party irrevocably consents to jurisdiction and venue in the appropriate state and federal courts closest to the other party's principal place of business and covenants to not assert forum non conveniens in any action between the parties. Each party agrees that, in the event it beaches its obligations hereunder, the other party shall be entitled to obtain specific performance or other equitable relief, in addition to its other remedies, and damages. Please indicate the agreement of the Lindner Funds to the foregoing terms and conditions by obtaining their authorized signatures where provided below. I look forward to closing this transaction. Very truly yours, Interleaf, Inc. By: /s/ Jaime W. Ellertson ----------------------- Jaime W. Ellertson, CEO AGREED: Lindner Growth Fund Lindner Dividend Fund By: /s/ Robert A. Lange By: /s/ Eric E. Ryback Name: Robert A. Lange Name: Eric E. Ryback Title: Senior Vice President Title: President Date: August 21, 1998 Date: August 21, 1998 EX-10.(B) 3 EXHIBIT 10(B) Exhibit 10(b) October 22, 1998 Via Facsimile and Airborne Express (in duplicate) Mr. Robert A. Lange, Sr. Vice President Lindner Funds 7711 Carendolet Avenue, Suite 700 St. Louis MO 63105 Re: Redemption of Series C Preferred Stock Dear Mr. Lange: Reference is made to the Letter Agreement between Interleaf and the Lindner Funds dated August 19, 1998 (the "Letter Agreement"). This will confirm that Interleaf and the Lindner Funds have agreed to amend the Letter Agreement in the manner described as "Alternative No. 1" in our letter to you dated October 8, 1998. Accordingly, the Series C Shares shall be redeemed at a price of $ .390625 per share, for a total redemption price of $1,578,669. Our checks in the total amount of $1,578,669 are enclosed with this letter. Once this letter is countersigned and payment received by you, the Series C Shares shall be redeemed and deemed no longer outstanding. Please forward all certificate(s) representing the Series C Shares to: Craig Newfield, General Counsel Interleaf, Inc. 62 Fourth Avenue Waltham, MA 01254 There are no conditions to the obligations of Interleaf to redeem the Series C Shares. This transaction shall be consummated pursuant to the terms and conditions of the Letter Agreement, which remains in full force and effect, as amended hereby. Please indicate the agreement of the Lindner Funds to the foregoing terms and conditions by obtaining their authorized signatures where provided below. Thank you for your cooperation. Interleaf, Inc. By: /s/ Craig Newfield ------------------ Craig Newfield, General Counsel AGREED: Lindner Growth Fund Lindner Dividend Fund By: /s/ Robert A. Lange By:/s/ Robert A. Lange Name: Robert A. Lange Name: Robert A. Lange Title: Senior Vice President Title: Senior Vice President Date: October 26, 1998 Date: October 26, 1998 EX-10.(C) 4 EXHIBIT 10(C) Exhibit 10(c) October 27, 1998 VIA Facsimile and U.S. Mail To the Holders of 6% Convertible Preferred Stock of Interleaf, Inc. Re: 6% Convertible Preferred Stock Gentlemen: Reference is made to the Preferred Stock Investment Agreement, dated as of September 30, 1997 (the "Investment Agreement"), between Interleaf, Inc. ("Interleaf") and you pursuant to which you acquired such number of shares of 6% Convertible Preferred Stock of Interleaf ("6% Preferred") as set forth beside your name below. Interleaf and you hereby agree to consummate the transactions set forth on the Term Sheet attached as Exhibit A hereto on the terms set forth therein. Interleaf's obligations to consummate such transactions are contingent upon Interleaf obtaining financing from third parties in at least the aggregate amount required to fund the initial redemption as set forth in the Term Sheet. However, in this regard, Interleaf represents that it has obtained financing commitments in an aggregate amount sufficient to fund such initial redemption, subject only to the requirement that Interleaf obtain the agreement of the holders of at least 75% of the 6% Preferred currently outstanding to consummate the transactions set forth on the Term Sheet. Interleaf's and your obligations to consummate the transactions set forth on the Term Sheet shall terminate unless (i) Interleaf receives executed counterparts hereof from the holders of at least 75% of the 6% Preferred currently outstanding on or before November 6, 1998, and (ii) the transactions contemplated herein are consummated on or before the earlier to occur of (a) the date which is ten (10) days from the day on which Interleaf receives executed counterparts hereof from the holders of at least 75% of the 6% Preferred currently outstanding, or (b) November 20, 1998; provided, that Interleaf has the right to extend each of these dates one time for a period of up to three (3) business days as necessary for ministerial purposes. This Letter Agreement is being executed by you subject to and conditioned as follows: (i) the final agreements and related documents will in all respects be subject to your approval and will contain the same terms and conditions described herein, and (ii) in the event that Interleaf offers any other holder of 6% Preferred, whether or not a signatory to a counterpart of this letter agreement, terms and conditions different from those contained herein, you shall have the right, but not the obligation, to consummate the transaction upon such other terms and conditions. Series D Investors October 27, 1998 Page 2 If you are in agreement with the foregoing, please sign, date and return this letter which will constitute our agreement with respect thereto. Very truly yours, INTERLEAF, INC. By: --------------------------------- Peter J. Rice, CFO Agreed and accepted:
Shares of 6% Preferred ---------------------------------------- Initially Currently Purchased Held Name of Investor X,000 X,000
By: -------------------------------- Name: -------------------------------- Title: -------------------------------- Date: -------------------------------- Exhibit A to Letter Agreement With Holders of 6% Convertible Preferred Stock TERM SHEET Amendment to Preferred Stock Investment Agreement for 6% Convertible Preferred Stock of Interleaf, Inc. Initial Redemption: Interleaf shall initially redeem 40% of the Investor's 6% Convertible Preferred Stock at $1,150 per share, inclusive of dividends accrued to date. Payment: $1,000 per share will be paid in cash. $ 150 per share will be paid in the form of Interleaf Common Stock, valued at $1.00 per share. Conversion: Please indicate your preference: / / The Conversion Price shall be permanently fixed at $1.40 for the remaining 60% of the Investor's 6% Convertible Preferred Stock. Future dividends on shares of 6% Convertible Preferred remaining outstanding after the initial redemption, if any, shall continue to accrue at 6% under original terms. The 6% Convertible Preferred Stock shall be 100% convertible immediately and permanently. OR / / The remaining 60% of the Investor's 6% Convertible Preferred Stock, together with dividends accrued in kind to the date of conversion, shall be immediately converted into Common Stock, using a Conversion Price of $1.10. Other: The Preferred Stock Investment Agreement and the 6% Convertible Preferred Stock certificate of designation shall remain in full force and effect under original terms; provided, that (as set forth above) the Conversion Price shall be permanently fixed at $1.40 and all (100%) of the 6% Convertible Preferred Stock that remains outstanding shall be immediately convertible into Common Stock. EX-10.(D) 5 EXHIBIT 10(D) Exhibit 10(d) VIA Facsimile and U.S. Mail November 4, 1998 To the Holders of 6% Convertible Preferred Stock of Interleaf, Inc. Re: 6% Convertible Preferred Stock Gentlemen: Reference is made to the Letter Agreement dated October 27, 1998 (the "Letter Agreement"), sent by Interleaf, Inc. ("Interleaf") to each of you as holders of the 6% Convertible Preferred Stock of Interleaf ("6% Preferred"). Commitments Received From 75% of the Holders Interleaf is pleased to advise you that it has received executed counterparts to the Letter Agreement from the holders of at least 75% of the 6% Preferred currently outstanding. Accordingly, we are moving forward to close the transactions contemplated by the Letter Agreement immediately. Additional Terms In connection with obtaining the executed counterparts to the Letter Agreement, the Company agreed that if the Company enters into written commitment(s) to issue equity or debt securities for cash or other consideration (other than in connection with the exercise of currently outstanding employee options) during the period beginning on the date hereof and ending on January 31, 1999, the Company shall offer to all holders of 6% Preferred who returned an executed counterpart to the Letter Agreement the opportunity to participate in such issuance on the same terms and conditions offered to other investors participating therein. Participation in any such issuance by all holders of 6% Preferred who returned an executed counterpart to the Letter Agreement shall be capped at the lesser of 100% of the aggregate portion of such issuance being offered to such other investors or 50% of the notional value (i.e., $1,000 per share) of the aggregate shares of 6% Preferred held by such holders as of the date of the Letter Agreement, with each holder being offered a participation therein based on its pro rata portion of the aggregate shares of 6% Preferred held by such holders as of the date of the Letter Agreement. Please note that you are not being asked to make any decision regarding your participation in any such issuance at this time. The Company will provide you with notice of, and information and documentation concerning any such issuance, if any, at the time thereof, and you will be given five days from such notice to respond. Series D Closing Instructions November 4, 1998 Page 2 of 3 Closing Information 1. Please sign where provided below and attached certificate(s) representing all shares of Series D Stock held by you, accompanied by stock powers duly endorsed in blank or duly executed instruments of transfer. 2. Within three (3) business days from the receipt by Interleaf of certificates representing all shares of Series D Stock held by you and by all other persons who executed a counterpart to the Letter Agreement, Interleaf will: (a) instruct its transfer agent to issue such number of shares of Common Stock to you as required under the Letter Agreement; and (b) mail to you (i) a check in the dollar amount required under the Letter Agreement, and (ii) certificate(s) representing the balance, if any, of shares of Series D Stock still held by you. 3. The Company hereby represents and warrants to each of you that the shares of Common Stock to be delivered to you were registered under the Securities Act of 1933 on the Registration Statement on Form S-3 filed by the Company on November 26, 1997. 4. Each of you hereby represents and warrants to the Company, severally and not jointly, that: a) you have, and upon consummation of the transactions contemplated by this Letter Agreement the Company will acquire, good, valid and marketable title to all of the shares of Series D Stock set forth beside your name on the signature pages hereto, free and clear of all liens; b) you have reviewed all reports and proxy statements filed by the Company with the Securities and Exchange Commission under the Securities Exchange Act of 1934 since March 31, 1998; c) you have had the opportunity to make inquiry concerning the Company and its business and personnel and the terms of this transaction; d) the officers of the Company have made available to you any and all written information that you have requested and have answered to your satisfaction all inquiries made by you; and e) you are not subject to any claim of any broker, finder, consultant or intermediary who might, directly or indirectly, be entitled to a fee or commission in connection with the consummation of the transactions contemplated hereby. 5. Each of you hereby (a) withdraws all notices of conversion of Series D Stock under the Agreement with respect to which shares of Common Stock have not been issued and delivered by the Company prior to the date hereof, and (b) releases the Company and its directors and officers from all manner of claims, liabilities, obligations or suits, in law or in equity, with respect thereto. 6. The Preferred Stock Investment Agreements dated as of September 30, 1997 between the Company and each of you, and the Series D certificate of designation, shall remain in full force and effect; provided, however, that notwithstanding anything to the contrary in the foregoing, from and after the closing of the transactions contemplated by the Letter Agreement, the Conversion Price (as defined in the Series D certificate of designation) for all shares of Series D Stock still held by you, if any, shall be $1.40. The Letter Agreement is terminated and of no further force or effect. Series D Closing Instructions November 4, 1998 Page 3 of 3 7. Each of you and the Company will pay its own costs and expenses, including attorneys' fees and expenses incurred by you in connection with the transactions contemplated herein or in the Letter Agreement. If you are in agreement with the foregoing, please sign, date and return this letter, which will constitute our agreement with respect thereto, together with your Series D Stock certificates. Interleaf, Inc. By: ------------------------------- Craig Newfield, General Counsel THE INVESTOR:
Shares of Series D To be Delivered by the Company Stock Being Converted Common Stock Bank Check --------------------- ------------ ---------- Name of Investor Name of Investor By: ---------------------------------- X00 X00,000 $X00,000 Name: ---------------------------------- Title: ---------------------------------- No. of Series D Shares held by the Investor after these transactions: Date: 0 ---------------------------------- --------------------
EX-10.(E) 6 EXHIBIT 10(E) Exhibit 10(e) October 28, 1998 Ms. Amanda Radice 121 Western Avenue Sherborn, MA 01770 Dear Amanda, I am delighted to offer you the position of Vice President Marketing with 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 Vice President Marketing is one of the most important officer level positions in our company. You will be responsible for all aspects of our Marketing activities from strategy development, to product rollout and customer interaction. As a direct report to the Chief Executive Officer, you will also be asked to participate in developing our long-term strategy, interface directly with the Board of Directors and participate on the senior management team. Compensation Package The base salary for the Vice President Marketing is $5,770 per pay period (annualized rate of $150,000), and you will participate in an annual incentive compensation pool with target first year earnings of $210,000 Your incentive compensation program is designed to reward you for meeting both quarterly and annual performance goals. The incentive compensation program will provide you with a bonus pool of $10,000 for quarterly goals and a $10,000 annual bonus pool. These bonus amounts will be paid upon percentage achievement of Interleaf's annual business plan, revenue, profit targets and MBO's (the Senior Managers Incentive Compensation Plan bonus amounts earned are paid annually). Additionally, an escalation bonus is paid should we exceed our targets. The specific calculation of bonus payment is detailed in our Senior Managers Compensation Plan (a sample of which is attached). As part of your compensation package, you will receive a signing bonus of $10,000 (a combination of your first quarter and annual bonus pro-rata) to be utilized for the purchase of Interleaf stock by yourself in the open market during your first ten (10) days of employment. You are responsible for any taxes on this bonus. This stock will be yours to hold and keep, but it is expected that you will not sell prior to a liquidity event, the passage of two years or your departure from the company. We believe that your becoming an immediate equity holder will provide you a stronger leadership stance and ease communication with external constituents. Equity Participation In addition to your signing bonus, I am delighted to offer you 125,000 stock options. These options will be granted at the next regularly scheduled Board meeting, with an exercise price equal to fair market value of the Common Stock on the date of grant, vesting in four equal annual installments commencing one year from the date of grant. As we discussed, I am fully committed to having you achieve your long-term compensation goals. In addition, on or prior to your Start Date, you are required to execute Interleaf's Standard Invention and Nondisclosure Agreement, along with a Non-Compete Agreement. Benefits Package Your compensation will also include participation in our standard corporate benefits program, a summary of which is attached. 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 November 2, 1998. 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, /s/ Jaime W. Ellertson Jaime W. Ellertson President and Chief Executive Officer Accepted: /s/ Amanda Radice November 2, 1998 - ----------------- ---------------- Amanda Radice Date EX-27 7 EX. 27
5 This schedule contains summary financial information extracted from the consolidated balance sheets an consolidated statements of operations found on pages 3 and 4 of the Company's Form 10-Q for the quarterly period ended September 30, 1998 and is qualified in its entirety by reference to such financial statements. 1,000 6-MOS MAR-31-1999 SEP-30-1998 16,787 0 11,098 1,119 370 29,081 11,745 299 33,942 25,466 0 0 188 188 6,660 33,942 3,885 21,081 1,272 8,515 15,185 0 0 (2,291) 25 (2,316) 0 0 0 (3,408) (0.18) (0.18)
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