-----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, KL98UBAhBMYBfdmlShOWGYKu4WnPL4Sn+vIBzw9bZZLsNGGtszcT1gdbv85YJ+df ggEgZNh7hFtkArntbupTVA== 0001047469-99-032559.txt : 19990817 0001047469-99-032559.hdr.sgml : 19990817 ACCESSION NUMBER: 0001047469-99-032559 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19990630 FILED AS OF DATE: 19990816 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: 99693447 BUSINESS ADDRESS: STREET 1: 62 FOURTH AVE CITY: WALTHAM STATE: MA ZIP: 02451 BUSINESS PHONE: 6172900710 MAIL ADDRESS: STREET 1: 62 FOURTH AVENUE CITY: WALTHAM STATE: MA ZIP: 02451 10-Q 1 FORM 10-Q - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 ---------- FORM 10-Q / X / QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934. For the Quarterly period ended JUNE 30, 1999 . or / / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934. For the transition period from _________________ to _____________. COMMISSION FILE NUMBER 0-14713 [LOGO] Interleaf, Inc. (exact name of registrant as specified in its charter) MASSACHUSETTS 04-2729042 (State or other jurisdiction (I.R.S. employer of incorporation or organization) identification number) 62 FOURTH AVENUE, WALTHAM, MA 02451 (Address of principal executive offices) (Zip Code) (781) 290-0710 (Registrant's telephone number, including area code) Indicate by check / X / 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, 1999 was 11,471,968. - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- -1- TABLE OF CONTENTS
PAGE PART I - FINANCIAL INFORMATION ITEM 1 - Financial Statements Consolidated balance sheet at June 30, 1999 and March 31, 1999....................................... 3 Consolidated statement of operations for the three months ended June 30, 1999 and 1998 ............................................................................... 4 Consolidated statement of cash flow for the three months ended June 30, 1999 and 1998 ............................................................................... 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 6 - Exhibits and Reports on Form 8-K ............................................................ 15 SIGNATURES ........................................................................................... 15
-2- PART I - FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS INTERLEAF, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEET
JUNE 30, 1999 MARCH 31, 1999 ------------- -------------- (UNAUDITED) In thousands, except for share and per share amounts ASSETS Current assets Cash and cash equivalents $ 12,901 $ 16,479 Accounts receivable, net of reserve for doubtful accounts of $1,064 at June 30, 1999 and $1,123 at March 31, 1999 12,090 12,008 Prepaid expenses and other current assets 2,001 1,541 ---------- ----------- Total Current Assets 26,992 30,028 Property and equipment, net 2,050 2,120 Intangible assets, net 7,942 5,222 Other assets 427 442 ---------- ----------- Total Assets $ 37,411 $ 37,812 ---------- ----------- ---------- ----------- LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities Accounts payable $ 1,715 $ 2,224 Accrued expenses 10,358 11,184 Unearned revenue 10,742 11,492 Accrued restructuring 966 953 ---------- ----------- Total Current Liabilities 23,781 25,853 Long-term restructuring 1,074 1,234 ---------- ----------- Total Liabilities 24,855 27,087 ---------- ----------- Redeemable common stock- shares issued and outstanding, none at June 30, 1999 and 469,093 at March 31, 1999 -- 1,496 ---------- ----------- Shareholders' Equity Preferred stock, par value $.10 per share, authorized 5,000,000 shares: Senior Series B Convertible, shares issued and outstanding, 726,003 at June 30, 1999 and March 31, 1999 73 73 6% Convertible, shares issued and outstanding, none at June 30, 1999 and 1,050 at March 31, 1999 -- -- Common stock, par value $.01 per share, authorized 50,000,000 shares, issued and outstanding, 11,463,747 at June 30, 1999 and 9,913,209 at March 31, 1999 115 99 Additional paid-in capital 98,007 94,795 Retained earnings (accumulated deficit) (84,925) (85,197) Cumulative translation adjustment (714) (541) ----- ----- Total Shareholders' Equity 12,556 9,229 ---------- ----------- Total Liabilities and Shareholders' Equity $ 37,411 $ 37,812 ---------- ----------- ---------- -----------
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED FINANCIAL STATEMENTS. -3- INTERLEAF, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENT OF OPERATIONS
Three months ended June 30 ---------------------------------- (unaudited) 1999 1998 In thousands, except for per share amounts Revenues: Products $ 3,067 $ 2,227 Maintenance 5,095 5,848 Services 4,844 2,933 ------- ------- Total revenues 13,006 11,008 ------- ------- Costs of Revenues: Products 516 636 Maintenance 791 825 Services 4,632 2,697 ------- ------- Total costs of revenues 5,939 4,158 ------- ------- Gross margin 7,067 6,850 ------- ------- Operating Expenses: Selling, general and administrative 5,802 4,970 Research and development 1,063 1,773 ------- ------- Total operating expenses 6,865 6,743 ------- ------- Income from operations 202 107 Other income 167 147 ------- ------- Income before income taxes 369 254 Provision for income taxes 97 -- ------- ------- Net Income 272 254 Dividends on Preferred Stock (2) (574) ------- ------- Net income (loss) applicable to common shareholders $ 270 $ (320) ------- ------- ------- ------- Income (loss) Per Share: Basic $ 0.02 $ (0.05) ------- ------- ------- ------- Diluted $ 0.02 $ ( 0.05) ------- ------- ------- ------- Shares used in computing basic income (loss) per share 11,101 6,126 ------- ------- ------- ------- Shares used in computing diluted income (loss) per share 12,426 6,126 ------- ------- ------- -------
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED FINANCIAL STATEMENTS. -4- INTERLEAF, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENT OF CASH FLOW
Three months ended June 30 ------------------------------------------- (unaudited) 1999 1998 ---- ---- In thousands Cash Flows from Operating Activities: Net income $ 272 $ 254 Adjustments to reconcile net income to net cash provided by (used in) operating activities: Depreciation and amortization expense 665 688 Changes in assets and liabilities: (Increase) decrease in accounts receivable, net (253) 4,306 (Increase) decrease in other assets (96) 323 Decreases in accounts payable and accrued expenses (872) (708) Decreases in unearned revenue (773) (1,612) Decreases in other liabilities (140) (931) ----------------- ---------------- Net cash provided by (used in) operating activities (1,197) 2,320 ----------------- ---------------- Cash Flows from Investing Activities: Capital expenditures (296) (92) Acquisitions (783) -- Capitalized software development costs (1,570) -- ----------------- ---------------- Net cash used in investing activities (2,649) (92) ----------------- ---------------- Cash Flows from Financing Activities: Net proceeds from issuance of common stock 516 26 ----------------- ---------------- Net cash provided by financing activities 516 26 ----------------- ---------------- Effect of exchange-rate changes on cash (248) 120 ----------------- ---------------- Net increase (decrease) in cash and cash equivalents (3,578) 2,374 Cash and cash equivalents at beginning of period 16,479 21,112 ----------------- ---------------- Cash and cash equivalents at end of period $ 12,901 $ 23,486 ----------------- ---------------- ----------------- ----------------
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE 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, 1999. 2. RECENTLY ISSUED ACCOUNTING STANDARDS 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, 2000 (April 1, 2001 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 believes the adoption of SFAS 133 will have no material impact to its operating results or financial position. -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, 1999 1998 ---- ---- In thousands, except for per share amounts NUMERATOR: Net Income $ 272 $ 254 ---------- ---------- Preferred Stock Dividends: Senior Series C Convertible -- (126) Senior Series D Convertible (2) (112) Preferred Stock Deemed Dividend: Senior Series D Convertible -- (336) ---------- ---------- (2) (574) ---------- ---------- Numerator for basic and diluted income (loss) per share: Net income (loss) available to common stockholders 270 (320) ---------- ---------- ---------- ---------- DENOMINATOR: Denominator for basic earnings per share: Weighted average shares 11,101 6,126 ---------- ---------- Effect of dilutive securities: Series B convertible Preferred Stock 325 -- Series C convertible Preferred Stock -- -- Series D convertible Preferred Stock -- -- Stock options 744 -- Stock purchase plan 70 -- Warrants 186 -- ---------- ---------- Dilutive potential common shares 1,325 -- Denominator for diluted earnings per share adjusted weighted average shares and assumed conversions 12,426 6,126 ---------- ---------- ---------- ---------- Basic earnings (loss) per share $ 0.02 $ (0.05) ---------- ---------- ---------- ---------- Diluted earnings (loss) per share $ 0.02 $ (0.05) ---------- ---------- ---------- ----------
For the three months ended June 30, 1999, potential common shares of 53 were excluded from the computation of diluted earnings per share because the effect would have been antidilutive. For the three months ended June 30, 1998, potential common shares of 3,327 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. ACQUISITION Effective April 7, 1999, the Company acquired certain assets and assumed certain liabilities of Texcel A.B., Texcel Research, Inc. and Texcel U.K. Limited (collectively "Texcel"). Texcel provides software and services to corporations and government agencies that depend on information access and efficient reuse of that information for competitive advantage. The Company paid cash of $.5 million, excluding a loan to Texcel of $.3 million, issued 250,000 shares of common stock valued at $.8 million, and issued warrants to purchase 200,000 shares of common stock valued at $.1 million. In connection with the acquisition, the net liabilities to provide support services to Texcel customers, partially offset by the fair value of fixed assets acquired, were recorded at $.1 million. The Company also recorded $1.5 million of goodwill which will be amortized on a straight-line basis over an estimated useful life of 5 years. 5. SEGMENT INFORMATION The Company develops and markets software products and services which address two distinct markets, referred to as "e-publishing" and "e-content". The Company's traditional solutions, which are used in the creation, publication, management and distribution of electronic and paper documents are targeted to the e-publishing market. Interleaf's e-content solutions are comprised of a new software product, called BladeRunner, and related services, and are targeted at a market called "Content Management". During fiscal 1999, Interleaf realized that its e-publishing and e-content segments require different resources, strategies and investments in order to be successful, and that the measurement of success is very different for each. As a result, during the first quarter of fiscal 2000, the Company has dedicated separate development, sales and support resources to its e-publishing and e-content divisions. Consistent with the separation of resource for these two divisions, the Company has changed its reporting segments to separately reflect results from the e-publishing and e-content divisions. The following summarizes the result of the Company's e-publishing and e-content divisions for the three months ended June 30, 1999 and 1998, respectively.
E-PUBLISHING E-CONTENT TOTAL THREE MONTHS ENDED JUNE 30, 1999 Product $ 2,004 $ 1,063 $ 3,067 Maintenance 5,000 95 5,095 Services 4,397 447 4,844 ------- ------- ------- Total Revenue $11,401 $ 1,605 $13,006 ------- ------- ------- ------- ------- ------- Operating Income 1,525 $(1,323) $ 202 ------- ------- ------- ------- ------- ------- THREE MONTHS ENDED JUNE 30, 1998 Product $ 2,227 -- $ 2,227 Maintenance 5,848 -- 5,848 Services 2,933 -- 2,933 ------- ------- ------- Total Revenue $11,008 $ -- $11,008 ------- ------- ------- ------- ------- ------- OPERATING INCOME $ 107 $ -- $ 107 ------- ------- ------- ------- ------- -------
-8- The following are reconciliations to corresponding totals in the accompanying consolidated statements:
Three Months Ended June 30, 1999 1998 ---- ---- Income for reportable segments $202 107 Non-operating income 75 (4) Interest income, net 92 151 ---- --- Income before taxes $369 $254 ---- --- ---- ---
6. CREDIT AGREEMENT At June 30, 1999 and March 31, 1999, the Company had outstanding letters of credit aggregating $.8 and $.9 million, respectively, expiring between December 31, 1999 and October 31, 2001. These letters of credit guarantee payments on two leases and future payments for an acquisition that occurred in fiscal 1999. The letters of credit are secured by equal amounts of cash and are reduced by the amount of the respective payments. 7. COMPREHENSIVE INCOME (LOSS) 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, 1999 was $.1 million. For the quarter ended June 30, 1998, total comprehensive income was $.3 million. ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS RESULTS OF OPERATIONS OVERVIEW The Company reported net income of $.3 million on total revenues of $13.0 million for fiscal 2000 first quarter ended June 30, 1999. This compares with net income of $.3 million on total revenues of $11.0 million for fiscal 1999 first quarter ended June 30, 1998. During the first quarter of fiscal 1999, the Company recorded total dividends on preferred stock of $.6 million. Therefore, after dividends on preferred stock, the Company's net loss applicable to common stockholders was $.3 million. The increase in total revenues of $2.0 million (18%) in the first quarter of fiscal 2000 compared with the same period of fiscal 1999 was due to an increase in product revenue from sales of the Company's new e-content products and the inclusion of services revenue from PDR Automated Systems and Publications, Inc. ("PDR") in the first quarter of fiscal 2000, neither of which were present in the first quarter of fiscal 1999. The first quarter of fiscal 2000 marked the initial general customer shipments of e-content products by the Company. PDR was acquired in the second quarter of fiscal 1999, and therefore, was not included in the results for the first quarter of fiscal 1999. -9- Effective April 7, 1999, the Company acquired certain assets and assumed certain liabilities of Texcel Research, Inc. and Texcel U.K. Limited (collectively "Texcel"). Texcel provides software and services to corporations and government agencies that depend on information access and efficient reuse of that information for competitive advantage. The Company paid cash of $.5 million, excluding a loan to Texcel of $.3 million, issued 250,000 shares of common stock valued at $.8 million, and issued warrants to purchase 200,000 shares of common stock valued at $.1 million. In connection with the acquisition, the net liabilities to provide support services to Texcel customers, partially offset by the fair value of fixed assets acquired, were recorded at $.1 million. The Company also recorded $1.5 million of goodwill which will be amortized on a straight-line basis over an estimated useful life of 5 years. During fiscal 1999, Interleaf realized that its e-publishing and e-content lines of business require different resources, strategies and investments in order to be successful, and that the measurement of success is very different for each. As a result, during the first quarter of fiscal 2000, the Company separated them into two divisions and dedicated separate development, sales and support resources . Consistent with the separation of resources for these two divisions, the Company has changed its reporting segments to separately reflect results from the e-publishing and e-content divisions. REVENUES PRODUCT: Total product revenue increased by $.8 million in the first quarter of fiscal 2000 compared with the first quarter of fiscal 1999. The increase is due to $1.1 million in sales of the Company's new e-content products, BladeRunnerTM and Information Manager, a product acquired from Texcel in the first quarter of fiscal 2000 and which is being incorporated into BladeRunner. The increase in product revenues due to sales of the e-content products was partially offset by a decrease in sales of the Company's e-publishing products. The e-publishing products represent the Company's legacy products in the complex publishing and document management markets. The decrease represents a continuing trend for these products and is mainly attributable 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. MAINTENANCE: Total maintenance revenue declined by $.8 million (13%) in the first quarter of fiscal 2000 compared with the first quarter of fiscal 1999. The decline was attributable to the Company's e-publishing segment, which accounted for 98% of total maintenance revenues. The first quarter of fiscal 2000 represented the first general customer shipments of e-content products and, therefore, the first maintenance revenue recognized for the segment. 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. SERVICES: Services revenue, consisting of consulting and training revenue, increased by $1.9 million in the first quarter of fiscal 2000 compared with the same period of the prior year. The increase in services revenue is mainly attributable to the acquisition of PDR, which generated $1.7 million of revenue in the quarter. PDR was acquired in the second quarter of fiscal 1999 and, therefore, the results of PDR's operations are not included in the Company's operating results for the first quarter of fiscal 1999. The Company's new e-content segment generated $.4 million of services revenue during the first quarter of fiscal 2000 which more than offset a $.2 million decrease in services revenue from the e-publishing segment, exclusive of PDR. -10- FISCAL 2000: During fiscal 1999, the Company developed and released several upgrades to its traditional products. In the first quarter of fiscal 2000, the Company released the first commercially available version of its content management software product, BladeRunner. Also, a content management product (Information Manager) providing complementary functionality was acquired from Texcel. Information Manager is being incorporated into BladeRunner. Growth in revenues during fiscal 2000 will be largely dependent on the introduction and customer acceptance of the new and enhanced software products released in fiscal 1999 and 2000, 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. 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 $.1 million in the first quarter of fiscal 2000 compared with the same period of the prior year. The decrease in cost of product revenue is mainly attributable to a decrease in capitalized software development amortization expense and reduced costs of outsourced manufacturing in fiscal 2000. The cost of product revenue for the first quarter of fiscal 1999 included start up costs incurred when changing outsource manufacturers. The cost of maintenance revenue increased as a percentage of maintenance revenue from 14% in fiscal 1999 to 16% in fiscal 2000. Savings from reduced staffing in the Company's e-publishing business segment were offset by the additional support staff acquired from Texcel. The cost of services revenue increased by $1.9 million in the first quarter of fiscal 2000 compared with the first quarter of fiscal 1999. The increase is attributable to the acquisition of PDR in the second quarter and Interleaf Italia in the fourth quarter of fiscal 1999. The lower gross margins in the services business reflect the higher costs of attracting staff coupled with discounted pricing being offered by the Company to gain market share in the e-content marketplace. OPERATING EXPENSES Selling, general and administrative ("SG&A") expenses increased by $.8 million in the first quarter of fiscal 2000 compared with the same period of the prior year. The increase is due to amortization of goodwill and intangible expense of $.2 million related to the Company's fiscal 1999 and 2000 acquisitions, the additional SG&A expenses incurred by Interleaf Italia and PDR of $.3 million and additional selling and marketing expenses associated with the launch of the e-content business segment. Amortization expenses and the SG&A associated with Interleaf Italia and PDR were not included in SG&A for the first quarter of 1999 as those acquisitions occurred subsequent to that date. Research and Development ("R&D") expenses consist primarily of personnel expenses to support product development, net of capitalized software development costs. In the first quarter of fiscal 2000, the Company's total product development and engineering expenses, including capitalized software development costs, were $2.7 million, representing 21% of revenues. This consisted of $1.1 million charged directly to R&D expense and $1.6 million of capitalized software development costs. In the first quarter of fiscal 1999, the Company's product development and engineering expenses were $1.8 million, representing 16% of revenues. There were no software development costs capitalized in the first quarter of fiscal 1999. The increase in product development and engineering in fiscal 2000 is attributable to development work on the Company's new content management product, BladeRunner, and to the acquisition of certain assets from Texcel, which increased the Company's engineering personnel and related expenses. -11- LIQUIDITY AND CAPITAL RESOURCES The Company had $12.9 million of cash and cash equivalents at June 30, 1999, a decrease of $3.6 million from March 31, 1999. The decrease was mainly attributable to capitalized software development costs of $1.6 million, cash used in operating activities to support revenue growth of $1.2 million, cash used in the acquisition of Texcel of $.8 million, cash used for capital expenditures of $.3 million and the effect of exchange rate changes on cash of $.2 million. These decreases were partially offset by the cash proceeds of a common stock warrant exercise of $.5 million. At June 30 and at March 31, 1999, the Company had outstanding letters of credit aggregating $.8 and $.9 million, respectively, expiring between December 31, 1999 and October 31, 2001. These letters of credit guarantee payments on two leases and the future payments for an acquisition that occurred. The letters of credit are secured by equal amounts of cash and are reduced by the amount of the respective payments. At June 30, 1999 and March 31, 1999, the Company had approximately $1.1 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 2000. However, the Company has determined that it needs to increase its investment in the development, marketing and promotion of its e-content solutions, and that it is therefore necessary for the Company to raise additional capital. The net tangible asset listing criteria for the NASDAQ National Market and the Company's financial condition dictate that any such financing be an equity financing. The Company is presently in the process of seeking additional equity capital through a private placement. The securities offered in the private placement will not have been registered under the Securities Act and will not be offered or sold absent registration or an applicable exemption. However, the Company cannot guarantee that financing through this private placement, or otherwise, can be obtained or that it can be obtained on commercially reasonable terms or without incurring substantial dilution to existing stockholders. 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 -12- 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 were most likely to experience Year 2000 problems 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 distributed another mailing to the entire maintenance base describing the status of the year 2000 releases and including a list of retired products and platforms, in the fourth quarter of calendar year 1998. STATUS: Most major products have been tested and modified for most of the computer platforms that will be supported beyond the year 2000. Upgrades which correct any known Year 2000 problems with those products are available at no extra charge to the customers with current maintenance contracts. Year 2000 upgrades were all completed for supported products by the end of the second calendar quarter of 1999 for all major products and platforms. 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 and low volume products has begun and will be completed by the end of September, 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 specific contracts with specific customers, and not for general re-sale. The Company believes that it has no obligation to modify those applications to address the Year 2000 problem, unless the particular customers engage Interleaf to fix those problems. All products under development are being developed to be Year 2000 Compliant. The Company has received notices from a small number of customers regarding non-compliance of unsupported products, and to date the Company has successfully resolved those issues without material cost. The Company cannot predict whether or not claims may be asserted with respect to non-supported products, either due to a breakdown in the customer communications process, to contractual obligations not understood by its customer or by Interleaf, or for other reasons. INTERNAL BUSINESS SYSTEMS In the United States, 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 Company has investigated and received assurances from the vendors that all critical internal business software in North America and Europe is Year 2000 ready. The assessment phase is now underway for business software used in Japan and Australia. The Company intends to have compliance assured by October 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 70% complete. The entire process is expected to be complete by the end of September 1999. -13- FACILITIES AND CRITICAL VENDORS In the fourth calendar quarter of 1998 Interleaf began 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 product manufacturing, are outsourced. Interleaf has been assured by those service providers that operation 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 budgeted 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 environment is expected to be $400,000. These expenditures began in late 1997 and will continue through the third calendar quarter of 1999. Software maintenance costs attributable to the Year 2000 will be approximately $50,000. Labor associated with this process of implementing the internally used systems was provided by 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 the unanticipated problems may arise. The Company has prepared a contingency plan to address reasonably likely worst case business operations scenarios. 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 continue to develop and market new and enhanced products and services, particularly the Company's content management productsand 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 establish or maintain strategic relationships with companies that have presence and expertise in the markets and market segments targeted by the Company; 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 -14- factors which might cause actual results to differ materially from those projected are more fully set forth under the caption "Risk Factors" on pages 20-22 of the Company's Annual Report on Form 10-K for the fiscal year ended March 31, 1999. 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 September 30, 1997) 3(b) By-Laws of the Company, as amended (incorporated herein by reference to the applicable Exhibit to the Company's Annual Report on Form 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 Exhibit 4.01 to the Company's Annual Report on Form 10-K for the fiscal year ended March 31, 1999) 10 Asset Purchase Agreement dated April 7, 1999 by and among Interleaf, Inc., Texcel International AB, Texcel Research, Inc. and Texcel (UK) Limited (incorporated herein by reference to Exhibit 4.3 to the Company's Registration Statement on Form S-3 dated May 6, 1999, File Number 333-77907) 11 Computation of Earnings Per Share (included as Note 3 to Financial Statements) 27 Financial Data Schedule
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 16, 1999 /s/ PETER J. RICE --------------------------------------------- Peter J. Rice, Vice President of Finance and Administration and Chief Financial Officer and Treasurer (Principal Financial and Accounting Officer) -15- EX-27 2 EXHIBIT 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, 1999, AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 1,000 3-MOS MAR-31-2000 JUN-30-1999 12,901 0 13,154 1,064 407 26,992 11,273 9,223 37,411 23,781 0 0 73 115 12,368 37,411 3,067 13,006 516 5,939 6,865 0 0 369 97 272 0 0 0 272 0.02 0.02
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