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SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
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FORM 10-K
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Annual Report Pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934
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For the fiscal year ended: Commission File Number:
MARCH 31, 1996 0-14713
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INTERLEAF, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
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Massachusetts 04-2729042
(STATE OF INCORPORATION) (IRS EMPLOYER IDENTIFICATION NUMBER)
62 Fourth Avenue
Waltham, Massachusetts 02154
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)
Telephone No.: (617) 290-0710
-------------------------
Securities registered pursuant to Section 12(b) of the Act:
None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, par value $.01 per share
Preferred Stock Purchase Rights
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No
--- ---
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. X
---
The aggregate market value of Common Stock held by non-affiliates of the
registrant at June 17, 1996 was $115,867,114 based upon the last reported sales
price of the Common Stock in the National Market System, as reported by NASDAQ
on such date.
-------------------------
APPLICABLE ONLY TO CORPORATE REGISTRANTS
The number of shares of the registrant's Common Stock, $.01 par value,
outstanding at June 17, 1996 was 17,297,671.
DOCUMENTS INCORPORATED BY REFERENCE
1. Portions of the Company's Proxy Statement relating to the Company's Annual
Meeting of Shareholders to be held on August 8, 1996. (Part III)
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PART I
ITEM 1. BUSINESS
General
Interleaf-Registered Trademark-, Inc. and its subsidiaries ("Interleaf" or
the "Company") develop and market software that is used in the creation,
management, and distribution of documents. The Company's software enables
customers to compose, edit, view and print documents, while also facilitating
their electronic management, preparation, conversion and distribution, thereby
enabling the Company to offer its customers an integrated document management
("IDM") solution.
Since the Company's inception, Interleaf has primarily focused on the
development and marketing of electronic publishing software on 32-bit Unix
workstations ("Workstations") manufactured by International Business Machines
Corporation ("IBM"), Digital Equipment Corporation ("Digital"), Sun
Microsystems, Inc. ("Sun"), Hewlett-Packard Company ("HP"), and on Intel-based
personal computers ("PCs"). During fiscal 1996, the Company completed porting
most of its software products to the Windows NT and Windows 95 operating systems
developed by Microsoft Corporation.
While the demand for electronic publishing products on Workstations and PCs
has matured, companies are requiring specific applications to integrate,
control, and distribute documents as an essential part of their businesses. This
market, however, has evolved slowly and has required that the Company reduce its
asset base and employment level. In September 1993, the Company recorded a
restructuring charge of $3 million, reducing employment by approximately 5%. As
the Company's electronic publishing revenue continued to decline in fiscal 1995,
the Company recorded a $7.1 million restructuring charge in September 1994,
reduced employment by approximately 25%, closed and consolidated 19 of the
Company's sales offices worldwide, and relocated its corporate headquarters. As
a result in fiscal 1996, operating expenses were reduced by approximately $18
million, while revenue was flat. Moreover, during fiscal 1996, since the Company
has been increasing its focus on developing and marketing IDM applications, it
restructured its sales force, including its senior sales management.
In fiscal 1997, the Company will continue its focus on developing IDM
applications to solve specific business problems for its customers, such as ISO
9000 applications for the manufacturing environment, and sales force automation
and integration. In May 1996, Interleaf acquired The Learning Alliance, Inc. to
utilize its sales force automation and integration technology in developing new
applications in this area. The Company's future revenue growth will be largely
dependent on its ability to develop these new applications and its reorganized
sales force to sell them successfully into the marketplace.
PRODUCTS AND SPECIALIZED SERVICES
The Company currently markets an integrated suite of software products that
are sold both individually and as part of an IDM solution. The products include
Interleaf 6 for publishing, WorldView for on-line distribution of document
collections, Intellecte/Access and RDM for document management, Cyberleaf and
Intellecte/BusinessWeb for Internet and intranet publishing and document
management, and Avalanche products for document preparation and conversion. The
Company also markets specialized services that include consulting and training
to enable its customers to deploy their IDM solutions.
INTERLEAF 6. Interleaf 6 operates on Sun, Digital, HP and IBM Workstations,
and supports the industry standard graphical user interface, Motif. During
fiscal 1996, the Company completed porting Interleaf 6 to Windows NT and Windows
95 developed by Microsoft Corporation.
Interleaf 6 is a production publishing engine that provides the
capabilities to develop solutions for customers' complex document processes.
Information-driven and collaborative publishing processes require a publishing
engine to assimilate information from documents that originate from a variety of
sources. These documents may be either a single document containing thousands of
pages or a collection or library of interrelated documents. Interleaf 6 enables
customers to reuse this information and re-purpose it for different distribution
media: paper, Internet, local area network ("LAN"), wide area network ("WAN"),
or CD-ROM. These documents share common characteristics such as multiple
authors, controlled revisions and long life cycles. Interleaf 6 automates
complex document processes by providing tools for creating and maintaining
documentation. By leveraging 32-bit operating environments, Interleaf 6 can
execute rapid changes across large document collections, maintaining cross
references, autonumbering and pagination.
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Foreign language versions of Interleaf 6 are available in French, Italian
and German. In fiscal 1996, the Company completed a Japanese version. Interleaf
6 is sold in modules. In the United States, the base module is priced at $1,395
and the complete package is $15,000. Interleaf 6 is subject to volume price
discounts, depending on the amount committed to by a customer.
WORLDVIEW. WorldView is a comprehensive electronic document distribution
system which enables customers to transform various types of electronic data
into collections of interrelated information for distribution online, by CD-ROM,
diskette or other media type for viewing on PCs and Workstations and is
available in English, French, Italian, Spanish, German and Japanese languages.
Customers may merge and assimilate documents ranging from single page reports to
thousands of pages of documentation that may originate in different formats and
different applications throughout an organization, thereby allowing customers to
build comprehensive electronic distribution applications designed specifically
for their document processes. WorldView also offers the ability to enhance
information with formatting, structure, graphical road maps and access tools.
These products have a list price starting at $195 in the United States.
WorldView Press, the tool that customers use to prepare their documents created
by either Interleaf or non-Interleaf authoring tools, for electronic viewing,
starts at $5,000. WorldView is subject to volume discounts.
RDM. Interleaf's RDM is a product for use on PCs and Workstations that
enables users to manage documents, whether created with Interleaf 6 or other
authoring products, in large document databases. RDM manages documents through
the creation, revision, and approval processes. It provides users with a central
document repository that manages document workflow, security, relationships and
revisions, particularly relevant in regulated and quality-driven processes. This
product has a list price starting at approximately $36,000 in the United States.
INTELLECTE/ACCESS. This product combines RDM, WorldView and optionally
Interleaf 6, with implementation services, for complex IDM projects. Since many
IDM projects require the integration of workflow, authoring, and viewing with
document management tools, Intellecte/Access enables customers to adopt this
integration package in a standard format. The Intellecte/Access service offering
tailors the integrated system to the customer's specific environment. In the
United States, Intellecte/Access is priced at $175,000, depending on services
needed by the customer.
INTELLECTE/BUSINESS WEB. This product offers Internet access to an RDM-
managed knowledge repository using a standard Web browser. Introduced in fiscal
1996, this product lists for approximately $25,000.
CYBERLEAF. This Internet product was introduced in November 1994 and
enables customers to publish documents on the Internet. Customers use Cyberleaf
to transform word processing files into Internet webs, ready to be viewed by
standard web browsers on the World Wide Web. Cyberleaf provides a complete web
production environment so information can be maintained in a single source. This
product has a list price of $1,595 in the United States.
LIAISON. Liaison is an open Application Programming Interface designed to
facilitate the development of IDM applications. Released in fiscal 1996,
Liaison's object-oriented framework is standards-based and makes it easy to
rapidly create networked solutions that operate across applications and
platforms. The price of this product begins at $499.
AVALANCHE. These products include Avalanche FASTTAG, which provides
structure to documents and filters them into Standard General Markup Language
("SGML") and word processing formats. Avalanche SGML HAMMER is a toolkit for
converting SGML documents between Document Type Definitions ("DTDs") and
filtering them into other formats so they can be used by word processors. In the
United States, the price for these products run from $3500 to $4000, depending
on platform.
All of the Company's core software products support documents in SGML
format. SGML is a standard to facilitate document interchange and is the basis
for Hypertext Markup Language ("HTML"), the data form for Internet World Wide
Web publishing.
SERVICES. The Company continues to implement its services strategy of
providing consulting and training to its customers to enable them to deploy
their IDM solutions, utilizing Interleaf's software products. During the fiscal
years ended March 31, 1996, 1995 and 1994, worldwide revenues from services were
approximately $21.5, $22.6 million, and $19.6 million respectively, representing
approximately 24%, 26%, and 18% respectively, of the Company's total revenues.
3
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MARKETS AND CUSTOMERS. Interleaf has historically directed its marketing
efforts primarily to the technical documentation segment of the electronic
publishing market. As this segment has matured, the Company has been
diversifying into IDM solutions, with emphasis on vertical markets. In fiscal
1997, the Company expects to identify and create applications to solve specific
business problems, such as ISO 9000 certification in manufacturing and sales
force automation and integration. Customers in these new markets require
software products from the Company that create, manage and disseminate document
based information to meet their specific business problems.
SALES AND DISTRIBUTION
UNITED STATES. In the United States, Interleaf distributes its software
products and customized services through direct and alternate channels.
DIRECT CHANNEL. Currently, the Company sells its software products and
consulting services to customers primarily through its direct sales force. Since
the start of fiscal 1993, the Company has had a telesales operation at its
corporate offices to supplement its direct sales force.
The consulting services are performed by consulting engineers working out
of the Company's direct sales offices or corporate headquarters.
DIRECT SALES/SERVICES. In the United States, the Company employs
approximately 174 persons engaged in direct sales, sales support, and services
activities. Services includes employees engaged in project management,
customized services and pre-sales activities. Interleaf maintains sales and
service offices in 8 United States locations.
ALTERNATE CHANNELS. The Company has entered into agreements with a number
of value-added resellers to market and distribute its software products.
Currently, the Company has approximately 80 resellers in the United States who
resell its software products. During the fiscal year ended March 31, 1996,
domestic revenues attributable to VAR sales totaled approximately 5% of the
domestic revenues, compared with 6% of the domestic revenues in both fiscal 1995
and fiscal 1994.
Overall, domestic revenue from the direct and alternate channels, including
services and customer support, accounted for approximately $55 million for the
fiscal year ended March 31, 1996, representing approximately 62% of the
Company's revenues for such year, compared with approximately $57 million or 65%
of total revenues for fiscal 1995, and $68 million or 61% of total revenues for
fiscal 1994.
INTERNATIONAL. The Company primarily markets its software products and
specialized services in Canada, Europe and Asia through its wholly-owned
subsidiaries. In Italy, however, Interleaf products are sold exclusively through
Interleaf Italia S.r.l. The Company has an equity interest of approximately 30%
in Interleaf Italia S.r.l., and has the right to purchase the remaining equity
at a formula price based upon investment by the other shareholders in such
entity, as well as its sales and profitability. Since April 1989, Interleaf has
been selling its products in Latin America through Interleaf Americas, Ltd., an
exclusive distributor. The revenues from Interleaf Americas have been
insignificant.
In August 1992, Interleaf established a wholly owned subsidiary in Japan to
market the Company's Japanese language products. This subsidiary has been
primarily selling through Japanese distributors and resellers who have
significant services capabilities, and not directly to end users as the Company
generally does outside of Japan.
Sales and support offices for these non-U.S. entities are maintained in
nearly all major European cities; the Company also has offices in Ottawa,
Canada; Tokyo, Japan; and Sydney and Melbourne, Australia.
Overall, international sales, including services and customer support,
accounted for approximately $34 million for the fiscal year ended March 31, 1996
or 38% of total revenues, compared with approximately $31 million or 35% of
total revenues for fiscal 1995, and approximately $43 million or 39% of total
revenues for fiscal 1994. As of March 31, 1996, 157 employees work in the
Company's international operations, including 15 in customer support.
4
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CUSTOMER SUPPORT
Many of Interleaf's customers enter into customer support agreements. The
Company employs 41 persons in customer support at its corporate headquarters,
and approximately 15 outside the United States. Each customer who has entered
into a standard support contract receives telephone access to the Company's
customer support staff and bug fixes and upgrades to Interleaf products covered
under the support contract. Worldwide revenues from customer support were $32.3
million, representing approximately 36% of total revenues for fiscal year ended
March 31, 1996, compared with $30.7 million or 35% of total revenues for fiscal
year ended March 31, 1995, and $30.7 million, or 28% of total revenues, for the
fiscal year ended March 31, 1994.
In the United States, the list price for standard support for Interleaf 6
is approximately $450 per year, generally paid annually in advance, with the
price increasing to $3,495 per year for Interleaf 6, with all options. Pricing
for support of the Company's WorldView product is listed at 20% of end-user
price, depending upon the configuration, with support for the Company's RDM
product being priced at approximately 20% of end-user price. If non-standard
support by a customer is required, prices will vary substantially.
PRODUCT DEVELOPMENT AND ENGINEERING
The software industry is characterized by rapid technological change which
requires the continuing enhancement of existing products, development of new
products and the porting of these products to new hardware platforms, operating
systems, and to various industry standard graphical user interfaces and
operating systems: (1) Motif-Registered Trademark-, (2) Windows, and (3) Windows
NT. During fiscal 1996, the Company completed its port of Interleaf 6 to operate
on the Windows NT and Windows 95 operating systems. The Company also completed
porting its WorldView and RDM products in client mode to operate on the Windows
NT operating system in fiscal 1996.
In fiscal 1996, as the Internet and intranets grew in the marketplace, the
Company developed its Intellecte/BusinessWeb product to enable its IDM solutions
to be utilized with these emerging technologies. In fiscal 1997, the Company
expects to continue to shift development and engineering resources toward the
development of business specific applications, such as sales force automation
and integration.
During the fiscal years ended March 31, 1996, 1995 and 1994, the Company's
product development and engineering expenses, including the amortization of
software development costs, were approximately $19.1 million, $22.1 million, and
$21.2 million respectively, representing 22%, 25%, and 19% respectively, of the
Company's total revenues. As of March 31, 1996, the Company had 169 employees
engaged in product development and engineering.
MANUFACTURING
The Company's manufacturing operations are engaged in the duplication of
tapes and diskettes, assembling, and final packaging.
BACKLOG
The Company generally manufactures its software on the basis of its
forecast of near-term demand and generally ships to end users within 30 days
after receipt of the order. Consequently, the Company's product backlog at this
time is not indicative of future sales levels. The Company does not regard the
amount of backlog at any time to be material to a current understanding of its
business. As the Company continues to expand its IDM business, which combines
products and services, project back-logs are expected to develop which may be
significant to understanding the business.
COMPETITION
The electronic publishing, viewing, and document management markets are
highly competitive. Interleaf competes with a number of companies and expects
that other companies not currently in the electronic publishing, viewing, and
document management market may introduce competing products. In addition, the
introduction and market acceptance of new technologies such as the Internet and
intranet, may also offer new forms of competition to the Company's existing
products.
5
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At the low end of the electronic publishing and viewing market, the Company
competes with Adobe Systems Inc. Principal competitive factors include product
functionality, customer support, ease of use, integration, and price. In the
document management market, the Company competes with numerous companies,
including Documentum, Inc.
The Company believes that its core products, integrated with each other,
blended with specialized services, and used across different hardware platforms,
are its principal competitive advantage in a market that is fragmented with many
companies offering only separate parts of a solution. The Company also believes
that its ability to provide IDM solutions for customer specific business
problems will increasingly distinguish the Company from its competitors.
EMPLOYEES
As of March 31, 1996, the Company, worldwide, employed 647 full-time
employees, of whom 169 were employed in research and development, which includes
quality assurance and technical documentation, 174 in domestic sales
operations, including services, 41 in domestic customer support, 36 in corporate
marketing, 70 in finance and administration, and 157 in the Company's
international operations. The Company's success will depend in large part on its
ability to attract and retain qualified personnel, who are in demand throughout
the industry. None of the Company's employees are represented by a labor union.
Interleaf believes that its employee relations are good.
PRODUCT PROTECTION
The Company relies on a combination of trade secret, patent, copyright and
trademark laws, license agreements and technical measures to protect its rights
in and to its software. Although the Company's license agreements prohibit
disclosure of the proprietary aspects of its products, it is technically
possible for competitors to copy aspects of its products in violation of the
Company's rights. INTERLEAF, Intellecte, Cyberleaf, FASTTAG and SGML HAMMER are
registered trademarks of the Company; WorldView and RDM are trademarks of the
Company.
The Company believes that, because of rapid technological change in the
software industry, patent, trade secret and copyright protection are less
significant than factors such as the knowledge, ability and experience of
employees as well as name recognition.
ITEM 2. PROPERTIES
The Company's principal executive, administrative and research and
development operations are located in two adjacent buildings, cumulatively
totalling approximately 110,000 square-feet in Waltham, Massachusetts, both of
which the Company occupies under leases expiring in December 2000.
The Company also leases sales and support offices in 8 locations in the
United States and 14 foreign locations for its subsidiaries.
ITEM 3. LEGAL PROCEEDINGS
There are no material legal proceedings to which the Company is a party or
to which any of its property is subject.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matter was submitted to a vote of security holders during the fourth
quarter of the fiscal year covered by this report.
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EXECUTIVE OFFICERS OF THE COMPANY
The current executive officers of the Company are listed below:
MARK H. CIEPLIK, 41, joined the Company as Vice President, Americas, in May
1995. Prior to that date, he was employed by System Software Associates, Inc.
("SSA"), a developer of manufacturing software, from December 1991, serving as
Director of North American Branch Operations and Major Account Sales. Before
joining SSA, he served in various senior sales management positions with IBM,
starting in 1975, most recently serving as Director of Sales commencing in 1988.
STANLEY C. DOUGLAS, 52, joined the Company as Senior Vice President, Software
Operations, in February 1996. Prior to joining the Company, Mr. Douglas was Vice
President and Chief Information Officer of Monadnock Paper Mills, a manufacturer
of paper, from November 1993 to February 1996; and from July 1989 to July 1993,
he served as Director of Information Systems at Vitalink Communications, Inc., a
network systems company.
FREDERICK J. EGAN, 49, has served as Vice President, Asia/Pacific/Japan from
March 1989; prior to that date he was Vice President for Third Party Operations
from June 1985. Mr. Egan joined the Company in 1983.
STEPHEN J. HILL, 40, joined the Company in May 1993, as General Manager of the
Company's UK subsidiary, and was promoted to Vice President, Europe in June
1994. Prior to joining the Company, Mr. Hill was employed by Oracle Development
Corporation, a software developer of database products from 1988 in various
senior management positions, where he had most recently been General Manager-
Major Accounts, of Oracle Development Corporation UK Ltd. from January 1990.
ED KOEPFLER, 47, joined the Company as President, Chief Executive Officer and
Director, in November 1994. Prior to joining the Company, Mr. Koepfler was
employed by System Software Associates, Inc., a developer of manufacturing
software, from August 1985 in various senior operational and sales management
positions, serving as its Vice President for North American Operations from
January 1992 to November 1994, and Vice President of Operations from January
1989 to December 1991.
G. GORDON M. LARGE, 56, became Executive Vice President and Chief Financial
Officer of the Company in June 1995. Prior to joining the Company, Mr. Large was
Executive Vice President and Chief Financial Officer of Card Establishment
Services, Inc. ("CES"), a merchant credit card processor, and its parent, CESI
Holding, Inc. ("CESI"). Mr. Large joined CES and CESI as Senior Vice President,
Strategic Planning and Business Development in October 1993, and became Chief
Financial Officer in December 1993 and Executive Vice President in February
1994. Previously, Mr. Large served as Senior Vice President and Chief Financial
Officer of Systems Center, Inc., a systems software company, from February 1992
until July 1993. From December 1988 until June 1991, Mr. Large was Chief
Financial Officer of Pansophic Systems, Inc., a systems and applications
software company, also serving as Vice President from December 1988 until June
1990 and Senior Vice President from June 1990 until October 1991.
BOB MAHER, 44, joined the Company as Vice President, Technology in May 1994, and
was elected an executive officer in June 1995. Prior to joining the Company, he
was employed by Autodesk Development, Inc., a developer of engineering and CAD-
CAM software, as Manager of the European Software Center from June 1993 to May
1994. Prior to joining Autodesk, from June 1991 to June 1993, Mr. Maher was
employed by Borland International, a developer of personal computer application
software, as Manager of Workgroup Software. Prior to joining Borland, Mr. Maher
was employed by Lotus Development Corporation, a developer of personal computer
application software, in various engineering management positions, most recently
serving as Director of Software Development from 1988 to June 1991.
There is no family relationship among the foregoing individuals.
Executive officers are elected on an annual basis and serve at the discretion of
the Board of Directors.
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PART II
ITEM 5. MARKET FOR THE COMPANY'S COMMON STOCK AND RELATED SECURITY HOLDER
MATTERS
The Company's common stock is traded on the over-the-counter market and is
quoted on the NASDAQ National Market tier of the NASDAQ Stock Market under
the symbol LEAF. On May 17, 1996, there were 939 holders of record of the
Company's common stock. This number does not reflect persons or entities
who hold their stock in nominee or "street name" through various brokerage
firms.
QUARTER ENDED JUNE 30 SEPTEMBER 30 DECEMBER 31 MARCH 31 YEAR
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FISCAL 1996
Common stock prices
High $8 $11 $12 5/8 $10 3/8 $12 5/8
Low 4 1/4 7 1/4 7 1/4 6 1/8 4 1/4
Close 7 3/8 10 10 1/8 8 7/8 8 7/8
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FISCAL 1995
Common stock prices
High $7 1/2 $4 7/8 $4 5/8 $6 $7 1/2
Low 5 2 1/2 3 1/4 2 7/8 2 1/2
Close 5 1/4 4 3/8 3 1/2 4 7/8 4 7/8
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The Company has never paid cash dividends. The Company is restricted from
paying cash dividends during the term of its credit agreement.
8
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ITEM 6. SELECTED FIVE-YEAR FINANCIAL DATA
<TABLE>
<CAPTION>
(IN THOUSANDS EXCEPT FOR PER SHARE AMOUNTS)
YEAR ENDED MARCH 31 1996 a 1995 b 1994 c 1993 1992 d
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<S> <C> <C> <C> <C> <C>
Total revenues $88,557 $87,856 $111,229 $117,341 $100,299
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Net income (loss) 311 (48,362) (8,448) 9,303 5,984
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Net income (loss) per share $0.02 $(3.47) $(0.63) $ 0.55 $0.38
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Shares used in computing net income (loss)
per share 18,495 13,938 13,384 16,836 15,704
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Total assets $48,916 $50,793 $96,884 $ 99,519 $87,573
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Long-term obligations 3 625 1,565 1,857 2,559
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Total shareholders' equity $15,419 $10,615 $56,632 $ 63,126 $52,108
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Common stock outstanding 16,698 14,203 13,631 13,064 12,434
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</TABLE>
a. Fiscal 1996 results include a $1.2 million benefit from the
settlement of a long-term dispute with a joint venture partner.
b. Fiscal 1995 results include a $17.2 million charge for the
write-down of intangible assets, a $7.1 million charge for
restructuring of the Company's worldwide operations, and a $1.9
million charge for revaluation of the Company's deferred tax asset.
c. Fiscal 1994 results include a $4 million charge for acquired
in-process research and development in connection with the acquisition
of Avalanche Development Company in June 1993, a $3 million charge for
restructuring of the Company's worldwide operations, and a $1.9
million benefit upon adoption of Statement of Financial Accounting
Standards No. 109, "Accounting for Income Taxes," effective April 1,
1993.
d. Fiscal 1992 results include the impact of the acquisition of
Interleaf GmbH in July 1991.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
R E S U L T S O F O P E R A T I O N S
OVERVIEW: During the last three fiscal years, fiscal 1994 through
1996, the Company has experienced significant changes to all aspects of its
business: a new management team is in place, the Company's cost structure
has been significantly reduced, and the Company's business strategy has
evolved into a focus on developing and supporting integrated document
management (IDM) solutions. As a result of these changes, the Company's
operating results have improved from net losses of approximately $8.4
million and $48.4 million in fiscal 1994 and 1995 respectively, to earning
a small profit of approximately $0.3 million in fiscal 1996. The Company
had historically derived a majority of its product revenue from its
authoring products. Authoring product license revenue experienced slowing
growth in fiscal 1993, declined in fiscal 1994, and by the end of fiscal
1995, had declined significantly from the beginning of fiscal 1993. As a
result, during fiscal 1994 and 1995, the Company initiated two
restructurings, resulting in a new senior management team, a 25% reduction
in the Company's worldwide employment during fiscal 1995, and the
elimination and/or consolidation of its corporate headquarters and 23 sales
offices. These initiatives resulted in annual cost savings of approximately
$18 million in fiscal 1996, when compared with fiscal 1995.
In fiscal 1996, the Company began to realize some of the benefits of
the initiatives taken in fiscal 1994 and 1995, as it succeeded in returning
to profitability. Revenue stabilized as a continued decline in authoring
product license revenue was offset by growing IDM solution revenues. The
focus on IDM solutions required major changes in the worldwide sales
organization; by the fourth quarter of fiscal 1996, about two-thirds of the
Company's sales force, as well as sales management, had been with the
Company fewer than twelve months. In addition, the Company released major
enhancements across its entire product line as well as several important
new products during fiscal 1996, and expects to release a number of
additional new products in fiscal 1997. Based on anticipated increasing
productivity of the sales force and favorable acceptance of the new and
enhanced products, the Company expects to show improved results during the
latter part of fiscal 1997.
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
REVENUES
PRODUCT: Total revenues were relatively stable in fiscal 1996 from
1995, compared to a decrease of 21% in fiscal 1995 from 1994. The decrease
in fiscal 1995 was due to an approximately $26.3 million (43%) reduction in
product license revenue, specifically from the decline in licensing of the
Company's authoring products. This was primarily attributable to the
increasing power of personal computers and popularity of Windows-based
publishing software, for which the Company did not have any offerings until
fiscal 1996, and 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. This trend continued
during fiscal 1996 as a decline in authoring product license revenue was
offset by increases in IDM solution revenue. Moreover, during fiscal 1996,
the Company has concentrated on rebuilding and strengthening its worldwide
sales force. The expected improvement in sales force productivity has taken
longer than planned, resulting in a slower return to product license
growth.
MAINTENANCE: Maintenance revenue, resulting from contracts to provide
telephone support and upgrades to the Company's software products, was
relatively stable in fiscal 1996, 1995 and 1994. This stability, during a
time of decreasing product licensing, was largely attributable to renewals
from the Company's very large, long-term customers primarily in the
aerospace/defense industry. Future maintenance revenue is dependent on the
Company's ability to maintain its existing customer base and to increase
maintenance contract volume related to the new IDM solution sales. This
will be necessary to offset the general downward pricing pressure on
maintenance in the software industry.
SERVICES: Services revenue, consisting of consulting and customer
training revenue, decreased by $1.1 million (5%) in fiscal 1996 from 1995,
compared to an increase of $3.0 million (15%) in fiscal 1995 from 1994. The
Company leverages software product licenses with services to provide IDM
solutions to its customers. During fiscal 1995, the Company worked on
several large service projects which were completed during early fiscal
1996. The increase in fiscal 1995 from 1994 was primarily due to these
projects, which increased employee utilization rates, and price increases
implemented during 1995. The decline in fiscal 1996 was primarily
attributable to the decrease in product license revenues during the last
two quarters of fiscal 1996, a decrease in services personnel, and lower
training revenue associated with the decline in authoring software product
licensing.
NORTH AMERICA: Revenues were approximately $57.1 million (64%), $60.0
million (68%), and $72.4 million (65%) of total revenues during fiscal
1996, 1995, and 1994, respectively. The decline in fiscal 1996 was
primarily due to a decrease in product license and training revenues. The
decrease in fiscal 1995, when compared with fiscal 1994, was due to a
significant decline in authoring product license revenues, partially offset
by an increase in services revenue.
INTERNATIONAL: Revenues from the Company's international operations
were approximately $31.5 million (36%), $27.9 million (32%), and $38.8
million (35%) of total revenues during fiscal 1996, 1995, and 1994,
respectively. The increase in fiscal 1996 was primarily due to an increase
in electronic distribution software licensing agreements in Europe and
increased demand from resellers in Japan, partially offset by a decline in
European services. The decrease in fiscal 1995, when compared with fiscal
1994, was due to a significant reduction in product license revenues in
Europe, primarily authoring products, and a decrease in demand from
resellers in Japan. This was partially offset by increased services revenue
in Europe.
Product license revenue in Japan is volatile because the Company
distributes its products through a network of large credit-worthy resellers
and integrators who typically enter into large upfront fixed fee license
agreements. Revenue in Japan during a given period is dependent on the
success of the resellers and integrators in licensing the Company's
products to end-user customers.
FISCAL 1997: During fiscal 1997, the Company plans to develop several
IDM-based product offerings which solve specific business problems such as
sales force automation and integration, quality and health and safety
compliance in manufacturing, and customer reporting in the financial
services industry. As part of this strategy, the Company acquired The
Learning Alliance, Inc. (TLA) in May 1996 and recently announced
Intellecte/Sales Team, a product offering that combines the Company's
Intellecte/BusinessWeb solution with TLA's sales methodology and sales
process management software into a sales force automation application.
Growth in revenues during fiscal 1997 will be largely dependent on
improving sales force productivity, the effectiveness of the Company's
increased investment in marketing and lead generation programs, customer
acceptance of the new and enhanced software products released in fiscal
1996 and planned for the next year, and the Company's success in leveraging
software products with services to provide IDM solutions to its customers.
10
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
COSTS OF REVENUES
Cost of product revenues includes amortization of capitalized software
development costs; product media, documentation materials, packaging and
shipping costs; and royalties paid for licensed technology. Cost of product
revenues declined approximately $4.4 million (41%) in fiscal 1996 from
1995, compared to an increase of approximately $1.2 million (13%) in fiscal
1995 from 1994. In the fourth quarter of fiscal 1995, the Company recorded
a write-down of capitalized software development costs associated with
older software products for which revenue projections did not support the
capitalized amounts. Also contributing to the high cost of product revenues
during fiscal 1995 were fixed overhead costs and certain time-based royalty
agreements. The decrease in fiscal 1996, when compared with fiscal 1995,
was primarily related to lower amortization of capitalized software
development costs, due to the fiscal 1995 write-down, and a decline in
royalties associated with certain time-based royalty agreements. Further
savings from the fiscal 1996 level are not anticipated. Cost of maintenance
revenue decreased by approximately $1.0 million (16%) in fiscal 1996 from
1995, compared to a decrease of approximately $0.7 million (11%) in fiscal
1995 from fiscal 1994. The decreases in the last two years were primarily
related to a reduction in customer support personnel associated with the
Company's fiscal 1995 restructuring. Further savings from the fiscal 1996
level are not anticipated. The decrease in cost of services revenue of
approximately $1.3 million (7%) in fiscal 1996 from 1995 and approximately
$1.0 million (5%) in fiscal 1995 from fiscal 1994, was primarily related to
a decline in services personnel during the last two years. Costs of
services in fiscal 1997 is dependent on the Company's revenue associated
with combining software products and services into IDM solutions.
OPERATING EXPENSES
SELLING, GENERAL AND ADMINISTRATIVE (SG&A): SG&A expenses decreased by
approximately $12.5 million (23%) in fiscal 1996 from 1995, compared to a
decrease of approximately $3.7 million (6%) in fiscal 1995 from fiscal
1994. The decline in SG&A expenses over the last two years was primarily
due to significant personnel and facilities expense reductions related to
the Company's fiscal 1995 restructuring. Also contributing to lower SG&A
expenses in fiscal 1996 was the settlement of a long-term dispute with a
joint venture partner that resulted in a non-recurring expense reduction of
approximately $1.2 million (see Note 12 to the Consolidated Financial
Statements for further discussion). Further SG&A expense reductions are not
anticipated as the full benefit of the restructuring programs have been
realized. Additionally, the Company intends to increase its investment in
marketing expenditures to increase its visibility and create new sales
opportunities. The Company will continue to manage SG&A expenses to keep
costs in line with revenue.
RESEARCH AND DEVELOPMENT (R&D): R&D expenses consist primarily of
personnel expenses to support product development offset by capitalized
software development costs. R&D expenses decreased by approximately $1.0
million (6%) in fiscal 1996 from 1995, compared to a decrease of
approximately $0.5 million (3%) in fiscal 1995 from fiscal 1994. The
decrease in fiscal 1996, when compared with fiscal 1995, was primarily due
to reduced personnel expenses associated with the Company's fiscal 1995
restructuring and increased capitalization of software development costs.
During fiscal 1996, 1995, and 1994, R&D expenses were approximately 18%,
19%, and 16%, respectively, of total revenues. R&D spending, which excludes
the offset for capitalized software development costs, represented
approximately 23%, 24%, and 19% of total revenues, respectively. During
fiscal 1996, the Company completed enhancements across all of its product
lines; ported its authoring product to the Windows 95 and Windows NT
operating systems; and introduced Liaison, a new strategic open Application
Programming Interface for simplifying the creation of IDM solutions, and
Intellecte/BusinessWeb, which provides easy access to business information
by enabling the use of all popular web browsers to locate and retrieve
documents from enterprise document repositories utilizing the Company's
document management product. The Company's product development plans for
fiscal 1997 will focus on IDM-based product offerings and continued
investment in product enhancements and ports. R&D expenses are expected to
remain fairly stable but are dependent on the capitalization of software
development costs associated with the fiscal 1997 product development
plans.
11
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
ONE-TIME CHARGES: The Company incurred restructuring charges of
approximately $7.1 million in fiscal 1995, related to a worldwide
reorganization and a reduction in the size of its operations; and
approximately $3.0 million in fiscal 1994, related to reorganization of
certain international subsidiaries. During the fourth quarter of fiscal
1995, the new management team performed a strategic and operational review
of the Company's sales and marketing processes, distribution channels,
product development plans, and customer support operations. As a
consequence of this review and associated changes in the Company's business
strategy and operations, the Company evaluated the carrying value of its
long-lived assets, principally goodwill and capitalized software
development costs, which resulted in a write-down of these assets of
approximately $17.2 million. During fiscal 1994, a non-recurring charge of
approximately $4.0 million was recorded for purchased in-process research
and development associated with the Company's acquisition of Avalanche
Development Company. See Notes 4, 8 and 13 to the Consolidated Financial
Statements for additional information.
INCOME TAXES
In fiscal 1994, the Company adopted SFAS No. 109, ACCOUNTING FOR
INCOME TAXES, which resulted in a benefit of approximately $1.9 million
recorded as a cumulative effect of a change in accounting principle. This
amount represented the Company's estimate of research and development tax
credit carryforwards that it considered probable of realization based on
anticipated domestic taxable income prior to the expiration of the credit
carryforwards. Fiscal 1995 was negatively impacted by an adjustment to the
beginning deferred tax asset valuation allowance of approximately $1.9
million when an analysis of the Company's actual and anticipated operating
results indicated, at that time, that the deferred tax asset established in
fiscal 1994 was not expected to be realized.
The Company has net operating loss carryforwards of approximately
$38.8 million in several tax jurisdictions to offset future taxable income.
In addition, the Company has tax credit carryforwards of approximately $7.1
million to offset federal and state income tax liabilities. Therefore, the
Company expects to pay minimal income taxes for the foreseeable future.
L I Q U I D I T Y A N D C A P I T A L R E S O U R C E S
The Company had approximately $12.7 million of cash and cash
equivalents at March 31, 1996, an increase of approximately $2.3 million
from March 31, 1995. The increase was primarily attributable to positive
cash flow from operating activities during fiscal 1996 and proceeds from
common stock issuances related to its stock option plans and employee stock
purchase plan of approximately $2.8 million. This positive impact was
partially offset by expenditures to liquidate capital lease obligations of
approximately $1.7 million and restructuring payments of approximately $2.0
million. Capital expenditures were approximately $1.6 million, a
significant reduction from the prior fiscal year. Interleaf's German
subsidiary, Interleaf GmbH, has been notified that it is liable for German
withholding taxes related to payments remitted to the United States from
Germany in 1990. The Company is appealing this assessment. At March 31,
1996, the Company had approximately $1.1 million of cash restricted for
potential payment of German withholding taxes, and approximately $0.2
million as collateral for various lease commitments.
Future capital commitments consist primarily of operating leases
related to both open and closed facilities. The Company expects to commit
to capital expenditures and operating leases totaling approximately $3.0
million for improvements to its information systems infrastructure.
Accrued restructuring charges were approximately $1.3 million at March
31, 1996. The Company relocated part of its headquarters operations and
sub-leased all major closed facilities during fiscal 1996. The reduction in
office space and rental rate and sub-lease of the vacated headquarters
space will result in annual cash and expense savings slightly in excess of
$1.0 million beginning in fiscal 1997. The restructuring reserve should be
sufficient to cover remaining expenditures, primarily attributable to
operating lease payments, net of sublease receipts, for closed facilities.
These expenditures are anticipated to continue through the year 2000.
12
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
In May 1995, the Company obtained a revolving line of credit from a
major commercial lender. Borrowings from the line of credit are secured by
substantially all domestic assets of the Company. At March 31, 1996, there
were no loans outstanding under this line of credit. As of May 17, 1996,
approximately $1.0 million of standby letters of credit were outstanding
and the amount available for borrowings was approximately $3.3 million. See
Note 5 to the Consolidated Financial Statements regarding borrowing limits
and restrictive covenants associated with the credit agreement.
In November 1995, the Company issued 190,000 shares of common stock
associated with an agreement between the Company and a joint venture
partner (see Note 12 to the Consolidated Financial Statements for further
discussion). On May 1, 1996, the Company acquired The Learning Alliance,
Inc. for $2,690,000. The Company issued approximately 350,000 shares of
common stock to the selling shareholders of TLA for the entire purchase
amount.
The Company believes that its existing cash and cash equivalents,
available line of credit, and cash generated from operations will provide
sufficient funds to meet the Company's planned operations for the
foreseeable future.
R I S K F A C T O R S
From time to time, information provided by the Company or statements
made by its employees may contain forward-looking information. The
Company's actual future results may differ materially from those
projections or suggestions made in such forward-looking information as a
result of various potential risks and uncertainties including, but not
limited to, the factors discussed below.
The Company's future operating results are dependent on its ability to
develop and market integrated document management software products and
services that meet the changing needs of organizations with complex
document management requirements. There are numerous risks associated with
this process, including rapid technological change in the information
technology industry and the requirement to bring to market IDM solutions
that solve complex business needs in a timely manner. In addition, the
existing document publishing, electronic distribution, and document
management markets are highly competitive. The Company competes against a
number of companies for sales of its software products on both an
individual product basis and integrated with services in large IDM solution
sales.
Sales cycles associated with IDM solution sales are long because
organizations frequently require the Company to solve complex business
problems that typically involve reengineering of their business processes.
In addition, a high percentage of the Company's product license revenues
are generally realized in the last month of a fiscal quarter and can be
difficult to predict until the end of a fiscal quarter. Accordingly, given
the Company's relatively fixed cost structure, a shortfall or increase in
product license revenue will have a significant impact on the Company's
operating results.
The Company markets its software products and services worldwide.
Global and/or regional economic factors, currency exchange rate
fluctuations, and potential changes in laws and regulations affecting the
Company's business could impact the Company's financial condition or future
operating results.
The market price of the Company's common stock may be volatile at
times in response to fluctuations in the Company's quarterly operating
results, changes in analysts' earnings estimates, market conditions in the
computer software industry, as well as general conditions and other factors
external to the Company.
13
<PAGE>
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
INTERLEAF, INC.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
AND FINANCIAL STATEMENT SCHEDULE
The following consolidated financial statements and schedules of Interleaf, Inc.
and subsidiaries, and report, are included herein:
Description Page
----------- ----
Report of Management....................................................... 15
Consolidated Statements of Operations for the Years
Ended March 31, 1996, 1995, and 1994....................................... 16
Consolidated Balance Sheets at March 31, 1996 and 1995..................... 17
Consolidated Statements of Changes in Shareholders' Equity
for the Years Ended March 31, 1996, 1995, and 1994......................... 18
Consolidated Statements of Cash Flows
for the Years Ended March 31, 1996, 1995, and 1994......................... 19
Notes to Consolidated Financial Statements................................. 20
Report of Independent Auditors............................................. 30
Supplemental Financial Information......................................... 31
Schedule II - Valuation and Qualifying Accounts............................ 32
All other schedules for which provision is made in the applicable accounting
regulation of the Securities and Exchange Commission are not required under the
related instructions or are inapplicable, and therefore have been omitted.
14
<PAGE>
REPORT OF MANAGEMENT
The financial statements, including all related financial information
presented in the Annual Report, were prepared by management, and management
is responsible for their fairness, integrity and objectivity. These
statements have been prepared in accordance with generally accepted
accounting principles, and include amounts that are based on management's
best estimates and judgement and incorporate accounting policies that are
reasonable and prudent for the Company's business environment. The
financial statements have been audited by our independent public
accountants, Ernst & Young LLP, and their report is included elsewhere
herein.
The Company maintains accounting and control systems that are subject
to modification based on recommendations from Ernst & Young LLP. Management
believes the internal control systems in use are sufficient to provide
reasonable assurance that assets are safeguarded against material loss and
are properly accounted for, and that transactions are properly recorded in
the financial records used in preparing the financial statements.
The Company has distributed throughout the organization its policies
for financial control. Management believes that its policies and the
monitoring of compliance with these policies provide reasonable assurance
that its operations are adhering to prescribed financial policy.
The Board of Directors carries out its responsibility for these
financial statements through its Audit Committee, composed of nonemployee
Directors. The Audit Committee reviews the financial statements before they
are released for publication. The Committee meets periodically with the
senior financial officers and Ernst & Young LLP. It reviews the audit
scope, significant financial transactions, major accounting issues and
recommendations of Ernst & Young LLP. Ernst & Young LLP has full and free
access to the Audit Committee and meets with its members, with and without
management being present, to discuss internal control, auditing and
financial reporting matters.
/S/ ED KOEPFLER /S/ G. GORDON M. LARGE
--------------- ----------------------
ED KOEPFLER G. GORDON M. LARGE
President Executive Vice President
and Chief Executive Officer and Chief Financial Officer
15
<PAGE>
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
(IN THOUSANDS EXCEPT FOR PER SHARE AMOUNTS)
YEAR ENDED MARCH 31 1996 1995 1994
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
REVENUES
Products $34,786 $34,602 $ 60,924
Maintenance 32,281 30,652 30,725
Services 21,490 22,602 19,580
- ---------------------------------------------------------------------------------------------------------------------------
Total revenues 88,557 87,856 111,229
- ---------------------------------------------------------------------------------------------------------------------------
COSTS OF REVENUES
Products 6,443 10,878 9,640
Maintenance 5,179 6,178 6,918
Services 18,270 19,605 20,577
- ---------------------------------------------------------------------------------------------------------------------------
Total costs of revenues 29,892 36,661 37,135
- ---------------------------------------------------------------------------------------------------------------------------
Gross margin 58,665 51,195 74,094
- ---------------------------------------------------------------------------------------------------------------------------
OPERATING EXPENSES
Selling, general and administrative 42,774 55,283 58,958
Research and development 15,875 16,855 17,332
Write-down of intangible assets - 17,173 -
Restructuring expense - 7,109 3,000
Charge for purchased research and development - - 3,985
- ---------------------------------------------------------------------------------------------------------------------------
Total operating expenses 58,649 96,420 83,275
- ---------------------------------------------------------------------------------------------------------------------------
Income (loss) from operations 16 (45,225) (9,181)
Other income (expense) 325 (1,019) (749)
- ---------------------------------------------------------------------------------------------------------------------------
Income (loss) before income taxes and cumulative effect
of change in accounting principle 341 (46,244) (9,930)
Provision for income taxes 30 2,118 418
- ---------------------------------------------------------------------------------------------------------------------------
Income (loss) before cumulative effect of change 311 (48,362) (10,348)
in accounting principle
Cumulative effect of change in accounting for income taxes - - 1,900
- ---------------------------------------------------------------------------------------------------------------------------
Net income (loss) $ 311 $ (48,362) $ (8,448)
- ---------------------------------------------------------------------------------------------------------------------------
INCOME (LOSS) PER SHARE
Income (loss) before cumulative effect of change
in accounting principle $ 0.02 $ (3.47) $(0.77)
Cumulative effect of change in accounting for income taxes - - 0.14
- ---------------------------------------------------------------------------------------------------------------------------
Net income (loss) $ 0.02 $ (3.47) $(0.63)
- ---------------------------------------------------------------------------------------------------------------------------
Shares used in computing income (loss)
per share 18,495 13,938 13,384
- ---------------------------------------------------------------------------------------------------------------------------
</TABLE>
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
16
<PAGE>
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
(IN THOUSANDS EXCEPT FOR SHARE AND PER SHARE AMOUNTS)
MARCH 31
1996 1995
- ---------------------------------------------------------------------------------------------------------
<S> <C> <C>
ASSETS
CURRENT ASSETS
Cash and cash equivalents $12,725 $10,441
Accounts receivable, net of reserve for doubtful
accounts of $1,695 in 1996 and $1,953 in 1995 19,771 22,766
Prepaid expenses and other current assets 2,112 2,122
- ---------------------------------------------------------------------------------------------------------
TOTAL CURRENT ASSETS 34,608 35,329
Property and equipment, net 7,800 11,058
Intangible assets 6,164 3,801
Other assets 344 605
- ---------------------------------------------------------------------------------------------------------
TOTAL ASSETS $48,916 $50,793
- ---------------------------------------------------------------------------------------------------------
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable $ 2,908 $ 2,687
Accrued expenses 13,252 16,193
Unearned revenue 15,986 15,649
Other current liabilities 1,348 5,024
- ---------------------------------------------------------------------------------------------------------
TOTAL CURRENT LIABILITIES 33,494 39,553
Other liabilities 3 625
- ---------------------------------------------------------------------------------------------------------
TOTAL LIABILITIES 33,497 40,178
- ---------------------------------------------------------------------------------------------------------
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, issued and outstanding 923,304 in
1996 and 1,728,573 in 1995 (liquidation value $7 per share) 92 173
Common stock, par value $.01 per share, authorized 30,000,000
shares, issued and outstanding 16,697,988 in 1996 and
14,203,027 in 1995 167 142
Additional paid-in capital 72,348 67,382
Retained earnings (deficit) (56,958) (57,269)
Cumulative translation adjustment (230) 187
- ---------------------------------------------------------------------------------------------------------
TOTAL SHAREHOLDERS' EQUITY 15,419 10,615
- ---------------------------------------------------------------------------------------------------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 48,916 $ 50,793
- ---------------------------------------------------------------------------------------------------------
</TABLE>
See Notes to Consolidated Financial Statements.
17
<PAGE>
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
(IN THOUSANDS) PREFERRED ADDITIONAL RETAINED TOTAL
STOCK COMMON PAID-IN EARNINGS EQUITY SHAREHOLDERS'
SENIOR SERIES B STOCK CAPITAL (DEFICIT) ADJUSTMENT EQUITY
- ----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Balances at March 31, 1993 $193 $131 $63,507 $ (459) $(246) $63,126
Net loss - - - (8,448) - (8,448)
Conversion of Senior Series B Convertible
Preferred stock into common stock (14) 2 12 - - -
Common stock issued in connection
with stock options exercised
by employees - 2 615 - - 617
Common stock issued in connection
with employee stock purchase plan - 1 1,293 - - 1,294
Income tax benefit related to exercise
of stock options - - 124 - - 124
Equity adjustment for foreign
currency translation - - - - (81) (81)
- -----------------------------------------------------------------------------------------------------------------------------
Balances at March 31, 1994 179 136 65,551 (8,907) (327) 56,632
Net loss - - - (48,362) - (48,362)
Conversion of Senior Series B Convertible
Preferred stock into common stock (6) 1 5 - - -
Common stock issued in connection with
stock options exercised by employees - 2 660 - - 662
Common stock issued in connection
with employee stock purchase plan - 2 1,167 - - 1,169
Common stock issued in connection
with warrants exercised - 1 (1) - - -
Equity adjustment for foreign
currency translation - - - - 514 514
- ----------------------------------------------------------------------------------------------------------------------------
Balances at March 31, 1995 173 142 67,382 (57,269) 187 10,615
Net income - - - 311 - 311
Conversion of Senior Series B Convertible
Preferred stock into common stock (81) 11 70 - - -
Common stock issued in connection with
stock options exercised by employees - 7 2,087 - - 2,094
Common stock issued in connection
with employee stock purchase plan - 1 685 - - 686
Income tax benefit related to exercise
of stock options - - 30 - - 30
Common stock issued in connection
with warrants exercised - 4 (4) - - -
Common stock issued in connection
with acquisition - 2 2,098 - - 2,100
Equity adjustment for foreign
currency translation - - - - (417) (417)
- -----------------------------------------------------------------------------------------------------------------------------
Balances at March 31, 1996 $ 92 $167 $ 72,348 $(56,958) $(230) $15,419
- -----------------------------------------------------------------------------------------------------------------------------
</TABLE>
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
18
<PAGE>
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
(IN THOUSANDS)
YEAR ENDED MARCH 31 1996 1995 1994
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income (loss) $ 311 $(48,362) $ (8,448)
Adjustments to reconcile net income (loss) to net
cash provided by (used in) operating activities:
Cumulative effect of change in accounting principle - - (1,900)
Charge for purchased research and development - - 3,985
Write-down of intangible assets - 17,173 -
Restructuring expense - 7,109 3,000
Gain from settlement of legal dispute (1,230) - -
Depreciation and amortization expense 7,754 12,188 10,544
Loss from disposal of property and equipment 11 261 153
Deferred income taxes - 1,860 89
Income tax benefit from stock options exercised 30 - 124
Changes in assets and liabilities, net of
effects from company purchased:
(Increase) decrease in accounts receivable, net 2,950 13,550 (2,641)
(Increase) decrease in other assets 97 (610) (676)
Increase (decrease) in accounts payable and
accrued expenses (1,068) (3,188) 3,314
Increase in unearned revenue 507 439 1,052
Decrease in other liabilities (2,532) (5,333) (2,092)
Other, net 76 (385) (41)
- ----------------------------------------------------------------------------------------------------------------------------
Net cash provided by (used in) operating activities 6,906 (5,298) 6,463
- ----------------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES
Decrease in marketable securities - - 4,070
Capital expenditures (1,597) (4,827) (5,232)
Capitalized software development costs (4,138) (3,831) (4,064)
Payment for company purchased,
net of cash acquired - - (5,342)
- -----------------------------------------------------------------------------------------------------------------------------
Net cash used in investing activities (5,735) (8,658) (10,568)
- -----------------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES
Net proceeds from issuance of common stock 2,780 1,831 1,911
Property and equipment financing - 682 1,375
Repayment of long-term debt and capital leases (1,688) (1,819) (2,254)
- -----------------------------------------------------------------------------------------------------------------------------
Net cash provided by financing activities 1,092 694 1,032
- -----------------------------------------------------------------------------------------------------------------------------
Effect of exchange-rate changes on cash 21 339 35
- -----------------------------------------------------------------------------------------------------------------------------
Net increase (decrease) in cash and cash equivalents 2,284 (12,923) (3,038)
Cash and cash equivalents at beginning of year 10,441 23,364 26,402
- -----------------------------------------------------------------------------------------------------------------------------
Cash and cash equivalents at end of year $12,725 $10,441 $23,364
- -----------------------------------------------------------------------------------------------------------------------------
</TABLE>
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
19
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
N O T E 1 COMPANY
Interleaf, Inc. and its subsidiaries (the Company) develop and market
integrated document management software and services worldwide for
networked and Web-based business solutions. The Company's software is used
for the electronic assembly, management, retrieval, distribution and
publishing of business-critical documents.
N O T E 2 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION: The consolidated financial statements include
the accounts of Interleaf, Inc. and its subsidiaries. All significant
intercompany balances and transactions have been eliminated in
consolidation.
REVENUE RECOGNITION: Revenue from the license of software products is
recognized when the products are shipped, provided there are no significant
vendor obligations remaining and collection of the receivable is considered
probable. Costs associated with insignificant vendor obligations are
accrued. Maintenance revenue is recognized ratably over the contract
period. Services (consulting and training) revenue is recognized as the
related services are performed on either a time and materials basis or pro-
rata based on project or contract completion.
Unearned revenue represents the remaining amount of revenue to be
recognized in future periods primarily related to maintenance and service
contracts.
CASH AND CASH EQUIVALENTS: Cash equivalents, consisting primarily of bank
notes, commercial paper and treasury bills, represent highly liquid
investments with maturities at date of purchase of three months or less.
These investments are stated at cost, which approximates market value.
At March 31, 1996, the Company had approximately $1.1 million of cash
restricted for potential payment of German withholding taxes, and
approximately $0.2 million as collateral for various lease commitments.
PROPERTY AND EQUIPMENT: Property and equipment are stated at cost.
Depreciation and amortization are determined on the straight-line method
over the estimated useful lives of the related assets. The estimated useful
lives generally range from 3 to 5 years. Expenditures for repairs and
maintenance are charged to operations as incurred.
CAPITALIZED SOFTWARE DEVELOPMENT COSTS: Costs incurred in the research,
design and development of software for sale to others are charged to
expense until technological feasibility is established, after which
remaining software development costs are capitalized and amortized
beginning when the product is available for general release to customers.
The amortization included in product costs of revenue is the greater of the
amount computed using the ratio of current gross revenues to total current
and anticipated gross revenues, or straight-line over the estimated
remaining useful life of the product not to exceed three years. The Company
continually compares the unamortized portion of capitalized software
development costs to the net realizable value of the related product. The
net realizable value is the estimated future gross revenues from that
product reduced by the estimated future costs of completing and disposing
of that product. The amount by which the unamortized capitalized costs
exceed the net realizable value is written-off.
See Note 4 for discussion of Intangible Asset write-downs recorded during
fiscal 1995.
FOREIGN CURRENCY TRANSLATION: The translation of assets and liabilities of
foreign subsidiaries is made at year-end rates of exchange, and revenues
and expenses are recorded at average rates of exchange. The resulting
translation adjustments are excluded from net income and are accumulated as
a separate component of shareholders' equity. Realized and unrealized
exchange gains or losses from foreign currency transactions are reflected
in the statements of operations and are not material.
INCOME TAXES: Income taxes have been provided using the liability method in
accordance with FASB Statement No. 109, ACCOUNTING FOR INCOME TAXES.
INCOME (LOSS) PER SHARE: Per share amounts are calculated using the
weighted average number of common shares and common share equivalents
outstanding during periods of net income. Common share equivalents are
attributable to stock options, common stock warrants and convertible
preferred stock. Per share amounts are calculated using only the weighted
average number of common shares outstanding during periods of net loss.
Fully diluted earnings per share is not materially different from reported
primary earnings per share.
STOCK OPTIONS: The Company grants stock options for a fixed number of
shares to employees with an exercise price not less than the fair market
value of the shares on the date of grant. The Company accounts for stock
option grants in accordance with APB Opinion No. 25, ACCOUNTING FOR STOCK
ISSUED TO EMPLOYEES, and, accordingly, recognizes no compensation expense
for the stock option grants.
CONCENTRATIONS OF CREDIT RISK: Financial instruments which potentially
subject the Company to concentrations of credit risk consist principally of
cash investments and accounts receivable. The Company places its cash
investments in investment grade instruments with maturities of three months
or less and limits the amount of investment with any one financial
institution. The credit risk associated with accounts receivable is limited
due to the Company's credit evaluation process and the large number of
customers and their dispersion over different industries and geographic
areas.
20
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONT'D)
N O T E 2 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CON'T)
USE OF ACCOUNTING ESTIMATES: The preparation of financial statements in
conformity with generally accepted accounting principles requires
management to make estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosure of contingent assets and
liabilities at the date of the financial statements and the reported
amounts of revenues and expenses during the reporting period. Actual
results could differ from these estimates.
BASIS OF PRESENTATION: Certain 1994 and 1995 amounts have been reclassified
to conform to the 1996 basis of presentation.
N O T E 3 PROPERTY AND EQUIPMENT
Property and equipment at March 31 consisted of the following:
<TABLE>
<CAPTION>
(IN THOUSANDS) 1996 1995
- ---------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------
<S> <C> <C>
Office, demonstration and other equipment $ 29,142 $ 29,492
Development equipment 13,118 12,753
Furniture 4,296 4,766
Leasehold improvements 1,818 823
- ---------------------------------------------------------------------------------------------
48,374 47,834
Less allowances for depreciation and amortization 40,574 36,776
- ---------------------------------------------------------------------------------------------
$ 7,800 $ 11,058
- ---------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------
</TABLE>
N O T E 4 INTANGIBLE ASSETS
During fiscal 1995, the Company recorded a write-down of intangible assets
principally associated with goodwill and capitalized software development
costs. The charge to write-down goodwill was approximately $15.2 million,
primarily related to the Company's acquisitions in prior years of its
exclusive distributors in Canada, France, and Germany. During fiscal 1994,
these subsidiaries began to experience declines in profitability. To
improve the profitability of its international operations, the Company
implemented a restructuring program in September 1993. The Company's
operations continued to perform below expectations during fiscal 1995.
Further headcount reductions and consolidation of facilities were
implemented in these subsidiaries as part of the Company's worldwide
restructuring program in the second quarter of fiscal 1995 (see Note 8). In
conjunction with the fiscal 1996 planning process, the Company's new
management team completed a strategic and operational review of all
operations. As a consequence of this review, management determined in the
fourth quarter of fiscal 1995 that there was a permanent impairment in the
Company's carrying value of its goodwill. This was based on the continued
deteriorating operating results in Canada, France, and Germany; the need to
recapitalize certain of these subsidiaries; and an assessment that the
factors which contributed to the valuations at the time of the respective
acquisitions were no longer in evidence. The Company discounted the
expected future cash flows from these subsidiaries and determined that the
goodwill had no future value.
The charge to write-down capitalized software development costs and related
other assets was approximately $3.2 million. Of this total, $2 million was
primarily related to the cancellation of software development projects
associated with the Company's decision to discontinue development efforts
related to the Windows 3.1, 16-bit operating system to concentrate on
development for the Windows 95 and Windows NT, 32-bit operating systems.
The remaining $1.2 million write-down to net realizable value, included in
product costs of revenue, related to revenue projections which no longer
adequately supported the capitalized amounts associated with certain older
software products.
The unamortized portion of capitalized software development costs was
$6,164,000 and $3,801,000 at March 31, 1996 and 1995, respectively.
Amortization and write-down to net realizable value of capitalized software
development costs was approximately $3.2 million, $5.3 million, and $3.9
million during fiscal 1996, 1995, and 1994, respectively.
21
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CON'T)
N O T E 5 CREDIT AGREEMENT
In May 1995, the Company obtained a revolving line of credit of up to $10
million. The credit agreement also provides for the issuance of letters of
credit of up to $2 million. Borrowings from the line of credit bear
interest at the higher of 9% or prime rate plus 2% and are secured by
substantially all domestic assets of the Company. Outstanding letters of
credit bear interest at 2%. The credit agreement expires in May 1997, but
may be extended annually for successive one year periods with the consent
of the lender. At March 31, 1996, there were no loans outstanding under
this line of credit. Borrowings under the credit agreement are based on the
level of eligible North American accounts receivable, modified by cash
collections during the previous 90 days. As of May 17, 1996, approximately
$1.0 million of standby letters of credit were outstanding and the amount
available for borrowings was approximately $3.3 million. The agreement
contains certain financial covenants relating to the Company's current
ratio, tangible net worth, and working capital, as well as restrictions on
certain additional indebtedness, acquisitions, capital expenditures, and
dividend payments.
N O T E 6 ACCRUED EXPENSES
Accrued expenses at March 31 consisted of the following:
(IN THOUSANDS) 1996 1995
- -----------------------------------------------------------------------------
Accrued compensation and related items $ 4,790 $ 4,785
Taxes, other than income 2,460 2,523
Royalties 706 2,351
Rent 1,561 1,927
Other 3,735 4,607
- -----------------------------------------------------------------------------
$13,252 $16,193
- -----------------------------------------------------------------------------
- -----------------------------------------------------------------------------
N O T E 7 LEASE COMMITMENTS
The Company leases its headquarters and sales offices, and certain
equipment under various operating leases, which expire through the year
2000. Rent expense amounted to approximately $6.6 million, $9.4 million,
and $9.4 million during fiscal 1996, 1995 and 1994, respectively. Future
minimum rental payments at March 31, 1996 under agreements classified as
operating leases with non-cancellable terms in excess of one year are as
follows:
(IN THOUSANDS) OPERATING LEASES
YEARS ENDING MARCH 31
- --------------------------------------------------------------------------------
1997 $ 4,869
1998 4,299
1999 3,394
2000 2,978
2001 2,275
Thereafter 129
- --------------------------------------------------------------------------------
Total minimum lease payments $17,944
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Lease commitments associated with closed facilities are accrued at March
31, 1996 and therefore are excluded from the amounts disclosed above.
22
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CON'T)
N O T E 8 RESTRUCTURING
Restructuring charges include costs associated with employee termination
benefits and facility closures and related costs. Employee termination
benefits include severance, wage continuation, notice pay and related
fringe benefits. Facility closure and related costs include lease payments,
lease buyout costs, disposal of property and equipment, and related costs.
During the second quarter of fiscal 1994, the Company recorded a
restructuring charge of approximately $3 million. The restructuring plan
was to reduce employment by approximately 50 people and to consolidate four
sales offices in North America and Europe.
During the second quarter of fiscal 1995, as part of a Company
reorganization and to reduce its size of operations, the Company recorded a
restructuring charge of approximately $7.1 million. The restructuring plan
was to reduce worldwide employment and to consolidate sales offices in
North America and Europe. The employment reduction primarily related to the
marketing, sales, general and administrative, and research and development
groups. Approximately $4.6 million of the restructuring charge was for
employee termination benefits and $2.5 million for facility closures and
related costs. As a result of the restructuring program, worldwide
employment was reduced by approximately 150 people, 19 sales offices were
consolidated and a part of headquarters operations was relocated.
From the accrued restructuring reserve, the Company paid approximately $0.7
million and $4.4 million for employee termination benefits during fiscal
1996 and 1995, respectively. Payments for facility closures and related
costs, net of sublease receipts, were approximately $1.3 million and $1.2
million during fiscal 1996 and 1995, respectively. Expenditures for
facility closures, primarily lease payments, are anticipated to continue
through the year 2000.
23
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (con't)
N O T E 9 INCOME TAXES
The provision for income taxes is composed of the following:
<TABLE>
<CAPTION>
(IN THOUSANDS) 1996 1995 1994
- ---------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------
<S> <C> <C> <C>
Current:
Federal $ 30 $ - $171
State - - 50
Foreign - 258 108
- ---------------------------------------------------------------------------------------
Total current 30 258 329
- ---------------------------------------------------------------------------------------
Deferred:
Federal - 1,860 35
State - - 54
- ---------------------------------------------------------------------------------------
Total deferred - 1,860 89
- ---------------------------------------------------------------------------------------
$ 30 $2,118 $418
- ---------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------
</TABLE>
The provision for income taxes is based on the following amounts of income
(loss) before income taxes:
<TABLE>
<CAPTION>
(IN THOUSANDS) 1996 1995 1994
- ---------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------
<S> <C> <C> <C>
Domestic $ 3,793 $(43,607) $(4,184)
Foreign (3,452) (2,637) (5,746)
- ---------------------------------------------------------------------------------------
$ 341 $(46,244) $(9,930)
- ---------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------
</TABLE>
Total income taxes reported are different from the amount that would have
been computed applying the federal statutory tax rate to income before
income taxes. The difference is attributable to the following:
<TABLE>
<CAPTION>
(IN THOUSANDS) 1996 1995 1994
- ------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Computed at federal statutory rate $ 116 $(15,723) $(3,376)
Loss for which no tax benefit was realized - 9,051 2,131
Purchased research and development - - 1,355
Nondeductible amortization 51 397 385
Nondeductible write-downs - 5,021 -
Other nondeductible expenses 66 101 61
Benefit of net operating loss carryforward (195) - (153)
Other temporary differences for which no tax benefit
was realized - 1,262 -
Adjustment to beginning of the year deferred tax asset
valuation allowance - 1,860 -
U.S. and foreign tax rate difference - 123 -
State income taxes, net of federal tax benefit - - 33
Other, net (8) 26 (18)
- ------------------------------------------------------------------------------------------------------
$ 30 $ 2,118 $ 418
- ------------------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------------------
</TABLE>
24
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CON'T)
N O T E 9 INCOME TAXES (CON'T)
Deferred taxes result from temporary differences in the recognition of
revenues and expenses for tax and financial reporting purposes. The
components of the Company's deferred tax assets and liabilities as of March
31 are as follows:
<TABLE>
<CAPTION>
(IN THOUSANDS) 1996 1995 1994
- ---------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------
<S> <C> <C> <C>
Deferred tax assets:
Net operating loss carryforwards $14,919 $13,453 $ 5,691
Tax credit carryforwards 7,120 6,950 5,724
Accrued rent 601 738 897
Reserve for doubtful accounts
receivable, vacation and other accruals 401 475 583
Restructuring 337 888 137
Other 55 - -
- ---------------------------------------------------------------------------------------
Total deferred tax assets 23,433 22,504 13,032
Deferred tax asset valuation allowance (21,294) (20,594) (8,922)
- ---------------------------------------------------------------------------------------
2,139 1,910 4,110
- ---------------------------------------------------------------------------------------
Deferred tax liabilities:
Capitalized software development costs (1,891) (1,464) (2,382)
Depreciation (225) (422) (451)
Other (23) (24) (19)
- ---------------------------------------------------------------------------------------
Total deferred tax liabilities (2,139) (1,910) (2,852)
- ---------------------------------------------------------------------------------------
Net deferred tax asset $ - $ - $ 1,258
- ---------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------
</TABLE>
Realization of total deferred tax assets is contingent upon future taxable
income. A 100% valuation allowance of net deferred tax assets has been
established due to the uncertainty of realization of these tax benefits.
The deferred tax asset valuation allowance increased $700,000 and
$11,672,000 during fiscal 1996 and 1995, respectively, and by $2,282,000
from the adoption of SFAS No. 109 on April 1, 1993 to March 31, 1994. In
the second quarter of fiscal 1995 the Company recorded an adjustment of
approximately $1.9 million to the beginning of the year balance when an
analysis of the Company's actual and anticipated operating results
indicated, at that time, that utilization of the deferred tax asset was not
expected to be realized.
At March 31, 1996, the Company and its subsidiaries had net operating loss
carryforwards of approximately $38.8 million that are available to offset
future taxable income. The loss carryforwards are attributable to
operations in several tax jurisdictions and expire in 1998 and thereafter.
In addition, the Company has research and development and other tax credit
carryforwards of approximately $7.1 million available to reduce future
federal and state income tax liabilities. The tax credit carryforwards
expire in 1999 and thereafter. During fiscal 1996, 1995 and 1994, income
tax payments made were approximately $252,000, zero, and $49,000,
respectively.
25
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CON'T)
N O T E 10 SHAREHOLDERS' EQUITY
On July 15, 1988, the Company declared a dividend distribution of one
Preferred Stock Purchase Right (a Right) for each outstanding share of the
Company's common stock to shareholders of record on July 25, 1988 and for
shares of the Company's common stock issued and outstanding thereafter.
Each Right entitles the holder to purchase a unit consisting of one-
hundredth of a share (a Unit) of Series A Junior Participating Preferred
Stock, $.10 par value (the Preferred Stock), at a purchase price of $65.00
in cash. The Rights initially trade with the shares of common stock and are
not exercisable. The Rights will separate from the common stock and become
exercisable 10 days after a public announcement that a person or group (an
Acquiring Person) acquires beneficial ownership of 20% or more of the
outstanding shares of common stock, or 10 business days after commencement
of a tender offer that would result in a person or group beneficially
owning 30% or more of the outstanding shares of common stock. In the event
that the Company is not the surviving corporation in a merger with an
Acquiring Person, or the acquisition of 25% of common stock by any person
(except pursuant to a tender offer for all shares of common stock
determined to be fair by certain directors of the Company), or upon certain
self-dealing transactions or increases in an Acquiring Person's ownership
of common stock, each holder of an outstanding Right other than an
Acquiring Person will receive, upon exercise of a Right, the number of
shares of the Company's common stock that equals the exercise price of the
Right divided by one half of the current market price of the Company's
common stock. In the event that the Company is not the surviving
corporation in a merger, or if more than 50% of its assets or earning power
is sold or transferred after any person has become an Acquiring Person,
each holder of an outstanding Right other than any Acquiring Person will
receive, upon exercise of a Right, the number of shares of common stock of
the acquiring company that equals the exercise price of the Right divided
by one half of the current market price of the acquiring company's common
stock. The Rights are non-voting, expire on July 15, 1998 and may be
redeemed at any time prior to becoming exercisable at a price of $.01 per
Right.
On September 29, 1989, the Company completed a private placement of
2,142,857 shares of its Senior Series B Convertible Preferred Stock, at
$7.00 per share. In the event of liquidation, the Series B holders have a
liquidation preference over all other shareholders of the Company and are
entitled to receive $7.00 per share. Thereafter, all other shareholders are
entitled to receive, on a per share basis, an amount equal to $15 million
divided by the total number of shares of common stock that the Series B
holders would have been entitled to receive upon conversion. Finally, the
Series B holders and common shareholders share ratably in the remainder, if
any, with each share of Series B being deemed to have been converted to
common stock. Series B holders are entitled to vote on all matters
submitted to the common shareholders as a single class with the common
shareholders, receiving the number of votes equal to the number of common
shares that they would have received upon conversion, except that the
Series B holders are entitled to elect one director, and the Company needs
the approval of the majority of the Series B holders on certain significant
events.
The Series B holders can convert each share of preferred stock into 1.34375
shares of common stock. Series B holders converted 805,269, 57,142, and
142,857 shares of Series B Convertible Preferred Stock into shares of the
Company's common stock during fiscal 1996, 1995, and 1994, respectively.
The Senior Series B Convertible Preferred Stock may be redeemed by the
Company at $21.00 per share, at any time, provided at least 20% of the then
outstanding shares of Senior Series B Convertible Preferred Stock are
redeemed. Preferred shareholders shall share ratably in any dividends
declared on the common stock, as if each Series B share had been converted
to common stock.
The Company had issued warrants to purchase the Company's common stock at
various prices in connection with certain research and development
agreements and exclusive distribution agreements. The Company issued
366,113 and 72,368 shares of common stock in connection with the exercise
of warrants during fiscal 1996 and 1995, respectively. The Company received
no proceeds upon the conversion of the warrants into common stock. There
are no warrants outstanding as of March 31, 1996.
STOCK OPTION PLANS: The Company has stock option plans that provide for the
granting of non-qualified and incentive stock options to employees,
consultants, and officers. The Board of Directors determines the option
price, the option term, and the vesting period. Incentive stock options are
granted at a price not less than the fair market value on the date of
grant. On July 14, 1994, the Board of Directors adopted the 1994 Employee
Stock Option Plan which provides for a maximum of 750,000 shares of common
stock to be issued and sold under the plan. On August 3, 1994, the Board of
Directors authorized the repricing of approximately 746,000 stock options
and the cancellation and re-grant of approximately 297,000 stock options
ranging in price from $4.00 to $19.38 to the fair market value of $2.75 on
that date. At the Annual Meeting of Shareholders on August 17, 1995,
shareholders approved an amendment to the Company's 1993 Stock Option Plan
to increase the number of shares of common stock available for issuance
under the plan by 750,000.
26
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CON'T)
N O T E 10 SHAREHOLDERS' EQUITY (CON'T)
A summary of activity for these stock option plans is as follows:
<TABLE>
<CAPTION>
(IN THOUSANDS, EXCEPT PRICE RANGE OF SHARES) NUMBER OF SHARES PRICE RANGE OF SHARES
- ------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------
<S> <C> <C>
Outstanding at March 31, 1993 1,533 $ 1.13 - $19.38
Granted 485 6.75 - 9.50
Exercised (192) 1.13 - 7.50
Cancelled (273) 3.13 - 15.87
- ------------------------------------------------------------------------------------------------------
Outstanding at March 31, 1994 1,553 1.13 - 19.38
Granted 1,574 2.75 - 7.25
Exercised (216) 1.13 - 3.63
Cancelled (951) 2.75 - 15.63
- ------------------------------------------------------------------------------------------------------
Outstanding at March 31, 1995 1,960 2.75 - 10.75
Granted 798 5.50 - 7.38
Exercised (689) 2.75 - 5.75
Cancelled (250) 2.75 - 10.63
- ------------------------------------------------------------------------------------------------------
Outstanding at March 31, 1996 1,819 $2.75 - $10.75
- ------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------
</TABLE>
At March 31, 1996, there were approximately 695,000 shares available for
grant. Options exercisable were approximately 912,000, 915,000, and 916,000
at March 31, 1996, 1995, and 1994, respectively. In May 1996, the Board of
Directors approved an amendment to the Company's 1994 Employee Stock Option
Plan to increase the number of shares of common stock available for
issuance under the plan by 750,000.
The Company also has stock option plans for non-employee directors. In
September 1993, the Board of Directors approved, with subsequent
ratification by the shareholders, the Company's 1993 Director Stock Option
Plan. The 1993 Director Stock Option Plan replaced the 1989 Director Stock
Option Plan. Options are granted at the fair market value at date of grant
and are exercisable one year later. Each non-employee director received a
grant of 5,000 options at the inception of the 1993 Director Stock Option
Plan. Each newly elected non-employee director receives a grant of 5,000
options as of the first date of his or her election as a director. Every
April 1, each non-employee director automatically receives a grant of 5,000
options. During fiscal 1996, 10,000 options were exercised. At March 31,
1996, there were options outstanding to purchase 105,000 shares and 65,000
shares were available for grant. Options exercisable were 105,000, 85,000,
and 36,000 at March 31, 1996, 1995, and 1994, respectively.
EMPLOYEE STOCK PURCHASE PLAN: The Company's Employee Stock Purchase Plan
allows eligible officers and employees to withhold up to 10% of their total
compensation to purchase shares of the Company's common stock. The purchase
price is 85% of the fair market value of the stock on the date a one-year
offering commences or the date an offering terminates, whichever is lower.
Shares issued to employees were approximately 157,000, 208,000, and 182,000
during fiscal 1996, 1995, and 1994, respectively.
At March 31, 1996, approximately 4,500,000 shares of common stock were
reserved for issuance primarily related to Series B Convertible Preferred
Stock, various stock option plans and the Employee Stock Purchase Plan.
N O T E 11 EMPLOYEE BENEFIT PLANS
The Company's retirement savings plan (401(k) plan) allows eligible
employees to make tax-deferred contributions. Participants in the 401(k)
plan may contribute up to 20% of their total annual compensation, not to
exceed the specified statutory limit. Participants are 100% vested in their
own contributions. The 401(k) plan permits, but does not require, the
Company to make contributions to the 401(k) plan. The Company made
contributions of $100,000 during fiscal 1995; no contributions were made
during fiscal 1996 and 1994.
27
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CON'T)
N O T E 12 RESEARCH AND DEVELOPMENT AGREEMENT
In October 1988, the Company entered into a joint venture (the Venture)
with PruTech Research and Development Partnership III (PruTech), for the
purpose of developing and marketing certain products. PruTech contributed
approximately $2,950,000 in cash to the Venture; the Company licensed to
the Venture certain base technology and was required to perform certain
development, marketing and administrative services for the Venture.
In March 1994, PruTech commenced an arbitration action against the Company,
alleging, among other things, (i) that the Company had mismanaged the
Venture; (ii) that PruTech was entitled to cash distributions of 30% of
Venture revenues; and (iii) that certain Venture-owned technology was used
in the Company's other products. In November 1995, the Company and PruTech
reached an agreement. The Company paid PruTech $2.1 million (the Purchase
Price) in consideration of (i) the acquisition by the Company of PruTech's
interest in the Venture, and (ii) the settlement of the pending arbitration
action and the release by PruTech of all claims that it may have had
against the Company arising out of the formation and operation of the
Venture. The Company issued to PruTech 190,000 common stock shares for
payment of the Purchase Price. The settlement of the arbitration action
resulted in an expense reduction of approximately $1.2 million, which is
included in selling, general and administrative expenses in the
Consolidated Statements of Operations. The Venture-owned technology
acquired by the Company was valued at $1.4 million and is included in
Intangible assets in the Consolidated Balance Sheets. The technology is
being amortized in the same manner as other capitalized software
development costs.
N O T E 13 ACQUISITIONS
On June 16, 1993, the Company purchased all of the outstanding equity
securities of Avalanche Development Company (Avalanche) for cash of
$5,500,000. Avalanche is a leading provider of document analysis and
conversion technology and services, with particular emphasis on Standard
Generalized Markup Language (SGML), the leading international standard for
electronic interchange of documents and data.
The acquisition was accounted for using the purchase method of accounting,
whereby the purchase price was allocated to the assets acquired and
liabilities assumed based on their respective fair values as of the date of
the acquisition. In connection with this acquisition, a portion of the
purchase price was allocated to purchased in-process research and
development, resulting in a charge to the Company's operations of
$3,985,000. The charge was not deductible for tax purposes.
On May 1, 1996, the Company purchased all of the outstanding equity
securities of The Learning Alliance, Inc. (TLA) for $2,690,000. The Company
issued approximately 350,000 shares of common stock to the selling
shareholders of TLA for the entire purchase amount. TLA provides sales
training services and develops and markets related software for the sales
force automation and integration marketplace. The acquisition will be
accounted for using the purchase method of accounting.
N O T E 14 CONTINGENCIES
In the ordinary course of its business activities, the Company is subject
to various investigations, claims and legal proceedings. Each of these
matters is subject to various uncertainties, and it is possible that some
of these matters may be resolved unfavorably to the Company. Management
believes that the ultimate resolution of these matters will not have a
material adverse effect on the financial position or results of operations
of the Company.
Interleaf's German subsidiary, Interleaf GmbH, has been notified that it is
liable for certain German withholding taxes related to payments remitted to
the United States from Germany. The Company is appealing this assessment;
however, approximately $1.1 million of the cash and cash equivalents
balance at March 31, 1996 has been restricted for potential payment of the
German withholding taxes. The Company believes the final outcome will not
have a material adverse effect on the financial position or results of
operations of the Company.
28
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CON'T)
N O T E 15 INDUSTRY SEGMENT AND GEOGRAPHIC INFORMATION
The Company operates in a single industry segment: developing and marketing
integrated document management software and services worldwide.
Information regarding geographic areas at March 31, 1996, 1995 and 1994,
and for the years then ended is as follows:
<TABLE>
<CAPTION>
(IN THOUSANDS)
MARCH 31, 1996
AND FOR THE YEAR THEN ENDED U.S. NON-U.S. ELIMINATIONS TOTAL
- ---------------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Sales to unaffiliated customers $ 54,953 $ 33,604 $ - $ 88,557
Intercompany royalties and transfers 8,770 - (8,770) -
- ---------------------------------------------------------------------------------------------------------
Net revenues 63,723 33,604 (8,770) 88,557
- ---------------------------------------------------------------------------------------------------------
Income (loss) from operations 2,651 (2,722) 87 16
- ---------------------------------------------------------------------------------------------------------
Identifiable assets 63,734 17,590 (32,408) 48,916
- ---------------------------------------------------------------------------------------------------------
MARCH 31, 1995
AND FOR THE YEAR THEN ENDED U.S. NON-U.S. ELIMINATIONS TOTAL
- --------------------------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------------------------
Sales to unaffiliated customers $ 56,853 $ 31,003 $ - $ 87,856
Intercompany royalties and transfers 7,076 18 (7,094) -
- --------------------------------------------------------------------------------------------------------------
Net revenues 63,929 31,021 (7,094) 87,856
- --------------------------------------------------------------------------------------------------------------
Income (loss) from operations (35,538) (9,687) - (45,225)
- --------------------------------------------------------------------------------------------------------------
Identifiable assets 61,679 18,877 (29,763) 50,793
- --------------------------------------------------------------------------------------------------------------
MARCH 31, 1994
AND FOR THE YEAR THEN ENDED U.S. NON-U.S. ELIMINATIONS TOTAL
- --------------------------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------------------------
Sales to unaffiliated customers $ 68,529 $ 42,700 $ - $ 111,229
Intercompany royalties and transfers 12,008 - (12,008) -
- --------------------------------------------------------------------------------------------------------------
Net revenues 80,537 42,700 (12,008) 111,229
- --------------------------------------------------------------------------------------------------------------
Income (loss) from operations (3,919) (5,262) - (9,181)
- --------------------------------------------------------------------------------------------------------------
Identifiable assets 107,661 21,945 (32,722) 96,884
- --------------------------------------------------------------------------------------------------------------
</TABLE>
Intercompany transfers between geographic areas are accounted
for at prices that approximate prices charged to unaffiliated
customers.
29
<PAGE>
REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
Board of Directors
Interleaf, Inc.
We have audited the accompanying consolidated balance sheets of Interleaf,
Inc. as of March 31, 1996 and 1995, and the related consolidated statements
of operations, changes in shareholders' equity, and cash flows for each of
the three years in the period ended March 31, 1996. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based
on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used
and significant estimates made by management, as well as evaluating the
overall financial statement presentation. We believe that our audits
provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the consolidated financial position of Interleaf,
Inc. at March 31, 1996 and 1995, and the consolidated results of its
operations and its cash flows for each of the three years in the period
ended March 31, 1996, in conformity with generally accepted accounting
principles.
/s/ Ernst & Young LLP
---------------------
Boston, Massachusetts
April 26, 1996
30
<PAGE>
SUPPLEMENTAL FINANCIAL INFORMATION
The following summarizes unaudited selected quarterly results of operations
for the years ended March 31, 1996 and 1995.
<TABLE>
<CAPTION>
(IN THOUSANDS EXCEPT FOR PER SHARE AMOUNTS)
QUARTER ENDED JUNE 30 SEPTEMBER 30 DECEMBER 31 MARCH 31 YEAR
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
FISCAL 1996
Revenues $ 23,127 $ 23,311 $ 21,255 $ 20,864 $ 88,557
- ---------------------------------------------------------------------------------------------------------------------------------
Gross margin 15,289 15,666 13,883 13,827 58,665
- ---------------------------------------------------------------------------------------------------------------------------------
Net income (loss) 472 922 429 a (1,512) 311
- ---------------------------------------------------------------------------------------------------------------------------------
Net income (loss) per share 0.03 0.05 0.02 (0.09) 0.02
- ---------------------------------------------------------------------------------------------------------------------------------
FISCAL 1995
Revenues $ 19,240 $ 23,011 $ 21,824 $ 23,781 $ 87,856
- ---------------------------------------------------------------------------------------------------------------------------------
Gross margin 10,781 13,931 12,493 13,990 51,195
- ---------------------------------------------------------------------------------------------------------------------------------
Net income (loss) (8,153) (14,556) b (5,782) (19,871) c (48,362)
- ---------------------------------------------------------------------------------------------------------------------------------
Net income (loss) per share (0.59) (1.05) (0.41) (1.41) (3.47)
- ---------------------------------------------------------------------------------------------------------------------------------
</TABLE>
NOTES TO SUPPLEMENTAL FINANCIAL INFORMATION
a. Includes a $1.2 million benefit from the settlement of a long-
term dispute with a joint venture partner.
b. Includes a $7.1 million charge for restructuring of the
Company's worldwide operations and a $1.9 million charge for
revaluation of the Company's deferred tax asset.
c. Includes a $17.2 million charge for the write-down of intangible
assets.
31
<PAGE>
SCHEDULE II
VALUATION AND QUALIFYING ACCOUNTS
<TABLE>
<CAPTION>
(In thousands)
- --------------------------------------------------------------------------------------------------------------------------------
COL. A COL. B COL. C COL. D COL. E COL. F
- --------------------------------------------------------------------------------------------------------------------------------
Balance at Additions to
Beginning of Costs and Other Additions- Deductions Balance at
Description Period Expenses Describe(1) Describe(2) End of Period
- --------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Year ended March 31, 1994:
Deducted from asset accounts
Allowance for doubtful accounts $ 725 $ 601 $ - $ (157) $ 1,169
- --------------------------------------------------------------------------------------------------------------------------------
Year ended March 31, 1995:
Deducted from asset accounts
Allowance for doubtful accounts $ 1,169 $ 683 $ 1,750 $ (1,649) $ 1,953
- ---------------------------------------------------------------------------------------------------------------------------------
Year ended March 31, 1996:
Deducted from asset accounts
Allowance for doubtful accounts $ 1,953 $ 630 $ 300 $ (1,188) $ 1,695
- -----------------------------------------------------------------------------------------------------------------------------
</TABLE>
- ------------------------
1 Reclass to allowance for doubtful accounts from accrued expenses
2 Write-off of uncollectible accounts receivable and effect of foreign
exchange rate fluctuations
32
<PAGE>
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information required by this item is contained in part under the caption
"Executive Officers of the Company" in Part I hereof and the remainder is
incorporated herein by reference to "Election of Directors" (except for the
information contained under the subheadings "Compensation Committee Report" and
"Stock Performance Graph") in the Company's Proxy Statement for the Company's
Annual Meeting of Shareholders to be held on August 8, 1996 (the "1996 Proxy
Statement").
ITEM 11. EXECUTIVE COMPENSATION
The information required by this item is incorporated herein by reference to
"Executive Compensation," "Severance Plan and Change in Control," "Directors'
Compensation," and "Ratification and Approval of the Amendment to the Company's
1987 Employee Stock Purchase Plan" contained in the 1996 Proxy Statement.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by this item is incorporated herein by reference to
information contained in the table appearing under the heading "Principal
Shareholders" contained in the 1996 Proxy Statement.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this item is incorporated herein by reference to
"Certain Relationships and Related Transactions" contained in the 1996 Proxy
Statement.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) 1. FINANCIAL STATEMENTS. The financial statements are listed in the Index
to Consolidated Financial Statements and Financial Statement Schedule filed
as part of this Annual Report on Form 10-K.
2. FINANCIAL STATEMENT SCHEDULE. The financial statement schedule is
listed in the Index to Consolidated Financial Statements and
Financial Statement Schedule filed as part of this Annual Report
on Form 10-K.
3. EXHIBITS. The exhibits listed in the accompanying Exhibit Index are
filed as part of this Annual Report on Form 10-K.
(b) REPORTS ON FORM 8-K
None.
The following trademarks are used herein:
Interleaf-Registered Trademark-, Intellecte-Registered Trademark- and
Cyberleaf-Registered Trademark- are registered trademarks of Interleaf, Inc.
RDM, WorldView, and Intellecte are trademarks of Interleaf, Inc.
Motif-Registered Trademark- is a registered trademark of the Open Software
Foundation, Inc.
Microsoft Windows is a trademark of Microsoft Corporation.
33
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed
on its behalf by the undersigned, thereunto duly authorized.
INTERLEAF, INC.
By: /s/ Ed Koepfler
------------------------------
Ed Koepfler, President and
Chief Executive Officer
Dated: June 28, 1996
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
SIGNATURE CAPACITY DATE
<S> <C> <C>
/s/ David A. Boucher Chairman of the Board of Directors June 28, 1996
- ------------------------
David A. Boucher
/s/ Ed Koepfler President and Chief Executive Officer June 28, 1996
- ------------------------ and a Director (Principal Executive Officer)
Ed Koepfler
/s/ G. Gordon M. Large Executive Vice President and Chief Financial June 28, 1996
- ------------------------ Officer and a Director (Principal Financial
G. Gordon M. Large and Accounting Officer)
/s/ Frederick B. Bamber Director June 28, 1996
- ------------------------
Frederick B. Bamber
/s/ Clinton P. Harris Director June 28, 1996
- ------------------------
Clinton P. Harris
/s/ George D. Potter, Jr. Director June 28, 1996
- ------------------------
George D. Potter, Jr.
</TABLE>
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION METHOD OF FILING
------- ----------- ----------------
<S> <C> <C>
3(a) Restated Articles of Organization of the Company, as amended [vii]
3(b) By-Laws of the Company, as amended [vii]
4(a) Specimen Certificate for Shares of the Company's Common Stock [i]
4(b) Rights Agreement, dated July 15, 1988, between the Company and The
First National Bank of Boston [ii]
10(a) Company's 1983 Stock Option Plan, as amended [vii]
10(a1) 1994 Employee Stock Option Plan [viii]
10(a2) 1993 Incentive Stock Option Plan, as amended [x]
10(b) Company's 1989 Director Stock Option Plan [iii]
10(b2) Company's 1987 Employee Stock Purchase Plan, as amended [vii]
10(c) Company's 1989 Officer and Employee Severance Benefit Plans [iii]
10(cc) Company's 1993 Director Stock Option Plan [vii]
10(d) Agreements between PruTech Research and Development Partnership III [iv]
and the Company, dated October 21, 1988.
10(e) Exclusive Marketing and Licensing Agreement, betweenInterleaf South [iii]
America, Ltd. and the Company, and related Option Agreement, dated
March 31, 1989.
10(f) Distribution and License Agreement between Interleaf Italia, S.r.l. [iii]
and the Company, and related Joint Venture Agreement, dated October
31, 1988.
10(g) Preferred Stock Purchase Agreements, for the issuance of 2,142,857 [iv]
shares of the Company's Senior Series B Convertible Preferred Stock,
dated September 29, 1989.
10(h) Notification to Preferred Shareholder of increase in conversion ratio, [v]
dated May 18, 1992.
10(i) Lease of Prospect Place, Waltham, MA, between Prospect Place Limited [vi]
Partnership and Interleaf, Inc., and related Agreements, dated March
30, 1990.
10(k) Letter Agreement between the Company and Richard P. Delio, the [vii]
Company's former Sr. Vice President of Finance and Administration and
Chief Financial Officer, dated March 30, 1994, concerning his
employment and severance with the Company.
10(l) Letter of Separation and Management Consulting Agreement between the [viii]
Company and Mark K. Ruport, the Company's former President, Chief
Executive Officer and Director, dated July 25, 1994, concerning his
separation and consulting obligations to the Company.
10(m) Letter Agreement between the Company and Richard P. Delio, the [viii]
Company's former Sr. Vice President of Finance and Administration and
Chief Financial Officer and Acting President, dated August 3, 1994,
concerning his employment and severance with the Company.
10(n) Letter of Separation and Management Consulting Agreement between the [viii]
Company and Peter Cittadini, the Company's former Sr. Vice President
Worldwide Operations, dated July 27, 1994, concerning his separation
and consulting obligations to the Company.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION METHOD OF FILING
------- ----------- ----------------
<S> <C> <C>
10(o) Executive Compensation Arrangement for David A. Boucher, the Company's [viii]
Chairman of the Board, dated July 20, 1994.
10(p) Letter of Separation and Management Consulting Agreement between the [viii]
Company and Lawrence S. Bohn, the Company's former Sr. Vice President,
Marketing and Business Development, dated September 20, 1994,
concerning his separation and consulting obligations to the Company.
10(q) Employment and severance agreement between the Company and Edward [ix]
Koepfler, the Company's President, dated October 3, 1994.
10(r) Loan and Security Agreement between the Company and Foothill Capital [xi]
Corporation, dated May 2, 1995.
10(s) Employment and severance agreement between the Company and G. Gordon [xi]
M. Large, the Company's Executive Vice President and Chief Financial
Officer, dated June 5, 1995
10(t) Net Lease, dated August 14, 1995, between Principal Mutual Insurance [xii]
Company and the Company.
10(u) Sublease, dated September 15, 1995, between Parametric Technology [xii]
Corporation and the Company.
10(v) Employment and severance agreement between the Company and Mark [xiii]
Cieplik, the Company's Vice President, Americas, dated March 17, 1995.
10(w) Agreement between PruTech Research and Development Partnership III and [xiv]
the Company, dated November 14, 1995.
11 Computation of Earnings Per Share Included
21 Subsidiaries of the Company Included
23 Consent of Independent Auditors Included
27 Financial Data Schedule Included
</TABLE>
________________________
[i] Incorporated herein by reference is the applicable Exhibit to Company's
Registration Statement on Form S-1, File Number 33-5743.
[ii] Incorporated herein by reference is Exhibit 1 to Company's Registration
Statement on Form 8-A, filed July 27, 1988.
[iii] Incorporated herein by reference is the applicable Exhibit to Company's
Annual Report on Form 10-K for the year ended March 31, 1989,
File Number 0-14713.
[iv] Incorporated herein by reference is the applicable Exhibit to Company's
Annual Report on Form 10-K for the year ended March 31, 1990,
File Number 0-14713.
[v] Incorporated herein by reference is the applicable Exhibit to Company's
Annual Report on Form 10-K for the year ended March 31, 1992,
File Number 0-14713.
[vi] Incorporated herein by reference is the applicable Exhibit to Company's
Report on Form 8-K filed April 13, 1990, File Number 0-14713.
[vii] Incorporated herein by reference is the applicable Exhibit to Company's
Annual Report on Form 10-K for the year ended March 31, 1994,
File Number 0-14713.
[viii] Incorporated herein by reference is the applicable Exhibit to Company's
Report on Form 10-Q for the quarter ended September 30, 1994,
File Number 0-14713.
<PAGE>
[ix] Incorporated herein by reference is the applicable Exhibit to
Company's Report on Form 10-Q for the quarter ended December 31, 1994,
File Number 0-14713.
[x] Incorporated herein by reference is the applicable Exhibit to Company's
Annual Report on Form 10-K for the year ended March 31, 1995,
File Number 0-14713.
[xi] Incorporated herein by reference is the applicable Exhibit to Company's
Report on Form 10-Q for the quarter ended June 30, 1995,
File Number 0-14713.
[xii] Incorporated herein by reference is the applicable Exhibit to Company's
Registration Statement on Form S-2, File Number 33-63785.
[xiii] Incorporated herein by reference is the applicable Exhibit to Company's
Report on Form 10-Q for the quarter ended September 30, 1995, File
Number 0-14713.
[xiv] Incorporated herein by reference is the applicable Exhibit to Company's
Report on Form 10-Q for the quarter ended December 31, 1995,
File Number 0-14713.
<PAGE>
INTERLEAF, INC.
EXHIBIT 11--COMPUTATION OF EARNINGS PER SHARE
<TABLE>
<CAPTION>
Year Ended March 31
1996 1995 1994
------- -------- --------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C>
PRIMARY
Average shares outstanding of Common Stock 15,557 13,938 13,384
Dilutive Senior Series B Convertible Preferred Stock 1,758 - -
Dilutive stock options 1,029 - -
Dilutive stock purchase warrants 97 - -
Dilutive stock purchase plan rights 54 - -
------- -------- --------
Total 18,495 13,938 13,384
------- -------- --------
------- -------- --------
Income (loss) before cumulative effect of change in
accounting principle $ 311 $(48,362) $(10,348)
------- -------- --------
------- -------- --------
Per share amount $ 0.02 $ (3.47) $ (0.77)
------- -------- --------
------- -------- --------
Cumulative effect of change in accounting principle $ - $ - $ 1,900
------- -------- --------
------- -------- --------
Per share amount $ - $ - $ 0.14
------- -------- --------
------- -------- --------
Net income (loss) $ 311 $(48,362) $ (8,448)
------- -------- --------
------- -------- --------
Per share amount $ 0.02 $ (3.47) $ (0.63)
------- -------- --------
------- -------- --------
FULLY DILUTED
Average shares outstanding of Common Stock 15,557 13,938 13,384
Dilutive Senior Series B Convertible Preferred Stock 1,758 - -
Dilutive stock options 1,186 - -
Dilutive stock purchase warrants 187 - -
Dilutive stock purchase plan rights 57 - -
------- -------- --------
Total 18,745 13,938 13,384
------- -------- --------
------- -------- --------
Income (loss) before cumulative effect of change in
accounting principle $ 311 $(48,362) $(10,348)
------- -------- --------
------- -------- --------
Per share amount $ 0.02 $ (3.47) $ (0.77)
------- -------- --------
------- -------- --------
Cumulative effect of change in accounting principle $ - $ - $ 1,900
------- -------- --------
------- -------- --------
Per share amount $ - $ - $ 0.14
------- -------- --------
------- -------- --------
Net income (loss) $ 311 $(48,362) $ (8,448)
------- -------- --------
------- -------- --------
Per share amount $ 0.02 $ (3.47) $ (0.63)
------- -------- --------
------- -------- --------
</TABLE>
The dilutive effect of stock options, stock purchase warrants, and stock
purchase plan rights are calculated using the treasury stock method. Under this
method, these common stock equivalents are assumed to be exercised and proceeds
from the exercise are assumed to be used to repurchase common stock at the
average market price for primary income (loss) per share and the higher of the
end of the period or average market price for fully diluted income (loss) per
share. The dilutive effect of Convertible Preferred Stock is calculated using
the if-converted method.
<PAGE>
EXHIBIT 21
SUBSIDIARIES OF INTERLEAF, INC.
1. Avalanche Development Company
2. Interleaf Australia Pty. Ltd.
3. Interleaf Benelux, N.V./S.A.
4. Interleaf Canada, Inc.
5. Interleaf Foreign Sales Corp.
6. Interleaf France, S.A.
7. Interleaf GmbH
8. Interleaf Iberica
9. Interleaf Japan, Inc.
10. Interleaf Securities Corp.
11. Interleaf Switzerland, S.A.
12. Interleaf U.K. Ltd.
13. Interleaf World Trade, Inc.
14. The Learning Alliance, Inc.
39
<PAGE>
EXHIBIT 23
CONSENT OF INDEPENDENT AUDITORS
We consent to the incorporation by reference in the Registration Statement
(Form S-2 No. 33-63785) of Interleaf, Inc. and in the related Prospectus, the
Registration Statement (Form S-3 No. 333-03761) of Interleaf, Inc. and in the
related Prospectus, the Registration Statements (Forms S-8 No. 33-8933,
No. 33-14529, No. 33-30218 and No. 33-59794) pertaining to the 1983 Stock Option
Plan of Interleaf, Inc., the Registration Statements (Forms S-8 No. 33-13249,
No. 33-30219, No. 33-40663 and No. 33-69066) pertaining to the 1987 Employee
Stock Purchase Plan of Interleaf, Inc., the Registration Statement (Form S-8
No. 33-30220) pertaining to the 1989 Director Stock Option Plan of Interleaf,
Inc., the Registration Statements (Forms S-8 No. 33-69068 and No. 33-61051)
pertaining to the 1993 Stock Option Plan of Interleaf, Inc., the Registration
Statement (Form S-8 No. 33-80864) pertaining to the 1993 Director Stock
Option Plan of Interleaf, Inc., and the Registration Statement (Form S-8
No. 33-84214) pertaining to the 1994 Employee Stock Option Plan of Interleaf,
Inc. of our report dated April 26, 1996, with respect to the consolidated
financial statements of Interleaf, Inc. included in the Annual Report
(Form 10K) for the year ended March 31, 1996.
Our audits also included the financial statement schedule of Interleaf, Inc.
listed in Item 14(a). This schedule is the responsibility of the Company's
management. Our responsibility is to express an opinion based on our audits.
In our opinion, the financial statement schedule referred to above, when
considered in relation to the basic financial statements taken as a whole,
presents fairly in all material respects the information set forth therein.
/s/ Ernst & Young LLP
Boston, Massachusetts
June 28, 1996
40
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the
consolidated balance sheets and consolidated statements of operations found on
pages 16 and 17 of the Company's Form 10-K for the year ended March 31, 1996,
and is qualified in its entirety by reference to such financial statements.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> MAR-31-1996
<PERIOD-END> MAR-31-1996
<CASH> 12,725
<SECURITIES> 0
<RECEIVABLES> 21,466
<ALLOWANCES> 1,695
<INVENTORY> 291
<CURRENT-ASSETS> 34,608
<PP&E> 48,374
<DEPRECIATION> 40,574
<TOTAL-ASSETS> 48,916
<CURRENT-LIABILITIES> 33,494
<BONDS> 0
0
92
<COMMON> 167
<OTHER-SE> 15,160
<TOTAL-LIABILITY-AND-EQUITY> 48,916
<SALES> 34,786
<TOTAL-REVENUES> 88,557
<CGS> 6,443
<TOTAL-COSTS> 29,892
<OTHER-EXPENSES> 58,019<F1>
<LOSS-PROVISION> 630
<INTEREST-EXPENSE> 40
<INCOME-PRETAX> 341<F1>
<INCOME-TAX> 30
<INCOME-CONTINUING> 311<F1>
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 311<F1>
<EPS-PRIMARY> 0.02
<EPS-DILUTED> 0.02
<FN>
<F1>Includes a $1.2 million benefit from the settlement of a long-term dispute with
a joint venture partner.
</FN>
</TABLE>
