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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, 1997 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
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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
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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 18, 1997 was $23,868,250 based upon the last reported
sales price of the Common Stock in the National Market System, as reported by
NASDAQ on such date.
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APPLICABLE ONLY TO CORPORATE REGISTRANTS
The number of shares of the registrant's Common Stock, $.01 par value,
outstanding at June 18, 1997 was 17,709,719.
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 15, 1997. (Part III)
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PART I
ITEM 1. BUSINESS
Interleaf-Registered Trademark-, Inc. and its subsidiaries ("Interleaf" or
the "Company") develop and market software that is used in the creation,
publication, management, and distribution of electronic 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 publishing ("IDP") solution.
Since the Company's inception, Interleaf has primarily focused on the
development and marketing of electronic publishing software for the technical
documentation segment. These products were developed 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").
The market for high-end technical document management products for
Workstations and PCs has matured. The maturing of this market has had a
negative impact on Interleaf's revenue and business. This is most evident in
product revenue which declined by 46% in fiscal year 1997 from the prior year
while total revenue declined by 27%. In comparison, fiscal year 1996's
product revenue and total revenue remained flat compared to fiscal year 1995
(although 1995's total revenue declined by 21% from the prior year). As a
response to revenue declines, the Company has reduced its asset base,
employment levels, and other costs over the last three fiscal years. In
fiscal years 1997 and 1995, Interleaf incurred restructuring charges of $11
million and $7 million, respectively. A major part of restructuring costs
was related to facilities which amounted to $8 million and $3 million for
fiscal years 1997 and 1995, respectively. Additionally, total employment
declined by 47% and 25% in fiscal years 1997 and 1995, respectively.
Severance costs related to the restructuring amounted to $3 million and $5
million in fiscal years 1997 and 1995, respectively. Investments in research
and development, including the capitalized software development costs,
were reduced by $4 million during fiscal year 1997 but averaged $19 million
during the last three fiscal years. The net effect on costs from these
changes is that quarterly operating expenses have been reduced by $8 million
from the first to the last quarter of fiscal year 1997.
While the demand for high-end technical document management products has
matured, most mid to large size companies are requiring enterprise publishing
solutions to assemble, integrate, control, and distribute documents as an
essential part of their businesses. In fiscal year 1998, the enterprise
publishing solutions market is expected to increase. The growth of the
Internet and intranet account for most of this increase, and as a result, the
definition of document publishing and management has changed. Solving
enterprise document management problems is an enterprise-wide problem,
beginning at a departmental level, e.g., Human Resources, Marketing, Sales,
Engineering, Finance, etc.
Interleaf plans to introduce new technologies and products in fiscal year
1998. These new technologies and products will focus on enterprise publishing
solutions for complex document publishing, distribution and management across
the entire enterprise. Interleaf's new technology, packaged and sold as IDP
applications, will allow our customers to solve specific business problems
such as enhancing corporate communication, reducing costs associated with
disparate document information systems, allowing customers to offer more
accurate, lower cost products and services, and substantially improving their
bottom line. The Company's future revenue growth will be largely dependent on
its ability to develop these new technologies and apply IDP application
solutions, as well as its ability to reorganize sales and distribution
channels 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 parts of an IDP solution. These
products include Interleaf 6 for publishing, WorldView for on-line
distribution of document collections, RDM for document management, and
BusinessWeb for Internet and intranet publishing and document management. The
Company also markets consulting and training to enable its customers to
deploy their IDP solutions.
Interleaf 6. Interleaf 6 operates on Sun, Digital, HP, and IBM Workstations
and on Windows NT and Windows 95 operating systems.
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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, intranet,
local area network ("LAN"), wide area network ("WAN"), CD-ROM or for On
Demand Printing. 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.
Foreign language versions of Interleaf 6 are available in French,
Japanese, Italian and German. 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.
WorldView Java. WorldView Java is a server based product that transforms
various types of electronic data into collections of interrelated information
for distribution and viewing on Web Browsers. In fiscal year 1997, WorldView
Java was released in Beta, and is expected to be ready for general
availability in early fiscal 1998.
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.
BusinessWeb. This product offers Internet access to an RDM-managed
knowledge repository using a standard Web browser. This product lists for
approximately $25,000.
Liaison. Liaison is an open Application Programming Interface designed to
facilitate the development of IDP applications. 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.
All of the Company's core software products support documents in Hypertext
Markup Language ("HTML"), the data form for Internet World Wide Web publishing.
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SERVICES. The Company continues to implement its services strategy of
providing consulting and training to its customers to enable them to deploy
their IDP solutions, utilizing Interleaf's software products. During the
fiscal years ended March 31, 1997, 1996 and 1995, worldwide revenues from
services were approximately $17.0 million, $21.5 million, and $22.6 million
respectively, representing approximately 26%, 24%, and 26% respectively, of
the Company's total revenues.
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 diversified
into IDP solutions, by applying its broad--based technology to vertical
markets. In fiscal 1998, Interleaf will aggressively market solutions to
vertical markets such as financial services, manufacturing, insurance and
healthcare.
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. In fiscal 1998,
the Company will team with technology partners, VARs and systems integrators
to provide a broader range of solutions to the market.
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 99 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 7 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 25 resellers in the United States
who resell its software products. During the fiscal year ended March 31,
1997, domestic revenues attributable to VAR sales totaled approximately 2% of
the domestic revenues, compared with 5% of the domestic revenue in fiscal
1996 and 5% in fiscal 1995.
Overall, domestic revenue from the direct and alternate channels,
including services and customer support, accounted for approximately $40
million for the fiscal year ended March 31, 1997, representing approximately
62% of the Company's revenues for such year, compared with approximately $55
million or 62% of total revenues for fiscal 1996, and $57 million or 65% of
total revenues for fiscal 1995.
INTERNATIONAL. The Company primarily markets its software products and
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, Australia.
Overall, international sales, including services and customer support,
accounted for approximately $26 million for the fiscal year ended March 31,
1997 or 40% of total revenues, compared with approximately $34 million or 38%
of total revenues for fiscal 1996, and approximately $31 million or 36% of
total revenues for fiscal 1995. As of March 31, 1997, 106 employees work in
the Company's international operations.
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CUSTOMER SUPPORT
Many of Interleaf's customers enter into customer support agreements. The
Company employs 25 people in customer support at its corporate headquarters,
and approximately 10 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
and maintenance were $29 million, representing approximately 45% of total
revenues for fiscal year ended March 31, 1997, compared with $32.3 million or
36% of total revenues for fiscal year ended March 31, 1996, and $30.7
million, or 35% of total revenues, for the fiscal year ended March 31, 1995.
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. Standard support includes new releases (upgrades) to products.
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 1997, the Company completed its port of Interleaf 6
to operate on the Windows NT and Windows 95 operating systems.
In fiscal 1997, as the Internet and intranets grew in the marketplace, the
Company developed its BusinessWeb product to enable its IDP solutions to be
utilized with these emerging technologies. In fiscal 1998, the Company
expects to continue to shift development and engineering resources toward the
development of new, Web-based publishing products and applications.
During the fiscal years ended March 31, 1997, 1996 and 1995, the Company's
product development and engineering expenses, including the amortization of
software development costs, were approximately $20.0 million, $19.1 million,
and $22.1 million respectively, representing 31%, 22%, and 25% respectively,
of the Company's total revenues. As of March 31, 1997, the Company had 62
employees engaged in product development and engineering.
MANUFACTURING
The Company's manufacturing operations are engaged in the duplication of
tapes, diskettes, CDs, and printed documents, 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.
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COMPETITION
The electronic publishing, distribution, viewing, and document management
markets are highly competitive. Some of these competitors are larger and have
greater resources than the Company has. Many new competitors emerged in the
electronic publishing, viewing, and document management market in fiscal
1997. The introduction and market acceptance of new technologies such as the
Internet and intranet, have also offered new forms of competition to the
Company's existing products.
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's products, integrated with each other, blended with
specialized services, and used across different hardware platforms, are its
principal competitive advantages 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 IDP solutions for customer specific
business problems will increasingly distinguish the Company from its
competitors.
EMPLOYEES
As of March 31, 1997, the Company, worldwide, employed 342 full-time
employees, of whom 62 were employed in research and development, which
includes quality assurance and technical documentation, 99 in domestic sales
operations, including services, 25 in domestic customer support, 10 in
corporate marketing, 40 in finance and administration, and 106 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 is a registered trademark 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 70,965 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 6 locations in the
United States and 8 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:
Jaime W. Ellertson, 40, joined the Company as President, Chief Executive
Officer and Director in January 1997. Prior to that date, he was Chairman of
Purview Technologies, Inc., an Internet monitoring, management, and analysis
software company, from July 1996 to January 1997. Mr. Ellertson was President
and Chief Executive Officer of Tartan, Inc., a manufacturer of compilers,
from December 1995 to June 1996. Previously, he was President and Chief
Executive Officer of Openware Technologies, a software and services company,
from July 1990 to December 1995.
Robert A. Fisher, 48, joined the Company as Vice President, Customer
Support in May 1997. Mr. Fisher was Vice President of Worldwide Customer
Support at Interleaf from 1989 to 1994 and rejoined Interleaf in May of this
year. Prior to rejoining Interleaf, Mr. Fisher was Vice President, Worldwide
Customer Services at Open Environment Corporation/Borland, a manufacturer of
middleware software, from August 1994 to May 1997.
Robert R. Langer, 51, became Chief Financial Officer of the Company in
January 1997. Prior to that date, Mr. Langer was interim President of Arity
Corporation, a database and related development tool technology company, from
February 1995 to October 1996. Mr. Langer served as Vice President and Chief
Financial Officer at Phoenix Technologies, Ltd., a systems software company,
from May 1990 to January 1995.
Christopher McKee, 38, joined the Company in May 1997, as Vice President
of Europe, Middle East, and Africa. Mr. McKee joined Interleaf from Inference
Corporation, a provider of knowledge management software and services, where
he was Senior Vice President, International Operations, from May 1996 to May
1997. Prior to being promoted to international vice president, Mr. McKee was
Vice President for Northern Europe from February 1994 to April 1995 and held
senior sales management positions with Inference Corporation from 1991 to
1994.
Gary Phillips, 37, joined the Company as Vice President, Sales in June
1997. Prior to joining Interleaf, Mr. Phillips was Vice President, Sales at
BBN Planet where he was responsible for Internet solutions sales, from June
1996 to June 1997. Prior to that, he was Vice President of Sales and
Marketing for BBN Enterprise Networks, which provided network consulting and
systems integration services, from June 1994 to June 1996. Prior to joining
BBN, Mr. Phillips held the position of Vice President of Sales and Marketing
for Application Systems Group, a start-up software/systems integration
company, from June 1993 to June 1994. Mr. Phillips held several sales
management positions, most recently as Director of Sales for U.S.
Operations, at Wang Laboratories, a computer manufacturer, software
applications developer, and services provider, from 1984 to June 1993.
Michael L. Torto, 35, joined the Company as Vice President, Marketing in
April 1997. Prior to joining Interleaf, Mr. Torto was Chief Operating Officer
at Ontos, Inc., an object database and object middleware technology company,
from April 1996 to April 1997. Mr. Torto served as Director of Marketing for
Intersolv's data access products division, from December 1995 to April 1996.
Previously, he was Vice President of TechGnosis, Inc., a European-based
software company in the database middleware market, from November 1994 to
December 1995. Previously, Mr. Torto was Director of Product Marketing at
Trinzic Corp., a manufacturer of client server software, from October 1991
until December 1994.
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 June 18, 1997, there were 839 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.
<TABLE>
<CAPTION>
Quarter ended June 30 September 30 December 31 March 31 Year
- ------------- ------- ------------ ----------- -------- -------
<S> <C> <C> <C> <C> <C>
FISCAL 1997
Common stock prices
High........................ 8 7/8 5 3/8 3 3/8 2 7/16 8 7/8
Low......................... 6 1/2 2 3/8 1 7/8 1 3/8 1 3/8
Close....................... 6 1/2 2 3/8 1 7/8 1 9/16 1 9/16
- --------------------------------------------------------------------------------------------------
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
- ----------------------------------------------------------------------------------------------------
</TABLE>
The Company has never paid cash dividends. The Company is restricted from
paying cash dividends during the term of the credit agreement.
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ITEM 6. SELECTED FIVE-YEAR FINANCIAL DATA
<TABLE>
<CAPTION>
(in thousands except for per share amounts)
Year ended March 31 1997 a 1996 b 1995 c 1994 d 1993
- ------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Total revenues $ 64,823 $88,557 $ 87,856 $111,229 $117,341
- ------------------------------------------------------------------------------------------------------------------------
Net income (loss) (29,550) 311 (48,362) (8,448) 9,303
- ------------------------------------------------------------------------------------------------------------------------
Net income (loss) per share $ (1.70) $ 0.02 $ (3.47) $ (0.63) $ 0.55
- ------------------------------------------------------------------------------------------------------------------------
Shares used in computing net income
(loss) per share 17,344 18,495 13,938 13,384 16,836
- ------------------------------------------------------------------------------------------------------------------------
Total assets $ 37,900 $48,916 $ 50,793 $ 96,884 $ 99,519
- ------------------------------------------------------------------------------------------------------------------------
Long-term obligations 2,955 733 625 1,565 1,857
- ------------------------------------------------------------------------------------------------------------------------
Total shareholders' equity (deficit) $ (772) $15,419 $ 10,615 $ 56,632 $ 63,126
- ------------------------------------------------------------------------------------------------------------------------
Common stock outstanding 17,459 16,698 14,203 13,631 13,064
- ------------------------------------------------------------------------------------------------------------------------
</TABLE>
a. Fiscal 1997 results include $10.9 million of restructuring charge
for restructuring of the Company's worldwide operations, a $2.3
million write-off of intangible assets, and a $2.5 million write-off
of capitalized software, inventory and prepaid royalties.
b. Fiscal 1996 results include a $1.2 million benefit from the
settlement of a long-term dispute with a joint venture partner.
c. Fiscal 1995 results include a $15.2 million write-off of
goodwill related to the acquisition of distributorships in Canada,
France and Germany, a $7.1 million charge for restructuring the
Company's worldwide operations, a $2.0 million write-off of
capitalized software development costs, and a $1.9 million charge
for revaluation of the Company's deferred tax asset.
d. 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 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.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Results of Operations
Overview: The Company recorded a net loss of $29.6 million on revenues of
$64.8 million in fiscal 1997. This compares with net income of $0.3
million on revenues of $88.6 million and a net loss of $48.4 million on
revenues of $87.9 million in fiscal 1996 and 1995, respectively. Much of
the decline in revenue for fiscal 1997 is due to a decrease in product
revenue (46% reduction) caused by the ongoing maturation of the market for
complex authoring products which is a main product line at the Company. An
effort to focus on developing and supporting integrated document
publishing ("IDP") applications for the extended enterprise has been
initiated. As a result of the total revenue decline of 27% in fiscal year
1997 from fiscal year 1996, principally in software products, the Company
underwent a comprehensive restructuring of facilities, fixed assets, and
personnel during the year. The net loss of $29.6 million for fiscal 1997
was due to the impact from the decline in product revenue, charges of $2.3
million for the write-off of intangible assets from an early fiscal year
1997 acquisition, a $2.5 million write-off of capitalized software,
inventory and prepaid royalties, and charges of $10.9 million for
restructuring the Company's worldwide operations. In addition to the 1997
restructuring, the Company began installing a new senior management team,
refocusing its business strategy, streamlining product offerings, and
significantly reducing the cost structure of the Company.
REVENUES
Product: Total product revenue decreased by $16.0 million or 46% in fiscal
1997 compared to fiscal 1996. Revenue declined in all geographic regions.
Fiscal 1996 was level with fiscal 1995. The continuing trend in the
reduction in product license revenue is due to several factors. The first
negative trend is the decline in licensing of the Company's UNIX-based
high-end authoring products which is primarily attributable to the
increasing popularity of Windows-based publishing software, for which the
Company did not have any offerings until fiscal 1996. A second factor is
the saturation of UNIX-based high-end authoring software in the
aerospace/defense industry, where the Company had historically derived most
of its authoring product license revenue.
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
The Company is refocusing its business strategy on providing integrated
document publishing (IDP) applications targeted toward specific vertical
markets. While the Company has built well-accepted integrated document
publishing based solutions for individual customers, it has not yet
demonstrated the ability to develop, market and sell IDP applications.
There is no assurance that the Company will be successful in implementing
its strategy and, therefore, the Company is unable to predict if or when
product revenues will stabilize or grow. Additionally, since the Company's
services and maintenance revenue is largely dependent on new product
licenses, these revenue components have also experienced downward pressure.
This trend will continue unless product revenue stabilizes.
Maintenance: Maintenance revenue declined by $3.3 million or 10% in fiscal
1997 from fiscal 1996, although it was relatively stable in fiscal 1996 and
1995. This relative 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 IDP application sales. This will be necessary to
offset the general downward pricing pressure on maintenance in the software
industry and customers perceived value of maintenance services.
Services: Services revenue, consisting of consulting and customer training
revenue, declined by $4.5 million or 21% in fiscal 1997 compared to a
decrease of $1.1 million or 5% in fiscal 1996 from 1995. The Company
leverages software product licenses with services to provide IDP solutions
to its customers. During fiscal 1995, the Company worked on several large
service projects which were completed during early fiscal 1996. The decline
in fiscal 1997 and 1996 was primarily attributable to the decrease in
product license revenues, a decrease in services personnel, and lower
training revenue associated with the decline in authoring software product
licensing. In fiscal 1997, consulting projects tended to be smaller with
resultant lower margins due to lower utilization rates and there was no
replacement of the large consulting projects completed in 1996 and 1995.
North America: Revenues were approximately $41.8 million (64%), $57.1
million (64%), and $60.0 million (68%) of total revenues during fiscal
1997, 1996, and 1995, respectively. The decline in fiscal 1997 was
primarily due to a decrease in product license and consulting revenues. The
decline in fiscal 1996 was primarily due to a decrease in product license
and training revenues.
International: Revenues from the Company's international operations were
approximately $23.0 million (36%), $31.5 million (36%), and $27.9 million
(32%) of total revenues during fiscal 1997, 1996, and 1995, respectively.
The decrease in fiscal 1997 was primarily due to declining product revenue
compared to fiscal 1996. The increase in fiscal year 1996 from fiscal year
1995 was due to the growth in software site licenses or electronic
distribution software licensing agreements in Europe and increased demand
from resellers in Japan, partially offset by a decline in European service
revenue.
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 upfront fixed fee
license agreements. Reorders in Japan are dependent on the success of the
resellers and integrators in licensing the Company's products to end-user
customers.
Fiscal 1998: During fiscal 1998, the Company plans to develop several
Integrated Document Publishing ("IDP") application offerings which solve
specific business problems in several industries. Growth in revenues during
fiscal 1998 will be largely dependent on improving sales force
productivity, the effectiveness of the Company's increased investment in
marketing and lead generation programs, customer acceptance of the new and
enhanced software products planned to be released in fiscal 1998 and the
next year, and the Company's success in leveraging software products with
services to provide IDP solutions to its customers. If the Company is
unable to grow or stabilize its revenues in fiscal 1998, further expense
reductions will be necessary in order to sustain operations.
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 increased $1.1 million or 16% in fiscal 1997 from 1996, compared
to a decrease of $6.4 million (50%) in fiscal 1996 from 1995. Included in
the cost of product revenues for fiscal 1997 and 1995, which was absent in
fiscal 1996, were write-downs of $2.0 million and $3.2 million,
respectively, of capitalized software development costs. This occurred as a
result of a strategic product review by management and a decision to
discontinue products and write-down old software products with limited
future revenue potential. Additionally, in fiscal year 1997, there
were write-offs of inventory and prepaid royalties. The cost of
maintenance revenue decreased by $0.6 million or 12% in fiscal 1997 from
1996, compared to a decrease of $1.0 million or 16% in fiscal 1996 from
1995. Most of the decreases were related to a reduction in customer support
personnel associated with the Company's 1997 and 1995 restructurings. The
decrease in cost of services revenue of $2.2 million or 12% in fiscal 1997
from 1996, compared to a decrease of $1.3 million or 7% in fiscal 1996
from 1995, is primarily related to the downward trend in product revenue
which results in less integration services.
OPERATING EXPENSES
Selling, General and Administrative (SG&A): SG&A expenses decreased $5.6
million or 13% in fiscal 1997 from 1996, compared to a decrease of $12.6
million or 23% in fiscal 1996 from fiscal 1995. The decline in SG&A
expenses over the last two fiscal years was primarily due to significant
personnel and facilities expense reductions related to the Company's fiscal
1997 and 1995 restructurings. 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
anticipated throughout fiscal 1998 as the full benefit of the restructuring
programs are realized. In addition, 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 $0.9 million
(6%) in fiscal 1997 from 1996, compared to a decrease of approximately $1.0
million (6%) in fiscal 1996 from fiscal 1995. The decrease in fiscal 1997
and 1996 was primarily due to reduced personnel expenses associated with the
Company's fiscal 1997 and 1995 restructurings and, for fiscal 1996 versus
1995, increased capitalization of software development costs. During fiscal
1997, 1996, and 1995, R&D expenses were approximately 23%, 18%, and 19%,
respectively, of total revenues. R&D spending, which excludes the offset
for capitalized software development costs, represented approximately 24%,
23%, and 24% of total revenues, respectively. During fiscal 1997, the
Company completed product enhancements across all of its major product
lines. Functionality and additional platform support were added to
Interleaf 6, WorldView, Intellecte/BusinessWeb, Liaison, and RDM in
multiple localized releases for its North American, European and
Asia/Pacific markets.
The Company's product development plans for fiscal 1998 call for a
consolidation of many individual product lines into focused integrated
enterprise publishing and distribution applications. The product strategy
directly aligns with the corporate strategy to refocus its efforts on
database enabled electronic publishing. As part of this effort, some
existing products that no longer align with its focus will be retired and a
number of new products will be developed to expand the Company's ability to
capture sales in new departments of its Fortune 1000 customer base, or in
mid-sized firms with high growth rates.
11
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
Restructuring and Other Charges: In fiscal year 1997, the Company incurred
restructuring charges of approximately $10.9 million, of which $8.5 million
related to the July and October 1996 restructurings. Additionally, there
was a $2.4 million charge recorded in the fourth quarter to reflect changes
in cost and timing assumptions for previously restructured facilities.
These restructuring initiatives were taken in an effort to realign the
Company's cost structure with the Company's revenues, which declined
throughout fiscal 1997. In addition, the Company recorded a charge of $2.3
million to write-off intangible assets associated with the acquisition of
The Learning Alliance (see further discussion in Liquidity and Capital
Resources). The Company also recorded a $2.5 million expense (of which
$2.2 million was recorded in the fourth quarter) for the write-off of
capitalized software development costs, inventory, and prepaid royalties
for discontinued products and products with limited revenue potential. In
fiscal year 1995, the Company incurred restructuring charges of
approximately $7.1 million due to a worldwide reorganization and a
reduction in the size of its operations. During the fourth quarter of
fiscal 1995, the 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 intangible assets, principally goodwill and capitalized
software development costs, which resulted in a write-down of
approximately $17.2 million.
INCOME TAXES
For fiscal year 1997, no tax provision was required due to the losses
sustained during the year. In fiscal 1996, the effective tax rate was
reduced by net operating loss 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 $60
million in several tax jurisdictions to offset future taxable income. In
addition, the Company has tax credit carryforwards of approximately $7
million to offset federal and state income tax liabilities. Therefore, the
Company expects to pay minimal income taxes for the foreseeable future.
12
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
Liquidity and Capital Resources
The Company had approximately $17.3 million of cash and cash equivalents at
March 31, 1997, an increase of approximately $4.6 million from March 31,
1996. The increase was primarily attributable to the net proceeds from the
issuance of Senior Series C Preferred Stock of $9.4 million and common
stock issuances related to its stock option plans and employee stock
purchase plan of approximately $1.2 million. This increase was partially
offset by payments of $4.1 million related to the Company's
restructurings and investments of $1.1 million in capitalized software
development costs. The Company also made investments of $1.8 million in
capital equipment, principally for improvements to the Company's
information system infrastructure in fiscal 1997. 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.
As part of the Company's former strategy to develop sales force automation
and integration applications, the Company acquired The Learning Alliance,
Inc. ("TLA") in May 1996 for 341,500 shares of common stock valued at $2.7
million. In December 1996, in order to allow the Company's management to
focus on development of its core businesses, the Company decided to divest
itself of TLA. TLA was sold in January 1997 for future royalty
considerations and foregone severance obligations. As a result of this
decision, in December 1996, the Company recorded a $2.3 million write-off
of certain intangible assets which had been recorded in connection with the
acquisition.
Restructuring accruals associated with both the fiscal 1997 and 1995
restructurings were approximately $7.3 million at March 31, 1997 and $1.3
million at March 31, 1996. Cash payments related to these restructurings,
the majority of which are related to operating lease payments, net of
subleases, are anticipated to continue until December 2000. All significant
vacant space under lease has been subleased, or is the subject of a letter
of understanding. Other future obligations at March 31, 1997, consist
primarily of facility and equipment leases relating to the regular
operations of the Company. In 1998, the Company expects to spend
approximately $700,000 in capital improvements and $3.4 million in cash
payments related to the restructuring accrual.
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, 1997 and
1996, there were no loans outstanding under this line of credit. However, a
letter of credit for $0.8 million is issued and outstanding and,
accordingly, the amount available for borrowings was approximately $1.2
million (see Note 5 to the Consolidated Financial Statements regarding
borrowing limits and restrictive covenants associated with the credit
agreement). This agreement expires in August 1997 and negotiations are
underway to establish a new credit facility. Management believes that they
will be able to continue or replace the existing agreement by August 1997.
In addition to the sale of Series C Convertible Preferred Stock (see Note
10 to the Consolidated Financial Statements), the Company also, in November
1995, 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). The objective of the fiscal 1997 Series
C financing was to enable the Company to generate sufficient cash flow to
return to a sustainable profitable condition.
During 1997, the Company experienced a substantial decline in revenues and
a substantial loss from operations, resulting in a shareholders' deficit at
March 31, 1997. Due to the downward trend in the Company's revenues, the
Company is unable to predict future revenues and when or if, it will
achieve a sustainable profitable level of operations. In response to these
matters, the Company developed detailed plans relating to its fiscal 1998
operations which, if realized, will restore the Company to profitable
operations. Although no assurances can be given that such plans will be
achieved, management is committed to taking all appropriate and necessary
actions to effect timely cost reductions in the event that anticipated
revenue levels are not achieved. In the event such actions are not
successful in achieving breakeven or profitable operations, additional
financing will be needed. Under such circumstances, no assurance can be
given that such financing could be obtained or that it could be obtained
at commercially reasonable terms or without incurring substantial dilution
to existing shareholders. The financial statements do not include any
adjustments to reflect the possible effects of these uncertainties.
The Company believes its current cash balances and cash generated from
operations will be sufficient to meet the Company's liquidity needs for
fiscal 1998 and the foreseeable future. The Company can only fund its long-
term growth through increasing revenues, combined with tightly managed
cost controls.
13
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
Risk Factors
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 publishing software products and
services that meet the changing needs of organizations with complex
document publishing requirements. There are numerous risks associated with
this process, including rapid technological change in the information
technology industry and the requirement to bring to market IDP applications
that solve complicated business needs in a timely manner. In addition, the
existing document publishing, electronic distribution, and document
management markets are highly competitive. Many of these competitors are
larger and better funded than the Company. The Company competes for sales
of its software products on both an individual product basis and integrated
with services in large IDP solution sales.
Sales cycles associated with IDP solution sales are long because
organizations frequently require the Company to solve complex business
problems that typically involve reengineering of their business processes.
In addition, a high percentage of the Company's product license revenues
are generally realized in the last month of a fiscal quarter and can be
difficult to predict until the end of a fiscal quarter. Accordingly, given
the Company's relatively fixed cost structure, a shortfall or increase in
product license revenue can have a significant impact on the Company's
operating results and liquidity.
The Company markets its software products and services worldwide. Global
and/or regional economic factors, currency exchange rate fluctuations, and
potential changes in laws and regulations affecting the Company's business
could impact the Company's financial condition or future operating results.
The market price of the Company's common stock may be volatile at times in
response to fluctuations in the Company's quarterly operating results,
changes in analysts' earnings estimates, market conditions in the computer
software industry, as well as general conditions and other factors external
to the Company.
14
<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...................................................
Report to Shareholders
Consolidated Statements of Operations for the Years
Ended March 31, 1997, 1996, and 1995...................................
Report to Shareholders
Consolidated Balance Sheets at March 31, 1997 and 1996.................
Report to Shareholders
Consolidated Statements of Changes in Shareholders' Equity (Deficit)
for the Years Ended March 31, 1997, 1996, and 1995.....................
Report to Shareholders
Consolidated Statements of Cash Flows
for the Years Ended March 31, 1997, 1996, and 1995.....................
Report to Shareholders
Notes to Consolidated Financial Statements.............................
Report to Shareholders
Report of Independent Auditors.........................................
Report to Shareholders
Supplemental Financial Information.....................................
Report to Shareholders
Schedule II - Valuation and Qualifying Accounts
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.
15
<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/ Jaime W. Ellertson /s/ Robert R. Langer
----------------------- --------------------
Jaime W. Ellertson Robert R. Langer
President Vice President, Finance and Administration
and Chief Executive Officer and Chief Financial Officer
16
<PAGE>
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
(in thousands except for per share amounts)
Year ended March 31 1997 1996 1995
- --------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
REVENUES
Products $ 18,821 $34,786 $34,602
Maintenance 28,972 32,281 30,652
Service 17,030 21,490 22,602
- --------------------------------------------------------------------------------------------------
Total revenues 64,823 88,557 87,856
- --------------------------------------------------------------------------------------------------
COSTS OF REVENUES
Products 7,502 6,443 12,866
Maintenance 4,561 5,179 6,178
Services 16,041 18,270 19,605
- --------------------------------------------------------------------------------------------------
Total costs of revenues 28,104 29,892 38,649
- --------------------------------------------------------------------------------------------------
Gross margin 36,719 58,665 49,207
- --------------------------------------------------------------------------------------------------
OPERATING EXPENSES
Selling, general and administrative 37,114 42,674 55,283
Research and development 14,994 15,875 16,855
Write-down of intangible assets 2,288 -- 15,185
Restructuring charge 10,942 -- 7,109
- --------------------------------------------------------------------------------------------------
Total operating expenses 65,338 58,549 94,432
- --------------------------------------------------------------------------------------------------
Income (loss) from operations (28,619) 116 (45,225)
Other income (expense) (931) 225 (1,019)
- --------------------------------------------------------------------------------------------------
Income (loss) before income taxes (29,550) 341 (46,244)
Provision for income taxes -- 30 2,118
- --------------------------------------------------------------------------------------------------
Net income (loss) $(29,550) $ 311 $(48,362)
- --------------------------------------------------------------------------------------------------
INCOME (LOSS) PER SHARE $ (1.70) $ 0.02 $ (3.47)
- --------------------------------------------------------------------------------------------------
Shares used in computing income (loss
per share) 17,344 18,495 13,938
- ---------------------------------------------------------------------------------------------------
</TABLE>
See Notes to Consolidated Financial Statements.
17
<PAGE>
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
(in thousands except for share and per share amounts)
MARCH 31 1997 1996
- --------------------------------------------------------------------------------------------
<S> <C> <C>
Assets
CURRENT ASSETS
Cash and cash equivalents $ 17,349 $ 12,725
Accounts receivable, net of reserve for doubtful
accounts of $1,371 in 1997 and $1,695 in 1996 11,359 19,771
Prepaid expenses and other current assets 1,504 2,112
- --------------------------------------------------------------------------------------------
TOTAL CURRENT ASSETS 30,212 34,608
Property and equipment, net 4,963 7,800
Intangible assets 2,281 6,164
Other assets 444 344
- --------------------------------------------------------------------------------------------
TOTAL ASSETS $ 37,900 $ 48,916
- --------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------
Liabilities and Shareholders' Equity (Deficit)
CURRENT LIABILITIES
Accounts payable $ 1,774 $ 2,908
Accrued expenses 14,455 13,255
Unearned revenue 15,102 15,986
Accrued restructuring 4,386 615
- --------------------------------------------------------------------------------------------
TOTAL CURRENT LIABILITIES 35,717 32,764
Long-term restructuring 2,955 733
- --------------------------------------------------------------------------------------------
TOTAL LIABILITIES 38,672 33,497
- --------------------------------------------------------------------------------------------
SHAREHOLDERS' EQUITY (DEFICIT)
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 861,911 in 1997 and 923,304 in
1996 (liquidation value $7 per share) 86 92
Senior Series C convertible, issued and outstanding
1,006,220 in 1997 (liquidation value $9.95 per share) 101 --
Common stock, par value $.01 per share, authorized
30,000,000 shares, issued and outstanding
17,459,219 in 1997 and 16,697,988 in 1996 175 167
Additional paid-in capital 85,513 72,348
Retained earnings (deficit) (86,508) (56,958)
Cumulative translation adjustment (139) (230)
- ---------------------------------------------------------------------------------------------
TOTAL SHAREHOLDERS' EQUITY (DEFICIT) (772) 15,419
- ---------------------------------------------------------------------------------------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY
(DEFICIT) $ 37,900 $ 48,916
- --------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------
</TABLE>
See Notes to Consolidated Financial Statements.
18
<PAGE>
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY (DEFICIT)
(in thousands)
<TABLE>
<CAPTION>
Total
Preferred Preferred Additional Retained Cumulative Shareholders'
Stock Senior Stock Senior Common Paid-in Earnings Translation Equity
Series B Series C Stock Capital (Deficit) Adjustment (Deficit)
- ------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
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
Net loss -- -- -- -- (29,550) -- (29,550)
Conversion of Senior
Series B Convertible
Preferred stock into
common stock (6) -- 1 5 -- -- --
Issuance and
obligations of
Preferred Stock
Series C -- 101 -- 9,289 -- -- 9,390
Common stock issued in
connection with stock
options exercised by
employees -- -- 2 447 -- -- 449
Common stock issued in
connection with
employee stock
purchase plan -- -- 2 737 -- -- 739
Common stock issued in
connection with
acquisition -- -- 3 2,687 -- -- 2,690
Equity adjustment for
foreigncurrency
translation -- -- -- -- -- 91 91
- ------------------------------------------------------------------------------------------------------------------------------
Balances at March 31,
1997 $ 86 $ 101 $ 175 $ 85,513 $ (86,508) $ (139) $ (772)
- ------------------------------------------------------------------------------------------------------------------------------
</TABLE>
See Notes to Consolidated Financial Statements.
19
<PAGE>
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
(in thousands)
Year ended March 31 1997 1996 1995
- -------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income (loss) $(29,550) $ 311 $(48,362)
Adjustments to reconcile net income
(loss) to net cash provided by
(used in) operating activities:
Write-off of intangible assets 2,288 -- 15,185
Restructuring charge 10,942 -- 7,108
Gain from settlement of legal dispute -- (1,230) --
Depreciation and amortization expense 9,706 7,754 14,176
Loss from disposal of property and
equipment 212 11 261
Deferred income taxes -- -- 1,860
Income tax benefit from stock options
exercised -- 30 --
Changes in assets and liabilities:
Decrease in accounts receivable, net 8,126 2,950 13,550
(Increase) decrease in other assets 309 97 (610)
Decrease in accounts payable and
accrued expenses (172) (1,068) (3,188)
Increase (decrease) in unearned revenue (730) 507 439
Decrease in other liabilities (4,379) (2,532) (5,333)
Other, net 410 76 (385)
- -----------------------------------------------------------------------------------------------------
Net cash provided by (used in) operating
activities (2,838) 6,906 (5,298)
- -------------------------------------------------------------------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES
Capital expenditures (1,816) (1,597) (4,827)
Capitalized software development costs (1,113) (4,138) (3,831)
- -------------------------------------------------------------------------------------------------------
Net cash used in investing activities (2,929) (5,735) (8,658)
- -------------------------------------------------------------------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES
Net proceeds from issuance of preferred
stock 9,390 -- --
Net proceeds from issuance of common
stock 1,250 2,780 1,831
Property and equipment financing -- -- 682
Repayment of long-term debt and capital
leases (18) (1,688) (1,819)
- -------------------------------------------------------------------------------------------------------
Net cash provided by financing activities 10,622 1,092 694
- -------------------------------------------------------------------------------------------------------
Effect of exchange-rate changes on cash (231) 21 339
- -------------------------------------------------------------------------------------------------------
Net increase (decrease) in cash and cash
equivalents 4,624 2,284 (12,923)
Cash and cash equivalents at beginning of
year 12,725 10,441 23,364
- -------------------------------------------------------------------------------------------------------
Cash and cash equivalents at end of year $ 17,349 $12,725 $ 10,441
- -------------------------------------------------------------------------------------------------------
</TABLE>
See Notes to Consolidated Financial Statements.
20
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1 Company
Interleaf, Inc. and its subsidiaries (the Company) develop and market
integrated document publishing and management software and services
worldwide for networked and Web-based business solutions. The Company's
software is used for the electronic assembly, management, retrieval,
publishing and distribution of business-critical documents.
Note 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. The Company also maintains a reserve for a sales allowance to
provide for possible product returns or allowances resulting from a lack of
sell through of products by resellers. In the fourth quarter of fiscal 1997,
the Company recorded a charge of $1.5 million to provide for anticipated
allowances expected to be granted. 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.
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 product feasibility is established, after which
remaining software development costs are capitalized. These costs are
amortized as part of the cost of revenue beginning when the product is
available for general release to customers. Such amounts are amortized 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 1997 and 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. The exchange loss for fiscal year 1997 was
$531,000 and not material for fiscal years 1996 and 1995.
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. In February 1997, the Financial Accounting Standards Board issued
Statement No. 128, Earnings per Share, which is required to be adopted on
December 31, 1997. At that time, the Company will be required to change the
method currently used to compute earnings per share and to restate all
prior periods. Under the new requirements for calculating primary earnings
per share, the dilutive effect of stock options will be excluded. The
Company has not yet determined what the impact of Statement 128 will be on
the calculation of fully diluted earnings per share.
Stock-Based Compensation: Statement of Financial Accounting Standards No.
123 (SFAS 123), "Accounting for Stock-Based Compensation," encourages but
does not require companies to record compensation cost for stock-based
employee compensation plans at fair value. The Company has chosen to
continue to account for stock-based employee compensation using the
intrinsic value method prescribed in Accounting Principles Board (APB)
Opinion No. 25, "Accounting for Stock Issued to Employees," and related
interpretations. Accordingly, compensation cost for stock options granted to
employees is measured as the excess, if any, of the quoted market price of
the Company's stock at the date of the grant over the amount an employee
must pay to acquire the stock.
Long-Lived Assets: Effective April 1, 1996, the Company adopted Financial
Accounting Standards Board (FASB) Statement of Financial Accounting
Standards No. 121, "Accounting for the Impairment of Long-Lived Assets and
for Long-Lived Assets to Be Disposed Of," which requires impairment losses
to be recorded on long-lived assets used in operations, such as property,
equipment and improvements, and intangible assets, when indicators of
impairment are present and the undiscounted cash flows estimated to be
generated by those assets are less than the carrying amount of the assets.
The adoption of this statement did not have an effect on the Company's
financial statements.
21
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (con't)
Note 2 Summary of Significant Accounting Policies (con't)
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.
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. Significant estimates include adequacy
of restructuring accruals, collectibility of accounts receivable, and
recoverability of depreciable assets and intangible assets. Actual results
could differ from these estimates.
Basis of Presentation: Certain 1996 and 1995 amounts have been
reclassified to conform to the 1997 basis presentation. The accompanying
financial statements have been presented assuming that the Company will
continue as a going concern. During 1997, the Company experienced a
substantial decline in revenues and a substantial loss from operations,
resulting in a shareholders' deficit at March 31, 1997. In response to
these matters, the Company developed detailed plans relating to its fiscal
1998 operations which, if realized, will restore the Company to profitable
operations. Although no assurances can be given that such plans will be
achieved, management is committed to taking all appropriate and necessary
actions to effect timely cost reductions in the event that anticipated
revenue levels are not achieved. In the event such actions are not
successful in achieving breakeven or profitable operations, additional
financing will be needed. Under such circumstances, no assurance can be
given that such financing could be obtained or that it could be obtained
at commercially reasonable terms or without incurring substantial dilution
to existing shareholders. The financial statements do not include any
adjustments to reflect the possible effects of these uncertainties.
Management believes that, based on the 1998 operating plan and existing
cash balances, the Company will have sufficient cash to support
operations.
Note 3 Property and Equipment
Property and equipment at March 31 consisted of the following:
<TABLE>
<CAPTION>
(in thousands) 1997 1996
- ----------------------------------------------------------------------------------------------
<S> <C> <C>
Office, demonstration and other equipment $ 27,739 $ 29,142
Development equipment 12,654 13,118
Furniture 3,799 4,296
Leasehold improvements 1,637 1,818
- ----------------------------------------------------------------------------------------------
45,829 48,374
Less allowances for depreciation and amortization 40,866 40,574
- ----------------------------------------------------------------------------------------------
$ 4,963 $ 7,800
- ----------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------
</TABLE>
Note 4 Intangible Assets
The Company's intangible assets have historically been purchased goodwill
and capitalized software development costs. The Company's policy has been to
amortize purchased goodwill to selling, general and administrative expense
and capitalized software development costs to cost of revenue.
In fiscal year 1997, the Company wrote-off goodwill of approximately $2.0
million related to the acquisition of The Learning Alliance (see Note 13).
As a result of a strategic product review, the Company wrote-off
capitalized software development costs of $2.0 million and $3.2 million in
fiscal years 1997 and 1995, respectively. These costs were associated with
discontinued products or products with limited future revenue potential. In
fiscal year 1995, the Company recorded a charge to write-off goodwill of
approximately $15.2 million which related to the Company's acquisition in
prior years of its exclusive distributors in Canada, France and Germany.
This goodwill was written-off as the Company had concluded the goodwill was
permanently impaired.
The unamortized portion of capitalized software development costs was $2.0
million and $6.2 million at March 31, 1997 and 1996, respectively.
Amortization and write-downs to net realizable value of capitalized
software development costs were approximately $5.0 million, $3.2 million,
and $5.3 million during fiscal 1997, 1996 and 1995, respectively.
22
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (con't)
Note 5 Credit Agreement
The Company has a revolving line of credit up to $10 million from a major
commercial lender. 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 the prime rate plus 2% and are
secured by substantially all tangible and intangible domestic assets of
the Company. Outstanding letters of credit bear interest at 2%. 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. At March 31, 1997, 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 March 31, 1997, approximately $0.8 million of standby letters of
credit were outstanding to secure the leasing of computer equipment, and
the amount available for additional borrowings is approximately $1.2
million. The current credit agreement expires in August 1997 and
negotiations are underway to establish a new credit facility.
Note 6 Accrued Expenses
Accrued expenses at March 31 consisted of the following:
<TABLE>
<CAPTION>
(in thousands) 1997 1996
- ----------------------------------------------------------------------------------------------
<S> <C> <C>
Accrued compensation and related items $ 4,987 $ 4,790
Taxes, other than income 2,414 2,460
Royalties 1,030 706
Rent 1,228 1,561
Other 4,796 3,738
- ----------------------------------------------------------------------------------------------
$ 14,455 $ 13,255
- ----------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------
</TABLE>
Note 7 Lease Commitments
The Company leases its headquarters and sales offices, and certain equipment
under various operating leases, which expire through the year 2001. Rent
expense amounted to approximately $5.1 million, $6.6 million, and $9.4
million during fiscal 1997, 1996, and 1995, respectively.
Future minimum lease commitments on noncancelable operating leases and
sublease income are as follows:
<TABLE>
<CAPTION>
(in thousands)
Year ended March 31 1998 1999 2000 2001 2002 THEREAFTER
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Future minimum lease commitments on noncancelable leases $ 7,839 $ 6,126 $ 5,468 $ 3,841 $ -- $ --
- ---------------------------------------------------------------------------------------------------------------------------------
Future minimum sublease income 2,285 2,058 1,974 1,403 -- --
- ---------------------------------------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------------------------------
</TABLE>
These future minimum lease commitments include approximately $10.3 million,
net of sublease income, related to facilities the Company has elected to
abandon or downsize in connection with the restructuring and
acquisition-related initiatives.
23
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (con't)
Note 8 Restructurings
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.
In the second quarter of fiscal 1997, as a result of a significant decline
in product revenue, the Company announced a restructuring plan and recorded
a charge of $4.8 million to reduce employment by approximately 75 people, to
close or reduce space in seven sales offices, and to implement the second
and final stage of relocating corporate headquarters to smaller and less
expensive space. The employee terminations affected all groups throughout
the organization. Approximately $1.3 million of the restructuring charge was
for employee termination benefits and $3.5 million for facility closures and
related costs.
In the third quarter of fiscal 1997, the Company announced another
restructuring plan and recorded a charge of $3.7 million to further reduce
employment by approximately 100 people at a cost of $1.8 million and to
close or reduce space in six sales offices at a cost of $1.9 million.
The employee terminations affected all groups throughout the organization.
In the fourth quarter of fiscal 1997, the Company recorded an additional
charge of $2.4 million to reflect changes in cost and timing assumptions
relating to previously restructured facilities.
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.
The Company paid approximately $2.7 million, $0.7 million, and $4.4 million
for employee termination benefits during fiscal 1997, 1996, and 1995,
respectively. Payments for facility closures and related costs, net of
sublease receipts, were approximately $1.4 million, $1.3 million, and $1.2
million during fiscal 1997, 1996, and 1995, respectively. Expenditures for
facility closures, primarily lease payments, are anticipated to continue
through the fiscal year 2001.
Note 9 Income Taxes
The provision for income taxes is composed of the following:
<TABLE>
<CAPTION>
(in thousands) 1997 1996 1995
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Current:
Federal $ -- $ 30 $ --
State -- -- --
Foreign -- -- 258
- -------------------------------------------------------------------------------------------------------------------
Total current -- 30 258
- -------------------------------------------------------------------------------------------------------------------
Deferred:
Federal -- -- 1,860
State -- -- --
- -------------------------------------------------------------------------------------------------------------------
Total deferred -- -- 1,860
- -------------------------------------------------------------------------------------------------------------------
$ -- $ 30 $ 2,118
- -------------------------------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------------------------------
</TABLE>
The provision for income taxes is based on the following amounts of income
(loss) before income taxes:
<TABLE>
<CAPTION>
(in thousands) 1997 1996 1995
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Domestic $ (21,586) $ 3,793 $ (43,607)
Foreign (7,964) (3,452) (2,637)
- -------------------------------------------------------------------------------------------------------------------
$ (29,550) $ 341 $ (46,244)
- -------------------------------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------------------------------
</TABLE>
24
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (con't)
Note 9 Income Taxes (con't)
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) 1997 1996 1995
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Computed at federal statutory rate $ (10,047) $ 116 $ (15,723)
Loss for which no tax benefit was realized 9,151 -- 9,051
Nondeductible amortization -- 51 397
Nondeductible write-downs 778 -- 5,021
Other nondeductible expenses 118 66 101
Benefit of net operating loss carryforward -- (195) --
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 -- -- --
Other, net -- (8) 26
- --------------------------------------------------------------------------------------------------------------------
$ -- $ 30 $ 2,118
- --------------------------------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------------------------------
</TABLE>
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) 1997 1996 1995
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Deferred tax assets:
Net operating loss carryforwards $ 22,897 $ 14,919 $ 13,453
Tax credit carryforwards 7,150 7,120 6,950
Accrued rent 473 601 738
Reserve for doubtful accounts receivable, vacation and other accruals 864 401 475
Restructuring 2,555 392 888
- -------------------------------------------------------------------------------------------------------------------
Total deferred tax assets 33,939 23,433 22,504
Deferred tax asset valuation allowance (33,619) (21,294) (20,594)
- -------------------------------------------------------------------------------------------------------------------
320 2,139 1,910
- -------------------------------------------------------------------------------------------------------------------
Deferred tax liabilities:
Capitalized software development costs (320) (1,891) (1,464)
Depreciation -- (225) (422)
Other -- (23) (24)
- -------------------------------------------------------------------------------------------------------------------
Total deferred tax liabilities (320) (2,139) (1,910)
- -------------------------------------------------------------------------------------------------------------------
Net deferred tax asset $ -- $ -- $ --
- -------------------------------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------------------------------
</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 $12,325,000 and $700,000
during fiscal 1997 and 1996, respectively. 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, 1997, the Company and its subsidiaries had net operating loss
carryforwards of approximately $60 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 million available to reduce future federal and state
income tax liabilities. The tax credit carryforwards expire in 1999 and
thereafter. During fiscal 1996, the Company made income tax payments of
approximately $252,000. No tax payments were made in 1997 or 1995. (See
Note 14.)
25
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (con't)
Note 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 61,393, 805,269, and
57,142 shares of Series B Convertible Preferred Stock into shares of the
Company's common stock during fiscal 1997, 1996, and 1995, 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.
On October 15, 1996, the Company issued 1,004,904 shares of newly authorized
Series C Convertible Preferred Stock ("Series C") at a price of $9.9512 per
share receiving net proceeds of $9.4 million. In accordance with the
agreement, the Company is obligated to issue an additional 1,316 shares of
Series C Convertible Preferred Stock. Each Series C share is initially
convertible into 4 shares of common stock, which rate is adjustable upon
certain issuances of common stock by the Company. Dividends of $0.24878 per
share are payable on April 15, 1998 and October 15, 1998, and $0.49756 per
share on each April 15 and October 15 thereafter. Holders of outstanding
shares of Series C Preferred Stock are entitled to the number of votes equal
to one-half the number of shares of common stock into which the Series C
shares are convertible. Series C shareholders are entitled to receive upon
liquidation an amount equal to $9.9512 per share plus any declared or
accrued but unpaid dividends, which amount is payable prior to any payments
to holders of the Series B Preferred Stock and common stock. Series C
shareholders must convert their shares into common stock upon the
consolidation, merger or sale of substantially all assets of the Company or,
subject to certain conditions, if the Company's common stock trades for
twenty consecutive days above $3.7317. The Company may, at its option,
redeem the Series C shares on or after October 16, 1999. The initial
redemption premium is 25%, which decreases 5% annually until October 16,
2004. As part of the Series C issuance, the Company issued warrants to
purchase 74,929 shares of common stock at an exercise price of $2.67 per
share to its investment banking firm. These warrants are exercisable
until October 15, 2001.
In prior years, 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.
26
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (con't)
Note 10 Shareholders' Equity (con't)
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 September 12, 1996, the Board of
Directors authorized a repricing program which allowed employees to elect to
reprice all or some of their outstanding options, ranging in exercise price
from $2.75 to $10.75 per share, to the September 12, 1996 closing price of
$2.5625. Any options repriced may not be exercised until March 12, 1997.
Options for approximately 2.1 million shares were repriced. 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. In May 1996 and October
1996, the Board of Directors approved amendments 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 and 1,000,000,
respectively.
A summary of activity for these stock option plans is as follows:
<TABLE>
<CAPTION>
Number of Price Range of Weighted Average
Shares Shares Price Per Share
<S> <C> <C> <C>
(in thousands, except price range of shares)
- -------------------------------------------------------------------------------------------------------------------------------
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 6.25
Exercised (689) 2.75-- 5.75 3.10
Cancelled (250) 2.75-- 10.63 8.75
- -------------------------------------------------------------------------------------------------------------------------------
Outstanding at March 31, 1996 1,819 2.75-- 10.75 4.50
Granted 2,813 2.05-- 2.56 2.44
Exercised (154) 2.75-- 4.50 2.90
Cancelled (1,539) 2.50-- 10.63 5.95
- -------------------------------------------------------------------------------------------------------------------------------
Outstanding at March 31, 1997 2,939 $2.05--$10.75 $2.75
- -------------------------------------------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------------------------------------------
</TABLE>
At March 31, 1997, there were approximately 789,000 shares available for
grant. Options exercisable were approximately 1,238,000, 912,000, and
915,000 at March 31, 1997, 1996, and 1995, respectively.
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 1997, no options were exercised and in fiscal 1996,
10,000 options were exercised. At March 31, 1997, there were options
outstanding to purchase 70,000 shares and 45,000 shares were available for
grant. Options exercisable were 70,000, 105,000, and 85,000 at March 31,
1997, 1996, and 1995, respectively.
Pro Forma Disclosure of the Effects of Stock--Based Compensation Plans: The
Company accounts for stock-based compensation using the method prescribed
in Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued
to Employees." The Company has adopted the disclosure-only provisions of
Statement of Financial Accounting Standards No. 123 (SFAS No. 123),
"Accounting for Stock-Based Compensation." Accordingly, no compensation
cost has been recognized for the Company's stock option plans and employee
stock purchase plan.
27
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (con't)
Note 10 Shareholders' Equity (con't)
Had compensation cost been determined based on the fair value at the grant
dates for awards under those plans in fiscal 1997 and 1996 on a basis
consistent with the provisions of SFAS No. 123, the Company's net income and
earnings per share on a fully diluted basis would have been as indicated
below:
<TABLE>
<CAPTION>
1997 1996
(in thousands, except per share amounts)
- -------------------------------------------------------------------------------------------------------
<S> <C> <C>
Net income (loss)--as reported $(29,550) $311
Net income (loss)--pro forma (29,858) 228
Earnings (loss) per-share--as reported (1.70) 0.02
Earnings (loss) per share--proforma (1.72) 0.01
<CAPTION>
Because SFAS No. 123 is only applicable to options granted subsequent to
March 31, 1995, its pro forma effects will not be fully reflected until
1998. The fair value of options at date of grant was estimated using the
Black-Scholes option pricing model with the following weighted average
assumptions:
- -------------------------------------------------------------------------------------------------------
<S> <C> <C>
Expected life (years) 4 4
Risk-free interest rate. 6.38% 5.79%
Volatility 73.8% 73.8%
Dividend yield -- --
- -------------------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------------------
</TABLE>
The weighted-average grant-date fair value of options granted during 1997
and 1996 was $1.38 and $2.86, respectively.
The following table summarizes information about stock options outstanding
at March 31, 1997:
<TABLE>
<CAPTION>
(in thousands, except price range of
shares) Options Outstanding Options Exercisable
- -----------------------------------------------------------------------------------------------------------------
Weighted
Average
Remaining Weighted Weighted
Number Contractual Average Number Average
Range of Exercise Outstanding Life (in Exercise Exercisable Exercise
Prices at 3/31/97 Years) Price at 3/31/97 Price
- -----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
$2.00--$ 2.56 2,591 9.7 $2.38 1,115 $2.56
$2.75--$ 5.50 190 6.7 2.95 140 3.02
$6.65--$ 8.87 225 6.4 6.91 89 7.28
$9.00--$10.75 3 3.5 $9.64 3 $9.64
- -----------------------------------------------------------------------------------------------------------------
</TABLE>
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 183,000, 157,000, and 208,000
during fiscal 1997, 1996, and 1995, respectively.
At March 31, 1997, approximately 10,235,000 shares of common stock were
reserved for issuance primarily related to the Series B and C Convertible
Preferred Stock, various stock option plans, warrants, and the Employee
Stock Purchase Plan.
Note 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 15% 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 1997 and 1996.
28
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (con't)
Note 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.
Note 13 Acquisitions
On May 1, 1996, the Company purchased all of the outstanding equity
securities of The Learning Alliance, Inc. ("TLA") for 341,500 shares of
common stock valued at $2,690,000. TLA provides sales training services and
develops and markets related software for the sales force automation and
integration marketplace.
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 estimated fair values. The
acquisition resulted in goodwill of approximately $2.6 million.
In December 1996, in order to allow the Company's management to focus on
development of its core businesses, the Company decided to divest itself of
TLA. TLA was sold in January 1997 for future royalty considerations and
foregone severance payments. As a result of this decision, in December 1996
the Company recorded a write-down of approximately $2.3 million of goodwill
which had been recorded in connection with the acquisition.
The operating results of TLA, which were not material, have been included in
the consolidated financial statements from the date of the acquisition to
the date of disposition. Pro forma presentations have not been included as
the acquisition was not material to the results of operations of the
Company.
Note 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, 1997 and 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.
29
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Con't)
Note 15 Industry Segment and Geographic Information
The Company operates in a single industry segment: developing and marketing
integrated document publishing software and services worldwide. Information
regarding geographic areas at March 31, 1997, 1996 and 1995, and for the
years then ended is as follows:
<TABLE>
<CAPTION>
(in thousands)
March 31, 1997
and for the year then ended U.S. Non-U.S. Eliminations Total
- --------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Sales to unaffiliated customers $ 39,558 $ 25,265 $ -- $ 64,823
Intercompany royalties and
transfers 6,547 201 (6,748) --
- --------------------------------------------------------------------------------------------------------------
Net revenues 46,105 25,466 (6,748) 64,823
- --------------------------------------------------------------------------------------------------------------
Income (loss) from operations (21,025) (7,594) -- (28,619)
- --------------------------------------------------------------------------------------------------------------
Identifiable assets 58,575 19,288 (39,963) 37,900
- --------------------------------------------------------------------------------------------------------------
<CAPTION>
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 2,797 (2,764) 83 116
- --------------------------------------------------------------------------------------------------------------
Identifiable assets 63,734 17,590 (32,408) 48,916
- --------------------------------------------------------------------------------------------------------------
<CAPTION>
March 31, 1995
and for the year then ended U.S. Non--U.S. Eliminations Total
- ---------------------------------- ----------------- ----------------- ----------------- -----------------
<S> <C> <C> <C> <C>
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
- --------------------------------------------------------------------------------------------------------------
</TABLE>
Intercompany transfers between geographic areas are accounted for at prices
that approximate prices charged to unaffiliated customers.
30
<PAGE>
REPORT OF ERNST & YOUNG LLP, IDNEPENDENT AUDITORS
Board of Directors
Interleaf, Inc.
We have audited the accompanying consolidated balance sheets of Interleaf,
Inc. as of March 31, 1997 and 1996, and the related consolidated statements
of operations, changes in shareholders' equity (deficit), and cash flows for
each of the three years in the period ended March 31, 1997. Our audits also
included the financial statement schedule listed in the Index at Item 14(a).
These financial statements and schedule are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements and schedule 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 consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position
of Interleaf, Inc. at March 31, 1997 and 1996, and the consolidated results
of its operations and its cash flows for each of the three years in the
period ended March 31, 1997, in conformity with generally accepted accounting
principles. Also, in our opinion, the related financial statement schedule,
when considered in relation to the basic financial statements taken as a
whole, present fairly in all material respects the information set forth
therein.
/s/ Ernst & Young LLP
- ------------------------
Boston, Massachusetts
June 16, 1997
31
<PAGE>
SUPPLEMENTAL FINANCIAL INFORMATION
The following summarizes unaudited selected quarterly results of operations
for the years ended March 31, 1997 and 1996 and the market range for the
Company's common stock for those periods:
<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 1997
Revenues $19,054 $16,585 $15,348 $13,836 d $64,823
- ----------------------------------------------------------------------------------------------------------------------------
Gross margin 11,920 9,405 8,842 6,552 36,719
- ----------------------------------------------------------------------------------------------------------------------------
Net income (loss) (3,800) (10,327)a (9,509)a,b (5,914)a,e (29,550)
- ----------------------------------------------------------------------------------------------------------------------------
Net income (loss) per share (0.22) (0.59) (0.54) (0.35) (1.70)
- ----------------------------------------------------------------------------------------------------------------------------
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 c (1,512) 311
- ------------------------------------------------------------------------------------------------------------------------------
Net income (loss) per share 0.03 0.05 0.02 (0.09) 0.02
- ------------------------------------------------------------------------------------------------------------------------------
</TABLE>
Notes to Supplemental Financial Information
a. Includes restructuring charges of $4.8 million, $3.7 million, and $2.4
million for the second, third, and fourth quarter, respectively. These
restructuring charges were to reduce worldwide employment and facility
costs.
b. Includes a $2.3 million write-off of goodwill related to the TLA
acquisition.
c. Includes a $1.2 million benefit from the settlement of a long-term
dispute with a joint venture partner.
d. Includes a $1.5 million reserve for sales allowances during the quarter.
e. Includes a $2.2 million write-off of capitalized software development
costs, inventory, and prepaid royalties for discontinued products and
products with limited future revenue potential.
32
<PAGE>
SCHEDULE II
Valuation and Qualifying Accounts
(In thousands)
<TABLE>
<CAPTION>
COL. A COL. B COL. C COL. D COL. E COL. F
- ------------------------------------- ------------ ------------ ----------- ----------- -------------
Balance at Additions to Other
Beginning of Costs and Additions-- Deductions Balance at
Description Period Expenses Describe(1) Describe(2) End of Period
- ------------------------------------- ------------ ------------ ----------- ----------- -------------
<S> <C> <C> <C> <C> <C>
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
Year ended March 31, 1997:
Deducted from asset accounts
Allowance for doubtful accounts $1,695 $304 $ -- $(628) $1,371
- ------------------------------------- ------------ ------------ ----------- ----------- -------------
</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
33
<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 15, 1997 (the "1997 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
1993 Stock Option Plan" contained in the 1997 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 1997 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 1997 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- is a registered trademark of Interleaf, Inc.
RDM and WorldView 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.
34
<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/ Jaime W. Ellertson
---------------------------------
Jaime W. Ellertson, President and
Chief Executive Officer
Dated: June 30, 1997
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/ Jaime W. Ellertson President and Chief Executive Officer and June 30, 1997
- ----------------------------------- a Director (Principal Executive Officer)
Jaime W. Ellertson
/s/ Robert R. Langer Vice President of Finance and Administration June 30, 1997
- ----------------------------------- and Chief Financial Officer (Principal Financial
Robert R. Langer and Accounting Officer)
/s/ Rory J. Cowan Chairman of the Board of Directors June 30, 1997
- -----------------------------------
Rory J. Cowan
/s/ Frederick B. Bamber Director June 30, 1997
- -----------------------------------
Frederick B. Bamber
/s/ David A. Boucher Director June 30, 1997
- -----------------------------------
David A. Boucher
/s/ Marcia J. Hooper Director June 30, 1997
- -----------------------------------
Marcia J. Hooper
/s/ George D. Potter, Jr. Director June 30, 1997
- -----------------------------------
George D. Potter, Jr.
</TABLE>
35
<PAGE>
EXHIBIT INDEX
Exhibit
Number Description Method of Filing
- ------- ----------- ----------------
3(a) Restated Articles of Organization of the [xvi]
Company, as amended
3(b) By-Laws of the Company, as amended [v]
4(a) Specimen Certificate for Shares of the [xiv]
Company's Common Stock
4(b) Rights Agreement, dated July 15, 1988, [xv]
between the Company and the First National
Bank of Boston
10(a) Company's 1983 Stock Option Plan, as amended [v]
10(a1) 1994 Employee Stock Option Plan, as amended [xiii]
10(a2) 1993 Incentive Stock Option Plan, as amended [viii]
10(b) Company's 1989 Director Stock Option Plan [i]
10(b2) Company's 1987 Employee Stock Purchase Plan, [xiii]
as amended
10(c) Company's 1989 Officer and Employee Severance [i]
Benefit Plans
10(cc) Company's 1993 Director Stock Option Plan [v]
10(d) Agreements between PruTech Research and [ii]
Development Partnership III and the Company,
dated October 21, 1988.
10(e) Exclusive Marketing and Licensing Agreement, [i]
between Interleaf South America, Ltd. and the
Company, and related Option Agreement, dated
March 31, 1989.
10(f) Distribution and License Agreement between [i]
Interleaf Italia, S.r.l. and the Company,
and related Joint Venture Agreement, dated
October 31, 1988.
10(g) Preferred Stock Purchase Agreements, for the [ii]
issuance of 2,142,857 shares of the Company's
Senior Series B Convertible Preferred Stock,
dated September 29, 1989.
10(h) Notification to Preferred Shareholder of [iii]
increase in conversion ratio, dated May 18,
1992.
10(i) Lease of Prospect Place, Waltham, MA, between [iv]
Prospect Place Limited Partnership and
Interleaf, Inc., and related Agreements,
dated March 30, 1990.
10(j) Employment and severance agreement between [vii]
the Company and Edward Koepfler, the Company's
President, dated October 3, 1994.
10(k) Loan and Security Agreement between the [ix]
Company and Foothill Capital Corporation,
dated May 2, 1995.
10(l) Employment and severance agreement between [ix]
the Company and G. Gordon M. Large, the
Company's Executive Vice President and Chief
Financial Officer, dated June 5, 1995.
10(m) Net Lease, dated August 14, 1995, between [x]
Principal Mutual Insurance Company and the
Company.
10(n) Sublease, dated September 15, 1995, between [x]
Parametric Technology Corporation and the
Company.
10(o) Employment and severance agreement between [xi]
the Company and Mark Cieplik, the Company's
Vice President, Americas, dated March 17, 1995.
10(p) Agreement between PruTech Research and [xii]
Development Partnership III and the Company,
dated November 14, 1995.
10(q) Series C Preferred Stock Agreement between [xiii]
Interleaf, Inc. and Lindner Investments,
dated October 14, 1996.
36
<PAGE>
Exhibit
Number Description Method of Filing
- ------- ----------- ----------------
10(r) Letter Agreement between the Company and [xvi]
Robert M. Stoddard, as the Company's then
Vice President of Finance and Administration,
and Chief Financial Officer, dated
November 11, 1996.
10(s) Letter Agreement between the Company and [xvi]
Rory J. Cowan, the Company's President and
Chief Executive Officer, dated November 15,
1996, concerning his employment and
compensation with the Company.
10(t) Letter Agreement between the Company and [xvi]
Mark H. Cieplik, the Company's Vice President
of Sales, dated November 15, 1996, concerning
his employment and compensation with the
Company.
10(u) Letter Agreement between the Company and [xvi]
Michael L. Shanker, the Company's Vice
President of Professional Services, dated
November 15, 1996, concerning his employment
and compensation with the Company.
10(v) Letter Agreement between the Company and [xvi]
Stephen J. Hill, the Company's Vice President
of Europe, dated November 15, 1996, concerning
his employment and compensation with the
Company.
10(w) Resignation Agreement and Release and [xvi]
Employment Agreement between Ed Koepfler, the
Company's former President and Chief Executive
Officer, and the Company, dated November 15,
1996, concerning his employment and severance
with the Company.
10(w1) Resignation Agreement and Release and Employment [xvi]
Agreement between G. Gordon M. Large, the
Company's former Executive Vice President of
Finance and Administration and Chief Financial
Officer, and the Company, dated November 12,
1996, concerning his employment and severance
with the Company.
10(x) Resignation Agreement and Release and Employment [xvi]
Agreement between Stan Douglas, the Company's
former Vice President of Engineering Operations,
and the Company, dated November 15, 1996,
concerning his employment and severance with the
Company.
10(y) Terms of Engagement between the Company and [xvi]
Robert R. Langer, Vice President of Finance and
Administration and Chief Financial Officer,
dated December 30, 1996, concerning his
employment with the Company.
10(z) Offer Letter and Acceptance between Jaime W. [xvi]
Ellertson, the Company's President and Chief
Executive Officer, and the Company, dated
January 9, 1997.
11 Computation of Earnings Per Share Included
21 Subsidiaries of the Company Included
23 Consent of Independent Auditors Included
27 Financial Data Schedule Included
____________________
[i] Incorporated herein by reference is the applicable Exhibit to Company's
Annual Report on Form 10-K for the year ended March 31, 1989, File Number
0-14713.
[ii] Incorporated herein by reference is the applicable Exhibit to Company's
Annual Report on Form 10-K for the year ended March 31, 1990, File Number
0-14713.
[iii] Incorporated herein by reference is the applicable Exhibit to Company's
Annual Report on Form 10-K for the year ended March 31, 1992, File Number
0-14713.
37
<PAGE>
[iv] Incorporated herein by reference is the applicable Exhibit to Company's
Report on Form 8-K filed April 13, 1990, File Number 0-14713.
[v] Incorporated herein by reference is the applicable Exhibit to Company's
Annual Report on Form 10-K for the year ended March 31, 1994, File Number
0-14713.
[vi] Incorporated herein by reference is the applicable Exhibit to Company's
Report on Form 10-Q for the quarter ended September 30, 1994, File Number
0-14713.
[vii] Incorporated herein by reference is the applicable Exhibit to Company's
Report on Form 10-Q for the quarter ended December 31, 1994, File Number
0-14713.
[viii] Incorporated herein by reference is the applicable Exhibit to Company's
Annual Report on Form 10-K for the year ended March 31, 1995, File Number
0-14713.
[ix] Incorporated herein by reference is the applicable Exhibit to Company's
Report on Form 10-Q for the quarter ended June 30, 1995, File Number 0-14713.
[x] Incorporated herein by reference is the applicable Exhibit to Company's
Registration Statement on Form S-2, File Number 33-63785.
[xi] Incorporated herein by reference is the applicable Exhibit to Company's
Report on Form 10-Q for the quarter ended September 30, 1995, File Number
0-14713.
[xii] Incorporated herein by reference is the applicable Exhibit to Company's
Report on Form 10-Q for the quarter ended December 31, 1995, File Number
0-14713.
[xiii] Incorporated herein by reference is the applicable Exhibit to Company's
Report on Form 10-Q for the quarter ended September 30, 1996, File Number
0-14713.
[xiv] Incorporated herein by reference is the applicable Exhibit to Company's
Registration Statement on Form S-1, File Number 33-5743.
[xv] Incorporated herein by reference is Exhibit 1 to Company's Registration
Statement on Form 8-A, filed July 27, 1988.
[xvi] Incorporated herein by reference is the applicable Exhibit to Company's
Report on Form 10--Q for the quarter ended December 31, 1996, File Number
0-14713.
38
<PAGE>
EXHIBIT 11
INTERLEAF, INC.
EXHIBIT 11--COMPUTATION OF EARNINGS PER SHARE
<TABLE>
<CAPTION>
Year Ended March 31
----------------------------------------
1997 1996 1995
---------- --------- --------
(In thousands, except per share amounts)
<S> <C> <C> <C>
PRIMARY
Average shares outstanding of Common Stock 17,344 15,557 13,938
Dilutive Senior Series B Convertible Preferred Stock -- 1,758 --
Dilutive Senior Series C Convertible Preferred Stock -- -- --
Dilutive stock options -- 1,029 --
Dilutive stock purchase warrants -- 97 --
Dilutive stock purchase plan rights -- 54 --
---------- --------- --------
Total 17,344 18,495 13,938
---------- --------- --------
---------- --------- --------
Income (loss) before cumulative effect of change
in accounting principle $(29,550) $ 311 $(48,362)
---------- --------- --------
---------- --------- --------
Per share amount $ (1.70) $ 0.02 $ (3.47)
---------- --------- --------
---------- --------- --------
Cumulative effect of change in accounting principle $ -- $ -- $ --
---------- --------- --------
---------- --------- --------
Per share amount $ -- $ -- $ --
---------- --------- --------
---------- --------- --------
Net income (loss) $(29,550) $ 311 $(48,362)
---------- --------- --------
---------- --------- --------
Per share amount $ (1.70) $ 0.02 $ (3.47)
---------- --------- --------
---------- --------- --------
FULLY DILUTED
Average shares outstanding of Common Stock 17,344 15,557 13,938
Dilutive Senior Series B
Convertible Preferred Stock -- 1,758 --
Dilutive Senior Series C
Convertible Preferred Stock -- -- --
Dilutive stock options -- 1,186 --
Dilutive stock purchase warrants -- 187 --
Dilutive stock purchase plan rights -- 57 --
---------- --------- --------
Total 17,344 18,745 13,938
---------- --------- --------
---------- --------- --------
Income (loss) before cumulative effect of change
in accounting principle $(29,550) $ 311 $(48,362)
---------- --------- --------
---------- --------- --------
Per share amount $ (1.70) $ 0.02 $ (3.47)
---------- --------- --------
---------- --------- --------
Cumulative effect of change in accounting principle $ -- $ -- $ --
---------- --------- --------
---------- --------- --------
Per share amount $ -- $ -- $ --
---------- --------- --------
---------- --------- --------
Net income (loss) $(29,550) $ 311 $(48,362)
---------- --------- --------
---------- --------- --------
Per share amount $ (1.70) $ 0.02 $ (3.47)
---------- --------- --------
---------- --------- --------
</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.
<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. 33-03761) 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 June 16, 1997, with respect to the consolidated
financial statements and schedule of Interleaf, Inc. included in the
Annual Report (Form 10-K) for the year ended March 31, 1997.
/s/ Ernst & Young LLP
Boston, Massachusetts
June 30, 1997
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted
consolidated balance sheets and consolidated statements of operations
pages 17 and 18 of the Company's Form 10-K for the year end
and is qualified in its entirety by reference to such financial statements
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> MAR-31-1997
<PERIOD-END> MAR-31-1997
<CASH> 17,349
<SECURITIES> 0
<RECEIVABLES> 12,730
<ALLOWANCES> 1,371
<INVENTORY> 205
<CURRENT-ASSETS> 30,212
<PP&E> 45,829
<DEPRECIATION> 40,866
<TOTAL-ASSETS> 37,900
<CURRENT-LIABILITIES> 35,717
<BONDS> 0
0
187
<COMMON> 175
<OTHER-SE> 15,057
<TOTAL-LIABILITY-AND-EQUITY> 37,900
<SALES> 18,820
<TOTAL-REVENUES> 64,823
<CGS> 7,502
<TOTAL-COSTS> 28,104
<OTHER-EXPENSES> 54,624 <F1>
<LOSS-PROVISION> 304
<INTEREST-EXPENSE> 400
<INCOME-PRETAX> (29,550) <F1>
<INCOME-TAX> 0
<INCOME-CONTINUING> (29,550) <F1>
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (29,550) <F1>
<EPS-PRIMARY> (1.70)
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