<PAGE>
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 8-K/A
(Amendment No. 1)
CURRENT REPORT
Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
Date of Report (Date of earliest event reported): September 9, 1998
INTERLEAF, INC.
------------------------------------------------------
(Exact name of registrant as specified in its charter)
Massachusetts 0-14713 04-2729042
- ---------------------------- ----------------------- -------------------
(State or other jurisdiction (Commission File Number) (I.R.S. Employer
of incorporation) Identification No.)
62 Fourth Avenue
Waltham, Massachusetts 02451
- ---------------------------------------- ----------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (781) 290-0710
<PAGE>
The undersigned hereby amends its Current Report on Form 8-K filed on
September 24, 1998 as follows:
Item 7. Financial Statements and Exhibits
(a) Financial Statements of Businesses Acquired
PDR Automated Systems and Publications, Inc. Financial Statements
Independent Auditors' Report and Independent Accountants' Compilation
Report
Audited Balance Sheet at June 30, 1998 and December 31, 1997
Audited Statement of Operations for the six months ended June 30, 1998
and the year ended December 31, 1997 and for the six months ended June
30, 1997 (unaudited)
Audited Statement of Stockholders Equity for the six months ended June
30, 1998 and the year ended December 31, 1997 and for the six months
ended June 30, 1997 (unaudited)
Audited Statement of Cash Flows for the six months ended June 30, 1998
and the year ended December 31, 1997 and for the six months ended June
30, 1997 (unaudited)
Notes to Financial Statements
(b) Pro Forma Financial Information
Interleaf, Inc. and PDR Automated Systems and Publications, Inc.
Unaudited Pro Forma Combined Balance Sheet at June 30, 1998
Interleaf, Inc. and PDR Automated Systems and Publications, Inc.
Unaudited Pro Forma Combined Statement of Operations for the twelve
months ended March 31, 1998
Interleaf, Inc. and PDR Automated Systems and Publications, Inc.
Unaudited Pro Forma Combined Statement of Operations for the three
months ended June 30, 1998
2
<PAGE>
(c) Exhibits.
10.1 Stock Purchase Agreement by and among Interleaf, Inc., PDR
Automated Systems and Publications, Inc. and Dona D. Ray, with variable
information for otherwise identical agreements with Messrs. Marksbury and
Kloiber.*
23.1 Consent of Dulworth, Breeding & Karns, Independent Accountants
- ------------------
*Previously filed by the Company in its Current Report on Form 8-K dated
September 24, 1998.
--------------
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
INTERLEAF, INC.
Date: November 12, 1998 By: /s/ Peter J. Rice
--------------------------------
Peter J. Rice, Vice President, Finance and
Administration, Chief Financial Officer and
Treasurer
3
<PAGE>
[LETTERHEAD]
INDEPENDENT AUDITORS' REPORT AND
INDEPENDENT ACCOUNTANTS' COMPILATION REPORT
- -------------------------------------------
The Board of Directors of
PDR Automated Systems and Publications, Inc.:
We have audited the accompanying balance sheets of PDR Automated Systems and
Publications, Inc. (an S Corporation) as of June 30, 1998, and December 31,
1997, and the related statements of operations, of stockholders' equity, and
of cash flows for the six months ended June 30, 1998, and for the year ended
December 31, 1997. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements.
An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of PDR Automated Systems and
Publications, Inc., as of June 30, 1998, and December 31, 1997, and the
results of its operations and its cash flows for the six months ended June
30, 1998, and for the year ended December 31, 1997, in conformity with
generally accepted accounting principles.
We have compiled the accompanying statements of operations and of cash flows
of PDR Automated Systems and Publications, Inc., for the six months ended
June 30, 1997, in accordance with Statements on Standards for Accounting and
Review Services issued by the American Institute of Certified Public
Accountants.
A compilation is limited to presenting in the form of financial statements
information that is the representation of management. We have not audited or
reviewed the accompanying statements of operations and of cash flows for the
six months ended June 30, 1997, and, accordingly, do not express an opinion
or any other form of assurance on them.
/s/ Dulworth, Breeding & Karns, LLP
September 17, 1998
<PAGE>
PDR AUTOMATED SYSTEMS AND
PUBLICATIONS, INC.
Six Months Ended June 30, 1998 and 1997,
and Year Ended December 31, 1997
Financial Statements
<PAGE>
BALANCE SHEETS
PDR AUTOMATED SYSTEMS AND PUBLICATIONS, INC.
<TABLE>
<CAPTION>
June 30, December 31,
1998 1997
---------- ------------
<S> <C> <C>
ASSETS
Current Assets:
Cash and cash equivalents $ 384,162 $ 305,624
Trade accounts receivable:
Billed 1,233,343 1,465,725
Work in process 12,780 7,078
Note receivable (including accrued
interest) - current portion 1,186,172 1,149,144
Prepaid expenses and other current
assets 10,392 13,359
---------- ----------
Total current assets 2,826,849 2,940,930
Property and Equipment, at cost:
Furniture and equipment 260,374 249,135
Less accumulated depreciation and
amortization 247,303 233,765
---------- ----------
Net property and equipment 13,071 15,370
Other Assets 14,105 14,588
Note Receivable (including accrued
interest) 1,144,020
---------- ----------
TOTAL ASSETS $2,854,025 $4,114,908
---------- ----------
---------- ----------
</TABLE>
See the accompanying notes to financial statements.
1
<PAGE>
<TABLE>
<CAPTION>
June 30, December 31,
1998 1997
---------- -----------
<S> <C> <C>
LIABILITIES
Current Liabilities:
Accounts payable $ 137,114 $ 123,287
Accrued expenses 213,833 210,390
---------- ----------
Total current liabilities 350,947 333,677
STOCKHOLDERS' EQUITY
Common stock (authorized 10,000
shares, issued 10,000 shares,
no par value) 12,032 12,032
Retained earnings 2,491,046 3,769,199
---------- ----------
Total stockholders' equity 2,503,078 3,781,231
---------- ----------
TOTAL LIABILITIES AND
STOCKHOLDERS' EQUITY $2,854,025 $4,114,908
---------- ----------
---------- ----------
</TABLE>
2
<PAGE>
STATEMENTS OF OPERATIONS
PDR AUTOMATED SYSTEMS AND PUBLICATIONS, INC.
<TABLE>
<CAPTION>
(Unaudited)
Six Months Year Ended Six Months
Ended December 31, Ended
June 30, 1998 1997 June 30, 1997
-----------------------------------------
<S> <C> <C> <C>
Revenue:
Services revenue $ 3,274,577 $ 5,695,830 $ 2,339,912
----------- ----------- -----------
Total revenue 3,274,577 5,695,830 2,339,912
Cost of Revenues:
Services 2,774,881 4,761,097 2,073,668
----------- ----------- -----------
Total cost of revenue 2,774,881 4,761,097 2,073,668
Gross Margin 499,696 934,733 266,244
Operating Expenses:
Selling, general
and administrative 144,415 163,106 73,477
Research and development 72,714 1,732
----------- ----------- -----------
Total operating expenses 144,415 235,820 75,209
Income From Operations 355,281 698,913 191,035
Interest Income 57,710 181,890 85,672
----------- ----------- -----------
Net Income $ 412,991 $ 880,803 $ 276,707
----------- ----------- -----------
----------- ----------- -----------
Income Per Share:
Basic $ 41.30 $ 88.08 $ 27.67
----------- ----------- -----------
----------- ----------- -----------
Diluted $ 41.30 $ 88.08 $ 27.67
----------- ----------- -----------
----------- ----------- -----------
Shares Used In Computing Income
Per Share:
Basic 10,000 10,000 10,000
----------- ----------- -----------
----------- ----------- -----------
Diluted 10,000 10,000 10,000
----------- ----------- -----------
----------- ----------- -----------
</TABLE>
See the accompanying notes to financial statements and independent auditors'
report and independent accountants' compilation report.
3
<PAGE>
STATEMENTS OF STOCKHOLDERS' EQUITY
PDR AUTOMATED SYSTEMS AND PUBLICATIONS, INC.
<TABLE>
<CAPTION>
Common Stock
------------
Number
of Retained
Shares Amount Earnings
----------- ----------- -----------
<S> <C> <C> <C>
Balance at December 31, 1996 10,000 $ 12,032 $ 7,093,645
Net income 880,803
Distribution to stockholders (4,205,249)
----------- ----------- -----------
Balance at December 31, 1997 10,000 12,032 3,769,199
Net income 412,991
Distribution to stockholders (1,691,144)
----------- ----------- -----------
Balance at June 30, 1998 10,000 $ 12,032 $ 2,491,046
----------- ----------- -----------
----------- ----------- -----------
</TABLE>
See the accompanying notes to financial statements.
4
<PAGE>
STATEMENTS OF CASH FLOWS
PDR AUTOMATED SYSTEMS AND PUBLICATIONS, INC.
<TABLE>
<CAPTION>
(Unaudited)
Six Months Year Ended Six Months
Ended December 31, Ended
June 30, 1998 1997 June 30, 1997
------------------------------------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income $ 412,991 $ 880,803 $ 276,707
Adjustments to reconcile net
income to net cash provided
by operating activities:
Depreciation 9,450 33,768 14,627
Amortization 482 1,625 330
Changes in assets and liabilities:
Decrease (increase) in trade
accounts receivable 226,680 (672,519) (339,522)
Decrease in prepaid expenses
and other current assets 2,967 4,079 2,955
Decrease in accrued interest
on note receivable 106,992 10,662 96,361
Increase in accounts payable 13,827 95,906 124,733
Increase in accrued expenses 3,443 81,653 58,077
---------- ----------- -----------
Total adjustments 363,841 (444,826) (42,439)
---------- ----------- -----------
Net cash provided by
operating activities 776,832 435,977 234,268
Cash flows from investing activities:
Purchases of property and equipment (7,150) (19,780) (2,838)
Purchases of other assets (2,891)
Proceeds from note receivable 1,000,000 3,750,000 3,750,000
---------- ----------- -----------
Net cash provided by
investing activities 992,850 3,727,329 3,747,162
</TABLE>
(continued on next page)
5
<PAGE>
STATEMENTS OF CASH FLOWS (continued)
PDR AUTOMATED SYSTEMS AND PUBLICATIONS, INC.
<TABLE>
<CAPTION>
(Unaudited)
Six Months Year Ended Six Months
Ended December 31, Ended
June 30, 1998 1997 June 30, 1997
------------------------------------------
<S> <C> <C> <C>
Cash flows from financing activities:
Distributions paid to stockholders (1,691,144) (4,205,249) (4,130,247)
---------- ---------- ----------
Net cash used in financing
activities (1,691,144) (4,205,249) (4,130,247)
---------- ---------- ----------
NET INCREASE (DECREASE) IN CASH
AND CASH EQUIVALENTS 78,538 (41,943) (148,817)
CASH AND CASH EQUIVALENTS AT
BEGINNING OF PERIOD 305,624 347,567 347,567
---------- ---------- ----------
CASH AND CASH EQUIVALENTS AT
END OF PERIOD $ 384,162 $ 305,624 $ 198,750
---------- ---------- ----------
---------- ---------- ----------
</TABLE>
See the accompanying notes to financial statements and independent auditors'
report and independent accountants' compilation report.
6
<PAGE>
NOTES TO FINANCIAL STATEMENTS
PDR AUTOMATED SYSTEMS AND PUBLICATIONS, INC.
Six months ended June 30, 1998 and 1997, and Year Ended December 31, 1997
(See independent auditors' report and independent accountants' compilation
report.)
NOTE A - SIGNIFICANT ACCOUNTING POLICIES AND NATURE OF BUSINESS
Nature of Business
PDR Automated Systems and Publications, Inc. (the "Company") is a nationally
recognized provider of services to support corporations in the development,
management and distribution of information. The Company's clients operate
primarily in high technology industries within the United States. Established in
1985 as a partnership and then incorporated in 1988, the Company is
headquartered in Lexington, Kentucky, with operating offices in Santa Clara,
California, Research Triangle Park, North Carolina and Acton, Massachusetts.
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
reported amounts of revenues and expenses during the reporting period. Actual
results could differ from those estimates.
Cash and Cash Equivalents
The Company's policy is to classify investments with maturities of ninety days
or less as cash and cash equivalents in the accompanying statements of cash
flows because they are readily convertible to a known amount of cash.
Allowance for Doubtful Accounts
Management believes an allowance for doubtful accounts was not considered
necessary at June 30, 1998, and December 31, 1997. As is customary in the
industry, the Company does not require collateral from customers in the ordinary
course of business.
7
<PAGE>
Property and Equipment
Property and equipment are recorded at cost. Depreciation is provided using both
straight-line and accelerated methods over the estimated useful lives of the
depreciable assets, ranging from five to seven years.
Computer Software Costs
The Company classifies the costs of planning, designing, and establishing the
technological feasibility of a computer software product as research and
development costs and charges those costs to expense when incurred. After
technological feasibility has been established, costs of producing a marketable
product and product masters are capitalized and amortized over the estimated
life of the product.
For the periods ended June 30, 1998, and December 31, 1997, there were no
capitalizable costs incurred. In addition, there were no costs for duplicating
computer software from product masters documentation and training manuals, and
for packaging the product for distribution. There were no costs for product
maintenance and support incurred either.
Revenue Recognition
Services revenue is recognized when earned.
Income Taxes
The Company has elected under Internal Revenue Code Section 1362(a) to be
treated as a small business corporation (an S corporation election) for federal
and state income tax purposes. Under those provisions, income and tax credits
are passed through to the stockholders. The stockholders are taxed individually
on their share of corporate earnings. The Company has elected the cash basis of
accounting for income tax purposes.
NOTE B - CASH AND CASH EQUIVALENTS
At June 30, 1998, and December 31, 1997, the Company had invested $380,654 and
$302,116, respectively, in a cash management account. The underlying investment
fund invests in short-term US Treasury and US Government Agency obligations,
repurchase agreements relating to such obligations, and a PNC Bank, N.A. deposit
account. The average maturities of the fund generally range between 20 and 60
days. The account is not guaranteed or insured by any bank or government agency.
The Company has not experienced any losses with this account.
8
<PAGE>
NOTE C - PROPERTY AND EQUIPMENT
Property and Equipment consisted of the following:
<TABLE>
<CAPTION>
June 30, December 31,
1998 1997
-------- ------------
<S> <C> <C>
Office and other equipment $213,715 $202,476
Furniture 46,659 46,659
-------- --------
Furniture and equipment 260,374 249,135
Less allowance for depreciation
and amortization 247,303 233,765
-------- --------
Net property and equipment $ 13,071 $ 15,370
-------- --------
-------- --------
</TABLE>
NOTE D - LONG-TERM LEASES
All noncancelable long-term leases have been categorized as operating leases.
The Company has leases for office space ranging from monthly to five years. The
month to month lease is with an entity partially owned by a related party.
Property taxes, insurance, maintenance and expenses related to the leased
property are included in all but one of the leases. One lease does require the
Company to pay maintenance and utilities directly.
Total rental expense under operating leases was $66,999 during the six months
ended June 30, 1998, and $135,969 during the year ended December 31, 1997, with
approximately $5,280 and $10,560, respectively, of these amounts being to the
entity partially owned by a related party. During the unaudited period from
January 1, 1997, through June 30, 1997, total rental expense under operating
leases was $64,960 with approximately $5,280 of this amount being to the entity
partially owned by a related party.
Minimum future obligations on operating leases in effect at June 30, 1998, are
as follows for the periods ended December 31:
<TABLE>
<S> <C>
July 1, 1998, through December 31, 1998 $ 61,243
January 1, 1999, through December 31, 1999 76,636
January 1, 2000, through December 31, 2000 56,088
January 1, 2001, through December 31, 2001 40,658
---------
Total $ 234,625
---------
---------
</TABLE>
9
<PAGE>
NOTE E - ACCRUED EXPENSES
Accrued expenses consisted of the following:
<TABLE>
<CAPTION>
June 30, December 31,
1998 1997
-------- ------------
<S> <C> <C>
Accrued payroll and withholdings $153,628 $150,513
Accrued vacation 29,965 15,016
Accrued unemployment 8,474 19,821
Other 21,766 25,040
-------- --------
$213,833 $210,390
-------- --------
-------- --------
</TABLE>
NOTE F - 401(k) PROFIT SHARING PLAN AGREEMENT
The Company maintains a 401(k) profit sharing plan covering employees who have
completed one year of service and attained the age of 21.
Employees may elect to contribute up to 15% of their salary on a pretax
basis. Employer matching contributions and profit sharing contributions are
determined annually by the Board of Directors. Employees become partially vested
in employer matching and profit sharing contributions after three years of
employment with the Company with a gradual increase in the vesting percentage
over the next four years, at which time they become fully vested. Any non-vested
amounts will be forfeited by the terminating participant and will be used to
offset future contributions. The match for the year ended December 31, 1997, and
for the six months ended June 30, 1998, was 50% on the first 5% of salary
deferred with $16,713 and $8,441, respectively, paid from forfeitures. For the
unaudited period from January 1, 1997, through June 30, 1997, there was $16,713
paid from forfeitures. The profit sharing/401(k) match expenses for the six
months ended June 30, 1998, and for the year ended December 31, 1997, were
$19,362 and $20,003, respectively. Due to forfeitures, there was no profit
sharing/401(k) match expense for the unaudited period from January 1, 1997,
through June 30, 1997.
NOTE G - MAJOR CUSTOMER
One major customer comprised approximately 53% and 52%, respectively, of the
Company's services revenue during the six months ended June 30, 1998, and the
year ended December 31, 1997. This customer accounted for $1,725,420 and
$2,953,519, respectively, of services revenue during the six months ended June
30, 1998, and the year ended December 31, 1997. The related trade accounts
receivable-billed at June 30, 1998, and December 31, 1997, were $562,300 and
$565,315, respectively. For the unaudited period from January 1, 1997, through
June 30, 1997, there was $1,243,785 of service revenue from this customer and
related trade accounts receivable-billed at June 30, 1997, of $626,738.
10
<PAGE>
NOTE H - SALE OF ASSETS
Effective April 1, 1996, the Company entered into an agreement to sell certain
assets of the Advanced Technology division to a major customer.
The purchase price of $6,000,000 was payable in cash and a note receivable as
follows:
(a) $250,000 in cash at the closing;
(b) $2,750,000, plus interest at the average rate of interest on 90 day
commercial paper, payable in January 1997;
(c) $1,000,000, plus interest at the prime rate, payable in January 1997;
(d) $1,000,000, plus interest at the prime rate, payable not later than January
31, 1998; and
(e) $1,000,000, plus interest at the prime rate, payable not later than January
31, 1999.
The agreement transferred ownership of the fixed assets ($23,993 of net book
value at April 1, 1996) and intangible assets including software products and
all customer contracts of the division. The Company was released from
responsibility on equipment leases and maintenance contracts transferred. The
operations of the Information Services division continued unchanged.
NOTE I - INCOME PER SHARE
There were 10,000 shares of common stock outstanding for all periods presented.
There were no dilutive securities issued or outstanding.
NOTE J - CHANGE IN OWNERSHIP
Effective August 31, 1998, the Company's stockholders sold all their common
stock to an unrelated corporate entity. The Company's S corporation election
terminated with the sale of the stock. Thereafter, the Company will be included
in the consolidated tax filings of its acquiror, a C corporation.
11
<PAGE>
INTERLEAF, INC. AND SUBSIDIARIES
UNAUDITED PRO FORMA COMBINED FINANCIAL STATEMENTS
The following unaudited pro forma combined financial statements are presented
for illustrative purposes only and are not necessarily indicative of the
combined financial position or results of operations that actually would have
been realized had Interleaf, Inc. ("Interleaf") and PDR Automated Systems and
Publications, Inc. ("PDR") been a combined company during the specific periods.
Additionally, they are not indicative of the results of future combined
operations.
The following pro forma combined financial statements give effect to the
business combination of Interleaf and PDR using the purchase method of
accounting. The pro forma combined financial statements utilize the audited
financial statements of Interleaf for the fiscal year ended March 31, 1998 and
of PDR for the fiscal year ended December 31, 1997, and the unaudited financial
statements of Interleaf and of PDR for the three months ended June 30, 1998. The
pro forma combined statements of operation assume that the acquisition took
place as of the beginning of the periods presented. The pro forma combined
balance sheet assumes that the acquisition took place as of the end of the
interim period. Due to the differing fiscal years of the combining entities, the
results of PDR's quarter ended March 31, 1998 have not been reflected in the pro
forma results of operations. PDR's revenue and net income for the three months
ended March 31, 1998 were $1.6 million and $.2 million, respectively.
The unaudited pro forma combined financial statements have been prepared by
management and should be read in conjunction with the historical financial
statements of Interleaf and PDR. An independent third party appraisal company
has been engaged to conduct a valuation of the intangible assets acquired. The
unaudited pro forma combined financial statements are based on certain
assumptions and preliminary estimates which may be subject to change.
F-1
<PAGE>
Interleaf, Inc. and PDR Automated Systems and Publications, Inc.
Pro Forma Combined Balance Sheets*
June 30, 1998
(Unaudited)
In thousands, except for share and per share amounts
<TABLE>
<CAPTION>
Assets Dr(Cr)
----------------------------------------------------------
Pro Forma
----------
Acquisition
Adjustments
Interleaf, Inc. PDR (Note 1) Combined
--------------- --- -------- ---------
<S> <C> <C> <C> <C>
Current Assets
Cash and cash equivalents $23,486 $ 384 $(2,863) (a) $21,007
Accounts receivable, net of reserve for doubtful accounts 8,416 1,246 -- 9,662
Note receivable -- 1,186 -- 1,186
Prepaid expenses and other current assets 880 11 -- 891
------- ------- ------ -------
Total Current Assets 32,782 2,827 (2,863) 32,746
Property and equipment, net 2,605 13 -- 2,618
Intangible assets 416 -- 1,554 (b) 1,970
Other assets 417 14 -- 431
------- ------- ------ -------
Total Assets $36,220 $ 2,854 $(1,309) $37,765
------- ------- ------ -------
------- ------- ------ -------
</TABLE>
<TABLE>
<CAPTION>
LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIT)
(Dr)Cr
-------------------------------------------------------
<S> <C> <C> <C> <C>
Current Liabilities
Accounts payable $ 2,012 $ 137 -- $ 2,149
Accrued expenses 11,025 214 2,034 (c) 13,273
Unearned revenue 10,546 -- -- 10,546
Accrued restructuring 1,353 -- -- 1,353
-------- -------- -------- --------
Total Current Liabilities 24,936 351 2,034 27,321
Long-term restructuring 1,692 -- -- 1,692
-------- -------- -------- --------
Total Liabilities 26,628 351 2,034 29,013
-------- -------- -------- --------
Shareholders' Equity (Deficit)
Preferred stock, par value $.10 per authorized
5,000,000 shares:
Series B, C and D, C & D 188 188
Common stock 185 12 (12) (d) 185
Additional paid-in capital 93,393 -- -- 93,393
Retained earnings(deficit) (83,818) 2,491 (3,331) (e) (84,658)
Cumulative translation adjustment (356) -- -- (356)
-------- -------- -------- --------
Total Shareholders' Equity (Deficit) 9,592 2,503 (3,343) 8,752
-------- -------- -------- --------
Total Liabilities and Shareholders' Equity (Deficit) $ 36,220 $ 2,854 $ (1,309) $ 37,765
-------- -------- -------- --------
-------- -------- -------- --------
</TABLE>
Note 1 - The pro forma balance sheet has been prepared to reflect the
acquisition of PDR Automated Systems and Publications Inc. ("PDR") by Interleaf,
Inc. (the "Company) for an aggregate price of $ 3,711 plus future consideration
of cash, stock or a combination of both at Interleaf's discretion, the amount of
which is dependent upon the resolution of certain earn out provisions . Pro
forma adjustments have been made to reflect:
(a) The initial cash payment of $2,863 for the purchase of PDR.
(b) Goodwill and other intangibles recorded.
(c) Minimum contingent amounts due to the former shareholders of PDR,
estimated acquisition costs and for the proceeds of an asset not
acquired by the Company.
(d) The elimination of the common stock account of PDR.
(e) The elimination of the acquired retained earnings of PDR, and write
off of $840 of acquired in-process research and development expense.
F-2
<PAGE>
INTERLEAF, INC. AND PDR AUTOMATED SYSTEMS AND PUBLICATIONS, INC.
PRO FORMA COMBINED STATEMENT OF OPERATIONS
TWELVE MONTHS
Unaudited
<TABLE>
<CAPTION>
Pro Forma
--------------------------------
Acquisition
3/31/98 12/31/97 Adjustments
Interleaf, Inc. PDR (Note 2) Combined
--------------- --- --------
<S> <C> <C> <C> <C>
In thousands, except for per share
amounts
Revenues:
Products $ 13,335 $ - $ - $ 13,335
Maintenance 26,083 26,083
Services 13,159 5,696 18,855
------------------------------------------------------------------
Total Revenue 52,577 5,696 0 58,273
------------------------------------------------------------------
Costs of revenues:
Products 3,966 3,966
Maintenance 3,747 3,747
Services 11,324 4,761 16,085
------------------------------------------------------------------
Total costs of revenues 19,037 4,761 0 23,798
------------------------------------------------------------------
Gross Margin 33,540 935 0 34,475
------------------------------------------------------------------
Operating Expenses:
Selling, general and administrative 22,281 163 155 (a) 22,599
Research and development 8,897 73 8,970
------------------------------------------------------------------
Total Operating Expenses 31,178 236 155 31,569
------------------------------------------------------------------
Income (loss) from operations 2,362 699 (155) 2,906
Other Income (expense) 153 182 (122) (b) 213
------------------------------------------------------------------
Income (loss) before income taxes 2,515 881 (277) 3,119
Provision for income taxes 79 0 0 79
------------------------------------------------------------------
Net income (loss) 2,436 881 (277) 3,040
Dividends on preferred stock (458) 0 0 (458)
------------------------------------------------------------------
Net income (loss) applicable to common stockholders 1,978 881 (277) 2,582
------------------------------------------------------------------
------------------------------------------------------------------
Earnings per share:
Basic $ 0.11 $ 0.14
------------------------------------------------------------------
------------------------------------------------------------------
Diluted $ 0.09 $ 0.11
------------------------------------------------------------------
------------------------------------------------------------------
Shares used in computing primary earnings per share:
Basic 17,857 17,857
------------------------------------------------------------------
------------------------------------------------------------------
Diluted 24,808 24,808
------------------------------------------------------------------
------------------------------------------------------------------
</TABLE>
Note 2 - The above statement gives effect to the following pro forma adjustments
necessary to reflect the acquisition of PDR as of April 1, 1997 as described in
Note 1 to the pro forma balance sheet.
(a) Annual amortization of goodwill and other purchased intangibles based
on ten year useful life.
(b) Interest income forgone from April 1, 1997 due to the acquisition of
PDR for cash of $ 2,863
Management estimates that approximately $840 of the purchase price represents
purchased in-process technology that has not yet reached technological
feasibility and has no alternative future use. This amount will be expensed
as a non-recurring charge. This amount has been reflected as reduction to
stockholders' equity and has not been included in the pro forma combined
statements of operations due to its non-recurring nature. The pro forma share
impact would have been as follows:
<TABLE>
<CAPTION>
FISCAL YEAR ENDED
3/31/98
<S> <C>
Basic $ (0.05)
--------
--------
Diluted $ (0.03)
--------
--------
</TABLE>
F-3
<PAGE>
INTERLEAF, INC. AND PDR AUTOMATED SYSTEMS AND PUBLICATIONS, INC.
PRO FORMA COMBINED STATEMENT OF OPERATIONS
THREE MONTHS ENDED JUNE 30,1998
Unaudited
<TABLE>
<CAPTION>
Pro Forma
------------------------------
Acquisition
Adjustments
Interleaf, Inc. PDR (Note 3) Combined
-------------- ----- ------------ -----------
<S> <C> <C> <C> <C>
In thousands, except for per share amounts
Revenues:
Products $ 2,227 $ - $ 2,227
Maintenance 5,848 5,848
Services 2,933 1,630 4,563
-----------------------------------------------------------------
Total Revenue 11,008 1,630 - 12,638
-----------------------------------------------------------------
-----------------------------------------------------------------
Costs of revenues:
Products 636 636
Maintenance 825 825
Services 2,697 1,374 4,071
-----------------------------------------------------------------
Total costs of revenues 4,158 1,374 5,532
-----------------------------------------------------------------
Gross Margin 6,850 256 - 7,106
-----------------------------------------------------------------
Operating Expenses:
Selling, general and administrative 4,970 70 39 (a) 5,079
Research and development 1,773 1,773
-----------------------------------------------------------------
Total Operating Expenses 6,743 70 39 6,852
-----------------------------------------------------------------
Income (loss) from operations 107 186 (39) 254
Other Income (expense) 147 29 (30) (b) 146
-----------------------------------------------------------------
Income (loss) before income taxes 254 215 (69) 400
Provision for income taxes
-----------------------------------------------------------------
Net income (loss) 254 215 (69) 400
Dividends on preferred stock (574) 0 0 (574)
-----------------------------------------------------------------
Net income (loss) applicable to common stockholders (320) 215 (69) (174)
-----------------------------------------------------------------
-----------------------------------------------------------------
Earnings per share:
Basic $ (0.02) $ (0.01)
-----------------------------------------------------------------
-----------------------------------------------------------------
Diluted $ (0.02) $ (0.01)
-----------------------------------------------------------------
-----------------------------------------------------------------
Shares used in computing
primary earnings per share
Basic 18,378 18,378
-----------------------------------------------------------------
-----------------------------------------------------------------
Diluted 18,378 18,378
-----------------------------------------------------------------
-----------------------------------------------------------------
</TABLE>
Note 3 - The above statement gives effect to the following pro forma adjustments
necessary to reflect the acquisition of PDR as of April 1, 1998 as described in
Note 1 to the pro forma balance sheet.
(a) Quarterly amortization of goodwill and other purchased intangibles based
on ten year useful life.
(b) Quarterly interest income forgone for the three months ended June 30, 1998
due to the acquisition of PDR for cash of $ 2,863
Management estimates that approximately $840 of the purchase price represents
purchased in-process technology that has not yet reached technological
feasibility and has no alternative future use. This amount will be expensed
as a non-recurring charge. This amount has been reflected as reduction to
stockholders' equity and has not been included in the pro forma combined
statements of operations due to its non-recurring nature. The pro forma share
impact would have been as follows:
<TABLE>
<CAPTION>
THREE MONTHS ENDED
6/30/98
<S> <C>
Basic $ (0.05)
--------
--------
Diluted $ (0.05)
--------
--------
</TABLE>
F-4
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibit No. Description
<S> <C>
10.1 Stock Purchase Agreement by and among Interleaf, Inc., PDR Automated Systems and
Publications, Inc. and Dona D. Ray, with variable information for otherwise
identical agreements with Messrs. Marksbury and Kloiber.*
23.1 Consent of Dulworth, Breeding & Karns, LLP
</TABLE>
- ------------
* Previously filed by the Company in its Current Report on Form 8-K dated
September 24, 1998.
<PAGE>
CONSENT OF INDEPENDENT ACCOUNTANTS
- ----------------------------------
November 12, 1998
The Board of Directors
PDR Automated Systems and Publications, Inc.
800 Corporate Drive, Suite 200
Lexington, KY 40503
To the Board of Directors:
We agree to the inclusion in the Form 8-K/A (Amendment No. 1) of Interleaf,
Inc., dated September 9, 1998, of our independent auditors' report and
independent accountants' compilation report, dated September 17, 1998, on our
audit of the financial statements of PDR Automated Systems and Publications,
Inc., as of June 30, 1998, and December 31, 1997, and for the six months
ended June 30, 1998, and for the year ended December 31, 1997, and our
compilation of the financial statements for the six months ended June 30,
1997.
Yours truly,
/s/ Dulworth, Breeding & Karns, LLP
Dulworth, Breeding & Karns, LLP
