]<PAGE>
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
--------------
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED JUNE 30, 1998
COMMISSION FILE NUMBER 0-14713
Interleaf, Inc.
(Exact name of Registrat as Specified in Its Charter)
Massachusetts 04-2729042
(State or Other Jurisdiction (I.R.S. Employer Identification Number)
of Incorporation or Organization)
62 Fourth Avenue, Waltham, MA 02154
(Address of Principal Executive Offices) (Zip Code)
(781) 290-0710
(Registrant's Telephone Number,
Including Area Code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the last 90 days.
Yes X No
----- -----
APPLICABLE ONLY TO CORPORATE ISSUERS
The number of shares outstanding of the issuer's Common Stock, $.01 par value,
as of August 11, 1998 was 18,683,754.
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1
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
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<S> <C>
PART I - FINANCIAL INFORMATION
Item 1 - Financial Statements
Consolidated balance sheets at June 30, 1998 and March 31, 1998...................................... 3
Consolidated statements of operations for the three months ended
June 30, 1998 and 1997 ............................................................................... 4
Consolidated statements of cash flows for the three months ended
June 30, 1998 and 1997 ............................................................................... 5
Notes to consolidated financial statements ........................................................... 6
Item 2 - Management's Discussion and Analysis of Financial Condition
and Results of Operations ............................................................................ 8
PART II - OTHER INFORMATION
Item 6 - Exhibits and Reports on Form 8-K ............................................................ 11
SIGNATURES ........................................................................................... 12
</TABLE>
2
<PAGE>
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
--------------------
INTERLEAF, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
June 30, 1998 March 31, 1998
-------------------- -------------------
In thousands, except for share and per share amounts (unaudited)
<S> <C> <C>
ASSETS
Current assets
Cash and cash equivalents $ 23,486 $ 21,112
Accounts receivable, net of reserve for doubtful accounts of $1,273
at June 30, 1998 and $1,364 at March 31, 1998 8,416 12,706
Prepaid expenses and other current assets 880 838
---------- ---------
Total Current Assets 32,782 34,656
Property and equipment, net 2,605 3,321
Intangible assets, net 416 583
Other assets 417 828
---------- ----------
Total Assets $ 36,220 $ 39,388
---------- ----------
---------- ----------
LIABILITIES and SHAREHOLDERS' EQUITY
Current liabilities
Accounts payable $ 2,012 $ 2,079
Accrued expenses 11,025 11,657
Unearned revenue 10,546 12,136
Accrued restructuring 1,353 2,143
---------- ----------
Total Current Liabilities 24,936 28,015
Long-term restructuring 1,692 2,063
---------- ----------
Total Liabilities 26,628 30,078
---------- ----------
Shareholders' Equity
Preferred stock, par value $.10 per share, authorized 5,000,000 shares:
Series A Junior Participating, none issued and outstanding
Senior Series B Convertible, shares issued and outstanding,
861,911 at June 30, 1998 and March 31, 1998 86 86
Senior Series C Convertible, shares issued and outstanding,
1,010,348 at June 30, 1998 and March 31, 1998 101 101
Senior Series D 6% Convertible, shares issued and outstanding,
7,463 at June 30, 1998 and 7,625 at March 31, 1998 1 1
Common stock, par value $.01 per share, authorized 50,000,000
shares, issued and outstanding, 18,507,993 at June 30, 1998 and
18,155,309 at March 31, 1998 185 182
Additional paid-in capital 93,393 93,369
Retained earnings (accumulated deficit) (83,818) (84,072)
Cumulative translation adjustment (356) (357)
---------- ---------
Total Shareholders' Equity 9,592 9,310
---------- ---------
Total Liabilities and Shareholders' Equity $ 36,220 $ 39,388
---------- ---------
---------- ---------
</TABLE>
See notes to consolidated financial statements
3
<PAGE>
INTERLEAF, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Three months ended June 30
-------------------------------------------
1998 1997
---- ----
(unaudited)
In thousands, except for per share amounts
<S> <C> <C>
Revenues:
Products $ 2,227 $ 2,742
Maintenance 5,848 6,650
Services 2,933 3,434
----------- ----------
Total revenues 11,008 12,826
----------- ----------
Costs of Revenues:
Products 636 730
Maintenance 825 946
Services 2,697 2,839
----------- ----------
Total costs of revenues 4,158 4,515
----------- ----------
Gross margin 6,850 8,311
----------- ----------
Operating Expenses:
Selling, general and administrative 4,970 5,557
Research and development 1,773 2,451
----------- ----------
Total operating expenses 6,743 8,008
----------- ----------
Income from operations 107 303
Other income 147 83
----------- ----------
Income before income taxes 254 386
Provision for income taxes -- --
----------- ----------
Net Income 254 386
Dividends on Preferred Stock (574) ---
----------- ----------
Net income (loss) applicable to common shareholders $ (320) $ 386
----------- ----------
----------- ----------
Income (loss) Per Share:
Basic $ (0.02) $ 0.02
----------- ----------
----------- ----------
Diluted $ (0.02) $ 0.02
----------- ----------
----------- ----------
Shares used in computing basic income (loss) per share 18,378 17,624
----------- ----------
----------- ----------
Shares used in computing diluted income (loss) per share 18,378 22,979
----------- ----------
----------- ----------
</TABLE>
See notes to consolidated financial statements.
4
<PAGE>
INTERLEAF, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOW
<TABLE>
<CAPTION>
Three months ended June 30
----------------------------------
(unaudited)
1998 1997
------------- ------------
In thousands
<S> <C> <C>
Cash Flows from Operating Activities:
Net income $ 254 $ 386
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation and amortization expense 688 997
Changes in assets and liabilities:
Decreases in accounts receivable, net 4,306 3,437
(Increase) decrease in other assets 323 (28)
Decreases in accounts payable and accrued expenses (708) (1,840)
Decreases in unearned revenue (1,612) (1,283)
Decreases in other liabilities (931) (999)
-------- ---------
Net cash provided by operating activities 2,320 670
-------- ---------
Cash Flows from Investing Activities:
Capital expenditures, net (92) (122)
-------- ---------
Net cash used in investing activities (92) (122)
-------- ---------
Cash Flows from Financing Activities:
Net proceeds from issuance of common stock 26 236
-------- --------
Net cash provided by financing activities 26 236
-------- --------
Effect of exchange-rate changes on cash 120 (102)
-------- --------
Net increase in cash and cash equivalents 2,374 682
Cash and cash equivalents at beginning of period 21,112 17,349
-------- --------
Cash and cash equivalents at end of period $ 23,486 $ 18,031
--------- ---------
--------- ---------
</TABLE>
See notes to consolidated financial statements
5
<PAGE>
INTERLEAF, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. Basis of Presentation
The consolidated financial statements include the accounts of Interleaf, Inc.
and its subsidiaries. All significant intercompany balances and transactions
have been eliminated in consolidation. Interleaf, Inc. and its subsidiaries are
collectively referred to as the "Company."
The accompanying unaudited consolidated financial statements have been prepared
in accordance with generally accepted accounting principles for interim
financial information and with the instructions to Form 10-Q and Rule 10-01 of
Regulation S-X. Accordingly, they do not include all financial information and
disclosures required by generally accepted accounting principles for complete
financial statements. In the opinion of management, these financial statements
include all adjustments (consisting only of normal recurring accruals) necessary
for a fair presentation of the results of operations for the interim periods
reported and of the financial condition of the Company as of the date of the
interim balance sheet. The results of operations for interim periods are not
necessarily indicative of the results to be expected for the full year.
These financial statements should be read in conjunction with the Company's
audited consolidated financial statements and related notes included in the
Company's Annual Report on Form 10-K for the year ended March 31, 1998.
2. Recently Issued Accounting Standards
Effective April 1, 1998, the Company adopted Statement of Position (SOP) 97-2,
"Software Revenue Recognition" which provides guidance on applying generally
accepted accounting principles on software transactions and supersedes SOP 91-1,
"Software Revenue Recognition." The adoption of SOP 97-2 did not have a material
impact on the Company's revenue recognition policies for the quarter ended June
30, 1998.
Effective April 1, 1998, the Company adopted Statement of Financial Accounting
Standards No. 130, "Reporting Comprehensive Income." This statement established
standards for reporting comprehensive income and its components. Comprehensive
income for the period is equal to net income plus "other comprehensive income,"
which, for the Company, consists of the change in cumulative translation
adjustments during the period. Total comprehensive income for the quarter ended
June 30, 1998 was $0.3 million, which was not materially different from net
income. For the quarter ended June 30, 1997, total comprehensive income was $0.3
million, which also was not materially different from net income.
On June 15, 1998, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards No. 133, Accounting for Derivative
Instruments and Hedging Activities (FAS 133). FAS 133 is effective for all
fiscal quarters of all fiscal years beginning after June 15, 1999 (April 1, 2000
for the Company). FAS 133 requires that all derivative instruments be recorded
each period in current earnings or other comprehensive income, depending on
whether a derivative is designated as part of a hedge transaction and, if it is,
the type of hedge transaction. The Company is currently evaluating the effect of
implementing this standard.
6
<PAGE>
3. Earnings Per Share
The following table sets forth the computation of basic and diluted earnings
(loss) per share:
<TABLE>
<CAPTION>
Three months ended
June 30,
1998 1997
-------- -------
In thousands, except for per share amounts
<S> <C> <C>
Numerator:
Net Income $ 254 $ 386
------- -------
Preferred Stock Dividends:
Senior Series C Convertible (126) --
Senior Series D Convertible (112) --
Preferred Stock Deemed Dividend:
Senior Series D Convertible (336) --
------- -------
(574) --
------- -------
Numerator for basic income (loss) per share:
Net income (loss) available to common stockholders (320) 386
------- -------
------- -------
Denominator:
Denominator for basic earnings per share:
Weighted average shares 18,378 17,624
------- -------
Effect of dilutive securities:
Series B Convertible Preferred Stock -0- 1,158
Series C convertible Preferred Stock -0- 4,025
Stock options -0- 147
Stock purchase plan rights -0- -0-
Warrants -0- 25
------- -------
Dilutive potential common shares -0- 5,355
Denominator for diluted earnings per share
adjusted weighted average shares and assumed conversions 18,378 22,979
------- -------
------- -------
Basic earnings (loss) per share $ (0.02) $ 0.02
------- -------
------- -------
Diluted earnings (loss) per share $ (0.02) $ 0.02
------- -------
------- -------
</TABLE>
For the three months ended June 30, 1998, potential common shares of 9,981 were
excluded from the computation of diluted earnings per share because the Company
had a net loss applicable to common shareholders, and the effect would have been
antidilutive.
7
<PAGE>
4. Credit Agreement
At June 30, 1998 and March 31, 1998, the Company had an equipment letter of
credit for $0.5 and $0.6 million, respectively, which was secured by the
equivalent amount of cash. This letter of credit expires on July 31, 1999.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
---------------------------------------------
Results of Operations
Overview
The Company reported net income of $0.3 million on total revenues of $11.0
million for its first quarter ended June 30, 1998. During the first quarter of
fiscal 1999, the Company recorded dividends of $0.3 million on its Senior Series
C and Senior Series D preferred stock, and a non-cash deemed dividend of $0.3
million on its Senior Series D preferred stock. Therefore, after dividends on
preferred stock, the Company's net loss applicable to common shareholders was
$0.3 million. This compares with net income of $0.4 million on total revenues of
$12.8 million for the first quarter of fiscal 1998. Since there were no
dividends on preferred stock in the prior year's first quarter ending June 30,
1998, the net income applicable to common shareholders remained at $0.4 million.
The decline of $1.8 million (14%) in revenue in the first quarter of fiscal 1999
compared to the same period in fiscal 1998 was due to a decrease in product
revenue and the related impact on maintenance and service revenue. This revenue
decline has been caused by the ongoing maturation of the market for complex
authoring products and the increasing popularity of low-end versions of
Windows-based authoring software. The Company has continued its efforts to focus
on developing a new content management product family, targeted toward its
customers' extended enterprise.
Revenues
Product: Total product revenue decreased by $0.5 million (19%) in the first
quarter of fiscal 1999 as compared to the same period in fiscal 1998. Product
revenues represented 20% and 21% of total revenues in the first quarter of
fiscal 1999 and 1998, respectively. Revenue declined in all geographic regions.
The continuing trend in the reduction in product revenue is due to two factors.
The first is the decline in licensing of the Company's UNIX-based high-end
authoring products which is primarily attributable to the increasing popularity
of Windows-based publishing software. The 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.
The Company is refocusing its business strategy on providing a new family of
content management products targeted toward specific vertical markets. While the
Company has built well-accepted integrated document publishing based solutions
for individual customers, it has not yet demonstrated the ability to develop,
market and sell content management products. There is no assurance that the
Company will be successful in implementing its strategy and, therefore, the
Company is unable to predict if or when 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 decreased by $0.8 million (12%) in the first
quarter of fiscal 1999 compared to the same period in fiscal 1998. Maintenance
revenues comprised 53% and 52% of total revenues in the first quarter of fiscal
1999 and 1998, respectively. Revenue declined in all geographic regions. Future
maintenance revenue is dependent on the Company's ability to maintain its
existing
8
<PAGE>
customer base and to increase maintenance contract volume related to the new
content management products. This will be necessary to offset the general
downward pricing pressure on maintenance in the software industry and a
reduction in customers' perceived value of maintenance services.
Services: Services revenue, consisting of consulting and customer training
revenue, decreased by $0.5 million (15%) in the first quarter of fiscal 1999
compared to the same period in fiscal 1998. Services revenue represented 27% of
total revenues in the first quarter of both fiscal 1999 and 1998. Revenue
declined in all geographic regions. Future services revenue is dependent on the
Company's ability to maintain its existing customer base and to increase
consulting and training contracts based on the introduction and success of new
products.
Fiscal 1999: During fiscal 1999, the Company plans to develop and release
several upgrades to its traditional products. The Company also plans to develop
product offerings which address at least two vertical segments of the content
management market. Growth in revenues during fiscal 1999 and fiscal 2000 will be
largely dependent on the introduction and customer acceptance of the new and
enhanced software products planned to be released in fiscal 1999 and the
following year, and the Company's success in leveraging software products with
services to provide content management solutions to its customers, improving
sales force productivity and the effectiveness of the Company's investment in
marketing and lead generation programs. If the Company is unable to grow or
stabilize its revenues in fiscal 1999, further expense reductions will be
necessary in order to sustain profitable operations.
Costs of Revenues
Cost of product revenues includes amortization of capitalized software
development costs, product media, documentation materials, packaging and
shipping costs, and royalties paid for licensed technology. Cost of product
revenues decreased by $0.1 million (13%) compared to the same period in fiscal
1998. Cost of product revenues as a percentage of product revenues was 29%
compared to 27% for the same period in fiscal 1998. The cost of maintenance
revenue declined by $0.1 million (13%) compared to the same period in fiscal
1998. Cost of maintenance revenues as a percentage of maintenance revenues was
14% for the first quarter of both fiscal 1999 and 1998. The cost of services
revenue declined by $0.1 million (5%) for the first quarter compared to the same
period in fiscal 1998. Cost of services revenue as a percentage of services
revenue was 92% for the first quarter compared to 83% for the same period in
fiscal 1998. The decline in the costs of revenues was impacted by the
year-to-year decline in product and services revenues.
Operating Expenses
Selling, general and administrative ("SG&A") expenses decreased by $0.6 million
(11%) for the first quarter compared to the same period in fiscal 1998. The
decline was primarily due to continued focus on stringent cost controls by
management.
Research and Development ("R&D") expenses consist primarily of personnel and
related overhead expenses to support product development. R&D expenses decreased
by $0.7 million (28%) for the first quarter compared to the same period in
fiscal 1998. Much of the decline was caused by a reduction in facility costs
when the R&D employees moved to less expensive facilities. No software
development costs were capitalized in the first quarter of fiscal 1999 or in the
first quarter of fiscal 1998.
Liquidity and Capital Resources
The Company had approximately $23.5 million of cash and cash equivalents at June
30, 1998, an increase of $2.4 million from March 31, 1998. The net increase was
the result of cash provided by operations, primarily from collections of
accounts receivable, partially offset by reductions in unearned revenue, other
liabilities, and accounts payable and accrued expenses. At June 30, 1998 and
March 31,
9
<PAGE>
1998, the Company had approximately $1.0 million of cash restricted for
potential payment of a withholding tax assessment on its German subsidiary
related to payments remitted to the United States from Germany in 1990. The
Company is appealing this assessment. The Company believes its current cash
balances and cash generated from operations, offset by restructuring payments,
will be sufficient to meet the Company's liquidity needs for fiscal 1999.
Year 2000
The Company has undertaken a comprehensive evaluation of its internal
information systems in order to evaluate those modifications which will be
required in order to address Year 2000 functionality and other operational
deficiencies. This review is substantially complete, and the Company has
estimated that the cost or risk which may be associated with its Year 2000 or
other internal operational issues is not material. The Company expects to
upgrade certain hardware and software during fiscal year 1999 in order to become
compliant. The estimated cost of these upgrades is less than $0.5 million.
The Company has undertaken a systematic review and planning process concerning
the requirements and abilities of its standard products (including embedded
third party products) to handle date information and to function appropriately
from and after January 1, 2000. The Company intends to discontinue its support
of certain products which it considers obsolete without regard to Year 2000
concerns. Although the Company believes that the effort required to adapt its
supported standard products to the Year 2000 will not have a materially adverse
impact on the Company's financial performance, currently unforeseen
difficulties, delays or requirements could cause this assessment to change. Many
of the Company's customers have implemented custom applications which rely on
the Company's standard products to operate, and the Company does not believe
that it has the obligation to modify those applications for the Year 2000. It is
possible that unforeseen liabilities may arise with respect to discontinued
products or custom applications.
Forward-Looking Statements
This Quarterly Report on Form 10-Q contains forward-looking statements
concerning the Company's performance and business operations. The Company wishes
to caution readers of this Quarterly Report on Form 10-Q that actual future
results may differ materially from the projections or suggestions made in such
forward-looking statements.
Factors which might cause actual future results to differ materially from those
projected in the forward-looking statements contained herein include the
following: The Company's ability to develop and market new and enhanced
products, particularly the Company's content management products and services;
delays in the development and introduction of such new and enhanced products and
services; failure to achieve customer and market acceptance of the Company's new
and enhanced products and services; delays in the growth and development of
market demand for content management software products; inability to increase
maintenance contract revenue related to content management products; inability
to increase revenue from consulting and training contracts with respect to the
introduction of new products; inability to improve sales force productivity; the
Company's ability to keep pace with the rapid technological change in its
industry and compete with companies which have greater market penetration, and
greater financial, technical and marketing resources; failure to adequately
protect the Company's intellectual property; inability to successfully leverage
the Company's software products with services to provide content management
solutions to its customers; inability to establish or maintain strategic
relationships with companies with outsourcing or service bureau businesses and
with companies that have presence and publishing expertise in the financial
services market; the inability of the Company to make acquisitions of, or
significant investments in, businesses that offer complementary products and
technologies; and failure to integrate the operations, information systems and
personnel of any acquired businesses. Certain of these and other factors which
might cause actual results to differ materially from
10
<PAGE>
those projected are more fully set forth under the caption "Risk Factors" on
pages 13-15 of the Company's Annual Report on Form 10-K for the fiscal year
ended March 31, 1998.
PART II - OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
--------------------------------
(a) Exhibits
<TABLE>
<CAPTION>
Exhibit Number Description
-------------- -----------
<S> <C>
3(a) Restated Articles of Organization of the
Company, as amended (incorporated herein
by reference to the applicable Exhibit in
the Company's Quarterly Report on Form
10-Q for the quarter ended December 31,
1996)
3(b) By-Laws of the Company, as amended
(incorporated herein by reference to the
applicable Exhibit to the Company's
Annual Report on From 10-K for the year
ended March 31, 1994)
4(a) Specimen Certificate for Shares of the
Company's Common Stock (incorporated
herein by reference to the applicable
Exhibit to the Company's Registration
Statement on Form S-1, File No. 33-5743)
4(b) Rights Agreement, dated July 15, 1998,
between the Company and the First
National Bank of Boston (incorporated
herein by reference to Exhibit 1 to the
Company's Registration Statement on Form
8-A filed July 27, 1988)
27 Financial Data Schedule
</TABLE>
(b) A Current Report on Form 8-K was filed by the Company on July 13,
1998, reporting under Item 4 , a change in the Company's independent
auditors.
11
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
August 14, 1998
/s/ Peter J. Rice
--------------------------------------------
Peter J. Rice,
Vice President of Finance and Administration
and Chief Financial Officer and Treasurer
(Principal Financial and Accounting Officer)
12
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED BALANCE SHEETS AND CONSOLIDATED STATEMENTS OF OPERATIONS FOUND ON
PAGES 3 AND 4 OF THE COMPANY'S FORM 10-Q FOR THE QUARTERLY PERIOD ENDED JUNE 30,
1998 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> MAR-31-1999
<PERIOD-END> JUN-30-1998
<CASH> 23,486
<SECURITIES> 0
<RECEIVABLES> 9,689
<ALLOWANCES> 1,273
<INVENTORY> 84
<CURRENT-ASSETS> 32,782
<PP&E> 14,887
<DEPRECIATION> 12,282
<TOTAL-ASSETS> 36,220
<CURRENT-LIABILITIES> 24,936
<BONDS> 0
0
188
<COMMON> 185
<OTHER-SE> 9,219
<TOTAL-LIABILITY-AND-EQUITY> 36,220
<SALES> 2,227
<TOTAL-REVENUES> 11,008
<CGS> 636
<TOTAL-COSTS> 4,158
<OTHER-EXPENSES> 6,743
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 254
<INCOME-TAX> 0
<INCOME-CONTINUING> 254
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (320)
<EPS-PRIMARY> (0.02)
<EPS-DILUTED> (0.02)
</TABLE>
