<PAGE>
SCHEDULE 14A INFORMATION
Proxy Statement Pursuant to Section 14(a) of the Securities Exchange Act of 1934
(Amendment No. )
Filed by the Registrant /X/
Filed by a Party other than the Registrant / /
Check the appropriate box:
/ / Preliminary Proxy Statement
/ / Confidential, for Use of the Commission Only (as permitted by
Rule 14a-6(e)(2))
/X/ Definitive Proxy Statement
/ / Definitive Additional Materials
/ / Soliciting Material Pursuant to Rule 14a-11(c) or Rule 14(a)-12
INTERLEAF, INC.
- --------------------------------------------------------------------------------
(Name of Registrant as Specified In Its Charter)
- --------------------------------------------------------------------------------
(Name of Person(s) Filing Proxy Statement if other than the Registrant)
Payment of Filing Fee (Check the appropriate box):
/X/ No fee required.
/ / Fee computed on table below per Exchange Act Rules 14a-6(i)(4) and
0-11.
1) Title of each class of securities to which transaction applies:
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2) Aggregate number of securities to which transaction applies:
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3) Per unit price or other underlying value of transaction
computed pursuant to Exchange Act Rule 0-11. (Set forth the
amount on which the filing fee is calculated and state how it
was determined):
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4) Proposed maximum aggregate value of transaction:
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5) Total fee paid:
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/ / Fee paid previously with preliminary materials.
/ / Check box if any part of the fee is offset as provided by Exchange Act
Rule 0-11(a)(2) and identify the filing for which the offsetting fee
was paid previously. Identify the previous filing by registration
statement number, or the Form or Schedule and the date of its filing.
1) Amount Previously Paid:
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2) Form, Schedule or Registration Statement No.:
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4) Date Filed:
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<PAGE>
NOTICE OF SPECIAL MEETING OF STOCKHOLDERS OF
INTERLEAF, INC.
TO BE HELD DECEMBER 28, 1998
You are hereby notified that a Special Meeting of Stockholders of Interleaf,
Inc. (the "Company") will be held on Monday, December 28, 1998, at 10:00 a.m.,
local time, at the offices of the Company located at 62 Fourth Avenue, Waltham,
Massachusetts, for the following purposes:
1. To consider and act upon a proposal to amend the Company's Restated
Articles of Organization to effect a one for three reverse stock split,
and to delete certain provisions of the Restated Articles which are no
longer applicable.
2. To approve the sale and issuance of up to 7,500,000 shares of Common
Stock of the Company to be issued in connection with a private placement
of shares of the Company's Common Stock.
3. To consider and act upon any other business as may properly come before
the meeting or any adjournment thereof.
The Board of Directors has fixed the close of business on December 1, 1998,
as the record date for determining the stockholders entitled to notice of, and
to vote at, the Special Meeting or any adjournment thereof.
By Order of the Board of Directors,
Craig Newfield, Clerk
Waltham, Massachusetts
December 4, 1998
YOUR VOTE IS IMPORTANT
TO ASSURE YOUR REPRESENTATION AT THE SPECIAL MEETING, YOU ARE URGED TO VOTE,
SIGN, DATE AND RETURN THE ENCLOSED PROXY AS PROMPTLY AS POSSIBLE IN THE
POSTAGE-PAID ENVELOPE ENCLOSED FOR THAT PURPOSE. EVEN IF YOU HAVE GIVEN YOUR
PROXY, THE PROXY MAY BE REVOKED AT ANY TIME PRIOR TO EXERCISE BY FILING WITH THE
CLERK OF THE COMPANY A WRITTEN REVOCATION, BY EXECUTING A PROXY WITH A LATER
DATE, OR BY ATTENDING AND VOTING AT THE SPECIAL MEETING.
<PAGE>
INTERLEAF, INC.
PROXY STATEMENT
FOR THE SPECIAL MEETING OF STOCKHOLDERS
TO BE HELD ON DECEMBER 28, 1998
This Proxy Statement is furnished in connection with the solicitation of
proxies by the Board of Directors of Interleaf, Inc., a Massachusetts
corporation with its principal executive offices at 62 Fourth Avenue, Waltham,
Massachusetts 02451 (the "Company"), for use at the Special Meeting of
Stockholders to be held on Monday, December 28, 1998, and at any adjournment
thereof (the "Special Meeting").
The enclosed proxy relating to the Special Meeting is solicited on behalf of
the Board of Directors of the Company and the cost of solicitation of proxies
will be borne by the Company. Certain of the Company's officers and other
employees of the Company may solicit proxies by correspondence, telephone,
telegraph and personal interviews, without extra compensation. The Company may
also pay to banks, brokers, nominees, and other fiduciaries their reasonable
expenses incurred in forwarding proxy materials to their principals. In
addition, the Company intends to retain a proxy solicitor at a cost to the
Company of approximately $6,000. It is expected that the Notice of Special
Meeting, Proxy Statement and Proxy Card will be mailed to stockholders of the
Company on or about December 4, 1998.
Only stockholders of record at the close of business on December 1, 1998
(the "Record Date") will be entitled to receive notice of, and to vote at, the
Special Meeting. As of the Record Date, there were outstanding and entitled to
vote 22,568,199 shares of Common Stock of the Company, $.01 par value per share
("Common Stock"), and 802,375 shares of the Company's Senior Series B
Convertible Preferred Stock, $.10 par value per share ("Series B Stock"). Each
share of (i) Common Stock is entitled to one vote per share, and (ii) Series B
Stock is entitled to 1.34375 votes per share. Therefore, the total number of
votes eligible to be cast on the matters proposed herein for consideration at
the Special Meeting is 23,646,391. The 6% Convertible Preferred Stock, $.10 par
value per share ("Series D Stock"), will not have any voting rights on the
matters to be submitted to stockholders at the Special Meeting.
The enclosed proxy, if executed and returned, will be voted in accordance
with the stockholder's instructions or, if no choice is specified, the proxies
will be voted in favor of the matters set forth in the accompanying Notice of
Special Meeting. If any other matters shall properly come before the Special
Meeting, the enclosed proxy will be voted by the proxies in accordance with
their best judgment. The proxy may be revoked by a stockholder at any time prior
to its exercise by filing with the Clerk of the Company a written revocation, by
executing a subsequently dated proxy, or by attending in person and voting at
the Special Meeting.
PROPOSAL NO. 1
APPROVAL OF REVERSE STOCK SPLIT AND
OTHER CHANGES
GENERAL
The Board of Directors of the Company has approved a proposal to amend the
Restated Articles of Organization of the Company (the "Articles") to effect a
one-for-three reverse stock split (the "Reverse Stock Split") of the presently
issued and outstanding shares of the Company's Common Stock, par value $.01 per
share, subject to the approval of the stockholders of the Company. At the same
time, the Company will also amend the Articles to delete all references to the
Series A Junior Participating
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Preferred Stock ("Series A Stock") and Series C Convertible Preferred Stock
("Series C Stock"), as no shares of such classes are outstanding. The complete
text of the amendment to the Articles (the "Amendment to the Articles") is set
forth in Appendix A to this Proxy Statement. If these changes are approved by
the requisite vote of the Company's stockholders, the Reverse Stock Split will
be effective on the date that the Amendment to the Articles is filed with the
Secretary of State of the Commonwealth of Massachusetts (the "Effective Date"),
and each certificate representing shares of Common Stock outstanding immediately
prior to the Reverse Stock Split (the "Old Common Stock") will be deemed
automatically without any action on the part of the stockholders to represent
one-third the number of shares of Common Stock after the Reverse Stock Split
(the "New Common Stock"); provided, however, that no fractional shares of New
Common Stock will be issued as a result of the Reverse Stock Split. In lieu
thereof, each stockholder whose shares of Old Common Stock are not evenly
divisible by three will receive one full share of New Common Stock for any
fractional part of New Common Stock to which that stockholder would otherwise be
entitled as a result of the Reverse Stock Split (i.e., each fractional share of
New Common Stock will be rounded upward to the nearest whole share of New Common
Stock). After the Reverse Stock Split becomes effective, stockholders will be
asked to surrender certificates representing shares of Old Common Stock in
accordance with the procedures set forth in a letter of transmittal to be sent
by the Company. Upon such surrender, a certificate representing shares of New
Common Stock will be issued and forwarded to the stockholders; however, each
certificate representing shares of Old Common Stock will continue to be valid
and represent shares of New Common Stock equal to one-third the number of shares
of Old Common Stock (rounded up to the next whole share).
Neither the number of shares nor the par value of the Company's capital
stock authorized by the Articles will change as a result of the Reverse Stock
Split. The New Common Stock issued pursuant to the Reverse Stock Split will be
fully paid and nonassessable. The voting and other rights that presently
characterize the Common Stock will not be altered by the Reverse Stock Split.
REASONS FOR THE REVERSE STOCK SPLIT
The principal reason for the proposed Reverse Stock Split is for the
Company's Common Stock to continue to remain eligible for listing on the Nasdaq
National Market. In order to maintain listing on the Nasdaq National Market, the
closing bid price of the Company's Common Stock must be at least $1.00 per
share. As of the Record Date, the closing bid price for the Company's Common
Stock had been below $1.00 for a period of 42 days. On November 13, 1998, The
Nasdaq Stock Market, Inc. ("Nasdaq") advised the Company that it is not in
compliance with the continuing maintenance requirements for the Nasdaq National
Market and that failure to maintain a bid price greater than or equal to $1.00
per share on an ongoing basis will result in the future delisting of the
Company's Common Stock, which may adversely affect the trading in and liquidity
of the Company's Common Stock. The Board of Directors believes that the
reduction of the number of issued and outstanding shares of Common Stock as a
result of the proposed Reverse Stock Split will increase the bid price of the
Common Stock to a level above Nasdaq's minimum bid price continuing maintenance
requirement. However, the Company cannot be sure that even after the Reverse
Stock Split it will meet the minimum bid price or any other minimum maintenance
standards established by Nasdaq. For example, if Proposal No. 2 is not approved,
the Company may not be able to meet the net tangible asset requirement.
The Board of Directors also believes that the proposed Reverse Stock Split
is desirable for other reasons. Before the Reverse Stock Split but after the
redemption of the Series C Stock and conversion of the Series D Stock as
described below, there are expected to be approximately 22.5 million shares of
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Common Stock outstanding and another 5.0 million shares issuable upon exercise
of outstanding options, warrants and conversion rights, plus another
approximately 7.5 million shares potentially issuable upon consummation of the
Private Placement described in Proposal No. 2, for a total of 35 million shares,
which is a large number for a corporation of the Company's size. The Board of
Directors believes the Reverse Stock Split should enhance the acceptability of
the Common Stock by the financial community and investing public. The Board of
Directors also believes that the proposed Reverse Stock Split will result in a
broader market for the Company's Common Stock than that which currently exists.
A variety of brokerage firm policies and practices tend to discourage those
firms from dealing with lower priced stocks. Some of those policies and
practices pertain to the payment of broker's commissions and to time-consuming
procedures that make the handling of lower priced stocks economically
unattractive to brokers. In addition, because the brokerage commission on a
lower priced stock generally represents a higher percentage of the sales price
than on a relatively higher priced issue, it discourages investor interest. The
proposed Reverse Stock Split should result in a price level for the Common Stock
that will, to some extent, reduce these negative effects. The expected increase
in price level may also encourage interest and trading in the Common Stock and
promote greater liquidity for the Company's stockholders, although liquidity
could be adversely affected by the reduced number of shares of Common Stock
outstanding.
There can be no assurance that any or all of the aforementioned effects will
occur. In particular, it is not unusual for the market price to fail to fully
adjust for a stock split or reverse stock split (i.e., the market price for
shares of the New Common Stock after the Reverse Stock Split may be less than
three times the market price per share of Old Common Stock before the Reverse
Stock Split). The Board of Directors cannot predict what effect the Reverse
Stock Split will have on the market price of the Common Stock.
EFFECT OF THE REVERSE STOCK SPLIT
Although the Company expects to file the Amendment to the Articles with the
Secretary of State of the Commonwealth of Massachusetts promptly following
approval of the Reverse Stock Split proposal, the actual timing of such filing
(and whether such filing is made) will be determined by the Board of Directors
based upon their evaluation as to when such action will be most advantageous to
the Company and its stockholders.
The Company presently has capital stock of 50,000,000 shares of Common Stock
authorized. The Reverse Stock Split would have no effect on the number of
authorized shares of Common Stock or the par value of the Common Stock, and each
share of New Common Stock will continue to entitle its holder to one vote. After
the Reverse Stock Split, the number of shares of capital stock available for
issuance will increase. Although the Company has no present plans to issue any
shares of Common Stock other than as set forth in Proposal No. 2, the issuance
of shares of the Company's capital stock, while providing desirable flexibility
in connection with possible acquisitions and other corporate purposes, could
have the effect of making it more difficult for a third party to acquire, or of
discouraging a third party from acquiring, a majority of the outstanding voting
stock of the Company. After the Reverse Stock Split, each stockholder will own
one-third as many shares (but the same percentage of the outstanding shares) as
such stockholder owned before the Reverse Stock Split; provided, however, that
any fractional share shall be rounded upward to the nearest whole share. The
number of shares of Common Stock that may be purchased upon the exercise of
outstanding options, warrants, and other securities convertible into, or
exercisable or exchangeable for, shares of Common Stock, including outstanding
shares of the Company's Series B Stock and the per share exercise price or
conversion prices thereof, will be adjusted as of the Effective Date of the
Reverse Stock Split so that the aggregate number of shares of Common Stock
issuable in respect of
3
<PAGE>
convertible securities immediately following the Effective Date will be
one-third of the number issuable in respect thereof immediately prior to the
Effective Date, and the aggregate exercise or conversion prices thereunder will
remain unchanged. The Series D Stock is convertible into Common Stock at a
conversion price determined as a discount to fair market value of the Common
Stock, and therefore the conversion price of the Series D Stock will not be
automatically adjusted by the Reverse Stock Split; provided, however, that if
the Reverse Stock Split has the effect of increasing the fair market value of
the Common Stock, then it will also have the effect of increasing the conversion
price of the Series D Stock and decreasing the aggregate number of shares of
Common Stock issuable in respect thereof. Under the terms of the Series D Stock
there are certain terms which are fixed, and which will automatically be
adjusted by the Reverse Stock Split, such as a cap on the conversion price
effective as of January 1, 1999, a "Green Floor Price" at which the Company has
the option of satisfying a conversion request in cash, and other terms.
The following table illustrates the principal effects of the proposed
Reverse Stock Split:
<TABLE>
<CAPTION>
PRIOR TO
PROPOSED AFTER PROPOSED
REVERSE STOCK REVERSE
SHARES OF COMMON STOCK SPLIT STOCK SPLIT
<S> <C> <C>
Authorized 50,000,000 50,000,000
Outstanding 22,543,199(1) 7,514,400(2)
Shares Issuable with Respect to Convertible
Securities(3)(4) 5,070,983 1,690,328
Shares Issuable under Proposal No. 2 7,500,000 2,500,000
</TABLE>
- ------------------------
(1) Shares outstanding as of the Record Date.
(2) Does not include shares of New Common Stock to be issued in lieu of
fractional shares.
(3) Does not include shares of Old Common Stock or New Common Stock issuable
upon conversion of the Series D Stock. There are currently outstanding 1,500
shares of Series D Stock and warrants to purchase an additional 763 shares
of Series D Stock, which are currently convertible in the aggregate into
approximately 3.65 million shares of Old Common Stock. If fair market value
of the New Common Stock is triple that of Old Common Stock as a result of
the Reverse Stock Split, then the Series D Stock and warrants would be
convertible into approximately 1.22 million shares of New Common Stock.
(4) Also does not include shares of Common Stock issuable pursuant to the
agreements under which the Company purchased all of the capital stock of PDR
Automated Systems and Publications, Inc. ("PDR"). Under such agreements, the
Company is obligated to issue to the former stockholders of PDR a number of
shares of Common Stock equal to a specified dollar amount which (depending
on certain financial contingencies) could range from $700,000 to $4.0
million.
The Company's outstanding Common Stock is currently registered under Section
12(g) of the Securities Exchange Act of the 1934, as amended (the "Exchange
Act") and, as a result, the Company is subject to the periodic reporting and
other requirements of the Exchange Act. The Reverse Stock Split will not effect
the registration of the Common Stock under the Exchange Act. After the Effective
Date, trading
4
<PAGE>
of the shares of the New Common Stock will continue to be reported on the Nasdaq
National Market under the Company's symbol "LEAF."
EXCHANGE OF STOCK CERTIFICATES; NO FRACTIONAL SHARES
The combination and reclassification of shares of Common Stock pursuant to
the proposed Reverse Stock Spilt will occur automatically on the Effective Date
without any action on the part of the stockholders of the Company and without
regard to the date certificates representing shares of Old Common Stock prior to
the Reverse Stock Split are physically surrendered for new certificates. Every
three shares of issued and outstanding Old Common Stock will be converted and
reclassified into one share of New Common Stock, and any fractional interests
resulting from such reclassification will be rounded upward to the nearest whole
share. For example, a holder of one hundred shares of Old Common Stock will be
the holder of thirty-four shares of New Common Stock at the Effective Date.
As soon as practicable after the Effective Date of the Reverse Stock Split,
the Company will send a letter of transmittal to each holder of record of shares
of Old Common Stock outstanding on the Effective Date. The letter of transmittal
will contain instructions for the surrender of certificate(s) representing
shares of Old Common Stock to Boston EquiServe, L.P. ("Boston EquiServe"), the
Company's exchange agent (the "Exchange Agent"). Upon proper completion and
execution of the letter of transmittal and return thereof to the Exchange Agent,
together with the certificate(s) representing shares of Old Common Stock, a
stockholder will be entitled to receive a certificate representing the number of
shares of New Common Stock into which his or her shares of Old Common Stock have
been reclassified and changed as a result of the Reverse Stock Split, which
certificate shall include shares resulting from the rounding up of any
fractional shares. Stockholders will not be required to pay any transfer fee or
other fee in connection with the exchange of certificates.
Stockholders should not submit any certificates until requested to do so. No
new certificate will be issued to a stockholder until he has surrendered his
outstanding certificate(s), together with the properly completed and executed
letter of transmittal, to the Exchange Agent.
After the Effective Date, each certificate representing shares of Old Common
Stock will, until surrendered and exchanged as described above, be deemed for
all purposes to evidence ownership of the number of shares of New Common Stock
into which the shares of Old Common Stock evidenced by such certificate have
been converted by the Reverse Stock Split.
FEDERAL INCOME TAX CONSEQUENCES OF THE REVERSE STOCK SPLIT
The following discussion of material federal income tax consequences of the
Reverse Stock Split is based upon the Internal Revenue Code of 1986, as amended
(the "Code"), Treasury regulations promulgated thereunder, judicial decisions,
and current administrative rulings and practices, all as in effect on the date
hereof and all of which could be repealed, overruled, or modified at any time,
possibly with retroactive effect.
This discussion may not address certain federal income tax consequences that
may be relevant to particular stockholders in light of their personal
circumstances or to certain types of stockholders (such as dealers in
securities, insurance companies, foreign individuals and entities, financial
institutions, and tax-exempt entities) who may be subject to special treatment
under the federal income tax laws. This discussion also does not address any tax
consequences under state, local or foreign laws.
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<PAGE>
No ruling from the Internal Revenue Service (the "IRS") has been requested
nor opinion of counsel sought or obtained with respect to the matters discussed
herein, and there is no assurance that the IRS or counsel would agree with the
conclusions set forth in this discussion. EACH STOCKHOLDER IS ENCOURAGED TO
CONSULT HIS OR HER OWN TAX ADVISOR REGARDING THE SPECIFIC TAX CONSEQUENCES OF
THE PROPOSED TRANSACTION TO SUCH STOCKHOLDER, INCLUDING THE APPLICATION AND
EFFECT OF STATE, LOCAL AND FOREIGN INCOME AND OTHER TAX LAWS.
The Reverse Stock Split will be effected pursuant to Section 368(a)(1)(E) of
the Code. Generally, the Reverse Stock Split will be a tax-free recapitalization
for the Company and its stockholders. Stockholders will have an aggregate basis
in the New Common Stock for reporting gain or loss equal to the aggregate basis
they had in the Old Common Stock and the holding period for the New Common Stock
will be the same as the stockholder's holding period in the Old Common Stock.
MISCELLANEOUS
The Board of Directors may abandon the proposed Reverse Stock Split at any
time before or after the Special Meeting and prior to the Effective Date of the
Reverse Stock Split if for any reason the Board of Directors deems it advisable
to abandon the proposal. The Board of Directors may consider abandoning the
proposed Reverse Stock Split if it determines, in its sole discretion, that the
Reverse Stock Split would, among other things, adversely affect the ability of
the Company to raise capital or the liquidity of the Common Stock. In addition,
the Board of Directors may make any and all changes to the Amendment to the
Articles that it deems necessary to file the Amendment to the Articles with the
Secretary of State of the Commonwealth of Massachusetts and give effect to the
Reverse Stock Split.
REMOVAL OF TERMS OF PREFERRED STOCK
In connection with the Amendment of the Articles for the Reverse Stock
Split, the Company will also amend the Articles to delete the description of the
rights and preferences of the Series A Stock and Series C Stock, and the shares
of Preferred Stock formerly designated as belonging to those series will be
restored to the status of undesignated Preferred Stock. The Series A Stock was
designated in connection with a Shareholder Rights Plan which has expired, and
no shares were ever issued. All outstanding shares of Series C Stock were
redeemed in November, 1998. The terms of the Senior Series B Preferred Stock and
6% Convertible ("Series D") Preferred Stock will not be affected by the
Amendment to the Articles.
VOTE REQUIRED
The affirmative vote of a majority of the votes entitled to be cast by
shares of capital stock outstanding and entitled to vote at the Special Meeting
is required to approve the Amendment to the Articles to effect the Reverse Stock
Split and removal from designation of the Series A Stock and Series C Stock.
RECOMMENDATION OF THE BOARD OF DIRECTORS
THE BOARD OF DIRECTORS RECOMMENDS A VOTE "FOR" PROPOSAL NO. 1.
6
<PAGE>
PROPOSAL NO. 2
APPROVAL OF 1998 PRIVATE PLACEMENT
GENERAL
The Company's stockholders are requested to approve the issuance of up to a
maximum of 7,500,000 shares of Common Stock to be issued in connection with the
proposed private placement of shares of its Common Stock, par value $.01 per
share (the "Private Placement"). On November 18, 1998, the Company entered into
a Common Stock Purchase Agreements (the "Purchase Agreements") with nine
purchasers (the "Purchasers") pursuant to which the Purchasers agreed upon the
request of the Company within certain time periods to purchase up to a total of
4,586,250 shares as specified in the Purchase Agreement at a purchase price of
$.80 per share, or an aggregate consideration of approximately $3,669,000. The
Company anticipates entering into additional stock purchase agreements, pursuant
to which the Company will have the right to sell up to an additional 2,913,750
shares of Common Stock in the Private Placement under the same terms and
conditions as the Purchase Agreements. (Except as specifically indicated, all
share information under this Proposal No. 2 is without giving effect to the
Reverse Stock Split described in Proposal No. 1.) The shares are being issued in
the Private Placement in reliance on an exemption from registration under
Regulation D promulgated under the Securities Act of 1933, as amended (the
"Securities Act").
Pursuant to the terms of the Purchase Agreements, the Company may, by
delivering a notice of sale to the Purchasers at any time, prior to the later of
December 31, 1998 or five business days after the resale registration statement
described below is declared effective, require the Purchasers to purchase that
number of shares of the Company's Common Stock is as specified in the notice of
sale.
Under the terms of the Purchase Agreements, the Company is required to file
a registration statement under the Securities Act with respect to the resale of
the shares of Common Stock sold in the Private Placement, and to use its best
efforts to have such registration statement declared effective as soon
thereafter as possible.
STOCKHOLDER APPROVAL
The issuance of the maximum number of shares of the Company's Common Stock
covered by the Private Placement is subject to stockholder approval pursuant to
the Nasdaq Marketplace Rules. Rule 4460(i)(1)(D) of the Marketplace Rules (the
"20% Rule") requires companies that are listed on the Nasdaq National Market to
obtain stockholder approval prior to, among other things, issuing common stock
in a private financing at a price less than the greater of book or market value
of the common stock, where the amount of common stock to be issued exceeds 20%
of the common stock or voting power of the company outstanding prior to the
issuance. Although the $.80 per share price was above the market price at the
time that the purchase price was negotiated with the unaffiliated Private
Placement Purchasers, it may be less than the market price at the time of the
issuance.
Therefore, a condition to the sale of Common Stock to be sold in the Private
Placement is that the Company's stockholders approve such issuances to the
extent such issuances of Common Stock exceed 4,513,640 shares, which is 20% of
the Common Stock of the Company prior to the issuances.
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<PAGE>
RELATIONSHIP OF CERTAIN PURCHASERS TO THE COMPANY
Certain of the Purchasers in the Private Placement are affiliates of the
Company. These affiliates were requested by the unaffiliated Purchasers to
invest some of their own money to purchase shares of the Company's Common Stock
in the Private Placement as an inducement to the other Purchasers to enter into
the Purchase Agreements. Messrs. Jaime W. Ellertson, President and Chief
Executive Officer of the Company, Peter J. Rice, Chief Financial Officer of the
Company, John E. Pavlov, Vice President of Development of the Company, Craig
Newfield, Vice President and General Counsel of the Company, Frederick B.
Bamber, a director of the Company, and Rory J. Cowan, Chairman of the Board of
Directors of the Company, agreed to purchase 175,000, 6,250, 5,000, 6,250,
12,500 and 6,250 shares, respectively, at a purchase price of $.80 per share.
REASONS FOR PRIVATE PLACEMENT
In August and October, 1998, the Company's Board of Directors reviewed the
Company's capital structure in light of its financial condition and low stock
price, and determined that it was in the Company's best interest to attempt to
repurchase and retire the Series C Stock and to redeem or negotiate a fixed
conversion price for the Series D Stock.
SUMMARY OF THE TRANSACTIONS. The following table summarizes the net effect
of the redemption of the Series C Stock, the partial conversion of the Series D
Stock and the Private Placement, as further described below:
POTENTIAL DILUTION
(Shares of Common Stock Issuable)
<TABLE>
<CAPTION>
BEFORE TRANSACTION AFTER
------------ ------------------------------------------------- ------------
<S> <C> <C> <C>
SERIES D 13,152,000 Converted 79% into Common Stock 3,525,811
21% Remains Outstanding 2,823,529
SERIES C 4,041,392 Redeemed 100% 0
PRIVATE PLACEMENT n/a Using $1.58m for Series C redemption 1,973,336
Using $2.2m for Series D partial conversion 2,743,500
TOTALS 17,193,392 11,066,176
</TABLE>
The net, cash neutral effect of these transactions would be to reduce the
potential dilution to the outstanding Common Stock by 6,127,216 shares, if the
Company were to raise exactly $3.78 million in the Private Placement.
Under the terms of the Series C Stock, the Company would have been obligated
to pay dividends semi-annually each October 15 and April 15 at the rate of 5%
through 1998 ($251,354 due October 15, 1998) and 10% ($1,005,418 due in 1999 and
in future years). On October 26, 1998, the Company redeemed all 1,010,348 shares
of Series C Stock outstanding for cash payments totaling $1,578,669. The
purchase price is more than offset by the benefit of elimination of the future
dividends. In addition, the Series C Stock was convertible at a fixed 4:1 ratio
into 4,041,392 shares of Common Stock. The purchase price of $1.58 million
equates to a price of $ .39 per share of Common Stock equivalent, which was
approximately
8
<PAGE>
50% below the trading price of the common Stock at the time of the redemption.
Therefore, the redemption was significantly anti-dilutive to the common
stockholders.
The Series D Stock is convertible into Common Stock at a 15% discount to the
average of the three lowest trading prices during the 22 trading day period
prior to the date of conversion. On October 27, 1998, the Company reached an
agreement with the holders of 79% of the outstanding shares of Series D Stock,
as amended on November 4, 1998, pursuant to which such shares were converted
into $2,194,800 in cash and 3,525,811 shares of Common Stock of the Company on
November 18, 1998. On that date, absent such agreement such shares of Series D
Stock were convertible into 10,328,471 shares of Common Stock. If the Company's
stock price were to fall further, the dilutive potential of such Series D Stock
would have been even greater. The terms of this negotiated conversion were based
on a conversion price of $1.10, which was a premium of 30% over the closing
price of the Common Stock on the day prior to the conversion. Therefore, the
negotiated conversion was significantly anti-dilutive to the common
stockholders.
Obtaining additional funds is critical to the Company's ability to satisfy
its obligations pursuant to the above agreements while also maintaining its net
tangible assets above the $4 million minimum dollar amount required under Rule
4450(a)(iii) of the Nasdaq Marketplace Rules in order for the Company to
maintain compliance with the continuing maintenance requirements of the Nasdaq
National Market.
CONSEQUENCES OF NON-APPROVAL
The Company has paid for redemption of the Series C Stock and the conversion
of a portion of the Series D Stock out of working capital, which has been
significantly depleted. As a result, management believes that the Company's
tangible net assets at the end of the current fiscal quarter may be below the $4
million level required under the Nasdaq Marketplace Rules. Because the Company
anticipates the sale and issuance of more than 20% of its Common Stock in the
Private Placement at a price that may be less than the greater of book or market
value of the Company's Common Stock, pursuant to the 20% Rule, the Company may
not raise any additional funds (if such sales result in the Company exceeding
the 20% threshold for issuances of Common Stock) through the sale of equity
unless the stockholders approve the issuance, as they are being requested to do
in this Proposal No. 2. Because there can be no assurance that the Company would
be able to sell its equity at a price at least equal to market value or in a
public offering, and because a public offering would require great expense and
possible delay, the Company's best option for obtaining the financing it
requires to satisfy its obligations while maintaining compliance with the Nasdaq
minimum net tangible asset requirement is through stockholder approval of
Proposal No. 2.
In the Purchase Agreements, the Company agreed to use its best efforts to
obtain stockholder approval for the issuances of the shares contemplated by that
Agreement. Therefore, if Proposal No. 2 is not approved at the Special Meeting,
the Purchase Agreements could arguably require the Company to continue to seek
stockholder approval, which would be costly to the Company. If Proposal No. 2 is
not approved at the Special Meeting the Company may consummate the Private
Placement while the Company continues to use its best efforts to obtain such
approval. However, if the Company cannot obtain such approval by January 29,
1998, then the Company would be obligated to re-purchase the Common Stock issued
pursuant to the Purchase Agreements at the purchase price paid, plus a penalty
of ten (10%) percent.
9
<PAGE>
USE OF PROCEEDS
The Company intends to use the proceeds raised in the Private Placement to
fund the cost of redemption of the Series C Stock and its conversion of a
substantial part of the Series D Stock. Any additional proceeds from the sale of
Common Stock would be used for general corporate purposes, including sales and
marketing, and research and development activities.
EFFECT ON OUTSTANDING COMMON STOCK AND PREFERRED STOCK
The issuance of the shares of Common Stock in the Private Placement will
have no effect on the rights or privileges of existing holders of Common Stock
or Preferred Stock except that the economic interests and voting rights of each
stockholder will be diluted as a result of such issuances.
VOTE REQUIRED
The affirmative vote of a majority of the votes entitled to be cast by
outstanding shares of capital stock present in person or by proxy and entitled
to vote at the Special Meeting is required to approve Proposal No. 2.
BOARD RECOMMENDATION
Although the additional issuance of the shares in the Private Placement will
have a dilutive effect on the Company's current stockholders, the Board of
Directors believes that stockholder approval is in the best interest of the
Company, since the Company's ability to raise additional financing absent
stockholder approval is severely limited, could be very costly to the Company
and could result in the Company's failure to maintain its net tangible assets at
or above the minimum level required by Nasdaq.
THE BOARD OF DIRECTORS RECOMMENDS A VOTE "FOR" PROPOSAL NO. 2.
SECURITY OWNERSHIP OF DIRECTORS AND OFFICERS
The following table sets forth certain information, as of December 1, 1998,
with respect to the beneficial ownership of the Company's voting shares by (i)
each director of the Company, (ii) each of the Company's executive officers as
required to be reported under Item 402(a)(3) Regulation S-K under the Securities
Act, (ii) all current directors and executive officers of the Company as a
group, and (iv) each person known by the Company to beneficially own more than
five (5%) percent of the outstanding shares of any voting class. This
information is based upon information received from or on behalf of the
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<PAGE>
individuals. Unless otherwise indicated, each stockholder referred to herein has
the sole voting and investment power over the shares listed.
<TABLE>
<CAPTION>
CLASS OF STOCK
-------------------------------------------------------------------------------------
SERIES B STOCK SERIES D STOCK
COMMON STOCK -------------------------- --------------------------
--------------------------- NO. OF NO. OF % OF TOTAL
NO. OF SHARES SHARES SHARES VOTING
BENEFICIALLY % OF CLASS BENEFICIALLY % OF CLASS BENEFICIALLY % OF CLASS CAPITAL STOCK
OWNED(1) OUTSTANDING OWNED OUTSTANDING OWNED OUTSTANDING OUTSTANDING(2)(3)
------------- ----------- ------------ ----------- ------------ ----------- -----------------
<S> <C> <C> <C> <C> <C> <C> <C>
DIRECTORS, OFFICERS AND
5% STOCKHOLDERS
- ------------------------
DIRECTORS AND OFFICERS
Frederick B. Bamber..... 33,100(4) * -- -- -- -- *
David A. Boucher........ 216,844(5) 1% -- -- -- -- 1%
Rory J. Cowan........... 85,000(6) * -- -- -- -- *
Marcia J. Hooper........ 25,000(7) * -- -- -- -- *
John A. Lopiano......... 3,000 * -- -- -- -- *
Jaime W. Ellertson...... 387,225(8) 1.7% -- -- -- -- 1.6%
Gary Phillips........... 37,500(9) * -- -- -- -- *
Christopher McKee....... 37,500(10) * -- -- -- -- *
John Pavlov............. 32,500(11) * -- -- -- -- *
Peter J. Rice........... 6,000 * -- -- -- -- *
Craig Newfield.......... 31,250(12) * -- -- -- -- *
Michael Torto........... 0(13) * -- -- -- -- *
All current directors
and executive officers
as a group (12
persons).............. 897,132(14) 3.8% -- -- -- -- 3.7%
5% STOCKHOLDERS
GeoCapital LLC
767 Fifth Avenue,
45(th) Floor
New York, NY
10153-4590............ 2,530,900 11.2% -- -- -- -- 10.7%
Advent International
Corporation
101 Federal Street
Boston, MA 02110...... -- -- 802,375(15) 100% -- -- 4.6%
SIL Nominees, Ltd.
1888 Century Park East
Suite 1108
Los Angeles, CA
90067................. -- -- -- -- 1,500 66.3% --
Cappello Capital Corp.
1299 Ocean Avenue,
Suite 306
Santa Monica, CA
90401................. -- -- -- -- 763(16) 33.7% --
</TABLE>
11
<PAGE>
- ------------------------
* Indicates less than 1%
(1) Does not include shares of Common Stock beneficially owned by virtue of
right to convert shares of Preferred Stock listed in other columns. In
addition, none of the beneficial ownership or option numbers in this
section of the Proxy Statement include any shares which may be purchasable
under the Company's 1987 Employee Stock Purchase Plan, any shares to be
purchased pursuant to the Private Placement, or the effects of the Reverse
Stock Split.
(2) Each share of Series B Stock has 1.34375 votes per share and is convertible
into that number of shares of Common Stock.
(3) Each share of Series D Stock may be converted into a number of shares of
Common Stock which depends on the trading prices of the Common Stock during
the 22 trading day period prior to the date of conversion. If all Series D
Stock warrants had been converted into Common Stock, and then all shares of
Series D Stock were converted into Common Stock based upon the applicable
conversion price formula as of December 1, 1998, they would have been
converted into approximately 4.26 million shares of Common Stock. The
Series D Stock has no voting power, except (i) as to whether a
consolidation or merger of the Company or a sale of all or substantially
all of its assets will constitute a liquidation or winding-up of the
Company for purposes of determining if such stock is entitled to its
liquidation preference, or (ii) as provided by law. The Series D Stock has
no right to vote on any Proposal contained herein.
(4) Includes 25,000 shares of Common Stock issuable pursuant to options which
are exercisable within 60 days after December 1, 1998.
(5) Includes 20,000 shares of Common Stock issuable pursuant to options which
are exercisable within 60 days after December 1, 1998.
(6) Includes 75,000 shares of Common Stock issuable pursuant to options which
are exercisable within 60 days after December 1, 1998.
(7) Includes 25,000 shares of Common Stock issuable pursuant to options which
are exercisable within 60 days after December 1, 1998. Does not include
861,911 shares of Series B Stock listed as beneficially owned by Advent
International Corporation, in which Ms. Hooper serves as Vice President.
(8) Includes 362,500 shares of Common Stock issuable pursuant to options which
are exercisable within 60 days after December 1, 1998.
(9) Consists of 37,500 shares of Common Stock issuable pursuant to options
which are exercisable within 60 days after December 1, 1998.
(10) Consists of 37,500 shares of Common Stock issuable pursuant to options
which are exercisable within 60 days after December 1, 1998.
(11) Consists of 32,500 shares of Common Stock issuable pursuant to options
which are exercisable within 60 days after December 1, 1998.
(12) Consists of 31,250 shares issuable pursuant to options which are
exercisable within 60 days after December 1, 1998.
12
<PAGE>
(13) Mr. Torto has resigned all positions with the Company.
(14) Includes 646,250 shares of Common Stock issuable upon exercise of options
held by five directors and seven executive officers which are exercisable
within 60 days after December 1, 1998. Does not include any Series B Stock
beneficially owned by Advent International Corporation, of which Ms. Marcia
Hooper (a director of the Company) serves as Vice President.
(15) Represents shares of Series B Stock beneficially held by various limited
partnerships of which Advent International Corporation is either the
general partner or a general partner of the general partner ("Advent").
These shares are currently convertible into an aggregate of 1,158,193
shares of Common Stock.
(16) Represents shares of Series D Stock issuable upon the exercise of Series D
Stock purchase warrants which were issued to Cappello Capital Corp. for
acting as the placement agent of the Series D Stock. These warrants are
immediately exercisable, and have been assigned to principals of the
placement agent and their family members.
OTHER MATTERS
VOTING PROCEDURES
The votes of stockholders present in person or represented by proxy and
entitled to vote at the Special Meeting (including shares which abstain from or
do not vote with respect to one or more of the matters presented at the Special
Meeting) will be tabulated by the inspector of elections appointed by the
Company. Boston Equiserve was appointed inspector for the Special Meeting and
will determine whether or not a quorum is present for a particular matter. The
affirmative vote of shares holding a majority of the votes entitled to be cast
by all shares outstanding and entitled to vote, whether or not present at the
meeting, is required for the approval of Proposal No. 1. The affirmative vote of
shares holding a majority of the votes entitled to be cast by shares present in
person or by proxy and entitled to vote at the Special Meeting is required for
the approval of Proposal No. 2.
Abstentions will be treated as shares that are present and entitled to vote,
but will not count as votes in favor of any matter. Accordingly, an abstention
from voting on Proposal Nos. 1 or 2 has the same legal effect as a vote
"against" the matter, even though the stockholder abstaining may intend a
different interpretation. Shares held of record by brokers who do not return a
signed and dated proxy will not be considered present at the meeting, will not
be counted towards a quorum and will not be voted on Proposal Nos. 1 and 2.
Shares held of record by brokers who return a signed and dated proxy but who do
not vote on either of Proposal Nos. 1 and 2 will count towards the quorum, but
will count neither for nor against the Proposal not voted. Shares considered as
not voted will have no effect on Proposal No. 2, but will have a negative effect
upon passage of Proposal No. 1.
STOCKHOLDER PROPOSALS
Proposals which stockholders intend to present at the Company's 1999 Annual
Meeting of Stockholders pursuant to Rule 14a-8 promulgated under the Securities
Exchange Act of 1934, as amended, must be received by the Company at its
principal office in Waltham, Massachusetts, no later than March 26, 1999 for
inclusion in the proxy statement for that meeting. If a proponent fails to
notify the Company by June 9, 1999 of a non-Rule 14a-8 Stockholder proposal
which it intends to submit at the Company's 1999 Annual
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<PAGE>
Meeting of Stockholders, the proxy solicited by the Board of Directors with
respect to such meeting may grant discretionary authority to the proxies named
therein to vote with respect to such matter.
OTHER PROPOSED ACTION
The Board of Directors knows of no other business to come before the Special
Meeting. However, if any other business should properly be presented to the
Special Meeting, the proxies will be voted in accordance with the judgment of
the person or persons holding the proxies.
IT IS IMPORTANT THAT PROXIES BE RETURNED PROMPTLY. THEREFORE, STOCKHOLDERS
ARE URGED TO FILL IN, SIGN AND RETURN THE ACCOMPANYING FORM OF PROXY IN THE
ENCLOSED ENVELOPE.
14
<PAGE>
APPENDIX A
PROPOSED ARTICLES OF AMENDMENT TO THE RESTATED
ARTICLES OF ORGANIZATION OF INTERLEAF, INC.
Interleaf, Inc., a Massachusetts corporation (the "Corporation"), does
hereby certify:
FIRST: That pursuant to action taken by unanimous written consent of the
directors of the Corporation, a vote was duly adopted setting forth a proposed
amendment to the Restated Articles of Organization of the Corporation, and
declaring such amendment to be advisable and resolving to obtain stockholder
approval of the proposed amendment at the Special Meeting of the Stockholders of
the Corporation for consideration thereof. The vote setting forth the proposed
amendment is as follows:
VOTED: Upon the Articles of Amendment to the Restated Articles of
Organization becoming effective pursuant to Massachusetts General Laws (the
"Effective Time"), each THREE outstanding shares of Common Stock, par value
$.01 per share (the "Old Common Stock"), shall thereupon be reclassified and
changed into ONE share of Common Stock, par value $.01 per share (the "New
Common Stock"). Upon such Effective Time, each holder of Old Common Stock
shall thereupon automatically be and become the holder of ONE share of New
Common Stock for every THREE shares of Old Common Stock then held by such
holder. Upon such Effective Time, each certificate formerly representing a
stated number of shares of Old Common Stock shall thereupon be deemed for
all corporate purposes to evidence ownership of New Common Stock in the
appropriately reduced whole number of shares. As soon as practicable after
such Effective Time, stockholders as of the date of the reclassification
will be notified by a letter of transmittal of the reverse stock split and,
upon their delivery of their certificates of Common Stock in accordance with
such letter of transmittal, will be sent new stock certificates representing
their shares of New Common Stock. No fractional shares will be issued by the
Corporation. In lieu thereof, each stockholder whose shares of Old Common
Stock are not evenly divisible by three will receive one additional share of
New Common Stock for the fractional share of Old Common Stock such
stockholder would otherwise be entitled to as a result of the reverse stock
split.
VOTED: That whereas the right for any stockholder to receive shares of
Series A Junior Participating Preferred Stock ("Series A Preferred Stock")
has expired and all of the shares of the Series C Convertible Preferred
Stock ("Series C Preferred Stock") have been redeemed, it is deemed
advisable to amend the Restated Articles of Organization of the Corporation
to delete the Certificate of Designation filed for shares of each of the
Series A Preferred Stock and Series C Preferred Stock.
VOTED: That the Board of Directors be and are hereby authorized to restore
the shares of Series A and Series C Preferred Stock to the status of
authorized but unissued shares of Preferred Stock of the Corporation,
undesignated as to series.
VOTED: That the proper officers of the Corporation be, and they hereby are,
authorized and directed to execute and file the Articles of Amendment with
the Secretary of State of the Commonwealth of Massachusetts to effectuate
the amendments contemplated by the foregoing votes.
SECOND: That thereafter, pursuant to a vote of the Board of Directors, a
special meeting of the stockholders of the Corporation was duly called and held,
upon notice in accordance with Section 36 of Chapter 156B of the Massachusetts
General Laws at which meeting the necessary number of shares
15
<PAGE>
required by Section 70 of Chapter 156B of the Massachusetts General Laws voted
in favor of the amendment.
THIRD: That such amendment was duly adopted in accordance with the
provisions of Section 70 of Chapter 156B of the Massachusetts General Laws.
FOURTH: That the Effective Date of this amendment shall be , 1998.
16
<PAGE>
INTERLEAF, INC.
Proxy for the Special Meeting of Shareholders to be held December 28, 1998
THIS PROXY IS SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS
OF THE COMPANY
The undersigned, revoking all prior proxies, hereby appoint(s) Jaime W.
Ellertson and Peter J. Rice and Craig Newfield, and each of them, with full
power of substitution, as proxies to represent and vote as designated herein,
all shares of capital stock of Interleaf, Inc. (the "Company") which the
undersigned would be entitled to vote if personally present at the Special
Meeting of Shareholders of the Company to be held at Interleaf, Inc.,
62 Fourth Avenue, Wallham, Massachusetts on Monday, December 28, 1998 at
10:00 a.m., local time, and at any adjournment thereof.
This proxy when properly executed will be voted in the manner directed
by the undersigned shareholder. If no direction is given, this proxy will be
voted for all proposals. Attendance of the undersigned at the meeting or at
any adjournment thereof will not be deemed to revoke this proxy unless the
undersigned shall revoke this proxy in writing.
- --------------- ---------------
SEE REVERSE CONTINUED AND TO SIGNED ON REVERSE SIDE SEE REVERSE
SIDE SIDE
- --------------- ---------------
<PAGE>
1. To consider and act upon a proposal to amend the Company's Restated
Articles of Organization to effect a one for three reverse stock split,
and to delete certain provisions of the Restated Articles which are no
longer applicable.
/ / FOR / / AGAINST / / ABSTAIN
2. To approve the sale and issuance of up to shares of Common
--------
Stock of the Company to be issued in connection with a private placement
of shares of the Company's Common Stock.
/ / FOR / / AGAINST / / ABSTAIN
3. To consider and act upon any other business as may properly come before
the meeting of any adjournment thereof.
MARK HERE FOR ADDRESS CHANGE AND NOTE AT LEFT / /
In their discretion, the proxies are authorized to
vote upon such other matters as may properly come
before the meeting or any adjournment thereof.
Signature Date
---------------------------------------- ----------------------
Signature Date
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