<PAGE>
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-Q
/X/ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934.
For the Quarterly period ended DECEMBER 31, 1998.
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or
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934.
For the transition period from _____________ to ______________.
COMMISSION FILE NUMBER 0-14713
[graphic]
Interleaf, Inc.
---------------
(exact name of registrant 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 02451
(Address of principal executive offices) (Zip Code)
(781) 290-0710
(Registrant's telephone number,
including area code)
Indicate by check /X/ 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 February 9, 1999 was 7,652,480.
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<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
PART I - FINANCIAL INFORMATION
ITEM 1 - Financial Statements
Consolidated balance sheets at December 31, 1998 and March 31, 1998.................................. 3
Consolidated statements of operations for the three and nine months ended
December 31, 1998 and 1997 ........................................................................... 4
Consolidated statements of cash flows for the nine months ended
December 31, 1998 and 1997 ........................................................................... 5
Notes to consolidated financial statements ........................................................... 6
ITEM 2 - Management's Discussion and Analysis of Financial Condition
and Results of Operations ................................................................. 10
PART II - OTHER INFORMATION
ITEM 2 - Changes in Securities and Use of Proceeds................................................... 17
ITEM 4 - Submission of Matters to Vote of Security Holders ........................................... 18
ITEM 5 - Other Information ........................................................................... 18
ITEM 6 - Exhibits and Reports on Form 8-K ............................................................ 18
SIGNATURES ........................................................................................... 19
</TABLE>
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<PAGE>
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
INTERLEAF, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
December 31,1998 March 31, 1998
---------------- --------------
In thousands, except for share and per share amounts (unaudited)
<S> <C> <C>
ASSETS
Current assets
Cash and cash equivalents $ 11,064 $ 21,112
Accounts receivable, net of reserve for doubtful accounts of $1,141 at
December 31, 1998 and $1,364 at March 31, 1998 12,927 12,706
Prepaid expenses and other current assets 2,185 838
--------- ---------
Total Current Assets 26,176 34,656
Property and equipment, net 2,185 3,321
Intangible assets, net 1,816 583
Other assets 389 828
--------- ---------
Total Assets $ 30,566 $ 39,388
--------- ---------
--------- ---------
LIABILITIES and SHAREHOLDERS' EQUITY
Current liabilities
Accounts payable $ 1,847 $ 2,079
Accrued expenses 12,138 11,657
Unearned revenue 10,169 12,136
Accrued restructuring 1,137 2,143
--------- ---------
Total Current Liabilities 25,291 28,015
Long-term restructuring 1,244 2,063
--------- ---------
Total Liabilities 26,535 30,078
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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,
726,003 at December 31, 1998 and 861,911 at March 31, 1998 73 86
Senior Series C Convertible, shares issued and outstanding, none at
December 31, 1998 and 1,010,348 at March 31, 1998 -- 101
Senior Series D 6% Convertible, shares issued and outstanding,
1,350 at December 31, 1998 and 7,625 at March 31, 1998 -- 1
Common stock, par value $.01 per share, authorized 50,000,000 shares,
issued and outstanding, 7,651,828 at December 31, 1998 and
6,051,770 at March 31, 1998 77 61
Additional paid-in capital 90,217 93,490
Retained earnings (accumulated deficit) (86,147) (84,072)
Cumulative translation adjustment (189) (357)
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Total Shareholders' Equity 4,031 9,310
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Total Liabilities and Shareholders' Equity $ 30,566 $ 39,388
--------- ---------
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</TABLE>
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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<PAGE>
INTERLEAF, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Three months ended Nine months ended
December 31 December 31
1998 1997 1998 1997
---- ---- ---- ----
(unaudited) (unaudited)
In thousands, except for per share amounts
<S> <C> <C> <C> <C>
Revenues:
Products $ 2,265 $ 3,695 $ 6,150 $ 9,595
Maintenance 5,576 6,400 16,592 19,744
Services 3,795 3,329 9,912 10,029
-------- -------- -------- --------
Total revenues 11,636 13,424 32,654 39,368
-------- -------- -------- --------
Costs of Revenues:
Products 545 1,177 1,817 2,859
Maintenance 724 976 2,300 2,934
Services 3,400 2,831 9,067 8,547
-------- -------- -------- --------
Total costs of revenues 4,669 4,984 13,184 14,340
-------- -------- -------- --------
Gross margin 6,967 8,440 19,470 25,028
Operating Expenses:
Selling, general and administrative 4,511 5,762 14,874 16,794
Research and development 2,347 2,021 6,179 6,788
Purchased in process research & development -- -- 990 --
-------- -------- -------- --------
Total operating expenses 6,858 7,783 22,043 23,582
-------- -------- -------- --------
Income (loss) from operations 109 657 (2,573) 1,446
Other income 132 69 523 115
-------- -------- -------- --------
Income (loss) before income taxes 241 726 (2,050) 1,561
Provision for income taxes -- -- 25 --
-------- -------- -------- --------
Net Income (loss) $ 241 $ 726 $ (2,075) $ 1,561
-------- -------- -------- --------
Dividends on Preferred Stock (94) -- (553) --
Gain on preferred stock redemption 8,771 -- 8,771 --
-------- -------- -------- --------
Net income applicable to common
shareholders-basic earnings per share $ 8,918 $ 726 $ 6,143 $ 1,561
-------- -------- -------- --------
Effect of dilutive securities
Dividends on Preferred Stock 74 -- 492 --
Gain on preferred stock redemption (8,771) -- (8,771) --
-------- -------- -------- --------
Net income (loss) applicable to common
shareholders-diluted earnings per share $ 221 $ 726 $ (2,136) $ 1,561
-------- -------- -------- --------
-------- -------- -------- --------
INCOME (LOSS) PER SHARE:
Basic $ 1.30 $ 0.12 $ 0.96 $ 0.26
-------- -------- -------- --------
-------- -------- -------- --------
Diluted $ 0.03 $ 0.10 $ (0.25) $ 0.20
-------- -------- -------- --------
-------- -------- -------- --------
Shares used in computing income (loss) per share
Basic 6,884 5,964 6,418 5,919
-------- -------- -------- --------
-------- -------- -------- --------
Diluted 8,406 7,203 8,642 7,712
-------- -------- -------- --------
-------- -------- -------- --------
</TABLE>
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<PAGE>
INTERLEAF, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOW
<TABLE>
<CAPTION>
Nine months ended December 31
------------------------------
Unaudited
---------
1998 1997
---- ----
<S> <C> <C>
In thousands
Cash Flows from Operating Activities:
Net (loss) income $ (2,075) $ 1,561
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation and amortization expense 2,028 3,110
Purchased in-process research & development 990 --
Changes in assets and liabilities, net of amounts acquired:
Decrease (increases) in accounts receivable, net 964 (900)
Decreases (increases) in other assets 62 (1,094)
Decreases in accounts payable and accrued expenses (1,437) (1,677)
Decreases in unearned revenue (2,154) (4,284)
Decreases in other liabilities (1,572) (2,623)
Other, net (59) 405
-------- --------
Net cash used in operating activities (3,253) (5,502)
-------- --------
Cash Flows from Investing Activities:
Capital expenditures, net (650) (919)
Acquisitions, net of cash acquired (2,731) --
-------- --------
Net cash used in investing activities (3,381) (919)
-------- --------
Cash Flows from Financing Activities:
Net proceeds from issuance of common stock -- 1,420
Net proceeds from issuance of convertible preferred stock -- 6,961
Repayment of long-term debt & capital leases -- (20)
Dividends Paid (251) --
Redemption of preferred stock (3,824) --
-------- --------
Net cash (used in) provided by financing activities (4,075) 8,361
-------- --------
Effect of exchange-rate changes on cash 661 (618)
-------- --------
Net (decrease) increase in cash and cash equivalents (10,048) 1,322
Cash and cash equivalents at beginning of period 21,112 17,349
-------- --------
Cash and cash equivalents at end of period $ 11,064 $ 18,761
-------- --------
-------- --------
</TABLE>
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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<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 for 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 for the quarter or nine month period
ended December 31, 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 Company is equal to net income plus the change in cumulative
translation adjustments during the period. Total comprehensive income for the
quarter ended December 31, 1998 was $.2 million, and for the nine months ended
December 31, 1998, total comprehensive income was a loss of $1.9 million. For
the quarter and nine months ended December 31, 1997, total comprehensive income
was $.7 million and $1.4 million respectively.
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
(for the Company, the fiscal year beginning April 1, 2000). 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; however, the Company does not currently engage in any hedging
activities.
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<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 Nine Months ended
December 31, December 31,
1998 1997 1998 1997
------- ------- ------- -------
In thousands, except for per share amounts
<S> <C> <C> <C> <C>
NUMERATOR:
Net income $ 241 $ 726 $(2,075) $ 1,561
Preferred stock dividends
Senior series C convertible (30) -- (283) --
Senior series D convertible -redeemed (44) -- (209) --
Senior series D convertible -outstanding (20) -- (61) --
------- ------- ------- -------
(94) -- (553) --
------- ------- ------- -------
Gains on redemption
Senior series C convertible 8,100 -- 8,100 --
Senior series D convertible 671 -- 671 --
------- ------- ------- -------
8,771 -- 8,771 --
------- ------- ------- -------
Numerator for basic income (loss) per share
Income loss available to common shareholders 8,918 726 6,143 1,561
------- ------- ------- -------
EFFECT OF DILUTIVE SECURITIES
Preferred stock dividends
Senior series C convertible 30 -- 283 --
Senior series D convertible -redeemed 44 -- 209 --
Senior series D convertible -outstanding - -- -- --
------- ------- ------- -------
74 -- 492 --
------- ------- ------- -------
Gains on redemption
Senior series C convertible (8,100) -- (8,100) --
Senior series D convertible (671) -- (671) --
------- ------- ------- -------
(8,771) -- (8,771) --
------- ------- ------- -------
Numerator for diluted income (loss) per share
Income (loss) available to common shareholders $ 221 $ 726 $(2,136) $ 1,561
------- ------- ------- -------
------- ------- ------- -------
DENOMINATOR:
Denominator for basic earnings per share
Weighted average shares 6,884 5,964 6,418 5,919
------- ------- ------- -------
Effect of dilutive securities
Series B convertible preferred stock 284 386 -- 386
Series C convertible preferred stock 322 -- 1,008 894
Series D convertible preferred stock 764 -- 1,216 --
Stock options 152 792 -- 482
Stock purchase plan rights -- 56 -- 26
Warrants -- 5 -- 5
------- ------- ------- -------
Dilutive potential common shares 1,522 1,239 2,224 1,793
------- ------- ------- -------
Denominator for diluted earnings per share
Adjusted weighted average shares
and assumed conversions 8,406 7,203 8,642 7,712
------- ------- ------- -------
------- ------- ------- -------
Basic earnings (loss) per share $ 1.30 $ 0.12 $ 0.96 $ 0.26
------- ------- ------- -------
------- ------- ------- -------
Diluted earnings (loss) per share $ 0.03 $ 0.10 $ (0.25) $ 0.20
------- ------- ------- -------
------- ------- ------- -------
</TABLE>
Effective December 31, 1998, the Company declared a 1 for 3 reverse split of
its common stock. Par value did not change as a result, and all share and per
share data have been restated to give effect to the 1 for 3 reverse split. In
connection with a private placement of Common Stock (see Note 6), the Company
issued 1,761,167 shares of Common Stock on February 16, 1999. These shares
are not included in the basic and diluted earnings (loss) per share amounts
for the three and nine month periods ending December 31, 1998 and 1997.
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<PAGE>
4. ACQUISITIONS
Effective August 31, 1998, the Company purchased 100% of the outstanding
common shares of PDR Automated Systems and Publications, Inc. ("PDR"). PDR
provides subcontracting and outsourcing services for the development,
management and distribution of information, and has developed certain
technology surrounding image processing. The acquisition has been accounted
for as a purchase business combination and, therefore, the operating
results of PDR have been included in the Consolidated Statement of
Operations since the date of acquisition. The Company paid cash of $2.9
million and, depending upon certain financial contingencies, may pay an
additional $3.0 million or more, payable in stock, except that the Company
may pay in cash under certain circumstances. A minimum contingent payment
of $.7 million is included in accrued expenses in the accompanying balance
sheet as part of the initial purchase price. The Company recorded costs
associated with the acquisition of $.1 million related to valuation
services, legal and audit fees.
In connection with this acquisition, the acquired net tangible assets of
PDR were recorded at $1.3 million, which approximates fair value. The
Company has also recorded $1.6 million of goodwill and other intangibles,
and $.8 million of purchased in-process research and development. It has
been determined that technological feasibility of the in-process technology
purchased has not been established and the technology has no alternative
future use. Therefore, in accordance with generally accepted accounting
principles, the Company has expensed the amount of the purchase price
allocated to purchased research and development of approximately $.8
million. The goodwill and other intangibles will be amortized on a straight
line basis over estimated useful lives ranging up to ten years.
The following pro-forma results of operations combine the operations of the
Company and PDR as if the combination had occurred at the beginning of each
period.
<TABLE>
<CAPTION>
Nine Months Ended
-----------------
Amounts in thousands, except 12/31/98 12/31/97
per share amounts -------- --------
<S> <C> <C>
Revenue $ 35,136 $44,088
--------- -------
Net income (loss) applicable to common
stockholders:
Basic $ 6,284 $ 1,309
--------- -------
--------- -------
Diluted $ (1,995) $ 1,309
--------- -------
--------- -------
Earning per share:
Basic $ .98 $ .22
--------- -------
--------- -------
Diluted $ (.23) $ .17
--------- -------
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</TABLE>
Effective September 11, 1998, the Company acquired the Panorama and CD Web
Publishing product lines from Softquad Inc. for $.4 million. The
acquisition provides the Company with products which are complementary to
its existing complex publishing product line and in-process technologies
which are expected to contribute to the development of the Company's new
content management products. The total fair value of the assets acquired
was approximately $.1 million.
In connection with this acquisition, it has been determined that
technological feasibility of the in-process technology purchased has not
been established and the technology has no alternative future use.
Therefore, in accordance with generally accepted accounting principles, the
Company has expensed the amount of the purchase price allocated to
purchased research and development of
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<PAGE>
approximately $.2 million. The excess of purchase price over the fair value
of the assets acquired ($.1 million) has been recorded as goodwill, and
will be amortized on a straight line basis over five years. This
acquisition is not considered material to the Company's financial position
or results of operation.
In connection with the acquisitions of PDR and certain assets of
Softquad, Inc. during the current fiscal year as described above,
Interleaf wrote off approximately $990,000 for in-process research and
development. The SEC has recently increased the scrutiny of certain
accounting practices, including the extent of write-offs of in-process
research and development in connection with acquisitions. While
Interleaf did obtain an evaluation from an outside accounting firm
concerning the amount of its write-off with respect to PDR, there is a
risk that a portion of those write-offs may be reduced, which would
result in a corresponding increase in the amount of goodwill and other
intangibles associated with those acquisitions. Any additional goodwill
would have to be amortized over future years.
5. CREDIT AGREEMENT
At December 31, 1998 and March 31, 1998, the Company had an equipment
letter of credit for $.4 and $.6 million, respectively, which was secured
by the equivalent amount of cash. This letter of credit expires on July 31,
1999.
6. STOCKHOLDER'S EQUITY
During the third quarter, the Company redeemed 100% of its Series C
Convertible Preferred Stock ("Series C Stock") for $1.6 million.
Additionally, dividends accrued at September 30, 1998 totaling $.2 million
were waived and will not be paid. For purposes of the 1999 third quarter
and nine months basic earnings per share calculation, this redemption
resulted in $8.1 million being added to net income to arrive at net income
available to common shareholders. The $8.1 million represents the excess of
the carrying amount of the Series C Stock over the fair value of the
consideration paid by the Company.
On November 4, 1998, the Company reached agreement with the holders of 79%
of its 6% Convertible Preferred Stock ("Series D Stock") outstanding,
pursuant to which all of the Series D Stock held by such persons (5,487
shares out of 6,987 outstanding) was converted into a total of
approximately $2.2 million in cash and approximately 3.5 million shares of
Common Stock. This conversion occurred on November 18, 1998. The shares of
Common Stock issued to the former Series D stockholders are held subject to
the restrictions on re-sale, prohibitions against short-selling and the
other terms and conditions of the Preferred Stock Investment Agreement
under which the Series D Stock was originally issued. For purposes of the
1999 third quarter and nine months basic earnings per share calculation,
this conversion resulted in $.7 million being added to net income to arrive
at net income available to common shareholders. The $.7 million represents
the excess of the carrying amount of Series D Stock over the fair value of
consideration paid by the Company.
The Company financed the redemption of the Series C Shares and the
cash portion of the conversion of the Series D Shares out of its
existing working capital and the sale of Common Stock to investors in a
private placement described below.
Between November 18 and December 15, 1998, the Company entered into
agreements with certain officers, directors and existing stockholders
of the Company under which each of them granted to the Company an
option to require each to purchase a specified number of shares of
Common Stock, up to an aggregate maximum of 1,761,167 shares if
Interleaf exercised its option in full, at an exercise price of $2.40
per share. On February 11, 1999, the Company exercised its option in
full and the 1,761,167 shares were issued on February 16, 1999 and the
Company received $4.2 million in cash proceeds.
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<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
RESULTS OF OPERATIONS
OVERVIEW
The Company reported net income of $.2 million on revenues of $11.6 million
for its third quarter and a net loss of $2.1 million on revenues of $32.7
million for the nine months ended December 31, 1998. The Company has recorded
preferred stock dividends of $.1 million and $.6 million for the third
quarter and nine months ended December 31, 1998, respectively, in deriving
net income applicable to common shareholders for basic earnings per share.
Additionally the Company recorded gains on the redemption of all outstanding
shares of its Series C preferred stock and conversion of 79% of its
outstanding Series D preferred stock aggregating $8.8 million. For purposes
of calculating diluted earnings per shares, all of the gains on redemption of
the preferred stock have been excluded. Dividends on the remaining
outstanding Series D shares have been included in the calculation of diluted
earnings per share for the third quarter and nine months ended December 31,
1998. Therefore, after dividends on preferred stock, the Company's net income
applicable to common shareholders was $8.9 million and $6.1 million for the
third quarter and nine months ended December 31, 1998, respectively, for
purposes of basic earnings per share. For purposes of diluted earnings per
share, the Company had net income applicable to common shareholders of $.2
million for the third quarter of 1998 and a net loss of $2.1 million for the
nine months ended December 31, 1998. This compares with net income of $.7
million on revenues of $13.4 million and net income of $1.6 million on
revenues of $39.4 million for the same periods during the prior year. There
were no dividends to record in the third quarter or the nine months ended
December 31, 1997.
Much of the decline in revenue is due to a decrease in product revenue and the
related decline in maintenance and service revenue caused by the continuing
maturation and saturation 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 to its customers' extended enterprises.
Effective August 31, 1998, the Company purchased 100% of the outstanding common
shares of PDR Automated Systems and Publications, Inc. ("PDR"). PDR provides
subcontracting and outsourcing services for the development, management and
distribution of information, and has developed certain technology surrounding
image processing. The acquisition has been accounted for as a purchase business
combination and, therefore, the operating results of PDR have been included in
the Consolidated Statement of Operations since the date of acquisition. The
Company paid cash of $2.9 million and, depending upon certain financial
contingencies, may pay an additional $3.0 million or more, payable in stock,
except that the Company may pay in cash under certain circumstances. A minimum
contingent payment of $.7 million is included in accrued expenses in the
accompanying balance sheet as part of the initial purchase price. The Company
recorded costs associated with the acquisition of $.1 million related to
valuation services, legal and audit fees.
In connection with this acquisition, the acquired net tangible assets of PDR
were recorded at $1.3 million, which approximates fair value. The Company has
also recorded $1.6 million of goodwill and other intangibles, and $.8 million of
purchased in-process research and development. It has been determined that
technological feasibility of the in-process technology purchased has not been
established and the technology has no alternative future use. Therefore, in
accordance with generally accepted accounting principles, the Company has
expensed the amount of the purchase price allocated to purchased research and
development of approximately $.8 million. The goodwill and other intangibles
will be amortized on a straight line basis over estimated useful lives ranging
up to ten years.
-10-
<PAGE>
Effective September 11, 1998, the Company acquired the Panorama and CD Web
Publishing product lines from Softquad Inc. for $.4 million. The acquisition
provides the Company with products which are complementary to its existing
complex publishing product line and in-process technologies which are expected
to contribute to the development of the Company's new content management
products. The total fair value of the assets acquired was approximately $.1
million.
In connection with this acquisition, it has been determined that technological
feasibility of the in-process technology purchased has not been established and
the technology has no alternative future use. Therefore, in accordance with
generally accepted accounting principles, the Company has expensed the amount of
the purchase price allocated to purchased research and development of
approximately $.2 million. The excess of purchase price over the fair value of
the assets acquired ($.1 million) has been recorded as goodwill, and will be
amortized on a straight line basis over five years. This acquisition is not
considered material to the Company's financial position or results of operation.
In connection with the acquisitions of PDR and certain assets of Softquad,
Inc. during the current fiscal year as described above, Interleaf wrote off
approximately $990,000 for in-process research and development. The SEC has
recently increased the scrutiny of certain accounting practices, including
the extent of write-offs of in-process research and development in connection
with acquisitions. While Interleaf did obtain an evaluation from an outside
accounting firm concerning the amount of its write-off with respect to PDR,
there is a risk that a portion of those write-offs may be reduced, which
would result in a corresponding increase in the amount of goodwill and other
intangibles associated with those acquisitions. Any additional goodwill would
have to be amortized over future years.
REVENUES
PRODUCT: Product revenue decreased by $1.4 million (39%) and $3.4 million (36%)
for the third quarter and nine months ended December 31, 1998, respectively,
compared with the same periods in fiscal 1998. The continuing trend of reduction
in product revenue is due to two factors. The first 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 second factor 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 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 are 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 $.8 million (13%) and $3.2 million
(16%) for the third quarter and nine months ended December 31, 1998,
respectively, compared with the same periods in fiscal 1998. Future maintenance
revenue is dependent on the Company's ability to maintain its existing customer
base and to increase maintenance contract volume related to the new 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.
-11-
<PAGE>
SERVICES: Service revenue, consisting of consulting and training revenue,
increased by $.5 million (14%) and $.1 million (1%) for the third quarter and
nine months ended December 31, 1998, respectively, compared with the same
periods in fiscal 1998. The increase in the third quarter is attributable to the
inclusion of PDR for the entire three month period. 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 the balance of fiscal 1999, the Company plans to develop and
release several upgrades to its traditional products. During the balance of
fiscal 1999 and beyond, the Company also plans to develop new 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. As part of its strategy to increase revenues,
the Company acquired PDR and acquired the Panorama and CD Web Publishing product
lines of SoftQuad Inc. The acquisition of PDR also provides the Company with
in-process development of certain technology surrounding image processing that
is expected to result in a completed product in fiscal 2000 and may be
incorporated into a content management software product currently under
development. The acquisition of the Panorama and CD Web Publishing product line
complements the Company's existing complex publishing products, and provides
technologies and resources to be used in the development of content management
products. The technologies acquired from this acquisition are expected to
shorten the development cycle of the Company's new content management products.
COSTS OF REVENUES
Cost of product revenue 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 $.6 million (54%) and $1.0 million (36%) for the third
quarter and nine months ending December 31, 1998 compared to the same periods
in fiscal 1998. Cost of product revenues as a percentage of product revenues
were (24%) and (30%) for the third quarter and the nine months ended December
31, 1998, respectively, compared with (32%) and (30%) for the same periods in
fiscal 1998. The decrease in cost of product revenue is due to decreased
amortization of capitalized software development cost, decreased royalties
expense and reduced cost of manufacturing. The cost of maintenance revenue
declined by $.3 million (26%) and $.6 million (22%) for the third quarter and
the nine months ended December 31, 1998, compared with the same periods in
fiscal 1998. Maintenance cost is directly related to maintenance revenue, and
the reduction in costs of maintenance are mainly the result of reduced
maintenance revenue. The cost of services revenue increased by $.6 million
(20%) and $.5 million (6%) for the third quarter and nine months ending
December 31, 1998, respectively, compared with same periods of fiscal 1998.
The increase in cost of service revenue was due to the inclusion of the
results of PDR during the quarter. The cost of services revenue as a
percentage of service revenue was 90% for the third quarter and 91% for the
nine months ended December 31, 1998 compared with 85% for the same periods
fiscal 1998. The increase in cost of services as a percentage of revenues
reflects the pricing pressure in the Company's consulting service business
coupled with increasing salary and related costs of consultants.
-12-
<PAGE>
OPERATING EXPENSES
Selling, general and administrative ("SG&A") expenses decreased by 1.3 million
(22%) and $1.9 million (11%) for the third quarter and nine months ended
December 31, 1998, respectively, compared with the same periods in fiscal 1998.
The declines were primarily due to a continued focus on stringent cost controls
by management, including an expense reduction initiative that began in September
1998. Additionally, SG&A expense was reduced by $.2 million as a result of the
adjustment of certain accrued expenses for which it was determined an accrual
were no longer necessary.
Research and development ("R&D") expenses consist primarily of personnel and
related overhead expenses to support product development. R&D expenses increased
by $.3 million (16%) in the third quarter of fiscal 1999 compared with the same
period of 1998. The increase is attributable to additional resources added to
accelerate the development of the Company's new enterprise content management
products. R&D expenses decreased by $.6 million (9%) for the nine months ended
December 31, 1998 compared with the same period of fiscal 1998. The decline can
be attributed to the Company's focus on cost controls resulting in lower
overhead expenses, mainly reduced facility costs of the Company's engineering
group and dedication of the Company's engineering resources to fewer development
projects.
In connection with the acquisition of PDR and the Panorama and CD Web Publishing
product line from SoftQuad, Inc., the Company recorded charges of $.8 million
and $.2 million, respectively, of purchased in-process research and development.
LIQUIDITY AND CAPITAL RESOURCES
The Company had approximately $11.1 million of cash and cash equivalents at
December 31, 1998, a decrease of $10.0 million from March 31, 1998. The decrease
in cash is mainly attributed to the amounts paid for the acquisition of PDR
($2.4 million net of cash acquired) and the Panorama and CD Web Publishing
product line from SoftQuad, Inc. ($.3 million), the redemption of the Series C
and D preferred Stock ($3.8 million) coupled with the decreases in cash due to
operating activities, $3.3 million, capital expenditures, $.7 million and
dividend payments, $.3 million. These decreases were partially offset by the
increase in cash due to the effect of exchange rate changes on cash, mainly cash
held by the Company's German subsidiary of $.7 million.
During the third quarter, the Company redeemed 100% of its Series C Convertible
Preferred Stock ("Series C Stock") for $1.6 million. Additionally, dividends
accrued at September 30, 1998 totaling $.2 million were waived and will not be
paid. For purposes of the 1999 third quarter and nine months basic earnings per
share calculation, this redemption resulted in $8.1 million being added to net
income to arrive at net income available to common shareholders. The $8.1
million represents the excess of the carrying amount of the Series C Stock over
the fair value of the consideration paid by the Company.
On November 4, 1998, the Company reached agreement with the holders of 79% of
its 6% Convertible Preferred Stock ("Series D Stock") outstanding, pursuant
to which all of the Series D Stock held by such persons (5,487 shares out of
6,987 outstanding) was converted into a total of approximately $2.2 million
in cash and approximately 3.5 million shares of Common Stock. This conversion
occurred on November 18, 1998. The shares of Common Stock issued to the
former Series D stockholders are held subject to the restrictions on re-sale,
prohibitions against short-selling and the other terms and conditions of the
Preferred Stock Investment Agreement under which the Series D Stock was
originally issued. For purposes of the 1999 third quarter and nine months
basic earnings per share calculation, this conversion resulted in $.7 million
being added to net income to arrive at net income available to common
-13-
<PAGE>
shareholders. The $.7 million represents the excess of the carrying amount of
Series D Stock over the fair value of consideration paid by the Company.
The Company financed the redemption of the Series C Shares and the cash
portion of the conversion of the Series D Shares out of its existing working
capital and the sale of Common Stock to investors in a private placement
described below.
Between November 18 and December 15, 1998, the Company entered into
agreements with certain officers, directors and existing stockholders of the
Company under which each of them granted to the Company an option to require
each to purchase a specified number of shares of Common Stock, up to an
aggregate maximum of 1,761,167 shares if Interleaf exercised its option in
full, at an exercise price of $2.40 per share. On February 11, 1999, the
Company exercised its option in full and the 1,761,167 shares were issued on
February 16, 1999 and the Company received $4.2 million in cash proceeds.
At December 31, 1998 and March 31, 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, combined with the cash proceeds from the private placement
(previously discussed), offset by restructuring payments, will be
sufficient to meet the Company's liquidity needs for fiscal 1999 and the
foreseeable future.
YEAR 2000
BACKGROUND
Some computers, software, and other equipment include programming code in which
calendar year data is abbreviated to only two digits. As a result of this design
decision, some of the systems do not properly recognize a year that begins with
"20" instead of "19". These problems are widely expected to increase in
frequency and severity as the year 2000 approaches, and are commonly referred to
as the "Millenium Bug" or "Year 2000 problem".
INTERLEAF APPROACH
Interleaf established a Year 2000 project team to address all aspects of the
Year 2000 problem in each area of its business. The project team has four areas
of focus, each with its own project manager. These four areas are: (1) the
software that is created by Interleaf and sold to customers; (2) internal
business systems; (3) the hardware and operating system software used by
employees; and (4) facilities and critical vendors other than computer
suppliers.
INTERLEAF CREATED PRODUCTS
Assessment:
In 1997 Interleaf began to focus on the Year 2000 problem regarding its software
products created for sale to customers. Products that generate the most revenue
or create the highest risk were prioritized for testing and repair. The
assessment of these products was completed in early 1998 and the repair process
begun. The Company made the decision to discontinue sales and support for
certain low volume products and computer platforms.
Customer Communications:
The Company sent a description of its Year 2000 product strategy to all of its
maintenance customers. It created and is maintaining a Year 2000 product status
page as part of its web site. Interleaf will distribute another mailing to the
entire maintenance base with the status of the year 2000 releases and a list of
retired products and platforms in the first calendar quarter of 1999.
Status:
Most major products have been tested and modified, and updates which correct any
known Year 2000 problems with those products are available at no extra charge to
the customers with current maintenance contracts for most of the computer
platforms that will be supported beyond the year 2000. Year 2000 updates will be
completed for supported products (those which Interleaf has committed to bring
into Year 2000 compliance) by the end of the first calendar quarter of 1999. The
extent of the changes required
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<PAGE>
ranges from simple recompilation with Year 2000 compliant operating systems to
extensive modifications. Testing and repair of layered applications for which
Interleaf has committed Year 2000 compliance has begun and will be completed by
the end of the second calendar quarter of 1999. The Company expects that the
layered applications will not require significant modifications, since initial
analysis has indicated that there is no date handling performed by these
products. Moreover, in many instances the Company created layered applications
under contracts with specific customers, and not for general re-sale, and the
Company believes that it has no obligation to modify those applications to
address the Year 2000 problem. All products under development are being
developed to be Year 2000 compliant.
INTERNAL BUSINESS SYSTEMS
Interleaf contracted an independent third party to perform Year 2000 compliance
testing on its critical internal business systems. Some problems were identified
and appropriate modifications were made. The systems were then re-tested and
performed successfully. The software vital to corporate operations has been
proven by the independent third party to function without problems related to
the millenium change. The assessment phase is now underway for business software
used in Europe, Japan, and Australia. The Company's intent is to insure that all
critical internal business software is Year 2000 compliant by the end of the
second calendar quarter of 1999.
HARDWARE AND OPERATING SYSTEMS SOFTWARE
Assessment of the systems used by employees began in early 1997 and has been
completed. The Company has developed a plan to upgrade or replace all critical
systems used by employees, including all hardware in the enterprise from servers
to laptops. The upgrade/replacement process began in early 1998 and is
approximately 40% complete. The entire process is anticipated to be complete by
the end of the third calendar quarter of 1999.
FACILITIES AND CRITICAL VENDORS
In the fourth calendar quarter of 1998 Interleaf began discussions with facility
management of its leased office spaces to ensure that the proper actions are
taken to avoid disruption of productivity in all Interleaf facilities. Two major
elements of Interleaf's business, payroll and manufacturing, are outsourced.
Interleaf is currently working with those service providers to insure that
operations of these critical business areas will not be affected by the
Millenium change.
COST
The costs of the Interleaf Year 2000 efforts are being funded out of cash flow
from operations. The total cost associated with the required modifications and
upgrades associated with the Year 2000 projects is not expected to be material
to the Company's financial position. The process of repairing and testing the
software that Interleaf creates for sale has been done with existing personnel.
The Year 2000 testing equipment and lab environment have been created using
existing equipment and space. The capital costs associated with the upgrade and
replacement of corporate and field office computing environments is budgeted to
be approximately $250,000. These expenditures began in late 1997 and will
continue through the third calendar quarter of 1999. Software maintenance costs
attributable to the Year 2000 process will be approximately $50,000. Labor
associated with this process of implementing the internally used systems comes
from the existing budgeted personnel.
RISK
Specifically, from Year 2000 problems, the Company could experience an
interruption in its ability to collect and process receivables, process payments
to vendors, safeguard and manage its invested assets and operating cash
accounts, accurately maintain customer information, accurately maintain
accounting records, process new orders and/or perform adequate customer service.
-15-
<PAGE>
While the Company believes the occurrence of such a situation is unlikely, a
possible worst case scenario might include one or more of the Company's
significant accounting systems or inventory management systems being
non-compliant. Such an event could result in a material disruption to the
Company's operations. Should the worst case scenario occur it could, depending
on its duration, have a material impact on the Company's results of operations
and liquidity and ultimately on its financial position. . The Company intends to
begin preparing a contingency plan to address reasonably likely worst case
scenarios in the second calendar quarter of 1999.
EURO CONVERSION.
On January 1, 1999, 11 of the 15 member countries of the European Union
established fixed conversion rates between their existing sovereign currencies
and the Euro. The transition to the Euro will be complete as of January 1, 2002.
The Company has significant operations within the European Union and is
currently preparing for the Euro conversion. The issues that the Company is
addressing include preparing its information systems for the Euro, analyzing the
benefit of decreased exchange rate risk in cross border transactions involving
participating countries and assessing the potential impact of increased price
transparency. In addition, the Euro is expected to affect general economic
conditions within the participating countries. The Company is analyzing the
impact of the Euro with a view to minimizing the impact of the Company's
operations. The Company does not expect the costs of upgrading its systems for
the Euro to be material.
FORWARD-LOOKING STATEMENTS
This Report contains forward-looking statements concerning the Company's
performance and business operations. The Company cautions readers 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; reliance by the Company on third party development partners who are
engaged in developing a portion of the Company's content management products
and the Company's dependence on the quality and timeliness of performance of
those vendors for on-time and high quality delivery of the Company's content
management products; 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 (including changes
to the standards upon which the Company's new products are based) 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. In addition,
the application of guidelines recently issued by the SEC concerning
write-offs of in-process research and development ("R&D") costs could result
in a reduction in the in-process R&D write-offs taken by the Company for
acquisitions, and corresponding increases in the amount of goodwill and other
intangibles recorded. Certain of these and other factors which might cause
-16-
<PAGE>
actual results to differ materially from 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 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
(a) During the third quarter, the Company redeemed 100% of its Series C
Convertible Preferred Stock ("Series C Stock") for $1.6 million. Additionally,
dividends accrued at September 30, 1998 totaling $.2 million were waived and
will not be paid. For purposes of the 1999 third quarter and nine months basic
earnings per share calculation, this redemption resulted in $8.1 million being
added to net income to arrive at net income available to common shareholders.
The $8.1 million represents the excess of the carrying amount of the Series C
Stock over the fair value of the consideration paid by the Company.
(b) On November 4, 1998, the Company reached agreement with the holders of
79% of its 6% Convertible Preferred Stock ("Series D Stock") outstanding,
pursuant to which all of the Series D Stock held by such persons (5,487
shares out of 6,987 outstanding) was converted into a total of approximately
$2.2 million in cash and approximately 3.5 million shares of Common Stock.
This conversion occurred on November 18, 1998. The shares of Common Stock
issued to the former Series D stockholders are held subject to the
restrictions on re-sale, prohibitions against short-selling and the other
terms and conditions of the Preferred Stock Investment Agreement under which
the Series D Stock was originally issued. For purposes of the 1999 third
quarter and nine months basic earnings per share calculation, this conversion
resulted in $.7 million being added to net income to arrive at net income
available to common shareholders. The $.7 million represents the excess of
the carrying amount of Series D Stock over the fair value of consideration
paid by the Company.
The Company financed the redemption of the Series C Shares and the cash portion
of the conversion of the Series D Shares out of its existing working capital and
the sale of Common Stock to investors in a private placement described in
paragraph (c) below.
(c) Between November 18 and December 15, 1998, the Company entered into
agreements with certain officers, directors and existing stockholders of the
Company under which each of them granted to the Company an option to require
each to purchase a specified number of shares of Common Stock, up to an
aggregate maximum of 1,761,167 shares if Interleaf exercised its option in full,
at an exercise price of $2.40 per share. On February 11, 1999, the Company
exercised its option in full and the 1,761,167 shares were issued on February
16, 1999 and the Company received $4.2 million in cash proceeds.
(d) Effective as of the open of business on December 31, 1998, the Company
declared a one for three reverse split of its Common Stock. As a result, each
certificate representing shares of Common Stock outstanding immediately prior to
the reverse stock split was automatically deemed to represent one-third the
number of shares of Common Stock after the reverse stock split, with fractional
shares being rounded up.
Neither the number of shares authorized nor the par value of the Company's
capital stock were changed as a result of the reverse stock split. In addition,
the voting and other rights of the Common Stock were not changed, with each
share of Common Stock outstanding after the reverse stock split carrying one
vote. The exercise prices and conversion price of the Company's outstanding
stock options and its Senior Series B Convertible Preferred Stock, respectively,
were adjusted so that one-third the number of shares of Common Stock are
issuable upon the exercise or conversion thereof. The reverse split had no
effect
-17-
<PAGE>
on the number of shares outstanding of the Company's 6% Convertible Preferred
Stock or on the conversion price of such shares, which is calculated as a
discount to market value at the date of conversion.
(e) As of December 14, 1998, employees of the Company holding approximately
95% of the stock options outstanding under the Company's 1994 Employee Stock
Option Plan and its 1993 Stock Option Plan entered into agreements with the
Company pursuant to which the exercise prices of such options were reduced to
fair market value of the Common Stock as of such date. Such stock options
were further amended so that no such option may be exercised until December
15, 1999.
ITEM 4. SUBMISSION OF MATTERS TO VOTE OF SECURITY HOLDERS
At the Special Meeting of Stockholders held on December 28, 1998, the
stockholders of the Company approved the one for three reverse stock split
and certain other changes to the Company's Restated Articles of Organization,
and authorized the issuance of up to 2,500,000 shares (post-split) of Common
Stock in a private placement. The reverse stock split and other amendments
were approved by a vote of 6,869,900 in favor, 174,399 against and 16,550
abstentions. The stock issuance was approved by a vote of 3,359,898 in favor,
202,116 against and 19,202 abstentions. A more complete description of these
matters appears in the Company's Proxy Statement dated December 4, 1998.
ITEM 5. OTHER INFORMATION
As of December 31, 1998, the Company had reached agreement in principle, and
signed a letter of intent, under which the Company would acquire from Finpiave,
S.p.A. its 69% ownership interest in Interleaf Italia S.r.l., which distributes
the Company's products in Italy. Interleaf currently owns the remaining 31% of
Interleaf Italia S.r.l. Since that date, the parties have successfully
negotiated the final terms of the transaction, and the Company expects that the
definitive agreements will be executed, and the transaction consummated, before
the end of February, 1999.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
EXHIBIT NUMBER DESCRIPTION
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
September 30, 1997)
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)
11 Computation of Earnings Per Share
(included as Note 3 to Financial
Statements)
-18-
<PAGE>
27 Financial Data Schedule
(b)(1) Amendment to Current Report on Form 8-K/A was filed by the Company on
November 12, 1998, providing financial information concerning PDR
Automated Systems and Publications, Inc., a company acquired by
Interleaf as reported in the prior quarter.
(2) A Current Report on Form 8-K was filed by the Company on November 27,
1998 with respect to the call of the Special Meeting described in Part
II, Item 4 above.
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.
February 16, 1999
/s/ Peter J. Rice
---------------------------------------------
Peter J. Rice,
Vice President of Finance and Administration
and Chief Financial Officer and Treasurer
(Principal Financial and Accounting Officer)
-19-
<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
December 31, 1998 and is qualified in its entirety by reference to such
financials.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> MAR-31-1999
<PERIOD-END> DEC-31-1998
<CASH> 11,064
<SECURITIES> 0
<RECEIVABLES> 14,068
<ALLOWANCES> 1,141
<INVENTORY> 378
<CURRENT-ASSETS> 26,176
<PP&E> 11,866
<DEPRECIATION> 9,681
<TOTAL-ASSETS> 30,566
<CURRENT-LIABILITIES> 25,291
<BONDS> 0
0
73
<COMMON> 229
<OTHER-SE> 3,729
<TOTAL-LIABILITY-AND-EQUITY> 30,566
<SALES> 6,150
<TOTAL-REVENUES> 32,654
<CGS> 1,817
<TOTAL-COSTS> 13,184
<OTHER-EXPENSES> 22,043
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> (2,050)
<INCOME-TAX> 25
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