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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 September 30, 1999.
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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
Interleaf, Inc.
------------------------------------------------------
(exact name of registrant as specified in its charter)
MASSACHUSETTS 04-2729042
(State or other jurisdiction (I.R.S. employer
of incorporation or organization) identification number)
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 November 11, 1999 was 13,008,327.
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<PAGE>
TABLE OF CONTENTS
PAGE
----
PART I - FINANCIAL INFORMATION
ITEM 1 - Financial Statements
Consolidated balance sheet at September 30, 1999
and March 31, 1999................ ............................ 3
Consolidated statement of operations for the three and
six months ended September 30, 1999 and 1998 .................. 4
Consolidated statement of cash flows for the six months ended
September 30, 1999 and 1998 ................................... 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 1 - Legal Proceedings .................................... 17
ITEM 2 - Changes in Securities and Use of Proceeds ............ 17
ITEM 4 - Submission of Matters to a Vote of Security Holders .. 17
ITEM 6 - Exhibits and Reports on Form 8-K ..................... 18
SIGNATURES .................................................... 19
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<PAGE>
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
INTERLEAF, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
<TABLE>
<CAPTION>
SEPTEMBER MARCH
30, 1999 31, 1999
--------- ---------
In thousands, except for share and per share amounts (UNAUDITED)
<S> <C> <C>
ASSETS
- ------
Current assets
Cash and cash equivalents $ 18,875 $ 16,479
Accounts receivable, net of reserve for doubtful accounts of
$1,001 at September 30, 1999 and $1,123 at March 31, 1999 9,704 12,008
Prepaid expenses and other current assets 1,882 1,541
--------- ---------
Total Current Assets 30,461 30,028
Property and equipment, net 2,357 2,120
Intangible assets, net 10,150 5,222
Other assets 358 442
--------- ---------
Total Assets $ 43,326 $ 37,812
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
- ------------------------------------
Current liabilities
Accounts payable $ 1,845 $ 2,224
Accrued expenses 13,584 11,184
Unearned revenue 8,047 11,492
Accrued restructuring 825 953
--------- ---------
Total Current Liabilities 24,301 25,853
Long-term restructuring 1,073 1,234
--------- ---------
Total Liabilities 25,374 27,087
--------- ---------
Redeemable common stock- shares issued and outstanding, none
at September 30, 1999 and 469,093 at March 31, 1999 -- 1,496
--------- ---------
Shareholders' Equity
Preferred stock, par value $.10 per share, authorized 5,000,000 shares:
Senior Series B Convertible, shares issued and outstanding, 726,003
at September 30, 1999 and March 31, 1999 73 73
6% Convertible, shares issued and outstanding, none at September 30,
1999 and 1,050 at March 31, 1999 -- --
Common stock, par value $.01 per share, authorized 50,000,000 shares,
issued and outstanding, 12,432,936 at September 30, 1999 and
9,913,209 at March 31, 1999 124 99
Additional paid-in capital 104,662 94,795
Retained earnings (accumulated deficit) (86,302) (85,197)
Cumulative translation adjustment (605) (541)
--------- ---------
Total Shareholders' Equity 17,952 9,229
--------- ---------
Total Liabilities and Shareholders' Equity $ 43,326 $ 37,812
========= =========
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE
CONSOLIDATED FINANCIAL STATEMENTS
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<PAGE>
INTERLEAF, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF OPERATIONS
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
SEPTEMBER 30 SEPTEMBER 30
1999 1998 1999 1998
-------- -------- -------- --------
In thousands, except for per share amounts (UNAUDITED) (UNAUDITED)
----------- -----------
<S> <C> <C> <C> <C>
Revenues:
Products $ 3,645 $ 1,658 $ 6,712 $ 3,885
Maintenance 5,060 5,168 10,155 11,016
Services 4,887 3,184 9,731 6,117
-------- -------- -------- --------
Total revenues 13,592 10,010 26,598 21,018
-------- -------- -------- --------
Costs of Revenues:
Products 685 636 1,201 1,272
Maintenance 724 751 1,515 1,576
Services 4,939 2,970 9,571 5,667
-------- -------- -------- --------
Total costs of revenues 6,348 4,357 12,287 8,515
-------- -------- -------- --------
Gross margin 7,244 5,653 14,311 12,503
-------- -------- -------- --------
Operating expenses:
Selling, general and administrative 6,473 5,393 12,275 10,363
Research and development 2,153 2,059 3,216 3,832
Purchased in-process research and development -- 498 -- 498
-------- -------- -------- --------
Total operating expenses 8,626 7,950 15,491 14,693
-------- -------- -------- --------
Income (loss) from operations (1,382) (2,297) (1,180) (2,190)
Other income 5 244 172 391
-------- -------- -------- --------
Income (loss) before income taxes (1,377) (2,053) (1,008) (1,799)
Provision for income taxes -- 25 97 25
-------- -------- -------- --------
Net income (loss) (1,377) (2,078) (1,105) (1,824)
Dividends on preferred stock -- (518) (2) (1,092)
-------- -------- -------- --------
Net income (loss) applicable to
common shareholders $ (1,377) $ (2,596) $ (1,107) $ (2,916)
======== ======== ======== ========
Income (loss) per share:
Basic $ (0.12) $ (0.42) $ (0.10) $ (0.47)
======== ======== ======== ========
Diluted $ (0.12) $ (0.42) $ (0.10) $ (0.47)
======== ======== ======== ========
Shares used in computing basic income (loss)
per share 11,856 6,240 11,481 6,183
======== ======== ======== ========
Shares used in computing diluted income (loss)
per share 11,856 6,240 11,481 6,183
======== ======== ======== ========
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE
CONSOLIDATED FINANCIAL STATEMENTS.
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<PAGE>
INTERLEAF, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOW
<TABLE>
<CAPTION>
SIX MONTHS ENDED
SEPTEMBER 30
-----------------------
1999 1998
-------- --------
(UNAUDITED)
<S> <C> <C>
In thousands
Cash Flows from Operating Activities:
Net income $ (1,105) $ (2,316)
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:
Depreciation and amortization expense 1,520 1,377
Purchased in-process research & development -- 498
Changes in assets and liabilities:
Decrease in accounts receivable, net 2,478 3,926
(Increase) decrease in other assets (2,799) 468
Increase (decrease) in accounts payable and accrued expenses 1,854 (378)
Decrease in unearned revenue (3,519) (3,793)
Decrease in other liabilities (282) (1,298)
Other, net -- (84)
-------- --------
Net cash provided by (used in) operating activities (1,853) 1,600
-------- --------
Cash Flows from Investing Activities:
Capital expenditures (780) (414)
Acquisitions (476) (2,731)
Capitalized software development costs (1,570) --
-------- --------
Net cash used in investing activities (2,826) (3,145)
-------- --------
Cash Flows from Financing Activities:
Net proceeds from issuance of common stock 7,181 --
Dividends paid -- (251)
-------- --------
Net cash provided by (used in) financing activities 7,181 (251)
-------- --------
Effect of exchange-rate changes on cash (106) 671
-------- --------
Net increase (decrease) in cash and cash equivalents 2,396 (4,325)
Cash and cash equivalents at beginning of period 16,479 21,112
-------- --------
Cash and cash equivalents at end of period $ 18,875 $ 16,787
======== ========
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE
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, 1999.
2. RECENTLY ISSUED ACCOUNTING STANDARDS
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 fiscal years beginning after June 15,
2000 (April 1, 2001 for the Company). FAS 133 requires that all derivative
instruments be recorded each period in current earnings or other
comprehensive income, depending on whether a derivative is designated as
part of a hedge transaction and, if it is, the type of hedge transaction.
The Company believes the adoption of FAS 133 will have no material impact to
its operating results or financial position.
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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 Six Months ended
September 30, September 30,
----------------------- -----------------------
1999 1998 1999 1998
-------- -------- -------- --------
<S> <C> <C> <C> <C>
In thousands, except for per share amounts
NUMERATOR:
Net income (loss) $ (1,377) $ (2,078) $ (1,105) $ (1,824)
Preferred Stock Dividends:
Senior Series C convertible -- (126) -- (252)
Senior Series D convertible -- (56) (2) (168)
Preferred Stock Deemed Dividend:
Senior Series D convertible -- (336) -- (672)
-------- -------- -------- --------
-- (518) (2) (1,092)
-------- -------- -------- --------
Numerator for basic and diluted income (loss) per share:
Income (loss) available to common stockholders $ (1,377) $ (2,596) $ (1,107) $ (2,916)
======== ======== ======== ========
DENOMINATOR:
Denominator for basic and diluted income (loss) per share:
Weighted average shares 11,856 6,240 11,481 6,183
======== ======== ======== ========
Basic income (loss) per share $ (0.12) $ (0.42) $ (0.10) $ (0.47)
======== ======== ======== ========
Diluted income (loss) per share $ (0.12) $ (0.42) $ (0.10) $ (0.47)
======== ======== ======== ========
</TABLE>
For the three and six months ended September 30, 1999, potential common
shares of 1,642 and 1,510, respectively, were excluded from the computation
of diluted earnings per share because the Company had a net loss applicable
to common shareholders and the effect would have been antidilutive. For the
three and six months ended September 30, 1998, potential common shares of
3,488 and 3,407, respectively, were excluded from the computation of diluted
earnings per share because the Company had a net loss applicable to common
shareholders, and the effect would have been antidilutive.
As previously reported in the Company's Annual Report on Form 10-K, the
Company has restated its fiscal 1999 results of operations to reflect a
reduction in the amount of purchased in-process research and development
charged to expenses. As a result of this restatement, the Company's
previously reported net losses applicable to common shareholders for the
second quarter and for the six months ended September 30, 1998 of $3.1
million and $3.4 million, respectively, were reduced to $2.6 million and
$2.9 million, respectively. The Company's previously reported basic and
diluted loss per share of $.49 and $.55 for the second quarter and six
months ended September 30, 1998, respectively, were reduced to $.42 and
$.47, respectively.
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<PAGE>
4. ACQUISITIONS
Effective April 7, 1999, the Company acquired certain assets and assumed
certain liabilities of Texcel International AB, Texcel Research, Inc. and
Texcel (UK) Limited (collectively, "Texcel"). Texcel provided software and
services to corporations and government agencies that depend on information
access and efficient reuse of that information for competitive advantage.
The Company paid cash of $.5 million, issued 250,000 shares of common stock
valued at $.8 million, and issued warrants to purchase 200,000 shares of
common stock valued at $.1 million. In addition, the Company made a loan of
$.3 million to Texcel, which was subsequently repaid. In connection with the
acquisition, the net liabilities to provide support services to Texcel
customers, partially offset by the fair value of fixed assets acquired, were
recorded at $.1 million. The Company also recorded $1.5 million of goodwill
which will be amortized on a straight-line basis over an estimated useful
life of 5 years.
Effective September 1, 1999, the Company purchased 100% of the outstanding
common shares of Docu-Net Inc. ("Docu-Net"). Docu-Net provides
subcontracting and outsourcing services for the development, management and
distribution of information. The acquisition has been accounted for as a
purchase business combination and, accordingly, the operating results of
Docu-Net have been included in the Consolidated Statement of Operations
since the date of the acquisition. The Company issued common stock valued at
$.1 million as payment for the purchase of Docu-Net, and depending upon
certain financial contingencies, the Company may be obligated to pay an
additional amount in cash or in common stock on or before October 3, 2000.
In connection with the acquisition, the Company recorded the assets and
liabilities of Docu-Net at their fair values. The Company also recorded $.1
million of goodwill which will be amortized on a straight-line basis over an
estimated useful life of 4 years.
Effective September 1, 1999, the Company acquired 100% of the outstanding
common shares of Horizon Interactive, Inc. ("Horizon"). Horizon provides
subcontracting and outsourcing services for the development, management and
distribution of information. The acquisition has been accounted for as a
purchase business combination and, accordingly, the operating results of
Horizon have been included in the Consolidated Statement of Operations since
the date of acquisition. As payment for the purchase of Horizon, the Company
issued common stock valued at $.2 million, is obligated to pay an additional
$.1 million on October 1, 2000, and depending upon certain financial
contingencies, the Company may be obligated to pay up to $.7 million, in
cash or in common stock on or before October 15, 2000. In connection with
the acquisition of Horizon, the Company recorded the assets and liabilities
of Horizon at their fair values. The Company also recorded $.3 million of
goodwill, which will be amortized over an estimated useful life of 4 years.
5. SEGMENT INFORMATION
The Company develops and markets software products and services which
address two distinct markets, one of which is referred to as "e-publishing"
or "complex publishing", and the other of which is referred to as
"e-content" or "content management". The Company's traditional or
"e-publishing" solutions are used in the creation, publication, management
and distribution of electronic and paper documents, and are targeted at the
complex publishing market. Interleaf's "e-content solutions" are comprised
of new software products, named BladeRunner, Information Manager,
Quicksilver and Panorama, and related services, and are targeted at the
content management market.
During fiscal 1999, Interleaf realized that its e-publishing and e-content
products and services require different resources, strategies and
investments in order to be successful, and that the measurement of success
is very different for each. As a result, during the first quarter of fiscal
-8-
<PAGE>
2000, the Company dedicated separate development, sales and support
resources to its e-publishing and e-content divisions. Consistent with the
separation of resources for these two divisions, the Company has changed its
reporting segments to separately reflect results from the e-publishing and
e-content divisions.
The following summarizes the results of the Company's e-publishing and
e-content divisions for the three and six months ended September 30, 1999
and 1998, respectively.
<TABLE>
<CAPTION>
THREE MONTHS ENDED
--------------------------------------------------------------------------------------
SEPTEMBER 30, 1999 SEPTEMBER 30, 1998
E-PUBLISHING E-CONTENT TOTAL E-PUBLISHING E-CONTENT TOTAL
-------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
Products $ 1,644 $ 2,001 $ 3,645 $ 1,658 $ -- $ 1,658
Maintenance 4,925 135 5,060 5,168 -- 5,168
Services 4,222 665 4,887 3,184 -- 3,184
-------- -------- -------- -------- -------- --------
Total revenues $ 10,791 $ 2,801 $ 13,592 $ 10,010 $ -- $ 10,010
======== ======== ======== ======== ======== ========
Income (loss) from
operations $ 1,479 $ (2,861) $ (1,382) $ (2,297) $ -- $ (2,297)
======== ======== ======== ======== ======== ========
SIX MONTHS ENDED
--------------------------------------------------------------------------------------
SEPTEMBER 30, 1999 SEPTEMBER 30, 1998
E-PUBLISHING E-CONTENT TOTAL E-PUBLISHING E-CONTENT TOTAL
-------- -------- -------- -------- -------- --------
Products $ 3,648 $ 3,064 $ 6,712 $ 3,885 $ -- $ 3,885
Maintenance 9,925 230 10,155 11,016 -- 11,016
Services 8,619 1,112 9,731 6,117 -- 6,117
-------- -------- -------- -------- -------- --------
Total revenues $ 22,192 $ 4,406 $ 26,598 $ 21,018 $ -- $ 21,018
======== ======== ======== ======== ======== ========
Income (loss) from
operations $ 3,004 $ (4,184) $ (1,180) $ (2,190) $ -- $ (2,190)
======== ======== ======== ======== ======== ========
</TABLE>
The following are reconciliations to corresponding totals in the accompanying
consolidated statements:
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------------- -------------------------
1999 1998 1999 1998
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Income (loss) for reportable
segments $ (1,382) $ (2,297) $ (1,180) $ (2,190)
Non-operating income (47) 37 28 33
Interest income, net 52 207 144 358
---------- ---------- ---------- ----------
Income (loss) before
income taxes $ (1,377) $ (2,053) $ (1,008) $ (1,799)
========== ========== ========== ==========
</TABLE>
6. SHAREHOLDER'S EQUITY
Effective August 13, 1999, Interleaf entered into an agreement with certain
existing stockholders, new investors, and the CEO of Interleaf under which
each of them agreed to purchase and Interleaf agreed to sell a total of
940,333 shares of common stock at a purchase price of $7.50 per share. On
September 3, 1999, Interleaf completed the sale and issuance of 940,333
shares to the purchasers.
-9-
<PAGE>
7. CREDIT AGREEMENT
At September 30, 1999 and March 31, 1999, the Company had outstanding
letters of credit aggregating $.8 and $.9 million, respectively, expiring
between December 31, 1999 and October 31, 2001. These letters of credit
guarantee payments on two leases and future payments for an acquisition that
occurred in fiscal 1999. The letters of credit are secured by equal amounts
of cash and are reduced by the amount of the respective payments.
8. COMPREHENSIVE INCOME (LOSS)
Comprehensive income for the period is equal to net income plus "other
comprehensive income," which, for the Company, consists of the change in
cumulative translation adjustments during the period. Total comprehensive
losses for the three and six months ended September 30, 1999 were $1.3
million and $1.2 million respectively. For the three and six months ended
September 30, 1998, total comprehensive losses were $1.9 million, and $1.6
million, respectively.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
---------------------------------------------
RESULTS OF OPERATIONS
OVERVIEW
The Company reported a net loss of $1.4 million on total revenues of $13.6
million for its second quarter and a net loss of $1.1 million on total revenues
of $26.6 million for the six months ended September 30, 1999. This compares with
a net loss of $2.1 million on total revenues of $10.0 million and a net loss of
$1.8 million on total revenues of $21.0 million for the same periods of the
prior year before the payment of dividends on preferred stock. The Company
recorded preferred stock dividends of $.5 million and $1.1 million for the
second quarter and six months ended September 30, 1998, respectively. Therefore,
after dividends on preferred stock, the Company's net loss applicable to common
stockholders was $2.6 million and $2.9 million for the second quarter and six
months ended September 30, 1998, respectively.
As previously reported in the Company's Annual Report on Form 10-K, the Company
has restated its fiscal 1999 results of operations to reflect a reduction in the
amount of purchased in-process research and development charged to expenses. As
a result of this restatement, the Company's previously reported net losses
applicable to common shareholders for the second quarter and for the six months
ended September 30, 1998 of $3.1 million and $3.4 million, respectively, were
reduced to $2.6 million and $2.9 million, respectively. The Company's previously
reported basic and diluted loss per share of $.49 and $.55 for the second
quarter and six months ended September 30, 1998, respectively, were reduced to
$.42 and $.47, respectively.
The increases in total revenues of $3.6 million and $5.6 million in the second
quarter and first six months of fiscal 2000 compared with the same periods of
fiscal 1999 were primarily due to increases in product revenue from the sales of
the Company's new e-content products and the inclusion of services revenue from
PDR Automated Systems and Publications, Inc. ("PDR") in fiscal 2000. Initial
product sales of the Company's e-content products occurred during the first
quarter of fiscal 2000 and PDR was acquired on August 31, 1998 and, therefore,
only one month of PDR revenue was included in the second quarter of fiscal 1999
results of operations. Total revenues for fiscal 2000 also included the results
of Interleaf Italia Srl ("Interleaf Italia"), a majority interest in which was
acquired in the fourth quarter of fiscal 1999. There were no revenues from
Interleaf Italia included in the second quarter or first six months of fiscal
1999.
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<PAGE>
Effective April 7, 1999, the Company acquired certain assets and assumed certain
liabilities of Texcel International AB, Texcel Research, Inc. and Texcel (UK)
Limited (collectively, "Texcel"). Texcel provided software and services to
corporations and government agencies that depend on information access and
efficient reuse of that information for competitive advantage. The Company paid
cash of $.5 million, issued 250,000 shares of common stock valued at $.8
million, and issued warrants to purchase 200,000 shares of common stock valued
at $.1 million. In addition, the Company made a loan of $.3 million to Texcel,
which was subsequently repaid. In connection with the acquisition, the net
liabilities to provide support services to Texcel customers, partially offset by
the fair value of fixed assets acquired, were recorded at $.1 million. The
Company also recorded $1.5 million of goodwill which will be amortized on a
straight-line basis over an estimated useful life of 5 years.
Effective September 1, 1999, the Company purchased 100% of the outstanding
common shares of Docu-Net Inc. ("Docu-Net"). Docu-Net provides subcontracting
and outsourcing services for the development, management and distribution of
information. The acquisition has been accounted for as a purchase business
combination and, accordingly, the operating results of Docu-Net have been
included in the Consolidated Statement of Operations since the date of the
acquisition. The Company issued common stock valued at $.1 million as payment
for the purchase of Docu-Net, and depending upon certain financial
contingencies, the Company may be obligated to pay an additional amount in cash
or in common stock on or before October 3, 2000. In connection with the
acquisition, the Company recorded the assets and liabilities of Docu-Net at
their fair values. The Company also recorded $.1 million of goodwill which will
be amortized on a straight-line basis over an estimated useful life of 4 years.
Effective September 1, 1999, the Company acquired 100% of the outstanding common
shares of Horizon Interactive, Inc. ("Horizon"). Horizon provides subcontracting
and outsourcing services for the development, management and distribution of
information. The acquisition has been accounted for as a purchase business
combination and, accordingly, the operating results of Horizon have been
included in the Consolidated Statement of Operations since the date of
acquisition. As payment for the purchase of Horizon, the Company issued common
stock valued at $.2 million, is obligated to pay an additional $.1 million on
October 1, 2000, and depending upon certain financial contingencies, the Company
may be obligated to pay up to $.7 million in cash or in common stock on or
before October 15, 2000. In connection with the acquisition of Horizon, the
Company recorded the assets and liabilities of Horizon at their fair values. The
Company also recorded $.3 million of goodwill, which will be amortized over an
estimated useful life of 4 years.
During fiscal 1999, Interleaf realized that its e-publishing and e-content lines
of business require different resources, strategies and investments in order to
be successful, and that the measurement of success is very different for each.
As a result, during the first quarter of fiscal 2000, the Company separated
these lines of business into two divisions and dedicated separate development,
sales and support resources. Consistent with the separation of resources for
these two divisions, the Company has changed its reporting segments to
separately reflect results from the e-publishing and e-content divisions.
REVENUES
PRODUCT: Total product revenue increased $2.0 million (120%) and $2.8 million
(73%) for the second quarter and six months ended September 30, 1999,
respectively, compared with the same periods in fiscal 1999. The increase is
primarily due to $2.0 million in sales from the Company's new e-content
products, BladeRunner and Information Manager, a product acquired from Texcel in
the first quarter of fiscal 2000. Information Manager has been incorporated into
BladeRunner, and is also sold separately on a limited basis. Additionally, the
Company has introduced the Quicksilver suite of products, an XML enabling
publishing technology which provides the Company's existing complex publishing
customers with a migration path to enterprise wide applications of XML such as
BladeRunner. Quicksilver was
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<PAGE>
introduced during the second quarter of fiscal 2000, and is sold on an annual
subscription basis under which the customer will receive all upgrades,
maintenance and support offered during each year for which the subscription
license fee is paid. Existing customers are offered the choice of continuing
with their e-publishing products and associated maintenance at a discount, or
migrating to Quicksilver subscriptions. The election by existing customers to
migrate to Quicksilver subscription licenses will therefore reduce the
maintenance revenue for the e-publishing segment and will increase subscription
revenue for the e-content segment.
MAINTENANCE: Total maintenance revenue decreased by $.1 million (2%) and $.9
million (8%) in the second quarter and six months ended September 30, 1999,
respectively, compared with the same periods of the prior year. Maintenance
revenue is primarily attributed to the Company's e-publishing segment, which
generated 97% and 98% of all maintenance revenue for the second quarter and six
months ended September 30, 1999. The declines in maintenance revenue reflect the
continued consolidation in the industries served by the e-publishing segment and
the continued migration of e-publishing customers to competing products. Future
maintenance revenue from the e-publishing segment is likely to decline as the
Company encourages existing customers to migrate to Quicksilver subscriptions.
Future maintenance revenue growth is dependent on the Company's ability to
increase maintenance contract volume related to the new content management
products.
SERVICES: Services revenue, consisting of consulting and training revenue,
increased by $1.7 million (53%) and $3.6 million (59%) for the second quarter
and six months ended September 30, 1999, respectively, compared with the same
periods of fiscal 1999. The increases in fiscal 2000 are primarily attributable
to the inclusion of revenue from PDR, which contributed $2.0 million and $3.7
million for the second quarter and six months ended September 30, 1999,
respectively. In fiscal 1999, only one month of PDR revenue, totaling $.5
million, was included in these periods as PDR was acquired August 31, 1998.
FISCAL 2000: During fiscal 1999, the Company developed and released several
upgrades to its traditional products. In the first quarter of fiscal 2000, the
Company released the first commercially available version of its content
management software product, BladeRunner. The Company also acquired a content
management product from Texcel, named Information Manager, which provided
complementary functionality. Information Manager has been incorporated into
BladeRunner, and is also sold separately on a limited basis. In the second
quarter of fiscal 2000, the Company introduced the Quicksilver suite of products
("Quicksilver"), an XML enabling publishing technology which provides the
Company's existing complex publishing customers with a migration path to
enterprise wide applications of XML, such as BladeRunner. The Company will
market Quicksilver on an annual subscription basis whereby a customer pays an
annual subscription license fee and is entitled to upgrades and telephone
support during the subscription period. Growth in revenues during fiscal 2000
will be largely dependent on the introduction and customer acceptance of the new
and enhanced software products released in fiscal 1999 and 2000, 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.
COSTS OF REVENUES
Cost of product revenues includes amortization of capitalized software
development costs, product media, documentation materials, packaging and
shipping costs, and royalties paid for licensed technology. Cost of product
revenues in the second quarter of fiscal 2000 was comparable with the same
period of fiscal 1999. Cost of product revenues for the six months ended
September 30, 1999 decreased by $.1 million compared to the same period of the
prior year. In the second quarter of fiscal 2000, increased amortization of
capitalized research and development costs were partially offset by decreases in
royalty expense compared with the prior year. For the six month period of fiscal
-12-
<PAGE>
2000, decreased royalty expense combined with reduced costs of outsource
manufacturing more than offset the increase in amortization of capitalized
research and developments costs. The cost of product revenue for the first and
second quarter of fiscal 1999 included start up costs incurred when changing
outsource manufacturers.
Costs of maintenance revenues for the second quarter and six months ended
September 30, 1999 were comparable to the same periods of the prior year.
Savings from reduced staffing in the Company's e-publishing business segment
were offset by the additional personnel acquired from Texcel and personnel hired
to develop, support and market e-content products.
Costs of services revenue increased by $2.0 million (66%) and $3.9 million (69%)
in the second quarter and six months ended September 30, 1999, respectively. The
increase is attributable to the acquisition of PDR in the second quarter and
Interleaf Italia in the fourth quarter of fiscal 1999. The lower gross margins
in the services business reflect the higher costs of attracting personnel and
the discounted pricing being offered by the Company to gain market share in the
e-content marketplace
OPERATING EXPENSES
Selling, general and administrative ("SG&A") expenses increased by $1.1 million
and $1.9 million in the second quarter and six months ended September 30, 1999
compared with the same periods of the prior year. The increases are primarily
attributable to the amortization of goodwill and intangible assets of $.2
million and $.4 million, respectively, related to the Company's fiscal 1999 and
2000 acquisitions and the incremental SG&A expenses incurred by Interleaf Italia
and PDR of $.3 million and $.6 million, respectively. The remaining increase is
due to additional selling and marketing expenses associated with the launching
of the Company's e-content division.
Research and Development ("R&D") expenses increased by $.1 million in the second
quarter of fiscal 2000 compared with the same period of the prior year. As a
percent of revenue, R&D expenses decreased to 16% in the second quarter of
fiscal 2000 from 21% in the second quarter of fiscal 1999. The decrease in R&D
expense as a percentage of revenue in the second quarter of fiscal 2000 compared
with the same period of fiscal 1999, is due to a reduction in engineering
contractor costs as certain phases of development projects were completed. In
the first six months of fiscal 2000, the Company's total R&D expenses, including
capitalized software development costs, were $4.8 million, representing 18% of
revenues. This consisted of $3.2 million charged directly to R&D expenses and
$1.6 million of capitalized software development costs. In the first six months
of fiscal 1999, the Company's product development and engineering expenses were
$3.8 million, representing 18% of revenues. There were no software development
costs capitalized in the first six months of fiscal 1999, and no such costs were
capitalized in the second quarter of fiscal 2000. The increase in R&D expenses
in fiscal 2000 is attributable to the continuing development and enhancements of
the Company's new content management product, BladeRunner, and to the
acquisition of certain assets from Texcel, which increased the Company's
engineering personnel and related expenses.
LIQUIDITY AND CAPITAL RESOURCES
The Company had $18.9 million of cash and cash equivalents at September 30,
1999, an increase of $2.4 million from March 31, 1999. The increase was mainly
attributable to the net proceeds received from a private placement of the
Company's common stock of $6.6 million and the proceeds from exercises of stock
warrants and employee stock options of $.6 million, which was partially offset
by capitalized software development costs of $1.6 million, cash used in
operating activities to support revenue growth of $1.8 million, cash used for
acquisitions of $.5 million, cash used for capital expenditures of $.8 million
and the effect of exchange rate changes on cash of $.1 million.
-13-
<PAGE>
At September 30, 1999 and at March 31, 1999, the Company had outstanding letters
of credit aggregating $.8 and $.9 million, respectively, expiring between
December 31, 1999 and October 31, 2001. These letters of credit guarantee
payments on two leases and the future payments for an acquisition that occurred
in fiscal 1999. The letters of credit are secured by equal amounts of cash and
are reduced by the amount of the respective payments.
At September 30, 1999 and March 31, 1999, the Company had approximately $1.1
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 will be sufficient to meet the Company's liquidity needs for fiscal
2000, including restructuring payments and increases in investment in the
development, marketing and promotion of its e-content products. However, the
Company is considering making additional large increases in its investments in
the development, marketing and promotion of its e-content solutions, and if such
additional investments are to be made it would be necessary for the Company to
raise additional capital. The net tangible asset listing criteria for the NASDAQ
National Market and the Company's financial condition dictate that any such
financing would be an equity financing. However, the Company cannot guarantee
that such financing can be obtained or that it can be obtained on commercially
reasonable terms or without incurring substantial dilution to existing
stockholders.
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 were most likely to experience Year 2000 problems 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 distributed a
mailing to the entire maintenance base describing the status of the year 2000
releases and included a list of retired products and platforms in the fourth
quarter of calendar year 1998.
-14-
<PAGE>
STATUS: All major products have been modified and tested for the computer
platforms that will be supported beyond the year 2000. Upgrades which correct
any known Year 2000 problems with those products have been made available at no
extra charge to the customers with current maintenance contracts. Year 2000
upgrades were all completed for supported products by the end of the second
calendar quarter of 1999 for all major products and platforms. The extent of the
changes required ranged from simple recompilation with Year 2000 compliant
operating systems to extensive modifications.
Testing and repair of generally available layered applications and low volume
products was completed by September 30, 1999. The layered applications did not
require significant modifications.
In addition, the Company created layered applications under specific contracts
with specific customers, and not for general re-sale. The Company expects that
those applications which operate in conjunction with non-compliant versions of
the Company's RDM product may experience major problems and even complete
failure on January 1, 2000. The Company has notified customers who are using
non-compliant versions of RDM of this risk. The Company offers a Year 2000
compliant version of RDM to those RDM customers who have subscribed for
maintenance. However, significant development may be required in order for those
applications to be ported to work with the RDM upgrade. The Company believes
that it has no obligation to modify those applications to address the Year 2000
problem or to work with the year 2000 compliant version of RDM, unless the
particular customers engage Interleaf to fix those problems.
All products under development are being developed to be Year 2000 compliant.
The Company received notices from a small number of customers regarding
non-compliance of unsupported products, and to date the Company has successfully
resolved those issues without material cost. The Company cannot predict whether
or not claims may be asserted with respect to non-supported products, either due
to a breakdown in the customer communications process, to contractual
obligations not understood by its customer or by Interleaf, or for other
reasons.
Internal Business Systems
- -------------------------
Interleaf contracted an independent third party to perform Year 2000 compliance
testing on its critical internal corporate 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 Company has investigated and received
assurances from the vendors that all critical internal business software in
North America and Europe is Year 2000 ready.
The operating system and database for the Company's worldwide customer support
information support system are not Year 2000 compliant. The Company is in the
process of correcting this system, and expects to have the Year 2000 fixes
complete by December 10, 1999. The Company has developed a contingency plan in
the event that this system experiences Year 2000 problems, and believes that
such failure would not have a materially adverse impact on the Company.
The assessment phase is now underway for business software used in Japan and
Australia. The Company intends to have compliance assured before the year 2000,
but this deadline may not be met. The Company does not believe that the failure
to reach this deadline would not have a material adverse impact on the Company.
Hardware and Operating Systems Software
- ---------------------------------------
Assessment of the systems used by employees began in early 1997 and has been
completed. The Company developed a plan to upgrade or replace all critical
systems used by employees, including all
-15-
<PAGE>
hardware in the enterprise from servers to laptops. The upgrade/replacement
process began in early 1998 and is approximately 90% complete (100% complete
with respect to critical systems). The entire process is expected to be complete
by the end of November 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 product manufacturing, are
outsourced. Interleaf has been assured by those service providers that operation
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 budgeted
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 the Company's corporate and field office computing
environments are expected to be $400,000. These expenditures began in late 1997,
were 90% incurred by the end of September 1999 and will be completed during the
fourth calendar quarter of 1999. Software maintenance costs attributable to the
Year 2000 will be approximately $50,000. Labor associated with this process of
implementing the internally used systems was provided by existing budgeted
personnel.
Risk
- ----
Interleaf has made a significant effort to address its Year 2000 issues. At this
time, there are no identifiable significant risks associated with its Year 2000
readiness, although there is a risk that unanticipated problems may arise. The
Company has prepared a contingency plan to address reasonably likely worst case
business operations scenarios.
FORWARD-LOOKING STATEMENTS
This Quarterly Report on Form 10-Q contains forward-looking statements
concerning the Company's performance and business operations. The Company wishes
to caution readers of this Quarterly Report on Form 10-Q that actual future
results may differ materially from the projections or suggestions made in such
forward-looking statements.
Factors which might cause actual future results to differ materially from those
projected in the forward-looking statements contained herein include the
following: The Company's ability to continue to develop and market new and
enhanced products and services, particularly the Company's content management
products and services; delays in the development and introduction of such new
and enhanced products and services; failure to achieve customer and market
acceptance of the Company's new and enhanced products and services; delays in
the growth and development of market demand for content management software
products; the failure of the market for multi-device portals and Web sites to
grow as expected; difficulties in designing and developing the X-WAP application
on time and with the required quality; changes in the XML and XSL language and
standards or the emergence of new competing technologies; and the development of
applications which are competitive with BladeRunner, Information Manager,
Quicksilver or X-WAP by other companies, including telecommunications companies,
having far greater resources than the Company; the Company's inability to raise
additional
-16-
<PAGE>
capital as may be necessary to effectively develop, market and promote its new
e-content products; inability to increase maintenance contract revenue related
to content management products; inability to increase revenue from consulting
and training contracts with respect to the introduction of new products;
inability to improve sales force productivity; the Company's ability to keep
pace with the rapid technological change in its industry and compete with
companies which have greater market penetration and greater financial, technical
and marketing resources; failure to adequately protect the Company's
intellectual property; inability to establish or maintain strategic
relationships with companies that have presence and expertise in the markets and
market segments targeted by the Company; the inability of the Company to make
acquisitions of, or significant investments in, businesses that offer
complementary products and technologies; and failure to integrate the
operations, information systems and personnel of any acquired businesses.
Certain of these and other factors which might cause actual results to differ
materially from those projected are more fully set forth under the caption "Risk
Factors" on pages 20-22 of the Company's Annual Report on Form 10-K for the
fiscal year ended March 31, 1999.
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
-----------------
There are no material legal proceedings to which the Company is a party or to
which any of its property is subject.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
-----------------------------------------
(c) Effective August 13, 1999, Interleaf entered into an agreement
with certain existing stockholders, new investors, and the CEO of Interleaf to
sell them a total of 940,333 shares of common stock at a purchase price of $7.50
per share. On September 3, 1999, Interleaf completed the sale and issuance of
940,333 shares to the purchasers, and realized $6,592,102 in proceeds after
expenses and commissions. The sales were made in reliance on the exemption
provided by Rule 506 under the Securities Act of 1933. Adams, Harkness & Hill,
Inc. and Stonegate Securities, Inc. each acted as independent sales agent with
respect to a portion of the total sales, for which they each received a 6%
commission. The shares were registered for re-sale on a Form S-3 promptly after
issuance.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
---------------------------------------------------
Interleaf, Inc. held its Annual Meeting of Stockholders on September 8, 1999. At
the meeting, the stockholders approved (a) the election of two Class III
directors each to hold office until the 2002 Annual Meeting of Stockholders and
(b) the ratification of the selection of PriceWaterhouseCoopers L.L.P. as
Interleaf's independent auditors for the year ending March 31, 2000.
-17-
<PAGE>
a) Election of Directors:
====================== ================= =================
NOMINEE FOR WITHHELD
- ---------------------- ----------------- -----------------
Frederick B. Bamber 9,493,252 205,063
- ---------------------- ----------------- -----------------
David A. Boucher 9,492,402 205,913
====================== ================= =================
b) Ratification of the selection of PriceWaterhouseCoopers L.L.P. as
Interleaf's independent auditors for the year ending March 31, 2000:
================= ================= ================= =================
FOR AGAINST ABSTAIN
- ----------------- ----------------- ----------------- -----------------
APPROVAL 9,401,823 5,792 290,700
================= ================= ================= =================
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
--------------------------------
(a) Exhibits
EXHIBIT NUMBER DESCRIPTION
-------------- -----------
3.1 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)
3.2 By-Laws of the Company, as amended (incorporated herein by
reference to the applicable Exhibit to the Company's
Annual Report on Form 10-K for the year ended March 31,
1994)
4 Specimen Certificate for Shares of the Company's Common
Stock (incorporated herein by reference to Exhibit 4.01 to
the Company's Annual Report on Form 10-K for the fiscal
year ended March 31, 1999)
10.1 Stock Purchase Agreement among Interleaf, Horizon
Interactive, Inc., and Steven Imke, Dale J. Chavez and
Randy Welsch, dated September 29, 1999 (incorporated
herein by reference to Exhibit 10.1 to the Company's
Registration Statement on Form S-3 dated October 22, 1999,
File Number 333-89117)
10.2 Stock Purchase Agreement among Interleaf, Docu-Net, Inc.,
and Daniel Schweitzer and Larry Scott, dated September 29,
1999 (incorporated herein by reference to Exhibit 10.2 to
the Company's Registration Statement on Form S-3 dated
October 22, 1999, File Number 333-89117)
11 Computation of Earnings Per Share (included as Note 3 to
Financial Statements)
27 Financial Data Schedule
-18-
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
November 15, 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>
<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
September 30,1999, and is qualified in its entirety by reference to such
financial statements.
</LEGEND>
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<S> <C>
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<FISCAL-YEAR-END> MAR-31-2000
<PERIOD-END> SEP-30-1999
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<SECURITIES> 0
<RECEIVABLES> 10,705
<ALLOWANCES> 1,001
<INVENTORY> 341
<CURRENT-ASSETS> 30,461
<PP&E> 12,652
<DEPRECIATION> (10,295)
<TOTAL-ASSETS> 43,326
<CURRENT-LIABILITIES> 24,301
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0
73
<COMMON> 124
<OTHER-SE> 17,755
<TOTAL-LIABILITY-AND-EQUITY> 43,326
<SALES> 6,712
<TOTAL-REVENUES> 26,598
<CGS> 1,201
<TOTAL-COSTS> 11,086
<OTHER-EXPENSES> 15,491
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