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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, 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
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(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
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(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 11, 2000 was 13,514,755.
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<PAGE>
TABLE OF CONTENTS
PAGE
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PART I - FINANCIAL INFORMATION
ITEM 1 - Financial Statements
Consolidated balance sheet at December 31, 1999 and March 31, 1999......... 3
Consolidated statement of operations for the three and nine months ended
December 31, 1999 and 1998 ................................................ 4
Consolidated statement of cash flows for the nine months ended
December 31, 1999 and 1998 ................................................ 5
Notes to consolidated financial statements ................................ 6
ITEM 2 - Management's Discussion and Analysis of Financial Condition
and Results of Operations ........................................ 11
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 ................................. 17
SIGNATURES ................................................................ 18
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<PAGE>
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
INTERLEAF, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
<TABLE>
<CAPTION>
DECEMBER 31, 1999 MARCH 31, 1999
----------------- --------------
(UNAUDITED)
In thousands, except for share and per share amounts
<S> <C> <C>
ASSETS
Current assets
Cash and cash equivalents $ 18,291 $ 16,479
Cash-restricted 11,982 --
Accounts receivable, net of reserve for doubtful accounts of $966
at December 31, 1999 and $1,123 at March 31, 1999 11,645 12,008
Prepaid expenses and other current assets 1,657 1,541
--------- ---------
Total current assets 43,575 30,028
Property and equipment, net 2,418 2,120
Intangible assets, net 9,572 5,222
Other assets 348 442
--------- ---------
Total Assets $ 55,913 $ 37,812
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities
Accounts payable $ 2,207 $ 2,224
Accrued expenses 12,159 11,184
Acquisition related payables 11,982 --
Unearned revenue 9,355 11,492
Accrued restructuring 755 953
--------- ---------
Total current liabilities 36,458 25,853
Long-term restructuring 985 1,234
--------- ---------
Total Liabilities 37,443 27,087
--------- ---------
Redeemable common stock- shares issued and outstanding, none at
December 31, 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,
none at December 31, 1999 and 726,003 at March 31, 1999 -- 73
6% Convertible, shares issued and outstanding, none at
December 31, 1999 and 1,050 at March 31, 1999 -- --
Common stock, par value $.01 per share, authorized 50,000,000 shares, issued and
outstanding, 13,505,538 at December 31, 1999 and
9,913,209 at March 31, 1999 135 99
Additional paid-in capital 109,451 94,795
Retained earnings (accumulated deficit) (90,296) (85,197)
Cumulative translation adjustment (820) (541)
--------- ---------
Total Shareholders' Equity 18,470 9,229
--------- ---------
Total Liabilities and Shareholders' Equity $ 55,913 $ 37,812
========= =========
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED FINANCIAL STATEMENTS.
</TABLE>
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<PAGE>
INTERLEAF, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF OPERATIONS
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
DECEMBER 31, DECEMBER 31,
1999 1998 1999 1998
---- ---- ---- ----
(UNAUDITED) (UNAUDITED)
----------- -----------
In thousands, except for per share amounts
<S> <C> <C> <C> <C>
Revenues:
Products $ 4,235 $ 2,265 $ 10,947 $ 6,150
Maintenance 3,437 5,576 13,592 16,592
Services 4,835 3,795 14,566 9,912
-------- -------- -------- --------
Total revenues 12,507 11,636 39,105 32,654
-------- -------- -------- --------
Costs of Revenues:
Products 674 545 1,875 1,817
Maintenance 702 724 2,217 2,300
Services 5,669 3,400 15,240 9,067
-------- -------- -------- --------
Total costs of revenues 7,045 4,669 19,332 13,184
-------- -------- -------- --------
Gross margin 5,462 6,967 19,773 19,470
-------- -------- -------- --------
Operating expenses:
Selling, general and administrative 6,869 4,511 19,144 14,874
Research and development 2,695 2,347 5,911 6,179
Purchased in-process research and development -- -- -- 498
-------- -------- -------- --------
Total operating expenses 9,564 6,858 25,055 21,551
-------- -------- -------- --------
Income (loss) from operations (4,102) 109 (5,282) (2,081)
Other income expenses 108 132 280 523
-------- -------- -------- --------
Income (loss) before income taxes (3,994) 241 (5,002) (1,588)
Provision for income taxes -- -- 97 25
-------- -------- -------- --------
Net income (loss) (3,994) 241 (5,099) (1,583)
Dividends on preferred stock -- (94) (2) (553)
Gain on redemption of preferred stock -- 8,771 -- 8,771
-------- -------- -------- --------
Net income (loss) applicable to common shareholders-basic
earnings per share $ (3,994) $ 8,918 $ (5,101) $ 6,635
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 $ (3,994) $ 221 $ (5,101) $ (1,664)
======== ======== ======== ========
Income (loss) per share:
Basic $ (0.31) $ 1.30 $ (0.43) $ 1.03
======== ======== ======== ========
Diluted $ (0.31) $ 0.03 $ (0.43) $ ( 0.19)
======== ======== ======== ========
Shares used in computing basic income (loss) per share 12,901 6,884 11,956 6,418
======== ======== ======== ========
Shares used in computing diluted income (loss) per share 12,901 8,406 11,956 8,642
======== ======== ======== ========
The accompanying notes are an integral part of these consolidated financial statements
</TABLE>
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<PAGE>
INTERLEAF, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOW
<TABLE>
<CAPTION>
NINE
MONTHS ENDED
DECEMBER 31,
(UNAUDITED)
---------------------------
1999 1998
-------- --------
In thousands
<S> <C> <C>
Cash Flows from Operating Activities:
Net income $ (5,099) $ (1,583)
Adjustments to reconcile net income (loss) to net cash provided by (used
in) operating activities:
Depreciation and amortization expense 2,479 2,028
Purchased in-process research & development -- 498
Changes in assets and liabilities:
Decrease in accounts receivable, net 313 964
(Increase) decrease in other assets (2,588) 62
Increase (decrease) in accounts payable and accrued expenses 4,038 (1,437)
Decrease in unearned revenue (2,184) (2,154)
Decrease in other liabilities (555) (1,572)
Other, net (74) (59)
-------- --------
Net cash provided by (used in) operating activities (3,670) (3,253)
-------- --------
Cash Flows from Investing Activities:
Capital expenditures (1,255) (650)
Acquisitions, net of cash acquired (476) (2,731)
Capitalized software development costs (1,570) --
-------- --------
Net cash used in investing activities (3,301) (3,381)
-------- --------
Cash Flows from Financing Activities:
Net proceeds from issuance of common stock 6,592 --
Net proceeds from exercise of stock options 2,425 --
Dividends paid -- (251)
Redemption of preferred stock -- (3,824)
-------- --------
Net cash provided by (used in) financing activities 9,017 (4,075)
-------- --------
Effect of exchange-rate changes on cash (234) 661
-------- --------
Net increase (decrease) in cash and cash equivalents 1,812 (10,048)
Cash and cash equivalents at beginning of year 16,479 21,112
-------- --------
Cash and cash equivalents at end of year $ 18,291 $ 11,064
======== ========
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED FINANCIAL STATEMENTS.
</TABLE>
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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. ("Interleaf") and its subsidiaries. All significant intercompany
balances and transactions have been eliminated in consolidation. Interleaf
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.
3. PROPOSED BUSINESS COMBINATION
Interleaf and BroadVision, Inc. ("BroadVision") have entered into an
agreement and Plan of Merger and Reorganization dated as of January 26, 2000
(the "Merger Agreement") providing for the merger of a newly created
Massachusetts corporation with and into Interleaf. Under the Merger
Agreement, each share of outstanding Interleaf common stock will be
converted into the right to receive 0.3465 BroadVision shares. Giving effect
to a three for one stock split recently announced by BroadVision, each share
of Interleaf common stock will be exchangeable for 1.0395 shares of
BroadVision common stock. Following the merger, BroadVision will be owned by
the former shareholders of Interleaf and BroadVision, and Interleaf will be
a wholly owned subsidiary of BroadVision.
The transaction is expected to close in May 2000, subject to the
satisfaction or waiver of various conditions as more fully described in the
Merger Agreement. These conditions include, but are not limited to,
stockholder approval, certain regulatory approvals, the effective
registration of the BroadVision securities issued in the merger in
accordance with provisions of the Securities Act of 1933, and the receipt of
opinions from the respective tax counsel of Interleaf and BroadVision
regarding certain United States federal income tax consequences of the
transactions.
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<PAGE>
4. 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,
------------------------- -------------------------
1999 1998 1999 1998
-------- -------- -------- --------
In thousands, except for per share amounts
<S> <C> <C> <C> <C>
NUMERATOR:
Net income (loss) $ (3,994) $ 241 $ (5,099) $ (1,583)
Preferred stock dividends:
Senior Series C convertible -- (30) -- (283)
6% convertible - redeemed -- (44) -- (209)
6% convertible - outstanding -- (20) (2) (61)
-------- -------- -------- --------
-- (94) (2) (553)
-------- -------- -------- --------
Gains on redemption
Senior Series C convertible -- 8,100 -- 8,100
6% convertible -- 671 -- 671
-------- -------- -------- --------
-- 8,771 -- 8,771
-------- -------- -------- --------
Numerator for basic income (loss) per share:
Income (loss) available to common stockholders $ (3,994) $ 8,918 $ (5,101) $ 6,635
======== ======== ======== ========
EFFECT OF DILUTIVE SECURITIES Preferred stock dividends:
Series C convertible -- 30 -- 283
6% convertible - redeemed -- 44 -- 209
6% convertible - outstanding -- -- -- --
-------- -------- -------- --------
-- 74 -- 492
-------- -------- -------- --------
GAINS ON REDEMPTION
Senior Series C convertible -- (8,100) -- (8,100)
6% convertible -- (671) -- (671)
-------- -------- -------- --------
-- (8,771) -- (8,771)
-------- -------- -------- --------
Numerator for diluted income (loss) per share:
Income (loss) available to common shareholders $ (3,994) $ 221 $ (5,101) $ (1,644)
======== ======== ======== ========
DENOMINATOR:
Denominator for basic income (loss) per share:
Weighted average shares 12,901 6,884 11,956 6,418
-------- -------- -------- --------
Effect of dilutive securities:
Series B convertible preferred stock -- 284 -- --
Series C convertible preferred stock -- 322 -- 1,008
Series D convertible preferred stock -- 764 -- 1,216
Stock options -- 152 -- --
Stock purchase plan -- -- -- --
Warrants -- -- -- --
-------- -------- -------- --------
Dilutive potential common shares -- 1,522 -- 2,224
-------- -------- -------- --------
Denominator for diluted earnings per share
Adjusted weighted average shares and assumed conversions 12,901 8,406 11,956 8,642
======== ======== ======== ========
Basic earnings (loss) per share $ (0.31) $ 1.30 $ (0.43) $ 1.03
======== ======== ======== ========
Diluted earnings (loss) per share $ (0.31) $ 0.03 $ (0.43) $ (0.19)
======== ======== ======== ========
</TABLE>
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<PAGE>
For the three and nine months ended December 31, 1999, potential common
shares of 2,731 and 1,923, 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 loss applicable to common shareholders for the nine
months ended December 31, 1998 of $2.1 million was reduced to $1.6 million.
The Company's previously reported basic income per share of $.96 for the
nine months ended December 31, 1998 was increased to $1.03 and the
previously reported diluted loss per share of $.25 was reduced to $.19.
5. 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.
The shares of Interleaf common stock and warrants to purchase common stock
which had been issued to Texcel in the acquisition were pledged by Texcel to
Interleaf as collateral to secure Texcel's obligations to indemnify
Interleaf against certain potential claims, most notably any claims which
might be asserted against Interleaf or the purchased assets by Texcel's
creditors. The pledged securities have been liquidated, and the resulting
proceeds, net of certain distributions to Texcel, have been recorded as
restricted cash. The indemnification period expires in April 2000, and at
that time Interleaf will be obligated to disburse the cash to Texcel, net of
indemnified claims. As a result, a corresponding liability "acquisition
related payable" is included as a current liability.
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
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<PAGE>
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.
6. 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, and
Quicksilver, 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
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 nine months ended December 31, 1999
and 1998, respectively.
<TABLE>
<CAPTION>
THREE MONTHS ENDED
--------------------------------------------- --- -------------------------------------------
DECEMBER 31, 1999 DECEMBER 31, 1998
E-PUBLISHING E-CONTENT TOTAL E-PUBLISHING E-CONTENT TOTAL
-------- -------- -------- -------- --------- --------
<S> <C> <C> <C> <C> <C> <C>
Products $ 419 $ 3,816 $ 4,235 $ 2,265 $ -- $ 2,265
Maintenance 3,313 124 3,437 5,576 -- 5,576
Services 3,656 1,179 4,835 3,795 -- 3,795
-------- -------- -------- -------- --------- --------
Total revenues $ 7,388 $ 5,119 $ 12,507 $ 11,636 $ $ 11,636
======== ======== ======== ======== ========= ========
Operating
income (loss) $ 1,348 $ (5,450) $ (4,102) $ 109 $ -- $ 109
======== ======== ======== ======== ========= ========
</TABLE>
<TABLE>
<CAPTION>
NINE MONTHS ENDED
--------------------------------------------- --- -------------------------------------------
DECEMBER 31, 1999 DECEMBER 31, 1998
E-PUBLISHING E-CONTENT TOTAL E-PUBLISHING E-CONTENT TOTAL
-------- -------- -------- -------- ------- --------
<S> <C> <C> <C> <C> <C> <C>
Products $ 4,067 $ 6,880 $ 10,947 $ 6,150 $ -- $ 6,150
Maintenance 13,238 354 13,592 16,592 -- 16,592
Services 12,275 2,291 14,566 9,912 -- 9,912
-------- -------- -------- -------- ------- --------
Total revenues $ 29,580 $ 9,525 $ 39,105 $ 32,654 $ $ 32,654
======== ======== ======== ======== ======= ========
Income(loss) from
operations $ 4,352 $ (9,634) $ (5,282) $ (2,081) $ -- $ (2,081)
======== ======== ======== ======== ======= ========
</TABLE>
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<PAGE>
The following are reconciliations to corresponding totals in the accompanying
consolidated statements:
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
DECEMBER 31, DECEMBER 31,
----------------------- -----------------------
1999 1998 1999 1998
------- ------- ------- -------
<S> <C> <C> <C> <C>
Income (loss) for reportable
segments $(4,102) $ 109 $(5,282) $(2,081)
Non-operating income (43) 2 (15) 35
Interest income, net 151 130 295 488
------- ------- ------- -------
Income (loss) before income
taxes $(3,994) $ 241 $(5,002) $(1,588)
======= ======= ======= =======
</TABLE>
7. 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.
8. CREDIT AGREEMENT
At December 31, 1999 and March 31, 1999, the Company had outstanding letters
of credit aggregating $.7 and $.9 million, respectively, expiring between
September 15, 2000 and October 1, 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.
9. 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 nine months ended December 31, 1999 were $4.2
million and $5.4 million respectively. For the three months ended December
31, 1998, total comprehensive income was $.2 million. For the nine months
ended December 31. 1998, total comprehensive loss was $1.4 million.
-10-
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
OVERVIEW
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 third quarter of fiscal 2000,
the Company introduced the Quicksilver suite of products ("Quicksilver"), an
XML-enabled publishing product which provides the Company's existing complex
publishing customers with a migration path to enterprise wide applications of
XML, such as BladeRunner. The Company markets Quicksilver on an annual
subscription basis whereby a customer pays an annual subscription license fee
and is entitled to use the product and to receive all upgrades and telephone
support during the subscription period.
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.
The Company reported a net loss of $4.0 million on total revenues of $12.5
million for its third quarter and a net loss of $5.1 million on total revenues
of $39.1 million for the nine months ended December 31, 1999. This compares with
net income of $.2 million on total revenues of $11.6 million and a net loss of
$1.6 million on total revenues of $32.7 million for the same periods of the
prior year before gains on the redemption of preferred stock and payment of
dividends on preferred stock. In the third quarter and nine months ended
December 31, 1998, the Company recorded preferred stock dividends of $.1 million
and $.6 million, respectively, in deriving net income applicable to common
shareholders. 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 share, all of the gains on redemption and
conversion 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 $6.6 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 $1.6 million for the
nine months ended December 31, 1998.
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 loss
applicable to common shareholders for the nine months ended December 31, 1998 of
$2.1 million was reduced to $ $1.6 million. The Company's previously reported
basic earnings per share of $.96 for the nine months ended December 31, 1998,
was increased to $1.03. The Company's previously reported diluted loss per share
of $.25 for the nine months ended December 31, 1998, was reduced to $.19. The
impact of the restatement in the third quarter of fiscal 1999 was not material.
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<PAGE>
The increases in total revenues of $.9 million and $6.4 million in the third
quarter and first nine 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 four months of PDR revenue was included in the nine months 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 third quarter or first nine months of fiscal
1999.
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.
RESULTS OF OPERATIONS
PRODUCT: Product license revenue includes the sale of software products under
perpetual and subscription license agreements. Total product revenue increased
83% to $4.2 million from $2.3 million for the third quarter and 76% to $10.9
million from $6.2 million for the nine months ended December 31, 1999,
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<PAGE>
respectively, compared with the same periods in fiscal 1999. The increase is
primarily due to sales of 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. Revenues from the e-content products
were $3.8 million and $6.9 million for the third quarter and nine months ended
December 31, 1999. Additionally, the Company has introduced the Quicksilver
suite of products, an XML enabled publishing product which provides the
Company's existing complex publishing customers with a migration path to
enterprise wide applications of XML such as BladeRunner. Quicksilver was
introduced during the second quarter of fiscal 2000, and is sold on an annual
subscription basis under which the customer is entitled to use the product and
to receive all upgrades, maintenance and support offered during the period 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 purchasing to Quicksilver subscriptions. The election by
existing customers to purchase Quicksilver subscription licenses therefore will
reduce the maintenance revenue for the e-publishing segment and will increase
subscription revenue for the e-content segment.
MAINTENANCE: Maintenance revenue is comprised of fees for technical support and
maintenance releases of e-publishing and e-content products. Total maintenance
revenue decreased by 39% to $3.4 million from $5.6 million in the third quarter
and by 18% to $13.6 million from $16.6 million for the nine months ended
December 31, 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 96% and 97%, respectively, of all maintenance revenue
for the third quarter and nine months ended December 31, 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 QuickSilver and competing third party 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: Professional services revenue includes installation, custom
application development, project and technical consulting, training and
technical document outsourcing. Services revenue increased by 26% to $4.8
million from $3.8 million in the third quarter and 47% to $14.6 million from
$9.9 million for the nine months ended December 31, 1999, respectively, compared
with the same periods of fiscal 1999. The increases in fiscal 2000 are primarily
attributable to growth in technical document outsourcing, which contributed $1.3
million and $4.7 million, respectively, of services revenue in the three and
nine month periods ended December 31, 1999. Additionally, Interleaf Italia,
which was acquired December 31, 1998, added $.2 million and $ .6 million of
services revenue, respectively, for the three and nine months ended December 31,
1999. The increases attributable to technical document outsourcing and to the
additional revenue provided by Interleaf Italia were partially offset by
declines in the services revenue generated by services associated with the
Company's traditional e-publishing products.
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 increased by 40% to $.7 million from $.5 million in the third quarter
compared with the same period of fiscal 1999. Cost of product revenues for the
nine months ended December 31, 1999 increased by 6% to $1.9 million from $1.8
million compared to the same period of the prior year. In the third quarter and
nine months of fiscal 2000, increased amortization of capitalized research and
development costs and higher outsourced manufacturing costs due to increased
sales were partially offset by decreases in royalty expense compared with the
prior year.
-13-
<PAGE>
Costs of maintenance revenues for the third quarter and nine months ended
December 31, 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 support
and maintain e-content products.
Costs of services revenue increased by 68% to $5.7 million from $3.4 million in
the third quarter and 67% to $15.2 million from $9.1 million for the nine months
ended December 31, 1999, respectively, compared with the same periods of the
prior year. The increase is attributable to the acquisition of PDR late in the
second quarter of fiscal 1999 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, lower margins in technical document outsourcing
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 53% to $6.9
million from $4.5 in the third quarter and 28% to $19.1 million from $14.9
million for the nine months ended December 31, 1999 compared with the same
periods of the prior year. The increases are primarily due to additional selling
and marketing expenses of $1.3 million and $2.2 million for the three and nine
months ended December 31, 1999, respectively, associated with the launching of
the Company's e-content division. The remaining increases are mainly
attributable to the amortization of goodwill and intangible assets of $.3
million and $.7 million, respectively, and to incremental G&A of $.4 million and
$.7 million respectively, for the three and nine months ended December 31, 1999
related to the Company's fiscal 1999 and 2000 acquisitions.
Research and Development ("R&D") expenses increased by 17% to $2.7 million from
$2.3 million in the third quarter of fiscal 2000 compared with the same period
of the prior year. As a percent of revenue, R&D expenses increased to 22% in the
third quarter of fiscal 2000 from 20% in the third quarter of fiscal 1999. The
increase in R&D expense as a percentage of revenue in the third quarter of
fiscal 2000 compared with the same period of fiscal 1999, is due to the on-going
initiatives in enhancing applications such as the Company's new wireless
application protocol for BladeRunner products. In the first nine months of
fiscal 2000, the Company's total R&D expenses, including capitalized software
development costs, were $7.5 million, representing 19% of revenues. This
consisted of $5.9 million charged directly to R&D expenses and $1.6 million of
capitalized software development costs. In the first nine months of fiscal 1999,
the Company's product development and engineering expenses were $6.2 million,
representing 19% of revenues. There were no software development costs
capitalized in the first nine months of fiscal 1999, and no such costs were
capitalized in the third 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
Interleaf and BroadVision have entered into an Agreement and Plan of Merger and
Reorganization dated as of January 26, 2000 (the "Merger Agreement") providing
for the merger of a newly created Massachusetts corporation with and into
Interleaf. Under the Merger Agreement, each share of outstanding Interleaf
common stock will be converted into the right to receive 0.3465 BroadVision
shares. Giving effect to a three for one stock split recently announced by
BroadVision, each share of Interleaf common stock will be exchangeable for
1.0395 shares of BroadVision common stock. Following the merger, BroadVision
will be owned by the former shareholders of BroadVision and Interleaf, and
Interleaf will be a wholly owned subsidiary of BroadVision.
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<PAGE>
The transaction is expected to close in May 2000, subject to the satisfaction or
waiver of various conditions as more fully described in the Merger Agreement.
These conditions include, but are not limited to, stockholder approval, certain
regulatory approvals, the effective registration of the BroadVision securities
issued in the merger securities in accordance with provisions of the Securities
Act of 1933, and the receipt of opinions from the respective tax counsel of
Interleaf and BroadVision regarding certain United States federal income tax
consequences of the transactions.
The Company had $18.3 million of cash and cash equivalents at December 31, 1999,
an increase of $1.8 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 $2.4 million, which were partially offset
by cash used in operating activities to support revenue growth of $3.6 million,
capitalized software development costs of $1.6 million, cash used for capital
expenditures of $1.3 million, cash used for acquisitions of $.5 million, and the
effect of exchange rate changes on cash of $.2 million. The Company also has
restricted cash of $11.9 million related to its acquisition of Texcel. This
amount is being held to secure Texcel's obligation to indemnify Interleaf
against certain potential claims, and is offset by the corresponding liability
to disburse the funds to Texcel in April 2000 net of the amount of indemnified
claims.
At December 31, 1999 and at March 31, 1999, the Company had outstanding letters
of credit aggregating $.7 and $.9 million, respectively, expiring between
September 15, 2000 and October 1, 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 December 31, 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 has recently agreed to be acquired by BroadVision and is considering its
current liquidity needs and means based on this proposed acquisition. If the
acquisition is not consummated, the Company would need to make additional
investments in the development, marketing and promotion of its e-content
solutions and 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
Some computers, software and other equipment may not properly recognize
a year that begins with a "20" instead of "19," resulting in software failures
or erroneous results, which are commonly referred to as the "Year 2000" problem.
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. Our
products and our internal systems and software may contain errors or defects
associated with Year 2000 date function that we may not have identified and
remedied and which may not yet be observable. The Company has prepared a
contingency plan to address reasonably likely worst case business operations
scenarios. Our contingency plan for Year 2000 problems, or those of third
parties, may yet prove to be inadequate. Further, we cannot assure you that our
customers will not assert claims against us alleging that our products should
-15-
<PAGE>
have been Year 2000 compliant at the time of purchase, which could result in
costly litigation and divert management's attention. We are unable to estimate
to what extent our business may be affected if our software, or the systems that
operate in conjunction with our software, experience a material Year 2000
failure.
Year 2000 problems and concerns also may affect the supply of, or demand for,
our products or result in third-party claims against us. We cannot assure you
that the entities on whom we rely for certain products and services that are
important to our business have been successful in addressing all of their
software and systems concerns in order to operate without disruption in the year
2000 and beyond, which may result in delays in development or shipment of our
products. Moreover, our customers or potential customers may have had Year 2000
problems or concerns that caused a reduction, delay or cancellation of orders or
failures or delays in making payments to us for products shipped. We are unable
at this time to estimate to what extent our revenues and operating results may
be affected by Year 2000 problems or concerns of others.
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:
o There are risks associated with the proposed acquisition by
BroadVision, such as difficulties in integrating the operations of the
two companies, significant management and operational distraction,
customer confusion, significant costs of the merger (including
transaction expenses and severance costs) and difficulties in retaining
key employees after the acquisition. In addition, the Company has
decided to discontinue development of BR-Web, and is planning to
integrate BladeRunner with BroadVision's One-To-One product, and to
offer One-to-One as a replacement for BR-Web under an arms-length
Reseller Agreement currently being negotiated. In the event that the
Company takes this course of action and the merger does not take place,
the Company will be dependent on BroadVision to provide upgrades,
support, training and assistance in promoting and implementing
BroadVision's One-To-One product. BroadVision may delay or fail to
perform its obligations under the proposed Reseller Agreement, and the
Company might be forced to re-start the development of BR-Web, which
would result in significant costs and a significant increase in the
overall time to market of the Company's web server product.
o The Company may not be able to continue to develop and market new and
enhanced products and services, particularly the Company's content
management products and services; the development and introduction of
such new and enhanced products and services may be delayed; the Company
may fail to achieve customer and market acceptance of its new and
enhanced products and services; there may be delays in the growth and
development of market demand for content management software products;
the market for multi-device portals and Web sites may not grow as
expected; the Company may have difficulties integrating BladeRunner
with the BroadVision One-to-One Enterprise product and customers may
not accept One-to-One as a replacement for BR-Web; the Company may have
difficulty 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 capital as may be
necessary to effectively develop, market and promote its new e-content
products; inability to increase maintenance contract revenue related
-16-
<PAGE>
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 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
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<PAGE>
Form S-3 dated October 22, 1999, File Number 333-89117)
10.3 Agreement and Plan of Merger and Reorganization, dated as
of January 26, 2000, by and among BroadVision, Inc.,
Infiniti Acquisition Sub, Inc. and Interleaf, Inc.
(incorporated herein by reference to Exhibit 2.1 to the
Company's Current Report on Form 8-K dated February 1,
2000)
11 Computation of Earnings Per Share (included as Note 3 to
Financial Statements)
27 Financial Data Schedule
(b) Reports on Form 8-K
A Current Report on Form 8-K was filed by the Company on February 1,
2000 with respect to the Agreement and Plan of Merger and
Reorganization entered into by the Company and BroadVision, Inc.
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 14, 2000
/s/ Peter J. Rice
--------------------------------------------
Peter J. Rice,
Vice President of Finance and Administration
and Chief Financial Officer and Treasurer
(Principal Financial and Accounting Officer)
<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 December
31,1999, and is qualified in its entirety by reference to such financial
statements.
</LEGEND>
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