SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q/A
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1998
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
Commission File Number 1-11135
TREEV, INC.
(Exact name of registrant as specified in its charter)
Delaware 54-1590649
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
500 Huntmar Park Drive, Herndon, Virginia 20170
(Address of principal executive offices)
(703) 478-2260
(Issuer's telephone number)
Indicate by check mark whether the registrant: (1) has filed all
reports required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the past 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 past 90 days. Yes [X] No [ ]
Indicate the number of shares outstanding of each of the issuer's
classes of common stock, as of the latest practicable date: 33,875,790 shares of
common stock, $.0001 par value, as of October 23, 1998.
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TREEV, INC.
Form 10-Q
Table of Contents
PART I FINANCIAL INFORMATION
Item 1. Financial Statements.
Consolidated Balance Sheets at September 30, 1998
(unaudited) and December 31, 1997 2
Consolidated Statements of Operations (unaudited) for
the three months ended September 30, 1998 and 1997 3
Consolidated Statements of Operations (unaudited) for
the nine months ended September 30, 1998 and 1997 4
Consolidated Statement of Changes in Stockholders' Equity
(unaudited) for the nine months ended September 30, 1998 5
Consolidated Statements of Cash Flows (unaudited)
for the nine months ended September 30, 1998 and 1997 6
Notes to Consolidated Financial Statements 7
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations. 12
PART II. OTHER INFORMATION
Item 1. Legal Proceedings. 19
Item 6. Exhibits and Reports on Form 8-K. 20
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TREEV, INC.
CONSOLIDATED BALANCE SHEETS
(In thousands, except share and per share amounts)
September 30, December 31,
1998 1997
--------- ---------
(Unaudited)
ASSETS
Current assets:
Cash and cash equivalents $ 4,291 $ 3,816
Accounts and notes receivable, net 7,006 8,569
Note receivable Dorotech sale -- 7,000
Inventories 827 722
Prepaid expenses and other 682 1,108
--------- ---------
Total current assets 12,806 21,215
Fixed assets, net 1,745 2,165
Long-term notes receivable, net 138 378
Software development costs and
purchased technology, net 2,637 2,490
Goodwill, net 374 499
Other assets 127 113
--------- ---------
Total assets $ 17,827 $ 26,860
========= =========
LIABILITIES & STOCKHOLDERS' EQUITY
Current liabilities:
Current debt maturities and
obligations under capital leases $ 571 $ 2,479
Accounts payable 1,973 2,037
Accrued compensation and
related expenses 1,078 1,135
Deferred revenue 3,584 3,334
Other accrued expenses 2,714 2,250
--------- ---------
Total current liabilities 9,920 11,235
Long-term debt and obligations
under capital leases 60 1,108
--------- ---------
Total liabilities 9,980 12,343
Commitments
Redeemable Series F preferred stock,
none and 792,186 shares issued and
outstanding -- 6,548
Stockholders' equity:
Preferred stock, $.0001 par value,
20,000,000 shares authorized;
3,169,601 and 1,615,675 shares
issued and outstanding
Common stock, $.0001 par value,
100,000,000 shares authorized;
33,875,790 and 26,236,186 shares
issued and outstanding 3 3
Additional paid-in-capital 139,697 132,403
Accumulated deficit (131,853) (124,437)
--------- ---------
Total stockholders' equity 7,847 7,969
--------- ---------
Total liabilities and
stockholders' equity $ 17,827 $ 26,860
========= =========
The accompanying notes are an integral part of these financial statements.
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TREEV, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except share and per share amounts)
(Unaudited)
Three Months Ended September 30,
1998 1997
----------- -----------
Revenue:
Products $ 3,466 $ 5,225
Services 2,902 4,719
----------- -----------
6,368 9,944
----------- -----------
Costs and expenses:
Cost of products sold 1,527 2,585
Cost of services provided 1,847 3,865
Sales and marketing 2,748 3,649
General and administrative 925 1,649
Product development 966 1,142
----------- -----------
8,013 12,890
----------- -----------
Loss before investment and
interest income and income taxes (1,645) (2,946)
Investment and interest income
(expense), net 3 (130)
----------- -----------
Loss before income taxes (1,642) (3,076)
Income tax benefit -- (142)
----------- -----------
Net income (loss) (1,642) (2,934)
----------- -----------
Preferred stock preferences
Accrued dividends (337) (930)
Imputed dividends -- (774)
----------- -----------
Net loss applicable to common shares $ (1,979) $ (4,638)
=========== ===========
Net loss per common share $ (0.06) $ (0.18)
=========== ===========
Weighted average shares outstanding 32,993,308 25,436,748
=========== ===========
Net loss per common share -
assuming dilution $ (0.06) $ (0.18)
=========== ===========
Weighted average shares outstanding 32,993,308 25,436,748
=========== ===========
The accompanying notes are an integral part of these financial statements.
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TREEV, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except share and per share amounts)
(Unaudited)
Nine Months Ended September 30,
1998 1997
------------ ------------
Revenue:
Products $ 11,260 $ 13,591
Services 8,395 14,805
------------ ------------
19,655 28,396
------------ ------------
Costs and expenses:
Cost of products sold 5,188 6,740
Cost of services provided 5,633 11,681
Sales and marketing 8,585 10,901
General and administrative 3,175 4,949
Product development 2,927 3,451
Gain from extinguishment of debt -- (267)
Restructuring costs 1,505 --
------------ ------------
27,013 37,455
------------ ------------
Loss before investment and interest
income and income taxes (7,358) (9,059)
Investment and interest income
(expense), net (58) (163)
------------ ------------
Loss before income taxes (7,416) (9,222)
Income tax benefit -- (87)
------------ ------------
Net loss (7,416) (9,135)
------------ ------------
Preferred stock preferences
Accrued dividends (1,011) (2,836)
Imputed dividends -- (774)
------------ ------------
Net loss applicable to common shares $ (8,427) $ (12,745)
============ ============
Net loss per common share $ (0.28) $ (0.51)
============ ============
Weighted average shares outstanding 29,957,510 24,957,354
============ ============
Net loss per common share -
assuming dilution $ (0.28) $ (0.51)
============ ============
Weighted average shares outstanding 29,957,510 24,957,354
============ ============
The accompanying notes are an integral part of these financial statements.
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TREEV, INC.
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
For the nine months ended September 30, 1998
(In thousands, except share amounts)
(Unaudited)
<TABLE>
<CAPTION>
Additional
Preferred Stock Common Stock paid-in Accumulated
Shares Amt. Shares Amt. capital Deficit Total
-------------------- ----------------------- ---------------- ---------------- -------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance December 31, 1997 1,615,575 $ -- 26,236,186 $3 $132,403 ($124,437) $7,969
Issuance of common stock,
net of offering costs of $245 5,338,500 4,318 4,318
Issuance of preferred stock,
net of offering costs of $763 1,560,576 10,667 10,667
Conversion of preferred stock (1,300) 1,958,720 0
Redemption of preferred stock (5,250) (7,085) (7,085)
Issuance of warrants 68 68
Dividends on preferred stock 342,384 (674) (674)
Net loss (7,416) (7,416)
-------------------- ----------------------- ---------------- ---------------- -------------
Balance September 30, 1998 3,169,601 $ -- 33,875,790 $3 $139,697 ($131,853) $7,847
==================== ======================= ================ ================ =============
</TABLE>
The accompanying notes are an integral part of these financial statements.
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TREEV, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
Nine Months
Ended September 30,
1998 1997
--------- ---------
(In thousands)
Cash flows from operating activities:
Net loss $(7,416) $(9,135)
Adjustments to reconcile net loss
to net cash used in operating
activities:
Depreciation and amortization 1,762 3,752
Restructuring costs 1,505 --
Other non-cash adjustments 77 15
Changes in assets and liabilities:
Accounts and notes receivable 1,536 (1,837)
Inventories (105) (6)
Prepaid expenses and other 2 145
Accounts payable (80) 1,698
Accrued compensation and
related expenses (57) 242
Accrued expenses, other (561) 161
Deferred revenues 250 (81)
Deferred income taxes -- (71)
------- -------
Net cash used in operating activities (3,087) (5,117)
------- -------
Cash flows from investing activities:
Capitalized software development and
license costs (1,072) (1,059)
Purchases of fixed assets (548) (557)
Proceeds from business divestitures,
net of related costs 7,230 60
------- -------
Net cash provided by (used in)
investing activities 5,610 (1,556)
------- -------
Cash flows from financing activities:
Proceeds from issuance of common
stock, net 4,318 23
Proceeds from issuance of preferred
stock, net 9,707 2,901
Cash dividends paid on preferred stock (337) (1,779)
Redemption of Mandatory Redeemable
Preferred Stock (6,548) (3,500)
Redemption of convertible preferred
stock (7,085) --
Redemption of convertible debentures (1,500) --
Proceeds from borrowings -- 5,000
Proceeds from issuance of long-term
debt -- 2,000
Principal payments on capital lease
obligations (603) (800)
Principal payments on debt -- (843)
------- -------
Net cash (used in) provided by
financing activities (2,048) 3,002
------- -------
Effect of exchange rate changes on cash
and cash equivalents -- (148)
Net increase (decrease) in cash and cash
equivalents 475 (3,819)
Cash and cash equivalents at beginning of year 3,816 7,601
------- -------
Cash and cash equivalents at September 30, $ 4,291 $ 3,782
======= =======
Supplemental Cash Flow Information:
Interest paid $ 191 $ 478
Income taxes paid $ 188 $ 261
The accompanying notes are an integral part of these financial statements.
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TREEV, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 1998 and 1997
1. BASIS OF PRESENTATION
The unaudited financial statements presented herein have been prepared in
accordance with the instructions to Form 10-Q and should be read in conjunction
with the financial statements and notes thereto included in the Company's Annual
Report on Form 10-K for the year ended December 31, 1997 which include
information and note disclosures not included herein. In the opinion of
management all adjustments, which include only those of a normal recurring
nature, necessary to fairly present the Company's financial position, results of
operations and cash flows have been made to the accompanying financial
statements. The results of operations for the nine month period ended September
30, 1998 may not be indicative of the results that may be expected for the year
ending December 31, 1998.
2. NAME CHANGE
During the second quarter of 1998, the Company changed its name from Network
Imaging Corporation to TREEV, Inc. The name change more accurately reflects the
Company's new orientation as a provider of integrated, production level document
management solutions and was done in conjunction with the introduction of the
Company's new integrated document management software product suite.
3. RESTRUCTURING CHARGES
During the second quarter of 1998, the Company incurred a charge of $1.5 million
as a result of effecting a restructuring plan ("the Plan"). The Plan provided
for the elimination of duplicate job functions and outdated or discontinued
products. Under the Plan, the Company is combining its three separate customer
support organizations into one support organization, and the Company's strategic
focus will shift to its newest suite of integrated document management software
using a Microsoft based architecture. The restructuring charge includes a
$827,000 write down to net realizable value of prepaid licenses and capitalized
software which related to products abandoned in favor of the new integrated
document management software suite. In addition, $677,000 of the restructuring
charge related to severance costs for 29 employees located throughout the U.S.,
including customer support, sales, marketing, engineering and administrative
personnel. The Plan is expected to be completed by the end of the first quarter
of 1999. At September 30, 1998, 24 employees had been terminated, severance
benefits of $539,000 had been paid out and the accrual balance relating to the
Plan was $138,000.
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4. REDEMPTION OF SERIES K AND L CONVERTIBLE PREFERRED STOCK
In September 1998, the Company redeemed in cash the remaining 2,000 shares
outstanding of Series K Convertible Preferred Stock ("Series K Stock") and all
of the outstanding 3,250 shares of Series L Convertible Preferred Stock ("Series
L Stock") for $7,100,000 including outstanding interest. The $7,100,000 payment
retired the obligations under the Series K Stock and Series L Stock. Proceeds
from the $10,000,000 issuance of the Company's Series N Convertible Preferred
Stock ("Series N Stock") were used, in part, to fund the redemption of the
Series K Stock and Series L Stock (See Note 5).
5. ISSUANCE OF SERIES N CONVERTIBLE PREFERRED STOCK
In September 1998, the Company completed a private placement of 1,559,576 shares
of Series N Stock, together with warrants to purchase and additional 800,000
shares of Common Stock at an exercise price of $0.625 per share. Proceeds from
the offering were $10,000,000 and offering costs were $619,000. In accordance
with the terms of the Series N Stock offering, approximately $7,100,000 of the
proceeds was used to redeem the Company's Series K Stock and Series L Stock, and
the remainder will be used for working capital purposes (See Note 4). The
Company also issued warrants to purchase 509,091 shares of Common Stock at an
exercise price of $0.69 per share to the placement agent in the transaction. In
connection with the sale of the Series N Stock, the Company agreed to register
the Common Stock issuable upon conversion of the preferred stock and execution
of the warrants upon such time as the Company files a registration statement to
register shares for any other stockholder of the Company. At September 30, 1998,
the 1,559,576 shares of Series N Stock were convertible into 15,595,760 shares
of Common Stock.
Each share of Series N Stock is convertible at the option of each holder into 10
shares of Common Stock. Upon stockholders' approval of the Series N Stock
offering at a special meeting of the stockholders, scheduled for December 9,
1998, any Series N Stock that has not previously been converted shall be
immediately converted into shares of Common Stock. Assuming that no shares of
the Series N Stock have been converted prior to such time, the Series N Stock
shall immediately convert into 15,595,760 shares of the Company's Common Stock.
The conversion price of the Series N Stock is $0.6412 per share, which was the
average volume market price of the Common Stock on the date the terms for the
Series N Stock were agreed to by the parties.
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6. CONVERSION OF LINE OF CREDIT TO PREFERRED STOCK
In June 1998, the Company converted the remaining $1.0 million of the
Stockholder line of credit into equity through the issuance of 1,000 shares of
Series M1 Convertible Stock ("Series M1 Stock"). The Company agreed, by
amendment to the securities purchase agreement for the Series M1 Stock, to file
a registration statement to register the Common Stock issuable upon conversion
of the preferred stock on or before March 30, 1999.
The Company received no proceeds from the conversion of the Stockholder line of
credit to equity. The Series M1 Stock issued and outstanding in December 2001
automatically converts into Common Stock. At September 30, 1998, the 1,000
shares of Series M1 Stock were convertible into 1,256,823 shares of Common
Stock.
The Series M1 Stock has a per share liquidation preference, subject to the
liquidation preference of the Series A Stock, of an amount equal to the sum of
$1,000 plus 8 1/2% per annum simple interest thereon for the period since the
date of issuance. Each share is convertible at the option of the holder into the
number of shares of Common Stock determined by dividing an amount equal to the
initial purchase price of $1,000 by $0.8125. The Series M1 Stock has a
cumulative dividend rate of 8 1/2% per annum which is payable at the time of
conversion or redemption in cash or shares of Common Stock, at the election of
the Company. If the cumulative dividend is paid in stock, the amount paid is
based on 95% of the closing bid price on the date of notice of conversion or
redemption.
The Series M1 holder has a right of redemption under certain circumstances, all
of which are under the sole control of the Company. The Company has the right,
at any time, to redeem all of the then outstanding Series M1 Stock for a price
per share equal to $1,000 plus the accrued unpaid dividend.
7. ISSUANCE OF COMMON STOCK
During the first quarter of 1998, the Company completed a private placement of
1,108,947 shares of Common Stock, together with warrants to purchase an
additional 50,000 shares of Common Stock, pursuant to Regulation D under the
Securities Act of 1933, as amended (the "Securities Act"). Proceeds from the
offering were $1,100,000 and offering costs were $26,000. Pursuant to the terms
of the private placement, the Company is obligated to file a registration
statement with the Securities and Exchange Commission to register the shares
when the Company files a registration statement to register shares for any other
stockholder, but in no event later than March 30, 1999.
During the second quarter of 1998, the Company completed a private placement of
2,907,126 shares of Common Stock, pursuant to Regulation D under the Securities
Act.
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Proceeds from the offering were $2,500,000 and offering costs were $150,000.
Pursuant to the terms of the private placement, the Company is obligated to file
a registration statement with the Securities and Exchange Commission to register
the shares when the Company files a registration statement to register shares
for any other stockholder, but in no event later than March 30, 1999.
During the second quarter of 1998, the Company issued 342,384 shares of Common
Stock as a quarterly dividend to the shareholders of the Company's Series A
Preferred Stock.
During the third quarter of 1998, the Company completed a private placement of
750,000 shares of Common Stock pursuant to Regulation D under the Securities
Act. Proceeds from the offering were $750,000 and offering costs were $60,000.
Pursuant to the terms of the private placement, the Company is obligated to file
a registration statement with the Securities and Exchange Commission to register
the shares when the Company files a registration statement to register shares
for any other stockholder, but in no event later than March 30, 1999. The
Company also completed a private placement of 200,000 shares of Common Stock
pursuant to Regulation D under the Securities Act. Proceeds from the offering
were $200,000 and offering costs were $10,000. Pursuant to the terms of the
private placement, the Company agreed to file a registration statement with the
Securities and Exchange Commission to register the shares.
During the third quarter of 1998, the Company issued 122,427 shares of Common
Stock under the Company's Employee Stock Purchase Plan ("the Plan"). Through
payroll deductions, employees can purchase the Company's Common Stock at a 15%
discount to the market price. Under the Plan, there are two six-month offering
periods beginning on January 1st and July 1st. The purchase price is determined
by taking 85% of the lower of (a) the average of the high and low market prices
on the offering commencement date and (b) the average of the high and low market
prices on the offering termination date. The terms of the Plan require that the
purchaser hold the shares purchased under the Plan for a minimum of six months
from the date the offering period ends.
8. EXCHANGE OF NOTE RECEIVABLE FOR EQUITY
During the second quarter of 1998, the Company exchanged a $1.1 million note
receivable, that had been received from the sale of a previously owned
subsidiary, for equity in the company that acquired the subsidiary. Previously,
the note had been reserved in its entirety, and the Company has made a similar
reserve on the equity received in the exchange.
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9. RETIREMENT OF REDEEMABLE PREFERRED STOCK
During the first quarter of 1998, the Company redeemed the remaining 792,186
shares of Series F Preferred Stock for $6.5 million including outstanding
interest. The $6,500,000 payment retired the obligations under the Series F
Stock. The Company used the $7,000,000 proceeds received in January 1998 from
the sale of its subsidiary in France, Dorotech, S.A., to finance the buy back of
the Company's Series F Stock.
10. CONVERTIBLE NOTE REDEMPTION
During the first quarter of 1998, the Company redeemed in cash $1.3 million of
the 8% Convertible Notes ("the Notes") due July 8, 2002 and August 20, 2002.
During the second quarter of 1998, the Company redeemed in cash $200,000 of the
Notes. At September 30, 1998, $400,000 of the Notes remained outstanding. During
October 1998, the Company redeemed in cash an additional $200,000 of the Notes
(See Note 11).
11. SUBSEQUENT EVENTS
During October 1998, the Company redeemed in cash $200,000 of the Notes. After
the October 1998 redemption, $200,000 of the Notes remained outstanding.
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Forward Looking Statements and Certain Risk Factors
This "Management's Discussion and Analysis of Financial Condition and
Results of Operations" section of this Quarterly Report on Form 10-Q contains
certain forward looking statements that are subject to a number of risks and
uncertainties. In addition, the Company may publish or make forward looking
statements from time to time relating to such matters as anticipated financial
performance, business prospects and strategies, sales and marketing efforts,
technological developments, new products, research and development activities,
and similar matters. The Private Securities Litigation Reform Act of 1995
provides a safe harbor for forward looking statements. In order to comply with
the terms of the safe harbor, the Company notes that a variety of factors could
cause the Company's actual results to differ materially from the anticipated
results or other expectations made in the Company's forward looking statements
in this Quarterly Report or elsewhere. Readers should carefully review the risk
factors described in other documents the Company files from time to time with
the Securities and Exchange Commission, specifically any Current Reports on Form
8-K filed by the Company. Some risks and uncertainties of the Company that
should be considered by the reader include:
The adverse results of operations that the Company has experienced have
been declining. Although the Company expects the trend of improved operating
results to continue, there can be no assurances that the Company will not
experience adverse results of operations in the future.
The Company has had net losses in each period of its operations since
its inception, except for one quarter, and it had an accumulated deficit at
September 30, 1998 of $131.9 million.
Pursuant to Nasdaq requirements, common and preferred stock trading on
Nasdaq must maintain a minimum bid price of $1.00. Nasdaq has indicated that
because the Company's Common Stock has traded below the Nasdaq minimum bid price
below $1.00, the Company is not currently in compliance with the minimum bid
price requirement to maintain listing on the Nasdaq National Market System.
Nasdaq indicated that the Company's Common Stock needed to be in compliance by
October 7, 1998. The Company was out of compliance at that time and has
requested a hearing. The Company understands that, under Nasdaq procedures, the
Company's Common Stock will continue to trade on the Nasdaq pending the outcome
of that hearing. A hearing date has not yet been scheduled. The Company has also
filed proxy materials with the SEC to seek shareholder approval to effect a
one-for-four reverse stock split to bring the stock price above $1.00. The
Company believes that if a reverse stock split is approved by
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shareholders and implemented, the Company's Common Stock will trade at a price
above the minimum required bid price for continued listing on the Nasdaq
National Market System. However, no assurances can be given that the market
price would rise in proportion to the reverse split or remain at levels
necessary for such continued listing. Any inability to trade on Nasdaq would
likely adversely effect the market price and liquidity of the Common Stock. In
the event that the Company's Common Stock trades at a minimum price of more than
$1.00 for a period of 10 consecutive trading days, and the Company is thereby
able to maintain its Nasdaq National Market System listing, the Company will
reassess whether to proceed with the reverse stock split.
The computer industry, including the information access, document
management, imaging and optical disk storage segments, is highly competitive,
and is characterized by rapid and continuous technological change. The Company's
future profitability will depend on, among other things, wide-scale market
acceptance of the Company's products and on the Company's ability to develop in
a timely fashion enhancements to existing products or new products. There can be
no assurance that the Company will be able to market successfully its current
products, develop and market enhancements to existing products or introduce new
products.
Year 2000 Readiness
The Year 2000 computer problem originated from programmers writing
software code that used two digits instead of four to represent the year. After
December 31, 1999, computers and software may incorrectly assume that the year
is "1900" rather than "2000." This could lead to system failures and disruptions
to activities and operations. In addition, Year 2000 is a leap year, which may
further exacerbate incorrect calculations, functions or system failures. At this
time it is difficult to predict the effects such disruptions could have and the
liabilities that any company may face as a result of these failures. Moreover,
companies must not only consider their own products and computer systems, but
also the Year 2000 readiness of any third parties, including principal vendors.
State of Readiness
The Company became aware in 1997 of its potential Year 2000 issues and
established a plan to assess its Year 2000 issues and develop an overall
strategy. In 1998, the Company began an assessment of its products, its own
information technology ("IT") and non-IT systems and the Company's vendors to
determine whether they are or will be Year 2000 ready. To ensure that the IT and
non-IT systems are, or will be, Year 2000 ready, surveys of the Company's
products, services and systems were conducted. These included: audits and
analyses of the Company's internal IT systems including hardware and software;
assessment of critical non-IT systems; and surveys on principal vendors as to
Year 2000 readiness. The Company identified several internal IT and non-IT
systems
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that were not Year 2000 ready. These internal systems have either been replaced
or modified with Year 2000 ready systems or will be upgraded to the Year 2000
ready product. All internal system upgrades are expected to be completed by the
third quarter of 1999. The Company has received written assurances from material
principal vendors as to Year 2000 readiness within that timeframe.
The majority of the Company's efforts regarding Year 2000 readiness
focused on the Company's products, specifically software applications. As an
integral part of the Company's assessment of whether its software products are
Year 2000 ready it has established a Year 2000 test force (the "Test Force").
The Test Force has been tasked with providing testing and validation of the
Company's Year 2000 readiness of its software products currently being sold to
its customers. The Company believes that the current versions of the TREEV Suite
of software products are Year 2000 ready. Customers using versions other than
current versions of the software products have been given the opportunity,
pursuant to maintenance plans or upgrade options, to receive current versions of
the software.
Costs to Address Year 2000 Readiness Issues
The calculation of costs incurred has been limited to bringing the
Company's software products, and its own IT and non-IT systems to Year 2000
readiness or to accelerating replacement systems to become Year 2000 ready.
Costs incurred in the normal maintenance of the Company's IT and non-IT systems
are not included. The total cost of the Year 2000 readiness project is estimated
at $740,000 and is being funded through operating cash flows. Of the total
project cost, approximately $260,000 is attributable to enhancements of the
Company's software products and the purchase of new IT and non-IT systems which
will be capitalized. The remaining $480,000 which will be expensed as incurred,
is not expected to have a material impact on the results of operations. To date,
the Company has incurred approximately $460,000 ($320,000 expensed and $140,000
capitalized) related to the assessment and validation efforts on the Year 2000
readiness project and the development of a modification plan and purchase of new
IT and non-IT systems and systems modifications.
The costs of the Year 2000 readiness project and the date by which the
Company believes it will complete the Year 2000 readiness modifications are
based on management's best estimates and are based on certain assumptions of
future events, including the continued availability of certain resources and
other factors. However, there can be no guarantee that these estimates will be
achieved and actual results could differ materially from those anticipated.
Specific factors that might cause such material differences include, but are not
limited to, the availability and cost of personnel trained in the Year 2000
readiness area and the ability to locate and correct all relevant computer
codes.
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Company's Contingency Plans
At the present time, the Company anticipates that essential software
products and IT and non-IT systems will be validated as Year 2000 ready in all
material respects. This belief is based on the progress to date and the assessed
degree of difficulty associated with the remaining phases to achieve Year 2000
readiness. Contingency plans are under development and the Company anticipates
that acceptable alternatives will be available in the event that a contingency
arises. These contingency plans generally anticipate use of alternative vendors
for hardware and operating systems. Nevertheless, it is not possible for the
Company to fully assess the likelihood or magnitude of consequences of Year 2000
issues, should representations made by vendors prove to be in error.
Year 2000 Information and Readiness Disclosure Act
This section captioned "Year 2000 Readiness," as well as other
statements herein or otherwise relating to the Year 2000 issues, are "Year 2000
Readiness Disclosures" pursuant to the "Year 2000 Information and Readiness
Disclosure Act."
Results of Operations - Nine months ended September 30, 1998 and 1997
Revenues. Total revenues were $19.7 million and $28.4 million
for the nine months ended September 30, 1998 and 1997, respectively. The $8.7
million decrease in revenue was the result of a decrease in product revenue of
$2.3 million, or 17%, and a decrease in service revenue of $6.4 million, or 43%.
The decrease in product revenue was attributable to an increase of $1.3 million,
or 13%, in comparative company revenues offset by a decrease of $3.6 million due
to the disposition in 1997 of the Company's subsidiary in France ("Dorotech").
The decrease in service sales of $6.4 million was the result of a $7.7 million
decrease due to the disposition of Dorotech, offset by a $1.3 million, or 19%,
increase in comparative company revenues. On a comparative company basis,
overall revenues increased $2.6 million, or 15%, from $17.1 million for the nine
months ended September 30, 1997 to $19.7 million for the same period in 1998.
Profit margins. Profit margins for product sales increased 4
percentage points for the first nine months of 1998 over the same period in 1997
as cost of products decreased from 50% to 46% of sales. The increase in product
sales margins was primarily due to the increased sales mix of the Company's
internally developed software products. Profit margins for service sales
increased 12 percentage points for the nine months ended September 30, 1998 as
compared to 1997 as the cost of services decreased from 79% to 67% of sales. The
increase in service sales margins from 21% to 33% was due to the Company's
continued emphasis on its custom development and professional services. On a
comparative company basis, overall profit margins increased 4 percentage points
to 45% for the nine months ended September 30, 1998 from 41% for the same period
in 1997.
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<PAGE>
Sales and marketing. Sales and marketing expenses were $8.6
million or 44% of revenue, for the nine months ended September 30, 1998 compared
to $10.9 million, or 38% of revenue in 1997. The decrease of $2.3 million, or
21%, was the result of the Company's disposition of Dorotech during 1997, which
reduced sales and marketing expenses $2.5 million, offset by an $144,000
increase in comparative company expenses.
General and administrative. G&A expenses were $3.2 million or
16% of revenue, for the nine months ended September 30, 1998 compared to $5.0
million, or 17% of revenue in 1997. The decrease of $1.8 million, or 36%, was
the result of the Company's disposition of Dorotech during 1997, which reduced
G&A expenses $1.1 million, and a $671,000, or 17%, decrease in comparative
company G&A expenses due to the Company's efforts in cost reduction.
Product development. The Company's expenditures on software
research and development activities ("R&D") in the nine months ended September
30, 1998 were $4.0 million, of which $1.1 million was capitalized and $2.9
million was expensed. Software research and development expenditures for the
1997 period were $4.5 million, of which $1.1 million was capitalized and $3.4
million was expensed. The $502,000 decrease in research and development
expenditures is attributable to the Company's 1997 disposition of Dorotech,
which reduced R&D expenses $790,000, offset by a $288,000 increase in
comparative company R&D expenses.
Restructuring costs. During the second quarter 1998, the
Company committed to a plan of restructuring and incurred a charge of $1.5
million.
Gain on extinguishement of debt. During the first quarter
1997, the Company's French subsidiary, Dorotech, realized a $267,000 gain in
connection with the partial forgiveness of a grant made from a French government
agency.
Net loss. The Company's net loss for the nine months ended
September 30, 1998 was $7.4 million as compared to $9.1 million for the
comparable period of 1997. The net loss decrease of $1.7 million is due to a
$900,000 decrease in net loss from the Company's continuing operations and due
to the disposition of Dorotech, which reduced the net loss by $835,000. The
$900,000 decrease in net loss from the Company's continuing operations is
primarily attributable to an increase of $1.8 million in gross margins and a
$671,000 decrease in G&A expense, offset by the $1.5 restructuring charge.
Net loss applicable to Common Shares. The net loss applicable
to common shares includes adjustments for dividend amounts related to the
Company's Series A preferred stock and, during 1997, for a $774,000 non-cash
charge to preferred stock dividends for the Company's Series K Preferred Stock.
The net loss applicable to
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<PAGE>
common shares was $8.4 million, or ($.28) per share, for the nine months ended
September 30, 1998 as compared to $12.7 million or ($.51) per share, for the
comparable period of 1997. The decrease in net loss applicable to common shares
is attributable to the decrease in net loss described above, the decrease in
annual Series A Preferred Stock dividends from $2.00 to $0.84 per share and the
$774,000 Series K non-cash dividend charge in 1997.
Results of Operations - Three months ended September 30, 1998 and 1997
Revenues. Total revenues were $6.4 million and $9.9 million
for the three months ended September 30, 1998 and 1997, respectively. The $3.5
million decrease in revenue was the result of a decrease in product revenue of
$1.7 million, or 33%, and a decrease in service revenue of $1.8 million, or 39%.
The decrease in product revenue was primarily attributable to a decrease of
$600,000, or 15%, in comparative company product revenues and a $1.1 million
reduction due the disposition in 1997 of the Company's French subsidiary,
Dorotech. The decrease in service revenues of $1.8 million was the result of a
$2.3 million decrease due to the disposition of Dorotech, offset by a $472,000,
or 19%, increase in comparative company service revenues. On a comparative
company basis, overall revenues decreased $100,000, or 1%, from $6.5 million for
the nine months ended September 30, 1997 to $6.4 million for the same period in
1998.
Profit margins. Profit margins for product sales increased 5
percentage points in the third quarter of 1998 over the same period in 1997 as
cost of products decreased from 49% to 44% of sales. The increase in product
sales margins was primarily due to the increased sales mix of the Company's
internally developed software products. Profit margins for service sales
increased 18 percentage points for the three months ended September 30, 1998 as
compared to 1997 as the cost of services decreased from 82% to 64% of sales. The
increase in service sales margins from 18% to 36% was due to the Company's
continuing emphasis on its custom development and professional services. On a
comparative company basis, overall profit margins increased 4 percentage points
to 47% for the three months ended September 30, 1998 from 43% for the same
period in 1997.
Sales and marketing. Sales and marketing expenses were $2.7
million or 43% of revenue, for the three months ended September 30, 1998
compared to $3.6 million, or 37% of revenue in 1997. The decrease of $901,000,
or 25%, was the result of the Company's disposition of Dorotech during 1997,
which reduced sales and marketing expenses $784,000 and by a $117,000 decrease
in comparative company expenses.
General and administrative. G&A expenses were $925,000 or
15% of revenue, for the three months ended September 30, 1998 compared to $1.6
million, or
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<PAGE>
17% of revenue in 1997. The decrease of $724,000, or 44%, was the result of the
Company's disposition of Dorotech during 1997, which reduced G&A expenses
$349,000, and a $375,000, or 29%, decrease in comparative company G&A expenses
due to the Company's efforts in cost reduction.
Product development. The Company's expenditures on software
R&D activities in the three months ended September 30, 1998 were $1.3 million,
of which $300,000 was capitalized and $1.0 million was expensed. Software
research and development expenditures for the 1997 period were $1.5 million, of
which $300,000 was capitalized and $1.2 million was expensed. The $0.2 million
decrease in research and development expenditures is primarily attributable to
the Company's 1997 disposition of Dorotech.
Net income (loss). The Company's net loss for the three
months ended September 30, 1998 was $1.6 million as compared to a $2.9 million
loss for the comparable period of 1997. The net loss decrease of $1.3 million in
the third quarter of 1998 as compared to the same period in 1997 is due to a
$800,000 decrease in net loss from the Company's continuing operations and the
disposition of Dorotech, which reduced the net loss by $500,000. The $800,000
decrease in net loss from the Company's continuing operations is primarily
attributable to an increase of $200,000 in gross margins, $375,000 decrease in
G&A expense and $117,000 reduction in sales and marketing expense.
Net loss applicable to Common Shares. The net loss applicable
to common shares includes adjustments for dividend amounts related to the
Company's Series A preferred stock and, during 1997, for a $774,000 non-cash
charge to preferred stock dividends for the Company's Series K Preferred Stock.
The net loss applicable to common shares was $2.0 million, or ($.06) per share,
for the three months ended September 30, 1998 as compared to $4.6 million or
($.18) per share, for the comparable period of 1997. The decrease in net loss
applicable to common shares is attributable to the decrease in net loss
described above and to the decrease in annual Series A Preferred Stock dividends
from $2.00 to $0.84 per share and the $774,000 Series K non-cash dividend charge
in 1997.
Liquidity and Capital Resources
As of September 30, 1998, the Company had $4.3 million in cash and cash
equivalents, as compared to $3.8 million in cash and cash equivalents at
December 31, 1997. Net working capital was $2.9 million at June 30, 1998 and
$10.0 million at December 31, 1997.
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<PAGE>
For the nine months ended September 30, 1998, the $475,000 increase in
cash and cash equivalents resulted from $5.6 million in cash generated by
investing activities, offset by $3.1 million used to fund operating activities
and $2.0 million in cash used to fund financing activities.
The $5.6 million provided by investing activities arose primarily with
respect to cash collected from the promissory note received as consideration for
the sale of Dorotech. The $3.1 million used by operating activities arose
primarily with respect to the $7.4 million net loss in operations, offset by
$1.8 million in depreciation charges, $1.5 million in restructuring costs, $1.5
million reduction in accounts receivable and $561,000 increase in accrued
expenses. The $2.0 million used by financing activities arose primarily from the
$6.5 million redemption of the Company's Series F Preferred Stock, $7.1 million
redemption of the Company's Series K and L Preferred Stock, $1.5 million used to
redeem the Company's convertible debentures and payments in capital leases of
$603,000, offset by the $4.3 million proceeds from the issuance of common stock,
$9.7 million proceeds from the issuance of preferred stock and $337,000 paid in
preferred stock dividends.
The adverse results of operations that the Company has experienced have
been declining. Although the Company expects the trend of improved operating
results to continue, there can be no assurances that the Company will not
experience adverse results of operations in the future. The Company believes
that the combination of existing cash, benefits from its second quarter
restructuring, potential future proceeds from such additional offerings of
equity securities as may be required, and any anticipated cash flows from
operations, will provide sufficient resources to fund its activities through the
next twelve months. Any anticipated cash flows from operations are largely
dependent upon the Company's ability to achieve its sales and gross profit
objectives for its TREEV product suite. If the Company is unable to meet these
objectives, it will consider alternative sources of liquidity. Although the
Company believes that it can successfully implement its operating plan and, if
necessary, raise additional capital, there can be no assurance that
implementation of the plan will be successful or that financing, if sought, will
be available.
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
The Company is not involved in any legal proceedings, other than the
routine litigation incidental to the business.
-19-
<PAGE>
Item 2. Changes in Securities
In September 1998, the Company redeemed in cash the remaining 2,000
shares outstanding of Series K Stock and all of the outstanding 3,250 shares of
Series L Stock for $7,100,000 including outstanding interest. The $7,100,000
payment retired the obligations under the Series K Stock and Series L Stock.
In September 1998, the Company completed a private placement of
1,559,576 shares of Series N Stock, together with warrants to purchase and
additional 800,000 shares of Common Stock at an exercise price of $0.625 per
share. Proceeds from the offering were $10,000,000. The Company also issued
warrants to purchase 509,091 shares of Common Stock at an exercise price of
$0.69 per share to the placement agent in the transaction. At September 30,
1998, the 1,559,576 shares of Series N Stock were convertible into 15,595,760
shares of Common Stock.
During the third quarter of 1998, the Company completed a private
placement of 950,000 shares of Common Stock pursuant to Regulation D under the
Securities Act. Proceeds from the offering were $950,000.
Item 3. Changes Upon Senior Securities
None.
Item 4. Submission of Matters to a Vote of Security Holders
None.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits.
3.35 Certificate of Designations, Preferences and Rights of Series N Convertible
Preferred Stock to be filed with the Secretary of State of the State of Delaware
on October 30, 1998 (previously filed).
10.36 Securities Purchase Agreement between TREEV, Inc. and Horace T. Ardinger,
Jr., Ardinger Family Partnership, Baker Family Trust, and the Adkins Family
Trust as of September 22, 1998 (previously filed).
27.1 Financial data schedule
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<PAGE>
(b) Reports on Form 8-K.
Form 8-K filed on September 17, 1998 to report the Company's plans to seek
stockholders' approval for a reverse stock split and to announce an equity
financing through a private placement of convertible preferred stock.
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<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 hereunto duly authorized.
TREEV, INC.
(Registrant)
Date: March 31, 1999 By /s/ James J. Leto
------------------------------------------
James J. Leto
Chief Executive Officer
Date: March 31, 1999 By /s/ Thomas A. Wilson
------------------------------------------
Thomas A. Wilson
President and Chief Operating Officer
Date: March 31, 1999 By /s/ Jorge R. Forgues
------------------------------------------
Jorge R. Forgues
Senior Vice President of Finance and
Administration, Chief Financial Officer
and Treasurer
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from SEC
Form 10-Q and is qualified in its entirety by reference to such financial
statements as of and for the nine months ended September 30, 1998.
</LEGEND>
<CIK> 0000883946
<NAME> TREEV INC
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<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
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