U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------
FORM 10-K
(Mark One)
[ X ] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1998
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: 0-22970
TREEV, INC.
(Exact name of registrant as specified in its Charter)
DELAWARE 54-1590649
State or other jurisdiction of (IRS Employer
incorporation or organization) Identification Number)
500 HUNTMAR PARK DRIVE, HERNDON, VIRGINIA 20170-5100
(Address of principal executive offices) (Zip code)
Registrant's telephone number, including area code (703) 478-2260
Securities Registered pursuant to Section 12(b) of the Act:
None
Securities Registered pursuant to Section 12(g) of the Act:
Common Stock, $.0001 par value per share
Redeemable Common Stock Purchase Stock Warrants expiring May 7, 1999
Series A Convertible Preferred Stock, $.0001 par value per share
Check whether the issuer (1) 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 past
90 days. Yes X No _____
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [ ]
State the aggregate market value of the voting stock held by
non-affiliates of the registrant. The aggregate market value shall be computed
by reference to the price at which the stock was sold, or the average bid and
asked prices of such stock, as of a specified date within 60 days prior to the
date of filing: $30,444,889 as of February 26, 1999 (Price of Common Stock =
$313/32).
Indicate the number of shares outstanding of each of the registrant's
classes of common stock, as of the latest practicable date: 12,756,388 shares of
Common Stock were outstanding as of February 26, 1999.
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FORWARD LOOKING STATEMENTS
This Annual Report contains forward-looking statements within the
meaning of Section 27A of the Securities Act of 1933, as amended, and Section
21E of the Securities Exchange Act of 1934, as amended. Actual results could
differ materially from those projected in the forward-looking statements as a
result of certain factors described herein and in other documents. Readers of
this document should pay particular attention to the risk factors described in
the section of this Report entitled "Management's Discussion and Analysis of
Financial Condition and Results of Operations". Readers should also carefully
review the risk factors described in the other documents the Company files from
time to time with the Securities and Exchange Commission, specifically the
Quarterly Reports on Form 10-Q to be filed by the Company in 1999 and any
Current Reports on Form 8-K filed by the Company.
PART I
ITEM 1. DESCRIPTION OF BUSINESS
Corporate Profile
TREEV, Inc. ("TREEV" or the "Company") is a leading developer and
marketer of document management technologies. TREEV provides client/server and
Internet solutions for document management, document imaging, enterprise report
management (COLD), and workflow process reengineering. The Company's TREEV Suite
of software products allows organizations to electronically capture, manage,
store, and distribute large volumes of information to geographically dispersed
enterprises. This information includes computer reports, engineering drawings,
scanned images, office documents, photos, voice files and video clips. The
Company's software products have been installed in over 2,000 banks, Fortune
1000 corporations, and government agencies.
TREEV's corporate headquarters, product development and marketing
operations are located in Herndon, Virginia. Regional sales offices are located
across the United States. The Company also has a testing and customer service
facility in Denver, Colorado.
The Business Case for Integrated Document Management Software Solutions
Organizations are continually looking for ways to more easily process
and distribute large volumes of information throughout an enterprise.
Traditional paper-based manual filing, retrieval, and distribution methodologies
are slow, labor intensive, and require bulky file storage. This problem is
compounded by the fact that, while businesses are becoming more decentralized,
they are, at the same time, attempting to better share information across their
operations. The TREEV Suite of software products solves this problem and
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satisfies the needs of companies looking for fast information access and the
ability to share documents across departments. Ultimately, the ability to
retrieve information from any corporate data repository, evaluate it and
distribute this knowledge to other locations leads to increased productivity.
TREEV's integrated document management software addresses this pressing business
need. The Company's products are well suited to handle the growing use of
digital information that organizations are creating and distributing through the
Internet.
Leveraging the Growth of the Internet
It is no secret that the Internet has become a driving economic force
in business today. At its foundation, the Internet provides a standardized
communications vehicle for connecting a business with its customers. Until
recently, businesses have used the Internet as a medium for publishing
information to their customers. Initially, many implementations took the form of
an "electronic brochure." Even though there was an ever-increasing amount of
important data being provided on the Internet, the communication interface was
primarily one way. Businesses are in the second phase of commercial deployment
over the Internet. Electronic commerce applications requiring full interactive
transaction processing are being implemented.
We are now entering the third phase of Internet development. In this
phase businesses will fully connect with their clients, diminishing the
differences between internal information systems and external web-based
applications. TREEV's products are well positioned to provide small and
large-scale Internet document management applications to handle this business
need.
The TREEV Suite
The TREEV Suite of integrated software products provides a scalable
framework of building blocks for developing customizable client/server and
Web-based applications for managing documents, files, and other unstructured
data types. Based on Microsoft's COM architecture, the TREEV Suite utilizes
industrial strength document management, document imaging, enterprise report
management, and workflow engines for rapid, cost-effective development of
enterprise information solutions. TREEV's standards-based design and unique
"adapter" architecture allows for connectivity to leading third-party document
management systems and seamless integration with existing production
applications.
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Key Benefits of the TREEV Product Suite
o TREEV provides a single, consistent application interface for both end
users and developers. The document management, document imaging, enterprise
report management, and workflow engines have been seamlessly combined using
TREEV's COM-based architecture.
o TREEV provides a framework of adapters for connecting document management
and other external systems with production applications. TREEV is committed
to delivering seamless connectivity to other vendors' repositories. This
unique strategy allows companies to combine existing heterogeneous systems
into a simple, easy-to-integrate framework, thus lowering the cost and time
risk of implementing company-wide solutions. Companies can build on their
pre-existing hardware and software investments.
o TREEV offers off-the-shelf, custom, and customizable, client/server and
Web-based applications. Internal and external users can retrieve and view
corporate information through a Microsoft Windows or a browser interface in
both intranet and Internet environments.
TREEV Suite Components
The TREEV suite embodies the concept of "from anywhere to any user".
TREEV's core engines - document management, document imaging, enterprise report
management, and workflow - are the foundation of TREEV's component-based
framework. They are described below:
OmniTREEV - this patented software solution manages the content and
storage of multimedia data types such as text, images, audio files or video
clips. OmniTREEV handles the management, storage, and distribution of any type
of multimedia or document object in high-transaction, client/server and Internet
environments. Companies, which utilize OmniTREEV, can seamlessly
multimedia-enable existing or new database applications while preserving their
investments in legacy information systems and hardware equipment.
DocuTREEV - this document management system allows the user to capture,
store and retrieve scanned images, word processing documents, spreadsheets and
other graphical files. Images can be stored and retrieved from magnetic disk
(RAID), CD-R, or optical disk. DocuTREEV effectively replaces the use of paper
and microfilm as a storage medium and takes advantage of Windows NT, UNIX, and
SQL technologies to deliver a true enterprise-wide scalable solution.
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DataTREEV - this enterprise report management software provides a
storage and retrieval system which offers high-volume, high-speed handling of
mission-critical report data for mainframe and client/server environments. In
its IBM MVS or VSE mainframe environment, DataTREEV off-loads report management
and storage operations to a dedicated Microsoft NT server thus minimizing the
use of host CPU and DASD resources. DataTREEV acquires and manages reports from
virtually any platform and provides simultaneous access to Internet, Windows,
and 3270 terminal-based users.
AutoTREEV - this easy-to-implement software application is designed to
automate complex business processes. Its patented rules-based workflow engine
stores logic that moves documents through an automated process based on the
definition of work types, users and tasks, and the recognition of dynamic
processing conditions.
Education and Support Services
Education, customer service and support are key competitive elements in
today's business environment. TREEV is dedicated to providing the best product
and system expertise, project management and guidance for delivering integrated
document management solutions. The Company's 24 hour, 7 days a week, customer
service program, based primarily in Denver, Colorado, is one of the most
comprehensive in the industry. TREEV's educational services department also
offers a complete range of training classes to help clients and business
partners acquire the technical training needed to succeed. Classes are held in
Herndon, Virginia, Denver, Colorado, and at client sites around the country.
Product Development
Product development is located at the Company's headquarters in
Herndon, Virginia. During 1998, the product development group focused on
completing product release plans for the TREEV 2000(TM) product suite to support
the company's short- and long-term revenue goals.
Strategically, the TREEV 2000(TM) suite has been developed to help
Value Added Resellers ("VARs") easily develop customized document management
applications to satisfy complex business problems. Because TREEV 2000(TM) is
based on Microsoft's COM architecture, both integrators and VARs are able to
rapidly build complete, Microsoft-compatible vertical applications according to
individual customer specifications. TREEV's flexible, easy-to-use design also
allows for connectivity to leading third-party document management systems and
integration with existing line-of-business applications. The Company hopes to
leverage this technology through its partners to penetrate new vertical markets.
TREEV 2000(TM) has also been specifically adapted to respond to growing
E-commerce demands for Internet document presentment.
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The Company views the product development organization as one of its key assets
and will continue to invest in building its infrastructure, refining the group's
software development methodology, and implementing the TREEV 2000TM product
strategy.
Assembly and Sources of Supply
The Company assembles its products at its facilities in Herndon,
Virginia and Denver, Colorado. The Company relies exclusively on outside
suppliers for the hardware components of its products such as scanners,
computers and optical disk drives and jukeboxes. Most parts and components are
currently available from multiple sources at competitive prices. To date, the
Company has not experienced significant delays in obtaining parts and
components, and although there can be no assurance, the Company does not expect
to experience such delays in the future.
Patents, Trademarks and Copyrights
The Company has registered certain trademarks and copyrights in the
United States and various foreign countries. The TREEV family of product names
used herein are registered or unregistered trademarks owned by the Company.
The Company also has two patents. A patent for the enterprise
multimedia system and method using scalable object-based architecture, which
primarily relates to the Company's OmniTREEV product, was granted on February
17, 1998. A patent for the rule engine interface for a visual workflow builder,
which primarily relates to the Company's AutoTREEV product, was granted on June
30, 1998. The Company has also applied for other patents on certain of its key
technologies. In general, however, management believes that the competitive
position of the Company depends primarily on the skill, knowledge and experience
of TREEV's personnel and their ability to develop, market and support software
products, and that its business is not materially dependent on copyright
protection, trademarks or patents. The Company believes that all of its products
are of a proprietary nature and its licensing agreements generally prohibit
program disclosure. It is possible, however, for product users or competitors to
copy portions of the Company's products without its consent.
Licenses for a number of software products have been granted to the
Company for its own use or for remarketing to its customers. In the aggregate,
these license are material to the business of the Company, but the Company
believes that the loss of any one of these licenses would not materially affect
the Company's results of operations or financial position.
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Warranty and Service
Warranties for hardware sold by the Company are generally provided by
the manufacturer. The Company provides initial warranties and ongoing service
contracts usually covering one year for its software products. The Company
recognizes revenue under service contracts ratably over the contract period.
Competition
Virtually every software vendor in TREEV's marketspace has built its
business by delivering proprietary development tools and interfaces. Because of
this fact, these systems are inappropriate for a wide range of applications. One
of the primary attributes of TREEV's technology is its ability to address a wide
range of information needs, from simple departmental applications to more
complex enterprise-wide systems. TREEV delivers open systems that give customers
the freedom to determine their own development environment.
With the release of TREEV 2000TM, the company has created a
Microsoft-centric framework for developing and delivering imaging, enterprise
report management, workflow, and document management applications. TREEV
believes it will benefit from this strategic product positioning as more and
more organizations look for real-time document access and tighter production
systems integration. With image-enabled applications becoming more commonplace,
the need to bring document management systems into the IT mainstream has become
paramount. Microsoft is accelerating this process by moving the industry toward
rapid application development with widely accepted development languages, tools,
and techniques.
Historically, TREEV's customers have chosen its products over
competitive offerings because of the product's ability to easily scale across an
enterprise and for its open, flexible architecture. "Scalability," "immediate
access to information," and "the ability to manage geographically dispersed
datastores into a single application" are all reasons customers cite for
choosing TREEV's software. With TREEV, many customers improve their efficiency
up to 40% and reduce paper consumption by as much as 65%.
Regarding specific vertical markets, TREEV is considered to be a
dominant vendor in the banking industry. TREEV provides banks with document
imaging and report management systems that improve customer service and
significantly reduce paper production and storage. The Company's software
facilitates daily operations such as tracking signature cards, loan
documentation, and checking account statements.
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TREEV's competitors vary depending upon vertical market focus and
overall client system requirements. FileNET, Eastman Software and IBM are
primary competitors for large Integrated Document and Output Management (IDOM)
enterprise-level installations. Smaller IDOM competitors include Optika,
Macrosoft, Hyland, and OTG Software. Competition from single product vendors
includes Documentum, INSCI, Adesso (TASC) and Staffware.
Sales and Marketing
The Company sells its integrated document software products indirectly
through business partners or VARs and directly within the banking marketplace
through its own sales force. Sales/sales support offices are located in or near
Atlanta, Charlotte, Dallas, Denver, Los Angeles, Minneapolis, New York, Orlando,
San Francisco, and Washington DC.
The Company is positioning itself to sell its software products through
indirect sales partners such as VARs, system integrators and original equipment
manufacturers ("OEMs"). Its recently developed Business Alliance Program (BAP)
is a catalyst and support vehicle for these marketing partnerships. TREEV is
also forming alliances with vendors of complementary product technologies such
as companies who market and manufacture database, application development,
systems management, and communication and connectivity software.
TREEV's Financial Services Group continues to increase its banking
industry penetration as it sells the new TREEV Suite--specifically imaging,
Enterprise Report Management and workflow--to its existing and growing client
base of 2,000 banks.
The company also maintains major accounts in the telecommunications and
public sector markets. Lucent Technologies, for example, uses TREEV's OmniTREEV
Web-based document management software to capture, store, and manage CAD/CAM
files, engineering drawings, and text-based operations manuals for its internal
and field engineers. In the public sector, HCFA uses TREEV's technology to
monitor and process Medicare payments. In this case, TREEV's software improved
form throughput and processing times by 25%.
TREEV's software is also used at the U.S Treasury and the Department of Defense.
The Company maintains active marketing programs for both its indirect
and direct sales channels. This includes representation at national trade
events, seminars, user group meetings, press and analyst tours, advertising in
major industry and news publications and participation in lead generation
activities such as direct mail campaigns. The Company's BAP has also been
expanded to include co-op marketing activities on a regional and national level.
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Business Dispositions
During 1994, the Company committed itself to a plan of restructuring
which was designed to improve operating results by concentrating the Company's
resources on the marketing and continued development of its main suite of
software products. In connection with its restructuring plan, the Company,
during 1995, 1996 and 1997, disposed of a number of operating units (the
"Divestitures" or the "Divested Businesse(s)") which were not considered
complimentary to the Company's business.
As a result of the Divestitures, the Company recorded a gain of
$266,000 in 1997 and losses of $921,000 and $9.3 million in 1996 and 1995,
respectively. The aggregate consideration received by the Company from the
Divestitures was $1.6 million in cash and $11.2 million in notes receivable, of
which $1.1 million was reserved as uncollectible at December 31, 1997, and
written off during 1998.
The Company sold the stock of its French subsidiary, Dorotech, in the
fourth quarter of 1997 and its Symmetrical Technologies, Inc., subsidiary in
1996. During 1995, the Company disposed of the following operations: Hunt Valley
Division (formerly NSI, Inc.), Network Imaging (UK Holdings) Limited,
Microsouth, Inc., Tekgraf, Inc., P E Systems, Inc., WildSoft Division, and IBZ
Digital Production AG.
Employees
The Company's success is highly dependent on its ability to attract and
retain qualified employees. Competition for employees is intense in the software
industry and particularly in the Washington, DC metropolitan area. To date, the
Company believes it has been successful in its efforts to recruit qualified
employees, but there is no assurance that it will continue to be as successful
in the future.
None of the Company's employees are represented by a labor union. The
Company has experienced no work stoppage and believes that its employee
relations are good.
At January 31, 1999, the Company employed 210 people.
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Directors and Executive Officers of the Company
Name Age Position
James J. Leto (2) 55 Chief Executive Officer and Chairman of
the Board
Thomas A. Wilson 59 President, Chief Operating Officer
Jorge R. Forgues 43 Senior Vice President of Finance and
Administration, Chief Financial Officer
and Treasurer
Brian H. Hajost 42 Executive Vice President, Corporate
Development
Richard G. McMahon 54 Senior Vice President of Professional
Services
Robert P. Bernardi (2) 46 Director and Secretary
John F. Burton (1)(2) 47 Director
C. Alan Peyser 65 Director
Michael J. Smith (1) 40 Director
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(1) Member of the Audit Committee.
(2) Member of the Compensation Committee.
James J. Leto became Chief Executive Officer and a Director of the
Company in May 1996 and became Chairman of the Board in June 1997. Mr. Leto
served as the Chairman and Chief Executive Officer of PRC Inc., an information
technology company ("PRC"), from January 1993 to February 1996, and prior
thereto in various capacities as an executive officer of that company. From
January 1989 until February 1992, Mr. Leto served as the Vice President and
General Manager of AT&T Federal Systems Computer Division, a division of AT&T
charged with developing a major system integration and computer presence in the
federal marketplace. Mr. Leto first joined AT&T in November 1977. Mr. Leto is a
director of Government Technology Systems, Inc and Federal Sources.
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Thomas A. Wilson became President and Chief Operating Officer of the
Company in September 1998. Mr. Wilson joined TREEV from Seer Technologies, Inc.
("Seer"), a $100 million software and services company based in Cary, North
Carolina, where he had served as President and CEO since August 1996. At Seer,
Mr. Wilson managed 700 employees at locations in 24 countries. Mr. Wilson
continues to serve as a Director of Seer. Prior to Seer, Mr. Wilson was
President and CEO of Viewstar Corporation, a $30 million document management
software company, which was acquired by Mosaix. Mr. Wilson has also served in
managerial capacities at Oracle Corporation, initially as head of its OEM group,
and later as Vice President and General Manager of Oracle's federal division.
Jorge R. Forgues became Chief Financial Officer, Vice President of
Finance and Administration and Treasurer of the Company in April 1996. In
January 1997, Mr. Forgues was promoted to Senior Vice President. From October
1993 through April 1996, he served as the Vice President of Finance &
Administration and Chief Financial Officer of Globalink, Inc., a computer
software developer that offered foreign language translation software. From July
1992 to September 1993, Mr. Forgues served as Director of Accounting at Spirit
Cruises, Inc., and from June 1987 to June 1992 he served as the Vice President
of Finance of Best Software, Inc., a computer software developer. Mr. Forgues is
a director of On-Site Sourcing Incorporated.
Brian H. Hajost joined the Company in March 1996, was appointed Senior
Vice President of Integrated Products in April 1996, was appointed Senior Vice
President of Marketing in May 1997, was appointed Senior Vice President of Sales
in May 1998 and became Executive Vice President, Corporate Development in
January 1999. From 1985 to 1996, Mr. Hajost was with Checkfree Holdings, Corp.
(formerly Servantis Systems, Inc.) where he served in various capacities
including Securities Products Group Regional Manager, Securities Products Group
Regional Director Banking Sales, Securities Product Group Vice President Sales
Manager, Imaging Technologies Group Vice President Sales and Marketing, and
Imaging Technologies Group Senior Vice President Business Unit Manager.
Richard G. McMahon joined the Company in April 1997 as Vice President
of Government Systems. He was promoted to Senior Vice President of Professional
Services effective February 1, 1998. From 1992 to 1997, Mr. McMahon was Vice
President and Managing Partner of NCR Corporation's government sector
professional services business. From 1982 to 1991, he was with AT&T where he
served in various senior management and marketing positions.
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Robert P. Bernardi has been a Director of the Company (and its
predecessor) since its inception. He was a co-founder of the Company. Mr.
Bernardi is the founder and Chief Executive Officer of Musicmaker.com. Mr.
Bernardi served as President of the Company from inception to February 1995, as
Chief Executive Officer from inception to May 1996, and Chairman of the Board of
Directors from September 1995 to June 1997. From 1988 to 1990, Mr. Bernardi was
an independent consultant in the document imaging and telecommunications fields.
From March 1984 to December 1987, Mr. Bernardi was Chairman and Chief Executive
Officer of Spectrum Digital Corporation, a publicly held telecommunications
equipment manufacturing company, with overall management responsibilities
including marketing, sales, engineering and finance.
John F. Burton was appointed to the Board of Directors in September
1995. Mr. Burton is Managing Director of Updata Capital, Inc., a mergers and
acquisitions investment bank, a position he has held since 1997. From October
1996 to February 1997, he was President of Burton Technology Partners. From
August 1995 to September 1996, he was President and Chief Executive Officer of
Nat Systems, Inc. From 1984 to 1995, Mr. Burton served in various executive
capacities at Legent Corporation including President, Chief Executive Officer
and Director. Mr. Burton is a member of the Board of Directors of Banyan Systems
Corporation, Axent Technologies, Netrix Corporation and MapInfo Corporation.
C. Alan Peyser became a Director of the Company in May 1996. Mr. Peyser
was appointed President and Chief Executive Officer of Cable & Wireless, Inc.,
in October 1996. From September 1995 to October 1996, Mr. Peyser served as a
consultant to Cable & Wireless, Inc. He is also currently President of Country
Long Distance Corporation and a member of the Board of Directors of Transworld
Communications, TCI International, Inc., Spaceworks and 1010web. Mr. Peyser
previously served as the Chief Executive Officer and President of Cable &
Wireless, Inc. from 1980 through September 1995.
Michael J. Smith became a Director of the Company in March 1999. Mr.
Smith has over fourteen years experience in the securities industry specializing
in finance for middle market and emerging growth companies. He currently serves
as an investment banker for Brill Securities (member: NYSE), a small New York
investment firm. Previously, Mr. Smith served as President of Stanhope Capital,
Inc., a New York based venture capital firm, as well as a Managing Director of
Condor Ventures, Inc., a Stamford Connecticut based venture capital firm. In
addition to investment banking, Mr. Smith has served as an outside business
consultant to numerous private emerging growth companies.
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ITEM 2. PROPERTIES
As of January 31, 1999, the Company leased 25,600 square feet for
administrative, marketing and product development and support facilities at its
headquarters in Herndon, Virginia, pursuant to a lease which expires in the year
2000. The Company also leases an aggregate of approximately 55,000 square feet
of similar facilities at other offices near Atlanta, Georgia; Charlotte, North
Carolina; Dallas, Texas; Denver, Colorado; Los Angeles, California; Minneapolis,
Minnesota; New York, New York; Orlando, Florida; San Francisco, California; and
San Jose, California. The Company's current rent expense under real property
leases on an annual basis is approximately $1.0 million. The Company owns no
real property and has no plans to purchase any real property for either
commercial or investment purposes in the foreseeable future. The Company
believes that its facilities are adequate for its purposes.
ITEM 3. LEGAL PROCEEDINGS
The Company is not involved in any legal proceedings, other than
routine litigation incidental to the business.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY
The Company held a Special Meeting of Stockholders on December 9, 1998
at which the stockholders: (1) approved the issuance of shares of the Company's
Common Stock issuable in connection with the Company's Series N Convertible
Stock and on exercise of warrants to purchase 200,000 shares of Common Stock at
an exercise price of $2.50 per share under Nasdaq Rule 4460(i)(1)(D); and (2)
approved an amendment to the Restated Certificate of Incorporation of the
Company to effect a one-for-four reverse stock split of the Company's
outstanding Common Stock.
In connection with the approval of the issuance of shares and warrants
with the Series N Convertible Stock, 10,476,162 shares were voted in favor of
the proposal, 1,311,428 were voted against, and 156,307 abstained.
With respect to the approval of the amendment to the Company's Restated
Certificate of Incorporation, 23,501,524 were voted in favor of the proposal,
3,111,440 were voted against, and 140,868 abstained.
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PART II
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The Company's Common Stock is traded on the Nasdaq National Market
under the symbol TREV. The Company also has outstanding redeemable common stock
purchase warrants (the "Warrants") that are traded on the Nasdaq National Market
under the symbol TREVW, and Series A Cumulative Convertible Preferred Stock (the
"Series A Preferred Stock") that is traded on the Nasdaq National Market under
the symbol TREVP. The following table indicates the high and low sales prices
for the Common Stock as reported by the Nasdaq National Market for the periods
indicated (which reflect inter-dealer prices, without retail mark-up, mark-down
or commission, and may not represent actual transactions).
PERIOD HIGH LOW
1997 -First Quarter 14 10 1/4
-Second Quarter 11 5/8 6 3/4
-Third Quarter 8 1/8 5
-Fourth Quarter 7 3 1/8
1998 -First Quarter 6 1/8 3 1/2
-Second Quarter 4 3/4 3 1/4
-Third Quarter 3 7/8 2 1/2
-Fourth Quarter 3 1 7/16
1999 -First Quarter 4 9/32 1 5/8
(through February 26)
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The Company has not paid any cash dividends on its Common Stock since
its inception and does not anticipate paying any cash dividends on its Common
Stock in the foreseeable future. As a result of the approval and adoption of the
Certificate of Amendment to Certificate of Designation of the Series A Stock,
effective May 1, 1997, the Company was no longer obligated to make any cash
dividend payments to the Series A stockholders. In addition, commencing January
1, 1998, Series A stockholders receive an annual dividend of $.84 per share,
accumulating quarterly, payable in Common Stock or cash, at the Company's
option.
As of February 26, 1999, the Company had approximately 387 record
holders of its Common Stock, and based on information supplied by certain of
such record holders, the Company estimates that as of such date there were
approximately 7,700 beneficial owners of its Common Stock.
On December 29, 1998, the Company issued 3,898,940 shares of Common
Stock to two investors upon the conversion of 1,559,576 shares of Series N
Convertible Preferred Stock held by the investors. The shares of stock were
issued in reliance upon Regulation D under the Securities Act of 1933, and the
Company received no cash proceeds from the conversion.
ITEM 6. SELECTED FINANCIAL DATA
The following tables set forth selected financial data for the five
years ended December 31, 1998. The statement of operations data for each of the
five years ended December 31, 1998 and the balance sheet data as of those dates
have been derived from the consolidated financial statements of the Company. The
consolidated financial statements for each of the three years ended December 31,
1998 have been audited by Ernst & Young LLP. The consolidated financial
statements for each of the two years ended December 31, 1995 have been audited
by other independent auditors. The financial data should be read in conjunction
with the consolidated financial statements, related notes, and other financial
information included herein.
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<TABLE>
Statement of Operations Data
(in thousands, except share amounts)
<CAPTION>
Year Ended December 31,
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1998 1997 1996 1995 1994
---- ---- ---- ----- ----
<S> <C> <C> <C> <C> <C>
Revenue $28,202 $35,806 $39,477 $69,151 $67,028
Net loss (7,344) (11,339) (17,341) (24,963) (39,625)
Net loss applicable to
Common shares (8,692) (14,310) (21,071) (34,896) (44,121)
Net loss per common share $(1.12) $(2.27) $(4.08) $(9.64) $(14.24)
======= ======= ======= ======= ========
Net loss per common share -
Assuming dilution $(1.12) $(2.27) $(4.08) $(9.64) $(14.24)
======= ======= ======= ======= ========
</TABLE>
<TABLE>
Balance Sheet Data
(in thousands, except share amounts)
<CAPTION>
Year Ended December 31,
------------------------------------------------------------------------------
1998 1997 1996 1995 1994
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Total assets $19,522 $26,860 $36,778 $49,964 $71,871
Working capital 2,516 9,980 9,893 13,454 17,513
Long-term debt 43 1,108 88 1,264 2,533
Redeemable preferred stock - 6,548 9,857 15,478 14,609
Stockholders' equity 7,530 7,969 11,717 10,185 25,156
</TABLE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Introduction
The following discussion of the financial condition and results of
operations of the Company should be read in conjunction with the Company's
Consolidated Financial Statements and related notes included herein.
II-3
<PAGE>
Forward Looking Statements and Certain Risk Factors
This "Management's Discussion and Analysis of Financial Condition and
Results of Operations" section of this Annual Report on Form 10-K 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 Annual 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, and the Company's operating results were profitable during the
last quarter of 1998. 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 two quarters including the most current one, and it
had an accumulated deficit at December 31, 1998 of $131.8 million.
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, 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.
II-4
<PAGE>
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 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.
II-5
<PAGE>
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.
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."
II-6
<PAGE>
Results of Operations
Revenue. Product revenue includes sales of software licenses and
computer equipment. Product revenue is recognized upon delivery or, if
applicable, acceptance. Service revenue includes software maintenance contracts,
installation and customization. Service revenue is recognized over the terms of
the related contracts as the services are completed or under the percentage of
completion method where appropriate.
Total revenue was $28 million in 1998, $36 million in 1997 and $39
million in 1996. The decrease in total revenue in 1998 over 1997 of $7.6
million, or 21%, resulted primarily from a decrease in service revenue of $6.1
million, or 35%, and a decrease in product revenue of $1.5 million, or 8%. The
decrease in total revenue in 1997 over 1996 of $3.7 million, or 9%, resulted
primarily from a decrease in service revenue of $3.6 million or 17%.
The decrease in product revenue in 1998 over 1997 was attributable to
an increase of $2.1 million, or 14%, 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"). Although reported product revenue remained
unchanged in 1997 over 1996, product revenue decreased $3.4 million due to the
Divestitures and increased $3.4 million from the Company's continuing
operations.
The decrease in service revenue in 1998 over 1997 of $6.1 million was a
result of a $7.7 million decrease due to the disposition of Dorotech, offset by
a $1.6 million, or 16%, increase in comparative company revenues. The decrease
in service revenue in 1997, compared to 1996, of $3.6 million was attributable
to the Divestitures which reduced service revenue by $5.1 million, offset by an
increase of $1.5 million in the Company's continuing service operations. The
increase in comparative company service revenue in 1998 and 1997 was
attributable to increased staffing and continued management emphasis on the
professional services business.
Due to the collapse and delayed recovery of the Asian financial market, one of
TREEV's customers in Malaysia was unable to fulfill the original payment terms
of its agreement with the Company. In order to comply with standard accounting
rules, the Company reversed the revenue associated with the agreement in the
amounts of $841,000 in the second quarter of 1998 and $1,659,000 in the third
quarter of 1998, thereby decreasing revenue in those quarters. Accordingly, in
March 1999, the Company filed amendments to its quarterly reports on Form 10-Q
for the second and third quarters of 1998.
Profit Margins. Profit margins for product sales continued to improve
in 1998 over 1997 from 54% to 59% as the cost of products sold decreased from
46% to 41% of sales. Profit margins for product sales improved in 1997 over 1996
from 46% to 54% as the cost of products sold decreased from 54% 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 and the disposition
in 1997 of Dorotech which had a 74% cost of products sold.
II-7
<PAGE>
Profit margins for service sales increased in 1998 over 1997 from 22% to 32% as
the cost of services decreased from 78% to 68% of sales. The increase in service
sales margins was due to the Company's continued emphasis on its custom
development and professional services. Profit margins for service sales
decreased in 1997 over 1996 from 25% to 22% as the cost of services increased
from 75% to 78% of sales. The decrease in service sales margins was attributable
to declines at the Company's former French subsidiary during the first three
quarters of 1997.
Product Development. The Company's expenditures on software research
and development activities ("R&D") in 1998 were $5.4 million, of which $1.6
million was capitalized and $3.8 million was expensed. The $500,000 decrease in
R&D expenditures was attributable to the Company's 1997 disposition of Dorotech,
which reduced R&D expenditures by $800,000, offset by a $300,000 increase in
comparative Company R&D expenses. The Company's expenditures on software R&D
activities in 1997 were $5.9 million, of which $1.5 million was capitalized and
$4.4 million was expensed. The Company's expenditures on software R&D in 1996
were $7.3 million, of which $2.0 million was capitalized and $5.3 million was
expensed. The $1.4 million decrease in R&D expenditures is attributable to the
Company's 1996 plan to consolidate various product development groups into a
common product development organization operating under a single senior manager.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses ("SG&A") were $15.6 million, or 55% of revenue, in 1998,
$20.3 million, or 57% of revenue, in 1997 and $24.6 million, or 62% of revenue,
in 1996. The decrease in 1998 compared to 1997 of $4.7 million, or 23%, was the
result of the Company's 1997 disposition of Dorotech, which accounted for a $3.6
million decrease in addition to a $1.1 million decrease in general and
administrative expenses from continuing operations due to the Company's
increased cost reduction efforts. The decrease in 1997 compared to 1996 of $4.4
million, or 18%, was the result of the Divestitures which accounted for a $3.1
million decrease in addition to a $1.3 million decrease from continuing
operations due to the Company's cost reduction efforts.
Exchange Fee and Gain on Sale of Asset, Net. During 1996, the Company
paid a fee of $650,000 plus $80,000 of expenses in connection with the extension
of the redemption date of the Company's Series F Preferred Stock. During 1996,
the Company realized a $111,000 gain on the disposition of stock distributed to
the Company by its medical insurance provider.
Restructuring Costs. During the second quarter of 1998, the Company
committed to a Restructuring Plan ("the 1998 Plan") and incurred a charge of
$1.5 million (See Note 10 to the Consolidated Financial Statements). Under the
1994 Restructuring Plan, the Company incurred a net change in estimate of
$175,000 in 1996.
II-8
<PAGE>
Interest Income (Expense), Net. Net interest expense was $56,000 in
1998 and $286,000 in 1997. Net interest income was $309,000 in 1996. The
$230,000 decrease in interest expense was attributable primarily to the line of
credit with a stockholder drawn on during 1997 which was converted into equity
at the end of 1997 and the beginning of 1998. The interest income in 1996 was
primarily attributable to the interest earned for the cash received from the
offerings done during the first three quarters of 1996.
Income Taxes. The Company incurred an income tax benefit of $68,000 in
1996 as a result of the net operating losses generated by Dorotech's operations
offset by a decrease in Dorotech's net deferred tax liabilities.
Net Loss. The Company's net loss was $7.3 million in 1998, $11.3
million in 1997 and $17.3 million in 1996. The $4.0 million decrease in net loss
between 1998 and 1997 was due to the $4.7 million decrease in SG&A expenses and
the $600,000 decrease in product development expenses, offset by the $1.5
million restructuring costs. The $6.0 million decrease in net loss between 1997
and 1996 was due to the $4.4 million reduction in SG&A expenses, the $900,000
reduction in product development expenses and the loss on the sale of subsidiary
in 1996.
The entities divested in 1997 and 1996 contributed a net loss of
approximately $840,000 and $2.1 million, respectively, in each of those years.
Net Loss Applicable to Common Shares. Net loss applicable to common
shares includes adjustments for accrued and imputed dividends related to the
Company's preferred stock. The net loss applicable to common shares was $8.7
million, or $1.12 per share, in 1998; $14.3 million, or $2.27 per share, in 1997
and $21.1 million, or $4.08 per share, in 1996. The decrease in 1998 over 1997
was primarily attributable to the decrease in net loss described above. The
decrease in 1997 over 1996 was attributable to the decrease in net loss
described above and the reduction in preferred stock dividends of $2.3 million.
The imputed dividends of $1.5 million recognized during 1997 were non-cash and
related to the below market conversion feature of the Company's Series K and L
Preferred Stock. The $2.3 million reduction in accrued dividends related
primarily to the amendment to the Company's Series A Preferred Stock. See Note 8
to the Consolidated Financial Statements.
II-9
<PAGE>
The following pro forma statements of operations represent the Company's
continuing operations and exclude the results of the Divested Businesses, the
gain and loss recorded on the sales of subsidiaries and other one time charges
that are not representative of the Company's continuing operations:
Year Ended December 31,
(in thousands, except per share amounts)
1998 1997 1996
-------- -------- --------
Revenue $ 28,202 $ 24,486 $ 19,706
Cost of sales 14,618 13,609 11,797
-------- -------- --------
Gross profit 13,584 10,877 7,909
Gross profit as % of sales 48% 44% 40%
Selling, general and administrative 15,579 16,700 17,921
Product development 3,788 3,856 4,152
Other income (expense) (56) (312) 287
-------- -------- --------
Operating loss (5,839) (9,991) (13,877)
Accrued dividends (1,348) (1,435) (3,730)
Imputed Accrued dividends -- (1,536) --
-------- -------- --------
Net loss applicable to common shares $ (7,187) $(12,962) $(17,607)
======== ======== ========
Net loss per common share $ (0.93) $ (2.06) $ (3.41)
======== ======== ========
Net loss per common share
- assuming dilution $ (0.93) $ (2.06) $ (3.41)
======== ======== ========
Weighted average shares 7,768 6,301 5,170
======== ======== ========
Liquidity and Capital Resources
As of December 31, 1998, the Company had $1.6 million in cash and cash
equivalents compared to $3.8 million in cash and cash equivalents at December
31, 1997. Net working capital decreased to $2.5 million at December 31, 1998
from $10.0 million at December 31, 1997.
II-10
<PAGE>
At December 31, 1998, the Company had outstanding debt of $385,000,
$342,000 of which is due within one year. This compares with debt of $3.6
million at December 31, 1996, $2.5 million of which was due within one year. The
decrease in debt of $3.2 million primarily arose from the conversion of the
Company's line of credit with a stockholder into equity and the repayment of the
Company's 8% Convertible Notes during 1998. See Note 7 to the Consolidated
Financial Statements.
For 1998, the $2.2 million decrease in cash and cash equivalents
resulted from a $4.5 million use of cash from operating activities, $5.0 million
provided by investing activities and $2.7 million used in financing activities.
The $4.5 million use of cash in operating activities arose primarily from the
$7.3 million loss from operations offset by $2.3 million in depreciation and
amortization charges. The $5.0 million provided by investing activities arose
from the proceeds of business divestitures, offset by capitalized software
development costs and the purchase of fixed assets. The $2.7 million in cash
used in financing activities arose primarily from the $4.3 million proceeds from
the issuance of Common Stock and the $9.7 million proceeds from the issuance of
Convertible Preferred Stock, offset by payments of $13.6 million to redeem
portions of the Company's Preferred Stock, $1.7 million to redeem a portion of
the Company's convertible debentures, Preferred Stock dividends of $700,000 and
net payments in capital leases of $700,000.
For 1997, the $3.8 million decrease in cash and cash equivalents
resulted from a $6.7 million use of cash from operating activities, $2.3 million
used in investing activities and the generation of $5.3 million from financing
activities. The $6.7 million use of cash in operating activities arose primarily
from the $11.3 million loss from operations offset by $4.5 million in
depreciation and amortization charges. The $2.3 million to fund investing
activities arose with respect to capitalized software development costs and the
purchase of fixed assets. The $5.3 million in cash provided by financing
activities arose primarily from the $5.1 million proceeds from the issuance of
Convertible Preferred Stock and proceeds of $6.9 million from borrowings, offset
by payments of $3.5 million to repurchase a portion of the Company's Series F
Preferred Stock, Preferred Stock dividends of $1.8 million and net payments in
debt and capital leases of $1.5 million.
For 1996, the $1.8 million decrease in cash and cash equivalents
resulted from a $11.8 million use of cash from operating activities, $2.6
million used in investing activities and the generation of $12.7 million from
financing activities. The $11.8 million use of cash in operating activities
arose primarily from the $17.3 million loss from operations offset by $5.8
million in depreciation and amortization charges. The $2.6 million to fund
investing activities primarily arose due to capitalized software development
costs and the purchase of fixed assets. The $12.7 million in cash provided by
financing activities arose primarily from the $6.0 million proceeds from the
issuance of Common Stock and $10.9 million proceeds from the issuance of
Convertible Preferred Stock offset by the $3.2 million payment of Series A
Preferred Stock dividends and net payments in debt and capital leases of $1.2
million.
II-11
<PAGE>
As a result of stock offerings in 1998, the Company received net
proceeds of approximately $14.0 million before offering costs of approximately
$1.0 million. Under the offerings, the Company issued 1,334,625 shares of Common
Stock and 1,560,576 shares of Preferred Stock. The net proceeds of the offerings
were used to redeem the Company's Preferred Stock and for working capital
purposes.
As a result of stock offerings in 1997, the Company received net
proceeds of approximately $9.3 million before offering costs of approximately
$1.4 million. Under the offerings, the Company issued 43,723 shares of Common
Stock and 10,550 shares of Preferred Stock. The net proceeds of the offerings
were used for working capital purposes.
At December 31, 1998, the annual dividend requirements on the Company's
Series A Preferred Stock is $0.84 per share annually, payable quarterly, in cash
or common stock at the Company's discretion. Dividends on the Company's Series M
and M1 Preferred Stocks are payable in cash or common stock, at the Company's
election.
During February 1999, the Company secured a $5 million revolving line
of credit from a commercial bank. The Company can draw up to $5 million on the
line of credit for working capital needs based on 80% of its eligible
receivables. The line of credit bears interest at a rate of prime plus 2%. The
agreement shall remain in effect until February 28, 2000, and automatically
renews for successive additional terms of one year each. The line of credit is
collateralized by all of the Company's accounts receivable, inventory,
equipment, general intangibles, and other personal property assets.
The adverse results of operations which the Company has experienced
have been declining and the Company's operating results were profitable during
the last quarter of 1998. 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 its existing cash, cash flows from operations and availability under its
line of credit should provide sufficient resources to fund its activities
through the next twelve months and to maintain net tangible assets of at least
$4.0 million, which is required for continued inclusion of the Company's
securities on the Nasdaq National Market. Anticipated cash flows from operations
are largely dependent upon the Company's ability to achieve its sales and gross
profit objectives for its TREEV Suite of products. If the Company is unable to
meet these objectives, it will consider alternative sources of liquidity, such
as additional offerings of equity securities and/or further reductions of
operating expenses (such as travel, marketing, consulting and salaries).
II-12
<PAGE>
Nasdaq announced new listing requirements on February 23, 1998 for
continued inclusion on the Nasdaq National Market. Specifically, Nasdaq
requires, effective February 23, 1998, that common and preferred stock trading
on its National Market continuously have a minimum bid price of $1.00. At times
in 1997 and 1998, the Company's Common Stock had a minimum bid price below $1.00
before the one-for-four reverse stock split in December 1998. The Company's
Preferred Stock has consistently traded with a minimum bid price of over $1.00.
Although the Company's Common Stock is currently trading with a minimum bid
price above $1.00, there can be no assurance that the Company's Common Stock
will continue to trade with such a minimum bid price. In the event that the
Company's Common Stock has a minimum bid price below $1.00, the Company believes
it can propose and effect a plan to achieve compliance; however, there can be no
assurance that the Company will be able to stay in compliance with the Nasdaq
requirement. While the Company believes that it can continue to meet the
requirements of the Nasdaq Stock Market, any ability to trade on a national
exchange could adversely impact the value of the Company's stock.
ITEM 8. FINANCIAL STATEMENTS
The Financial Statements appear at pages F-1 to F-29.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE
None
II-13
<PAGE>
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Directors and Executive Officers of the Company
For information regarding directors and executive officers of
the Company, see the information appearing under the caption "Executive
Officers" in Part I, Item 1 of this Form 10-K.
ITEM 11. EXECUTIVE COMPENSATION
Information required by Item 11 is incorporated by reference from the
Company's definitive proxy statement for its annual stockholders' meeting to be
held on June 8, 1999.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Information required by Item 12 is incorporated by reference from the
Company's definitive proxy statement for its annual stockholders' meeting to be
held on June 8, 1999.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Information required by Item 13 is incorporated by reference from the
Company's definitive proxy statement for its annual stockholders' meeting to be
held on June 8, 1999.
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a)(1) and (2) List of Financial Statements and Financial Statement Schedules
The Following consolidated financial statements of TREEV, Inc. are included
in Item 8:
Consolidated Balance Sheet as of December 31, 1998 and 1997
Consolidated Statements of Operations for the years ended December 31,
1998, 1997 and 1996
Consolidated Statements of Changes in Stockholders' Equity for the years
ended December 31, 1998, 1997 and 1996
Consolidated Statements of Cash Flows for the years ended December 31,
1998, 1997 and 1996
Notes to Consolidated Financial Statements
III-1
<PAGE>
The following consolidated financial statement schedule of TREEV, Inc. is
included in Item 14(d):
Schedule II - Valuation and Qualifying Accounts
(3) Exhibits. The following exhibits are filed herewith or incorporated
herein by reference:
Exhibit No. Description
2.9 Agreement and Plan of Reorganization by and among the Company,
Dorotech France SA and the stockholders of Dorotech France SA dated
August 30, 1993 with the amendments thereto dated September 29, 1993
and October 1, 1993 (incorporated by reference to Exhibit 1 to
Company's Current Report on Form 8-K relating to such Agreement and
Plan of Reorganization filed October 13, 1993).
2.26 Agreement for the Purchase and Sale of Assets of Symmetrical
Technologies, Inc. as of September 30, 1996 (incorporated by reference
to Exhibit 10.a to the Company's Quarterly Report on Form 10-Q for the
period ended September 30, 1996).
2.27 Share sale and Purchase Agreement between Network Imaging Corporation
and Systems Engineering Reinhardt S.A.R.L. dated December 10, 1997.
3.1 Certificate of Incorporation of the Company (incorporated by reference
to Exhibit 3.1 to the Company's registration statement on Form S-1
(Registration No. 333-36417) filed December 5,1997).
3.1.1 Certificate of Amendment to Certificate of Incorporation of TREEV,
Inc. as of January 15, 1999.
3.2 Certificate of Ownership and Merger merging TREEV, Inc. into Network
Imaging Corporation filed in Delaware on May 5, 1998 (incorporated by
reference to Exhibit 3.14 to the Company's Quarterly Report on Form
10-Q for the quarterly period ended June 30, 1998).
3.3 Restated Bylaws as of May 17, 1996 (Incorporated by reference to
Exhibit 3.11 to Amendment No. 1 to the Company's Form 10-Q for the
quarterly period ended June 30, 1997).
3.4 Certificate of Designations for Series A Cumulative Convertible
Preferred Stock filed with the Secretary of State of the State of
Delaware on December 7, 1993 (incorporated by reference to Exhibit
3.1c to the Company's registration statement on Form SB-2
(Registration No. 33-73164) filed December 20, 1993).
3.5 Certificate of Amendment to Certificate of Designations of Series A
Cumulative Convertible Preferred Stock filed with the Secretary of
State of the State of Delaware on December 31, 1997 (incorporated by
reference to Exhibit 3.6 to the Company's Annual Report on Form 10-K
for the fiscal year ended December 31, 1997).
3.6 Certificate of Designations, Preferences and Rights of Series M
Convertible Preferred Stock filed with the Secretary of State of the
State of Delaware on January 7, 1998 (incorporated by reference to
Exhibit 3.8 to the Company's Annual Report on Form 10-K for the fiscal
year ended December 31, 1997).
III-2
<PAGE>
3.7 Certificate of Correction filed to Correct a Certain Error in the
Certificate of Amendment to Certificate of Designations of Series A
Cumulative Convertible Preferred Stock (filed on December 31, 1997)
filed with the Secretary of State of the State of Delaware on January
13, 1998 (incorporated by reference to Exhibit 3.9 to the Company's
Annual Report on Form 10-K for the fiscal year ended December 31,
1997).
3.8 Certificate of Designations, Preferences and Rights of Series M1
Convertible Preferred Stock filed with the Secretary of State of the
State of Delaware on July 22, 1998 (incorporated by reference to
Exhibit 3.15 to the Company's Quarterly Report on Form 10-Q for the
quarterly period ended June 30, 1998).
3.9 Certificate of Designations, Preferences and Rights of Series N
Convertible Preferred Stock (incorporated by reference to Exhibit 3.35
to the Company's Quarterly Report on Form 10-Q for the quarterly
period ended September 30, 1998).
4.1 Specimen Common Stock Certificate.
10.1 Securities Purchase Agreement between Network Imaging Corporation and
Fred Kassner dated as of December 29, 1997 (incorporated by reference
to Exhibit 10.22 to the Company's Annual Report on Form 10-K for the
fiscal year ended December 31, 1997).
10.2 Securities Purchase Agreement between TREEV, Inc. and Fred Kassner as
of June 30, 1998 (incorporated by reference to Exhibit 10.34 to the
Company's Quarterly Report on Form 10-Q for the quarter ended June 30,
1998).
10.3 Securities Purchase Agreements between TREEV, Inc. and Horace T.
Ardinger, Jr., Ardinger Family Partnership, Baker Family Trust, and
the Adkins Family Trust as of September 30, 1998 (incorporated by
reference to Exhibit 10.36 to the Company's Quarterly Report on Form
10-Q for the quarter ended September 30, 1998).
21 Subsidiaries.
27.1 Financial Data Schedules for the year ended December 31, 1998.
b) Reports on Form 8-K. The Company filed the following reports on
Form 8-K during or relating to the fourth quarter of 1998:
None
c) The exhibits are listed in Items 14(a)(3)
d) Financial Statement Schedules:
Schedule II Valuation and Qualifying Account
III-3
<PAGE>
SIGNATURES
In accordance with Section 13 of the Securities Exchange Act of 1934,
the Registrant caused this report to be signed on its behalf by the undersigned,
thereunto duly authorized, in the County of Fairfax, Commonwealth of Virginia on
March 31, 1999.
TREEV, INC.
By: /s/ James J. Leto
-----------------------
James J. Leto
Chairman and Chief Executive Officer
In accordance with the requirements of the Securities Exchange Act of
1934, this report has been signed below by the following persons on behalf of
the Registrant and in the capacities and on the dates indicated.
Signature Title Date
/s/ James J. Leto
James J. Leto Chairman of the Board and March 31, 1999
Chief Executive Officer
/s/ Thomas A. Wilson
Thomas A. Wilson President and Chief Operating March 31, 1999
Officer
/s/ Jorge R. Forgues
Jorge R. Forgues Senior Vice President of Finance March 31, 1999
and Administration, Chief
Financial Officer
/s/ Robert P. Bernardi
Robert P. Bernardi Director and Secretary March 31, 1999
/s/ John F. Burton
John F. Burton Director March 31, 1999
/s/ C. Alan Peyser
C. Alan Peyser Director March 31, 1999
/s/ Michael J. Smith
Michael J. Smith Director March 31, 1999
<PAGE>
INDEX TO FINANCIAL STATEMENTS
Page
Report of Ernst & Young LLP, Independent Auditors F-2
Consolidated Balance Sheets as of December 31, 1998 and 1997 F-3
Consolidated Statements of Operations for the years ended
December 31, 1998, 1997 and 1996 F-4
Consolidated Statements of Changes in Stockholders' Equity
for the years ended December 31, 1998, 1997 and 1996 F-5
Consolidated Statements of Cash Flows for the years ended
December 31, 1998, 1997 and 1996 F-6
Notes to Consolidated Financial Statements F-7
<PAGE>
Report of Ernst & Young LLP, Independent Auditors
Board of Directors
TREEV, Inc.
We have audited the accompanying consolidated balance sheets of TREEV, Inc. as
of December 31, 1998 and 1997 and the related consolidated statements of
operations, stockholders' equity, and cash flows for each of the three years in
the period ended December 31, 1998. Our audits also include the financial
statement schedules listed in the Index at Item 14(a). These financial
statements and schedules are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements and
schedules based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of TREEV, Inc. at
December 31, 1998 and 1997 and the consolidated results of its operations and
its cash flows for each of the three years in the period ended December 31,
1998, in conformity with generally accepted accounting principles. Also, in our
opinion, the related financial schedules, when considered in relation to the
basic financial statements taken as a whole, present fairly in all material
respects the information set forth therein.
Fairfax, Virginia
March 22, 1999
F-2
<PAGE>
TREEV, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In thousands, except share and per share amounts)
December 31,
1998 1997
--------- ---------
ASSETS
Current assets:
Cash and cash equivalents $ 1,645 $ 3,816
Accounts and notes receivable, net 11,419 8,569
Note receivable -- 7,000
Inventories 911 722
Prepaid expenses and other 490 1,108
--------- ---------
Total current assets 14,465 21,215
Fixed assets, net 1,578 2,165
Long-term notes receivable, net 47 378
Software development costs and
purchased technology, net 2,978 2,490
Goodwill, net 332 499
Other assets 122 113
--------- ---------
Total assets $ 19,522 $ 26,860
========= =========
LIABILITIES & STOCKHOLDERS' EQUITY
Current liabilities:
Current debt maturities and
obligations under capital leases $ 342 $ 2,479
Accounts payable 2,327 2,037
Accrued compensation and expenses 1,448 1,135
Deferred revenue 5,887 3,334
Other accrued expenses 1,945 2,250
--------- ---------
Total current liabilities 11,949 11,235
Long-term debt and obligations under
capital leases 43 1,108
Total liabilities 11,992 12,343
Commitments
Redeemable Series F preferred stock,
0 shares and 792,186 shares issued
and outstanding at December 31,
1998 and 1997 -- 6,548
Stockholders' equity:
Convertible preferred stock,
$.0001 par value, 20,000,000 shares
authorized; 1,610,025 and 1,615,575
shares issued and outstanding at
December 31, 1998 and 1997 -- --
Common stock, $.0001 par value,
100,000,000 shares authorized;
12,367,888 and 6,559,047 shares
issued and outstanding at
December 31, 1998 and 1997 1 1
Additional paid-in-capital 139,310 132,405
Accumulated deficit (131,781) (124,437)
--------- ---------
Total stockholders' equity 7,530 7,969
--------- ---------
Total liabilities and
stockholders' equity $ 19,522 $ 26,860
========= =========
The accompanying notes are an integral part of these financial statements.
F-3
<PAGE>
TREEV, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
Years ended December 31,
(In thousands, except share and per share amounts)
1998 1997 1996
----------- ----------- -----------
Revenues:
Products $ 16,813 $ 18,310 $ 18,336
Services 11,389 17,496 21,141
----------- ----------- -----------
28,202 35,806 39,477
----------- ----------- -----------
Costs and expenses:
Cost of products sold 6,894 8,383 9,953
Cost of services provided 7,724 13,625 15,901
Product development 3,788 4,428 5,342
Selling, general and
administrative 15,579 20,263 24,634
Sale of subsidiaries and
other, net -- 160 921
Exchange fee and gain on
sale of asset, net -- -- 619
Restructuring costs 1,505 -- (175)
----------- ----------- -----------
35,490 46,859 57,195
----------- ----------- -----------
Loss before interest (expense)
income and income taxes (7,288) (11,053) (17,718)
Interest (expense) income, net (56) (286) 309
----------- ----------- -----------
Loss before income taxes (7,344) (11,339) (17,409)
Income tax benefit -- -- (68)
----------- ----------- -----------
Net loss (7,344) (11,339) (17,341)
----------- ----------- -----------
Preferred stock dividends
Accrued dividends (1,348) (1,435) (3,730)
Imputed dividends -- (1,536) --
----------- ----------- -----------
Net loss applicable to
common shares $ (8,692) $ (14,310) $ (21,071)
=========== =========== ===========
Net loss per common share $ (1.12) $ (2.27) $ (4.08)
=========== =========== ===========
Weighted average shares
outstanding 7,768,329 6,301,464 5,170,424
=========== =========== ===========
The accompanying notes are an integral part of these financial statements.
F-4
<PAGE>
TREEV, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
Years ended December 31, 1998, 1997 and 1996
(In thousands, except share amounts)
<TABLE>
<CAPTION>
Additional
Preferred Stock Common Stock paid-in Accumulated Translation
Shares Amt. Shares Amt. capital Deficit Adjustment Total
------------------- ------------------- ---------- ------------ ------------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance December 31, 1995 1,605,228 $ -- 4,659,307 $ 1 $ 105,067 $ (95,757) $ 875 $ 10,186
Issuance of common stock,
net of offering costs of $376 475,622 6,149 6,149
Issuance of preferred stock,
net of offering costs of $209 1,100 10,791 10,791
Issuance of warrants for line
of credit 192 192
Buy-back adjustment of Redeemable
Series F preferred stock 5,962 5,962
Conversion of preferred stock (653) 589,225 --
Accretion of preferred stock (341) (341)
Dividends on preferred stock (3,389) (3,389)
Translation adjustment (491) (491)
Net loss (17,341) (17,341)
---------
Total Comprehensive Income (17,832)
------------------- ------------------- ---------- ------------ ------------- ---------
Balance December 31, 1996 1,605,675 -- 5,724,153 1 124,431 (113,098) 384 11,718
Issuance of common stock upon
exercise of warrants 5,833 23 23
Conversion of preferred stock (650) 755,028 --
Conversion of convertible notes 30,310 98 98
Issuance of preferred stock,
net of offering costs of $2,379 10,550 10,220 10,220
Issuance of common stock 43,723 174 174
Issuance of warrants 430 430
Dividends on preferred stock (1,435) (1,435)
Imputed dividends on preferred stock (1,536) (1,536)
Translation adjustment (384) (384)
Net loss (11,339) (11,339)
---------
Total Comprehensive Income (11,723)
------------------- ------------------- ---------- ------------ ------------- ---------
Balance December 31, 1997 1,615,575 -- 6,559,047 1 132,405 (124,437) -- 7,969
Issuance of common stock,
net of offering costs of $245 1,334,625 4,319 4,319
Issuance of preferred stock,
net of offering costs of $763 1,560,576 10,667 10,667
Conversion of preferred stock (1,560,876) 4,388,620 --
Redemption of preferred stock (5,250) (7,085) (7,085)
Issuance of warrants 15 15
Dividends on preferred stock (1,348) (1,348)
Issuance of common stock in
payment of dividends 85,596 337 337
Net loss (7,344) (7,344)
------------------- ------------------- ---------- ------------ ------------- ---------
Balance December 31, 1998 1,610,025 $ -- 12,367,888 $ 1 $ 139,310 $(131,781) $ -- $ 7,530
=================== =================== ========== ============ ============= =========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-5
<PAGE>
TREEV, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years ended December 31,
(In thousands)
1998 1997 1996
-------- -------- --------
Cash flows from operating activities:
Net loss $ (7,344) $(11,339) $(17,341)
Adjustments to reconcile net loss
to net cash used in operating
activities:
Depreciation and amortization 2,307 4,464 5,793
Restructuring costs 827 -- (175)
(Gain) loss on closure and
sale of subsidiaries -- (266) 921
Other gains and losses, net 33 426 --
Realized (gain) on sale of
short-term investments -- -- (108)
Changes in assets and liabilities:
Accounts and notes receivable (2,884) (3,604) 1,871
Inventories (189) 4 313
Prepaid expenses and other 199 325 937
Accounts payable 291 1,626 (3,353)
Accrued expenses (316) 1,217 54
Deferred revenue 2,553 462 (449)
Deferred income taxes -- 15 (246)
-------- -------- --------
Net cash used in operating activities (4,523) (6,670) (11,783)
-------- -------- --------
Cash flows from investing activities:
Sale of short-term investments -- -- 111
Software development costs and
purchased technology (1,587) (1,454) (1,979)
Purchases of fixed assets (712) (888) (1,068)
Cash received from business
divestitures and related costs 7,328 46 299
-------- -------- --------
Net cash provided by (used in)
investing activities 5,029 (2,296) (2,637)
-------- -------- --------
Cash flows from financing activities:
Proceeds from issuance of common stock,
net 4,319 162 6,149
Proceeds from issuance of preferred
stock, net 9,667 5,122 10,791
Cash dividends paid on preferred stock (674) (1,779) (3,210)
Proceeds from borrowings -- 6,861 --
Redemption of Redeemable Series F
preferred stock (6,548) (3,500) --
Redemption of convertible preferred
stock (7,085) -- --
Redemption of convertible notes (1,700) -- --
Proceeds from sale and leaseback of
fixed assets -- -- 196
Principal payments on capital lease
obligations (656) (1,126) (913)
Principal payments on debt -- (421) (270)
-------- -------- --------
Net cash (used in) provided by
financing activities (2,677) 5,319 12,743
-------- -------- --------
Effect of exchange rate changes on
cash and cash equivalents -- (138) (81)
Net decrease in cash and cash
equivalents (2,171) (3,785) (1,758)
Cash and cash equivalents at
beginning of year 3,816 7,601 9,359
-------- -------- --------
Cash and cash equivalents at
end of year $ 1,645 $ 3,816 $ 7,601
======== ======== ========
Supplemental Cash Flow Information:
Interest paid $ 207 $ 629 $ 278
The accompanying notes are an integral part of these financial statements.
F-6
<PAGE>
TREEV, Inc.
Notes To Consolidated Financial Statements
December 31, 1998, 1997 and 1996
TREEV, Inc. ("TREEV" or the "Company") is a developer and marketer of
document management software. Its flagship product line, the TREEV suite of
software products, allows organizations to electronically capture, manage,
store, and distribute large volumes of information. This information includes
computer reports, engineering drawings, scanned images, office documents,
photos, voice files and video clips.
The adverse results of operations that the Company has experienced have been
declining, and the Company's operating results were profitable during the last
quarter of 1998. 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 its existing cash, anticipated cash flows from 1999 operations, and cash
availability under its line of credit should provide sufficient resources to
fund its activities in 1999. Anticipated cash flows from 1999 operations are
largely dependent upon the Company's ability to achieve its sales and gross
profit objectives for its TREEV suite of products. Achievement of these
objectives is subject to various risk factors related to, among other things:
the need to use a two-step distribution channel involving system integrators;
the long lead times in the sales cycle; the large dollar size of the average
unit sale requiring high level customer authorizations; the large number of
established and potential competitors in the marketplace; the fast pace of
technology evolution related to the product suite; the newness of the Company's
sales and marketing staff; and the evolving nature of the Company's sales and
marketing strategies. The Company nevertheless believes that its sales and gross
profit objectives are achievable in light of its recent divestitures of non-core
business units, the successful installation of TREEV and enterprise report
management products in several major contracts during 1998, the repositioning of
its product lines, additions to the executive sales management, and the
refocusing of sales and marketing resources. If the Company is unable to meet
these objectives, it will consider alternative sources of liquidity, such as
public or private offerings of equity securities; the curtailment of certain
capital expenditures and discretionary expenditures (such as travel, marketing,
consulting and salaries); and other various courses of action.
F-7
<PAGE>
TREEV, Inc.
Notes to Consolidated Financial Statements (continued)
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of consolidation --
The consolidated financial statements for fiscal years 1997 and 1996 include the
accounts of TREEV, Inc. and its subsidiaries. All significant intercompany
transactions and balances have been eliminated.
Cash equivalents and short-term investments --
The Company considers all highly liquid instruments purchased with an original
maturity of three months or less to be cash equivalents.
Revenue recognition --
Statement of Position 97-2, "Software Revenue Recognition" (SOP 97-2), was
issued in October 1997 and was amended by Statement of Position 98-4 (SOP 98-4).
The Company adopted SOP 97-2 in 1998. The Company's revenue recognition policies
and practices for software license fees are consistent with SOP 97-2 and SOP
98-4. Additionally, the American Institute of Certified Public Accountants
(AICPA) issued SOP 98-9, which amends SOP 97-2 and is effective for transactions
entered into beginning January 1, 2000. This pronouncement is not expected to
materially impact the Company's revenue recognition practices.
The Company generates revenue through software license fees, hardware sales, and
professional services. Revenues from software license fees are recognized upon
shipment when collection is probable in accordance with the related contract.
Revenue from hardware and software contracts with significant completion
services involving technically difficult issues for the attainment of customer
acceptance is recognized upon customer acceptance. Revenue from maintenance
contracts is recognized ratably over the terms of the contract.
For labor intensive contracts which require significant production or
customization, the Company accounts for such revenue in accordance with AICPA
Statement of Position 81-1, "Accounting for Performance of Construction-type and
Certain Production-type Contracts," using the percentage of completion method.
Losses, if any, are recognized in the period that such losses are determined.
Inventories --
Inventories are stated at the lower of cost, determined on the first-in,
first-out method, or market.
F-8
<PAGE>
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
Fixed assets --
Fixed assets are stated at cost, net of accumulated depreciation. Depreciation
is computed using straight-line and accelerated methods over the life of the
related asset, generally three years. Leasehold improvements are amortized over
the shorter of the estimated useful life of the improvements or the terms of the
related lease.
Software development costs and purchased technology --
The Company capitalizes certain software development and enhancement costs in
accordance with Statement of Financial Accounting Standards No. 86, "Accounting
for the Costs of Computer Software to Be Sold, Leased or Otherwise Marketed,"
("SFAS 86"). The Company capitalizes certain acquired software licenses (see
Note 4) which are incorporated into the Company's products. Amortization of
software development and license costs is provided on an individual product
basis over the estimated useful life of the products, which is principally three
years, beginning when the related products are available for general release.
Costs for research and development incurred prior to establishing technological
feasibility of software products, or after their commercial release, are
expensed in the period incurred. The Company periodically assesses capitalized
software amounts and, when less than anticipated net realizable value, charges
any such excess to expense.
Goodwill --
The excess of the purchase price over the fair value of the net identifiable
tangible and intangible assets of businesses acquired is being amortized on a
straight-line basis over seven years. Amortization expense in 1998, 1997 and
1996 was $166,000, $743,000 and $1.1 million, respectively. Accumulated
amortization as of December 31, 1998 and 1997 was $837,000 and $671,000,
respectively. The Company routinely evaluates recoverability of goodwill by
comparing future undiscounted cash flows to the recorded carrying value to
determine if a write-down is required. If a write-down were required, the
Company would prepare a discounted cash flow analysis to determine the amount of
the write-down.
Concentration of Credit Risk --
Financial instruments that potentially subject the Company to significant
concentrations of credit risk consists primarily of its cash equivalents, trade
accounts and notes receivable. The Company periodically performs credit
evaluations of customer's financial condition and generally requires no
collateral.
F-9
<PAGE>
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
Fair Value of Financial Instruments --
The carrying value of the Company's financial instruments, including cash
equivalents, accounts and notes receivable, accounts payable and debt,
approximate fair value.
Product warranty --
Warranties for hardware sold by the Company are generally provided by the
manufacturer. The Company provides warranties and service contracts for certain
products and accrues related expenses based on actual claims history.
Income taxes --
The Company's income taxes are presented in accordance with Statement of
Financial Accounting Standards No. 109, "Accounting for Income Taxes" ("SFAS
109") which requires recognition of deferred tax liabilities and assets for the
expected future tax consequences of events that have been included in the
financial statements or tax returns. Under SFAS 109, deferred tax liabilities
and assets are determined based on the difference between the financial
statement and tax basis of assets and liabilities, using enacted tax rates in
effect for the year in which the differences are expected to reverse.
Foreign currency translation --
The functional currency of the Company's foreign operation was the applicable
local currency. Consequently, for the operation outside the United States,
assets and liabilities were translated into United States dollars using exchange
rates in effect at the balance sheet date and revenues and expenses using the
average exchange rate during the period. The gains and losses resulting from
such translations are included as a component of stockholders' equity. Since the
Company's French subsidiary operated only within France, exposure to foreign
exchange risk was limited (See Note 5).
Net loss per common share --
In 1997, the Financial Accounting Standards Board issued Statement of Financial
Accounting Standards No. 128, "Earnings per Share" ("SFAS 128") which replaced
the calculation of primary and fully diluted earnings per share with basic and
diluted earnings per share. Unlike primary earnings per share, basic earnings
per share excludes any dilutive effects of options, warrants and convertible
securities. Diluted earnings per share is very similar to the previously
reported fully diluted earnings per share. All earnings per share amounts for
all periods have been presented to conform to the SFAS 128 requirements (See
Note 12).
F-10
<PAGE>
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
Stock Based Compensation --
Effective January 1, 1996, the Company adopted Statement of Financial Accounting
Standards No. 123, "Accounting for Stock-Based Compensation" ("SFAS 123"), which
allows companies which have stock-based compensation arrangements with employees
to adopt a new fair-value basis of accounting for stock options and other equity
instruments, or to continue to apply the existing accounting rules under
Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to
Employees" ("APB 25") but with additional disclosure. The Company has adopted
the disclosure provisions of SFAS 123 and accordingly the disclosure had no
effect on the Company's financial position or results of operations (See Note
8).
Comprehensive Income --
The Company has adopted Statement of Financial Accounting Standard No. 130,
"Reporting Comprehensive Income" ("SFAS 130"), which establishes standards for
reporting the components of comprehensive income and requires that all items
that are required to be recognized under accounting standards as components of
comprehensive income be included in a financial statement that is displayed with
the same prominence as other financial statements. Comprehensive income includes
net income as well as certain items that are reported directly within a separate
component of stockholders' equity and bypass net income.
Segment Reporting --
The Company has adopted Statement of Financial Accounting Standard No. 131,
"Disclosures about Segments of an Enterprise and Related Information" ("SFAS
131"), in fiscal year 1998 (See Note 13). SFAS 131 changes the way companies
report segment information and requires segments to be determined based on how
management measures performance and makes decisions about allocating resources.
Use of estimates--
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
F-11
<PAGE>
NOTE 2- RECEIVABLES
Receivables consist of the following (in thousands):
December 31,
--------------------------
1998 1997
-------- --------
Trade accounts receivable $ 11,638 $ 8,586
Unbilled receivables 10 49
Notes receivable 902 2,329
Employee receivables 38 119
Other receivables 54 12
-------- --------
12,642 11,095
Allowance for uncollectible
accounts receivable (1,176) (1,050)
Allowance for uncollectible
notes receivable -- (1,098)
-------- --------
11,466 8,947
Less current receivables, net (11,419) (8,569)
-------- --------
Long term receivables, net $ 47 $ 378
======== ========
The Company's notes receivable balance of $902,000 at December 31, 1998 included
$377,000 of notes resulting from the divestitures of previously owned operating
units made during 1996 (See Note 5) and $525,000 of notes receivable from former
stockholders of a subsidiary acquired in 1994 (See Note 16).
During 1998, the Company exchanged a $1.1 million note receivable, which 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.
NOTE 3 - FIXED ASSETS
Fixed assets consist of the following (in thousands):
December 31,
----------------------
1998 1997
------- -------
Computer and office equipment $ 3,685 $ 3,032
Furniture and leasehold improvements 631 599
Furniture, fixtures and equipment
under capital leases 3,429 3,297
------- -------
7,745 6,928
Less: Accumulated depreciation (6,167) (4,763)
------- -------
$ 1,578 $ 2,165
======= =======
F-12
<PAGE>
NOTE 3 - FIXED ASSETS (continued)
Depreciation and amortization expense related to fixed assets in 1998, 1997, and
1996 totaled $1.4 million, $1.8 million and $1.7 million, respectively. Included
in these amounts are $530,000, $489,000 and $580,000 of amortization expense
related to capital leases during 1998, 1997 and 1996, respectively.
NOTE 4- SOFTWARE DEVELOPMENT COSTS AND PURCHASED TECHNOLOGY
Capitalized software development costs and purchased technology consists of the
following (in thousands):
December 31,
------------------------
1998 1997
------- -------
Internally developed $ 5,020 $ 4,604
Purchased technology -- 312
------- -------
5,020 4,916
Less: Accumulated amortization (2,042) (2,426)
------- -------
$ 2,978 $ 2,490
======= =======
During 1998, 1997 and 1996, amortization of capitalized software development and
license costs totaled $706,000, $1.6 million and $2.6 million, respectively, and
was included in cost of products sold (See Note 10).
NOTE 5 - DIVESTITURES OF BUSINESSES
During the fourth quarter of 1997, the Company sold the stock of Dorotech, SA.
("Dorotech") a wholly owned subsidiary of the Company, in a transaction that
resulted in a $266,000 gain. The Company received as consideration a promissory
note totaling $7.0 million, which was paid to the Company during January 1998.
This $7.0 million promissory note is presented separately within the 1997
consolidated balance sheet. In connection with the sale of Dorotech, the Company
reduced goodwill and related accumulated amortization by $5.1 million and $3.4
million, respectively.
In 1996 the Company sold several of its subsidiaries ("the Divestitures")
resulting in a loss on disposal of $921,000. The Company received as
consideration from the Divestitures, cash and notes totaling $1.5 million in
1996.
F-13
<PAGE>
NOTE 6 - OTHER ACCRUED EXPENSES
Other accrued expenses consist of the following (in thousands):
December 31,
-------------------
1998 1997
------ ------
Accrued preferred dividends $ 337 $ --
Accrued income and other taxes 253 427
Other 1,355 1,823
------ ------
$1,945 $2,250
====== ======
NOTE 7- BORROWING ARRANGEMENTS
Borrowings consist of the following (in thousands):
December 31,
----------------------
1998 1997
------- -------
Line of credit $ -- $ 1,000
Convertible notes (net of discount)
bearing interest at 8% 200 1,863
Capital lease obligations bearing
interest from 9.8% to 12.7% 185 724
------- -------
385 3,587
Less amounts due in one year (342) (2,479)
------- -------
Long term debt and capital
lease obligations $ 43 $ 1,108
======= =======
During December 1997, $4.0 million of the outstanding $5.0 million line of
credit ("the Line of Credit") was converted into equity through the issuance of
4,000 shares of Series M Convertible Stock (See Note 8). During June 1998, the
remaining $1.0 million balance of the Line of Credit was converted into equity
through the issuance of 1,000 shares of Series M1 Convertible Stock (see Note
8).
During July and August 1997, the Company issued, pursuant to a private placement
exemption under the Securities Act of 1933, as amended, 8% Convertible Notes
("the Notes") due July 8, 2002 and August 20, 2002 totaling $2.0 million. During
December 1997, $100,000 of Notes was converted into 121,241 shares of Common
Stock. During 1998, $1.7 million of the Notes were redeemed in cash. During
January 1999, the Company redeemed the remaining $200,000 balance of the Notes
in cash (See Note 18).
The Company leases certain of its furniture and equipment under capital lease
arrangements. Future minimum lease payments under these capital leases are:
1999, $153,000; 2000, $30,000; 2001, $13,000; and 2002, $3,000. Of the $199,000
total lease payments, $15,000 represents interest.
F-14
<PAGE>
NOTE 8 - STOCKHOLDERS' EQUITY
Common Stock --
During December 1998, the Company's stockholders approved a one-for-four reverse
stock split of the Company's outstanding Common Stock. All Common Stock and per
share data have been restated to reflect the reverse stock split.
In March 1996, the Company completed a private placement of 233,658 shares of
Common Stock, together with warrants to purchase 16,000 shares of Common Stock,
pursuant to Regulation D under the Securities Act of 1933. Net proceeds from the
offering were $3.0 million. The Company subsequently registered the Common Stock
and Common Stock issuable upon exercise of the warrants under the Securities Act
of 1933.
In March and June 1996, the Company issued 105,260 and 101,153 shares,
respectively, of Common Stock pursuant to Regulation S under the Securities Act
of 1933. Proceeds from the offerings were $1.7 million and $1.3 million,
respectively.
During the first quarter of 1998, the Company completed a private placement of
277,237 shares of Common Stock, together with warrants to purchase 12,500 shares
of Common Stock, pursuant to Regulation D under the Securities Act of 1933.
Proceeds from the offering were $1,075,000 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.
During the second quarter of 1998, the Company completed a private placement of
726,782 shares of Common Stock, pursuant to Regulation D under the Securities
Act of 1933. Proceeds from the offering were $2,453,000 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.
During the second quarter of 1998, the Company issued 85,596 shares of Common
Stock as a quarterly dividend to the shareholders of the Company's Series A
Cumulative Convertible Preferred Stock.
During the third quarter of 1998, the Company completed a private placement of
250,000 shares of Common Stock pursuant to Regulation D under the Securities Act
of 1933. 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. During the third
quarter, the Company also completed a
F-15
<PAGE>
NOTE 8 - STOCKHOLDERS' EQUITY (continued)
private placement of 50,000 shares of Common Stock, pursuant to Regulation D
under the Securities Act of 1933. 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 when the Company files a registration
statement to register shares for any other stockholder.
Series A Preferred Stock -
The issuance of up to 1,750,000 shares of the Series A Cumulative Convertible
Preferred Stock (the "Series A Stock") has been authorized and 1,605,025 shares
are outstanding. A majority of the outstanding shares of the Series A Stock and
the Common Stock voted to approve amendments to the terms of the Series A Stock
("the Amendments"), which became effective December 31, 1997.
As of the date of the effectiveness of the Amendments, the stockholders of the
Series A Stock are entitled to receive an annual dividend of $0.84 per share,
payable quarterly in cash or Common Stock, at the Company's option, and convert
to Common Stock at a rate of 1.92 shares of Common Stock for each share of
Series A Stock. The date the Company releases its earnings or the applicable
quarter shall also be the record date for the dividend payment. If the dividend
is paid in Common Stock, the number of shares of Common Stock distributed as a
dividend will be based on the average closing price per share of Common Stock
during the 10 day period following the Company's release of earnings for the
applicable quarter. Dividend payments will be made 20 days after the release of
earnings.
Beginning January 1, 1999, the Company will be able to convert each share of the
Series A Stock into shares of Common Stock if the closing price per share of
Common Stock is at least equal to $16.00 per share for 20 consecutive trading
days. Beginning January 1, 2000, the Company will be able to convert each share
of Series A Stock into shares of Common Stock if the closing price per share of
Common Stock is at least equal to $12.00 per share for 20 consecutive trading
days. Beginning January 1, 2001, the Company is able to convert each share of
the Series A Stock into shares of Common Stock at any time at the Company's
option.
The Series A stockholders vote as a class to approve or disapprove any issuance
of any securities senior to or on parity with the Series A Stock with respect to
dividends or distributions. The Series A Stock has a liquidation price of $12.00
per share. At December 31, 1998, the Series A Stock was convertible into
3,081,648 shares of Common Stock.
F-16
<PAGE>
NOTE 8 - STOCKHOLDERS' EQUITY (continued)
Series H and J Preferred Stock --
The 260 shares of Series H and 390 shares of Series J Convertible Preferred
Stock outstanding at December 31, 1996 were converted during 1997 into 358,912
and 396,115 shares of Common stock, respectively.
Series K and L Preferred Stock --
During 1998, 1,300 shares of the Series K Convertible Preferred Stock (the
"Series K Stock") outstanding at December 31, 1997 were converted into 489,681
shares of common stock. In addition, the Company redeemed in cash the remaining
2,000 shares outstanding of the Series K Stock and the 3,250 shares of Series L
Convertible Preferred Stock (the "Series L Stock") outstanding at December 31,
1997 for $7,085,000 including outstanding interest. Proceeds from the
$10,000,000 issuance of the Company's Series N Convertible Preferred Stock (the
"Series N Stock") were used, in part, to fund the redemption of the Series K
Stock and the Series L Stock.
Series M Preferred Stock --
In December 1997, the Company converted $4 million of the outstanding $5 million
Line of Credit into 4,000 shares of Series M Convertible Preferred Stock the
(the "Series M Stock"). The Company received no proceeds from the conversion of
the Line of Credit to equity. The Series M Stock issued and outstanding in
December 2001 automatically converts into Common Stock. At December 31, 1998 the
4,000 shares of Series M Stock were convertible into 1,085,699 shares of Common
Stock.
The Series M 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 $1.00. The Series M 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.
The Series M holder has a right of redemption under various 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 M Stock for a price
per share equal to $1,000 plus the accrued unpaid dividend.
F-17
<PAGE>
NOTE 8 - STOCKHOLDERS' EQUITY (continued)
Series M1 Preferred Stock --
In June 1998, the Company converted the remaining $1.0 million of the Line of
Credit outstanding at December 31, 1997 into 1,000 shares of Series M1
Convertible Preferred Stock (the "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 when the Company files a registration statement to
register shares for any other stockholder. 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 December 31, 1998 the 1,000 shares of Series M1 Stock were convertible
into 337,306 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.
Series N 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 200,000 shares of Common
Stock at an exercise price of $2.50 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 $7,085,000 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. The Company also issued warrants to
purchase 124,290 shares of Common Stock at an exercise price of $2.80 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. In December 1998, the 1,559,576 shares of Series N
Stock were converted into 3,898,940 shares of Common Stock.
F-18
<PAGE>
NOTE 8 - STOCKHOLDERS' EQUITY (continued)
Stock purchase warrants --
The Company has the following warrants outstanding at December 31, 1998, all of
which are currently exercisable:
<TABLE>
<CAPTION>
Warrants
Warrants Exercise Outstanding Shares Issuable
Issuance Issued Price Range Expiration Dec. 31, 1998 Upon Exercise
- -------- ------------------ ----------- ---------- ------------- ---------------
<S> <C> <C> <C> <C> <C>
IPO Units 163,598 $4.00 May 1999 163,598 163,598
Placement agents 589,425 $2.80-$4.00 Aug 2001-Jan 2003 300,267 300,267
Other 338,402 $3.64-$27.28 Jan 2000-Dec 2002 291,318 291,318
Series D preferred 56,767 $30.28 July 2000 56,767 56,767
Series E preferred 8,600 $28.80 August 2000 8,600 8,600
Private Placement 44,850 $4.00-$16.00 Nov 2000-Dec 2002 44,850 44,850
Series G preferred 10,000 $15.00 December 2000 10,000 10,000
Series H Preferred 20,000 $15.00 June 2001 20,000 20,000
Series K Preferred 148,500 $4.00 July 2002 148,500 148,500
Series L Preferred 100,547 $4.00 December 2002 100,547 100,547
Series N Preferred 200,000 $2.50 September 2001 200,000 200,000
--------- --------- ---------
1,680,689 1,344,447 1,344,447
========= ========= =========
</TABLE>
Stock option and stock purchase plans --
The Company applies APB 25 in accounting for its stock option plans ("the
Plans"), and accordingly, recognizes compensation expense for any difference
between the fair value of the underlying common stock and the grant price of the
option at the date of grant. Certain options qualify as incentive stock options
under the Internal Revenue Code. The Board of Directors determines the vesting
and terms of any options granted under the plans with the requirement that the
term of an incentive stock option shall not exceed ten years. To date, options
granted range from five- to ten-year terms. The exercise price per share of
Common Stock subject to an incentive stock option is not less than the fair
market value at the time of grant. The Company has also issued non-qualified
plan options. An aggregate of 10.5 million shares has been authorized for
issuance under the Company's stock option plans.
During 1998, the Company established an Employee Stock Purchase Plan ("the
Plan"). Employees can choose to have up to 10% of their annual earnings withheld
to purchase the Company's Common Stock. Under the terms of the Plan, there are
two six-month offering periods beginning on January 1st and July 1st of each
year during which employees can participate. 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 that the offering period ends. Under the Plan, the Company sold
30,607 shares of Common Stock to employees during 1998.
F-19
<PAGE>
NOTE 8 - STOCKHOLDERS' EQUITY (continued)
Pro forma information regarding net income and earnings per share is required by
SFAS 123, and has been determined as if the Company had accounted for its
employee stock option and stock purchase plans under the fair value method. The
fair value of options granted during 1998, 1997 and 1996 are estimated at $1.05,
$3.16, and $8.88, per share respectively, on the date of grant using a
Black-Scholes option pricing model with the following weighted-average
assumptions for 1998, 1997 and 1996 respectively: average risk-free interest
rates of 4.7%, 5.4%, and 6.7%; dividend yields of 0.0%; volatility factors of
the expected market price of the Company's common stock is 0.74 for 1998, 0.58
for 1997 and 0.63 for 1996; and a weighted-average expected life of the option
of 5 years.
The Black-Scholes option valuation model was developed for use in estimating the
fair value of traded options, which have no vesting restrictions and are fully
transferable. In addition, option valuation models require the input of highly
subjective assumptions including the expected stock price volatility. As the
Company's employee stock options have characteristics significantly different
from those of traded options and because changes in the subjective input
assumptions can materially affect the fair value estimate, in management's
opinion, the existing models do not necessarily provide a reliable single
measure of the fair value of its employee stock options.
For purposes of pro forma disclosures, the estimated fair value of the options
is amortized to expense over the options' vesting period. The Company's pro
forma loss is $11.2 million, $16.2 million, and $23.1 million for 1998, 1997 and
1996, respectively and pro forma net loss applicable to common shares is $1.44,
$2.56, and $4.48 for 1998, 1997 and 1996, respectively. The effect of applying
SFAS 123 on the 1998, 1997 and 1996 pro forma net losses is not necessarily
representative of the effects on reported net loss and net loss per share for
future years due to, among other things, 1) the vesting period of the stock
options and the 2) fair value of additional stock options in future years.
The following table summarizes the activity in stock options issued by the
Company:
Weighted Average
Options Exercise Price
---------- ----------------
Balance, January 1, 1996 1,625,081 $ 16.48
Granted 363,500 7.52
Exercised (22,217) 4.92
Forfeited (212,905) 16.32
----------
Balance, December 31, 1996 1,753,459 16.88
Granted 670,088 7.60
Exercised --
Forfeited (759,009) 16.60
----------
Balance, December 31, 1997 1,664,538 7.68
Granted 2,130,455 2.08
Exercised --
Forfeited (2,147,005) 6.37
----------
Balance, December 31, 1998 1,647,988 $ 2.16
==========
F-20
<PAGE>
NOTE 8 - STOCKHOLDERS' EQUITY (continued)
In December 1998, the Board of Directors approved a plan to reprice the
Company's outstanding stock options. The plan allowed holders of
out-of-the-money options, excluding executives, officers and directors, to
receive a new exercise price of $1.63 per option share, the market price on the
date of the approved plan. The plan allowed executives, officers and directors
holding out-of-the-money options to also receive a new exercise price of $1.63
but for fewer shares of Common Stock determined pursuant to the Black-Scholes
formula intended to result in approximate economic equivalence between the old
and the new options. As a result of this repricing, options for an aggregate of
797,072 out of a total of 1,876,159 shares of Common Stock at exercise prices
ranging from $2.52 to $27.28 per share were surrendered.
In August 1997, the Board of Directors approved a plan to reprice the Company's
outstanding stock options. The plan allowed holders of out-of-the-money options,
excluding executives, officers, and directors, to receive a new exercise price
of $6.00 per option share, the market price on the date of the approved plan.
The plan allowed executives and officers holding out-of-the-money options to
also receive a new exercise price of $6.00 but for fewer shares of Common Stock
determined pursuant to the Black-Scholes formula intended to result in
approximate economic equivalence between the old and the new options. As a
result of this repricing, options for an aggregate of 140,438 out of a total of
408,750 shares of Common Stock at exercise prices ranging from $7.64 to $27.28
per share were surrendered. Stock options held by the Company's Board of
Directors were not repriced.
In July 1997, the Company adopted the 1997 Director Stock Option Plan ("the
Director Plan") for the Company's Directors and discontinued cash payments to
the Board Members for their service. The Director Plan provides stock option
grants in the amount of 7,500 shares at each annual board meeting for those
directors who are not executive officers of the Company and are not serving on
the Board as a representative of an institutional investor. Persons appointed to
the Board at any time after the annual grant receive pro-rata shares of the
option grant. Options vest 25% each quarter and become fully vested on the first
anniversary of their grant. The Company has reserved 360,000 shares of Common
Stock for issuance in connection with the Director Plan. During 1998, the
Company amended the Director Plan to provide stock option grants in the amount
of 1,875 shares per each calendar quarter. Options become fully vested ninety
days following the date of grant.
F-21
<PAGE>
NOTE 8 - STOCKHOLDERS' EQUITY (continued)
The following table summarizes information about stock options outstanding at
December 31, 1998:
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
--------------------------------------------- ---------------------------------
Weighted-Average
Remaining
Range of Exercise Contractual Life Weighted-Average Number Weighted-Average
Prices Number Outstanding (in years) Exercise Price Exercisable Exercise Price
- --------------------- ------------------- ------------------- ------------------- ------------------ -------------------
<S> <C> <C> <C> <C> <C>
$ 1.44 - 1.63 1,526,843 8.4 $ 1.63 753,169 $ 1.63
3.24 - 4.52 18,000 2.0 4.35 18,000 4.35
5.12 - 6.00 52,394 3.7 5.93 52,394 5.93
10.00- 15.00 43,751 5.7 12.84 43,751 12.84
16.52- 17.00 7,000 7.0 16.57 7,000 16.57
</TABLE>
NOTE 9 - REDEEMABLE PREFERRED STOCK
In December 1996, the Company entered into an agreement with the holder of the
Series F Preferred Stock to redeem the shares for an aggregate of $9.9 million
or $5.50 per share. During the first quarter of 1997, the Company redeemed $3.5
million of the Series F Preferred Stock. The Company used proceeds from its Line
of Credit to finance the Series F Preferred share buy back. During the second
quarter of 1997, the Company amended the December 1996 redemption agreement and
as a result, the remaining $6.4 million, excluding interest, was due upon the
sale of the Company's Dorotech subsidiary. During the fourth quarter 1997, the
Company sold its Dorotech subsidiary and in January 1998, the Company redeemed
the remaining shares of Series F Preferred Stock, including outstanding
interest, for $6.5 million.
NOTE 10 - 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 combined its three separate customer
support organizations into one support organization, and the Company's strategic
focus shifted its newest suite of integrated document management software to
using Microsoft based architecture. The restructuring charge included 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 United
States, 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 December 31, 1998, 27 employees had been terminated,
severance benefits of $655,000 had been paid out and the accrual balance
relating to the Plan was $22,000.
F-22
<PAGE>
NOTE 11 - INCOME TAXES
The source of the loss before the income tax benefit was from the following
jurisdictions (in thousands):
Year ended December 31,
--------------------------------------------
1998 1997 1996
-------- -------- --------
U.S. $ (7,344) $(10,417) $(16,332)
Foreign -- (922) (1,077)
-------- -------- --------
(7,344) (11,339) (17,409)
======== ======== ========
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amount of assets and liabilities for financial purposes and
the amounts used for income tax purposes. Deferred tax assets and liabilities
are comprised of the following (in thousands):
December 31,
------------------------
1998 1997
-------- --------
Deferred tax assets:
Net operating loss and capital
loss carryforwards $ 45,694 $ 42,414
Other 2,657 2,099
-------- --------
Gross deferred tax assets $ 48,351 $ 44,513
======== ========
Deferred liabilities:
Software development costs (1,174) (910)
-------- --------
Gross deferred tax liabilities (1,174) (910)
Deferred tax asset valuation allowance (47,177) (43,603)
-------- --------
$ -- $ --
======== ========
SFAS 109 requires a valuation allowance to reduce the deferred tax assets
reported if, based on the weight of the evidence, it is more likely than not
that some portion or all of the deferred tax assets will not be realized. After
consideration of all the evidence, both positive and negative, management has
determined that a $47,177,000 and $43,603,000 valuation allowance at December
31, 1998 and 1997, respectively, is necessary to reduce the deferred tax assets
to the amount that will more likely than not be realized.
F-23
<PAGE>
NOTE 11 - INCOME TAXES (continued)
Income tax expense (benefit) differs from the amount of income tax determined by
applying the applicable U.S. statutory federal income tax rate to the loss
before income taxes as a result of the following differences:
Year ended December 31,
------------------------------
1998 1997 1996
------ ------ ------
Statutory U.S. tax rate benefit 34.0% 34.0% 34.0%
State income taxes, net 4.5 3.6 4.0
Operating losses and tax credits
with no current tax benefit (38.5) (37.6) (37.5)
Other -- -- (0.1)
------ ------ ------
--% --% 0.4%
====== ====== ======
As of December 31, 1998, the Company had available net operating and capital
loss carry forwards of approximately $119 million which expire in years through
2018 and are limited under Section 382 of the Internal Revenue Code.
Accordingly, the utilization of the net operating loss and capital loss carry
forwards will be limited in future years due to the changes in ownership. In
addition, the Company has research tax credit carry forwards of $1.2 million.
The Company sold its foreign subsidiary, Dorotech, during 1997. Due to a
difference between book and tax basis, the Company realized a capital loss of
approximately $25 million. In addition, due to the sale of Dorotech, the Company
has recognized a deferred tax benefit of approximately $46,000, which is
reflected in the gain on the sale of Dorotech.
F-24
<PAGE>
NOTE 12 - LOSS PER SHARE
The following table sets forth the computation of basic and diluted loss per
share:
1998 1997 1996
----------- ----------- -----------
Numerator (in thousands):
Net Loss $ (7,344) $ (11,339) $ (17,341)
Preferred stock preferences
- Accrued dividends (1,348) (1,435) (3,730)
- Imputed dividends -- (1,536) --
----------- ----------- -----------
Numerator of basic loss
per share -
Net loss applicable to
common shares (8,692) (14,310) (21,071)
Effect of dilutive securities -- -- --
----------- ----------- -----------
Numerator for diluted loss
per share-
Net loss applicable to
common shares after
assumed conversions $ (8,692) $ (14,310) $ (21,071)
Denominator:
Denominator for basic loss
per share - weighted
average shares 7,768,329 6,301,464 5,170,424
Effect of dilutive securities -- -- --
----------- ----------- -----------
Denominator for diluted loss
per share - adjusted
weighed average shares and
assumed conversions 7,768,329 6,301,464 5,170,424
=========== =========== ===========
Basic loss per share $ (1.12) $ (2.27) $ (4.08)
=========== =========== ===========
Diluted loss per share $ (1.12) $ (2.27) $ (4.08)
=========== =========== ===========
Since the Company has incurred losses in 1998, 1997 and 1996, securities that
could potentially dilute the basic earnings per share in the future were not
included in the dilution computation because they would have been anti-dilutive
for the periods presented. The potentially dilutive convertible securities
include the Company's Series A, Series M and Series M1 Convertible Preferred
Stock, which were convertible into 3,081,648 shares, 1,085,699 shares and
337,306 shares of common stock, respectively, at December 31, 1998. Also
outstanding at December 31, 1998 were options and warrants, which were
convertible into 1,647,988 and 1,344,447 shares of common stock, respectively.
For additional disclosures regarding outstanding preferred stock, employee stock
options and warrants, see Note 8.
F-25
<PAGE>
NOTE 13 - BUSINESS SEGMENTS
In June 1997, SFAS No. 131, "Disclosures about Segments of an Enterprise and
Related Information," was issued effective for fiscal years ending after
December 15, 1998.
The Company's reportable segments are strategic business units that sell its
products and services to a wide variety of customers throughout the United
States. They are managed separately because each business requires different
technology, marketing and management strategies.
The Company's two reportable segments are its products and services groups. The
products segment includes sales of software licenses of the Company's TREEV
Suite of document management software and computer equipment. The services
segment includes sales of software maintenance contracts, installation, training
and customization. The accounting policies of the segments are the same as those
described in the summary of significant accounting policies. The Company
evaluates performance based on operating earnings of the respective business
units before income taxes and interest income and expenses.
The following table sets forth summarized financial information concerning the
Company's reportable segments for the years ended December 31, 1998, 1997 and
1996 (in thousands). The "Corporate" column includes corporate related items and
expenses not allocated to reportable segments, such as sale of subsidiaries,
exchange fee and gain, and restructuring costs.
<TABLE>
<CAPTION>
Products Services Corporate Total
------------------- ------------------ ------------------- ---------------
<S> <C> <C> <C> <C>
1998
Revenues $16,813 $11,389 $ --- $28,202
Segment profit (loss) 260 (2,008) (5,540) (7,288)
Identifiable assets 9,641 7,057 2,824 19,522
Depreciation and amortization 1,236 732 339 2,307
Capital expenditures 263 363 86 712
1997
Revenues $18,310 $17,496 $ --- $35,806
Segment profit (loss) 580 (5,113) (6,520) (11,053)
Identifiable assets 6,947 6,675 13,238 26,860
Depreciation and amortization 1,925 1,069 1,470 4,464
Capital expenditures 240 515 133 888
1996
Revenues $18,336 $21,141 $ --- $39,477
Segment profit (loss) (1,977) (5,226) (10,515) (17,718)
Identifiable assets 10,090 10,519 16,169 36,778
Depreciation and amortization 2,945 848 2,000 5,793
Capital expenditures 246 513 309 1,068
</TABLE>
F-26
<PAGE>
NOTE 13 - BUSINESS SEGMENTS (continued)
The following table sets forth summarized financial information concerning to
the Company's operations by geographic area for the years ended December 31,
1998, 1997 and 1996 (in thousands):
United Western
States Europe
---------------- -----------------
1998
Revenue $28,202 $--
Net loss (7,344) --
Total assets 19,522 --
1997
Revenue $24,486 $11,320
Net loss (10,417) (922)
Total assets 26,680 --
1996
Revenue $21,383 $18,094
Net loss (16,332) (1,077)
Total assets 22,718 14,060
Revenue in 1998 included sales to the U.S. Government totaling $900,000. Revenue
in 1997 included sales to the U.S. Government and French Government totaling
$1.6 million and $6.0 million, respectively. Revenue in 1996 included sales to
the U.S. Government and French Government totaling $1.1 million and $10.3
million, respectively.
NOTE 14 - COMMITMENTS
The Company leases its corporate office, sales offices, assembly facilities and
certain equipment under non-cancelable operating leases, certain of which
provide for both operating expense reimbursements and annual escalations that
are amortized over the lease term. Rent expense related to these leases was $
1.1 million, $1.1 million and $1.6 million for the years ended December 31,
1998, 1997, and 1996, respectively.
Future minimum lease payments under non-cancelable operating leases are as
follows (in thousands):
Year ending December 31,
1999 $ 1,107
2000 390
Thereafter --
-------------
$ 1,497
=============
F-27
<PAGE>
NOTE 15- CONTINGENCIES
The Company is subject to legal proceedings and claims, which are in the
ordinary course of business. Management believes that the outcome of such
matters will not have a material impact on the Company's financial position or
its result of operations.
NOTE 16 - RELATED PARTY TRANSACTIONS
During 1997, the Company renegotiated the termination of three consulting
agreements, with individuals who were current or former members of the Board of
Directors and officers of the Company, whereby all three would expire during
1998. The Company recognized total compensation expense of approximately
$211,000, $553,000 and $715,000 in 1998, 1997 and 1996, respectively, related to
these agreements.
During December 1996, the Company and a stockholder entered into a line of
credit agreement. At December 31, 1997, there was $1.0 million outstanding
against the line of credit (See Note 7). The Company paid $42,000 and $295,000
relating to interest on the line of credit in 1998 and 1997, respectively.
The Company holds two notes receivable totaling $525,000 from two former
stockholders of a subsidiary acquired in 1994 due and payable in December 1999.
Interest accrues at 6.55% per annum (See Note 2).
NOTE 17 - EMPLOYEE PROFIT SHARING PLANS AND 401K PLAN
The Company sponsors a 401(K) plan that covers all full-time employees.
Participants in the plan may make contributions of up to 15% of pre-tax annual
compensation. The Company may make discretionary matching contributions at the
option of the Board of Directors. The Company has made no contributions.
The Company had a mandatory and a voluntary profit sharing plan covering
substantially all employees in France. Contributions to the plans were based
upon earnings of the French operations. There were no contributions made to the
plans in 1998 and 1997 while plan contributions in 1996 totaled $28,000.
F-28
<PAGE>
NOTE 18 - SUBSEQUENT EVENTS
During January 1999, the Company redeemed in cash the remaining $200,000 of the
8% Convertible Notes.
During the first quarter of 1999, the Company completed a private placement of
388,500 shares of Common Stock pursuant to Regulation D under the Securities Act
of 1933. Proceeds from the offering were $777,000 and offering costs were
approximately $70,000.
During February 1999, the Company secured a $5 million revolving line of credit
from a commercial bank. The Company can draw up to $5 million on the line of
credit for working capital needs based on 80% of its eligible receivables. The
line of credit bears interest at a rate of prime plus 2%. The agreement shall
remain in effect until February 28, 2000, and automatically renews for
successive additional terms of one year each. The line of credit is
collateralized by all of the Company's accounts receivable, inventory,
equipment, general intangibles, and other personal property assets.
F-29
<PAGE>
<TABLE>
Schedule II - Valuation and Qualifying Accounts
TREEV, Inc.
December 31, 1998
<CAPTION>
Balance at Charged to Charged to Balance at
Beginning of Costs and Other End of
Description Period Expenses Accounts Deductions (1) Period
<S> <C> <C> <C> <C>
Allowance for Uncollectible Accounts Receivable
Year Ended Dec 31, 1996 183 219 25 377
Year Ended Dec 31, 1997 377 673 0 1050
Year Ended Dec 31, 1998 1050 833 707 1176
Allowance for Uncollectible Notes Receivable
Year Ended Dec 31, 1996 1350 0 875 475
Year Ended Dec 31, 1997 475 623 1098
Year Ended Dec 31, 1998 1098 1098 0
(1) Uncollectible accounts written off, net of recoveries
</TABLE>
CERTIFICATE OF AMENDMENT
TO CERTIFICATE OF INCORPORATION
OF TREEV, INC.
TREEV, a corporation organized and existing under and by virtue of the General
Corporation Law of the State of Delaware (the "Corporation"), DOES HEREBY
CERTIFY:
FIRST: That the Board of Directors of the Corporation, adopted a resolution and
declared advisable the following amendment to the Restated Certificate of
Incorporation of the Corporation:
RESOLVED, that the Certificate of Incorporation of the Corporation be
amended by adding to Article Fourth of the Company's Restated Certificate of
Incorporation the following provision:
Simultaneously with the effective date of this amendment (the "Effective
Date"), each four shares of the Company's Common Stock, par value $.0001 per
share, issued and outstanding immediately prior to the Effective Date (the
"Old Common Stock") shall, automatically and without any action on the part
of the holder thereof, be reclassified as and changed, pursuant to a reverse
stock split (the "Reverse Stock Split"), into one share of the Company's
outstanding Common Stock (the "New Common Stock"), subject to the treatment
of fractional share interests as described below. Each holder of a
certificate or certificates which immediately prior to the Effective Date
represented outstanding shares of Old Common Stock (the "Old Certificates,"
whether one or more) shall be entitled to receive upon surrender of such Old
Certificates to the Company's Transfer Agent for cancellation, a certificate
or certificates (the "New Certificates," whether one or more) representing
the number of whole shares of the New Common Stock into and for which the
shares of the Old Common Stock formerly represented by such Old Certificates
so surrendered, are reclassified under the terms hereof. From and after the
Effective Date, Old Certificates shall thereupon be deemed for all corporate
purposes to evidence ownership of New Common Stock in the appropriately
reduced whole number of shares. No certificates or scrip representing
fractional share interests in New Common Stock will be issued, and no such
fractional share interest will entitle the holder thereof to vote, or to any
rights of a stockholder of the Company. Any fraction of a share of New
Common Stock to which the holder would otherwise be entitled will be
adjusted downward to the nearest whole share and the holder will receive
cash in lieu of such fractional share. If more than one Old Certificate
shall be surrendered at one time for the account of the same stockholder,
the number of full shares of New Common Stock for which New Certificates
shall be issued shall be computed on the basis of the aggregate number of
shares represented by the Old Certificates so surrendered. In the event that
the Company's Transfer Agent determines that a holder of Old Certificates
has not surrendered all his certificates for exchange, the Transfer Agent
shall carry forward any fractional share until all certificates of that
holder have been presented for exchange such that payment for fractional
shares to any one person shall not exceed the value of one share. If any new
Certificate is to be issued in a name other than that in which it was
issued, the Old Certificates so surrendered shall be properly endorsed and
1
<PAGE>
otherwise in proper form for transfer, and the stock transfer tax stamps to
the Old Certificates so surrendered shall be properly endorsed and otherwise
in proper form for transfer, and the person or persons requesting such
exchange shall affix any requisite stock transfer tax stamps to the Old
Certificates surrendered, or provide funds for their purchase, or establish
to the satisfaction of the Transfer Agent that such taxes are not payable.
From and after the Effective Date, the amount of capital shall be
represented by the shares of the New Common Stock into which and for which
the shares of the Old Common Stock are reclassified, until thereafter
reduced or increased in accordance with applicable law. All references
elsewhere in the Restated Certificate of Incorporation to the "Common Stock"
shall, after the Effective Date, refer to the New Common Stock.
FURTHER RESOLVED, that at any time prior to the filing of the foregoing
amendment to the Company's Certificate of Incorporation effecting the Reverse
Stock Split, notwithstanding authorization of the proposed amendment by the
stockholders of the Company, the Board may abandon such proposed amendment
without further action by the stockholders.
SECOND: That the stockholders of the Corporation approved said amendment by
majority vote at a special meeting of the stockholders in accordance with the
provisions of the Restated Certificate of Incorporation of the Corporation and
the General Corporation Law of the State of Delaware.
THIRD: That the aforesaid amendment was duly adopted in accordance with the
applicable provisions of Section 242 of the General Corporation Law of the State
of Delaware.
IN WITNESS WHEREOF, the Corporation has caused this certificate to be signed
by Julia A. Bowen, its Assistant Secretary this 9th day of December, 1998.
TREEV, INC.
By: /s/ Julia A. Bowen
Julia A. Bowen
Assistant Secretary
2
TREEV, INC.
COMMON STOCK Incorporated under the laws of the State of Delaware
CUSIP 894692 30 0
This certifies that
______________________________________________________________________________
is the owner of _____________________________________________________________
FULLY PAID AND NON-ASSESSABLE SHARES OF THE COMMON STOCK, PAR
VALUE $.0001 EACH, OF
TREEV, Inc. transferable on the books of the Corporation by the holder hereof,
in person or by a duly authorized attorney, upon surrender of this certificate
properly endorsed. This certificate is not valid until countersigned and re-
gistered by the Transfer Agent and Registrar.
Witness the facsimile seal of the Corporation and the facsimile signatures of
duly authorized officers.
Dated:
/s/ Julia A. Bowen Seal of TREEV, Inc. /s/ James J. Leto
Secretary Chairman
<PAGE>
The Corporation will furnish to any shareholder upon request and without
charge a full statement of the designations, preferences, limitations, and
relative rights and preferences between the shares of each series of the
Preferred Stock so far as the same may have been fixed and determined, and the
authority of the board of directors to fix and determine the relative rights and
preferences of subsequent series.
------------
KEEP THIS CERTIFICATE IN A SAFE PLACE. IF IT IS LOST, STOLEN OR DESTROYED THE
CORPORATION WILL REQUIRE A BOND OF INDEMNITY AS A CONDITION TO THE ISSUANCE OF A
REPLACEMENT CERTIFICATE.
------------
The following abbreviations, when used in the inscription on the face of
this certificate, shall be construed as though they were written out in full
according to applicable laws or regulations:
TEN COMM - as tenants in common UNIF TRANS MIN ACT-___________________
(Cust)
TEN ENT - as tenants by the entireties Custodian ________________ under
(Minor)
JT TEN - as joint tenants with Uniform Transfers to Minors Act
the right of survivorship ______________________
and not as tenants in common (state)
Additional abbreviations may also be used though not in the above list.
FOR VALUE RECEIVED ______________________ HEREBY SELL, ASSIGN AND TRANSFER UNTO
Please insert social security number or
other identifying number of assignee
[____________________________________]
________________________________________________________________________________
(PLEASE PRINT OR TYPEWRITE NAME AND ADDRESS, INCUDING ZIPCODE, OF ASSIGNEE)
________________________________________________________________________________
________________________________________________________________________________
_____________________________________________________________________ shares
of the capital stock on the books of the within named Corporation with full
power of substitution in the premises.
Dated _______________________
__________________________________________________________________
NOTICE: The signature to this assignment must correspond with the name as
written upon the face of the certificate in every particular, without alteration
or enlargement or any change whatever.
Signature(s)Guaranteed:
______________________________________________
The signature(s) should be guaranteed by an eligible guarantor institution
(banks, stockbrokers, savings and loan associations and credit unions with
membership in an approved signature guarantee medallion program), pursuant to
S.E.C. rule 17Ad-15.
EXHIBIT 21
None.
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from SEC
Form 10-K and is qualified in its entirety by reference to such financial
statements as of and for the year ended December 31, 1998.
</LEGEND>
<CIK> 0000883946
<NAME> TREEV INC
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> DEC-31-1998
<CASH> 1,645
<SECURITIES> 0
<RECEIVABLES> 12,642
<ALLOWANCES> (1,176)
<INVENTORY> 911
<CURRENT-ASSETS> 14,465
<PP&E> 7,745
<DEPRECIATION> (6,167)
<TOTAL-ASSETS> 19,522
<CURRENT-LIABILITIES> 11,949
<BONDS> 0
0
0
<COMMON> 1
<OTHER-SE> 7,529
<TOTAL-LIABILITY-AND-EQUITY> 19,522
<SALES> 28,202
<TOTAL-REVENUES> 28,202
<CGS> 14,618
<TOTAL-COSTS> 14,618
<OTHER-EXPENSES> 20,872
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 56
<INCOME-PRETAX> (7,344)
<INCOME-TAX> 0
<INCOME-CONTINUING> (7,344)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (7,344)
<EPS-PRIMARY> (1.12)
<EPS-DILUTED> (1.12)
</TABLE>
