SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q/A
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1999
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
Commission File Number 1-11135
TREEV, INC.
(Exact name of registrant as specified in its charter)
Delaware 54-1590649
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
13900 Lincoln Park Drive, Suite 300, Herndon, Virginia 20171
(Address of principal executive offices)
(703) 478-2260
(Issuer's telephone number)
Indicate by check mark whether the registrant: (1) has filed all
reports required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the past 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]
Indicate the number of shares outstanding of each of the issuer's
classes of common stock, as of the latest practicable date: 13,903,514 shares of
common stock, $.0001 par value, as of September 30, 1999.
<PAGE>
Subsequent to filing a Form 10-Q with the Securities and Exchange
Commission ("SEC") on November 12, 1999, which included the quarterly financial
statements of TREEV, Inc. (the "Company") for the three and nine month periods
ended September 30, 1999, the Company became aware that the timing and amount of
reported earned revenues from license transactions in 1999 required revision.
Accordingly, the Company has determined to restate its quarterly financial
statements for the three and nine month periods ended September 30, 1999.
This Form 10-Q/A includes in Item 1 of Part I such restated financial
statements and related notes thereto for the three and nine month periods ended
September 30, 1999, and other information relating to such restated financial
statements. Except for Items 1 and 2 of Part I and Exhibit 27.1, no other
information included in the original report on Form 10-Q is amended by this Form
10-Q/A.
<PAGE>
TREEV, INC.
Form 10-Q/A
Table of Contents
PART I FINANCIAL INFORMATION
Item 1. Financial Statements.
Consolidated Balance Sheets at September 30, 1999
(unaudited and restated) and December 31, 1998 2
Consolidated Statements of Operations (unaudited and
restated) for the three months ended
September 30, 1999 and 1998 3
Consolidated Statements of Operations (unaudited and
restated) for the nine months ended
September 30, 1999 and 1998 4
Consolidated Statement of Changes in Stockholders' Equity
(unaudited and restated) for the nine months ended
September 30, 1999 5
Consolidated Statements of Cash Flows (unaudited and
restated) for the nine months ended
September 30, 1999 and 1998 6
Notes to Consolidated Financial Statements
(unaudited and restated) 7
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations. 11
PART II. OTHER INFORMATION
Item 1. Legal Proceedings. 18
Item 6. Exhibits and Reports on Form 8-K. 18
<PAGE>
TREEV, INC.
BALANCE SHEETS
(In thousands, except share and per share amounts)
September 30, December 31,
1999 1998
------------ ------------
(Unaudited
and restated)
ASSETS
Current assets:
Cash and cash equivalents $ 528 $ 1,645
Accounts and notes receivable, net 12,868 11,419
Inventories 1,093 911
Prepaid expenses and other 1,008 490
--------- ---------
Total current assets 15,497 14,465
Fixed assets, net 1,160 1,578
Long-term notes receivable, net 26 47
Software development costs, net 3,453 2,978
Goodwill, net 208 332
Other assets 116 122
--------- ---------
Total assets $ 20,460 $ 19,522
========= =========
LIABILITIES & STOCKHOLDERS' EQUITY
Current liabilities:
Current debt maturities and
obligations under capital leases $ 4,501 $ 342
Accounts payable 2,636 2,327
Accrued compensation and expenses 1,050 1,448
Deferred revenue 3,775 5,887
Other accrued expenses 1,967 1,945
--------- ---------
Total current liabilities 13,929 11,949
Long-term debt and obligations under
capital leases 20 43
--------- ---------
Total liabilities 13,949 11,992
Stockholders' equity:
Convertible preferred stock,
$.0001 par value, 20,000,000 shares
authorized; 1,610,025 shares issued
and outstanding -- --
Common stock, $.0001 par value,
100,000,000 shares authorized;
13,903,514 and 12,367,888 shares
issued and outstanding 1 1
Additional paid-in-capital 141,317 139,310
Accumulated deficit (134,807) (131,781)
--------- ---------
Total stockholders' equity 6,511 7,530
--------- ---------
Total liabilities and
stockholders' equity $ 20,460 $ 19,522
========= =========
The accompanying notes are an integral part of these financial statements.
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TREEV, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except share and per share amounts)
(Unaudited)
Three Months Ended September 30,
1999 1998
------------ ------------
(Restated)
Revenue:
Products $ 5,314 $ 3,466
Services 3,400 2,902
------------ ------------
8,714 6,368
------------ ------------
Costs and expenses:
Cost of products sold 1,597 1,527
Cost of services provided 2,137 1,847
Sales and marketing 2,706 2,748
General and administrative 761 925
Product development 1,099 966
------------ ------------
8,300 8,013
------------ ------------
Income (loss) before investment and
interest income and income taxes 414 (1,645)
Interest (expense) income, net (133) 3
------------ ------------
Income (loss) before income taxes 281 (1,642)
Income tax benefit -- --
------------ ------------
Net income (loss) 281 (1,642)
------------ ------------
Preferred stock dividends (337) (337)
------------ ------------
Net income (loss) applicable to common shares $ (56) $ (1,979)
============ ============
Net income (loss) per common share $ 0.00 $ (0.24)
============ ============
Weighted average shares outstanding 12,851,866 8,248,327
============ ============
The accompanying notes are an integral part of these financial statements.
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<PAGE>
TREEV, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except share and per share amounts)
(Unaudited)
Nine Months Ended September 30,
1999 1998
------------ ------------
(Restated)
Revenue:
Products $ 12,354 $ 11,260
Services 9,803 8,395
------------ ------------
22,157 19,655
------------ ------------
Costs and expenses:
Cost of products sold 5,323 5,188
Cost of services provided 6,310 5,633
Sales and marketing 7,828 8,585
General and administrative 2,394 3,175
Product development 3,150 2,927
Restructuring costs -- 1,505
------------ ------------
25,005 27,013
------------ ------------
Loss before investment and
interest income and income taxes (2,848) (7,358)
Interest expense, net (178) (58)
------------ ------------
Loss before income taxes (3,026) (7,416)
Income tax benefit -- --
------------ ------------
Net loss (3,026) (7,416)
------------ ------------
Preferred stock dividends (1,011) (1,011)
------------ ------------
Net loss applicable to common shares $ (4,037) $ (8,427)
============ ============
Net loss per common share $ (0.32) $ (1.13)
============ ============
Weighted average shares outstanding 12,792,448 7,489,378
============ ============
The accompanying notes are an integral part of these financial statements.
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<PAGE>
<TABLE>
TREEV, INC.
STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
Nine months ended September 30, 1999
(In thousands, except share amounts)
(Unaudited and restated)
<CAPTION>
Additional
Preferred Stock Common Stock paid-in Accumulated
Shares Amt. Shares Amt. capital Deficit Total
------------------------ --------------------------- ---------------- ---------------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance December 31, 1998 1,610,025 $ - 12,367,888 $ 1 $ 139,310 $ (131,781) $ 7,530
Issuance of common stock,
net of offering costs of $71 492,749 854 854
Conversion of convertible notes 1,042,877 2,092 2,092
Issuance of warrants 72 72
Dividends on preferred stock (1,011) (1,011)
Net loss (3,026) (3,026)
------------------------ --------------------------- ---------------- ---------------- ---------
Balance September 30, 1999 1,610,025 $ - 13,903,514 $ 1 $ 141,317 $ (134,807) $ 6,511
======================== =========================== ================ ================ =========
</TABLE>
The accompanying notes are an integral part of these financial statements.
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<PAGE>
<TABLE>
TREEV, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
<CAPTION>
Nine months Ended September 30,
1999 1998
------- -------
(Restated)
<S> <C> <C>
Cash flows from operating activities:
Net loss $ (3,026) $ (7,416)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation and amortization 1,703 1,762
Restructuring costs -- 1,505
Other non-cash adjustments 223 77
Changes in assets and liabilities:
Accounts and notes receivable (1,713) 1,536
Inventories (182) (105)
Prepaid expenses and other (301) 2
Accounts payable 310 (80)
Accrued expenses (757) (618)
Deferred revenues (2,112) 250
-------- --------
Net cash (used in) operating activities (5,855) (3,087)
-------- --------
Cash flows from investing activities:
Software development costs (1,252) (1,072)
Purchases of fixed assets (384) (548)
Cash received from business divestitures and related costs 285 7,230
-------- --------
Net cash (used in) provided by investing activities (1,351) 5,610
-------- --------
Cash flows from financing activities:
Proceeds from issuance of common stock, net 854 4,318
Proceeds from issuance of preferred stock, net -- 9,707
Cash dividends paid on preferred stock (674) (337)
Redemption of Redeemable Series F preferred stock -- (6,548)
Redemption of convertible preferred stock -- (7,085)
Proceeds from issuance of convertible notes 1,997 --
Redemption of convertible notes (200) (1,500)
Proceeds from issuance of subordinated notes 1,100 --
Borrowings of debt 14,862 --
Repayments of debt (11,745) --
Principal payments on capital lease obligations (105) (603)
-------- --------
Net cash provided by (used in) financing activities 6,089 (2,048)
-------- --------
Net (decrease) increase in cash and cash equivalents (1,117) 475
Cash and cash equivalents at beginning of year 1,645 3,816
-------- --------
Cash and cash equivalents at September 30, $ 528 $ 4,291
======== ========
Supplemental Cash Flow Information:
Interest paid $ 144 $ 191
======== ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
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<PAGE>
TREEV, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 1999 and 1998
(Unaudited and restated)
1. BASIS OF PRESENTATION
The unaudited financial statements presented herein have been prepared in
accordance with the instructions to Form 10-Q and should be read in conjunction
with the financial statements and notes thereto included in the Company's Annual
Report on Form 10-K for the year ended December 31, 1998 which include
information and note disclosures not included herein. In the opinion of
management all adjustments, which include only those of a normal recurring
nature, necessary to fairly present the Company's financial position, results of
operations and cash flows have been made to the accompanying financial
statements. The results of operations for the nine-month period ended September
30, 1999 may not be indicative of the results that may be expected for the year
ending December 31, 1999.
2. RESTATEMENT OF FINANCIAL STATEMENTS
Subsequent to filing a Form 10-Q with the SEC which included the Company's
quarterly financial statements for the three and nine month periods ended
September 30, 1999, the Company became aware that the timing and amount of
reported earned revenues from license transactions in 1999 required revision.
During 1999, TREEV initiated relationships with new customers under its Business
Alliance Program (the "BAP") which allowed the customers to purchase licenses of
the Company's software products at discounted rates based on commitments from
the BAP customers to meet certain volume requirements. The terms and conditions
of the BAP agreements were consistent with prior agreements entered into with
longstanding customers in similar lines of business. The Company anticipated
these BAP customers, primarily value added resellers, systems integrators, and
original equipment manufacturers, would increase the distribution and market
share of its document management solutions. The Company's management evaluated
the new BAP customers' credit ratings, business reputation, and ability to
comply with the terms of the BAP agreements prior to initiating the
relationships. However, during the fourth quarter of 1999, the Company
experienced a significant number of new BAP customers not complying with the
financial obligations under the BAP agreements as amounts became due in full.
The Company's management initiated a review of these relationships to determine
the degree of correlation among the new BAP customers and lack of financial
performance in a timely manner. In addition, the Company considered the lack of
financial performance of the new BAP customers, as a class, to the
collectibility criteria of SOP 97-2 and determined that the software revenues
related to such arrangements no longer met that criteria as amounts due by this
class of customers were generally not paid in full when due. Based on the
results of management's review of new BAP customers, the Company, after
consultation with its independent auditors, determined that certain revenues
previously recognized should be reversed and recognized when payments are
received from new BAP customers until sufficient history with specific customers
is achieved to determine the likelihood that the new BAP customers' financial
obligations will be met in accordance with the original terms of such agreement.
In addition to the reversal of certain revenues as discussed above, the Company
reversed related costs of revenue and commissions attributable to such
transactions and certain other expenses related thereto. The Company also
reversed legal fees that had been accrued during the quarter attributable to
certain litigation that was resolved in the third quarter of 1999, as such
amounts were not paid.
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<PAGE>
Accordingly, such financial statements for the periods presented in this Form
10-Q/A have been restated as follows (in thousands):
<TABLE>
<CAPTION>
Three months ended September 30, Nine months ended September 30, 1999
1999
------------------------------------ ------------------------------------
As Reported Restated As Reported Restated
------------------ ----------------- ------------------ -----------------
<S> <C> <C> <C> <C>
Statement of Operations Data
Product revenues $ 5,604 $ 5,314 $ 13,234 $ 12,354
Cost of products sold 1,582 1,597 5,278 5,323
Selling, general and administrative 3,631 3,467 10,841 10,222
Net income (loss) 422 281 (2,720) (3,026)
Net income (loss) per common share $ 0.01 $ 0.00 $ (0.29) $ (0.32)
</TABLE>
September 30, 1999
------------------------------------
As Reported Restated
------------------ -----------------
Balance Sheet Data
Accounts and notes receivable, net $ 13,748 $ 12,868
Inventories 1,138 1,093
Accrued compensation 1,377 1,050
Other accrued expenses 2,259 1,967
Accumulated deficit (134,501) (134,807)
3. LINE OF CREDIT
During the first quarter of 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 equal to prime plus 2%.
The current interest rate at September 30, 1999, was 10.25%. 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. At September
30, 1999, the Company had $3,301,000 outstanding under the line of credit.
4. CONVERTIBLE NOTES REDEMPTION
During the first quarter of 1999, the Company redeemed in cash the remaining
$200,000 of the 8% Convertible Notes (the "Notes") due August 20, 2002. At
September 30, 1999, all of the Notes had been converted or redeemed.
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<PAGE>
5. ISSUANCE OF COMMON STOCK
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, as amended. Proceeds from the offering were $777,000 and offering costs
were approximately $71,000.
During the first and third quarters of 1999, the Company issued 45,555 and
30,510 shares, respectively, of Common Stock under the Company's 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 the offering period ends.
6. ISSUANCE OF CONVERTIBLE NOTES
During the second quarter of 1999, the Company issued, pursuant to Regulation D
under the Securities Act of 1933, as amended, 8% Convertible Notes (the
"Convertible Notes") due October 1, 1999, totaling $2,000,000, together with
warrants to purchase 50,000 shares of Common Stock at an exercise price of $2.00
per share. The Company estimated the fair value of the warrants to be
approximately $50,000 in the aggregate and has recognized this additional
borrowing cost over the term of the Convertible Notes pursuant to the effective
interest rate method. After giving consideration to the stated interest rate and
the estimated fair value of the warrants at the issuance date, the Company's
effective interest rate related to the Convertible Notes was approximately
14.9%. The Convertible Notes were convertible, at the Company's election, into
Common Stock at a conversion price of $2.00 per share. On September 30, 1999,
the Convertible Notes and related interest were converted into 1,042,877 shares
of Common Stock.
7. ISSUANCE OF SUBORDINATED PROMISSORY NOTES
During the third quarter of 1999, the Company issued a 14% Subordinated
Promissory Note (the "Promissory Note") due June 1, 2000, totaling $1,100,000.
The Promissory Note is subordinated to the Company's revolving line of credit
and is collateralized by all of the Company's accounts receivable, inventory,
equipment, general intangibles, and other personal property assets. Interest
payments are due monthly and the Promissory Note may be prepaid at any time
without premium or penalty.
8. BUSINESS SEGMENTS
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. 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.
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<PAGE>
software maintenance contracts, installation, training, and customization. The
following table sets forth summarized financial information concerning the
Company's reportable segments for the periods ended September 30, 1999 and 1998
(in thousands). The "Corporate" column includes corporate related items and
expenses not allocated to reportable segments, such as sale of subsidiaries and
restructuring costs.
<TABLE>
<CAPTION>
Products Services Corporate Total
------------------- ------------------ ------------------ ----------------
<S> <C> <C> <C> <C>
1999
Revenues $12,354 $9,803 $ --- $22,157
Segment profit (loss) 910 (1,364) (2,394) (2,848)
1998
Revenues $11,260 $8,395 $ --- $19,655
Segment profit (loss) (523) (2,155) (4,680) (7,358)
</TABLE>
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<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Forward Looking Statements and Certain Risk Factors
This "Management's Discussion and Analysis of Financial Condition and
Results of Operations" section of this Quarterly Report on Form 10-Q contains
certain forward looking statements that are subject to a number of risks and
uncertainties. In addition, the Company may publish or make forward looking
statements from time to time relating to such matters as anticipated financial
performance, business prospects and strategies, sales and marketing efforts,
technological developments, new products, research and development activities,
and similar matters. The Private Securities Litigation Reform Act of 1995
provides a safe harbor for forward looking statements. In order to comply with
the terms of the safe harbor, the Company notes that a variety of factors could
cause the Company's actual results to differ materially from the anticipated
results or other expectations made in the Company's forward looking statements
in this Quarterly Report or elsewhere. Readers should carefully review the risk
factors described in other documents the Company files from time to time with
the Securities and Exchange Commission, specifically any Current Reports on Form
8-K filed by the Company. Some risks and uncertainties of the Company that
should be considered by the reader include:
The adverse results of operations that the Company has experienced have
been declining. Although the Company expects the trend of improved operating
results to continue, there can be no assurances that the Company will not
experience adverse results of operations in the future.
The Company has had net losses in each period of its operations since
its inception, except for three quarters, and it had an accumulated deficit at
September 30, 1999 of $135 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.
Revenues for any period depend on the number, size and timing of
license agreements. The size and timing of license agreements is difficult to
forecast because software sales cycles are affected by the nature of the
transactions, including the scope of
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<PAGE>
the solutions to be licensed and the organizational and geographic scope of the
licenses. Also, the number, size and timing of license agreements may be
affected by external factors including the effects of such conditions on the
Company's customers and prospects, or competitors' actions. A small variation in
the timing of software licensing transactions, particularly near the end of any
quarter or year, can cause significant variations in software product license
revenues in any period.
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 fourth 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.
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<PAGE>
Customers using versions other than current versions of the software products
have been given the opportunity, pursuant to maintenance plans or upgrade
options, to receive current versions of the software.
Costs to Address Year 2000 Readiness Issues
The calculation of costs incurred has been limited to bringing the
Company's software products, and its own IT and non-IT systems to Year 2000
readiness or to accelerating replacement systems to become Year 2000 ready.
Costs incurred in the normal maintenance of the Company's IT and non-IT systems
are not included. The total cost of the Year 2000 readiness project is estimated
at $730,000 and is being funded through operating cash flows. Of the total
project cost, approximately $255,000 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 $475,000 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 $665,000 ($465,000 expensed and $200,000
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.
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<PAGE>
Year 2000 Information and Readiness Disclosure Act
This section captioned "Year 2000 Readiness," as well as other
statements herein or otherwise relating to the Year 2000 issues, are "Year 2000
Readiness Disclosures" pursuant to the "Year 2000 Information and Readiness
Disclosure Act."
Results of Operations - Nine months ended September 30, 1999 and 1998
Revenues. Total revenues were $22.2 million and $19.7 million
for the nine months ended September 30, 1999 and 1998, respectively. The $2.5
million increase in revenue was the result of an increase in product revenue of
$1.1 million, or 10%, and an increase in service revenue of $1.4 million, or
17%. The increase in product revenue was attributable to continued growth of the
Company's direct and indirect channels along with the introduction of the eTREEV
product technology. The increase in service revenue was attributable to
increased staffing and continued management emphasis on the professional
services business.
Profit margins. Profit margins for product sales increased 3%
for the nine months ended September 30, 1999, compared to the same period in
1998, as cost of products sold decreased from 46% to 43% of sales. The increase
in product sales margins from 54% to 57% was primarily due to the increased
sales mix of the Company's internally developed software products. Profit
margins for service sales increased 3% for the nine months ended September 30,
1999, as compared to the same period in 1998, as the cost of services decreased
from 67% to 64% of sales. The increase in service sales margins from 33% to 36%
was due to the Company's continued emphasis on its custom development and
professional services.
Sales and marketing. Sales and marketing expenses were $7.8
million or 35% of revenue, for the nine months ended September 30, 1999,
compared to $8.6 million, or 44% of revenue, for the same period in 1998. The
decrease of $800,000, or 9%, was the result of continuing cost reduction efforts
by the Company.
General and administrative. G&A expenses were $2.4 million,
or 11% of revenue, for the nine months ended September 30, 1999, compared to
$3.2 million, or 16% of revenue, for the same period in 1998. The decrease of
$800,000, or 25%, was due to the Company's continued cost reduction efforts.
Product development. The Company's expenditures on software
research and development activities ("R&D") for the nine months ended September
30, 1999, were $4.4 million, of which $1.3 million was capitalized and $3.1
million was expensed. R&D expenditures for the same period in 1998 were $4.0
million, of which $1.1 million was capitalized and $2.9 million was expensed.
The $400,000 increase in R&D expenditures was primarily attributable to the
development of the Company's new eTREEV product technology.
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<PAGE>
Net loss. The Company's net loss for the nine months ended
September 30, 1999, was $(3.0) million as compared to $(7.4) million for the
comparable period in 1998. The net loss decrease of $4.3 million was due to the
increase in gross margins, the decrease in sales and marketing and G&A expenses,
and the restructuring charge incurred in the second quarter of 1998, offset by
an increase in product development costs.
Net loss applicable to Common Shares. The net loss applicable
to common shares includes adjustments for dividend amounts related to the
Company's preferred stock. The net loss applicable to common shares was $(4.0)
million, or $(0.32) per share, for the nine months ended September 30, 1999, as
compared to $(8.4) million, or $(1.13) per share, for the comparable period in
1998. The decrease in net loss applicable to common shares is attributable to
the decrease in net loss described above and an increase in the weighted average
shares outstanding.
Results of Operations - Three months ended September 30, 1999 and 1998
Revenues. Total revenues were $8.7 million and $6.4 million
for the three months ended September 30, 1999 and 1998, respectively. The $2.3
million increase in revenue was the result of an increase in product revenue of
$1.8 million, or 53%, and an increase in service revenue of $500,000, or 17%.
The increase in product revenue was attributable to continued growth of the
Company's direct and indirect channels along with the introduction of the eTREEV
product technology. The increase in service revenues was attributable to
increased staffing and continued management emphasis on the professional
services business.
Profit margins. Profit margins for product sales increased
14% for the three months ended September 30, 1999, compared to the same period
in 1998, as cost of products sold decreased from 44% to 30% of sales. The
increase in product sales margins from 56% to 70% was primarily due to the
increased sales mix of the Company's internally developed software products.
Profit margins for service sales increased 1% for the three months ended
September 30, 1999, compared to the same period in 1998, as the cost of services
decreased from 64% to 63% of sales. The increase in service sales margins from
36% to 37% was due to the Company's continued emphasis on its custom development
and professional services.
Sales and marketing. Sales and marketing expenses were $2.7
million, or 31% of revenue, for the three months ended September 30, 1999,
compared to $2.7 million, or 43% of revenue, for the same period in 1998. The
associated expenses remained stable over the comparable periods.
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General and administrative. G&A expenses were $800,000, or
9% of revenue, for the three months ended September 30, 1999, compared to
$900,000, or 15% of revenue, for the same period in 1998. The decrease of
$100,000, or 11%, was due to the Company's continued cost reduction efforts.
Product development. The Company's expenditures on software
R&D activities for the three months ended September 30, 1999, were $1.5 million,
of which $400,000 was capitalized and $1.1 million was expensed. R&D
expenditures for the same period in 1998 were $1.3 million, of which $300,000
was capitalized and $1.0 million was expensed. The $200,000 increase in R&D
expenditures was primarily attributable to the development of the Company's new
eTREEV product technology.
Net income (loss). The Company's net income for the three
months ended September 30, 1999, was $281,000 as compared to a $(1.6) million
net loss for the comparable period in 1998. The net loss decrease of $1.9
million was primarily attributable to the $2.0 million increase in gross
margins.
Net income (loss) applicable to Common Shares. The net loss
applicable to common shares includes adjustments for dividend amounts related to
the Company's preferred stock. The net income applicable to common shares was
$(56,000), or $.(00) per share, for the three months ended September 30, 1999,
as compared to a net loss of $(2.0) million, or $(0.24) per share, for the
comparable period in 1998. The decrease in net loss applicable to common shares
was attributable to the decrease in net loss described above and an increase in
the weighted average shares outstanding.
Liquidity and Capital Resources
As of September 30, 1999, the Company had $528,000 in cash and cash
equivalents, as compared to $1.6 million in cash and cash equivalents at
December 31, 1998. Net working capital was $1.6 million at September 30, 1999,
and $2.5 million at December 31, 1998.
For the nine months ended September 30, 1999, the $1.1 million decrease
in cash and cash equivalents resulted from $6.1 million in cash generated by
financing activities, offset by $5.9 million used to fund operating activities
and $1.3 million in cash used to fund investing activities.
The $6.1 million provided by financing activities arose primarily from
the issuance of the convertible notes and the subordinated notes along with the
draws under the Company's revolving line of credit. The $5.9 million used by
operating activities arose primarily with respect to the $3.0 million net loss
from operations, offset by the $1.7 million in depreciation and amortization
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charges, the $1.7 million increase in accounts receivable, the $800,0000
decrease in accrued expenses and the $2.1 decrease in deferred revenues. The$1.3
million used by investing activities arose primarily from the $1.3 million in
capitalized software development cost.
During the first quarter of 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 equal to prime
plus 2%. The line of credit 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 that the Company has experienced have
been declining. Although the Company expects the trend of improved operating
results to continue, there can be no assurances that the Company will not
experience adverse results of operations in the future. The Company believes
that 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. 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).
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.
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PART II. OTHER INFORMATION
Item 1. Legal Proceedings
The Company is not involved in any legal proceedings, other than the
routine litigation incidental to the business.
Item 2. Changes in Securities
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, as amended. Proceeds from the offering were $777,000.
During the first and third quarters of 1999, the Company issued 45,555
and 30,510 shares, respectively, of Common Stock under the Company's Employee
Stock Purchase Plan.
During the second quarter of 1999, the Company issued 8% Convertible
Notes (the "Convertible Notes") totaling $2,000,000 pursuant to Regulation D
under the Securities Act of 1933, as amended. During the third quarter of 1999,
the Convertible Notes and related interest were converted into 1,042,877 shares
of Common Stock.
Item 3. Changes Upon Senior Securities
None.
Item 4. Submission of Matters to a Vote of Security Holders
None.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits.
27.1 Financial data schedule
(b) Reports on Form 8-K.
None.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned hereunto duly authorized.
TREEV, INC.
(Registrant)
Date: September 13, 2000 By /s/ Thomas A. Wilson
------------------------------------------
Thomas A. Wilson
President and Chief Executive Officer
Date: September 13, 2000 By /s/ Brian H. Hajost
------------------------------------------
Brian H. Hajost
Executive Vice President, Finance and
Corporate Development
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