U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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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, 1999
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
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(Address of principal executive offices) (Zip code)
Registrant's telephone number, including area code (703) 478-2260
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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
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: $41,566,000 as of February 29, 2000 (Price of Common Stock =
$61/16).
Indicate the number of shares outstanding of each of the registrant's
classes of common stock, as of the latest practicable date: 15,874,461 shares of
Common Stock were outstanding as of February 29, 2000.
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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 2000 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 content management solutions. 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
satisfies the needs of companies looking for fast information access and the
ability to share documents across departments. Ultimately, the ability to
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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.
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
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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.
eTREEV - is an intuitive browser client that provides instant online
access to statements and reports archived in the DataTREEV Enterprise Report
Management system. With eTREEV, you can realize a multitude of benefits,
including rapid deployment, improved customer service, and reduced costs. eTREEV
also puts you ahead of the competition by giving you a jump start on extending
other services to customers as their demands continue to become more
sophisticated.
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
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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 1999, the product development group focused on
completing product release plans for the eTREEV(TM) product technology to
support the company's short- and long-term revenue goals.
Strategically, the eTREEV technology 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.
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.
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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 licenses 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.
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.
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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.
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,
SER/Macrosoft, Hyland, and OTG Software. Competition from single product vendors
includes Documentum, INSCI 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.
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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 over 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.
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.
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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.
Business Combination
The Company has entered into an Agreement and Plan of Merger dated as of
November 19, 1999 (the "Merger Agreement") with CE Computer Equipment AG, a
German corporation. Provided that certain conditions are met, as set forth in
the Merger Agreement, at the conclusion of the merger, the Company will become a
wholly-owned subsidiary of CE Computer Equipment. Under the terms of the Merger
Agreement, CE Computer Equipment will issue a total of 1,330,000 Ordinary Shares
in the form of American Depositary Shares ("ADSs") in exchange for the
outstanding shares of the Company's Common Stock and Preferred Stock and for the
outstanding warrants and options for the Company's Common Stock. The merger is
conditional on its being accounted for as a pooling of interests and is subject
to certain conditions to closing, including governmental and shareholder
approvals. Shareholders owning more than 38% of the Company's Common Stock have
agreed to vote their shares in favor of the merger. This description of the
Merger Agreement is not complete, and shareholders are urged to read the Merger
Agreement that is attached to the Company's Form 8-K filed by the Company on
December 3, 1999.
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, 2000, the Company employed 231 people.
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Directors and Executive Officers of the Company
Name Age Position
James J. Leto (2) 56 Chairman of the Board
Thomas A. Wilson 60 President, Chief Executive Officer and
Director
Brian H. Hajost 43 Executive Vice President, Finance and
Corporate Development
Michael F. Guido 48 Executive Vice President, Sales
Thomas F. Giampa 41 Senior Vice President, Technology, Research
& Development
Richard G. McMahon 55 Senior Vice President of Professional
Services
Robert P. Bernardi (2) 47 Director and Secretary
John F. Burton (1)(2) 48 Director
C. Alan Peyser 66 Director
Michael J. Smith (1) 41 Director
Edwin A. Adams 51 Director
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(1) Member of the Audit Committee.
(2) Member of the Compensation Committee.
James J. Leto became Chairman of the Board in June 1997. Mr. Leto
served as the Company's Chief Operating Officer from May 1996 until August 1999.
Prior to that, Mr. Leto was 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.
Thomas A. Wilson became President and Chief Executive Officer of the
Company in August 1999. From September 1998 until August 1999, Mr. Wilson served
in the capacity of President and Chief Operating Officer. Mr. Wilson joined
TREEV from Seer Technologies, Inc. ("Seer"), a $100 million software and
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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.
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 was appointed Executive Vice President, Corporate Development in
January 1999 and became Executive Vice President, Finance and Corporate
Development in August 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.
Michael F. Guido joined the Company in April 1999 as Executive Vice
President of Sales. From 1998 to 1999, Mr. Guido was Senior Vice President at
AMS Holdings. From 1997 to 1998, he was a Senior Vice President at CACI. From
1976 to 1996, Mr. Guido served at various executive positions including
President of the North American Division and President of International
Operations.
Thomas F. Giampa joined the company in October 1995 as Vice President
of Engineering. He was promoted to Senior Vice President of Technology, Research
and Development in January 2000. From 1991 to 1995, Mr. Giampa served as a
Senior Manager at PRC, Inc. From 1989 to 1991 he served at a management level at
UNITECH Software.
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.
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
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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.
Edwin A. Adams was appointed to the Board of Directors in March 1999.
Mr. Adams is a consultant specializing in public speaking engagements at
technology industry events and sales motivational seminars, a position he has
held since April 1998. From May 1993 to April 1998, he was Senior Vice President
and General Manager of the Americas for SCO Inc., a provider of UNIX operating
system software. From May 1992 to may 1993, Mr. Adams was Senior Vice President
of Sales and Marketing of Telebit, a provider of high end modems and dial up
routers. From 1987 to 1992, he served in various capacities at Oracle
Corporation including Vice President of Sales and Vice President of Marketing.
Mr. Adams is a member of the Board of Directors of Crystal Graphics, Net ERP and
Jones Business Systems, all privately held software of systems integration
companies. He also serves on the Board of ITAA Software Division, a national
trade association of software companies.
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ITEM 2. PROPERTIES
As of January 31, 2000, 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 that expires in April
2000. The company has entered into a new lease for 44,200 square feet for its
headquarters in Herndon, Virginia, which commences in May 2000 and expires in
April 2010. 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
None.
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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 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
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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 5/8 1 19/32
-Second Quarter 4 1 1/2
-Third Quarter 3 15/32 2 3/32
-Fourth Quarter 4 1/2 2 1/8
2000 -First Quarter 6 5/8 3 19/32
(through February 29)
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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 29, 2000, the Company had approximately 264 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.
ITEM 6. SELECTED FINANCIAL DATA
The following tables set forth selected financial data for the five
years ended December 31, 1999. The statement of operations data for each of the
five years ended December 31, 1999 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 four years ended December 31,
1999 have been audited by Ernst & Young LLP. The consolidated financial
statements for of the year 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.
II-2
<PAGE>
<TABLE>
<CAPTION>
Statement of Operations Data
(in thousands, except share amounts)
Year Ended December 31,
--------------------------------------------------------
1999 1998 1997 1996 1995
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
Revenue $ 31,209 $ 28,202 $ 35,806 $ 39,477 $ 69,151
Net loss (2,636) (7,344) (11,339) (17,341) (24,963)
Net loss applicable to
common shares (3,984) (8,692) (14,310) (21,071) (34,896)
Net loss per common share $ (0.30) $ (1.12) $ (2.27) $ (4.08) $ (9.64)
======== ======== ======== ======== ========
</TABLE>
Balance Sheet Data
(in thousands, except share amounts)
Year Ended December 31,
-----------------------------------------------
1999 1998 1997 1996 1995
------- ------- ------- ------- -------
Total assets $23,291 $19,522 $26,860 $36,778 $49,964
Working capital 2,202 2,516 9,980 9,893 13,454
Long-term debt 120 43 1,108 88 1,264
Redeemable preferred stock -- -- 6,548 9,857 15,478
Stockholders' equity 7,425 7,530 7,969 11,717 10,185
II-3
<PAGE>
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.
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 two quarters of 1999. 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 four quarters, and it had an accumulated deficit at
December 31, 1999, of $134 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
II-4
<PAGE>
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.
Impact of Year 2000
In prior years, the Company discussed the nature and progress of its
plans to become Year 2000 ready. In late 1999, the Company completed its
remediation and testing of systems. As a result of those planning and
implementation efforts, the Company experienced no significant disruptions in
mission critical information technology and non-information technology systems
and believes those systems successfully responded to the Year 2000 date change.
The Company incurred approximately $715,000 during 1999 in connection with
remediating its systems. The Company is not aware of any material problems
resulting from Year 2000 issues, either with its products, its internal systems,
or the products and services of third parties. The Company will continue to
monitor its mission critical computer applications and those of its suppliers
and vendors throughout the year 2000 to ensure that any latent Year 2000 matters
that may arise are addressed promptly.
Year 2000 Information and Readiness Disclosure Act
The section captioned "Impact of Year 2000," 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
Revenue. Product revenue includes sales of software licenses and
computer equipment. Product revenue is recognized upon delivery or, if
applicable, acceptance in accordance with Statement of Position 97-2, "Software
Revenue Recognition." 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 $31 million in 1999, $28 million in 1998 and $36
million in 1997. The increase in total revenue in 1999 over 1998 of $3 million,
or 11%, resulted primarily from an increase in service revenue of $1.9 million,
or 17%, and an increase in product revenue of $1.2 million, or 7%. 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 increase in product revenue in 1999 over 1998 was attributable to
continued growth of the Company's direct and indirect channels along with the
introduction of the eTREEV product technology. The decrease in product revenue
in 1998 over 1997 was attributable to an increase of $2.1 million, or 14%, in
II-5
<PAGE>
comparative company revenues, offset by a decrease of $3.6 million due to the
disposition in 1997 of the Company's subsidiary in France ("Dorotech").
The increase in service revenue in 1999 over 1998 of $1.9 million was a
result of increased software maintenance contract revenue and continued growth
of professional services business. 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 Company restated its unaudited financial statements for the first,
second and third quarters of 1999 to reflect net adjustments totaling
approximately $300,000. The Company reported results based on its assessment, at
the time, that its revenue recognition policies were appropriate under current
software revenue recognition guidelines under SOP 97-2. The adjustments were
made to principally align the Company's accounting policies with recently issued
interpretative guidelines, recent trends in the industries best practices and
current positions taken by the SEC. Certain other non-revenue related
adjustments were made as well. Accordingly, in March 2000, the Company filed
amendments to its quarterly reports on Form 10-Q for the first, second and third
quarters of 1999.
Profit Margins. Profit margins for product sales continued to improve
in 1999 over 1998 from 59% to 62% as the cost of products sold decreased from
41% to 38% of sales. Profit margins for product sales increased in 1998 over
1997 from 54% to 59% as the cost of products sold decreased from 46% to 41% of
sales. The increase in product sales margins was primarily due to the increased
sales mix of the Company's internally developed software.
Profit margins for service sales increased in 1999 over 1998 from 32%
to 37% as the cost of services decreased from 68% to 63% of sales. The increase
in service sales margins was due to the continued growth of maintenance revenue
and professional services business which provided more contribution towards its
fixed costs. 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.
Product Development. The Company's expenditures on software research
and development activities ("R&D") in 1999 were $5.9 million, of which $1.8
million was capitalized and $4.1 million was expensed. The Company's
expenditures on software R&D activities in 1998 were $5.4 million, of which $1.6
million was capitalized and $3.8 million was expensed. The $500,000 increase in
R&D expenditures was primarily attributable to the development of the Company's
new eTREEV product technology. 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 $500,000 decrease from 1998 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.
II-6
<PAGE>
Selling, General and Administrative Expenses. Selling, general and
administrative expenses ("SG&A") were $14.2 million, or 46% of revenue, in 1999,
$15.6 million, or 55% of revenue, in 1998 and $20.3 million, or 57% of revenue,
in 1997. The decrease in 1999 compared to 1998 of $1.4 million, or 9%, was due
to the Company's continued cost reduction efforts. 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.
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).
Interest Income (Expense), Net. Net interest expense was $346,000 in
1999, $56,000 in 1998 and $286,000 in 1997. The $290,000 increase in interest
expense was attributable primarily to draws on the line of credit with a
commercial bank and the issuance of subordinated promissory notes during 1999
(See Note 7 to the Consolidated Financial Statements). The $230,000 decrease in
interest expense from 1997 to 1998 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.
Net Loss. The Company's net loss was $2.6 million in 1999, $7.3 million
in 1998 and $11.3 million in 1997. The $4.7 million decrease in net loss between
1999 and 1998 was primarily due to the $2.4 million increase in profit margins,
the $1.4 million decrease in SG&A expenses and the $1.5 million decrease in
restructuring costs, offset by the increases in product development costs and
interest expense. 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.
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 $4.0
million, or $0.30 per share, in 1999; $8.7 million, or $1.12 per share, in 1998
and $14.3 million, or $2.27 per share, in 1997. The decrease in 1999 over 1998
was primarily attributable to the decrease in net loss described above and an
increase in the weighted average shares outstanding. The decrease in 1998 over
1997 was primarily attributable to the decrease in net loss described above. 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 (See Note 8 to the Consolidated Financial Statements).
II-7
<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)
1999 1998 1997
-------- -------- --------
Revenue $ 31,209 $ 28,202 $ 24,486
Cost of Sales 15,187 14,618 13,609
-------- -------- --------
Gross Profit 16,022 13,584 10,877
Gross Profit as % of sales 51% 48% 44%
Selling, general and administrative 14,202 15,579 16,700
Product Development 4,110 3,788 3,856
Other income (expense) (346) (56) (312)
-------- -------- --------
Operating loss (2,636) (5,839) (9,991)
Accrued dividends (1,348) (1,348) (1,435)
Imputed dividends -- -- (1,536)
-------- -------- --------
Net loss applicable to common shares $ (3,984) $ (7,187) $(12,962)
======== ======== ========
Net loss per common share $ (0.30) $ (0.93) $ (2.06)
======== ======== ========
Weighted average shares 13,115 7,768 6,301
Liquidity and Capital Resources
As of December 31, 1999, the Company had $1.9 million in cash and cash
equivalents compared to $1.6 million in cash and cash equivalents at December
31, 1998. Net working capital was $2.2 million at December 31, 1999 compared to
$2.5 million for the same period in 1998.
At December 31, 1999, the Company had outstanding debt of $7.7 million,
$7.6 million of which is due within one year. This compares with debt of
$385,000 at December 31, 1998, $342,000 million of which was due within one
year. The increase in debt of $7.3 million primarily arose from draws on the
line of credit with a commercial bank and the issuance of subordinated
promissory notes during 1999 (See Note 7 of the Consolidated Financial
Statements).
II-8
<PAGE>
For 1999, the $241,000 increase in cash and cash equivalents resulted
from a $6.9 million use of cash from operating activities, $2.0 million used in
investing activities and $9.2 million provided by financing activities. The $6.9
million use of cash in operating activities arose primarily from the $2.6
million loss from operations offset by $2.3 million in depreciation and
amortization charges, $2.7 million increase in accounts and notes receivable,
$2.7 million decrease in deferred revenues, 780,000 decrease in accrued expenses
and $579,000 increase in prepaid and other expenses. The $2.0 million used by
investing activities arose from the $1.8 million increase in capitalized
software development costs and $580,000 purchase of fixed assets, offset by
$340,000 proceeds from business divestitures. The $9.2 million in cash 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.
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.
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.
II-9
<PAGE>
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, 1999, 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 June 30, 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 and the Company's operating results were profitable during the
last two quarters of 1999. 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 debt or 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
II-10
<PAGE>
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-28
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE
None
II-11
<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 2, 2000.
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 2, 2000.
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 2, 2000.
III-1
<PAGE>
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:
Report of Independent Auditors
Consolidated Balance Sheet as of December 31, 1999 and 1998
Consolidated Statements of Operations for the years ended December 31,
1999, 1998 and 1997
Consolidated Statements of Changes in Stockholders' Equity for the years
ended December 31, 1999, 1998 and 1997
Consolidated Statements of Cash Flows for the years ended December 31,
1999, 1998 and 1997
Notes to Consolidated Financial Statements
The following consolidated financial statement schedule of TREEV, Inc. is
included in Item 14(d). Except for the schedule listed below, all other
schedules are omitted because they are not applicable or the required
information is shown in the financial statements or notes thereto.
Schedule II - Valuation and Qualifying Accounts
(3) Exhibits. The following exhibits are filed herewith or incorporated
herein by reference:
Exhibit No. Description
2.28 Agreement and Plan of Merger, dated as of November 19,
1999, between CE Computer Equipment AG and TREEV,
Inc. (incorporated by reference to Exhibit 2.1 to
Company's Current Report on Form 8-K relating to such
Agreement and Plan of Merger filed December 3, 1999).
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 (incor-
porated by reference to Exhibit 3.1c to the Company's regis-
tration statement on Form SB-2 (Registration No. 33-73164)
filed December 20, 1993).
III-2
<PAGE>
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).
3.7 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).
4.1 Specimen Common Stock Certificate.
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,
1999.
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:
Form 8-K on December 3, 1999, to report that the Company had
entered into an Agreement and Plan of Merger dated November 19,
1999 with CE Computer Equipment AG.
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 30, 2000.
TREEV, INC.
By: /s/ Thomas A. Wilson
-------------------------
Thomas A. Wilson
President 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.
<TABLE>
<CAPTION>
Signature Title Date
--------- ----- ----
<S> <C> <C>
/s/ Thomas A. Wilson
- ----------------------
Thomas A. Wilson President and Chief Executive Officer March 30, 2000
/s/ Brian H. Hajost
- ----------------------
Brian H. Hajost Executive Vice President, Finance and Corporate March 30, 2000
Development
/s/ Robert P. Bernardi
- ----------------------
Robert P. Bernardi Director and Secretary March 30, 2000
/s/ John F. Burton
- ----------------------
John F. Burton Director March 30, 2000
/s/ C. Alan Peyser
- ----------------------
C. Alan Peyser Director March 30, 2000
/s/ Michael J. Smith
- ----------------------
Michael J. Smith Director March 30, 2000
/s/ Edwin A. Adams
- ----------------------
Edwin A. Adams Director March 30, 2000
</TABLE>
III-4
<PAGE>
INDEX TO FINANCIAL STATEMENTS
Page
Report of Ernst & Young LLP, Independent Auditors F-2
Consolidated Balance Sheets as of December 31, 1999 and 1998 F-3
Consolidated Statements of Operations for the years ended
December 31, 1999, 1998 and 1997 F-4
Consolidated Statement of Changes in Stockholders' Equity
for the years ended December 31, 1999, 1998 and 1997 F-5
Consolidated Statements of Cash Flows for the years ended
December 31, 1999, 1998 and 1997 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, 1999 and 1998 and the related consolidated statements of
operations, stockholders' equity, and cash flows for each of the three years in
the period ended December 31, 1999. 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 auditing standards generally accepted
in the United States. 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, 1999 and 1998 and the consolidated results of its operations and
its cash flows for each of the three years in the period ended December 31,
1999, in conformity with accounting principles generally accepted in the United
States. 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 20, 2000
F-2
<PAGE>
TREEV, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In thousands, except share and per share amounts)
<TABLE>
<CAPTION>
December 31,
1999 1998
--------- ---------
ASSETS
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 1,886 $ 1,645
Accounts and notes receivable, net 13,816 11,419
Inventories 1,135 911
Prepaid expenses and other 1,111 490
--------- ---------
Total current assets 17,948 14,465
Fixed assets, net 1,237 1,578
Long-term notes receivable, net 21 47
Software development costs, net 3,627 2,978
Other assets 458 454
--------- ---------
Total assets $ 23,291 $ 19,522
========= =========
LIABILITIES & STOCKHOLDERS' EQUITY
Current liabilities:
Current debt maturities and obligations under capital leases $ 7,572 $ 342
Accounts payable 2,374 2,327
Accrued compensation and expenses 1,160 1,448
Deferred revenue 3,143 5,887
Other accrued expenses 1,497 1,945
--------- ---------
Total current liabilities 15,746 11,949
Long-term debt and obligations under capital leases 120 43
--------- ---------
Total liabilities 15,866 11,992
Stockholders' equity:
Convertible preferred stock, $.0001 par value, 20,000,000 shares
authorized; 1,610,025 shares issued and
outstanding at December 31, 1999 and 1998 -- --
Common stock, $.0001 par value, 100,000,000 shares authorized;
14,237,009 and 12,367,888 shares issued and outstanding at
December 31, 1999 and 1998 1 1
Additional paid-in-capital 141,841 139,310
Accumulated deficit (134,417) (131,781)
--------- ---------
Total stockholders' equity 7,425 7,530
--------- ---------
Total liabilities and stockholders' equity $ 23,291 $ 19,522
========= =========
</TABLE>
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)
<TABLE>
<CAPTION>
1999 1998 1997
------------------ ---------------- ----------------
<S> <C> <C> <C>
Revenues:
Products $ 17,982 $ 16,813 $ 18,310
Services 13,227 11,389 17,496
------------------ ---------------- ----------------
31,209 28,202 35,806
------------------ ---------------- ----------------
Costs and expenses:
Cost of products sold 6,887 6,894 8,383
Cost of services provided 8,300 7,724 13,625
Product development 4,110 3,788 4,428
Selling, general and administrative 14,202 15,579 20,263
Restructuring costs and other - 1,505 160
------------------ ---------------- ----------------
33,499 35,490 46,859
------------------ ---------------- ----------------
Loss before interest expense and income taxes (2,290) (7,288) (11,053)
Interest expense (346) (56) (286)
------------------ ---------------- ----------------
Net loss (2,636) (7,344) (11,339)
------------------ ---------------- ----------------
Preferred stock dividends
Accrued dividends (1,348) (1,348) (1,435)
Imputed dividends - - (1,536)
------------------ ---------------- ----------------
Net loss applicable to common shares $ (3,984) $ (8,692) $ (14,310)
================== ================ ================
Net loss per common share $ (0.30) $ (1.12) $ (2.27)
================== ================ ================
Weighted average shares outstanding 13,115,228 7,768,329 6,301,464
================== ================ ================
</TABLE>
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, 1999, 1998 and 1997
(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, 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
Issuance of common stock, net
of offering costs of $7 604,128 - 1,041 1,041
Issuance of warrants 72 72
Dividends on preferred stock (1,348) (1,348)
Issuance of common stock in payment of dividends 222,116 - 674 674
Conversion of convertible notes 1,042,877 - 2,092 2,092
Net loss (2,636) (2,636)
------------------- -------------------- ------------ ------------ ------------ ------------
Balance December 31, 1999 1,610,025 $ - 14,237,009 $ 1 $141,841 $ (134,417) $ - $ 7,425
=================== ==================== ============ ============ ============ ============
</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)
<TABLE>
<CAPTION>
1999 1998 1997
--------- --------- ---------
<S> <C> <C> <C>
Cash flows from operating activities:
Net loss $ (2,636) $ (7,344) $(11,339)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation and amortization 2,314 2,307 4,464
Restructuring costs -- 827 --
Other gains and losses, net (5) 33 160
Other non-cash interest fees 405 -- --
Changes in assets and liabilities:
Accounts and notes receivable (2,711) (2,884) (3,604)
Inventories (224) (189) 4
Prepaid expenses and other (579) 199 325
Accounts payable 48 291 1,626
Accrued expenses (780) (316) 1,232
Deferred revenue (2,744) 2,553 462
-------- -------- --------
Net cash used in operating activities (6,912) (4,523) (6,670)
-------- -------- --------
Cash flows from investing activities:
Software development costs and purchased technology (1,762) (1,587) (1,454)
Purchases of fixed assets (580) (712) (888)
Cash received from business divestitures and related costs 340 7,328 46
-------- -------- --------
Net cash provided by (used in) investing activities (2,002) 5,029 (2,296)
-------- -------- --------
Cash flows from financing activities:
Proceeds from issuance of common stock, net 1,041 4,319 162
Proceeds from issuance of preferred stock, net -- 9,667 5,122
Cash dividends paid on preferred stock (674) (674) (1,779)
Proceeds from borrowings -- -- 6,861
Redemption of Redeemable Series F preferred stock (6,548) (3,500)
Redemption of convertible preferred stock -- (7,085) --
Proceeds from issuance of convertible notes 1,997 -- --
Redemption of convertible notes (200) (1,700) --
Proceeds from issuance of subordinated notes 3,000 -- --
Borrowings of line of credit 23,453 -- --
Repayments of line of credit (19,340) -- --
Principal payments on capital lease obligations and debt (122) (656) (1,547)
-------- -------- --------
Net cash provided by (used in) financing activities 9,155 (2,677) 5,319
-------- -------- --------
Effect of exchange rate changes on cash and cash equivalents -- -- (138)
Net increase (decrease) in cash and cash equivalents 241 (2,171) (3,785)
Cash and cash equivalents at beginning of year 1,645 3,816 7,601
-------- -------- --------
Cash and cash equivalents at end of year $ 1,886 $ 1,645 $ 3,816
======== ======== ========
Supplemental Cash Flow Information:
Interest paid $ 277 $ 207 $ 629
======== ======== ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-6
<PAGE>
TREEV, Inc.
Notes To Consolidated Financial Statements
December 31, 1999, 1998 and 1997
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
two quarters of 1999. 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 2000 operations, and cash
availability under its line of credit should provide sufficient resources to
fund its activities in 2000. Anticipated cash flows from 2000 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 the successful installation of
TREEV and enterprise report management products in several major contracts
during 1999, 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 debt or 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 year 1997 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"). Amortization of software development 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 1999, 1998 and
1997 was $166,000, $166,000 and $743,000, respectively. Accumulated amortization
as of December 31, 1999 and 1998 was $1,004,000 and $837,000, 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.
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.
F-9
<PAGE>
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
- ---------------------------------------------------------------
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).
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
F-10
<PAGE>
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
- ---------------------------------------------------------------
Stock Based Compensation (continued) --
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,
--------------------------
1999 1998
-------- --------
Trade accounts receivable $ 13,892 $ 11,638
Notes receivable 563 902
Other receivables 594 102
-------- --------
15,049 12,642
Allowance for uncollectible
accounts receivable (1,212) (1,176)
-------- --------
13,837 11,466
Less current receivables, net (13,816) (11,419)
-------- --------
Long term receivables, net $ 21 $ 47
======== ========
The Company's notes receivable balance of $563,000 at December 31, 1999,
included a $50,000 balance on a note resulting from the divestiture of
previously owned operating unit made during 1996 and $513,000 of notes
receivable from former stockholders of a subsidiary acquired in 1994 (See Note
16).
NOTE 3 - FIXED ASSETS
Fixed assets consist of the following (in thousands):
December 31,
----------------------
1999 1998
------- -------
Computer and office equipment $ 3,273 $ 3,685
Furniture and leasehold improvements 757 631
Furniture, fixtures and equipment
under capital leases 3,098 3,429
------- -------
7,128 7,745
Less: Accumulated depreciation (5,891) (6,167)
------- -------
$ 1,237 $ 1,578
======= =======
Depreciation and amortization expense related to fixed assets in 1999, 1998 and
1997 totaled $1.0 million, $1.4 million and $1.8 million, respectively. Included
in these amounts are $243,000, $530,000 and $489,000 of amortization expense
related to capital leases during 1999, 1998 and 1997, respectively.
F-12
<PAGE>
NOTE 4- SOFTWARE DEVELOPMENT COSTS
Capitalized software development costs consist of the following (in thousands):
December 31,
----------------------
1999 1998
------- -------
Capitalized software development costs 6,781 5,020
Less: Accumulated amortization (3,154) (2,042)
------- -------
$ 3,627 $ 2,978
======= =======
During 1999, 1998 and 1997, amortization of capitalized software development
costs totaled $1.1 million, $0.7 million and $1.6 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.
NOTE 6 - OTHER ACCRUED EXPENSES
Other accrued expenses consist of the following (in thousands):
December 31,
--------------------
1999 1998
------ ------
Accrued preferred dividends $ 337 $ 337
Accrued income, sales and other taxes 350 253
Other 810 1,355
------ ------
$1,497 $1,945
====== ======
F-13
<PAGE>
NOTE 7- BORROWING ARRANGEMENTS
Borrowings consist of the following (in thousands):
<TABLE>
<CAPTION>
December 31,
------------------
1999 1998
------- -------
<S> <C> <C>
Line of credit $ 4,450 $--
Subordinated Promissory Notes bearing interest from 13.5% to 14% 3,073 --
Convertible Debentures bearing interest at 8% -- 200
Capital lease obligations bearing interest from 9.8% to 14% 169 185
------- -------
7,692 385
Less current debt and capital lease obligations (7,572) (342)
------- -------
Long term debt and capital lease obligations $ 120 $ 43
======= =======
</TABLE>
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 December 31, 1999, was 10.25%. The agreement shall
remain in effect until June 30, 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 December 31, 1999, the Company had
$4,450,000 outstanding under the line of credit.
During the second, third and fourth quarters of 1999, the Company issued
Subordinated Promissory Notes (the "Promissory Notes") due June 1, 2000,
totaling $3 million and bearing interest from 13.5% to 14%. The Promissory Notes
are subordinated to the Company's revolving line of credit and are
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 Notes may be prepaid at any time
without premium or penalty. CE Computer Equipment AG is the lender of $2 million
of the Promissory Notes, which bear interest at 13.5%.
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 the
first quarter of 1999, the Company redeemed in cash the remaining $200,000
balance of the Notes.
The Company leases certain of its furniture and equipment under capital lease
arrangements. Future minimum lease payments under these capital leases are 2000,
$67,000; 2001, $52,000; 2002, $42,000; and 2003, $54,000. Of the $215,000 total
lease payments, $46,000 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.
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 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.
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 $70,000.
F-15
<PAGE>
NOTE 8 - STOCKHOLDERS' EQUITY (continued)
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 46,000 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 $61,000 in the aggregate and recognized this additional borrowing
cost over the term of the Convertible Notes. 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.
During the fourth quarter of 1999, the Company issued 222,116 shares of Common
Stock as quarterly dividends to the shareholders of the Company's Series A
Cumulative Convertible Preferred Stock.
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 for 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 can 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 can 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 will be able to convert each share of the Series A
Stock into shares of Common Stock at any time at the Company's option.
F-16
<PAGE>
NOTE 8 - STOCKHOLDERS' EQUITY (continued)
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, 1999, the Series A Stock was convertible into
3,081,648 shares of Common Stock.
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. During January 2000, the
4,000 shares of Series M Stock were converted into 1,177,219 shares of Common
Stock (See Note 18).
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. During January 2000, the 1,000 shares of Series M1 Stock were converted
into 337,719 shares of Common Stock (See Note 18).
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, 1999, all of
which are currently exercisable:
<TABLE>
<CAPTION>
Warrants
Warrants Exercise Outstanding Shares Issuable
Issuance Issued Price Range Expiration Dec. 31, 1999 Upon Exercise
- -------- ------------------ ----------- ---------- ------------- --------------
<S> <C> <C> <C> <C> <C>
Placement agents 589,425 $2.80-$4.00 Aug 2001-Jan 2003 290,267 290,267
Other 386,255 $2.00-$27.28 Jan 2000-Dec 2005 332,921 332,921
Series D preferred 56,767 $30.28 July 2000 56,767 56,767
Series E preferred 8,600 $28.80 July 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 $3.00-$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
--------- ----------- ------------
1,564,944 1,212,452 1,212,452
========= =========== ============
</TABLE>
During 1999, 660,642 warrants issued by the Company expired in accordance with
the terms and conditions of the related warrant agreements.
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 76,065 and 30,607 shares of Common Stock
to employees during 1999 and 1998, respectively.
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 1999, 1998 and 1997 are estimated at $1.40,
$1.05 and $3.16, per share respectively, on the date of grant using a
Black-Scholes option pricing model with the following weighted-average
assumptions for 1999, 1998 and 1997 respectively: average risk-free interest
rates of 5.0%, 4.7% and 5.4%; dividend yields of 0.0%; volatility factors of the
expected market price of the Company's common stock is 0.85 for 1999, 0.74 for
1998 and 0.58 for 1997; 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 $6.0 million, $11.2 million and $16.2 million for 1999, 1998 and
1997, respectively and pro forma net loss applicable to common shares is $0.46,
$1.44 and $2.56 for 1999, 1998 and 1997, respectively. The effect of applying
SFAS 123 on the 1999, 1998 and 1997 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, 1997 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
Granted 1,525,234 2.00
Exercised (142,940) 1.63
Forfeited (163,215) 4.43
----------
Balance, December 31, 1999 2,867,067 $ 1.97
==========
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, 1999:
<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 - 2.09 2,390,346 7.9 $ 1.65 1,235,407 $ 1.63
2.19 - 2.94 407,583 9.6 2.79 20,833 2.19
3.38 - 4.00 14,526 9.1 3.54 14,526 3.54
5.52 - 6.00 25,736 6.3 5.87 25,736 5.87
10.00 -14.76 21,876 7.5 10.68 21,876 10.68
16.52- 17.00 7,000 6.0 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 was completed by the end of the first quarter
of 1999.
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,
--------------------------------------------
1999 1998 1997
-------- -------- --------
U.S. $ (2,636) $ (7,344) $(10,417)
Foreign -- -- (922)
-------- -------- --------
$ (2,636) $ (7,344) $(11,339)
======== ======== ========
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,
----------------------
1999 1998
--------- --------
Deferred tax assets:
Net operating loss and capital
loss carryforwards $ 47,174 $ 44,731
Other 2,573 2,657
-------- --------
Gross deferred tax assets $ 49,747 $ 47,388
======== ========
Deferred liabilities:
Software development costs (900) (1,174)
-------- --------
Gross deferred tax liabilities (900) (1,174)
Net deferred tax asset valuation allowance (48,847) (46,214)
-------- --------
$ --- $ ---
======== ========
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 $48,847,000 and $46,214,000 valuation allowance at December
31, 1999 and 1998, respectively, is necessary to reduce the deferred tax assets
to the amount that will more likely than not be realized.
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:
F-23
<PAGE>
NOTE 11 - INCOME TAXES (continued)
Year ended December 31,
-----------------------------------------
1999 1998 1997
-------- -------- --------
Statutory U.S. tax rate benefit 34.0% 34.0% 34.0%
State income taxes, net 4.6 3.6 3.6
Operating losses and tax credits
with no current tax benefit (39.7) (37.2) (37.6)
Other -- -- --
-------- -------- --------
--% --% --%
======== ======== ========
As of December 31, 1999, the Company had available net operating and capital
loss carry forwards of approximately $122 million which expire in years through
2019 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>
<TABLE>
<CAPTION>
NOTE 12 - LOSS PER SHARE
The following table sets forth the computation of basic and diluted loss per
share:
1999 1998 1997
<S> <C> <C> <C>
--------------- --------------- -------------
Numerator (in thousands):
Net Loss $(2,636) $(7,344) $(11,339)
Preferred stock preferences
- Accrued dividends (1,348) (1,348) (1,435)
- Imputed dividends -- -- (1,536)
--------------- --------------- -------------
Numerator of basic loss per share - Net
loss applicable to common shares (3,984) (8,692) (14,310)
Effect of dilutive securities -- -- --
--------------- --------------- -------------
Numerator for diluted loss per share- Net
loss applicable to common shares after
assumed conversions $(3,984) $(8,692) $(14,310)
=============== =============== =============
Denominator:
Denominator for basic loss per share-weighted
average shares 13,115,228 7,768,329 6,301,464
Effect of dilutive securities -- -- --
--------------- --------------- -------------
Denominator for diluted loss per share- adjusted
weighed average shares 13,115,228 7,768,329 6,301,464
conversions
=============== =============== =============
Basic loss per share $ (0.30) $ (1.12) $ (2.27)
=============== =============== =============
Diluted loss per share $ (0.30) $ (1.12) $ (2.27)
=============== =============== =============
</TABLE>
Since the Company has incurred losses in 1999, 1998 and 1997, 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, 1,170,699 shares and
350,409 shares of common stock, respectively, at December 31, 1999. Also
outstanding at December 31, 1999 were options and warrants, which were
convertible into 2,867,067 and 1,212,452 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. In addition,
corporate related items and expenses not allocated to reportable segments, such
as sale of subsidiaries, exchange fee and gain, and restructuring costs, are
shown separately as "Corporate".
The following table sets forth summarized financial information concerning the
Company's reportable segments for the years ended December 31, 1999, 1998 and
1997 (in thousands).
<TABLE>
<CAPTION>
Products Services Corporate Total
--------- --------- --------- -------
<S> <C> <C> <C> <C>
1999
Revenues $ 17,982 $ 13,227 $ -- $ 31,209
Segment profit (loss) before interest and taxes 1,789 (537) (3,541) (2,290)
Identifiable assets 12,516 7,168 3,607 23,291
Depreciation and amortization 1,440 598 276 2,314
Capital expenditures 184 335 62 580
1998
Revenues $ 16,813 $ 11,389 $ -- $ 28,202
Segment profit (loss) before interest and taxes 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) before interest and taxes 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
</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,
1999, 1998 and 1997 (in thousands):
United Western Europe
States
------- -------------
1999
Revenue $31,209 $ --
Net loss (2,636) --
Total assets 23,291 --
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 --
Revenue in 1999 and 1998 included sales to the U.S. Government totaling $704,000
and $900,000 respectively. Revenue in 1997 included sales to the U.S. Government
and French Government totaling $1.6 million and $6.0 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 $1.2
million, $1.1 million and $1.1 million for the years ended December 31, 1999,
1998 and 1997, respectively.
Future minimum lease payments under non-cancelable operating leases are as
follows (in thousands):
Year ending December 31,
2000 $ 1,626
2001 1,321
2002 1,348
2003 1,376
2004 1,405
Thereafter 6,457
-------------
$ 13,533
=============
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 and $553,000 in 1998 and 1997, respectively, related to these
agreements.
The Company holds two notes receivable totaling $513,000 from two former
stockholders of a subsidiary acquired in 1994. 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 or $10,500 whichever is lower. The Company may make discretionary
matching contributions at the option of the Board of Directors. The Company has
made no contributions in 1999, 1998 or 1997.
NOTE 18 - SUBSEQUENT EVENTS
During January 2000, the 4,000 outstanding shares of Series M Stock were
converted into 1,177,219 shares of Common Stock.
During January 2000, the 1,000 outstanding shares of Series M1 Stock were
converted into 337,719 shares of Common Stock.
F-28
<PAGE>
Shedule II - Valuation and Qualifying Accounts
TREEV, Inc.
December 31, 1999
<TABLE>
<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, 1997 377 673 0 1050
Year Ended Dec 31, 1998 1050 833 707 1176
Year Ended Dec 31, 1999 1176 300 264 1212
Allowance for Uncollectible Notes Receivable
Year Ended Dec 31, 1997 475 623 1098
Year Ended Dec 31, 1998 1098 1098 0
Year Ended Dec 31, 1999 0 0
(1) Uncollectible accounts written off, net of recoveries
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
(Replace this text with the legend)
</LEGEND>
<CIK> 0000883946
<NAME> TREEV INC
<MULTIPLIER> 1,000
<CURRENCY> US Dollar
<S> <C>
<PERIOD-TYPE> 12-mos
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-31-1999
<PERIOD-END> DEC-31-1999
<EXCHANGE-RATE> 1
<CASH> 1,886
<SECURITIES> 0
<RECEIVABLES> 15,049
<ALLOWANCES> (1,212)
<INVENTORY> 1,135
<CURRENT-ASSETS> 17,948
<PP&E> 7,128
<DEPRECIATION> (5,891)
<TOTAL-ASSETS> 23,291
<CURRENT-LIABILITIES> 15,745
<BONDS> 0
0
0
<COMMON> 1
<OTHER-SE> 7,425
<TOTAL-LIABILITY-AND-EQUITY> 23,291
<SALES> 31,209
<TOTAL-REVENUES> 31,209
<CGS> 15,187
<TOTAL-COSTS> 15,187
<OTHER-EXPENSES> 18,312
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 346
<INCOME-PRETAX> (2,636)
<INCOME-TAX> 0
<INCOME-CONTINUING> (2,636)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (2,636)
<EPS-BASIC> (0.30)
<EPS-DILUTED> (0.30)
</TABLE>
