Leto Steers Treev Toward Profitability

Leto Steers Treev Toward Profitability

By Bob Starzynski
Staff Writer

If Treev Inc. executives made the proper calculations late last month, the eight-year-old company will become profitable next quarter for the first time ever.

The Herndon, Va.-based company, known as Network Imaging until last month, laid off 30 of its 240 employees May 18 and took a one-time charge of $1.5 million to pay severance packages and downsizing costs.

Along with a new president, Treev is wrapping up a reorganization that started when James Leto took over the chief executive spot two years ago.

Treev, which makes data management and storage software primarily for commercial customers, has seen its stock price hover around $1 a share for the past six months. Four years ago, the stock was worth more than $10 a share.

But that long, downward trend should reverse course with several recent changes, Leto said.

First, Leto promoted David MacWhorter to president and chief operating officer at the end of May. MacWhorter, who has been with Treev for four years, previously served as the company's vice president of sales.

MacWhorter will assume responsibility of day-to-day operations and the presidency from Leto, who will keep his chairman and CEO titles and spend more time trying to secure strategic alliances.

"Leto really does need to be more of a rainmaker," said Alan Jacobs, an analyst with Avalon Research Group Inc. in Boca Raton, Fla.

Two other analysts speculated that Leto's eye will be on two types of alliances - bundling Treev's software products with other products, and finding resellers to push products on the company's behalf.

In promoting MacWhorter, Leto also agreed to give up a large portion of his pay. His $300,000 annual salary will be cut in half in exchange for company stock options. According to Securities and Exchange Commission documents, Leto has already received 760,000 stock options in his two years with Treev.

Treev's market is littered with large, powerful players, such as IBM Corp., FileNet Corp. and Wang Global. Treev, by comparison, has annual revenue under $40 million.

However, Jacobs believes the company has a strong enough group of products to carve out a comfortable niche without being completely squeezed by the giants.

Treev's work force was 500 people three years ago. But while trying to move the company to profitability, Leto has lowered the number by selling businesses and going through several rounds of layoffs.

The most recent round was from the consolidation of three sales and marketing divisions into one, Leto said.

"They are down to a core business, focused on a select few products," said one analyst familiar with Treev. "Cutting costs can get you to profitability. But from there they will need to grow rather than cut back."

Treev, which was founded in 1990 and went public two years later, made 19 problematic acquisitions through 1994, according to Leto. The acquisitions, most of which were start-up companies, created major expenses and little synergy.

After three years serving as chairman of PRC Inc. in McLean, Va., Leto came to Treev in 1996 to clean up the balance sheet. He quickly closed operations in Colorado and Washington and consolidated software development and financial segments into the company's headquarters.

In the process, management almost completely turned over, with four of the top five company officers having joined since Leto came aboard.

The consolidation brought the company's revenue down to $36 million last year from $69 million in 1995. But the company's losses were more than cut in half in that period, to $11 million last year.

However, cleaning up the balance sheet also brought another hurdle late last year. Nasdaq threatened to delist Treev for failing to maintain a minimum of $4 million in net tangible assets.

Leto's answer was to sell a French subsidiary in December for $8.1 million and convert dividend-bearing preferred stock into common stock.

The company met Nasdaq's Dec. 31 deadline by completing both transactions under the wire that day.