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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-KSB
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 [FEE REQUIRED]
For the fiscal year ended March 31, 1996
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 [NO FEE REQUIRED]
For the transition period from __________ to __________
Commission File Number 1-13524
TIMELINE, INC.
(Exact name of small business issuer as specified in its charter)
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WASHINGTON 91-1590734
(State or other jurisdiction of incorporation or organization) (I.R.S. Employer Identification No.)
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3055 112TH AVENUE N.E., STE. 106
BELLEVUE, WA 98004
(Address of principal executive offices)
(206) 822-3140
(Issuer's telephone number)
Securities registered under Section 12(b)
of the Exchange Act: COMMON STOCK, $.01 PAR VALUE
WARRANTS TO PURCHASE COMMON STOCK
Securities registered under Section 12(g)
of the Exchange Act: (none)
Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter
period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. Yes X No
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Check if disclosure of delinquent filers in response to Item 405 of Regulation
S-B is not contained in this form, and no disclosure will 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-KSB or any amendment to
this Form 10-KSB. [ ]
State issuer's revenues for its most recent fiscal year: $5,047,277.
As of June 11, 1996, 3,136,106 shares of the Registrant's common stock were
outstanding and the aggregate market value of such common stock held by
non-affiliates was approximately $15,278,073 based on the average of the bid
($7.00) and ask ($7.25) prices on that date of $7.125.
DOCUMENTS INCORPORATED BY REFERENCE
(1) Issuer's registration statement on Form SB-2, as amended and declared
effective on January 18, 1995 (No. 33-85320) (the "Form SB-2"); (2) final
prospectus dated January 18, 1995 and filed with the Commission pursuant to Rule
424(b) (the "Prospectus"); and (3) Proxy Statement relating to its July 15, 1996
Annual Meeting of Shareholders and to be filed with the Commission on or about
the date hereof (the "Proxy Statement").
Transitional Small Business Disclosure Format (Check One): Yes No X
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This filing consists of 28 pages. There are no exhibits.
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PART I
ITEM 1: DESCRIPTION OF BUSINESS
Further information in satisfaction of Item 1 of Form 10-KSB is incorporated
herein by reference to the sections of the Prospectus under the captions
"Prospectus Summary," "Risk Factors," and "Business." In addition, in further
satisfaction of Item 1 of Form 10-KSB and in satisfaction of the requirements of
Rule 14a-3(b), the following information is provided as to the business of the
Registrant.
OVERVIEW
The Company develops, markets and supports enterprise-wide financial
management and reporting software. Timeline's software products automatically
access and distribute business information with full accounting control.
Although the Company has products which permit the processing of transactions,
Timeline's marketing and development strategy is focused on products which
report accounting data in meaningful and flexible formats. These reporting
products allow end users to gather and disseminate business information
throughout the enterprise while the enterprise maintains maximum flexibility in
determining the types of transaction processing systems it will use.
It has been estimated that 40% of the financial analysis and management
reporting done in businesses today is accomplished through keying data from
paper or fixed reports into spreadsheets. This reflects a desire to have data
reside in a user friendly environment, such as Microsoft(R) Office, where the
information is then available for automated inclusion in word processing
documents, forwarding and distribution through electronic mail, manipulation in
spreadsheets, etc. Electronic data residing in common desktop environments is
also capable of distribution through the Internet.
Many financial and management reporting products are focused on the
presentation, either electronically or on paper, of processed data in formatted
reports. While Timeline products can present information in formatted reports,
the Company's technology also permits the distribution of an actual database of
information to the end user's personal computer. These databases are built
through selective criteria which limit data transfer to only that data relevant
to each particular end user. This allows for the distribution of manageable
packets over networks or the Internet and maintain corporate security. Each
database can be arranged in a unique "view," or "orientation," as desired by the
end user. The end user may then view the data through standard corporate reports
or through his or her library of customized personal reports. Additionally, the
data resides in Microsoft Office, which makes it automatically available for use
in Microsoft Excel spreadsheets and all other Microsoft Office tools.
Timeline believes that its proprietary technology, designed to allow
the enterprise to avoid time-consuming, error-prone and costly keying of data,
distinguishes Timeline's products from other vendors of reporting software. The
data resident at the desktop is as valid as the data in the underlying
accounting system. Moreover, the type of underlying accounting system, and the
platform on which it resides, is immaterial. While many enterprises are
migrating accounting functions from larger mainframe- and minicomputer-based
systems to client/server systems, others have elected to retain their existing,
or "legacy." accounting systems. Timeline's business strategy is focused on
meeting the financial management needs of both types of enterprise by providing
products that accept and report on data from both legacy and newer systems.
In May 1994, following 17 years of marketing products designed solely
for use in the Digital Equipment Corporation ("Digital") mainframe and
minicomputer environment, the Company introduced its first client/server
product, Open General Ledger(TM) ("OGL(TM)"). OGL(TM) incorporates technology
designed to gather data from multiple operating systems and hardware platforms,
old and new, for translation into a Microsoft Corporation ("Microsoft")
client/server environment, and to process transactions within the Microsoft
operating system. Refinements to this technology have resulted in the Company's
new MetaView product line, which emphasizes financial reporting and management
functions, rather than transaction processing, and enables the user to duplicate
data directly from legacy and client server systems.
The Company's technological direction has remained consistent. However,
its marketing message has become more refined, precipitated in part by
Microsoft's product strategy (see "Microsoft Alliance" below). Although the
Company's client/server product line includes both transaction processing and
reporting functions, Timeline's marketing
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and technological focus have evolved from accounting transaction processing
systems to financial and management information products.
The Company's strategy is not designed to oppose the interests of those
clients who have previously licensed OGL(TM). It became apparent to the Company
that virtually all licensees of OGL(TM) use the product in conjunction with, not
in place of, existing general ledgers. Because OGL(TM) was marketed to large
enterprises, the sheer volume of transactions being processed from feeder
systems (accounts payable, accounts receivable, etc.), was more efficiently
handled on existing large computers. The functions of OGL(TM) utilized in
practice are its connectivity to multiple systems, its ability to distribute
data to the desktop, and its complex reporting architecture for consolidations,
allocations, budgeting and multiple foreign currency conversions.
All of the functions listed above are available in the Company's
MetaView products. By eliminating pure transaction processing, these new product
offerings efficiently serve to complement existing systems by handling one or
more of these more complex issues. The MetaView products are designed to extend
the life of the existing systems, allow the purchase of less expensive new
systems, and deliver data for reporting and analysis throughout the enterprise.
The Company believes MetaView products can complement other vendors' products by
adding functionality to eliminate competitive disadvantages in their products.
As such, it is anticipated vendors of accounting modules are candidates to
bundle or distribute MetaView products in conjunction with their accounting
systems.
Management believes the market potential of focusing on distributing
business information through its MetaView products greatly exceeds that
available in accounting transaction processing. A more narrow focus allows the
Company to more quickly train its expanding sales force, expedite its research
and development efforts, and generally be more efficient. Furthermore,
management perceives actively licensing OGL(TM) as a general ledger would put
the Company in competition with the same vendors with whom the Company is
pursuing marketing alliances.
It follows that the importance of the Company's joint product
development agreement with Collier Jackson, Inc. covering accounts payable and
accounts receivable modules has diminished. These products, along with OGL(TM),
will currently only be available through technology licensing to other vendors.
Furthermore, another alliance partner, Centre-file, Ltd, has been offered for
sale by its parent, National Westminister Bank. While the Company continues to
build products capable of incorporating workflow technology, it currently is not
actively marketing Centre-file's workflow products. Until ownership and market
strategy of Centre-file, Ltd., is determined, the Company will continue this
strategy. Nevertheless, the Company believes its technology has greatly
benefited from the Centre-file association. Many workflow features are present
in Timeline's new filtering technology (see below).
At May 31, 1996, Timeline employed 73 full time employees and four
consultants in the United States, and four full-time employees and one
consultant in its subsidiary Timeline Europe Ltd., located in the United
Kingdom.
TECHNOLOGY BACKGROUND
The last decade brought significant new developments in computing.
First was the market acceptance of graphical user interface operating systems on
the desktop, the most prolific being Microsoft Windows(TM). The ease of use
associated with intuitive point-and-click functionality is generally believed to
increase user productivity and satisfaction, reduce training costs and encourage
nontechnical users to more fully utilize computing resources. The second
development was the proliferation of personal desktop computers, which resulted
from a many fold decrease in computing price/performance ratios combined with a
dramatic increase in the power available on computing networks. Additional power
on the desktop led to the introduction of suites of robust applications working
together to create environments which greatly increase personal productivity, of
which Microsoft Office is one. Finally, improvements in personal computing
software brought to the desktop many attributes, such as concurrent task
processing, file sharing and sophisticated local area network capacity, that
were previously available only to mainframes and minicomputers. These
enhancements have made desktop computers the preferred and most efficient work
environment for users of business information.
An impediment to the business use of suites of personal productivity
systems on the desktop has been the inability of these newer systems to function
together with the host-based systems such as mainframe accounting systems.
Mainframes and minicomputers continue to serve as the nerve center of many
enterprise-wide systems. Migrating from host-based to networked computing
involves significant capital outlays and data loss risks. Moreover, enterprises
have made substantial investments both in legacy systems and in the
infrastructures required to utilize them. Legacy systems in many enterprises
will continue to be able to handle large volumes of data for many years. For
these reasons, many
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enterprises will retain their mainframe and minicomputer systems, and many
others will migrate slowly. Regardless of the computing infrastructure of an
enterprise, however, management perceives significant demand for server and
desktop tools which allow for meaningful financial reporting and analysis
drawing on data residing throughout the infrastructure.
Timeline Technologies. Timeline's client/server software is designed to
overlay an enterprise's entire computing infrastructure with a reporting engine
which can accept and organize data, with full accounting controls, from both
legacy systems and newer technologies. Timeline's proprietary "architecture," in
conjunction with its proprietary "generation engine," is designed to accomplish
this task. Compatibility with legacy systems allows the enterprise to preserve
hardware and software investments or commence the transition to a client/server
environment while providing enhanced reporting capabilities throughout the
enterprise. The use of filtering technology not only automates the transfer of
data from accounting and information systems into desktop databases, but can
automatically rebuild such databases to reflect changes introduced in the
underlying accounting structure. This eliminates costly dual maintenance of data
structures between the legacy and the MetaView systems. The Company is not aware
of any other product capable of automating the gathering of data from
heterogeneous computing systems, selectively building multiple data sets in
differing views and distributing them to the desktop.
The following is a brief discussion of the Company's three primary
proprietary technologies:
- Timeline Architecture. Timeline's architecture, first introduced
in OGL(TM), is a multi-dimensional data segmentation capacity
which exceeds the capacity of all accounting data structures known
to the Company. This capacity enables the Timeline reporting
products to accept data from multiple transaction processing
systems concurrently, to combine such data into a single database
and to add reporting relationships not present in the source
system.
- Generation Engine. The Company's generation engine, also
introduced in OGL(TM), enables Timeline products to automate the
conversion of accounting data structures into Microsoft-compatible
databases. Prior technologies required substantial human
intervention to manually build tables, input forms and manipulate
other attributes of the data. It is this technology which allows
automated building of any number of databases for distribution
throughout the organization.
- Filter Technology. Timeline's filter technology was first
introduced in its MetaView product line. Filtering allows the
Timeline product to duplicate data directly from one or more
transaction processing systems, and to feed the data to the
generation engine to automatically build a new database resident
in the Timeline architecture. The Timeline product is tied
directly to the underlying systems. Changes made in these
underlying systems (such as adding a new accounting relationship
for a newly purchased company) are reflected in the next Timeline
database in an automated manner. Prior technologies required
substantial human intervention to manually extract and import data
and to maintain the synchronization of the accounting and
information systems.
A patent application is pending before the US Patent and Trademark Office on a
portion of the technology discussed above.
MICROSOFT ALLIANCE
The Company believes that the flexibility of its technology for
building database structures in an automated manner will allow its products to
adapt to data structures contained in many accounting products. Timeline
licensed this technology to Microsoft pursuant to an agreement under which
Timeline developed, on behalf of Microsoft, the Microsoft(R) Small Business
Financial Manager (first introduced in February 1996 as Microsoft(R) Accounting
Analysis Pack or MSAAP). Delivery under the agreement had a negative impact on
short term operating results and a substantial portion of the Company's
development personnel were engaged such that they were not available to improve
and refine Timeline's own product offerings. Nevertheless, management believes
there are significant long term benefits in empowering Microsoft to deliver this
strategy and architecture in the low end accounting market. It is believed this
is a strategic move which will enhance the Company's market penetration long
term.
Microsoft's product, scheduled for initial shipments in June, 1996, is
specifically intended to provide the small office and home office user a
reporting environment based in Microsoft Office on data drawn from accounting
systems residing in other environments. This is consistent with the Company's
approach with large organizations. One
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ramification of the relationship with Microsoft, and the main reason Timeline
undertook the agreement, is Microsoft has the potential to establish Timeline's
technology as a widely-accepted standard in financial reporting. In fact,
management believes a gap will exist in the market for middle tier organizations
to adopt a similar strategy. Management viewed this as an opportunity to
engineer and develop a new product line aimed to fill this potential market
niche (see discussion of products below). Additionally, the Company will also
provide products to the small office market by making add-on products for the
Microsoft Small Business Financial Manager which can be distributed through
accounting vendors.
Timeline intends to support all these products with its Internet
service.
PRODUCTS
The Company continues to refine its product line to address the demands
of clients and to incorporate changes in technology. During the fiscal year
ending March 31, 1996, the Company has introduced new products and re-engineered
its MetaView product. These new products are logical by-products of the
Microsoft effort. The Company's products allow the distribution of data sets of
information to the desktop. Once data is contained in a local Microsoft Office
database, the end user can produce any report resident in the Timeline or
Microsoft products which also reside in Microsoft Office. Furthermore, the data
is available for each end user to develop his or her own analysis or personal
reports using normal Microsoft technology. The user can be assured the data is
as accurate as is the data in the underlying accounting system.
Timeline's primary product family, MetaView, consists of a set of
client/server software applications based on Microsoft Windows/Windows NT(TM)
and Microsoft Office operating systems and products from Microsoft Corporation.
Timeline's MetaView products allow end users to effect enterprise-wide reporting
in the user-friendly Microsoft desktop environment, which is currently utilized
by many enterprises. The relational accounting architecture embodied in MetaView
adapts to existing accounting systems and other enterprise data that may or may
not reside in a Microsoft environment.
In mid-1995, the Company entered into an agreement with Microsoft
pursuant to which Timeline agreed to develop for Microsoft a financial reporting
system for use in the "small-office, home-office" or "SOHO" market (i.e.,
businesses with up to approximately five desktop users). The release of this
product, Microsoft(R) Small Business Financial Manager ("SBFM") was announced by
Microsoft in February 1996. SBFM, which incorporates a portion of Timeline's
proprietary MetaView architecture, is designed as a reporting and analysis
system which includes a set of standard report formats for viewing data created
by one of 12 leading accounting software products for the SOHO market (such as
QuickBooks(R) for Windows from Intuit, Inc., Peachtree(R) for Windows from
Peachtree Software, Inc., and Simply Accounting from Computer Associates
International, Inc.). The Company expects SBFM to begin shipping in June 1996.
Also in February 1996, the Company announced the release of MetaView
Analyst(TM), a "client" product which enables the user to view, create and
distribute reports in Microsoft Excel based on data from a single accounting
system. MetaView Analyst(TM), as the client, can be used with SBFM, as the
"server," in the SOHO market to create and distribute custom reports based on
the particular needs of the enterprise. MetaView Analyst(TM) is also the client
to Timeline's server based software allowing the distribution of reporting
databases to end-users throughout an enterprise. Like SBFM, final commercial
release of MetaView Analyst(TM) is expected in June 1996.
Commencing in October 1996, the Company also expects to release both
client and server applications designed for the "mid-level" market (i.e.,
businesses with approximately six to 100 desktop users). The server product,
MetaView Analyst Server(TM) for Microsoft(R) BackOffice will support data from
any single accounting system which is stored in Microsoft's SQL Server(TM)
database. The client product, MetaView Analyst(TM), will work with data stored
and extracted from the server.
The original MetaView Server(TM) product was introduced in late 1995 as
a financial and management reporting system which included modules to allow
traditional financial reporting, budgeting, foreign currency conversion,
consolidations and allocations. The various modules in the product provide
desktop and network reporting on information originating in a single or multiple
accounting systems within the enterprise.
Open General Ledger(TM) (OGL(TM)), the Company's first client/server
product, is a full-function general ledger that handles transaction processing
as well as financial reporting in a single environment. It is fully integrated
with MetaView to provide all the functionality of that product's various
modules. Open General Ledger(TM) is aimed toward enterprises
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seeking a total enterprise-wide solution for both processing and reporting.
Despite an initial level of licensing activity of OGL(TM) which was acceptable
to the Company, it is focusing its sales, marketing and development on the
MetaView family of products. It is part of the Company's strategy to form sales
and marketing alliances with vendors of general ledger products. In light of
this policy, the Company is not pursuing its own general ledger licenses as this
would be deemed competitive to its alliance partners.
In addition to client/server products, the Company develops, markets
and supports a fully integrated line of host-based accounting applications that
operate on VAX(R) and AXP(R) computer systems from Digital Equipment
Corporation. This product line represents a continuation of Timeline's
historical core business and provides ongoing maintenance, license and
consulting revenue. Products in this market include General Ledger, Accounts
Payable, Accounts Receivable, Digibase, Digicalc II(R), Fixed Assets, Inventory,
Purchase Order and Association Management.
RESEARCH AND DEVELOPMENT
The Company has expended approximately $649,000 and $973,000,
respectively, for research and development in the fiscal years ended March 31,
1995 and 1996. The Company intends to enhance and expand its client/server
product line in connection with evolving customer requirements and industry
standards. Historically, the Company has developed new products internally.
However, the Company currently employs a number of outside consultants in an
effort to speed the release of its product offerings to the market. As of March
31, 1996, the Company employed 21 persons in its product development group. The
Company intends to increase the number of development personnel over the next
several quarters.
In addition, the Company has entered into development arrangements with
Integra Software, Inc. under which the services of approximately four full time
equivalent personnel will be dedicated to developing filters to various
accounting systems from the Company's MetaView products.
EXECUTIVE OFFICERS
The executive officers of the Company and their ages are as follows:
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NAME AGE POSITION
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John W. Calahan 52 President, Chief Executive Officer and
Director
Donald K. Babcock 59 Senior Technologist and Director
Charles R. Osenbaugh 47 Executive Vice President, Chief
Financial Officer and Director
Frederick W. Dean 44 Vice President - Product Management
Michael G. Evans 42 Managing Director, Timeline Europe Ltd.
Michael R. Mooradian 38 Vice President - North American Sales
Robert B. Wallace 46 Vice President - Educational Services
David B. Kouchi 28 Vice President - Development
Owen A. Carton 31 Vice President - Marketing
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The following is a brief account of the business experience of each
executive officer of the Company.
JOHN W. CALAHAN is a founder of the Company, and has been President,
Chief Executive Officer and a Director since inception in April 1993. He was
also a founder and director of the Company's predecessor, Timeline Services,
Inc.,
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from its inception in 1977 until its merger into the Company in July 1994. From
1977 to April 1993, Mr. Calahan also served as President of Timeline Services,
Inc. From 1971 to 1977, Mr. Calahan practiced public accounting in Seattle with
Arthur Andersen & Co., Ernst & Ernst (now Ernst & Young), and Calahan, Reed &
Gunn. He holds a B.A. degree in accounting from the University of Washington and
received his CPA certificate in 1972.
DONALD K. BABCOCK is a founder of the Company and a Director since
inception. He currently serves as Senior Technologist, and previously was Senior
Vice President of Research & Development and Chief Technologist. He was also a
founder of Timeline Services, Inc. and served as a director from its inception
in 1977 until its merger into the Company in July 1994. From 1977 to April 1993,
Mr. Babcock also served as Senior Vice President and Chief Technologist of
Timeline Services, Inc. From 1970 to 1977, he was a consultant with Riggs,
Babcock & Mishko, a Tacoma, Washington based data processing and consulting firm
to the property and casualty insurance industry. Mr. Babcock was Manager of
Systems Programming at United Pacific Insurance Company from 1965 to 1970, and a
data processor in the U.S. Air Force from 1955 to 1965.
CHARLES R. OSENBAUGH has served as Executive Vice President -- Finance,
Chief Financial Officer, Treasurer, Secretary and a Director since inception.
From April 1988 to April 1993, Mr. Osenbaugh served as Executive Vice President,
Chief Executive Officer and a Director, and from April 1993 to July 1994 as
President and a Director, of Timeline Services, Inc. From 1975 to 1988, Mr.
Osenbaugh was a partner of Lasher & Johnson, a Seattle law firm. From 1973 to
1975, Mr. Osenbaugh practiced public accounting with Arthur Andersen & Co. He
holds a B.B.A. degree in economics and a J.D. degree, both from the University
of Iowa, and received his CPA certificate in 1975.
FREDERICK W. DEAN serves as Vice President - Product Management and has
been a Vice President since the Company's inception. From 1979 to April 1993,
Mr. Dean served as Vice President at Timeline Services, Inc. He practiced public
accounting at Calahan, Reed & Gunn from 1978 to 1979, and at Arthur Andersen &
Co. from 1973 to 1977. From 1977 to 1978, Mr. Dean was the Controller of the
Seattle Mariners Baseball Club. Mr. Dean holds a B.A. degree in accounting from
the University of Washington.
MICHAEL G. EVANS has served as a Managing Director of London-based
Timeline Europe Ltd. since its inception in November 1995. From January 1995 to
November 1995, Mr. Evans was Senior Director of Financial Applications for North
America at Comshare, Inc. Prior to this Michael worked for Comshare's United
Kingdom subsidiary in London for nine years. At the time of his transfer to the
USA he was the director responsible for the Financial Applications Division. Mr.
Evans earned a BA with Honors from The University of Kent in Canterbury, Kent,
England in 1975, and was qualified as a Chartered Accountant in 1978.
MICHAEL R. MOORADIAN joined the Company as Vice President - North
American Sales in January, 1996. From 1991 until 1995, Mr. Mooradian worked for
Comshare, Inc., first as a Marketing Representative, then Sales Manager, and
finally Central Regional Sales Director. Prior to that, he was a Senior Account
Executive with Ross Systems, Inc. from 1989 to 1991, a Sales Representative with
Corporate Class Software, Inc. from 1987 to 1989, and a Sales Representative
with Information Resources, Inc. from 1986 to 1987 and with Hewlett -Packard
from 1984 to 1986. Mr. Mooradian graduated from DePaul University in 1981 with a
B.S. in Business Administration.
ROBERT B. WALLACE serves as Vice President - Educational Services and
has been a Vice President of the Company since July 1994, having joined the
Company at inception as Vice President of Consulting Services. From 1989 to
April 1993, Mr. Wallace was the Vice President of Sales and Marketing of
Timeline Services, Inc. He served as Senior Vice President and Chief Financial
Officer of BMG Corporation, a Seattle-based construction equipment manager, from
1987 to 1989. From 1983 to 1989, Mr. Wallace was Senior Vice President, Chief
Financial Officer and Chief Operating Officer of Accountant MicroSystems, Inc.,
an accounting systems software company in Bellevue, Washington. Mr. Wallace
previously practiced public accounting with Arthur Andersen & Co. He has a B.A.
degree in accounting from the University of Washington, and is a certified
public accountant.
DAVID B. KOUCHI joined the Company as Program Manager in October 1993,
became Director of Research & Development in March 1994, and recently was named
Vice President of Development. From May 1993 to October 1993, Mr. Kouchi was
Program Manager at Ackerley Communications, Inc., where he initiated the
downsizing of financial and operational software applications from
mini-computers onto a desktop client/server environment. While at Microsoft
Corporation from January 1991 to May 1993, Mr. Kouchi was a member of the
Microsoft Access(R) testing team where his responsibilities included performance
bench marking and analysis, development and testing of Access(R) user interface
enhancements, and development of demonstration applications. Mr. Kouchi was
employed as a software test analyst at
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Safeco Insurance Company in 1990. He holds a B.A. degree in business
administration/information systems from the University of Washington.
OWEN A. CARTON has been Vice President of the Company since joining in
November 1993. From June 1992 to September 1993, Mr. Carton was Product Manager,
Database Management Products in Microsoft Corporation's Worldwide Marketing
Division, where he was responsible for developing and implementing business
strategies for the promotion of Microsoft database management software programs
and applications (i.e., Microsoft Access(R)) with domestic U.S. and worldwide
responsibility. From October 1986 to June 1992, Mr. Carton was employed by
Microsoft Ltd., a wholly-owned subsidiary of Microsoft which is responsible for
the sale and marketing of Microsoft products and for after-sales customer
support services and on-site installation of customized software products and
systems to major corporate clients in Europe. At Microsoft Ltd., Mr. Carton
ultimately attained the position of Corporate Account Manager within the
company's Finance Group, where he was responsible for the sale and
implementation of Microsoft products to major financial companies throughout the
U.K., including the Royal Bank of Scotland and the Union Bank of Switzerland and
the development of a Merchant Banking Sector Sales Program. Mr. Carton received
his Leaving Certificate Qualification with honors from St. Paul's College,
Dublin, Ireland, in 1982.
ITEM 2. DESCRIPTION OF PROPERTY
Timeline leases approximately 17,025 square feet of office space at
3055 112th Ave. N.E., Bellevue, Washington. The office space lease expires
February 28, 2001. The Company also leases approximately 3,085 square feet of
office space located at 6250 River Road, Rosemont, Illinois, under a lease which
expires March 31, 1999. At 500 Chiswick High Road, London, United Kingdom, the
Company leases approximately 900 square feet of office space in a shared office
provider environment.
Timeline does not own any real estate.
ITEM 3. LEGAL PROCEEDINGS
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of security holders during the
fourth quarter of the fiscal year.
PART II
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Timeline's common stock is traded on the Nasdaq SmallCap Market
("Nasdaq") and the Boston Stock Exchange ("BSE") under the symbols "TMLN" and
"TML", respectively. Additionally, warrants to purchase common stock are traded
on both Nasdaq and BSE under the symbols "TMLNW" and "TMLW", respectively. Both
classes of securities initiated trading on January 18, 1995, the effective date
of the Company's initial public offering of common stock and warrants. The
following table contains the high and low trading price as reported by Nasdaq
for each quarter of fiscal 1996.
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1st Quarter 2nd Quarter 3rd Quarter 4th Quarter
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Common Stock
High 7 3/8 8 1/8 7 1/8 7 1/8
Low 3 1/8 5 1/4 4 1/2 4
Warrants
High 2 7/8 3 2 5/8 2
Low 3/8 1 1/2 1 3/8 1 1/4
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At March 31, 1996 there were 2,614,576 shares of common stock
outstanding. An additional 1,000,000 warrants to purchase common stock were
outstanding, each warrant allowing the purchase of one share of stock on or
before January 17, 2000 at a price of $6.25 per share.
No cash dividends have been paid on the stock of the Company and no
dividends are currently contemplated by management. There are no restrictions on
the payment of dividends.
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
The charts below containing interim period information are provided solely as
part of Registrant's annual report to securityholders, and are not submitted as
a response to Item 6 of Form 10-KSB. The inclusion of the charts below does not
constitute or imply Registrant's agreement that such charts are subject to
Section 18 of the Exchange Act.
RESULTS OF OPERATIONS
Timeline's operating results for fiscal year ending March 31, 1996 were a net
loss of $1,423,000, compared to a net loss of $177,000 for the period ended
March 31, 1995. Strong growth in software license and consulting revenue was
more than offset by increased expenses resulting from the growth of the Company
and additions to its infrastructure, and the continued expected weakness in
maintenance revenue due to the transition in the Company's technology base.
These factors contributed to the resulting decrease in net operating results.
GROSS REVENUE
<TABLE>
<CAPTION>
Three Months Ended Twelve Months Ended
March 31, March 31,
1996 1995 Change 1996 1995 Change
- -------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
(Dollars in Thousands)
Software license 304 253 20% 2,303 1,294 78%
Maintenance 207 272 (24%) 893 1,063 (16%)
Consulting 445 364 22% 1,851 1,155 60%
Other 11 N/A% 29 N/A
----------------- -------------------
Net sales 956 900 6% 5,047 3,541 43%
- -------------------------------------------------------------------------------------------------
</TABLE>
Total revenue increased 43% to $5,047,000 for the fiscal year ended March 31,
1996. Both software license revenue (up 78%) and consulting revenue (up 60%)
showed significant growth. The vast majority of license revenue is now due to
fees generated from products based on the Microsoft Windows/Windows NT
environment (herein "Timeline MS Systems"). This includes $400,000 attributable
to fees billed during the year to Microsoft Corporation for technology licenses
and software development of the Microsoft Small Business Financial Manager. The
increase in consulting revenue for the March 31, 1996 fiscal year can also be
attributed to the increased volume of installation and training in conjunction
with new licenses.
Maintenance revenue was down $170,000 (16%) during the March 1996 fiscal year
compared to March 1995. These results are indicative of the expected continuing
weakness in maintenance revenue from the declining installed base of Timeline
software for Digital Equipment Corporation VAX and AXP based systems. This trend
will most likely continue during the period of transition as this installed base
moves away from mini-computer based systems, and until maintenance revenue from
licensees of Timeline's MS Systems increases.
Page 9
<PAGE> 10
GROSS MARGIN
<TABLE>
<CAPTION>
Three Months Ended Twelve Months Ended
March 31, March 31,
1996 1995 Change 1996 1995 Change
- -----------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
(Dollars in Thousands)
Gross profit 571 623 (8%) 3,218 2,504 29%
Percentage of net sales 60% 69% 64% 71%
- -----------------------------------------------------------------------------------------
</TABLE>
Costs of Revenue increased during the March 31, 1996 fiscal year by $792,000
(76%) over the March 31, 1995 fiscal year. This is due in part to approximately
$427,000 of costs directly associated with the production of the Microsoft SBFM
charged to Cost of Revenues. The remaining increase in Costs of Revenue are, in
large part, attributable to increased payroll and related expenses for increased
staff in the consulting division.
SALES AND MARKETING & RESEARCH AND DEVELOPMENT
<TABLE>
<CAPTION>
Three Months Ended Twelve Months Ended
March 31, March 31,
1996 1995 Change 1996 1995 Change
- ---------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
(Dollars in Thousands)
Sales and marketing 552 300 84% 1,616 931 74%
Percentage of net sales 58% 33% 32% 26%
- ---------------------------------------------------------------------------------------------
Research & development
- expensed 423 168 973 649
- capitalized 131 -0- 167 -0-
------------------- -------------------
Total 554 168 230% 1,140 649 76%
Percentage of net sales 58% 19% 23% 18%
- ---------------------------------------------------------------------------------------------
</TABLE>
Sales and marketing costs increased 74% to $1,616,000 in fiscal 1996 from
$931,000 in fiscal 1995. A substantial portion of this increase came in the
final two quarters of the fiscal year and is directly attributable to the
opening of offices in London, England, in November, 1995 and the Chicago area in
January, 1996, which included adding personnel. In addition, significant
marketing funds were spent to establish a seminar series as a way of introducing
Timeline products into the European market. The Company regards the response to
the seminars, which were launched in the U.S. after year end, as excellent.
Research and development costs were $973,000 in fiscal 1996 compared to $649,000
in fiscal 1995, a 50% increase. The increase in research and development costs
was the result of new programmers being hired in fiscal 1996 to staff the
production of new product offerings to be released in June, 1996. The new
products include complimentary products to the Microsoft SBFM. The new Timeline
products are intended to be marketed into the middle tier accounting software
market. The Company's product line has historically been licensed to high end
accounting system users. Capitalized software costs represent certain software
programming costs which will be incorporated in the Company's new product
offerings. All other research and development was expensed as incurred.
Page 10
<PAGE> 11
GENERAL AND ADMINISTRATIVE EXPENSE
<TABLE>
<CAPTION>
Three Months Ended Twelve Months Ended
March 31, March 31,
1996 1995 Change 1996 1995 Change
- -----------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
(Dollars in Thousands)
General & administrative 726 332 119% 1,983 894 122%
Percentage of net sales 76% 37% 39% 25%
- -----------------------------------------------------------------------------------------------
</TABLE>
Primarily due to increasing its staff by approximately 60% and the related
overhead expenses during fiscal 1996, general and administrative expenses
increased 119% to $1,983,000 from $894,000 in fiscal 1995. Also, during the last
two quarters of the fiscal year the Company expanded its leased space in the
Bellevue, Washington home office as well as adding leased office space and
executive and administrative personnel in London. The Company's additional
office space expense in Illinois is accounted for as part of its sales and
marketing expense.
Depreciation expense increased in fiscal 1996 to $165,000 from $115,000 in
fiscal 1995. This increase reflects depreciation on approximately $633,000 of
new equipment and fixtures purchased during fiscal 1996 for use by additional
personnel and to equip the new and expanded offices occupied during fiscal 1996.
Interest expense decreased 66% to $41,000 in fiscal 1996 from $119,000 in fiscal
1995. Interest income increased to $136,000 from $26,000 for fiscal 1995. These
changes are directly due to use of the proceeds from the initial public offering
in January, 1995 applied to debt reduction and investments in marketable debt
securities.
The Company did not record a tax benefit in either year as the tax assets
generated by the net operating losses do not satisfy the recognition criteria
set forth by generally accepted accounting principles. Accordingly, a valuation
allowance that offsets its net deferred tax assets has been recorded.
LIQUIDITY AND CAPITAL RESOURCES.
The Company's cash and cash equivalent and short-term investment balances at
March 31, 1996 stood at $392,000 compared to $2,287,000 at March 31, 1995. The
decrease in cash is primarily attributable to the $1,423,000 net loss incurred
in fiscal 1996. Total obligations, excluding deferred income items, totaled
$1,306,000 at March 31, 1996 as compared to $516,000 at March 31, 1995. The
fiscal 1996 obligations include a corporate guarantee of a $500,000 bank note
between the Timeline Employee Stock Ownership Trust (the "ESOT") and Silicon
Valley Bank. This note is intended to be repaid from employee and matching
employer contributions under the Timeline Employee Stock Ownership Plan (the
"ESOP"). The proceeds from the loan were used to purchase 95,200 shares of
common stock of the Company in March 1996.
Net cash used in operating activities was $1,553,000 in fiscal 1996 as compared
to $770,000 in fiscal 1995, which was primarily attributable to the increased
net loss incurred in fiscal 1996. The Company funded the cash used in operating
activities by selling $1,793,000 of short term investments.
Other cash used in investing activities included the purchase of approximately
$633,000 of new equipment and $167,000 of capitalized software development
costs.
The Company recently completed the private placement of 521,530 shares of new
issue common stock. Proceeds from this placement, net of all applicable fees and
costs are estimated at $2,225,000. Based on current cash and cash equivalent
balances, the Company expects no additional borrowings, sales of equity or debt
instruments will be required to fund operations during fiscal 1997. The Company
has secured a bank revolving line of credit of $750,000 based upon the
collateral of its accounts receivable. Any guarantee of the obligation of the
Timeline ESOT reduces the amount available to be drawn on this line of credit.
At March 31, 1996, the outstanding balance on this credit facility was zero.
Page 11
<PAGE> 12
ITEM 7. FINANCIAL STATEMENTS
Financial Statements
Page
----
Report of Independent Public Accountant 15
Consolidated Balance Sheets as of March 31, 1996 and 1995 16
Consolidated Statement of Operations for the years ended
March 31, 1996 and 1995 17
Consolidated Statements of Changes in Stockholders' Equity 18
Consolidated Statement of Cash Flows for the years ended
March 31, 1996 and 1995 19
Notes to Financial Statements 20
Page 12
<PAGE> 13
TIMELINE, INC.
FINANCIAL STATEMENTS
AS OF MARCH 31, 1996 AND 1995
TOGETHER WITH AUDITORS' REPORT
Page 13
<PAGE> 14
This page intentionally left blank.
Page 14
<PAGE> 15
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Shareholders of
Timeline, Inc.:
We have audited the accompanying consolidated balance sheets of Timeline, Inc.
(a Washington corporation) as of March 31, 1996 and 1995, and the related
consolidated statements of operations, stockholders' equity and cash flows for
the years then ended. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Timeline, Inc. as of March 31,
1996 and 1995, and the results of its operations and its cash flows for the
years then ended, in conformity with generally accepted accounting principles.
/s/ ARTHUR ANDERSEN LLP
Seattle, Washington,
May 22, 1996
Page 15
<PAGE> 16
TIMELINE, INC.
CONSOLIDATED BALANCE SHEETS -- MARCH 31, 1996 AND 1995
ASSETS
<TABLE>
<CAPTION>
1996 1995
----------- -----------
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents $ 284,542 $ 387,382
Short-term investments 107,174 1,900,000
Accounts receivable, net of allowance of
$69,601 and $39,955 1,181,322 673,848
Prepaid expenses and other 295,126 236,574
----------- -----------
Total current assets 1,868,164 3,197,804
PROPERTY AND EQUIPMENT, net of accumulated
depreciation of $1,245,908 and $1,120,882 853,174 392,936
CAPITALIZED SOFTWARE COSTS, net of accumulated
amortization of $251,777 and $178,997 210,040 115,726
OTHER ASSETS 86,447 --
----------- -----------
Total assets $ 3,017,825 $ 3,706,466
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 422,534 $ 216,307
Accrued expenses 280,914 186,314
Deferred revenues 431,503 482,851
Current portion of long-term debt 125,000 --
Current portion of obligations under capital
leases 64,511 64,511
----------- -----------
Total current liabilities 1,324,462 949,983
LONG-TERM DEBT, net of current portion 375,000 --
OBLIGATIONS UNDER CAPITAL LEASES, net of current portion 38,204 49,331
----------- -----------
Total liabilities 1,737,666 999,314
----------- -----------
STOCKHOLDERS' EQUITY:
Common stock, $.01 par value, 20,000,000 shares authorized,
2,614,576 and 2,519,376 issued and outstanding 26,146 25,194
Additional paid-in capital 6,843,166 6,348,281
Deferred compensation (500,000) --
Accumulated deficit (5,089,153) (3,666,323)
----------- -----------
Total stockholders' equity 1,280,159 2,207,152
----------- -----------
Total liabilities and stockholders' equity $ 3,017,825 $ 3,706,466
=========== ===========
</TABLE>
The accompanying notes are an integral part of these balance sheets.
Page 16
<PAGE> 17
TIMELINE, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED MARCH 31, 1996 AND 1995
<TABLE>
<CAPTION>
1996 1995
----------- -----------
<S> <C> <C>
REVENUES:
Software license $ 1,902,813 $ 1,293,797
Software development 400,000 --
Maintenance 892,703 1,063,388
Consulting 1,851,761 1,155,101
Other -- 28,509
----------- -----------
Total revenues 5,047,277 3,540,795
COST OF REVENUES 1,828,790 1,036,809
----------- -----------
Gross profit 3,218,487 2,503,986
----------- -----------
OPERATING EXPENSES:
Sales and marketing 1,616,071 930,704
General and administrative 1,982,733 894,494
Research and development 972,983 648,539
Depreciation 164,870 114,665
----------- -----------
Total operating expenses 4,736,657 2,588,402
----------- -----------
Loss from operations (1,518,170) (84,416)
----------- -----------
OTHER INCOME (EXPENSE):
Interest income 136,077 26,425
Interest expense and other (40,737) (119,048)
----------- -----------
Total other income (expense) 95,340 (92,623)
----------- -----------
Net loss $(1,422,830) $ (177,039)
=========== ===========
NET LOSS PER COMMON SHARE $ (.56) $ (.10)
=========== ===========
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING 2,519,376 1,775,810
=========== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
Page 17
<PAGE> 18
TIMELINE, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED MARCH 31, 1996 AND 1995
<TABLE>
<CAPTION>
Preferred Stock Common Stock
---------------------- -----------------
Paid-in Deferred Accumulated
Shares Amount Shares Amount Capital Compensation Deficit Total
--------- ----------- --------- ------- ----------- ------------ ----------- -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
BALANCE, March 31, 1994 1,027,993 $ 1,963,159 990,600 $10,500 $ 598,654 $ -- $(3,489,284) $ (916,971)
Net loss -- -- -- -- -- -- (177,039) (177,039)
Merger transaction (832,157) (832,157) 197,400 1,380 830,777 -- -- --
Conversion of preferred stock (195,836) (1,131,002) 323,126 3,231 1,127,771 -- -- --
Issuance of common stock -- -- 1,000,000 10,000 4,365,000 -- -- 4,375,000
Issuance of warrants -- -- -- -- 625,000 -- -- 625,000
Offering costs -- -- -- -- (1,174,503) -- -- (1,174,503)
Exercise of warrants -- -- 8,250 83 29,917 -- -- 30,000
Redemption of warrants -- -- -- -- (54,335) -- -- (54,335)
---------- ----------- --------- ------- ----------- --------- ----------- -----------
BALANCE, March 31, 1995 -- -- 2,519,376 25,194 6,348,281 -- (3,666,323) 2,707,152
Net loss -- -- -- -- -- -- (1,422,830) (1,422,830)
Issuance of common shares to
ESOP -- -- 95,200 952 499,048 (500,000) -- --
Foreign currency translation
adjustment -- -- -- -- (4,163) -- -- (4,163)
---------- ----------- --------- ------- ----------- --------- ----------- -----------
BALANCE, March 31, 1996 -- $ -- 2,614,576 $26,146 $ 6,843,166 $(500,000) $(5,089,153) $ 1,280,159
========== =========== ========= ======= =========== ========= =========== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
Page 18
<PAGE> 19
TIMELINE, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED MARCH 31, 1996 AND 1995
<TABLE>
<CAPTION>
1996 1995
----------- -----------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $(1,422,830) $ (177,039)
Adjustments to reconcile net loss to cash
used in operating activities-
Depreciation and amortization 237,650 227,772
Loss on disposal of fixed assets 8,101 --
Changes in assets and liabilities:
Accounts receivable (507,474) (310,875)
Prepaid expenses and other (58,552) (197,191)
Accounts payable 206,227 (72,021)
Accrued expenses 94,600 (97,929)
Deferred revenues (51,348) (142,402)
Other noncurrent assets (59,340) --
----------- -----------
Net cash used in operating activities (1,552,966) (769,685)
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment (582,286) (118,016)
Capitalized software development costs (167,094) --
Sales of short-term investments 1,792,826 --
Purchases of short-term investments -- (1,900,000)
----------- -----------
Net cash provided by (used in) investing activities 1,043,446 (2,018,016)
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Sale of shares to ESOP 500,000 --
Costs of ESOP financing (27,107) --
Payments on capital lease obligations (62,050) (66,772)
Borrowings under line of credit 1,499,578 --
Repayments under line of credit (1,499,578) --
Proceeds from notes payable -- 476,677
Payments on notes payable -- (973,257)
Payments on shareholder notes -- (225,694)
Sale of common and preferred stock and warrants -- 5,000,000
Costs of initial public offering -- (1,073,139)
Redemption of warrants -- (54,335)
----------- -----------
Net cash provided by financing activities 410,843 3,083,480
----------- -----------
EFFECT OF EXCHANGE RATE CHANGES ON CASH (4,163) --
----------- -----------
NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS (102,840) 295,779
CASH AND CASH EQUIVALENTS, beginning of year 387,382 91,603
----------- -----------
CASH AND CASH EQUIVALENTS, end of year $ 284,542 $ 387,382
=========== ===========
SUPPLEMENTAL CASH FLOW DISCLOSURES:
Cash paid during the year for interest $ 35,264 $ 120,587
Capital lease obligations incurred 50,923 20,105
</TABLE>
The accompanying notes are an integral part of these financial statements
Page 19
<PAGE> 20
TIMELINE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 1996
1. THE COMPANY:
Organization
The accompanying financial statements are for Timeline, Inc. and its
wholly-owned subsidiary, Timeline Europe, Ltd., combined with Timeline Services,
Inc. (TSI) and its wholly owned, nonoperating subsidiary, WHY Systems, Inc. Both
Timeline, Inc. and TSI develop, market and support enterprise-wide financial
management software. During fiscal 1995, TSI and Timeline, Inc. merged, with
Timeline, Inc. the surviving corporation. TSI shareholders exchanged 100% of
their common and preferred stock in TSI for 990,000 shares of common stock and
7,334 shares of Series A preferred stock in Timeline, Inc. Prior to the merger,
TSI owned 792,000 shares or 80% of Timeline, Inc.'s common stock and 7,334
shares or 4% of Timeline, Inc.'s Series A preferred stock. These shares were
canceled upon consummation of the merger. The merger has been accounted for as a
reorganization in a manner similar to a pooling-of-interests. The accounts of
the two companies, after the elimination of all intercompany accounts and
transactions, have been combined as if they had been one company for all periods
presented. References in these financial statements to the "Company" or to
"Timeline" mean collectively TSI and Timeline, Inc., both before and subsequent
to the merger.
During fiscal 1996, the Company formed a subsidiary in the U.K. (Timeline
Europe, Ltd.). To date, revenues from sales outside the United States have not
been material.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
Basis of Presentation
These financial statements have been prepared in accordance with generally
accepted accounting principles. 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. Actual results could differ from these estimates. Other significant
accounting policies are summarized in the following paragraphs.
Cash and Cash Equivalents
The Company considers all highly liquid investments with a purchased maturity of
three months or less to be cash equivalents. Cash equivalents are valued at
cost, which approximates fair value due to the short-term nature of these
investments.
Short-term Investments
The Company accounts for its investments in accordance with Statement of
Financial Accounting Standards No. 115, "Accounting for Certain Investments in
Debt and Equity Securities," which requires the Company to present its
investments at their fair market value. The Company has classified all of its
investments as available-for-sale, at the time of purchase. Material unrealized
gains or losses on these securities are recognized as increases or decreases to
shareholders' equity, respectively. There were no material unrealized gains or
losses on these investments as of March 31, 1996 and 1995. As of March 31, 1996,
investments consist entirely of a federal agency security, while at March 31,
1995, investments consist of $1,400,000 of federal government and agency
securities and $500,000 of corporate debt securities.
Page 20
<PAGE> 21
Property and Equipment
Property and equipment are stated at historical cost. Improvements and
replacements are capitalized. Maintenance and repairs are expensed when
incurred. The provision for depreciation is determined by the straight-line
method, which allocates the cost of property and equipment additions, including
capital leases, over the lesser of the lease period or their estimated useful
lives of three to seven years.
Capitalized Software Costs and Research and Development Costs
The Company capitalizes certain internally generated software development costs,
which consist primarily of salaries along with fees paid for certain outsourced
software development costs, in accordance with Statement of Financial Accounting
Standards No. 86. Amounts capitalized relate to software development costs
incurred after the technological feasibility and market acceptance of a product
line have been established. The provision for amortization is on a
product-by-product basis. The annual amortization is the greater of the amount
computed using (a) the ratio that current gross revenues for a product bear to
the total of current and anticipated future gross revenues for that product or
(b) the straight-line method over the remaining estimated economic life of the
product including the period being reported on. Presently all capitalized
software costs are amortized using the straight-line method. Amortization starts
when the product is available for general release to customers. During fiscal
1996 and 1995, the Company capitalized $167,094 and $0, respectively, of
software development costs. Amortization expense for fiscal 1996 and 1995 was
$72,780 and $113,107, respectively. The amortization is included in cost of
revenues in the accompanying statements of operations.
All other research and development costs are expensed as incurred.
Revenue Recognition
The Company recognizes revenue in accordance with the American Institute of
Certified Public Accountants Statement of Position No. 91-1, "Software Revenue
Recognition." Revenue from software licenses is recognized upon shipment,
provided no significant vendor obligations remain and collection of the
resulting receivable is deemed probable. Software licenses sold, for which there
are still significant vendor obligations or right of return, are recorded as
deferred revenue and are recognized as revenue upon the fulfillment of the
obligation or lapse of the return period. Software licenses typically include a
three-month warranty period. The revenues attributable to the warranty are
recognized ratably over the warranty period.
The Company enters into post-contract customer-support maintenance agreements,
which are renewable annually. Revenue from these maintenance agreements is
treated as deferred revenue and recognized ratably over their terms.
The Company also enters into separately priced consulting agreements with its
customers to provide installation, training and other consulting services. These
agreements are priced on a time and materials basis and revenues are recognized
as the services are performed. The nature of the services do not significantly
alter the licensed software.
Net Loss per Common Share
Net loss per common share was based on the weighted average number of common
shares outstanding during each period, assuming that all series of convertible
preferred stock had been converted to common stock at the beginning of the
periods presented. Common stock equivalents include shares issuable upon the
exercise of outstanding stock options or warrants. These shares are not included
in the computation of net loss per share because the effect of including such
shares would be antidilutive. Furthermore, the 95,200 shares issued in 1996
related to the Employee Stock Ownership Plan are not considered outstanding as
none of the shares were committed to be released to plan participants as of
March 31, 1996.
Page 21
<PAGE> 22
3. PROPERTY AND EQUIPMENT:
Property and equipment, net of accumulated depreciation, consist of the
following at March 31:
<TABLE>
<CAPTION>
1996 1995
----------- -----------
<S> <C> <C>
Computer equipment $ 1,616,632 $ 1,147,806
Office equipment 482,450 366,012
----------- -----------
2,099,082 1,513,818
Less-- accumulated depreciation (1,245,908) (1,120,882)
----------- -----------
Total property and equipment $ 853,174 $ 392,936
=========== ===========
</TABLE>
4. FINANCING ARRANGEMENTS:
Line of Credit
The Company maintains a $750,000 line of credit with a local bank. The line of
credit has a variable rate of interest of prime plus 1.5% (9.75% at March 31,
1996.) Related borrowings are secured by the Company's short-term investments.
Any guarantee of the obligation of the Timeline Employee Stock Ownership Trust
reduces the amount available to be drawn on this line of credit. There were no
borrowings outstanding under this line of credit as of March 31, 1996.
Employee Stock Ownership Plan
During March 1996, the Company established an Employee Stock Ownership Plan
(ESOP) that covers substantially all U.S. employees. The Company registered and
sold 95,200 shares of common stock (4% of the total outstanding) to the ESOP.
Financing for the purchase was provided by a $500,000 bank loan which is a
direct obligation of the Company's Employee Stock Ownership Trust (the Trust)
and is secured by pledge of the shares purchased and is guaranteed by the
Company. The Company is obligated to make retirement plan contributions to the
Trust in an amount sufficient to meet principal and interest payments each
month. The guarantee agreement with the lender also requires the Company to meet
certain financial covenants. As of March 31, 1996, the Company was out of
compliance with certain of these covenants, including minimum liquidity and
other performance related covenants. The bank has granted a waiver for the
noncompliance.
Funds for payment of the note principal and interest are obtained by the ESOP
from employer retirement plan contributions from the Company which are included
in general and administrative expenses. The outstanding balance of the note is
included as a liability on the balance sheet. The Company has recorded $500,000
of deferred compensation expense related to the ESOP at March 31, 1996. As the
note was issued in March 1996, there were no interest or principal payments on
the note during the fiscal year ended March 31, 1996.
The ESOP note bears interest at the prime rate plus 2% (10.25% at March 31,
1996). Minimum principal payments are as follows:
<TABLE>
<S> <C>
1997 $125,000
1998 125,000
1999 125,000
2000 125,000
--------
$500,000
========
</TABLE>
5. FEDERAL INCOME TAXES:
Income taxes are provided in the income statement as required by Statement of
Financial Accounting Standards No. 109, "Accounting for Income Taxes" (SFAS No.
109).
Page 22
<PAGE> 23
The Company has determined that the deferred tax assets do not satisfy the
recognition criteria set forth in SFAS No. 109. Accordingly, a valuation
allowance has been recorded against the applicable deferred tax assets and
therefore no tax benefit has been recorded in the accompanying statement of
operations. The Company's net deferred tax assets (liabilities) as of March 31
are as follows:
<TABLE>
<CAPTION>
1996 1995
----------- -----------
<S> <C> <C>
Net operating loss carryforward $ 1,223,000 $ 721,000
Research and experimentation credit 290,000 290,000
Deferred revenues 147,000 164,000
Capitalized software costs (71,000) (39,000)
Other 62,000 93,000
----------- -----------
1,651,000 1,229,000
Less - valuation allowance (1,651,000) (1,229,000)
----------- -----------
Net deferred tax assets $ -- $ --
=========== ===========
</TABLE>
The net operating loss carryforwards and research and experimentation credit
carryforwards expire through 2010.
In connection with the initial public offering, the Company experienced a
significant change in ownership, which limits the amount of net operating loss
carryforwards and research and experimentation credits which may be used in any
given year to approximately $300,000.
6. 401(k) SAVINGS AND PROFIT SHARING PLAN:
All employees of the Company over 21 years of age have the option of
participating in a company-sponsored 401(k) savings and profit sharing plan.
Employees can contribute up to 15% of their gross pay subject to statutory
maximums. At its discretion, the Company may make contributions to the plan
based on a percentage of participants' contributions. Employer contributions
vest over a period of seven years. The Company has made no contributions to the
plan in either of the years ended March 31, 1996 or 1995.
7. COMMITMENTS AND CAPITAL LEASE OBLIGATIONS:
Leases
The Company has entered into noncancelable lease agreements involving equipment
and office space. The following is a schedule of future minimum lease payments
under both capital and operating leases as of March 31, 1996:
<TABLE>
<CAPTION>
Capital Operating
------- ---------
<C> <C> <C>
1997 $ 72,959 $ 380,433
1998 23,298 381,975
1999 15,419 382,960
2000 15,419 346,270
2001 5,141 310,273
--------- ----------
Total minimum lease payments 132,236 $1,801,911
==========
Less-- amount representing interest and tax costs (29,521)
--------
Present value of net minimum
lease payments 102,715
Less-- current portion (64,511)
---------
$ 38,204
=========
</TABLE>
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<PAGE> 24
Rental expense for operating leases amounted to $290,660 and $197,364 for the
years ended March 31, 1996 and 1995, respectively.
Employment Contracts
The Company has entered into employment agreements with certain key employees.
The following are the future minimum guaranteed salary amounts associated with
these contracts:
<TABLE>
<S> <C>
1997 $277,000
1998 277,000
1999 277,000
2000 138,500
--------
$969,500
========
</TABLE>
8. STOCKHOLDERS' EQUITY:
Initial Public Offering
During fiscal 1995, the Company completed its initial public offering. The
offering was for 1,000,000 units, consisting of one share of common stock and
one warrant to purchase one share of common stock for $6.25 at any time through
January 17, 2000. Immediately prior to the closing of the offering, all
preferred shares were converted into common stock.
Stock Options and Warrants
In September 1994, the Company adopted its 1994 Stock Option Plan (the "1994
Plan") and its Directors' Nonqualified Stock Option Plan (the "Directors'
Plan"). An aggregate of 250,000 shares of common stock are collectively reserved
for issuance upon exercise of options granted to the Company's employees,
directors and consultants under the 1994 Plan and the Directors' Plan
(collectively, the "Stock Option Plans"). The exercise price of any options to
be granted is equal to or greater than the fair market value of the common stock
at the date of grant. The terms of the options are for a period of ten years or
less. Options automatically expire 90 days after termination of employment.
The Company also has a 1993 Stock Option Plan (the "Old Plan"). A total of
132,000 shares of Common Stock have been reserved for issuance under the Old
Plan.
Statement of Financial Accounting Standards No. 123 ("SFAS 123"), "Accounting
for Stock-Based Compensation," which is effective for years beginning after
December 15, 1995, was issued in October 1995. The Company has continued to
measure compensation cost for employee stock compensation plans under the
guidelines of Accounting Principles Board Opinion No. 25, as allowed by SFAS
123. In fiscal 1997, the Company will adopt the disclosure requirements of SFAS
123.
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<PAGE> 25
Options outstanding as of each period are as follows:
<TABLE>
<CAPTION>
Option
Number of Exercise
Options Price
--------- -------------
<S> <C> <C>
Balance, March 31, 1994 268,850 $ .06 - $3.64
Granted 100,761 $ 3.64
Exercised (8,250) $ 3.64
Canceled (80,412) $ .06 - $3.64
-------- -------------
Balance, March 31, 1995 280,949 $ .06 - $3.64
Granted 186,800 $3.57 - $6.75
Exercised -- --
Canceled (13,344) $ 3.64
-------- -------------
Balance, March 31, 1996 454,405 $ .06 - $6.75
======== =============
</TABLE>
A total of 208,483 and 181,277 options were vested as of March 31, 1996 and
1995, respectively. The 245,922 options which are not vested as of March 31,
1996 will vest ratably over the next three to four years.
In connection with its initial public offering, the Company issued warrants to
purchase 1,000,000 shares of common stock for $6.25 per share, subject to
adjustment. Commencing April 18, 1995, the warrants are subject to redemption by
the Company at $.05 per warrant if the closing bid price of the common stock
averages in excess of $10.00.
9. SUBSEQUENT EVENT:
During May 1996, the Company closed a sale of 521,530 shares of common stock in
a private placement offering. Estimated net proceeds to the Company after
offering costs and subsequent registration of the shares were approximately
$2,225,000.
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<PAGE> 26
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
PART III
The information called for by Items 9 through 12 of Part III is included in the
Registrant's Proxy Statement and is incorporated herein by reference. The
information appears in the Proxy Statement under the captions "Election of
Directors," "Security Ownership of Directors and Executive Officers," "Executive
Compensation" and "Certain Transactions." For certain other information called
for by Item 9, pertaining to executive officers of the Registrant, see
"Executive Officers" in Item 1 of Part I of this Form 10-KSB.
ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------ -----------
<S> <C>
2.1* Articles of Merger of Timeline Services, Inc. into
Timeline, Inc.
3.1* Articles of Incorporation, as amended and in effect
3.2* Bylaws
4.1* Specimen Common Stock Certificate
4.2* Form of Warrant Agreement with Representative and
Warrant Agent
4.3* Form of Representative's Warrant
4.4* Specimen Redeemable Common Stock Purchase Warrant
10.1.A* Amended and Restated 1993 Stock Option Plan
10.1.B* Form of Employee Stock Option Agreement
10.5* 1994 Stock Option Plan
10.6* Directors' Nonqualified Stock Option Plan
Common Stock Purchase Warrants issued in
consideration of loans or loan guarantees:
10.8.A* Warrant issued July 31, 1994 to Frederick W. Dean
10.8.B* Warrant issued July 31, 1994 to Charles R. Osenbaugh
10.8.C* Warrant issued July 31, 1994 to John W. Calahan
10.8.D* Warrant issued July 31, 1994 to Michael R. Hallman
Employment Agreements
10.9.A* Form of Employment Agreement with John W. Calahan
10.9.B* Form of Employment Agreement with David B. Kouchi
10.9.C* Form of Employment Agreement with Donald K. Babcock
10.11* Form of Indemnification Agreement with directors and
officers
10.12* Form of Lock-up Agreement with securityholders
</TABLE>
Page 26
<PAGE> 27
<TABLE>
<S> <C>
10.13* Form of Employee (Confidentiality) Agreement
10.14* Form of License Agreement for Computer Application
Software (client/server)
10.15* Form of License Agreement for Computer Application
Software (VAX-based)
10.16* Form of Basic Service for Software Agreement
10.17* Form of Value Added Reseller (Distribution) Agreement
10.18.A* Solution Provider Agreement with Microsoft
Corporation dated September 23, 1994
10.19* Letter of Intent effective as of September 29, 1994
with Centre-file Limited
10.20* Private Label Software Development and Distribution
Agreement dated January 7, 1994 with
CompuServe/Collier-Jackson
10.21* U.S. Patent and Trademark Office Notice of Allowance
(Serial No. 08/162,839 [3/28/94])
10.22* Lease Agreement dated July 7, 1986, as amended, with
G&W Investment Partners, successor lessor under the
Agreement initially entered into with The Mutual
Life Insurance Company of New York
10.23** Value Added Reseller Agreement with K2 Group plc,
effective as of December 31, 1994
10.24*** Form of Consulting Partners Agreement
10.25*** Software Distribution Agreement with Centre-file
Limited dated April 28, 1995
11.1*** Statement re: computation of per share earnings
21.1* Subsidiary of Timeline, Inc.
</TABLE>
*Incorporated herein by reference from Item 27 of Registrant's Form SB-2.
**Incorporated herein by reference from Item 6(a) of Registrant's Form 10-QSB
for the quarter ended December 31, 1994 (therein listed as Exhibit 10.1).
***Incorporated herein by reference from Item 13 of Registrant's Form 10-KSB for
the year ended March 31, 1995.
(b) No reports on Form 8-K were filed during the quarter ended March 31, 1996.
Page 27
<PAGE> 28
SIGNATURES
In accordance with Section 13 or 15(d) of the Exchange Act, the registrant
caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
Timeline, Inc.
By: /s/ John W. Calahan
-------------------------------
John W. Calahan, President
Dated: June 17, 1996
In accordance with the Exchange Act, 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 Capacities Date
--------- ---------- ----
<S> <C> <C>
/s/ John W. Calahan Director June 17, 1996
- -------------------------------------------- President
John W. Calahan Chief Executive Officer
/s/ Donald K. Babcock Director June 17, 1996
- -------------------------------------------- Senior Technologist
Donald K. Babcock
/s/ Charles R. Osenbaugh Director June 17, 1996
- -------------------------------------------- Chief Financial Officer
Charles R. Osenbaugh Executive Vice President
Treasurer and Secretary
/s/ Michael R. Hallman Director June 17, 1996
- --------------------------------------------
Michael R. Hallman
/s/ Kent L. Johnson Director June 17, 1996
- --------------------------------------------
Kent L. Johnson
</TABLE>
Page 28
