<PAGE> 1
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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
--------------------------------------------
FORM 10-QSB/A
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTER ENDED SEPTEMBER 30, 1998 COMMISSION FILE NUMBER 1-13524
TIMELINE, INC.
(Exact name of small business issuer as specified in its charter)
WASHINGTON 91-1590734
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
3055 112TH AVENUE N.E., STE. 106
BELLEVUE, WA 98004
(Address of principal executive offices)
(206) 822-3140
(Issuer's telephone number)
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 [ ]
State the number of shares outstanding of each of the issuer's classes of common
equity, as of the latest practicable date:
OUTSTANDING AT
CLASS OCTOBER 15, 1998
Common Stock, $.01 Par Value 3,215,196
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<PAGE> 2
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
TIMELINE, INC.
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
SEPTEMBER 30, 1998
(UNAUDITED) MARCH 31, 1998
------------------ ------------------
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 320,511 $ 59,022
Accounts receivable, net of allowance
of $32,548 and $60,966 575,220 1,372,155
Prepaid expenses and other 43,759 94,381
Receivable from related parties 23,536 174,864
------------------ ------------------
Total current assets 963,026 1,700,422
PROPERTY AND EQUIPMENT, net of accumulated
depreciation of $1,528,567, and $1,469,026 440,123 490,167
CAPITALIZED SOFTWARE COSTS, net of accumulated
amortization of $993,143 and $863,339 588,535 472,496
OTHER ASSETS 1,052 21,072
------------------ ------------------
Total assets $ 1,992,736 $ 2,684,157
================== ==================
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 63,730 $ 352,392
Accrued expenses 240,306 399,386
Line of credit -- 146,872
Deferred revenue 384,043 460,191
Current portion of long-term debt 232,778 329,578
Current portion of capital leases 10,705 19,939
------------------ ------------------
Total current liabilities 931,562 1,708,358
OBLIGATIONS UNDER CAPITAL LEASES, net of current portion 9,662 5,781
------------------ ------------------
Total liabilities 941,224 1,714,139
------------------ ------------------
STOCKHOLDERS' EQUITY:
Common stock 32,184 32,147
Additional paid-in capital 9,206,043 9,205,706
Unearned ESOP shares (270,833) (270,833)
Accumulated deficit (7,915,882) (7,997,002)
------------------ ------------------
Total stockholders' equity 1,051,512 970,018
------------------ ------------------
Total liabilities and stockholders' equity $ 1,992,736 $ 2,684,157
================== ==================
</TABLE>
The accompanying notes are an integral part of these balance sheets.
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<PAGE> 3
TIMELINE, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30,
1998 1997 1998 1997
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
REVENUES:
Software license $ 400,717 $ 282,045 $ 1,246,854 $ 484,186
Software development 25,200 185,051 26,873 305,851
Maintenance 210,576 172,345 396,804 406,662
Consulting and other 165,560 244,453 331,233 521,958
------------- ------------- ------------- -------------
Total revenues 802,053 883,894 2,001,764 1,718,657
COST OF REVENUES: 220,726 333,063 460,622 792,985
------------- ------------- ------------- -------------
Gross profit 581,327 550,831 1,541,142 925,672
------------- ------------- ------------- -------------
OPERATING EXPENSES:
Sales and marketing 102,145 156,261 272,107 475,932
Research and development 182,075 132,621 364,245 296,299
General and administrative 256,527 338,471 691,156 815,054
Depreciation 64,268 56,099 100,209 118,403
------------- ------------- ------------- -------------
Total operating expenses 605,015 683,452 1,427,717 1,705,688
------------- ------------- ------------- -------------
Income (loss) from operations (23,688) (132,621) 113,425 (780,016)
------------- ------------- ------------- -------------
OTHER INCOME (EXPENSE):
Gain on Sale of Timeline Europe Limited -- 1,038,409 -- 1,038,409
Interest income 7,358 1,208 8,337 2,114
Interest expense (18,598) (36,838) (40,641) (73,183)
------------- ------------- ------------- -------------
Total other income (expense) (11,240) 1,002,779 (32,304) 967,340
------------- ------------- ------------- -------------
Net income (loss) $ (34,928) $ 870,158 $ 81,121 $ 187,324
============= ============= ============= =============
Basic net income (loss) per common share $ (0.01) $ 0.28 $ 0.03 $ 0.06
============= ============= ============= =============
Diluted net income (loss) per common and
common equivalent share $ (0.01) $ 0.27 $ 0.02 $ 0.06
============= ============= ============= =============
Shares used in calculation of basic
earnings per share 3,215,178 3,131,610 3,215,178 3,131,610
============= ============= ============= =============
Shares used in calculation of diluted
earnings per share 3,215,178 3,195,254 3,257,310 3,195,254
============= ============= ============= =============
</TABLE>
The accompanying notes are an integral part of these financial statements.
3
<PAGE> 4
TIMELINE, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE SIX MONTHS ENDED SEPTEMBER 30, 1998 AND 1997
(UNAUDITED)
<TABLE>
<CAPTION>
1998 1997
------------ ------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net cash provided by operations $ 806,524 $ 65,556
------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment (50,165) (8,072)
Capitalized software costs (245,845) (155,854)
------------ ------------
Net cash used in investing activities (296,010) (163,926)
------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from note receivable -- 157,214
Borrowings on notes payable -- 192,649
Borrowings under line of credit 64,892 --
Payments on notes payable (96,800) (373,096)
Payments on line of credit (211,764) --
Payments on capital lease obligations (5,353) (8,341)
Proceeds from issuance of common stock and ESOP contributions -- 917
------------ ------------
Net cash used in financing activities (249,025) (30,657)
------------ ------------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 261,489 (129,027)
CASH AND CASH EQUIVALENTS, beginning of period 59,022 187,428
------------ ------------
CASH AND CASH EQUIVALENTS, end of period $ 320,511 $ 58,401
============ ============
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the period for -
Interest $ 52,860 $ 73,183
Income taxes -- --
</TABLE>
The accompanying notes are an integral part of these financial statements
4
<PAGE> 5
TIMELINE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
SEPTEMBER 30, 1998
1. INTERIM FINANCIAL STATEMENTS
The accompanying financial statements of Timeline, Inc. (the Company) are
unaudited. In the opinion of the Company's management, the financial statements
include all adjustments, consisting only of normal recurring adjustments,
necessary to state fairly the financial information set forth therein. In
addition, the amounts included in the six months ended September 30, 1997 for
research and development and general and administrative expenses have been
restated to correct a transposition from the amounts previously reported.
Results of operations for the three-month and six-month periods ended September
30, 1998 are not necessarily indicative of future financial results.
Certain notes and other information have been condensed or omitted from the
interim financial statements presented in this Quarterly Report on Form 10-QSB.
Accordingly, these financial statements should be read in conjunction with the
Company's audited financial statements and accompanying notes for the year ended
March 31, 1998, previously reported.
2. STOCKHOLDERS' EQUITY
Changes in stockholders' equity for the period from March 31, 1998 to September
30, 1998 were as follows:
<TABLE>
<S> <C>
Stockholders' equity, March 31, 1998 $ 970,018
Exercise of common stock options 373
Net income 81,121
------------
Stockholders' equity, September 30, 1998 $ 1,051,512
============
</TABLE>
3. NET INCOME (LOSS) PER COMMON SHARE
Basic net income (loss) per share is the net income (loss) divided by the
average number of shares outstanding during the year. Diluted net income (loss)
per share is calculated as the net income (loss) divided by the sum of the
average number of shares outstanding during the year plus the net additional
shares that would have been issued had all dilutive options been exercised, less
shares that would be repurchased with the proceeds from such exercise (Treasury
Stock Method). During the quarter ended September 30, 1998, the effect of
including outstanding options is antidilutive, therefore, options have been
excluded from the calculation of diluted net loss per share. Shares in the
Employee Stock Ownership Plan, which were not committed to be released to plan
participants as of each quarter end are not considered outstanding for the
earnings per share calculation.
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<PAGE> 6
The computation of diluted net income (loss) per common and common equivalent
share is as follows for the three-month and six-month periods ended September
30:
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
September 30, September 30, September 30, September 30,
1998 1997 1998 1997
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
Net income (loss) $ (34,928) $ 870,158 $ 81,121 $ 187,324
------------- ------------- ------------- -------------
Weighted average common shares 3,215,178 3,131,610 3,215,178 3,131,610
outstanding
Plus: dilutive options and warrants -- 64,644 324,644 64,644
Less: shares assumed repurchased with proceeds
from exercise -- (1,000) (282,512) (1,000)
------------- ------------- ------------- -------------
Weighted average common and common equivalent
shares outstanding 3,215,178 3,195,254 3,257,310 3,195,254
============= ============= ============= =============
Diluted net income (loss) per common and common
equivalent share $ (0.01) $ 0.27 $ 0.02 $ 0.06
============= ============= ============= =============
</TABLE>
4. LITIGATION
In May 1998, the Company, certain of its directors, former directors and
officers, were named as defendants in a securities lawsuit, Tennant v. Timeline,
Inc., et al., Case No. 9805-03737, in the Circuit Court of the State of Oregon
for Multnomah County. The lawsuit alleged certain violations of Oregon state
securities laws filed by several individual shareholders who purchased stock
primarily in the 1996 private placement. The Company intends to vigorously
defend such lawsuit. The ultimate outcome of such litigation is uncertain,
however, the Company believes its potential losses are limited to $250,000 based
on the limits of its insurance policies.
6
<PAGE> 7
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
This Management's Discussion and Analysis of Financial Condition and Results of
Operations includes a number of forward-looking statements which reflect the
Company's current views with respect to future events and financial performance.
These forward-looking statements are subject to certain risks and uncertainties
including those discussed below that could cause actual results to differ
materially from historical results or those anticipated. When used herein, the
words "anticipate," "believe," "estimate," "intend," "may," "will," "expect" and
similar expressions as they relate to the Company are intended to identify such
forward-looking statements. The Company's actual results, performance or
achievements could differ materially from the results expressed in, or implied
by, these forward-looking statements. The Company does not undertake any
obligation to revise these forward-looking statements to reflect any future
events or circumstances. In addition, the disclosures under the caption "Other
Factors that May Affect Operating Results", consist principally of a brief
discussion of risks which may affect future results and are thus, in their
entirety, forward-looking in nature. Readers are urged to carefully review and
consider the various disclosures made by the Company in this report and in the
Company's other reports previously filed with the Securities and Exchange
Commission (the "SEC"), including the Company's periodic reports on Forms 10-KSB
and 10-QSB, and the Company's registration statements on Forms SB-2 and S-3, and
those described from time to time in the Company's press releases and other
communications, which attempt to advise interested parties of the risks and
factors that may affect the Company's business.
RESULTS OF OPERATIONS
REVENUES
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
September 30, September 30,
1998 1997 Change 1998 1997 Change
- -----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
(Dollars in Thousands)
Software license 401 282 42% 1,247 484 158%
Software development 25 185 (86)% 27 306 (91)%
Maintenance 211 172 23% 397 407 (2)%
Consulting and Other 165 245 (33)% 331 522 (37)%
------------------------- -------------------------
Revenues 802 884 (9)% 2,002 1,719 16%
- -----------------------------------------------------------------------------------------------------------------------
</TABLE>
Total operating revenues for the three months ended September 30, 1998 were down
9% compared to the prior year comparable quarter from $884,000 to $802,000. For
the six-month period ended September 30, 1998 compared to September 30, 1997,
total revenues were up 16% from $1,719,000 to $2,002,000. However, the mix of
revenue source changed substantially, reflecting a continuing shift in the
business focus of the Company. This shift, while instituted shortly after the
change in management which occurred in the third quarter of fiscal 1997, has
taken time to be fully reflected in year-to-year comparable results. The
emphasis has been on delivery of the Company's products to the market through
third-party alliance partners, as opposed to primary reliance on direct end-user
sales. The implementation of this strategy has been reflected as a gradual
realignment of revenues due to the long-term nature of delivery of product
through alliances. In order to integrate Timeline products with the products of
its alliance partners, the Company generally is required to make certain
software enhancements. In addition, substantial marketing efforts are necessary
to train and inform the alliance partners' sales professionals of the Company's
products to enable them to represent an expanded product line.
7
<PAGE> 8
Software license revenues for the quarter and six months ended September 30,
1998 increased over the comparable periods ended September 30, 1997. These
increases primarily reflect license revenue, net of discounts or fees, from the
Company's alliance partners as part of its emphasis on third-party distribution
and marketing, including a significant one-time license fee from Seagate
Software, Inc. Management believes the increase in license revenue verifies its
shift in strategy is appropriate, and that it allows greater representation in
the market than could be afforded through a direct sales model.
Development fee revenue was substantially lower in the six months and quarter
ending September 30, 1998 than September 30, 1997. This is reflective of
management not pursuing revenue through custom programming. Rather, the Company
believes its development resources are best utilized to support the Company's
third-party alliance relationships, by making software enhancements necessary to
integrate new alliance partners' products with Timeline products. Additionally,
the decrease is due in part to the Company's change in policy not to require all
or a portion of the up front costs of such integration to be shared by new
alliance partners to the same extent as in prior years. Management believes its
prior policy was a negative factor in trying to make new alliances, and, to the
extent the Company can afford to bear these costs, the Company believes the
results will be reflected by a greater number of alliance partners over time
than there would be if such "barrier to entry" was maintained.
While maintenance revenue was relatively even for the comparable six-month
periods (down 2%), it increased 23% for the comparable three-month periods. This
increase reflects the continued increases in maintenance revenue from the
Company's product series based on Microsoft Corporation's operating systems,
more than offsetting decreasing maintenance fees from licensees of Timeline's
Digital-based product line.
Consulting revenue decreased 33% and 37% in the comparable quarters and
six-month periods, respectively. This decrease is a direct result of the
reduction in the number of employees involved in consulting in the US for the
comparable quarters. In addition, this decrease is due in part to the complete
elimination of consulting revenue from Analyst Financials Limited (formerly
Timeline Europe Limited) in the first half of fiscal 1999, as compared to its
inclusion for a portion of the comparable fiscal 1998 period. The Company
believes that as its licensing relationships increase, this will result in
increased demand for consulting services in subsequent quarters. This lag is a
natural result of the time it takes to gear up for new implementations and
training required when hiring new consulting resources. The Company hired two
new employees to increase its staff of consultants during the second quarter of
fiscal 1998 and expects that consulting revenue will increase during the third
quarter of fiscal 1999.
GROSS MARGIN
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
September 30, September 30,
1998 1997 Change 1998 1997 Change
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
(Dollars in Thousands)
Gross profit 581 551 5% 1,541 926 66%
Percentage of
operating revenues 72% 62% 77% 54%
- -----------------------------------------------------------------------------------------------------------------------------
</TABLE>
The positive change in the Company's gross margin as a percentage of gross
revenue is due in large part to changes in the mix of higher-margin software
licenses and lower margin consulting and maintenance revenue, which is labor
intensive. Changes in amortization of capitalized software costs were immaterial
between the comparable periods of fiscal 1999 and fiscal 1998. Amortization for
the three and six-month
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<PAGE> 9
periods of fiscal 1999 were $76,000 and $130,000 respectively, compared with
$69,000 and $135,000 for the three and six-month periods of fiscal 1998,
respectively.
SALES AND MARKETING EXPENSE
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
September 30, September 30,
1998 1997 Change 1998 1997 Change
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
(Dollars in Thousands)
Sales and marketing 102 156 (35)% 272 476 (43)%
Percentage of
operating revenues 13% 18% 14% 28%
- -----------------------------------------------------------------------------------------------------------------------------
</TABLE>
Sales and marketing expenses as a percentage of net sales and in actual dollar
amounts decreased substantially between the periods presented. This decrease is
due to the significant reduction in sales personnel and related expenses in the
United States, and in part to the elimination from the Company's financial
statement for fiscal 1999 of such expenses for the previously wholly-owned
Timeline Europe Limited. During the quarter ended September 1998, the Company
hired one additional sales and marketing staff member to meet increased demands,
but does not anticipate that additional personnel will be needed in this area in
the immediate future. Management believes actual dollar amounts and percentage
of revenue comparisons may vary in future quarters based upon the volume of
sales from quarter to quarter.
RESEARCH AND DEVELOPMENT EXPENSE
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
September 30, September 30,
1998 1997 Change 1998 1997 Change
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
(Dollars in Thousands)
Research & development 182 133 37% 364 296 23%
Percentage of
operating revenues 23% 15% 18% 17%
- ---------------------------------------------------------------------------------------------------------------------------
</TABLE>
The Company previously made a strategic decision not to undertake any research
and development on new products unless directly related to its third-party
alliance relationships and better serving the needs of its distributors'
end-user community. Accordingly, research and development expenses during the
periods ended September 30, 1998 and 1997 were attributable solely to making
certain software enhancements to meet the particular needs of its distributors
and to integrate the Company's products with the accounting package(s) of the
various vendors. The increases in the quarter and six-month periods ending
September 1998 over the quarter and six-month periods ending September 30, 1997
are due to modest increases in staffing and contract expenses.
Management believes the actual dollar amount of research and development
expenses will increase in future quarters. The Company has hired additional
personnel in this area during the period ended September 30, 1998 and expects to
hire additional personnel in future quarters to meet the demand generated by the
Company's success in entering into distribution and private label agreements
with various accounting vendors.
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<PAGE> 10
GENERAL AND ADMINISTRATIVE EXPENSE
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
September 30, September 30,
1998 1997 Change 1998 1997 Change
- ------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
(Dollars in Thousands)
General & administrative 257 338 (24)% 691 815 (15)%
Percentage of
operating revenues 32% 38% 35% 47%
- ------------------------------------------------------------------------------------------------------------------------------
</TABLE>
General and administrative expenses decreased 24% and 15%, respectively, between
the comparable three-month periods and six-month periods ended September 30,
1998 and September 30, 1997. This decrease is a direct result of management's
efforts to reduce the workforce and related overhead expenses as well as the
elimination of Timeline Europe Limited as a consolidated subsidiary of the
Company. Management believes that general and administrative expenses should
remain relatively stable over the next several quarters other than legal fees,
which are event driven. In addition, the Company is committed to vigorously
pursue its defense in the securities litigation (as discussed in Note 4 of the
Notes to Financial Statements above), and is also committed to pursue
enforcement of its recently granted patent rights, and as a result management
believes its legal and enforcement expenses will increase substantially over the
next several quarters.
INCOME TAX
Income taxes are provided in the statement of operations in accordance with the
asset and liability method. The Company has determined that the tax assets
generated by the net operating losses and research and experimentation credits
do not satisfy the recognition criteria set forth under the liability method.
Accordingly, a valuation allowance is recorded against the applicable deferred
tax assets and therefore no tax benefit is recorded.
In connection with the Company's initial public offering in January 1995, the
Company experienced a significant change in ownership, which limits the amount
of net operating loss carry forwards and credits which may be used in any given
year. However, the Company does not expect this to be a factor in fiscal 1999.
LIQUIDITY AND CAPITAL RESOURCES
The Company's cash and cash equivalent and short-term investment balances at
September 30, 1998 stood at $321,000 compared to $59,000 at March 31, 1998. The
increase in cash is attributable to substantial collections of outstanding
accounts receivable and the profitable operations in the six-month period. Total
obligations, excluding deferred income items, totaled $557,000 at September 30,
1998 as compared to $1,254,000 at March 31, 1998. The fiscal 1999 obligations
include a corporate guarantee of a $167,000 bank note between the Timeline
Employee Stock Ownership Trust 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"), however, since these contributions
have been negligible, those obligations will likely be paid out of operating
funds. The Company is currently out of compliance with certain debt covenants
associated with the ESOP debt and has therefore classified this debt as current.
The President and CEO of the Company has personally guaranteed this debt.
10
<PAGE> 11
Net cash generated in operating activities was $807,000 in the six-month period
ended September 30, 1998. This was primarily due to the Company reducing its
accounts receivable and generating net income offset by a reduction in current
liabilities. The Company used $296,000 for investing activities and $249,000 for
financing activities during the same period.
Based on current cash and cash equivalent balances, the Company believes it has
adequate resources and credit lines to fund operations during fiscal 1999.
However, additional borrowings, sales of equity or debt instruments or
substantial sales of assets may be required if the Company experiences any
significant losses.
At September 30, 1998, the outstanding balance on the Company's line of credit
facility was zero. Timeline has a bank line of credit of up to $625,000 secured
by qualified account receivables. As of September 30, 1998, the Company had
approximately $337,000 available on this line of credit, based upon qualified
account receivables.
OTHER EVENTS
On September 1, 1998 the U.S. Patent and Trademark Office granted the Company US
Patent #5, 802,511 on, among other things, its method of building databases
optimized for reporting from information contained in other sources of data.
While the Company's investigation of the import of this patent is very
preliminary, management believes the patent may have value for application
vendors in areas that are not directly competitive with the Company.
Additionally, the Company is vigorously investigating a number of other
application vendors' product offerings in an attempt to determine if there is
infringement of the Company's patent rights. Furthermore, the Company is
pursuing additional related claims before the US Patent and Trademark Office and
has filed for patent protection in approximately 20 additional countries.
Management intends to seek ways to commercialize the patent outside of the
Company's primary area of application through licensing and joint ventures.
Additionally, in the event the Company determines, in its opinion, that other
software vendors are offering products which infringe upon the Company's patent
rights, it intends to vigorously enforce its rights against those parties. At
this preliminary stage, it is very difficult to measure the effect any of these
activities will have on the Company's future expenses and revenue. However,
management believes that expenses for enforcement of its existing and potential
patent rights will increase during subsequent periods, as will the expenses
associated with pursuing patent rights internationally. Because a patent is
subject to attack from a party who may have developed prior technology unknown
to the patent office and the Company, any analysis of whether these activities
will ultimately generate additional revenue is speculative. However, management
intends to undertake a systematic and reasoned effort, including, if
appropriate, filing infringement suits in its efforts to commercialize the
patent.
OTHER FACTORS THAT MAY AFFECT OPERATING RESULTS
The Company's operating results may fluctuate due to a number of factors,
including, but not limited to, the ability of the Company to continue to develop
and expand distribution channels and to continue to develop relationships with
third-party distributors and licensees of the Company's products, the ability
and expense to integrate the Company's products with those of its third-party
distributors and licensees, the ability of the Company to hire qualified
consulting, sales and marketing, and research and development personnel and its
ability to generate revenue from such personnel, the outcome of the securities
litigation against the Company, the availability of additional financing or
capital resources, the volume and timing of systems sales and licenses, changes
in the product mix of revenues, changes in the level of operating expenses, and
general economic conditions in the software industry. All of the above factors
are difficult for the Company to forecast, and can materially adversely affect
the Company's business and operating results for one quarter or a series of
quarters.
11
<PAGE> 12
YEAR 2000 READINESS
The statements in the following section include "Year 2000 readiness disclosure"
within the meaning of the Year 2000 Information and Readiness Act. The Company
has undertaken a plan to address the potential impact to its business of "Year
2000 issues" (i.e., issues that may arise as a result of computer programs that
use only the last two, rather than all four, digits of the year). The plan
addresses Internal Matters, which are under the Company's operation and over
which the Company exercises some control, and External Matters, which are
outside the Company's control and influence.
Internal Matters. The Company's review of Internal Matters falls into two
categories; which are identified and addressed separately below.
Computer Hardware and Software:
1. The Y2K compliance status of the Microsoft products used by the Company is
found at http://www.microsoft.com/technet/topics/year2k/default.htm. All
products are deemed compliant by Microsoft with two exceptions. The NT
Workstation SP3 requires an upgrade that has not yet been applied, and
Microsoft Access 2.0 does not pass Microsoft's test for Y2K compliance.
However, the Company's use of Access 2.0 as required for its Financial
Server products has been tested and it is the Company's belief that
Financial Server using Access 2.0 is Y2K compliant.
2. The DEC VAX system and a DEC AXP system run OpenVMS. The AXP has been
upgraded to V7.1 and the upgrade of the VAX to V7.1 is scheduled for the
first quarter of calendar 1999. Compaq's Y2K position on OpenVMS V7.1
(compliant) is stated at
http://www.openvms.digital.com/openvms/products/year2000/index.html. The Y2K
position of the BASIC compiler and the C Compiler that is used for
maintenance of the Company's VMS products will be assessed in the first
quarter of calendar 1999.
3. PC hardware. The Company has less than 75 PC's in use and estimates that
fewer than 25% of those will need upgrades to be compliant. This upgrade
project is expected to be completed in the first half of calendar 1999.
4. Various other software packages. Certain employees of the Company require
software products to assist them in their jobs. The number of these products
is estimated to be fewer than ten, and assessment of the products for Year
2000 compliance is scheduled to take place in the first half of calendar
1999.
5. A listing of printers, modems and other computer hardware is being
assembled, reviewed and assessed for Year 2000 compliance. After the review
is completed, a determination will be made regarding the need to upgrade or
replace the various hardware products.
The Company estimates that the cost for the upgrades listed above and any
replacements will not exceed $15,000. The Company intends to fund Year 2000
upgrades and changes through operating cash flow and indebtedness.
Timeline Software Products:
The Company's current versions of its products and services are designed to be
Year 2000 compliant. Following is a list showing the current version number of
the software products that are believed to be Year 2000 compliant:
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Vax/Alpha Version 6.0
Financial Analytics Version 2.5 and higher
MV Server Versions 2.4d and 2.5c
Analyst 1.5 compatible suite*
Third-Party Alliance Partner Filters
*Designed to be Y2K compliant, but no testing performed. Upgrade
recommended to Financial Analytics
The Company recognizes that certain customers may have made custom, site
specific changes to software provided by the Company. The Company cannot assess
the number or nature of such customizations nor their Y2K compliance. To the
extent the customization work was performed by the Company, customers may
request a review and, if possible, an upgrade to the customization on a time and
materials basis. While the Company's above-listed products have been released as
Year 2000 compliant, certain customers have not yet upgraded to these versions.
Although the Company believes that its internal systems, products and services
are currently Year 2000 compliant, a complete re-testing of the current release
of the software is scheduled to take place during the first half of calendar
1999. However, there can be no assurances that the Company's products and
systems contain all necessary date codes. In addition, there can be no guarantee
that the systems of other companies on which the Company relies or with whom it
does business will be Year 2000 compliant and would not have an adverse effect
on the Company's business.
Timeline makes no representation or warranty as to, and will not address, the
Year 2000 readiness of any hardware, firmware, software, services protocols,
data, interfaces to third party systems, or user-customized functions or
features that may be used with Timeline software other than those Company
products discussed above. The Company does not plan to test any products other
than the current version and will not provide Year 2000 support for any products
other than those identified on the list. The information contained on the list
is based on data available to the Company at the time of its preparation. From
time to time, Timeline may change the information on the list without notice to
the customer.
The Company estimates that the cost to date for upgrading its products to be
Year 2000 compliant is approximately $160,000. These costs have been incurred
over a several year period and have been funded by operating cash flow. Although
future expenses are not known at this time, the Company believes they will not
be material.
The Company estimates that it has completed approximately 60% of its year 2000
Plan regarding Internal Matters. The Internal Matter review process is planned
for completion by the end of the June 1999.
External Matters. The Company has commenced a review of External Matters which
are outside the Company's control and influence. This process consists of a
determination of the customer and supplier relationships and third-party
alliance partners that could have a potential material impact upon the Company
and its ongoing operations. Confirmation of Y2K compliance has been received
from the building management with regard to building systems, the telephone
system and service providers, and the Company's business equipment such as
copiers, postage and fax machines. Additional vendors and suppliers may be added
if further analysis determines the impact on the Company would be material in
the event of a Year 2000 compliance failure. The Company will be contacting its
third-party alliance partners with regard to their Year 2000 Compliance status
and any compatibility issues that may arise.
A contingency plan for External Matters has not yet been completed and there can
be no assurance that Year 2000 problems resulting from customer, supplier or
third-party alliance partner relationships will not have a material adverse
impact on the Company. The Company anticipates completion of this process by
June 30, 1999.
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The Company estimates that it has completed approximately 60% of its Year 2000
plan for External Matters. To date, it has incurred expenses of less than
$15,000, and anticipates future direct costs to be no more than an additional
$20,000.
Although the Company believes that it has an effective plan in place that will
resolve any Year 2000 issues in a timely manner, the Company may be adversely
impacted by Year 2000 issues if its re-testing of its software products indicate
Year 2000 processing problems, or if upgrades to internal computer hardware and
software are not completed on schedule. In the event that third parties do not
complete the necessary remediation, the Company could be subject to interruption
of its normal business activities, including its ability to meet product
development deadlines, maintain consulting schedules, generate revenue through
third-party alliance partners, deliver software to customers, invoice customers,
collect payments or engage in similar business activities. Such an event could
result in a material adverse effect on the Company's revenues or in litigation
surrounding such business interruptions. In addition, disruptions in the economy
generally resulting from the Year 2000 issue could materially adversely affect
the Company. The amount of potential liability and revenues cannot reasonably be
estimated at this time.
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PART II. - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
In May 1998, the Company, certain of its directors, former
directors and officers, were named as defendants in a securities
lawsuit, Tennant v. Timeline, Inc., et al., Case No. 9805-03737,
in the Circuit Court of the State of Oregon for Multnomah
County. The lawsuit alleged certain violations of Oregon state
securities laws filed by several individual shareholders who
purchased stock primarily in the 1996 private placement. The
Company intends to vigorously defend such lawsuit. The ultimate
outcome of such litigation is uncertain, however, the Company
believes its potential losses are limited to $250,000 based on
the limits of its insurance policies.
In addition, on October 9, 1998, the Company filed a complaint
in the U.S. District Court for the Western District of
Washington, Timeline, Inc. v. Clarus Corporation (case number
C98-1431). The lawsuit seeks unspecified damages from Clarus
Corporation for claims of patent infringement, breach of
contract and misappropriation of Company trade secrets. This
litigation is in its infancy and its ultimate outcome and any
recovery by the Company is uncertain.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
In September 1998, the Company granted a warrant to purchase
21,000 shares of Timeline, Inc. common stock, at an exercise
price of $1.00 per share, to Len Cereghino & Co. in payment of
services rendered.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
At the Company's Annual Meeting of Shareholders held on July 16,
1998, one director nominee was duly elected on the following
vote:
<TABLE>
<CAPTION>
Affirmative Votes Votes Withheld
----------------- --------------
<S> <C> <C>
Frederick W. Dean 2,935,529 9,720
</TABLE>
A second proposal, the ratification of Arthur Andersen LLP as
the Company's independent auditors for the year ending March 31,
1999 was voted on and approved at the Company's Annual Meeting
on the following vote:
<TABLE>
<CAPTION>
Affirmative Votes Negative Votes Abstentions
----------------- -------------- -----------
<S> <C> <C>
2,927,949 6,800 10,500
</TABLE>
ITEM 5. OTHER INFORMATION
None
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ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
27.1 Financial Data Schedule
(b) No reports on Form 8-K were filed during the three
months ended September 30, 1998.
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SIGNATURES
In accordance with the requirements of the Exchange Act, the registrant caused
this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
Timeline, Inc.
(Registrant)
Date: February 22, 1999 By: /s/ Charles R. Osenbaugh
--------------------------------
Charles R. Osenbaugh
President/Chief Financial Officer
Signed on behalf of registrant and as
principal financial officer.
17
