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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
For the fiscal year ended March 31, 2000
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from __________ to __________
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)
(425) 822-3140
(Issuer's telephone number)
Securities registered under Section 12(b) of the Exchange Act:
COMMON STOCK, $.01 PAR VALUE
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 [ ]
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. [ ]
The issuer's revenues for its most recent fiscal year were: $7,945,919.
As of May 15, 2000, 3,449,112 shares of the Registrant's common stock were
outstanding and the aggregate market value of such common stock held by
non-affiliates was approximately $7,854,630 based on the average of the bid
($2.50) and ask ($3.00) prices on that date of $2.75.
DOCUMENTS INCORPORATED BY REFERENCE
(1) Proxy Statement relating to the Company's July 20, 2000 Annual Meeting of
Shareholders and to be filed with the Commission within 120 days of the end of
the fiscal year (the "Proxy Statement").
Transitional Small Business Disclosure Format (Check One): Yes [ ] No [X]
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PART I
This Annual Report on Form 10-KSB includes a number of forward-looking
statements that reflect the Company's current views with respect to business
strategies, products, 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, but are not the exclusive means of identifying such
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. TO FACILITATE READERS IN IDENTIFYING FORWARD-LOOKING
STATEMENTS IN THE OTHER SECTIONS OF THIS DOCUMENT, THE COMPANY HAS ATTEMPTED TO
MARK SENTENCES CONTAINING SUCH STATEMENTS WITH A SINGLE ASTERISK AND PARAGRAPHS
CONTAINING ONLY FORWARD LOOKING STATEMENTS WITH DOUBLE ASTERISKS. HOWEVER, NO
ASSURANCE CAN BE MADE ALL SUCH STATEMENTS HAVE BEEN IDENTIFIED AND MARKED.
Therefore, 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
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.
ITEM 1: DESCRIPTION OF BUSINESS
OUR BUSINESS
We develop, market and support company-wide financial reporting,
budgeting and management software. Our software products enable customers to
automatically access and distribute business and accounting information in a
secure environment and with full accounting controls. Although we have products
that permit the processing of transactions, our marketing and development
strategy is focused on products that report accounting data in meaningful and
flexible formats. These reporting products allow our customers to gather and
distribute business information throughout their companies while maintaining
maximum flexibility in determining the types of transaction processing systems
they will use. We allow the end-user to receive information through a web
browser, distributed Excel workbooks, data marts or actual reports delivered via
e-mail.
Many financial and management reporting products are focused on the
presentation, either electronically or on paper, of processed data in formatted
reports. While our products can present information in formatted reports, our
technology can also distribute an actual database of information (a "data mart")
to an end-user's computer. These databases or data marts are built through
selective criteria that limit the data mart to relevant data for each particular
end-user. This design is intended to allow for the distribution of manageable
packets of data over networks or the Internet while maintaining 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 in a standard
corporate report format or through a personal library of customized report
formats. Additionally, the data resides in Microsoft Office, which makes it
automatically available for use in Microsoft Excel spreadsheets and all other
Microsoft Office tools.
We believe that our proprietary technology allows customers to avoid
time-consuming, error-prone and expensive data entry.* Our products allow
customers to avoid data entry by facilitating an efficient exchange of
information between the desktop computer and the underlying hardware platform
and accounting system. Our products also work with both new and old accounting
systems. Many customers are changing their accounting systems from larger
mainframe- and minicomputer-based systems to newer "client/server" systems that
store information on a server that in turn makes the information available to a
desktop computer (the "client"). Our products facilitate an efficient exchange
of information between the client and server.
Other businesses have elected to retain their existing, or "legacy"
accounting systems. Our business strategy is focused on meeting the financial
management needs of customers with both types of accounting systems by providing
products that accept and report on data from both legacy and newer client/server
systems.
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Our Timeline(R) Analyst and Timeline(R) Server product lines are
designed to gather data from multiple operating systems and hardware platforms,
old and new, for translation into a Microsoft client/server environment. Our
products enable our customers to:
- perform financial reporting and management functions;
- connect to multiple types of operating systems;
- efficiently distribute data to desktop computers;
- perform consolidations and allocations; and
- perform budgeting functions.
The flexibility of our Timeline products make it possible for our customers to
deliver data for reporting and analysis throughout their business enterprise
without purchasing a new, expensive computer system.
In addition to providing an infrastructure to deliver data, Timeline
provides a number of processes to enhance or augment sophisticated financial
reporting. These include budgeting, allocations, consolidations, foreign
currency conversion and security.
We believe that our products can improve the accounting and reporting
software of other software vendors.* Our products are designed to enhance
existing accounting and reporting software by adding functions and flexibility
that the software may not have. As a result, our products can eliminate
weaknesses or competitive disadvantages in other accounting and reporting
software. Our preferred method of product distribution is through
transaction-based software vendors that bundle our products or distribute our
products in conjunction with their accounting and reporting systems. We believe
that a majority of our license fee revenue in fiscal year 2001 will be generated
by licensing and distribution agreements with these third-party vendors.*
At March 31, 2000, we employed 33 full-time employees and two part-time
employees.
OUR TECHNOLOGY
Our software works with a customer's entire computing infrastructure to
create a reporting engine that can accept and organize data, with full
accounting controls, from both new and old accounting systems. Our proprietary
architecture, in conjunction with our proprietary generation engine, is designed
to accomplish this task. The compatibility of our software with older legacy
accounting systems allows a customer to preserve existing computer hardware and
software systems or transition to a client/server environment while providing
enhanced reporting capabilities. If a customer is already using client/server
systems, our technology provides distributed packets of data that enhance the
productivity of reporting, budgeting and analysis professionals throughout the
enterprise. Our products use patent-protected driver technology that not only
automates the transfer of data from accounting and information systems into
desktop databases, but can automate rebuilding databases to reflect changes in
the underlying accounting information. This eliminates the costly process of
maintaining databases in both our software and the underlying accounting system.
The following is a brief discussion of our three primary proprietary
technologies:
- Timeline Architecture. Our architecture contains a multi-dimensional
data segmentation capacity that exceeds the capacity of all accounting
data structures known to the Company. This capacity enables our
reporting products to accept data from multiple transaction processing
systems concurrently, to combine data into a single database and to
add reporting relationships not present in the source system(s). For
example, we can (a) take data from a customer's general ledger, human
resources/payroll, sales and order processing systems, (b) combine all
of the data in one database, and (c) allow the customer to use the
combined data for payroll and sales analysis.
- Generation Engine. Our generation engine enables our products to
automate the building of Microsoft-compatible databases. Prior
technologies required substantial human intervention to manually build
tables, input forms and manipulate other attributes of the data. The
generation engine allows a customer to build a wide range of databases
for distribution throughout the business enterprise.
- Interface Technology. Our interface technology allows our products to
(a) discern the structure of existing transaction-based systems, (b)
extract data from one or more transaction processing systems,
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and (c) feed data to the generation engine. Our product is tied
directly to the underlying accounting systems and changes made in
these underlying systems (such as adding a new accounting relationship
for a newly purchased company) are automatically reflected in our data
marts. Prior technologies required substantial human intervention to
manually maintain structures in both the transaction and reporting
systems, and maintain the synchronization of the accounting and
information systems.
We have been granted three patents by the U.S. Patent and Trademark
Office on our technology and have a total of 70 issued claims. We believe
additional International patents will be granted during fiscal 2001.*
OUR PRODUCTS
Our products make it possible to distribute information and data marts
from an underlying accounting system to the desktop. Our primary products,
Timeline Analyst and Timeline Server, consist of a set of client/server software
applications based on Microsoft Windows(TM)/Windows NT(TM) and Microsoft Office
operating systems. Once data is contained in a local Microsoft Office database,
the data is available for each end-user to develop his or her own analysis or
personal reports using Microsoft or Timeline-enhanced technology. The
personalized data on the desktop is as accurate as is the data in the underlying
accounting system.
Timeline Server is the central warehouse of financial and management
reporting data structured in a multi-dimensional relational database. Timeline
Server includes traditional financial reporting features including budgeting,
foreign currency conversion, consolidations and allocations. The various
Timeline Server functions provide desktop and network reporting based on
information contained in one or more underlying accounting systems. While this
product can provide many transaction-driven benefits, our market focus is to use
Timeline Server as a data warehouse to handle large volumes of data in
conjunction with Timeline Analyst.
Timeline Analyst is a stand alone "data mart," which enables the user to
view, create and distribute reports in Microsoft Excel based on data from one or
more underlying accounting systems. Timeline Analyst also works with our
server-based software to distribute reporting databases to desktop end-users
throughout a business enterprise.
Manager is a product designed for the "mid-level" market (businesses
with approximately six to 100 desktop users). This product completes the
Timeline Analyst suite by allowing Timeline Analyst users to distribute packets
of information and assign new reporting relationships at the desktop level.
Timeline Budgeting consists of applications and tools that access and
manipulate the underlying Timeline information and data marts. Timeline
Budgeting offers our customers a combination of Microsoft Excel interfaces and
flexible access to and manipulation of information. The functions offered by
Timeline Budgeting include automatic dissemination of budget templates,
consolidation of budget input, allocations, and multiple spread methods.
YEAR 2000 DISCLOSURE
We experienced no material Y2K issues or problems in connection with our
internal operations, third-party relationships or software products. We will
continue to monitor our software products to ensure no problems arise either
with regard to leap year or Y2K issues. We anticipate no material additional
costs.*
RECENT DEVELOPMENTS SUBSEQUENT TO 2000 FISCAL YEAR
On May 31, 2000, we announced that we have entered into a binding letter
of intent to acquire all of the outstanding equity of Analyst Financials
Limited, the European distributor for our products, in which we currently own
12.5% of the outstanding equity. Upon completion of the transaction, Analyst
Financials will become a wholly-owned subsidiary responsible for our operations
throughout Europe, the Middle East and Africa. The purchase price for the equity
of Analyst Financials will be approximately Pound Sterling875,000. We have the
option to pay the purchase price in cash, our common stock or a combination of
cash and our common stock. We expect to complete the transaction on a
stock-for-stock basis.* Under the terms of the letter of intent, the purchase
price is subject to adjustment based on the results of operation through the
closing of the transaction. We have agreed to deposit with Analyst Financials a
forfeitable bond of Pound Sterling50,000 once all of the shareholders of Analyst
Financials have signed a letter of intent. If the transaction is not completed,
we may forfeit the bond.
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The parties have agreed to use best efforts to complete the transaction
on or before June 30, 2000. However, there are certain contingencies that must
be satisfied or waived before completion of the transaction. As a result, we
cannot assure you that the transaction will be completed within the expected
timeframe, or at all.**
OTHER FACTORS THAT MAY AFFECT OPERATING RESULTS
OUR ABILITY TO OPERATE PROFITABLY IS UNCERTAIN.
Our historical operations have not been consistently profitable. We have
an accumulated deficit of $5,451,435 at March 31, 2000. Our license revenues
have fluctuated substantially from quarter to quarter in the past and are likely
to continue to fluctuate substantially in the future. To become consistently
profitable, we must:
- increase the licensing and maintenance revenues of our existing
client/server products;
- increase the licensing of patented technology to third parties;
- develop new products; and
- control our expenses.
We cannot assure you that we will meet these objectives or achieve
sustained profitability. Although we believe that current cash balances and
anticipated operating results are sufficient to fund our operations in fiscal
2001, we can give no assurances that sufficient sales will be generated or that
sufficient financing will be obtained to enable us to obtain or sustain
profitability.* This could have a detrimental effect on the market price of our
stock.
OUR PROFITABILITY DEPENDS ON THE SUCCESS OF OUR PRODUCTS.
Our future profitability will depend upon the successful development,
marketing and licensing of our existing product line and other new products.* We
cannot give you any assurances that:
- our products will achieve or sustain revenue growth;
- enhancements to our products and other applications can be
successfully developed;
- demand for our products will continue to grow or be sustained; or
- our products will successfully compete with the products of others.
To the extent demand for our products does not develop due to competition, poor
product performance, negative assessments by our customers of our financial
resources and expertise, technological change or other factors, our operations
may be materially and adversely affected.
WE RELY ON LICENSING AND DISTRIBUTION RELATIONSHIPS.
We rely on agreements with third-party licensees and distributors for
sales and licensing of our products. Our agreements with licensees and
distributors are generally not exclusive, may be terminated by either party
without cause, and generally do not impose minimum licensing or purchase
requirements. The effectiveness of third-party licensing and distribution
agreements depends in part on:
- market acceptance and distribution channels of our third-party
licensee's and distributor's products and services;
- our ability to integrate our products with those of the third party;
and
- the continued viability and financial stability of such third parties,
which, in turn, depends on the overall economic health of the software
industry.
We cannot assure you that these licensees and distributors will perform their
contractual obligations as expected or that we will derive any additional
revenue licensing and distribution arrangements. Also, we can give no assurances
that we will successfully develop new relationships or maintain existing
relationships with third-party licensees and distributors. Finally we cannot
assure you that such licensees and distributors will be able to market our
products effectively, or that any existing licensee or distributor will continue
to represent our products. A failure of any of these events to occur could
materially adversely affect our results of operations.
In addition, Analyst Financials relies in part on its direct sales force
for some of its sales and licensing efforts, especially in the greater London
area. If we close the acquisition of Analyst Financials, we expect to continue
this direct
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sales effort through Analyst Financials.* Over the last several years, we have
moved away from the direct sales model in the U.S. and have relied more on
licensing through our third-party distribution channels. There are no assurances
that we will be able to profitably or successfully maintain the direct sales
model through Analyst Financials.
EVEN IF WE CLOSE THE ACQUISITION WITH ANALYST FINANCIALS, WE MAY NOT BE
SUCCESSFUL IN INTEGRATING OUR BUSINESS OPERATIONS WITH ANALYST
FINANCIALS, AND WE MAY FACE ADDITIONAL RISKS FOLLOWING THE ACQUISITION.
On May 31, 2000, we announced that we have entered into a letter of
intent to acquire Analyst Financials Limited, the European distributor for our
products, of which we currently own 12.5%. There are no assurances that we will
be successful in consummating this acquisition in the timing expected, or at
all. Integrating our operations with those of Analyst Financials after the
acquisition may be difficult and time consuming. The integration of our combined
operations may temporarily distract management from the day-to-day business of
the combined company, and we may fail to manage this integration effectively or
to achieve any of the anticipated benefits that both companies hope will result
from the acquisition. A failure to effectively integrate Analyst Financials
could materially and adversely affect our business.
The potential future acquisition of Analyst Financials is subject to the
risks commonly encountered in such transactions, including, among others:
- difficulties associated with assimilating the personnel and
operations of the acquired business;
- the risk that we will not achieve expected financial results or
strategic goals for the acquired business;
- the potential disruption of its ongoing business;
- the diversion of significant management and other resources; and
- the need to impose and maintain uniform standards, controls,
procedures and policies.
The potential future acquisition of Analyst Financials is also subject
to risks related to international operations, including, among others:
- unexpected changes in regulatory requirements;
- difficulties in staffing and managing foreign operations;
- differing employment laws and practices, and cultural barriers in
foreign countries;
- longer payment cycles and seasonal reductions in business activity
during the summer months in Europe and some other parts of the world;
- currency exchange fluctuations; and
- potentially adverse tax consequences.
Any of these factors could adversely affect the success of our operations, our
financial condition and results of operations.
WE ARE SUBJECT TO PENDING LEGAL PROCEEDINGS.
From time to time we have been, and expect to continue to be, subject to
legal proceedings and claims in the ordinary course of our business.* Such legal
proceedings could expose us to liability and require the expenditure of
significant financial and managerial resources, which could harm our business.
In March 1999, we filed a lawsuit against Sagent Technologies, Inc.,
seeking monetary damages and an injunctive relief. Our claims are based on the
alleged unauthorized licensing by Sagent of certain products that we believe
infringe on our patent rights under U.S. Patent Nos. 5,802,511, 6,023,694 and
6,026,392. The litigation process is in the discovery phase, and the trial is
set for January 2001. From time to time, we may pursue litigation against other
third parties to enforce or protect our rights under these patents or our
intellectual property rights generally.*
In July 1999, Microsoft Corporation sued us and claimed that we violated
a June 1999 patent license agreement between Microsoft and us. We believe that
the claims made by Microsoft have no merit and intend to vigorously defend
against this lawsuit. This litigation process is in the discovery phase, and the
trial is set for December 2000.
In December 1999, Clarus Corporation filed a declaratory judgment action
against us in Atlanta, Georgia requesting that the court find that Clarus'
software products do not infringe our U.S. Patent No. 5,802,511. Clarus also
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requested that this patent be declared invalid. Subsequently, in March 2000,
Clarus voluntarily dismissed its lawsuit without prejudice.
WE MAY NOT BE ABLE TO ENFORCE OUR INTELLECTUAL PROPERTY RIGHTS, AND
OTHERS MAY CLAIM THAT WE ARE INFRINGING THEIR INTELLECTUAL PROPERTY
RIGHTS.
We rely on a combination of patents, copyright, trademark and trade
secrecy laws, confidentiality procedures and contractual provisions to protect
our intellectual property rights. We attempt to protect our software,
documentation and other written materials under patent, trade secret and
copyright laws, which afford only limited protection. We have received three
U.S. patents and have filed for patent protection in certain foreign countries.
Despite our efforts to protect our intellectual property rights:
- laws and contractual restrictions may not be sufficient to prevent
misappropriation of our technology or deter others from developing
similar technologies;
- current federal laws that prohibit unauthorized copying and
distribution of software provide only limited protection from
software "pirates", and effective patent, trademark, copyright and
trade secret protection may be unavailable or limited in foreign
countries;
- other companies may claim common law trademark rights based upon
state or foreign laws that precede the federal registration of our
trademarks; and
- policing unauthorized use of our products and trademarks is
difficult, expensive and time-consuming, and we may be unable to
determine the extent of this unauthorized use.
Spending additional resources on research and development could
adversely affect our financial condition and results of operation. We intend to
protect our patent rights against infringement through negotiation and
litigation, if necessary.* As described above, we are currently involved in a
number of lawsuits, including a claim against Sagent Technology, Inc. for
infringement of one of our patents and a suit against us by Microsoft
Corporation for a claim of breach of contract. Such litigation is costly and we
cannot assure you that we will be successful.
We cannot assure you that our intellectual property protections will be
adequate or that third parties will not independently develop substantially
similar products, services and technology. Although we believe our products,
services and technology do not infringe on any proprietary rights of others, as
the number of software products available in the market increases and the
functions of these products further overlap, we may become increasingly subject
to infringement claims. These claims, with or without merit, could result in
costly litigation or might require us to enter into royalty or licensing
agreements, which may not be available on terms acceptable to us.**
WE RELY ON LICENSE REVENUE FROM A LIMITED LINE OF PRODUCTS.
While in the immediate future we expect revenue from licensing our
patent rights, this is viewed as a temporary market situation.* Product-license
revenues and related services from our Timeline Analyst and Timeline Server
products accounted for a large percentage of our total revenues during fiscal
2000. We expect revenues from our Timeline Analyst and Timeline Server products
to account for substantially all of our long-term future revenues.* As a result,
factors adversely affecting the demand for our Timeline Analyst and Timeline
Server products, such as competition, pricing or technological change, could
materially adversely affect our business, financial condition and operating
results. Our future financial performance will substantially depend on our
ability to sell current versions of the Timeline Analyst and Timeline Server
products and our ability to develop and sell enhanced versions of Timeline
Analyst and Timeline Server products.
WE RELY ON MICROSOFT PRODUCTS.
We have developed all of our client/server products to function in the
Microsoft Windows and/or Windows NT environments, including the recently
introduced Windows 2000. We anticipate that our future products will also be
designed for use in connection with Microsoft software products such as its
Windows ME, expected to be introduced later this year.* In light of this product
strategy, sales of our new products would be materially and adversely affected
by market developments adverse to Microsoft Windows, Windows NT, Windows 2000,
Windows ME or other future Microsoft software products. Our success in
developing products for use with Microsoft software products depends on our
ability to gain timely access to, and to develop expertise in, current and
future Microsoft software products. We cannot assure you that we will be able to
develop expertise in, and continue to develop products for, Microsoft software
products. Moreover, the abandonment by Microsoft of, or any adverse change to,
its current operating system product line, strategy
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or business operations would materially and adversely affect our business. We
cannot predict the impact, if any, that the current anti-trust lawsuit against
Microsoft will have on our business or products.
OUR OPERATING RESULTS MAY VARY SIGNIFICANTLY.
Our results of operations have historically varied substantially from
period to period (quarterly or otherwise), and we expect they will continue to
do so.* Fluctuations in our operating results have resulted, and may result in
the future, from the following factors:
- the size and timing of product or patent licensing agreements and
customer orders for our products;
- the timing of the introduction and customer acceptance of new
products or product enhancements by us or our competitors;
- changes in pricing policies by us or our competitors; and
- changes in general economic conditions.
Over the past several years, we have made great efforts to reduce our operating
and other expenses, including significant reductions in our sales and marketing
staff and research and development activities. We cannot assure you that these
expense reductions will have the desired result of enabling us to achieve
profitability or that they will not have adverse effects on us. In addition, we
are currently more reliant on licensing and distribution arrangements and less
on direct sales, and accordingly we expect that timing of revenues will
fluctuate from quarter to quarter.* If we increase our direct sales and
marketing efforts or undertake research and development not funded by third
parties, our operating expenses would increase and may have an adverse impact on
our results of operations. Any of these fluctuations may cause significant
variations in periodic results of operations. We do not take any actions
specifically designed to limit fluctuations in our periodic results of
operations. Because a significant portion of our expenses, particularly
personnel costs and rent, are relatively fixed in advance of any particular
quarter, shortfalls in revenue caused by a fluctuation of licensing and
distribution revenue may cause significant variation in operating results in any
particular quarter.
OUR ABILITY TO MANAGE GROWTH SUCCESSFULLY IS UNCERTAIN.
In the event we successfully close our potential acquisition of Analyst
Financial, this acquisition will place significant demands on our management and
other resources. To manage growth effectively, we must continue to improve our
operational, financial and other management processes and systems. Our success
also depends largely on management's ability to maintain high levels of employee
utilization, project and instructional quality and competitive pricing for our
services. We cannot assure you that we will be successful in managing our
growth.
WE MAY NEED ADDITIONAL FINANCING.
Our net working capital (excluding deferred revenue) at March 31, 2000
was approximately $5,815,000. Our capital needs in the future will depend upon
factors such as:
- market acceptance of our products and any other new products we
develop;
- the success of our third-party software licensing and distribution
arrangements;
- our ability to license our patents; and
- our ability to develop and maintain sustained maintenance and support
revenue.
None of these factors can be predicted with certainty.
We may need substantial additional financing in the future for which we
have no commitments or arrangement. We cannot assure you that any additional
financing, if required, will be available on terms acceptable to us. If we raise
additional funds by selling stock, the percentage ownership of our then current
stockholders will be reduced.* Our inability to obtain required financing could
have a material adverse effect on our results of operations and could cause us
to significantly reduce or suspend our operations, seek a merger partner, sell
certain of our assets, sell additional securities on terms which are highly
dilutive to existing investors, or obtain funds through arrangements that are
unfavorable to us.
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OUR INDUSTRY IS SUBJECT TO RAPID TECHNOLOGICAL CHANGE.
To remain competitive, we must develop new software products while
enhancing and improving our existing software programs. The development of
software products is characterized by rapid technological change, changes in
user and customer requirements and preferences, frequent new product and service
introductions embodying new technologies and the emergence of new industry
standards and practices that could render our existing proprietary technology
and systems obsolete. Our success will depend on our ability to maintain
compatibility with existing and future Microsoft Windows, Windows NT, Windows
2000 and other operating environments, database systems and development tools.*
There will be a material adverse effect on our results of operations if we fail
to anticipate or respond promptly and adequately to changes in technology and
customer preferences, or if there are any significant delays in our product
development or introductions.* We cannot assure you that we will be successful
in developing new products or enhancing our existing products on a timely basis,
or that such new products or product enhancements will achieve market
acceptance.
WE MAY BE SUBJECT TO LIABILITIES ASSOCIATED WITH NEW PRODUCTS.
Software products frequently contain errors or defects, especially when
first introduced or when new versions or enhancements are released. Although we
intend to subject our new software products and new versions and enhancements to
vigorous testing prior to their release, our products may contain errors or
defects.* These errors or defects may result in unexpected re-programming costs,
shipping costs and other expenses. Although our license agreements with our
customers contain provisions designed to limit our exposure to potential product
liability claims, any errors or defects could also result in liability claims
against us by the consumers of our products. Also, we, Microsoft, or our
competitors may announce new products, capabilities or technologies which have
the potential to replace or shorten life cycles of our existing products and
which may cause customers to defer purchasing our existing products. Delays or
difficulties associated with new product introductions or product enhancements
could have a material adverse effect on our results of operations. Any of the
foregoing events could have a negative impact on our business or financial
condition.
WE FACE INTENSE COMPETITION IN OUR BUSINESSES.
The business information software market is highly competitive. We
believe that our primary competition is software vendors such as Hyperion
Solutions, Inc., Comshare, Inc., FRX Software Corporation, Cognos Corporation,
and various budgeting vendors such as Adaytum, Inc. and Pillar by Hyperion.*
Many of our competitors in the consulting arena have substantially greater
financial, management, marketing and technical resources than we do. Because
there are minimal barriers to entry into the software market, we believe that
competition will continue to proliferate.* The market for our products is
characterized by significant price competition, and we expect that our products
will face increasing pricing pressures.*
Many of our current and potential competitors have well-established
relationships with our potential customers, have extensive knowledge of the
markets serviced by our customers, and more extensive development, sales and
marketing resources. As a result, our competitors may be able to respond more
quickly to new or emerging technologies and changes in customer requirements, or
to devote greater resources to the development, promotion and sale of their
products than we are able to. Such competition could seriously harm our ability
to sell products on favorable terms. We cannot assure you that we will be able
to compete successfully against current and future competition, and the failure
to do so would negatively impact our business and financial condition.
OUR SUCCESS DEPENDS ON OUR ABILITY TO RECRUIT AND RETAIN QUALIFIED
INFORMATION TECHNOLOGY PROFESSIONALS AND SALES AND MARKETING PERSONNEL.
Our future success depends in large part on our ability to attract,
develop and retain highly skilled information technology professionals,
particularly project managers, consultants, software engineers and programmers.
Highly skilled information technology professionals are in high demand and are
likely to remain a limited resource for the foreseeable future. In addition, one
of the keys to the success of our business in the event we close the acquisition
with Analyst Financials will be our ability to retain Analyst Financial's
executives and employees, and attract additional skilled employees. If we are
unable to keep our current technical employees, we may be unable to adequately
service current projects or bid for new projects. If we are unable to recruit
additional technical employees, we may not be able to expand or grow our
business. We compete for the services of information technology professionals
with other consulting firms, software vendors and consumers of information
technology services, many of which have greater financial resources than we
have. We may not be successful in hiring and retaining a sufficient number of
information technology professionals to staff our consulting projects. To
attract qualified technical employees, we may need to substantially increase the
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<PAGE> 10
compensation, bonuses, stock options or other benefits we offer to employees.
These additional costs may negatively affect our business and operating results.
THE FUTURE SUCCESS OF OUR BUSINESS IS HEAVILY DEPENDENT ON THE CONTINUED
SERVICES OF CERTAIN KEY EMPLOYEES.
Our future success depends to a significant extent on the skills,
experience and efforts of our senior management. In particular, we depend on
Charles Osenbaugh, our Chief Executive Officer and Chief Financial Officer. Mr.
Osenbaugh is not subject to an employment agreement and we have not obtained key
person life insurance or disability insurance policies on him. If Mr. Osenbaugh
ends his employment with us, or becomes incapacitated and unable to perform his
duties, then our business and financial condition could be seriously harmed.
We also depend on the services of qualified and experienced information
technology professionals, creative personnel, and sales and marketing personnel.
We typically do not enter into employment agreements with these individuals. Any
of these employees could leave their employment with us, and could offer their
services to our competitors. Our business and financial condition could be
negatively impacted if any of these events occur.
THE MARKET FOR OUR SHARES IS LIMITED.
Our common stock is currently listed for trading on the OTC Bulletin
Board, and as a result, an investor may find it more difficult to dispose of, or
to obtain accurate quotations as to the price of, our securities than if the
securities were traded on the Nasdaq Stock Market or another national exchange.
In addition, our common stock is also listed for trading on the Boston Stock
Exchange. If we were to experience significant or prolonged losses or otherwise,
it may be unable to maintain the standards for continued listing on the Boston
Stock Exchange. As a result, an investor would find it more difficult to dispose
of, or to obtain accurate quotations for, our securities.
Our securities are subject to certain rules and regulations relating to
"penny stock" (generally defined as any equity security that is not quoted on
the Nasdaq Stock Market and that has a price less than $5.00 per share, subject
to certain exemptions). Broker-dealers who sell penny stocks are subject to
certain "sales practice requirements" for sales in certain nonexempt
transactions (i.e., sales to persons other than established customers and
institutional "accredited investors"), including requiring delivery of a risk
disclosure document relating to the penny stock market and monthly statements
disclosing recent price information for the penny stock held in the account, and
certain other restrictions. For as long as our securities are subject to the
rules on penny stocks, the market liquidity for such securities could be
materially and adversely affected.
OUR STOCK PRICE IS VOLATILE.
The trading price of our common stock has fluctuated significantly in
the past. The future trading price of our common stock may continue experiencing
wide price fluctuations in response to such factors as:
- actual or anticipated fluctuations in revenues or operating results;
- changing information technology spending habits of our clients and
prospective clients;
- failure to meet expectations of performance;
- announcements of technological innovations or new products by our
competitors;
- developments in or disputes regarding copyrights, trademarks, patents
and other proprietary rights;
- product and services pricing, discounts and margins; and
- general economic conditions.
WE DO NOT INTEND TO PAY DIVIDENDS.
We have not declared dividends on our common stock in the past, and do
not intend to declare dividends on our common stock in the foreseeable future.*
THERE ARE A NUMBER OF STATE LAW PROVISIONS THAT COULD DELAY OR PREVENT
AN ACQUISITION OF OUR COMPANY.
We are subject to the provisions of Chapter 23B.19 of the Washington
Business Corporation Act, which prohibit a corporation registered under the
Securities Exchange Act of 1934, as amended, from engaging in certain
significant transactions with a 10% shareholder. Significant transactions
include, among others, a merger with or disposition of assets
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<PAGE> 11
to the 10% shareholder. These provisions have the effect of making it more
difficult for a third party to acquire a majority of our outstanding voting
stock, or delaying such an acquisition, even if the takeover by a third party
would be beneficial.
ITEM 2. DESCRIPTION OF PROPERTY
Timeline leases approximately 12,354 square feet of office space at 3055
112th Ave. N.E., Bellevue, Washington, under a lease which expires April 30,
2004. Timeline does not own any real estate.
ITEM 3. LEGAL PROCEEDINGS
In March 1999, the Company filed an action in the U.S. Federal District
Court for Western Washington against Sagent Technologies, Inc., seeking monetary
damages and an injunction from further unauthorized licensing of certain
products that the Company believes infringe on its patent rights under U.S.
Patent Nos. 5,802,511, 6,023,694 and 6,026,392. The litigation process is in the
discovery phase, and the trial is set for January 2001. From time to time, the
Company may pursue litigation against other third parties to enforce or protect
its rights under these patents or its intellectual property rights generally.*
In July 1999, the Company was served a complaint by Microsoft
Corporation in the Superior Court of Washington for King County alleging breach
of contract regarding a Patent License Agreement signed by both companies in
June 1999. The Company believes the claims made by Microsoft have no merit and
intends to vigorously defend itself in this lawsuit.* This litigation process is
in the discovery phase, and the trial is set for December 2000.
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 OTC Bulletin Board ("OTCBB")
and the Boston Stock Exchange ("BSE") under the symbols "TMLN" and "TML",
respectively. We initiated trading of our common stock on January 18, 1995, the
effective date of our initial public offering of common stock, and our common
stock traded on the Nasdaq SmallCap Market (Nasdaq) from its effective date
until November 1997, following which time it is has been quoted on the OTCBB.
The following table contains the high and low bid information as reported by
OTCBB, for each quarter of fiscal 1999 and 2000. The quotations from the OTCBB
reflect inter-dealer prices without retail mark-up, mark-down, or commissions
and may not represent actual transactions.
<TABLE>
<CAPTION>
Fiscal 1999 Fiscal 2000
---------------------------------- ----------------------------------
1st 2nd 3rd 4th 1st 2nd 3rd 4th
Quarter Quarter Quarter Quarter Quarter Quarter Quarter Quarter
------- ------- ------- ------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Common Stock
High 2 1/2 1 5/8 1 1/16 7/8 2 2 11/16 2 3/4 6 1/4
Low 7/8 11/16 7/16 3/8 3/8 1 5/16 1 7/16 1 7/16
</TABLE>
Warrants to purchase our common stock, which were issued in connection
with our initial public offering and which were traded on both OTCBB and BSE
under the symbols "TMLNW" and "TMLW", respectively, expired on January 18, 2000.
At June 1, 1999 there were 3,449,112 shares of common stock outstanding
held by approximately 72 holders of record.
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<PAGE> 12
In November 1999, Charles R. Osenbaugh, the Company's President and CEO,
was granted a performance-based stock option to purchase 50,000 shares of common
stock, at an exercise price of $1.875 per share. This option becomes vested upon
achieving 10 consecutive days of our stock closing trading at $5.00 per share or
higher. In any event, this option shall vest, if not otherwise vested, seven
years from the date of grant provided Mr. Osenbaugh is then employed by
Timeline.
No cash dividends have been paid on our stock 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 shareholders, 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
For the fiscal year ended March 31, 2000, we generated net income of
$2,912,000, compared to a net loss of $366,000 for the year ended March 31,
1999. This increase was attributable, in large part, to recognition in fiscal
2000 of a $5,000,000 license fee from Microsoft Corporation for the licensing of
U.S. Patent No. 5,802,511 and subsequent patents issued or which may be issued
in the future based upon extensions of the same technology.
Other significant factors in our results for the fiscal year ended March
31, 2000 were higher expenses on relatively flat operating revenues. The
greatest increase in expenses was in the area of general and administrative
expenses to account for attorneys' fees, costs, and expert fees associated with
patent enforcement and contract litigation, as well as bonus and non-cash stock
compensation expenses associated with executive bonuses triggered by achievement
of a number of long-term profitability objectives.
GROSS REVENUE
<TABLE>
<CAPTION>
Three Months Ended Twelve Months Ended
March 31, March 31,
------------------ ------ ------------------- ------
2000 1999 Change 2000 1999 Change
---- ---- ------ ----- ----- ------
<S> <C> <C> <C> <C> <C> <C>
(Dollars in Thousands)
License 281 362 (22%) 6,329 1,794 253%
Maintenance 194 188 3% 833 854 (3%)
Consulting 134 173 (23%) 735 713 3%
Software Development 22 13 69% 49 41 20%
--- --- --- ----- ----- ---
Total Revenues 631 736 (14%) 7,946 3,402 134%
</TABLE>
Our total revenue increased 134% to $7,946,000 for the fiscal year ended
March 31, 2000. Revenues generated by license fees were substantially higher in
fiscal 2000 over fiscal 1999, while all other categories of revenue were not
materially different than the prior year. This increase was attributable, in
large part, to recognition in fiscal 2000 of a one-time $5,000,000 license fee
from Microsoft Corporation. License revenues for fiscal 1999 consisted of
software license revenues through our distribution partners, including a
one-time software license fee of $650,000 from Seagate Software, Inc. We believe
license fee revenue will be erratic as a large portion of the license fees
generated in fiscal 2000 were for patent licenses.* While we are vigorously
pursuing additional patent license arrangements, we cannot predict the outcome
of ongoing and future negotiations and there are no assurances that we will be
successful in entering into additional patent licenses, or the timing of any
such licenses. In addition, we are currently in litigation regarding our
patents, the ultimate outcome of which could adversely affect our ability to
enter into additional patent licenses and our existing patent licenses. Software
license revenues for fiscal 2000 were lower than in fiscal 1999. We believe the
impact of Year 2000 compliance uncertainties on the industry as a whole may have
had a negative impact on software license revenue in fiscal 2000. It is too
early to discern whether fiscal 2001 activity in software licenses for our
distribution channels will show a significant increase. Our license revenue for
software (as opposed to patent) licenses was generated almost exclusively by
Infinium
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<PAGE> 13
Software, Inc., Electronic Data Systems, Inc. (EDS), Navision a/s, and Analyst
Financials Limited (formerly Timeline Europe Limited) during fiscal 2000. As we
enter fiscal 2001, we also have in place distribution agreements with Intuitive
Manufacturing Systems, Inc., Open Systems, Inc. and Primark, Inc., and we expect
to see an increase in contribution to revenue from these distributors throughout
the coming year.*
Consulting and maintenance revenues for the 2000 fiscal year were
relatively consistent with fiscal 1999. Consulting revenue is directly related
to the amount of software license activity. Accordingly, consulting revenues for
fiscal 2000 were affected by a slowdown in software license revenues, which we
believe were due in part to uncertainties surrounding Year 2000 compliance.
Consulting revenues for fiscal 1999 were affected by reduced staffing during
much of the fiscal year, offset by limited hiring in the fourth quarter of the
fiscal year. We believe the demand for consulting and maintenance services in
fiscal 2001 will be reduced by greater use of distribution channels that have
existing agreements with Value Added Resellers.* These VARs seek to provide such
services to end-users who may use our software in conjunction with software
provided by the distribution channel.
Software development revenues increased in fiscal 2000, but were not
material to overall revenue. We do not anticipate that software development
revenue will contribute significantly to revenue in fiscal 2001 as there are no
substantial contracts currently in place or being pursued for development
efforts.* We do not consider software development for fees to be a line of
business that should be pursued except in exceptional situations.
GROSS PROFIT
<TABLE>
<CAPTION>
Three Months Ended Twelve Months Ended
March 31, March 31,
------------------ ------ ------------------- ------
2000 1999 Change 2000 1999 Change
---- ---- ------ ----- ----- ------
<S> <C> <C> <C> <C> <C> <C>
(Dollars in Thousands)
Gross profit 349 504 (31%) 6,790 2,460 176%
Percentage of total revenues 55% 68% 85% 72%
</TABLE>
Our gross profit increased during the 2000 fiscal year by $4,330,000,
which represents a 176% growth over the 1999 fiscal year. However, an unusually
large license fee of $5,000,000 from Microsoft Corporation makes the results for
fiscal 2000 not directly comparable to fiscal 1999. In the fourth quarter of
fiscal 2000, our gross profit was lower in both actual dollars and as a
percentage of gross revenue compared to fourth quarter 1999. Our cost of revenue
increased in both real terms and as a percentage of sales for the 2000 fiscal
year (excluding patent licensing). This reflects greater amortization expense in
fiscal 2000, in part due to a change in the estimated useful life of certain
software products, and amortization of more products during the fourth quarter
of fiscal 2000. Gross profit in fiscal 1999 represented a decrease in cost of
revenue due to lower amortization expense and continued savings associated with
our shift to third-party distribution channels. We expect amortization expense
to decrease in fiscal 2001 due to certain software products becoming fully
amortized in fiscal 2000.* Nevertheless, this decrease could be reversed if we
acquire capitalized software outright or through a merger or acquisition.*
SALES AND MARKETING & RESEARCH AND DEVELOPMENT EXPENSE
<TABLE>
<CAPTION>
Three Months Ended Twelve Months Ended
March 31, March 31,
------------------ ------ ------------------- ------
2000 1999 Change 2000 1999 Change
---- ---- ------ ----- ----- ------
<S> <C> <C> <C> <C> <C> <C>
(Dollars in Thousands)
Sales and marketing 109 145 (25%) 617 599 3%
Percentage of total revenues 17% 20% 8% 18%
Research & development 272 143 90% 1,161 657 77%
Percentage of total revenues 43% 19% 15% 19%
</TABLE>
Our sales and marketing costs increased 3% in fiscal 2000. This increase
was mainly due to a large increase in costs in the first quarter of the fiscal
year as a result of a large commission/bonus. For the fourth quarter, these
costs were 25% lower than in fiscal 1999, mainly due to a lower head count.
Sales and marketing costs for fiscal 1999 were affected
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<PAGE> 14
by reduced staffing during much of the fiscal year, offset by limited hiring in
the fourth quarter of the fiscal year. Sales and marketing expenses are expected
to increase in fiscal 2001 over fiscal 2000 as we intend to increase the number
of employees in our sales department.* This is reflective of the increased
number of distribution partners who are expected to require representation in
fiscal 2001.*
Our costs for research and development were $1,161,000 in fiscal 2000
compared to $657,000 in fiscal 1999, a 77% increase. This increase in costs was
the result of a decrease in capitalization of research and development cost in
fiscal 2000; i.e. a higher percentage of our expenses in the product group were
capitalized in fiscal 1999. Also, we increased the number of employees working
in development for fiscal 2000 as compared to fiscal 1999. We continue to add
additional product resources and expect research and development expenses will
be higher in fiscal 2001 than fiscal 2000.*
GENERAL AND ADMINISTRATIVE EXPENSE
<TABLE>
<CAPTION>
Three Months Ended Twelve Months Ended
March 31, March 31,
------------------ ------ ------------------- ------
2000 1999 Change 2000 1999 Change
---- ---- ------ ----- ----- ------
<S> <C> <C> <C> <C> <C> <C>
(Dollars in Thousands)
General & administrative 656 363 81% 2,365 1,329 78%
Percentage of total revenues 104% 49% 30% 39%
</TABLE>
Our general and administrative expenses increased by 78% for the full
fiscal year and 81% for the fourth quarter during fiscal 2000. A significant
portion of this increase is a result of attorneys' fees related to patent
enforcement and contract litigation, and payment of incentive compensation to
executives upon reaching relevant objectives in the first and fourth quarter,
respectively. It is hard to determine if these expenses will be greater or
smaller in fiscal 2001 because we cannot predict the outcome of and expenses
associated with the lawsuits in which we are involved on alleged patent
infringements and contract disputes.*
Our depreciation expense decreased in fiscal 2000 to $182,000 from
$196,000 in fiscal 1999 due to certain fixed assets becoming fully depreciated.
OTHER INCOME
Interest expense decreased to $33,000 in fiscal 2000 from $57,000 in
fiscal 1999, while interest income increased to $105,000 from $12,000 for fiscal
1999. These changes reflect our positive cash flow in fiscal 2000 and our
significant reductions in debt. We believe interest costs for fiscal 2001 will
be less than in fiscal 2000 as the balance outstanding on debts continues to
decline in the ordinary course.* If no additional large cash license fees are
received in fiscal 2001, interest income will likely be lower as we are funding
operations and legal fees and costs related to patent enforcement through
utilization of cash and liquid investments.*
We did not record a tax benefit or cost in fiscal 1999 but we did record
a tax cost of $56,000 in fiscal 2000. All taxes expensed in fiscal 2000 are for
alternative minimum taxes which could not be offset by net operating loss
carryforwards from prior years. Tax assets generated by net operating losses
from prior years and fiscal 1999 did not satisfy the recognition criteria set
forth by generally accepted accounting principles in either fiscal 1999 or
fiscal 2000. Accordingly, we have established a valuation allowance that offsets
net deferred tax assets. As taxable income is accrued, which is offset by
previously unrecognized net operating loss carryforwards, we offset tax costs
with such net operating losses. We do not anticipate recognition of federal
income taxes other than alternative minimum taxes in the near future as existing
net operating loss carryforwards are considered adequate to cover taxable
income, if any, for fiscal 2001.* During fiscal 2000 approximately $2,600,000 of
net operating loss carryforwards were so utilized.
LIQUIDITY AND CAPITAL RESOURCES
Our cash and cash equivalent and trading marketable securities balances
at March 31, 2000 stood at $3,017,000 compared to $59,000 at March 31, 1999. At
March 31, 2000, we also held approximately $3,030,000 of publicly-traded stock
which is restricted from sale until approximately September 1, 2000. As of May
18, 2000, these shares were valued at approximately $1,500,000 based on
then-current market prices.
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<PAGE> 15
The $3,854,000 of cash flows from operating activities consisted of net
income of approximately $2,912,000 increased by the noncash compensation,
depreciation and amortization of $728,000. Changes in operating assets and
liabilities and ESOP contributions generated the remaining net positive change
of $250,000. Net cash provided by operating activities of $3,854,000 in fiscal
2000 compares to $771,000 provided in fiscal 1999. Net cash used in investing
activities of $2,455,468 consisted of $79,000 for property and equipment,
$302,000 for capitalized software and development costs and $2,876,000 for
purchase of short-term investments. These amounts were offset by $801,000 in
proceeds from a note receivable and the sale of short-term investments. The
$2,455,468 of net cash used in investing activities compares to $341,468 used in
fiscal 1999. Net cash used in financing activities of $12,812 consisted of
payments on capital lease obligations, line of credit, notes payable and
retirement of treasury stock in the amount of $584,000, offset by borrowings
under the line of credit and sales of common stock and exercise of stock options
of $597,000. Net cash used in financing activities of $12,812 compares to
$(428,809) in fiscal 1999.
Our total obligations, excluding deferred income items, totaled $796,000
at March 31, 2000 compared to $669,000 at March 31, 1999.
At March 31, 2000, we had no outstanding balance on our line of credit
facility. We have a bank line of credit of $500,000 based upon selling our
accounts receivable with recourse. We believe current cash and cash equivalent
balances, along with our ability to sell restricted securities starting in
September 2000, are adequate to fund operations as well as continued costs and
expenses of litigation, through fiscal 2001.*
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<PAGE> 16
ITEM 7. FINANCIAL STATEMENTS
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Shareholders of
Timeline, Inc.:
We have audited the accompanying balance sheets of Timeline, Inc. (a Washington
corporation) as of March 31, 2000 and 1999, and the related 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 auditing standards generally accepted
in the United States. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Timeline, Inc. as of March 31,
2000 and 1999, and the results of its operations and its cash flows for the
years then ended in conformity with accounting principles generally accepted in
the United States.
/s/ ARTHUR ANDERSEN LLP
Seattle, Washington,
April 28, 2000 (except with respect to Note 12, as to which the date is May
31,2000)
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<PAGE> 17
TIMELINE, INC.
BALANCE SHEETS -- MARCH 31, 2000 AND 1999
ASSETS
<TABLE>
<CAPTION>
2000 1999
----------- -----------
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents $ 1,470,703 $ 59,453
Marketable securities - trading 1,546,256 --
Short-term restricted investments 3,030,000 --
Securities held for others 170,000 --
Accounts receivable (including $8,345 and $195,150 from affiliates),
net of allowance of $38,500 and $52,010 323,387 559,666
Note receivable from affiliate 516 13,567
Prepaid expenses and other 69,856 56,888
----------- -----------
Total current assets 6,610,718 689,574
PROPERTY AND EQUIPMENT, net of accumulated
Depreciation of $1,794,311 and $1,624,597 266,073 371,850
CAPITALIZED SOFTWARE COSTS, net of accumulated
Amortization of $171,051 and $1,131,458 655,199 628,508
OTHER ASSETS 2,185 2,185
----------- -----------
Total assets $ 7,534,175 $ 1,692,117
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 303,885 $ 142,487
Accrued expenses 487,921 355,125
Line of credit -- 23,705
Deferred revenues 372,000 418,827
Current portion of long-term debt -- 132,578
Current portion of obligations under capital leases 4,309 10,705
----------- -----------
Total current liabilities 1,168,115 1,083,427
OBLIGATIONS UNDER CAPITAL LEASES, net of current portion -- 4,309
----------- -----------
Total liabilities 1,168,115 1,087,736
----------- -----------
STOCKHOLDERS' EQUITY:
Common stock, $.01 par value, 20,000,000 shares authorized,
3,449,112 and 3,191,368 issued and outstanding 34,492 31,946
Additional paid-in capital 9,124,178 9,070,865
Unearned ESOP shares -- (135,417)
Other comprehensive income 2,658,825 --
Accumulated deficit (5,451,435) (8,363,013)
----------- -----------
Total stockholders' equity 6,366,060 604,381
----------- -----------
Total liabilities and stockholders' equity $ 7,534,175 $ 1,692,117
=========== ===========
</TABLE>
The accompanying notes are an integral part of these balance sheets.
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<PAGE> 18
TIMELINE, INC.
STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED MARCH 31, 2000 AND 1999
<TABLE>
<CAPTION>
2000 1999
----------- -----------
<S> <C> <C>
REVENUE
Software license $ 6,329,477 $ 1,793,526
Software development 49,340 41,163
Maintenance 833,361 854,290
Consulting 733,741 712,585
----------- -----------
Total revenues 7,945,919 3,401,564
----------- -----------
COST OF REVENUES 1,156,204 941,857
----------- -----------
Gross profit 6,789,715 2,459,707
----------- -----------
OPERATING EXPENSES:
Sales and marketing 617,435 598,946
General and administrative 2,364,998 1,328,715
Research and development 1,161,476 656,798
Depreciation and amortization 182,274 196,239
----------- -----------
Total operating expenses 4,326,183 2,780,698
Gain (loss) from operations 2,463,532 (320,991)
----------- -----------
OTHER INCOME (EXPENSE):
Gain on sale of securities 334,322 --
Unrealized gain on trading securities 56,828 --
Interest expense and other (32,649) (57,010)
Interest income and other 145,053 11,990
----------- -----------
Total other income (expense) 503,554 (45,020)
----------- -----------
Income (loss) before income taxes 2,967,085 (366,011)
Income tax provision (55,507) --
----------- -----------
Net income (loss) $ 2,911,578 $ (366,011)
=========== ===========
BASIC NET INCOME (LOSS) PER COMMON AND COMMON
EQUIVALENT SHARE $ 0.89 $ (0.12)
=========== ===========
DILUTED NET INCOME (LOSS) PER COMMON AND COMMON
EQUIVALENT SHARES $ 0.83 $ (0.12)
=========== ===========
SHARES USED IN CALCULATION OF BASIC EARNINGS PER SHARE 3,274,673 3,152,834
=========== ===========
SHARES USED IN CALCULATION OF DILUTED EARNINGS PER SHARE 3,524,273 3,152,834
=========== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
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<PAGE> 19
TIMELINE, INC.
STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED MARCH 31, 2000 AND 1999
<TABLE>
<CAPTION>
Common Stock Additional Unearned Other
---------------------- Paid-in ESOP Comprehensive Accumulated
Shares Amount Capital Shares Income Deficit Total
---------- -------- ----------- --------- ------------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE, March 31, 1998 3,214,622 $ 32,147 $ 9,205,706 $(270,833) $- $(7,997,002) $ 970,018
Net loss -- -- -- -- -- (366,011) (366,011)
Exercise of common stock
options 556 37 337 -- -- -- 374
Retirement of ESOP shares (23,810) (238) (135,178) 135,416 -- -- --
---------- -------- ----------- --------- ----------- ----------- -----------
BALANCE, March 31, 1999 3,191,368 $ 31,946 $ 9,070,865 $(135,417) $- $(8,363,013) $ 604,381
Net Income -- -- -- -- -- 2,911,578 2,911,578
Exercise of common stock
options 339,995 3,369 306,431 -- -- -- 309,800
Retirement of ESOP shares (7,251) (73) (106,212) 135,417 -- -- 29,132
Stock based compensation -- -- 152,344 -- -- -- 152,344
Unrealized gain on
available for sale
securities -- -- -- -- 2,658,825 -- 2,658,825
Repurchase of common stock (75,000) (750) (299,250) -- -- -- (300,000)
---------- -------- ----------- --------- ----------- ----------- -----------
BALANCE, March 31, 2000 3,449,112 $ 34,492 $ 9,124,178 $ -- $ 2,658,825 $(5,451,435) $ 6,366,060
========== ======== =========== ========= =========== =========== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
Page 19
<PAGE> 20
TIMELINE, INC.
STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED MARCH 31, 2000 AND 1999
<TABLE>
<CAPTION>
2000 1999
----------- ---------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ 2,911,578 $(366,011)
Adjustments to reconcile net income (loss) to net cash
used in operating activities:
Depreciation and amortization 576,328 464,359
Loss on disposal of property and equipment 8,846 711
Non-cash compensation expense 152,344 --
ESOP contribution compensation expense 29,132 --
Changes in operating assets and liabilities:
Accounts receivable 111,279 812,489
Prepaid expenses and other (12,968) 119,345
Accounts payable 161,398 (147,403)
Accrued expenses and other (37,204) (90,305)
Deferred revenues (46,827) (41,364)
Other noncurrent assets -- 18,887
----------- ---------
Net cash provided by operating activities 3,853,906 770,708
----------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment (79,172) (78,633)
Investment in capitalized software and development costs (301,915) (424,132)
Purchase of short-term investments (2,875,697) --
Proceeds from sale of short-term investments 788,265 --
Proceeds from note receivable 13,051 161,297
----------- ---------
Net cash used in investing activities (2,455,468) (341,468)
----------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Payments on capital lease obligations (10,705) (10,706)
Borrowings under line of credit 287,012 134,155
Repayments under line of credit (310,717) (257,322)
Payments on notes payable (132,578) (295,310)
Retirement of shares/treasury stock (130,000) --
Sales of common stock and exercise of stock options 309,800 374
----------- ---------
Net cash used in financing activities 12,812 (428,809)
----------- ---------
NET INCREASE IN CASH AND CASH EQUIVALENTS 1,411,250 431
CASH AND CASH EQUIVALENTS, beginning of year 59,453 59,022
----------- ---------
CASH AND CASH EQUIVALENTS, end of year $ 1,470,703 $ 59,453
=========== =========
SUPPLEMENTAL CASH AND NONCASH DISCLOSURES:
Cash paid during the year for interest $ 28,708 $ 56,510
Non-cash transactions:
Unrealized gain on available for sale securities 2,658,825 --
Offset of accounts receivable for capitalized software 125,000 --
Retirement of unallocated ESOP shares 104,167 135,416
Repurchase of common stock for restricted investment 170,000 --
Prepaid asset financed through accounts payable -- 81,852
</TABLE>
The accompanying notes are an integral part of these financial statements.
Page 20
<PAGE> 21
NOTES TO FINANCIAL STATEMENTS
MARCH 31, 2000
1. THE COMPANY:
Organization
The accompanying financial statements are for Timeline, Inc. (the Company). The
Company develops, markets and supports enterprise-wide financial management,
budgeting and reporting software. Timeline's software products automatically
access and distribute business information with full accounting control.
Operations
As of March 31, 2000, the Company had an excess of current assets over current
liabilities of $5,442,603 and had an accumulated deficit of $(5,451,435), with
total stockholders' equity of $6,366,060. Management is in the process of
evaluating alternatives for raising additional funds and improving results of
operations. These alternatives potentially include the continued licensing or
sale of part of its patented software, agreements with distribution partners to
market the Company's products and entering into additional debt agreements. If
these alternatives are unsuccessful, the Company would need to implement a plan
to reduce costs substantially until sales from operations generate sufficient
cash flows to continue to fund operations and development.*
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
Basis of Presentation
These financial statements have been prepared in accordance with generally
accepted accounting principles and assuming that the Company will continue as a
going concern. 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.
Marketable Securities
Marketable securities consist of both equities and debt instruments, the
majority of which are under the management of PaineWebber, Inc. and its
affiliate. The Company actively buys and sells individual securities in this
account and has classified these securities as Trading under the provisions of
Statement of Financial Accounting Standards 115. Consistent with the provisions
of that statement, the Company has recorded these investments at their fair
market value in the accompanying balance sheet. The Company realized gains of
$185,147 on sales of these securities during fiscal 2000. This amount is
included as a component of the gain on sale of securities in the accompanying
statement of operations. In addition, the Company recognized unrealized gains of
$56,828 in fiscal 2000 resulting from the appreciation of these securities fair
market values. This amount is included in the accompanying statement of
operations.
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 shorter of the lease period or their estimated useful
lives of three to seven years.
Page 21
<PAGE> 22
Capitalized Software Costs and Research and Development Costs
The Company capitalizes certain internally generated software development costs,
which consist primarily of salaries, in accordance with Statement of Financial
Accounting Standards No. 86. Amounts capitalized relate to software development
costs incurred after the technological feasibility of a product line has been
established. Amortization is recognized using the straight-line method over the
products' estimated economic life of three years. Amortization starts when the
product is available for general release to customers. During fiscal 2000 and
1999, the Company capitalized $426,915 and $424,131, respectively, of software
development costs. The fiscal 2000 amount includes $125,000 of software that was
acquired in a non-cash exchange for the offset of accounts receivable from a
related party (see Note 11). Amortization expense for fiscal 2000 and 1999 was
$400,225 and $268,120, respectively. The Company changed the estimated useful
life of certain software products in fiscal 2000, which contributed to the large
increase in amortization expense. This amortization is included in cost of
revenues in the accompanying statements of operations.
All research and development costs are expensed as incurred.
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
recognized ratably over the maintenance period.
The Company also enters into separately priced consulting agreements with its
customers to provide installation, training and other consulting services. These
agreements are generally priced on a time and materials basis and revenues are
recognized as the services are performed. The nature of the services does not
significantly alter the licensed software.
Net Income (Loss) per Common Share
The Company adopted Statement of Financial Accounting Standard No. 128,
"Earnings per Share," effective December 15, 1998. 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
fiscal year 1999, the effect of including outstanding options is antidilutive,
therefore, options have been excluded from the calculation of diluted net loss
per share. Furthermore, shares in the Employee Stock Ownership Plan, which were
not committed to be released to plan participants as of each year-end, are not
considered outstanding for the earnings per share calculation.
The computation of diluted net income (loss) per common and common equivalent
share is as follows at March 31:
<TABLE>
<CAPTION>
2000 1999
----------- -----------
<S> <C> <C>
Net income (loss) $ 2,911,578 $ (366,011)
----------- -----------
Weighted average common shares outstanding 3,274,668 3,152,834
Plus: dilutive options and warrants 577,926 --
Less: shares assumed repurchased with proceeds from exercise (328,326) --
----------- -----------
Weighted average common and common equivalent shares outstanding 3,524,268 3,152,834
----------- -----------
Diluted net income (loss) per common and common equivalent share $ .83 $ (.12)
=========== ===========
</TABLE>
The calculation of diluted net income (loss) per common and common equivalent
does not include 41,025 and 1,964,911 options and warrants in 2000 and 1999,
respectively, as they are antidilutive.
Page 22
<PAGE> 23
Reclassifications
Certain reclassifications have been made to the 1999 financial statements to
conform them to the current year's presentation.
3. RESTRICTED INVESTMENTS:
In September 1999, the Company settled a patent infringement lawsuit filed
against Broadbase Software, Inc. (Broadbase) in the U.S. Federal District Court
for Western Washington. Under the agreement reached between the parties,
Broadbase has licensed the Timeline technology covered under U.S. Patent Nos.
5,802,511, 6,023,694 and 6,026,392 for a license fee of $602,000, of which
$210,000 was cash and the remainder was restricted stock. An additional $40,000
in cash was received from Broadbase and was recorded as other income. The 80,000
shares of Broadbase restricted common stock was recorded at a value of $4.90 per
share as of the date of the licensing agreement. The Company is unable to
transfer ownership of this common stock for a period of one year from the date
of the licensing agreement. The Company has committed to transfer 4,250 shares
to certain shareholders in connection with the repurchase of the Company's
common stock (see Note 11). Additionally, the Company has classified the stock
to be transferred as securities held for others. At March 31, 2000, the reported
value of Broadbase's publicly traded common stock was $40.00 per share. The
total value of noncommitted Broadbase restricted common stock was $3,030,000 at
March 31, 2000. The unrealized gain on this stock of $2,658,825 at March 31,
2000, is included in other comprehensive income in the accompanying balance
sheet. As of April 28, 2000, the reported value of Broadbase publicly traded
common stock had decreased to $15.82 per share. Broadbase completed a
two-for-one stock split on April 10, 2000. All per share amounts have been
adjusted to reflect this stock split.
4. MAJOR CUSTOMERS:
During fiscal 2000, one customer comprised approximately 63% of the Company's
total revenue. During 1999, two customers comprised approximately 28% and 14% of
the Company's total revenue. At March 31, 2000, approximately 23% and 11%, of
the accounts receivable balance was due from the Company's two largest
customers. At March 31, 1999, approximately 32%, 14% and 12% of the accounts
receivable balance was due from the Company's three largest customers.
5. PROPERTY AND EQUIPMENT:
Property and equipment consists of the following at March 31:
<TABLE>
<CAPTION>
2000 1999
---------- -----------
<S> <C> <C>
Computer equipment $1,625,052 $1,553,018
Office equipment 435,332 443,429
---------- -----------
2,060,384 1,996,447
Less-- accumulated depreciation (1,794,311) (1,624,597)
---------- -----------
Total property and equipment $ 266,073 $ 371,850
========== ===========
</TABLE>
6. FINANCING ARRANGEMENTS:
Line of Credit
In May 1997, the Company entered into a line of credit agreement with its
primary lender. Under the agreement, the Company may sell receivables with
recourse in an amount up to $500,000. Interest on the line of credit is
calculated at 2.50% of the average monthly balance plus a 1% administration fee.
At March 31, 2000 and 1999, $0 and $23,705 was outstanding under this agreement,
respectively.
Page 23
<PAGE> 24
Secured Promissory Note
During May 1997, the Company borrowed $150,000 under a secured promissory note
agreement. The note was secured by certain property and equipment and bore
interest at 22.5%. At March 31, 1999, $28,411 was outstanding under this
agreement. This amount was paid in full during fiscal 2000.
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 to the ESOP. Financing for the purchase was
provided by a $500,000 bank loan which was a direct obligation of the Company's
Employee Stock Ownership Trust (the Trust) and was secured by a pledge of the
shares purchased and was guaranteed by the Company and the chief executive
officer.
Funds for payment of the note principal and interest were obtained by the ESOP
from employee contributions and a Company match as well as Company advances to
the ESOP. The outstanding balance of $0 and $104,167 at March 31, 2000 and 1999,
respectively, on the ESOP note is included as a liability on the balance sheet.
The Company has recorded the cost of unallocated shares as unearned ESOP shares.
During 2000 and 1999, the Company applied $104,167 and $135,416, respectively,
of its prepayments to the ESOP to repurchase and retire 7,251 and 23,810 shares,
respectively, of its common stock. In addition, during fiscal 2000, the Company
contributed $100,000 in cash to the ESOP. No cash contribution was made in
fiscal 1999.
The ESOP note bore interest at the prime rate plus 2% (10.5% at March 31, 1999).
7. FEDERAL INCOME TAXES:
Federal income taxes are determined using an asset and liability approach.
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 deferred tax assets (liabilities) as of March 31 are
as follows:
<TABLE>
<CAPTION>
2000 1999
----------- -----------
<S> <C> <C>
Net operating loss carryforward $ 1,042,000 $ 2,008,000
Research and experimentation credit 800,000 800,000
Deferred revenues 126,000 142,000
Capitalized software costs (223,000) (214,000)
Other 45,000 70,000
----------- -----------
1,790,000 2,806,000
Less - valuation allowance (1,790,000) (2,806,000)
----------- -----------
Net deferred tax assets $ -- $ --
=========== ===========
</TABLE>
The net operating loss carryforwards and research and experimentation credit
carryforwards expire through 2018.
The valuation allowance decreased by $1,016,000 during the year ended March 31,
2000 and decreased by $83,000 during 1999.
In connection with the initial public offering, the Company experienced a
significant change in ownership, which limits the amount of previously generated
net operating loss carryforwards and research and experimentation credits of
$1,753,000 and $221,000, respectively, which may be used in any given year to
approximately $300,000.
Page 24
<PAGE> 25
The provisions for income taxes attributable to continuing operations are as
follows:
<TABLE>
<CAPTION>
2000 1999
------- ---------
<S> <C> <C>
Current $55,507 $ --
Deferred -- --
------- ---------
Total provision $55,507 $ --
======= =========
</TABLE>
Reconciliation of the United States statutory rate to the effective tax rates
attributable to continuing operations follows:
<TABLE>
<CAPTION>
2000 1999
------- -------
<S> <C> <C>
Federal income tax expense (benefit) at U.S. statutory rates 34.0 % (34.0)%
Non-deductible expenses 0.2 % 1.1 %
Alternative Minimum Taxes 1.9 % -- %
(Decrease) Increase in deferred tax valuation allowance (34.2)% 32.9 %
----- ------
Provision for income taxes 1.9 % -- %
===== ======
</TABLE>
8. 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 20% 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 six years. The Company made contributions of $17,424 and
$4,025 to the plan during the years ended March 31, 2000 and 1999, respectively.
9. COMMITMENTS AND CONTINGENCIES:
Litigation
In March 1999, the Company filed an action in the U.S. Federal District Court
for Western Washington against Sagent Technologies, Inc., seeking monetary
damages and an injunction from further unauthorized licensing of certain
products that the Company believes infringe on its patent rights under U.S.
Patent Nos. 5,802,511, 6,023,694 and 6,026,392. The litigation process is in the
discovery phase, and the trial is set for January 2001. From time to time, the
Company may pursue litigation against other third parties to enforce or protect
its rights under these patents or its intellectual property rights generally.*
In July 1999, the Company was served a complaint by Microsoft Corporation in the
Superior Court of Washington for King County alleging breach of contract
regarding a Patent License Agreement signed by both companies in June 1999. The
Company believes the claims made by Microsoft have no merit and intends to
vigorously defend itself in this lawsuit.* This litigation process is in the
discovery phase, and the trial is set for December 2000.
Page 25
<PAGE> 26
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, 2000:
<TABLE>
<CAPTION>
Capital Operating
------- ----------
<S> <C> <C>
2001 $5,141 $ 263,298
2002 -- 356,059
2003 -- 376,691
2004 -- 385,001
------ ----------
Total minimum lease payments 5,141 $1,381,049
==========
Less-- amount representing interest
and tax costs (832)
------
Present value of net minimum
lease payments--all current $4,309
======
</TABLE>
Rent expense amounted to $241,269 and $246,303 for the years ended March 31,
2000 and 1999, respectively.
10. STOCKHOLDERS' EQUITY:
Stock Options and Warrants
The Company has a 1994 Stock Option Plan (the "1994 Plan") and a Directors'
Nonqualified Stock Option Plan (the "Directors' Plan"). An aggregate of 475,000
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") and
151,125 are available for grant as of March 31, 2000. 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 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. At March 31, 2000, the Company had granted
options to purchase 255,273 shares of common stock, including those described in
the following paragraphs, which are not part of these option plans. As of March
31, 2000, no further option grants are available under the Old Plan. Options
under these plans generally vest ratably over three- or four-year periods. The
term of the options is for a period of 10 years or less. Options automatically
expire 90 days after termination of employment.
In November 1997, the Company granted a performance-based stock option to the
President and CEO to purchase 75,000 shares of common stock at an exercise price
of $1.00 per share. One half of the shares under this option vested when the
Company's common stock closed trading at a price of $2.00 per share for a period
of 10 consecutive days, and the remaining one-half of the shares under this
option vested when the Company's common stock closed trading at a price of $3.00
per share for a period of 10 consecutive days. This option vested in full during
fiscal 2000, and the Company recognized a total of $152,344 in non-cash
compensation expense.
In February 1999, the Company granted a second performance-based stock option to
the President and CEO to purchase 50,000 shares of common stock at an exercise
price of $1.00 per share. This option will vest in full when the Company's
common stock closes trading at a price of $5.00 or more per share for a period
of 10 consecutive days. In any event, this option will vest, if not otherwise
vested, seven years from the date of grant provided that this individual is then
employed by the Company. This option had not vested as of March 31, 2000.
Page 26
<PAGE> 27
In November 1999, the Company granted a third performance-based stock option to
the President and CEO to purchase 50,000 shares of common stock at an exercise
price of $1.875 per share. This option will vest in full when the Company's
common stock closes trading at a price of $5.00 or more per share for a period
of 10 consecutive days. In any event, this option will vest, if not otherwise
vested, seven years from the date of grant provided that this individual is then
employed by the Company. This option had not vested as of March 31, 2000.
Options outstanding as of each period are as follows:
<TABLE>
<CAPTION>
Weighted
Number of Average
Options Exercise Price
--------- --------------
<S> <C> <C>
Balance, March 31, 1998 484,611 $1.68
Granted 172,500 1.23
Exercised (5,000) 1.00
Canceled (44,200) 2.35
------- -----
Balance, March 31, 1999 607,911 $1.50
Granted 108,500 1.41
Exercised (39,322) .23
Canceled (60,275) 2.72
------- -----
Balance, March 31, 2000 616,814 $1.46
======= =====
</TABLE>
The Company has adopted the disclosure-only provisions of Statement of Financial
Accounting Standards No. 123, "Accounting for Stock-Based Compensation" (SFAS
No. 123). Accordingly, no compensation cost has been recognized for stock
options issued at market value on the date of grant. Had compensation cost for
the Company's stock option plans been determined based on the fair value of the
options at the grant date for awards in 2000 and 1999, consistent with the
provisions of SFAS No. 123, the Company's net income (loss) and net income
(loss) per common share would have been increased to the pro forma amounts
indicated below:
<TABLE>
<CAPTION>
2000 1999
---------- ----------
<S> <C> <C>
Net income (loss) - as reported $2,911,578 $(366,011)
Net income (loss) - pro forma 2,831,799 (466,352)
Basic net income (loss) per
common share - as reported .89 (.12)
Basic net income (loss) per
common share - pro forma .86 (.15)
Diluted net income (loss) per
common share - as reported .83 (.12)
Diluted net income (loss) per
common share - pro forma .80 (.15)
</TABLE>
The fair value of each option grant is established on the date of grant using
the Black-Scholes option-pricing model with the following weighted-average
assumptions used for grants during 2000 and 1999: zero dividend yield; expected
volatility of 97% and 102%, respectively; risk-free interest rates varying by
grant date between 6.00% and 6.38%; and expected lives of five years. Because
the SFAS No. 123 method of accounting has not been applied to options granted
prior to April 1, 1995, the resulting pro forma compensation cost may not be
representative of that to be expected in future years. The weighted-average
grant date fair value of options granted during fiscal 2000 and 1999, was $.99
and $.76, respectively.
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. These warrants expired on January 18, 2000.
Page 27
<PAGE> 28
In March 1998, the Company sold warrants to purchase 300,000 shares of common
stock at an exercise price of $1.00 per share. These warrants were sold for
$100,000 in connection with a software development agreement. In February 2000,
these warrants were exercised in full.
In September 1998 and March 1999, the Company issued warrants to purchase 21,000
and 21,000 shares of common stock, respectively, with an exercise price of $1.00
per share, to outside consultants in exchange for services rendered. These
warrants have a term of 5 years.
Information relating to stock options outstanding and stock options exercisable
at March 31, 1999 is as follows:
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
------------------------ ---------------------
Weighted Weighted Weighted
Average Average Average
Number Remaining Exercise Number Exercise
Range of Exercise Prices of Shares Life in Years Price of Shares Price
------------------------ --------- ------------- -------- --------- --------
<S> <C> <C> <C> <C> <C>
$.06 ............................. 32,322 3.4 $ .06 32,322 $ .06
$1.00-$2.19 ...................... 511,104 8.1 1.22 263,104 1.22
$3.57-$6.75 ...................... 73,388 5.1 3.70 73,388 3.70
------ --- ------ ------- ------
Totals 616,814 7.5 $ 1.46 368,814 $ 1.61
======= === ====== ======= ======
</TABLE>
11. RELATED PARTY TRANSACTIONS:
The Company's transactions with related parties are as follows:
Analyst Financials
In July, 1997, the Company sold a majority interest in its then wholly-owned
subsidiary, Timeline Europe Ltd. (Analyst Financials). As a result, the
Company's ownership interest in Analyst Financials was reduced to 12.5% and the
Analyst Financials management team and certain outside investors obtained an
87.5% ownership interest in Analyst Financials.
In connection with the sale of the majority interest in Analyst Financials, the
Company and Analyst Financials executed a Distributorship Agreement and Source
Code License which allowed Analyst Financials to distribute, enhance and
maintain certain Timeline, Inc. software products in exchange for licensing fees
and maintenance fees payable to the Company. The licensing fees are based on a
percentage of revenues generated by Analyst Financials. During the term of this
agreement, Analyst Financials has the right to market and license certain of the
Company's products to the exclusion of the Company in Europe, the Middle East
and Africa. The Company recorded revenues under this agreement of $226,207 and
$183,872 in fiscal 2000 and 1999, respectively.
In September, 1999, the Company purchased certain software source code from
Analyst Financials. Timeline paid Analyst Financials $85,000 in cash and offset
a receivable from Analyst Financials in the amount of $125,000. The offset of
this receivable has been included as a non-cash transaction in the accompanying
statement of cash flows.
Stock Exchange
In March 2000, the Company entered into an agreement with two shareholders to
reacquire 75,000 shares of its outstanding common stock. In exchange, the
shareholders will receive 4,250 shares of Broadbase Software, Inc. common stock
after the transfer restrictions lapse in September 2000. The shareholders also
received a cash payment of $130,000 at the date of that agreement. As part of
this transaction, the Company recognized the unrealized gain on the 4,250 shares
of Broadbase common stock of $149,175. This amount is included as a component of
the gain on sale of securities in the accompanying statement of operations. The
Company has recorded a liability of $170,000, which represents the fair value of
the shares to be transferred at the date of this agreement. This amount is
included in accrued expenses in the accompanying Balance Sheet.
Page 28
<PAGE> 29
12. SUBSEQUENT EVENT:
On May 31, 2000, the Company announced that it had entered into a binding letter
of intent to acquire all of the outstanding equity of Analyst Financials
Limited. Upon completion of the transaction, Analyst Financials will become a
wholly-owned subsidiary responsible for the Company's operations throughout
Europe, the Middle East and Africa. The purchase price for the equity of Analyst
Financials will be approximately Pound Sterling875,000. The Company has the
option to pay the purchase price in cash, common stock or a combination of cash
and common stock. The Company expects to complete the transaction on a
stock-for-stock basis.* Under the terms of the letter of intent, the purchase
price is subject to adjustment based on the results of operation through the
closing of the transaction. The Company has agreed to deposit with Analyst
Financials a forfeitable bond of Pound Sterling50,000 once all of the
shareholders of Analyst Financials have signed a letter of intent. If the
transaction is not completed, the Company may forfeit the bond.
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."
ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------------ -----------
<S> <C>
3.1* Articles of Incorporation, as amended and in effect
3.2* Bylaws
4.1* Specimen Common Stock Certificate
10.1.A* Amended and Restated 1993 Stock Option Plan
10.1.B* Form of Employee Stock Option Agreement
10.2* 1994 Stock Option Plan
10.3* Directors' Nonqualified Stock Option Plan
10.4** Employee Stock Ownership Plan
Common Stock Purchase Warrants issued in consideration
of loans or loan guarantees:
10.5.A* Warrant issued July 31, 1994 to Frederick W. Dean
10.5.B* Warrant issued July 31, 1994 to Charles R. Osenbaugh
10.5.C* Warrant issued July 31, 1994 to John W. Calahan
10.6* Form of Indemnification Agreement with directors and officers
10.7* Form of Employee (Confidentiality) Agreement
</TABLE>
Page 29
<PAGE> 30
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
<S> <C>
10.8* Form of License Agreement for Computer Application Software
(client/server)
10.9* Form of License Agreement for Computer Application Software
(VAX-based)
10.10* Form of Basic Service for Software Agreement
10.11* Form of Value Added Reseller (Distribution) Agreement
10.12* Solution Provider Agreement with Microsoft Corporation dated
September 23, 1994
10.13.A**** Lease Agreement dated September 8, 1995, as amended, with G&W
Investment Partners
10.13.B***** Amendment to Lease Agreement dated March 20, 1999, with G&W
Investment Partners
10.13C Amendment to Lease Agreement dated March 10, 2000 with
MONY Life Insurance Company
10.14*** Form of Consulting Partners Agreement
10.15***** Patent License Agreement with Microsoft
10.16***** Amended and Restated Accounts Receivable Purchase Agreement
with Silicon Valley Bank
21.1* Subsidiary of Timeline, Inc
23.1 Consent of Independent Public Accountants
27.1 Financial Data Schedule
</TABLE>
*Incorporated herein by reference from Item 27 of Registrant's Form SB-2.
**Incorporated herein by reference from the Registrant's Registration
Statement on Form S-8 filed on March 11, 1996.
***Incorporated herein by reference from Item 13 of Registrant's Form 10-KSB
for the year ended March 31, 1995.
****Incorporated herein by reference from Item 13 of Registrant's Form 10-KSB
for the year ended March 31, 1997.
*****Incorporated herein by reference from Item 13 of Registrant's Form 10-KSB
for the year ended March 31, 1999.
(b) No reports on Form 8-K were filed during the quarter ended March 31, 2000.
Page 30
<PAGE> 31
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/ Charles R. Osenbaugh
---------------------------------
Charles R. Osenbaugh, President
Dated: June 12, 2000
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>
Director
/s/ Charles R. Osenbaugh President June 12, 2000
------------------------------------- Chief Executive Officer
Charles R. Osenbaugh Chief Financial Officer
and Treasurer
Director
/s/ Frederick W. Dean Executive Vice President - June 12, 2000
-------------------------------------
Frederick W. Dean
/s/ Donald K. Babcock Director June 12, 2000
-------------------------------------
Donald K. Babcock
/s/ Kent L. Johnson Director June 12, 2000
-------------------------------------
Kent L. Johnson
</TABLE>
Page 31
