1
================================================================================
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
--------------------------------------------
FORM 10-QSB
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTER ENDED DECEMBER 31, 1998 COMMISSION FILE NUMBER 1-13524
TIMELINE, INC.
(Exact name of small business issuer as specified in its charter)
WASHINGTON 91-1590734
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
3055 112TH AVENUE N.E., STE. 106
BELLEVUE, WA 98004
(Address of principal executive offices)
(206) 822-3140
(Issuer's telephone number)
Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter
period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. Yes [X] No [ ]
State the number of shares outstanding of each of the issuer's classes of common
equity, as of the latest practicable date:
OUTSTANDING AT
CLASS JANUARY 15, 1999
Common Stock, $.01 Par Value 3,215,196
================================================================================
1
2
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
TIMELINE, INC.
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1998
(UNAUDITED) MARCH 31, 1998
------------------ ----------------
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 109,735 $ 59,022
Accounts receivable, net of allowance
of $37,830 and $60,966 764,940 1,372,155
Prepaid expenses and other 9,121 94,381
Note receivable 15,933 174,864
----------- -----------
Total current assets 899,729 1,700,422
PROPERTY AND EQUIPMENT, net of accumulated
depreciation of $1,576,853, and $1,469,026 400,440 490,167
CAPITALIZED SOFTWARE COSTS, net of accumulated
amortization of $1,062,301 and $863,339 595,579 472,496
OTHER ASSETS 2,185 21,072
----------- -----------
Total assets $ 1,897,933 $ 2,684,157
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 75,471 $ 352,392
Accrued expenses 228,949 399,386
Line of credit -- 146,872
Deferred revenue 586,865 460,191
Current portion of long-term debt 183,109 329,578
Current portion of capital leases 10,705 19,939
----------- -----------
Total current liabilities 1,085,099 1,708,358
OBLIGATIONS UNDER CAPITAL LEASES, net of current portion 6,986 5,781
----------- -----------
Total liabilities 1,092,085 1,714,139
----------- -----------
STOCKHOLDERS' EQUITY:
Common stock 32,184 32,147
Additional paid-in capital 9,206,043 9,205,706
Unearned ESOP shares (270,833) (270,833)
Accumulated deficit (8,161,546) (7,997,002)
----------- -----------
Total stockholders' equity 805,848 970,018
----------- -----------
Total liabilities and stockholders' equity $ 1,897,933 $ 2,684,157
=========== ===========
The accompanying notes are an integral part of these balance sheets.
2
3
TIMELINE, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
THREE MONTHS ENDED NINE MONTHS ENDED
DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31,
1998 1997 1998 1997
----------- ----------- ----------- -----------
REVENUES:
Software license $ 184,389 $ 283,952 $ 1,431,243 $ 768,138
Software development 1,950 69,163 28,823 375,014
Maintenance 269,300 193,717 666,104 600,379
Consulting and other 208,186 243,263 539,419 765,222
----------- ----------- ----------- -----------
Total revenues 663,825 790,095 2,665,589 2,508,753
COST OF REVENUES: 248,963 342,475 709,585 1,135,460
----------- ----------- ----------- -----------
Gross profit 414,862 447,620 1,956,004 1,373,293
----------- ----------- ----------- -----------
OPERATING EXPENSES:
Sales and marketing 182,278 102,285 454,385 578,217
Research and development 149,082 159,422 513,327 455,721
General and administrative 274,696 259,744 965,852 1,074,798
Depreciation 48,287 57,000 148,496 175,403
----------- ----------- ----------- -----------
Total operating expenses 654,343 578,451 2,082,060 2,284,139
----------- ----------- ----------- -----------
Loss from operations (239,481) (130,831) (126,056) (910,846)
----------- ----------- ----------- -----------
OTHER INCOME (EXPENSE):
Gain on Sale of Timeline Europe Limited -- -- -- 1,038,409
Interest income 3,284 2,877 11,621 4,991
Interest expense and other (9,467) (48,388) (50,108) (121,571)
----------- ----------- ----------- -----------
Total other income (expense) (6,183) (45,511) (38,487) 921,829
----------- ----------- ----------- -----------
Net income (loss) $ (245,664) $ (176,342) $ (164,543) $ 10,983
=========== =========== =========== ===========
Basic net income (loss) per common share $ (0.08) $ (0.06) $ (0.05) $ 0.00
=========== =========== =========== ===========
Diluted net income (loss) per common and
common equivalent share $ (0.08) $ (0.06) $ (0.05) $ 0.00
=========== =========== =========== ===========
Shares used in calculation of basic
earnings per share 3,164,442 3,130,610 3,164,257 3,130,610
=========== =========== =========== ===========
Shares used in calculation of diluted
earnings per share 3,164,442 3,130,610 3,164,257 3,195,254
=========== =========== =========== ===========
The accompanying notes are an integral part of these financial statements.
3
4
TIMELINE, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE NINE MONTHS ENDED DECEMBER 31, 1998 AND 1997
1998 1997
(unaudited) (unaudited)
----------- -----------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net cash generated by operations $ 734,980 $ 82,465
--------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment (58,769) (9,512)
Capitalized software costs (324,128) (217,225)
--------- ---------
Net cash used in investing activities (382,897) (226,737)
--------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from notes receivable -- 301,285
Proceeds from notes payable -- 192,649
Borrowings under line of credit 64,892 --
Payments on notes payable (146,469) (489,577)
Payments on line of credit (211,764) --
Payments on capital lease obligations (8,029) (12,512)
Proceeds from issuance of common stock -- 1,458
--------- ---------
Net cash used in financing activities (301,370) (6,697)
--------- ---------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 50,713 (150,969)
CASH AND CASH EQUIVALENTS, beginning of period 59,022 187,428
--------- ---------
CASH AND CASH EQUIVALENTS, end of period $ 109,735 $ 36,459
========= =========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the period for -
Interest $ 62,197 $ 112,661
Income taxes -- --
The accompanying notes are an integral part of these financial statements
4
5
TIMELINE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
DECEMBER 31, 1998
1. INTERIM FINANCIAL STATEMENTS
The accompanying financial statements of Timeline, Inc. (the Company) are
unaudited. In the opinion of the Company's management, the financial statements
include all adjustments, consisting only of normal recurring adjustments,
necessary to state fairly the financial information set forth therein. Results
of operations for the three-month and nine-month periods ended December 31, 1998
are not necessarily indicative of future financial results.
Certain notes and other information have been condensed or omitted from the
interim financial statements presented in this Quarterly Report on Form 10-QSB.
Accordingly, these financial statements should be read in conjunction with the
Company's audited financial statements and accompanying notes for the year ended
March 31, 1998, previously reported.
2. STOCKHOLDERS' EQUITY
Changes in stockholders' equity for the period from March 31, 1998 to December
31, 1998 were as follows:
Stockholders' equity, March 31, 1998 $ 970,018
Exercise of common stock options 373
Net income (164,543)
---------
Stockholders' equity, December 31, 1998 $ 805,848
=========
3. NET INCOME (LOSS) PER COMMON SHARE
Basic net income (loss) per share is the net income (loss) divided by the
average number of shares outstanding during the year. Diluted net income (loss)
per share is calculated as the net income (loss) divided by the sum of the
average number of shares outstanding during the year plus the net additional
shares that would have been issued had all dilutive options been exercised, less
shares that would be repurchased with the proceeds from such exercise (Treasury
Stock Method). During the quarter ended December 31, 1998, the effect of
including outstanding options is antidilutive, therefore, options have been
excluded from the calculation of diluted net loss per share. Shares in the
Employee Stock Ownership Plan, which were not committed to be released to plan
participants as of each quarter end are not considered outstanding for the
earnings per share calculation.
5
6
The computation of diluted net income (loss) per common and common equivalent
share is as follows for the three-month and nine-month periods ended December
31:
Three Months Ended Nine Months Ended
December 31, December 31, December 31, December 31,
1998 1997 1998 1997
----------- -------------- ----------- -----------
Net income (loss) $ (245,664) $ (176,342) $ (164,543) $ 10,983
----------- -------------- ----------- -----------
Weighted average common shares outstanding
3,164,442 3,130,610 3,164,257 3,130,610
Plus: dilutive options and warrants -- -- -- 65,644
Less: shares assumed repurchased with proceeds
from exercise -- -- -- (1,000)
----------- -------------- ----------- -----------
Weighted average common and common equivalent
shares outstanding 3,164,442 3,130,610 3,164,257 3,195,254
=========== ============== =========== ===========
Diluted net income (loss) per common and common
equivalent share $ (0.08) $ (0.06) $ (0.05) $ 0.00
=========== ============== =========== ===========
4. LITIGATION
In May 1998, the Company, certain of its directors, former directors and
officers, were named as defendants in a securities lawsuit, Tennant v. Timeline,
Inc., et al., Case No. 9805-03737, in the Circuit Court of the State of Oregon
for Multnomah County. The lawsuit alleged certain violations of Oregon state
securities laws filed by several individual shareholders who purchased stock
primarily in the 1996 private placement. The Company intends to vigorously
defend such lawsuit. The ultimate outcome of such litigation is uncertain,
however, the Company believes its potential losses are limited to $250,000 based
on the limits of its insurance policies.
6
7
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
This Management's Discussion and Analysis of Financial Condition and Results of
Operations includes a number of forward-looking statements which reflect the
Company's current views with respect to future events and financial performance.
These forward-looking statements are subject to certain risks and uncertainties
including those discussed below that could cause actual results to differ
materially from historical results or those anticipated. When used herein, the
words "anticipate," "believe," "estimate," "intend," "may," "will," "expect" and
similar expressions as they relate to the Company are intended to identify such
forward-looking statements. The Company's actual results, performance or
achievements could differ materially from the results expressed in, or implied
by, these forward-looking statements. The Company does not undertake any
obligation to revise these forward-looking statements to reflect any future
events or circumstances. In addition, the disclosures under the caption "Other
Factors that May Affect Operating Results", consist principally of a brief
discussion of risks which may affect future results and are thus, in their
entirety, forward-looking in nature. TO FACILITATE READERS IN IDENTIFYING
FORWARD-LOOKING STATEMENTS, 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. 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 the Company's registration statements on
Forms SB-2 and S-3, and those described from time to time in the Company's press
releases and other communications, which attempt to advise interested parties of
the risks and factors that may affect the Company's business.
RESULTS OF OPERATIONS
REVENUES
Three Months Ended Nine Months Ended
December 31, December 31,
1998 1997 Change 1998 1997 Change
----- ----- ----- ----- ----- -----
(Dollars in Thousands)
Software license 185 284 (35)% 1,431 768 86%
Software development 2 69 (97)% 29 375 (92)%
Maintenance 269 194 39% 666 601 11%
Consulting and Other 208 243 (14)% 540 765 (29)%
----- ----- ----- -----
Revenues 664 790 (16)% 2,666 2,509 6%
----- ----- ----- ----- ----- -----
Total operating revenues for the three months ended December 31, 1998 were down
16% compared to the prior year comparable quarter from $790,000 to $664,000. For
the nine-month period ended December 31, 1998 compared to December 31, 1997,
total revenues were up 6% from $2,509,000 to $2,666,000. As discussed in prior
filings, the mix of revenue source has changed substantially, reflecting a
continuing shift in the business focus of the Company. This shift is to an
emphasis on delivery of the Company's products through third-party alliance
partners, as opposed to primary reliance on direct end-user sales.
The Company has entered into certain funded development arrangements whereby
third parties provide funding for some or all of the cost of development of
products. In exchange for this funding, the third party will receive discounts
on future software licenses for the developed products. The Company records the
development payments received as a direct reduction in related capitalized
software costs to the extent they have been incurred. Any excess is recorded as
deferred revenue until additional costs are incurred or the project is
completed, at which time the remaining excess amount will be recorded as
7
8
software development revenue. Total payments received under these arrangements
during the three-month period ended December 31, 1998 were $95,000.
Software license revenues for the quarter ended December 31, 1998 decreased 35%
as compared to the same quarter in fiscal 1998. A primary aspect of this
decrease is attributable to the concern in the industry and among the public
about Year 2000 issues. Management believes, based on information generally
available in pronouncements by vendors of accounting and ERP software, that the
market for such products will remain weak for several more quarters due to the
hesitancy of end users to implement new software packages on the eve of the year
2000.* The Company's products are offered, in large part, as part of a suite
with these accounting products and are, therefore, directly impacted by the
sales climate associated with such packages. This directly affects the amount of
license revenue generated from the Company's third party distributors.
Additionally, Timeline did not enter into any licenses generated by direct sales
during the quarter as a result of its shift in focus away from direct sales to
third party relationships. Management believes that these factors were the
primary cause of the decrease in the amount of license fee revenue for the third
quarter of fiscal 1999. Management intends to continue to develop and expand
relationships with its existing and future third party distributors and believes
that its continued efforts in developing and maturing such relationships with
third party distributors will positively impact the license revenue generated in
future quarters.*
For the nine months ended December 31, 1998 license revenue increased over the
comparable periods ended December 31, 1997. The increase primarily reflects
license revenue from a significant one-time license fee from Seagate Software,
Inc.
Development fee revenue was substantially lower, 97% in the nine months and 92%
in the quarter ending December 31, 1998, than December 31, 1997. This is
reflective of management not pursuing revenue through custom programming in
order to focus its resources on its core software products and development of
filters between its products and those of its alliance partners.
Maintenance revenue for the comparable nine-month periods rose 11% in fiscal
1999 and increased 37% for the comparable three-month periods of fiscal 1999
over 1998. This increase reflects the growth in maintenance revenue from the
Company's product series based on Microsoft Corporation's operating systems,
more than offsetting decreasing maintenance fees from licensees of Timeline's
Digital-based product line.
Consulting revenue decreased 14% and 29% in the comparable quarters and
nine-month periods, respectively. Consulting revenue is related to the level of
licenses signed and will continue to proportionately reflect the level of end
user product licenses signed (without regard to technology licenses such as
Seagate) on a quarter-by-quarter basis. The Company believes that as its
licensing relationships increase, there will be increased demand for consulting
services in subsequent quarters.* This lag is a natural result of the time it
takes to gear up for new implementations and training required when hiring new
consulting resources. Therefore, although consulting revenue actually increased
in the third quarter when compared to the prior quarters of fiscal 1999, a
slight decrease in consulting revenue in future quarters may result from the
lower license fees generated in this quarter.*
8
9
GROSS MARGIN
Three Months Ended Nine Months Ended
December 31, December 31,
1998 1997 Change 1998 1997 Change
------- ---------- ----------- -------- -------- --------
(Dollars in Thousands)
Gross margin 415 448 (7)% 1,956 1,373 42%
Percentage of
operating revenues 63% 57% 73% 55%
The positive change in the Company's gross margin as a percentage of gross
revenue between the third quarters of fiscal 1998 and 1999 is due in large part
to changes in the mix of higher-margin software licenses and maintenance
revenues, and lower margin consulting and software development revenues which
are labor intensive. The lower gross margin when comparing third quarter results
with prior quarters of fiscal 1999 is also reflective of the mix of revenue
between license and maintenance fees and consulting revenue. Amortization of
capitalized software costs included in cost of revenue for the three month
periods of fiscal 1999 and 1998 were $69,000 and $81,000, respectively, and were
$199,000 and $204,000, respectively, for the nine-month periods of fiscal 1999
and 1998.
SALES AND MARKETING EXPENSE
Three Months Ended Nine Months Ended
December 31, December 31,
1998 1997 Change 1998 1997 Change
------- ---------- ----------- -------- -------- --------
(Dollars in Thousands)
Sales and marketing 182 102 78% 454 578 (21)%
Percentage of
operating revenues 27% 13% 17% 23%
Sales and marketing expenses as a percentage of operating revenues and in actual
dollar amounts increased substantially between the three-month periods
presented, but continued to show a substantial reduction on both comparisons for
the nine-month periods. The increase for the comparable three-month periods
reflects the fact the Company has two additional sales and marketing employees,
hired in prior fiscal 1999 quarters, as compared to fiscal 1998's third quarter.
The Company is conservatively increasing its employee base in response to the
current and anticipated increase in the number of third party distribution
partners.* Nevertheless, on a full nine-month comparative, the average number of
full-time equivalents was higher in fiscal 1998 than fiscal 1999.
RESEARCH AND DEVELOPMENT EXPENSE
Three Months Ended Nine Months Ended
December 31, December 31,
1998 1997 Change 1998 1997 Change
------- ---------- ----------- -------- -------- --------
(Dollars in Thousands)
Research & development 149 159 (6)% 513 456 13%
Percentage of
operating revenues 22% 20% 19% 18%
Research and development expenses during the quarter and nine-month periods
ended December 31, 1998 decreased slightly by 6% and increased 13%,
respectively, over the same periods ending December 31, 1997.
9
10
The Company previously made a strategic decision not to undertake any research
and development on new products unless directly related to its third-party
alliance relationships and better serving the needs of its distributors'
end-user community. Accordingly, research and development expenses during the
periods ended December 31, 1998 and 1997 were attributable solely to making
certain software enhancements to meet the particular needs of its distributors,
to integrate the Company's products with the accounting package(s) of the
various vendors, and to enhance existing products. Increases in the nine-month
period ending December 31, 1998 over the nine-month period ending December 31,
1997 are due to modest increases in staffing and contract expenses.
Research and development expenses have decreased in the third quarter as
compared to the second quarter of fiscal 1999 due to fewer people and
contractors working on research and development projects. The Company expects to
hire additional personnel in future quarters to meet the demand generated by the
Company's success in entering into distribution and private label agreements
with various accounting vendors.*
GENERAL AND ADMINISTRATIVE EXPENSE
Three Months Ended Nine Months Ended
December 31, December 31,
1998 1997 Change 1998 1997 Change
------- ---------- ----------- -------- -------- --------
(Dollars in Thousands)
General & administrative 275 260 6% 966 1,075 (10)%
Percentage of
operating revenues 41% 33% 36% 43%
General and administrative expenses increased 6% between the comparable
three-month periods and decreased by 10% between comparable nine-month periods
ended December 31, 1998 and December 31, 1997. This reflects the fact that the
Company is no longer in a down-sizing mode as had occurred well into fiscal
1999. The Company has again adopted a policy of gradually increasing the number
of employees as market demands. While the number of employees in Administration
has not increased, overhead expenses are affected by increased headcount
throughout the Company. Other than this slight increase in overhead expenses,
management believes general and administrative expenses should remain relatively
stable over the next several quarters with the exception of legal fees, which
are event driven.* The Company is committed to vigorously pursue its defense in
the securities litigation (as discussed in Note 4 of the Notes to Financial
Statements), and is also committed to pursue enforcement of its recently granted
patent rights. As a result, management believes its legal and enforcement
expenses will increase substantially over the next several quarters.*
INCOME TAX
Income taxes are provided in the statement of operations in accordance with the
asset and liability method. The Company has determined that the tax assets
generated by the net operating losses and research and experimentation credits
do not satisfy the recognition criteria set forth under the liability method.
Accordingly, a valuation allowance is recorded against the applicable deferred
tax assets and therefore no tax benefit is recorded.
In connection with the Company's initial public offering in January 1995, the
Company experienced a significant change in ownership, which limits the amount
of net operating loss carry forwards and credits which may be used in any given
year. However, the Company does not expect this to be a factor in fiscal 1999.
10
11
LIQUIDITY AND CAPITAL RESOURCES
The Company's cash and cash equivalent and short-term investment balances at
December 31, 1998 stood at $110,000 compared to $59,000 at March 31, 1998. Total
obligations, excluding deferred income items, totaled $505,000 at December 31,
1998 as compared to $1,254,000 at March 31, 1998. The fiscal 1999 obligations
include a corporate guarantee of a $135,000 bank note between the Timeline
Employee Stock Ownership Trust and Silicon Valley Bank. This note is intended to
be repaid from employee and matching employer contributions under the Timeline
Employee Stock Ownership Plan (the "ESOP"), however, since these contributions
have been negligible, those obligations will likely be paid out of operating
funds.* The Company is currently out of compliance with certain debt covenants
associated with the ESOP debt and has therefore classified this debt as current.
The President and CEO of the Company has personally guaranteed this debt. Net
cash generated in operating activities was $735,000 in the nine-month period
ended December 31, 1998. This was primarily due to the Company reducing its
accounts receivable. The Company used $383,000 for investing activities and
$301,000 for financing activities during the same period.
Based on current cash and cash equivalent balances and projections of cash that
will be generated from future operations, the Company believes it has adequate
resources and credit lines to fund operations during fiscal 1999 and 2000.
However, additional borrowings, sales of equity or debt instruments or
substantial sales of assets may be required if the Company experiences any
significant losses.**
At December 31, 1998, the outstanding balance on the Company's line of credit
facility was zero. Timeline has a bank line of credit of up to $625,000 secured
by qualified account receivables. As of December 31, 1998, the Company had
approximately $357,053 available on this line of credit, based upon qualified
accounts receivable.
OTHER EVENTS
On September 1, 1998, the U.S. Patent and Trademark Office granted the Company
US Patent #5, 802,511 on, among other things, its method of building databases
optimized for reporting from information contained in other sources of data.
Management believes the patent may have value for application vendors in areas
that are not directly competitive with the Company.* Additionally, the Company
is vigorously investigating a number of other application vendors' product
offerings in an attempt to determine if there is infringement of the Company's
patent rights. Furthermore, the Company is pursuing additional related claims
before the US Patent and Trademark Office and has filed for patent protection in
approximately 20 additional countries.
Management intends to seek ways to commercialize the patent outside of the
Company's primary area of application through licensing and joint ventures.
Additionally, in the event the Company determines, in its opinion, that other
software vendors are offering products which infringe upon the Company's patent
rights, it intends to vigorously enforce its rights against those parties. At
this stage, it is very difficult to measure the effect any of these activities
will have on the Company's future expenses and revenue. However, management
believes that expenses for enforcement of its existing and potential patent
rights will increase during subsequent periods, as will the expenses associated
with pursuing patent rights internationally. Because a patent is subject to
attack from a party who may have developed prior technology unknown to the
patent office and the Company, any analysis of whether these activities will
ultimately generate additional revenue is speculative. However, management
intends to undertake a systematic and reasoned effort, including, if
appropriate, filing infringement suits in its efforts to commercialize the
patent.**
11
12
OTHER FACTORS THAT MAY AFFECT OPERATING RESULTS
The Company's operating results may fluctuate due to a number of factors,
including, but not limited to, the ability of the Company to continue to develop
and expand distribution channels and to continue to develop relationships with
third-party distributors and licensees of the Company's products, the ability
and expense to integrate the Company's products with those of its third-party
distributors and licensees, the ability of the Company to hire qualified
consulting, sales and marketing, and research and development personnel and its
ability to generate revenue from such personnel, the outcome of the securities
litigation against the Company, the availability of additional financing or
capital resources, the volume and timing of systems sales and licenses, changes
in the product mix of revenues, changes in the level of operating expenses, and
general economic conditions in the software industry. All of the above factors
are difficult for the Company to forecast, and can materially adversely affect
the Company's business and operating results for one quarter or a series of
quarters.**
YEAR 2000 READINESS
The statements in the following section include "Year 2000 readiness disclosure"
within the meaning of the Year 2000 Information and Readiness Act. The Company
has undertaken a plan to address the potential impact to its business of "Year
2000 issues" (i.e., issues that may arise as a result of computer programs that
use only the last two, rather than all four, digits of the year). The plan
addresses Internal Matters, which are under the Company's operation and over
which the Company exercises some control, and External Matters, which are
outside the Company's control and influence.
Internal Matters. The Company's review of Internal Matters falls into two
categories; which are identified and addressed separately below.
Computer Hardware and Software:
1. The Y2K compliance status of the Microsoft products used by the Company
is found at http://www.microsoft.com/technet/topics/year2k/default.htm.
All products are deemed compliant by Microsoft with two exceptions. The
NT Workstation SP3 requires an upgrade that has not yet been applied,
and Microsoft Access 2.0 does not pass Microsoft's test for Y2K
compliance. However, the Company's use of Access 2.0 as required for its
Financial Server products has been tested and it is the Company's belief
that Financial Server using Access 2.0 is Y2K compliant.
2. The DEC VAX system and a DEC AXP system run OpenVMS. The AXP has been
upgraded to V7.1 and the upgrade of the VAX to V7.1 is scheduled for the
first quarter of calendar 1999. Compaq's Y2K position on OpenVMS V7.1
(compliant) is stated at
http://www.openvms.digital.com/openvms/products/year2000/index.html. The
Y2K position of the BASIC compiler and the C Compiler that is used for
maintenance of the Company's VMS products will be assessed in the first
quarter of calendar 1999.*
3. PC hardware. The Company has less than 75 PC's in use and estimates that
fewer than 25% of those will need upgrades to be compliant. This upgrade
project is expected to be completed in the first half of calendar 1999.*
4. Various other software packages. Certain employees of the Company
require software products to assist them in their jobs. The number of
these products is estimated to be fewer than ten, and assessment of the
products for Year 2000 compliance is scheduled to take place in the
first half of calendar 1999.
12
13
5. A listing of printers, modems and other computer hardware is being
assembled, reviewed and assessed for Year 2000 compliance. After the
review is completed, a determination will be made regarding the need to
upgrade or replace the various hardware products.*
The Company estimates that the cost for the upgrades listed above and any
replacements will not exceed $15,000. The Company intends to fund Year 2000
upgrades and changes through operating cash flow and indebtedness.**
Timeline Software Products:
The Company's current versions of its products and services are designed to be
Year 2000 compliant. Following is a list showing the current version number of
the software products that are believed to be Year 2000 compliant:
Vax/Alpha Version 6.0
Financial Analytics Version 2.5 and higher
MV Server Versions 2.4d and 2.5c
Analyst 1.5 compatible suite*
Third-Party Alliance Partner Filters
*Designed to be Y2K compliant, but no testing performed. Upgrade
recommended to Financial Analytics
The Company recognizes that certain customers may have made custom, site
specific changes to software provided by the Company. The Company cannot assess
the number or nature of such customizations nor their Y2K compliance. To the
extent the customization work was performed by the Company, customers may
request a review and, if possible, an upgrade to the customization on a time and
materials basis.* While the Company's above-listed products have been released
as Year 2000 compliant, certain customers have not yet upgraded to these
versions. Although the Company believes that its internal systems, products and
services are currently Year 2000 compliant, a complete re-testing of the current
release of the software is scheduled to take place during the first half of
calendar 1999.* However, there can be no assurances that the Company's products
and systems contain all necessary date codes.* In addition, there can be no
guarantee that the systems of other companies on which the Company relies or
with whom it does business will be Year 2000 compliant and would not have an
adverse effect on the Company's business.*
Timeline makes no representation or warranty as to, and will not address, the
Year 2000 readiness of any hardware, firmware, software, services protocols,
data, interfaces to third party systems, or user-customized functions or
features that may be used with Timeline software other than those Company
products discussed above. The Company does not plan to test any products other
than the current version and will not provide Year 2000 support for any products
other than those identified on the list.* The information contained on the list
is based on data available to the Company at the time of its preparation. From
time to time, Timeline may change the information on the list without notice to
the customer.
The Company estimates that the cost to date for upgrading its products to be
Year 2000 compliant is approximately $160,000. These costs have been incurred
over a several year period and have been funded by operating cash flow. Although
future expenses are not known at this time, the Company believes they will not
be material.*
The Company estimates that it has completed approximately 60% of its year 2000
Plan regarding Internal Matters. The Internal Matter review process is planned
for completion by the end of the June 1999.*
13
14
External Matters. The Company has commenced a review of External Matters which
are outside the Company's control and influence. This process consists of a
determination of the customer and supplier relationships and third-party
alliance partners that could have a potential material impact upon the Company
and its ongoing operations. Confirmation of Y2K compliance has been received
from the building management with regard to building systems, the telephone
system and service providers, and the Company's business equipment such as
copiers, postage and fax machines. Additional vendors and suppliers may be added
if further analysis determines the impact on the Company would be material in
the event of a Year 2000 compliance failure. The Company will be contacting its
third-party alliance partners with regard to their Year 2000 Compliance status
and any compatibility issues that may arise.*
A contingency plan for External Matters has not yet been completed and there can
be no assurance that Year 2000 problems resulting from customer, supplier or
third-party alliance partner relationships will not have a material adverse
impact on the Company. The Company anticipates completion of this process by
June 30, 1999.**
The Company estimates that it has completed approximately 60% of its Year 2000
plan for External Matters. To date, it has incurred expenses of less than
$15,000, and anticipates future direct costs to be no more than an additional
$20,000.**
Although the Company believes that it has an effective plan in place that will
resolve any Year 2000 issues in a timely manner, the Company may be adversely
impacted by Year 2000 issues if its re-testing of its software products indicate
Year 2000 processing problems, or if upgrades to internal computer hardware and
software are not completed on schedule. In the event that third parties do not
complete the necessary remediation, the Company could be subject to interruption
of its normal business activities, including its ability to meet product
development deadlines, maintain consulting schedules, generate revenue through
third-party alliance partners, deliver software to customers, invoice customers,
collect payments or engage in similar business activities. Such an event could
result in a material adverse effect on the Company's revenues or in litigation
surrounding such business interruptions. In addition, disruptions in the economy
generally resulting from the Year 2000 issue could materially adversely affect
the Company. The amount of potential liability and revenues cannot reasonably be
estimated at this time.**
14
15
PART II. - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
In May 1998, the Company, certain of its directors, former
directors and officers, were named as defendants in a securities
lawsuit, Tennant v. Timeline, Inc., et al., Case No. 9805-03737,
in the Circuit Court of the State of Oregon for Multnomah
County. The lawsuit alleged certain violations of Oregon state
securities laws filed by several individual shareholders who
purchased stock primarily in the 1996 private placement. The
Company intends to vigorously defend such lawsuit. The ultimate
outcome of such litigation is uncertain, however, the Company
believes its potential losses are limited to $250,000 based on
the limits of its insurance policies.*
In addition, on October 9, 1998, the Company filed a complaint
in the U.S. District Court for the Western District of
Washington, Timeline, Inc. v. Clarus Corporation (case number
C98-1431). The lawsuit seeks unspecified damages from Clarus
Corporation for claims of patent infringement, breach of
contract and misappropriation of Company trade secrets. This
litigation is in its infancy and its ultimate outcome and any
recovery by the Company is uncertain.*
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
None
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
ITEM 5. OTHER INFORMATION
None
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
27.1 Financial Data Schedule
(b) No reports on Form 8-K were filed during the three months
ended December 31, 1998.
15
16
SIGNATURES
In accordance with the requirements of the Exchange Act, the registrant caused
this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
Timeline, Inc.
(Registrant)
Date: February 11, 1999 By: /s/ Charles R. Osenbaugh
--------------------------------------
Charles R. Osenbaugh
President/Chief Financial Officer
Signed on behalf of registrant and as
principal financial officer.
16
17
EXHIBITS INDEX
EXHIBIT
NUMBER DESCRIPTION
27.1 Financial Data Schedule
17