We have instituted a compensation plan that could cause employee compensation costs to increase, as described in the Liquidity and Capital Resources section below.* No bonus was paid for the results of the first three fiscal quarter of 2005.
General and administrative expenses for the third quarter and first nine months of fiscal 2005 decreased by 7% and 9%, respectively, over comparable periods in fiscal 2004. We have instituted changes which have generated substantial decreases in salaries, payroll taxes and rents. We experienced a significant increase in auditing fees during the first quarter of fiscal 2005 for the audit for the 2004 fiscal year. However, we engaged a new auditing firm in the first quarter of fiscal 2005 and our accounting fees have been lower in each subsequent quarter.
We expect general and administrative expenses to decline further during the remainder of fiscal 2005 due to a scheduled reduction in leased space in London.* We have taken a number of steps during fiscal 2005 to reduce our costs of operations, including renegotiating the terms of some vendor contracts. However, we have instituted a compensation plan for employees, as described in Liquidity and Capital Resources below, that may increase compensation costs if certain revenue goals are achieved.*
Patent expenses include the costs of litigation and negotiations with respect to patent licenses. Patent expenses for the third quarter and the first nine months of fiscal 2005 decreased by 38% and 25%, respectively, over the comparable periods in fiscal 2004. Patent expenses decreased in part because no patent litigation was pending during the first nine months of fiscal 2005. These expenses can vary dramatically quarter-to-quarter depending upon the level of activity required from legal counsel and experts. We continue to incur capital expenses related to the registration of our patents which in turn increases the amount of amortization charged against quarterly operations. The capitalized procurement costs were in part related to attorney fees incurred to finalize the issuance of our WorkWise patents on process automation and our Canadian, Chinese and second Australian patent on automation of data mart design. We anticipate undertaking new litigation during the remainder of fiscal 2005 and/or fiscal 2006 to protect our patent rights.* Consequently, we expect significant swings in patent costs will result.*
Depreciation and Amortization
Depreciation expense decreased in the quarter ended December 31, 2004 to approximately $9,000 from approximately $16,000 in the quarter ended December 31, 2003. Depreciation expense decreased in the nine-month period ended December 31, 2004 to approximately $26,000 from approximately $49,000 in the nine-month period ended December 31, 2003. Amortization of intangible assets for each of the quarters ended December 31, 2004 and 2003 was $0.
Other Income and Expense
Other income and expense generated income of approximately $33,000 in the third quarter of fiscal 2005 compared to income of approximately $16,000 in the third quarter of fiscal 2004. The major components of other income and expense in all periods are interest and foreign currency exchange gain and loss. During the quarter ended December 31, 2004, interest expense was approximately $1,000 and foreign exchange gain was approximately $34,000. During the quarter ended December 31, 2003, interest expense was less that one thousand dollars and foreign exchange gain was approximately $16,000.
Income Tax
No income tax expense was recorded in the third quarter of either fiscal 2005 or fiscal 2004. All income or loss is offset by appropriate adjustments to the valuation allowance of our net operating loss carry-forwards.
LIQUIDITY AND CAPITAL RESOURCES
We have historically suffered recurring operating losses and negative cash flows from operations. As of December 31, 2004, we had negative net working capital of approximately $365,000 (positive working capital position of approximately $366,000 when excluding deferred revenue). Additionally, as of December 31, 2004, our cash and cash equivalents were approximately $100,000 compared to cash and cash equivalents of approximately $511,000 as of March 31, 2004.
The decrease in our cash and cash equivalents is attributable to losses from operations during the first two quarters of fiscal 2005, although we had operating income in the third quarter of fiscal 2005. These losses were primarily attributable to significant decreases in software and patent license and consulting revenue during those quarters.
Accounts receivable were approximately $594,000 and $423,000 at December 31, 2004 and March 31, 2004, respectively. We believe the increase in accounts receivable is simply due to the normal swings in the timing of collections and the greater revenue during the third quarter of fiscal 2005.
On September 23, 2004, we entered into an Accounts Receivable Financing Agreement with Silicon Valley Bank, providing for a line of credit of up to $350,000. Under the Financing Agreement, for any of our accounts receivable that Silicon Valley Bank agrees to finance, we will receive an advance equal to 80% of the face amount of such accounts receivable. All advances are subject to a variable interest rate. As of December 31, 2004, the interest rate for any advances by the Bank was 7.75% per annum. In connection with the Financing Agreement, we granted Silicon Valley Bank a security interest in all of our assets. As of December 31, 2004, we had approximately $26,000 outstanding under the line of credit, out of total of approximately $245,000 available for borrowing based on
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eligible accounts receivable at that time. Silicon Valley Bank is not obligated to finance any of our accounts receivable. There can be no assurance that Silicon Valley Bank will make advances to us when requested.*
Total liabilities, excluding deferred revenue, were approximately $369,000 at December 31, 2004 compared to approximately $344,000 at March 31, 2004. The increase in total liabilities is attributable to an increase in our borrowings under our accounts receivable line of credit established in the second quarter of fiscal 2005, as described above.
For the fourth quarter of fiscal 2005, we expect to generate cash from increased maintenance revenues and software license revenues and, possibly, additional licenses of our patented technology.* We expect that our primary uses of cash will be salaries and other expenses associated with general and administrative, research and development, and sales and marketing activities.* We have instituted an compensation plan based on certain gross revenue and net income targets that could cause employee compensation costs to increase.* All U.S.-based employees are eligible to participate in a bonus pool in an amount, subject to specified adjustments and limitations, that represents 50% of the amount by which U.S. revenue exceeds U.S. internal budgets for each quarter of fiscal 2005. No bonus was paid for the results of the first three fiscal quarters of 2005. Additionally, if the economy and new license revenue numbers improve to a level where salary reductions instituted in the fourth quarter of fiscal 2002 are no longer deemed necessary, this would also put upward pressure on costs.*
We intend to continue to monitor new license activity closely and may have to reduce staff, and/or seek outside financing or a sale or merger if consulting and maintenance revenues and patent and software licenses do not increase quarter-to-quarter during the remainder of fiscal 2005 and beyond.* By taking this cautious approach combined with our current cash and cash equivalent balances and proceeds from bank credit facilities, we believe we will have adequate resources to fund operations, as well as costs and expenses of any litigation we may pursue, through the balance of fiscal 2005.* Our auditors added an explanatory paragraph to their opinion on our fiscal 2004 consolidated financial statements stating that there was substantial doubt about our ability to continue as a going concern.
There can be no assurance that our efforts to monitor expenses and generate revenue will be successful.* Accordingly, we need to contemplate other alternatives to enable us to fund continuing operations, including, but not limited to, engaging a financial advisor to explore strategic alternatives, which may include a merger, asset sale, joint venture or another comparable transaction, loans from management or employees, requesting further advances under the Financing Agreement, salary deferrals or other cost cutting mechanisms, or raising additional capital by private placements of equity or debt securities or through the establishment of other funding facilities.* None of these potential alternatives may be available to us, or may only be available on unfavorable terms.* If we are unable to obtain sufficient cash to continue to fund our operations, we may be forced to seek protection from creditors under the bankruptcy laws or cease operations.* Our inability to obtain additional cash as needed could have a material adverse effect on our financial position, results of operations and our ability to continue in existence.* The consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty.
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Other Factors That May Affect Operating Results
Our operating results may fluctuate due to a number of factors, including, but not limited to, the following factors:
| • | competition from existing or new product offerings, |
| • | the ability of our third-party distributors and licensees in selling and marketing our products, |
| • | market acceptance of our products, |
| • | changes in the size or volume of consulting or maintenance contracts with existing clients and potential clients, |
| • | our ability to develop and expand distribution channels and to develop relationships with third-party distributors and licensees of our products, both internationally and domestically, |
| • | our decreased emphasis on direct sales, and increased reliance on OEMs and VARs |
| • | our ability to motivate and retain our existing employees, including sales and marketing personnel, as well as to attract and hire new employees in the future, |
| • | our ability to integrate our products with those of our third-party distributors and licensees, |
| • | our patent licensing strategies and ability to pursue further patent licenses, |
| • | the availability of additional financing or capital resources, |
| • | the volume and timing of systems sales and licenses, |
| • | changes in the level of operating expenses, and |
| • | general economic conditions in the software industry. |
All of the above factors are difficult for us to forecast, and can materially adversely affect our business and operating results for one quarter or a series of quarters.**
Item 3 Controls and Procedure
(a) Evaluation of Disclosure Controls and Procedures
We performed an evaluation under the supervision and with the participation of management, including our Chief Executive Officer/Chief Financial Officer, as of the end of the period covered by this report, of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934 (the “Exchange Act”)). Based on this evaluation, we concluded our disclosure controls and procedures are effective to ensure that information required to be disclosed in reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in Securities and Exchange Commission rules and forms.
(b) Changes in Internal Controls
There were no significant changes in our internal controls or in other factors that could significantly affect these controls subsequent to the date of their evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses.
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PART II. – OTHER INFORMATION
Item 6. Exhibits
(a) Exhibits:
31.1 Certification of Charles R. Osenbaugh, President, Chief Executive Officer and Chief Financial Officer of Timeline, Inc. pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32.1 Certification of Charles R. Osenbaugh, President, Chief Executive Officer and Chief Financial Officer of Timeline, Inc. pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
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SIGNATURE
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 10, 2005 | By: | /s/ CHARLES R. OSENBAUGH |
| |
|
| | Charles R. Osenbaugh
President/Chief Financial Officer |
| | |
| | |
| | Signed on behalf of registrant and as principal executive officer and financial officer. |
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