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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-QSB
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTER ENDED SEPTEMBER 30, 2000 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)
Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter
period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. Yes [X] No [ ]
State the number of shares outstanding of each of the issuer's classes of common
equity, as of the latest practicable date:
OUTSTANDING AT
CLASS OCTOBER 15, 2000
Common Stock, $.01 Par Value 3,793,498
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PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
TIMELINE, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
ASSETS
September 30, March 31,
2000 2000
----------- -----------
CURRENT ASSETS: (unaudited) (audited)
Cash and cash equivalents $ 266,281 $ 1,470,703
Marketable securities -- trading 1,026,623 1,546,256
Marketable securities -- available for sale 688,170 --
Short-term restricted investments -- 3,030,000
Securities held for others 170,000 170,000
Accounts receivable, net of allowance of $33,100 and $38,500 769,562 323,387
Prepaid expenses and other 113,864 70,372
----------- -----------
Total current assets 3,034,500 6,610,718
PROPERTY AND EQUIPMENT, net of accumulated
depreciation of $1,079,013 and $1,794,311 228,408 266,073
CAPITALIZED SOFTWARE COSTS, net of accumulated
amortization of $246,584 and $163,622 1,519,121 555,617
CAPITALIZED PATENTS, net of accumulated amortization of $10,845
and $7,429 112,130 99,582
GOODWILL, net of accumulated amortization of $6,562 and $0 71,714 --
OTHER ASSETS 6,552 2,185
----------- -----------
Total assets $ 4,972,425 $ 7,534,175
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 328,530 $ 303,885
Accrued expenses 622,743 444,093
Notes Payable 8,002 43,828
Deferred revenues 366,788 372,000
Current portion of obligations under capital leases -- 4,309
----------- -----------
Total current liabilities 1,326,063 1,168,115
OTHER LIABILITIES 25,039 --
----------- -----------
Total liabilities 1,351,102 1,168,115
----------- -----------
STOCKHOLDERS' EQUITY:
Common stock, $.01 par value, 20,000,000 shares authorized,
3,761,176 and 3,449,112 issued and outstanding 37,623 34,492
Additional paid-in capital 9,927,882 9,124,178
Other comprehensive income 439,495 2,658,825
Foreign currency adjustment (39,397) --
Accumulated deficit (6,744,280) (5,451,435)
----------- -----------
Total stockholders' equity 3,621,323 6,366,060
----------- -----------
Total liabilities and stockholders' equity $ 4,972,425 $ 7,534,175
=========== ===========
The accompanying notes are an integral part of these balance sheets.
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TIMELINE, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
Three Months Ended Six Months Ended
September 30, September 30, September 30, September 30,
2000 1999 2000 1999
----------- ----------- ----------- -----------
REVENUES:
Software license $ 675,534 $ 121,957 $ 787,925 $ 198,612
Other licenses -- 602,000 -- 5,602,000
Software development 16,587 22,313 22,116 22,313
Maintenance 186,634 225,406 340,896 430,474
Consulting and other 236,579 217,494 309,208 424,013
----------- ----------- ----------- -----------
Total revenues 1,115,334 1,189,170 1,460,145 6,677,412
----------- ----------- ----------- -----------
COST OF REVENUES: 301,486 251,956 479,926 642,493
----------- ----------- ----------- -----------
Gross profit 813,848 937,214 980,219 6,034,919
----------- ----------- ----------- -----------
OPERATING EXPENSE:
Sales and marketing 357,411 133,857 591,748 380,057
Research and development 336,667 304,429 658,145 611,610
General and administrative 698,614 459,798 1,270,034 1,179,244
Depreciation 37,028 42,775 84,128 90,775
Amortization: intangibles/
goodwill 100,494 -- 100,494 --
----------- ----------- ----------- -----------
Total operating expenses 1,530,214 940,859 2,704,549 2,261,686
----------- ----------- ----------- -----------
(Loss) income from operations (716,366) (3,645) (1,724,330) 3,773,233
OTHER INCOME (EXPENSE):
Gain on securities 181,125 -- 454,765 --
Interest expense and other (31,452) (15,146) (35,961) (23,196)
Other income (2,245) 40,000 (2,244) 40,000
Interest income 4,825 42,805 14,924 43,766
----------- ----------- ----------- -----------
Total other income 152,253 67,659 431,484 60,570
----------- ----------- ----------- -----------
Net (loss) income $ (564,113) $ 64,014 $(1,292,846) $ 3,833,803
=========== =========== =========== ===========
Basic net (loss) income per
common share $ (0.15) $ 0.02 $ (0.36) $ 1.19
=========== =========== =========== ===========
Diluted net (loss) income per
common and common equivalent share $ (0.15) $ 0.02 $ (0.36) $ 1.10
=========== =========== =========== ===========
Shares used in calculation of
basic earnings per share 3,757,817 3,223,709 3,603,715 3,212,935
=========== =========== =========== ===========
Shares used in calculation of
diluted earnings per share 3,757,817 3,617,587 3,603,715 3,483,865
=========== =========== =========== ===========
The accompanying notes are an integral part of these financial statements
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TIMELINE, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE SIX MONTHS ENDED SEPTEMBER 30, 2000 AND 1999
(UNAUDITED)
2000 1999
----------- -----------
CASH FLOW FROM OPERATING ACTIVITIES:
Net cash (used in) provided by operations $(2,174,707) $ 4,282,638
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Cash acquired in AFL acquisition 29,056 --
Purchase of property and equipment (19,085) (27,065)
Proceeds from property and equipment 22,075 --
Payments for capitalized software development costs (87,486) (158,607)
Purchase of short-term investments (586,150) (4,432,859)
Proceeds from sale of short-term investments 1,683,049 425,000
(Issuance) proceeds of note receivable (952) 8,204
----------- -----------
Net cash provided by (used in) investing activities 1,040,507 (4,185,327)
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Payments on capital lease obligation (4,309) (15,014)
Payment of notes payable (35,826) --
Borrowing under line of credit -- 287,012
Repayments under line of credit -- (310,717)
Payment on long term debt -- (122,916)
Exercise of stock options/warrants 9,310 31,070
----------- -----------
Net cash used in financing activities (30,825) (130,565)
----------- -----------
EFFECT OF FOREIGN EXCHANGE RATE (39,397) --
NET CHANGE IN CASH AND CASH EQUIVALENTS (1,204,422) (33,254)
CASH AND CASH EQUIVALENTS, beginning of period 1,470,703 59,453
----------- -----------
CASH AND CASH EQUIVALENTS, end of period $ 266,281 $ 26,199
=========== ===========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid for interest during year $ 4,508 $ 20,199
Non-cash transactions:
Equity consideration for AFL acquisition 797,525 --
Unrealized (loss) gain on available for sale securities (2,219,330) 246,000
Offset of accounts receivable for capitalized software -- 125,000
Retirement of unallocated ESOP shares -- 135,417
The accompanying notes are an integral part of these financial statements
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TIMELINE, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
SEPTEMBER 30, 2000
1. INTERIM FINANCIAL STATEMENTS
The accompanying condensed consolidated interim 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
six-month periods ended September 30, 2000 are not necessarily indicative of
future financial results.
Certain notes and other information have been condensed or omitted from the
condensed consolidated 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 annual financial statements for the year ended
March 31, 2000, previously reported.
2. MARKETABLE SECURITIES -- TRADING
The Company invests in various marketable securities through investment accounts
with brokers. At September 30, 2000, these investments included common and
preferred stock and had a fair market value of $1,026,623. The Company has
classified these investments as trading securities under Statement of Accounting
Standards (SFAS) 115 as it is the Company's intent to actively buy and sell
individual securities within these investment accounts.
3. MARKETABLE SECURITIES -- AVAILABLE FOR SALE
In September 1999, the Company settled a patent infringement lawsuit filed
against Broadbase Software, Inc. (Broadbase). As part of the settlement, the
Company received 80,000 shares of Broadbase restricted common stock with a fair
market value of $392,000 at the date of the settlement. The Company was subject
to restrictions on the sale of these securities for a period of one year from
the date that they were received. These restrictions lapsed in September 2000.
Accordingly, the Company has reclassified this investment as marketable
securities in the accompanying balance sheets.
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 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. In connection with this
transaction, the Company recognized the unrealized gain of $149,175 on these
shares. This amount is included as a component of the gain on 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 that agreement. This amount is included in accrued expenses in the
accompanying Balance Sheet.
In June 2000, the Company sold 15,000 shares of Broadbase common stock to its
investment broker at a price of $30.24 per share. In connection with this
transaction the Company recognized the unrealized gain of $380,100 on these
shares. This amount is included as a component of the gain on securities in the
accompanying statement of operations.
The total value of noncommitted Broadbase common stock was $688,170 at September
30, 2000. The Company has accounted for these shares as available for sale
securities as required under SFAS 115. Accordingly, the unrealized gain on this
stock of $439,495 at September 30, 2000, is recorded as other comprehensive
income in the accompanying balance sheet. Broadbase completed a two-for-one
stock split on April 10, 2000. All per share amounts have been adjusted to
reflect this stock split.
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4. SHAREHOLDERS' EQUITY
Changes in shareholders' equity for the period from March 31, 2000 to September
30, 2000 were as follows:
Shareholders' equity, March 31, 2000 $ 6,366,060
Exercise of common stock options 9,310
Equity consideration issued for AFL acquisition 797,525
Foreign currency adjustment (39,397)
Other comprehensive income -- unrealized loss on
available-for-sale securities (2,219,330)
Net loss (1,292,846)
-----------
Shareholders' equity, September 30, 2000 $ 3,621,322
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5. NET INCOME PER COMMON SHARE
Basic net income per share is the net income divided by the average number of
shares outstanding during the year. Diluted net income per share is calculated
as the net income 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). For the three and six
month periods ended September 30, 2000, all options and warrants were
anti-dilutive and accordingly, they were not included in the calculation of net
income per common share.
The computation of diluted net income (loss) per common and common equivalent
share is as follows for the three-month and six-month periods ended September
30:
Three Months Ended Six Months Ended
September 30, September 30, September 30, September 30,
2000 1999 2000 1999
----------- ----------- ----------- -----------
Net income (loss) $ (564,113) $ 64,014 $(1,292,846) $ 3,833,803
----------- ----------- ----------- -----------
Weighted average common shares
outstanding 3,757,817 3,223,709 3,603,715 3,212,935
Plus: dilutive options and warrants -- 862,676 -- 788,072
Less: shares assumed repurchased
with proceeds from exercise -- (468,798) -- (517,142)
----------- ----------- ----------- -----------
Weighted average common and common
equivalent shares outstanding 3,757,817 3,617,587 3,603,715 3,483,865
=========== =========== =========== ===========
Diluted net income (loss) per
common and common equivalent share $ (0.15) $ 0.02 $ (0.36) $ 1.10
=========== =========== =========== ===========
6. 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 Timeline believes infringe on Timeline's patent rights under U.S.
Patent #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.
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. The trial was held
in early October, 2000. Post-trial briefs have been submitted and a decision is
expected soon.
In July 2000, the Company filed a lawsuit against Oracle Corporation seeking
monetary damages and injunctive relief. The Company's claims are based on
Oracle's alleged introduction of elements in its product family that
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utilize technology similar to the Company's patented technology licensed to
Microsoft. The litigation process is in the discovery phase.
From time to time, the Company may pursue litigation against other third parties
to enforce or protect its rights under this patent or its intellectual property
rights generally.*
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
This Quarterly Report on Form 10-QSB includes a number of forward-looking
statements that reflect our 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 we use the words "anticipate,"
"believe," "could," "should," "predict," "may," "will," "expect" and similar
expressions as they relate to Timeline, we are identifying such forward-looking
statements, but these words are not the exclusive means of identifying such
statements. Our actual results, performance or achievements could differ
materially from the results expressed in, or implied by, these forward-looking
statements. We do 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, WE HAVE 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 us in this report
and in our other reports previously filed with the Securities and Exchange
Commission (the "SEC"), including our periodic reports on Forms 10-KSB and
10-QSB, and those described from time to time in our press releases and other
communications, which attempt to advise interested parties of the risks and
factors that may affect our business.
RESULTS OF OPERATIONS
REVENUES
Three Months Ended Six Months Ended
September 30, September 30,
2000 1999 Change 2000 1999 Change
- --------------------------------------------------------------------------------------------------------
(Dollars in Thousands)
Software license 676 122 454% 788 199 296%
Other license 0 602 (100)% 0 5,602 (100)%
Maintenance 186 225 (17)% 341 430 (21)%
Consulting and Other 237 218 9% 309 424 (27)%
Software development 16 22 (23)% 22 22 0%
------------------ ------------------
Revenues 1,115 1,189 (6)% 1,460 6,677 (78)%
- --------------------------------------------------------------------------------------------------------
Our total operating revenues of $1,115,000 for the quarter ended September 30,
2000 were 6% lower than the $1,189,000 for the quarter ended September 30, 1999.
However, there were substantial changes in the nature of revenue for these two
periods. Revenues for the quarter ended September 30, 1999 consisted primarily
of revenue from patent licensing, whereas the comparable quarter in fiscal 2001
did not include any revenue from patent licensing. Revenue for the quarter ended
September 30, 2000 consisted primarily of significant increases in revenue from
software licenses (454% increase) and consulting (9% increase), which was
partially offset by decreases in software development (23% decrease) and
maintenance revenue (17% decrease). In addition, results of operations for the
quarter ended September 30, 2000 include the operations of Analyst Financials
Limited (AFL), which we acquired as of June 30, 2000, and accordingly, results
of operations for periods in fiscal 2000 (prior to the AFL acquisition) to
fiscal 2001 (after the AFL acquisition) are not directly comparable. For the
period ended September 30, 1999, AFL was only accounted for on the basis of
royalties paid to Timeline on AFL license and maintenance revenue under its then
distributor agreement. These amounted to $54,913 and $27,672, respectively, in
the second quarter of fiscal 2000 as compared to license revenue of $317,357 and
maintenance revenue of $77,941 in the second quarter of fiscal 2001 generated
through the AFL office.
The increase in revenue from software licenses in fiscal 2001 over fiscal 2000
is directly attributable to improved results from our third-party distribution
partners. During the second quarter of fiscal 2001, we had sales through
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eight alliance partners, which represented an increase in the number of
revenue-generating distribution partners from four in the prior quarter. We
believe there is continued weakness in the enterprise resource planning (ERP)
and accounting software markets, which weakness directly affects the sale and
distribution of our products as an additional module on their products or as an
"after-market" add-on. However, we have continued to establish strategic
alliances with national and international distribution partners, including ID
Application a.s. and Applied Systems, Inc., and anticipate that such channels
will result in increases to software licenses during fiscal 2001.* In addition,
although we continue to pursue additional patent licenses, we believe that the
current litigation regarding our patents has had a negative impact on our
ability to enter into additional patent licenses. The ultimate outcome of any of
these litigation matters could adversely affect our ability to enter into
additional patent licenses and our existing patent licenses.* 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.*
Maintenance fee revenue decreased by 17% for the comparable three-month periods
and 21% for the comparable six-month periods ended September 30, 2000 and 1999,
respectively. This reflects the fact we began outsourcing the maintenance on our
product series based on our older VAX-based product line as of May 1, 2000. We
continue to experience increased maintenance revenue from maintenance contracts
for our Microsoft-based product lines in the quarterly and six-month comparisons
from fiscal 2000 to fiscal 2001.
Consulting and other revenue increased 9%, from $218,000 to $237,000 in the
quarters ended September 30, 1999 and September 30, 2000. For the six-month
periods, consulting and other revenue decreased by 27%. Fluctuations in
consulting revenue are reflective of the number of new licenses entered into at
any particular time and the backlog, if any, of previously licensed systems not
yet installed. We believe that these fluctuations will become less material in
the future as a larger percentage of new product licensing is transacted through
OEM channels that directly provide installation services to end-users.* In
addition, as a result of the AFL acquisition, the number of consultants on staff
has increased, and we expect that this increase will result in increased
consulting revenue for future periods when compared to results in the prior
fiscal year prior to the AFL acquisition.*
Development fee revenue was $17,000 and $22,000 in the quarters ended September
30, 2000 and 1999, respectively, and $22,000 for each of the six-month periods
ended September 30, 2000 and 1999, respectively. Development revenues are not
material to overall revenue and we do not anticipate that 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
Three Months Ended Six Months Ended
September 30, September 30,
2000 1999 Change 2000 1999 Change
- ---------------------------------------------------------------------------------------------------
(Dollars in Thousands)
Gross profit 814 937 (13)% 980 6,035 (84)%
Percentage of operating revenues 73% 79% 67% 90%
- ---------------------------------------------------------------------------------------------------
Our gross profit decreased 13% for the comparable quarters in fiscal 2001 and
2000, and decreased 6% as a percentage of operating revenue for the comparable
quarters. The gross profit for the comparable three- and six-month periods are
not directly comparable because of the high-margin patent license revenue we
received in fiscal 2000. Gross profit in the quarter ended September 30, 2000
represented an increase in the cost of revenue due to increased revenue from
software licenses and consulting (rather than higher-margin patent licenses) and
from increased amortization, in part resulting from the AFL acquisition. In
general, we expect to see continued improvements to our gross profit due to our
shift in focus to higher-margin software and patent licenses, and less focus on
lower margin consulting and maintenance revenue which is labor intensive.*
Additionally, since patent licenses, to date, have tended to be driven by legal
actions and/or negotiated settlements of threatened legal actions, the costs of
securing patent licenses vary greatly from license to license. As patent
licensing is expected to continue to be both relevant and widely different
between reporting periods, substantial fluctuations in comparative margins may
continue to occur.* In addition, we expect that amortization expenses in future
quarters will increase over that experienced in the comparable quarters in
fiscal 2000.* This expected increase is a result of the acquisition of AFL which
caused a substantial capitalization of the purchase price as amortizable assets
from July 1, 2000 forward (typically over the next 12 quarters).*
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SALES AND MARKETING EXPENSE
Three Months Ended Six Months Ended
September 30, September 30,
2000 1999 Change 2000 1999 Change
- ---------------------------------------------------------------------------------------------------------------
(Dollars in Thousands)
Sales and marketing 357 134 166% 592 380 56%
Percentage of operating revenues 32% 11% 41% 6%
- ---------------------------------------------------------------------------------------------------------------
Sales and marketing expenses in actual dollar amounts increased by 166% and 56%,
respectively, between the quarters and six-month periods ended September 30,
2000 and September 30, 1999. In addition, sales and marketing expenses as a
percentage of operating revenue increased from 11% to 32% for the three months
ended September 30, 1999 and 2000, and from 6% to 41% for the six months ended
September 30, 1999 and 2000. The increase in actual dollar amounts was primarily
due to an increase in the number of sales and marketing personnel from four to
12 as a result of the AFL acquisition. The increase as a percentage of operating
revenue reflects not only the increased costs from increased personnel, but also
the change in the sources of revenue from the comparable periods in fiscal 2001
and 2000 -- fiscal 2000 included significant revenue from patent license fees,
whereas fiscal 2001 includes a greater emphasis on software license revenue,
which required greater sales and marketing expense.
RESEARCH AND DEVELOPMENT EXPENSE
Three Months Ended Six Months Ended
September 30, September 30,
2000 1999 Change 2000 1999 Change
- ---------------------------------------------------------------------------------------------------------------
(Dollars in Thousands)
Research and development 337 304 11% 658 612 8%
Percentage of operating revenues 30% 26% 45% 9%
- ---------------------------------------------------------------------------------------------------------------
Research and development expenses increased 11% and 8%, respectively, during the
quarters and six-month periods ended September 30, 2000 and 1999. These
increases in research and development expenses were attributable to making
certain software enhancements to meet the particular needs of our distributors,
to integrate our products with the accounting package(s) of our various vendors,
and to allow better operations on new products released by Microsoft
Corporation. These increases also included normal salary increases and marginal
costs as the number of personnel employed in these activities has remained
relatively stable. The AFL acquisition did not result in an increase in the
number of employees in this area. Changes in research and development expenses
as a percentage of revenue for the comparable periods, is primarily due to
changes in the volume of revenue, rather than changes in headcount. Furthermore,
in the three and six month periods ended September 30, 2000 and 1999, the
portion of our staff's efforts capitalized for future amortization did not vary
significantly.
We believe the actual dollar amount of research and development expenses will
increase moderately in future quarters. We expect to hire additional personnel
in future quarters to meet the demand generated by our success in entering into
distribution and private label agreements with various accounting vendors.**
GENERAL AND ADMINISTRATIVE EXPENSE
Three Months Ended Six Months Ended
September 30, September 30,
2000 1999 Change 2000 1999 Change
- ---------------------------------------------------------------------------------------------------------------
(Dollars in Thousands)
General and administrative 699 460 52% 1,270 1,179 8%
Percentage of operating revenues 63% 39% 87% 18%
- ---------------------------------------------------------------------------------------------------------------
General and administrative expenses increased 52% and 8%, respectively, between
the comparable three-month and six-month periods ended September 30, 2000 and
September 30, 1999. The large increase in the quarter ended
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September 30, 2000 is a direct result of an increase of three personnel through
the AFL acquisition and increased attorneys' fees associated with our patent
litigation and our contract litigation with Microsoft. For the comparable
six-month periods, however, the impact of increased expenses in fiscal 2001
noted above are almost completely offset by substantial bonuses which were paid
in the quarter ended June 30, 1999 as a result of the high gross revenue
generated in that quarter from patent license revenue.
The increase of these costs as a percentage of revenues for the comparative
periods is due to the significant revenue generated through licensing of the
patented technology in the periods in fiscal 2000. We believe that general and
administrative expenses should remain relatively stable over the next several
quarters unless there are settlements in various litigation matters.*
Furthermore, these expenses will continue to include substantial legal fees
arising out of the litigation with Microsoft, which went to trial in October
2000, our patent litigation against Sagent Technologies, Inc., for which trial
is currently scheduled to begin in January 2001, and our lawsuit against Oracle
Corporation, which is in the discovery period.*
OTHER INCOME
Other income increased from $67,000 in the second quarter of fiscal 2000 to
$152,000 in the second quarter of fiscal 2001. The increase was primarily due to
realized and unrealized gains on securities of approximately $181,000, which was
partially offset by increased interest expense and decreased interest income in
the second quarter of fiscal 2001.
INCOME TAX
Income taxes are provided in the statement of operations in accordance with the
asset and liability method. We have 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 our initial public offering in January 1995, we 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, we do
not expect this to be a factor in fiscal 2001.*
LIQUIDITY AND CAPITAL RESOURCES
Our cash and cash equivalent and short-term investment balances at September 30,
2000 stood at approximately $1,981,000 compared to approximately $6,047,000 at
March 31, 2000. At September 30, 2000, we also maintained a balance of $170,000
of securities we have committed to transfer under securities sales agreements
(see Footnote 3 to Unaudited Consolidated Financial Statements) in addition to
our cash and short-term investment balances. This balance of $1,981,000 at
September 30, 2000 includes approximately $688,000 of securities that are
classified as available for sale for accounting purposes (see Footnote 3 to
Unaudited Consolidated Financial Statements). At March 31, 2000, the market
value of these securities stood at $3,030,000. The substantial decrease in our
cash and cash equivalent and short-term investment balances is attributable to
the large operating losses during the first two quarters of fiscal 2001, cash
expenditures associated with the acquisition of AFL, and substantial decreases
in the market value of shares of Broadbase Software, Inc. between March and
September 2000. The Broadbase shares were received in settlement of patent
litigation and were restricted until mid-September 2000 in a manner that did not
allow us to hedge our position (see Footnote 3 to Unaudited Consolidated
Financial Statements). Total obligations, excluding deferred income items, were
approximately $984,000 at September 30, 2000 as compared to approximately
$796,000 at March 31, 2000. This increase is primarily due to expenses accrued
as a result of the acquisition of AFL.
Net cash used in operating activities was approximately $2,175,000 in the
six-month period ended September 30, 2000. This was primarily due to our
generating net losses for the first six months of fiscal 2001. We generated
$1,041,000 from investing activities and used approximately $31,000 for
financing activities.
Based on current cash and cash equivalent balances, along with our current
ability to sell restricted securities, we believe we have adequate resources to
fund operations, as well as continued costs and expenses of litigation, through
fiscal 2001.*
12
OTHER FACTORS THAT MAY AFFECT OPERATING RESULTS
Our operating results may fluctuate due to a number of factors, including, but
not limited to, the success and revenue growth of our products, our ability to
continue to develop and expand distribution channels and to develop
relationships with third-party distributors and licensees of our products, our
ability to successfully integrate our business operations with AFL, our ability
to manage growth, our ability to integrate our products with those of its
third-party distributors and licensees, our ability to hire qualified sales and
marketing personnel and to generate revenue from such sales and marketing
personnel, the outcome of the litigation involving Microsoft Corporation, Sagent
Technologies, Inc. and Oracle Corporation, the outcome and costs of pursuing
patent litigation against third parties, the availability of additional
financing or capital resources, the volume and timing of systems sales and
licenses, reductions in the size or volume of maintenance contracts with
clients, 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 us to forecast, and can materially
adversely affect our business and operating results for one quarter or a series
of quarters.**
YEAR 2000 COMPLIANCE
We experienced no material issues or problems as a result of the transition into
the year 2000 with regard to internal operations or our software products. We
will continue to monitor our software products to ensure no problems arise
either with regard to leap year or Y2K issues, but anticipate no material
additional costs.*
13
PART II. - OTHER INFORMATION
ITEM 1. 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 Timeline believes infringe on Timeline's patent rights under U.S.
Patent #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.
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. The trial was held
in early October, 2000. Post-trial briefs have been submitted and a decision is
expected soon.
In July 2000, the Company filed a lawsuit against Oracle Corporation seeking
monetary damages and injunctive relief. The Company's claims are based on
Oracle's alleged introduction of elements in its product family that utilize
technology similar to the Company's patented technology licensed to Microsoft.
The litigation process is in the discovery phase.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
At our Annual Meeting of Shareholders held on July 20, 2000, two director
nominees were duly elected on the following vote:
Affirmative Votes Votes Withheld
Donald K. Babcock 2,845,225 475
Kent L. Johnson 2,845,225 475
A second proposal, the ratification of Arthur Andersen LLP as our independent
auditors for the year ending March 31, 2001, was voted on and approved at our
Annual Meeting on the following vote:
Affirmative Votes Negative Votes Abstentions
2,832,200 1,825 11,675
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
27.1 Financial Data Schedule
(b) A report on Form 8-K was filed on August 2, 2000, reporting Item
2 information relating to the purchase of the outstanding shares
in Analyst Financials Limited, the European distributor for our
products. The acquisition was effective as of June 30, 2000. We
previously owned 12.5% of the outstanding shares in AFL and
through this transaction, acquired the remaining 87.5%, and AFL
became our wholly-owned subsidiary. On September 12, 2000,
Timeline filed a Form 8-K/A amending the previously filed report,
to add the pro forma financial statement information required to
be filed.
14
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: November 13, 2000 By: /s/ Charles R. Osenbaugh
-------------------------------------------
Charles R. Osenbaugh
President/Chief Financial Officer
Signed on behalf of registrant and as principal
financial officer.
15
EXHIBITS INDEX
EXHIBIT
NUMBER DESCRIPTION
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27.1 Financial Data Schedule