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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 DECEMBER 31, 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 JANUARY 15, 2001
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Common Stock, $.01 Par Value 4,040,998
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PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
TIMELINE, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
ASSETS
December 31, March 31,
2000 2000
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CURRENT ASSETS:
Cash and cash equivalents $ 151,954 $ 1,470,703
Marketable securities -- trading 630,814 1,546,256
Marketable securities -- available for sale 1,142,188 3,030,000
Securities held for others 26,000 170,000
Accounts receivable, net of allowance of $36,552 and $38,500 683,332 323,387
Prepaid expenses and other 106,805 72,557
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Total current assets 2,741,093 6,612,903
PROPERTY AND EQUIPMENT, net of accumulated
depreciation of $875,093 and $1,794,311 207,258 266,073
INTANGIBLE ASSETS, net of accumulated
amortization of $323,027 and $171,051 2,213,328 655,199
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Total assets $ 5,161,679 $ 7,534,175
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LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 444,848 $ 303,885
Accrued expenses 475,172 487,921
Deferred revenues 381,680 372,000
Current portion of obligations under capital leases - 4,309
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Total current liabilities 1,301,700 1,168,115
OTHER LIABILITIES 25,563 -
----------- -----------
Total liabilities 1,327,263 1,168,115
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STOCKHOLDERS' EQUITY:
Common stock, $.01 par value, 20,000,000 shares authorized,
4,040,998 and 3,449,112 issued and outstanding 40,435 34,492
Additional paid-in capital 10,434,809 9,124,178
Other comprehensive income (expense) (531,488) 2,658,825
Foreign currency adjustment (19,702) -
Accumulated deficit (6,089,638) (5,451,435)
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Total stockholders' equity 3,834,416 6,366,060
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Total liabilities and stockholders' equity $ 5,161,679 $ 7,534,175
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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 Nine Months Ended
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December 31, December 31, December 31, December 31,
2000 1999 2000 1999
----------- ----------- ----------- -----------
REVENUES:
Software license $ 366,523 $ 248,208 $1,154,448 $ 446,820
Other licenses 2,025,000 - 2,025,000 5,602,000
Software development 16,587 4,813 38,703 27,125
Maintenance 186,119 208,532 527,015 639,006
Consulting and other 182,867 175,611 492,075 599,624
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Total revenues 2,777,096 637,164 4,237,241 7,314,575
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COST OF REVENUES: 408,070 231,755 887,996 874,248
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Gross profit 2,369,026 405,409 3,349,245 6,440,327
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OPERATING EXPENSE:
Sales and marketing 369,098 128,763 960,847 508,820
Research and development 451,804 277,185 1,109,948 888,795
General and administrative 809,138 529,598 2,079,172 1,708,843
Depreciation 32,704 46,072 116,832 136,847
Amortization: Intangibles/
goodwill 14,515 - 115,009 -
---------- ---------- ---------- ----------
Total operating expenses 1,677,259 981,618 4,381,808 3,243,305
---------- ---------- ---------- ----------
(Loss) income from operations 691,767 (576,209) (1,032,563) 3,197,022
OTHER INCOME (EXPENSE):
Gain on securities (31,145) 88,770 423,620 88,770
Interest expense and other (5,979) (2,218) (44,186) 14,586
Interest income - 35,128 14,924 78,893
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Total other income (37,152) 121,680 394,359 182,249
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Net (loss) income $ 654,643 $ (454,529) $ (638,203) $3,379,271
========== ========== ========== ==========
Basic net (loss) income per
common share $ 0.17 $ (0.14) $ (0.17) $ 1.05
========== ========== ========== ==========
Diluted net (loss) income per
common and common equivalent share $ 0.16 $ (0.14) $ (0.17) $ 0.96
========== ========== ========== ==========
Shares used in calculation of
basic earnings per share 3,867,103 3,223,709 3,691,511 3,216,526
========== ========== ========== ==========
Shares used in calculation of
diluted earnings per share 4,126,525 3,223,709 3,691,511 3,525,321
========== ========== ========== ==========
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 NINE MONTHS ENDED DECEMBER 31, 2000 AND 1999
(UNAUDITED)
2000 1999
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CASH FLOW FROM OPERATING ACTIVITIES:
Net cash (used in) provided by operations $(1,291,592) $ 3,761,074
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CASH FLOWS FROM INVESTING ACTIVITIES:
Cash acquired in AFL acquisition 29,056 -
Purchase of property and equipment (23,639) (63,064)
Proceeds from property and equipment 22,075 -
Payments for capitalized software development costs (177,670) (207,685)
Purchase of short-term investments (2,442,325) (1,180,770)
Proceeds from sale of short-term investments 2,622,887 -
(Issuance) proceeds of note receivable (952) 12,318
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Net cash provided by (used in) investing activities 29,432 (1,439,201)
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CASH FLOWS FROM FINANCING ACTIVITIES:
Payments on capital lease obligation (4,309) (8,029)
Payment of notes payable (43,828) (132,578)
Borrowing under line of credit - 287,012
Repayments under line of credit - (310,717)
Exercise of stock options/warrants 11,250 31,071
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Net cash used in financing activities (36,887)) (133,241)
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EFFECT OF FOREIGN EXCHANGE RATE (19,702) -
NET CHANGE IN CASH AND CASH EQUIVALENTS (1,318,749) 2,188,632
CASH AND CASH EQUIVALENTS, beginning of period 1,470,703 59,453
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CASH AND CASH EQUIVALENTS, end of period 151,954 $ 2,248,085
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SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid for interest during year 10,424 $ 22,212
Non-cash transactions:
Equity consideration issued for acquisitions 1,305,325 -
Unrealized (loss) gain on available for sale securities (2,219,330) 4,108,000
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)
DECEMBER 31, 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
nine-month periods ended December 31, 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 December 31, 2000, these investments included common and
preferred stock and had a fair market value of $630,814. 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 licensed certain patented technology to Broadbase in exchange for cash
of $40,000 and 80,000 shares of Broadbase 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.
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 were entitled to receive 4,250 shares of Broadbase common stock
after the transfer restrictions lapsed in September 2000. The shareholders also
received a cash payment of $130,000 at the date of this agreement. In connection
with this transaction, the Company recognized the unrealized gain of $149,175 on
these shares at March 31, 2000. That amount was included as a gain on securities
in the March 31, 2000 annual statement of operations. The Company also recorded
a liability of $170,000, which represented the fair value of the shares to be
transferred at the date of that agreement. As of December 31, 2000, the Company
had transferred ownership of 3,600 shares under this agreement. The remaining
shares are recorded in the accompanying balance sheet at their fair market value
on the date of this agreement of $26,000, with an offsetting liability for the
same amount that is a component of accrued expenses. Broadbase completed a
two-for-one stock split on April 10, 2000. All per share amounts have been
adjusted to reflect this stock split.
In December 2000, the Company settled a patent infringement lawsuit filed
against Sagent Technology, Inc. (Sagent). As part of the settlement, the Company
licensed certain patented technology to Sagent in exchange for $600,000 and
600,000 shares of Sagent common stock with a fair market value of $1,425,000 at
the date of the settlement. The shares of Sagent common stock issued to the
Company are considered restricted securities under securities laws, and Sagent
has agreed to file a registration statement with the Securities and Exchange
Commission to register the shares for resale.
The total value of noncommitted Broadbase and Sagent common stock was $1,142,188
at December 31, 2000. The Company has accounted for these shares as available
for sale securities as required under SFAS 115. Accordingly, the unrealized loss
on these securities of $531,488 at December 31, 2000, is recorded as other
comprehensive income in the accompanying balance sheet.
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4. SHAREHOLDERS' EQUITY
Changes in shareholders' equity for the period from March 31, 2000 to December
31, 2000 were as follows:
Shareholders' equity, March 31, 2000 $ 6,366,060
Exercise of common stock options 11,250
Equity consideration issued for acquisitions 1,305,325
Foreign currency adjustment (19,702)
Other comprehensive income -- unrealized loss on
available-for-sale securities (3,190,314)
Net loss (638,203)
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Shareholders' equity, December 31, 2000 $ 3,834,416
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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).
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
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December 31, December 31, December 31, December 31,
2000 1999 2000 1999
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Net income (loss) $ 654,643 $ (454,529) $ (638,203) $ 3,379,271
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Weighted average common shares
outstanding 3,867,103 3,223,709 3,691,511 3,216,526
Plus: dilutive options and warrants 575,104 - - 769,322
Less: shares assumed repurchased
with proceeds from exercise 315,683 - - 460,528
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Weighted average common and common
equivalent shares outstanding 4,126,525 3,223,709 3,691,511 3,525,321
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Diluted net income (loss) per
common and common equivalent share $ 0.16 $ (0.14) $ (0.17) $ 0.96
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6. LITIGATION
In March 1999, the Company filed an action in the U.S. Federal District Court
for Western Washington against Sagent, Technology, Inc. seeking monetary damages
and an injunction from further unauthorized licensing of certain products that
the Company believed infringe on its patent rights. Effective December 1, 2000,
the Company entered into a settlement agreement with Sagent. Under the terms of
the settlement, Sagent paid $600,000 in cash and issued 600,000 shares of Sagent
common stock to the Company.
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. In
December 2000, the Court issued a Judgment in the lawsuit holding the language
of the agreement would support Microsoft's right to sublicense its customers to
use Microsoft's SQL Server by adding code or software products to it so long as
the added code or software does not itself independently infringe Timeline's
patent. The Company has notified the Court of its intention to appeal.
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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.
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.*
7. ACQUISITIONS
Effective June 30, 2000, the Company acquired Analyst Financials Limited (AFL).
The total purchase consideration for this acquisition was approximately
$1,862,419 and consisted of 303,814 shares of Timeline common stock with a total
fair market value of $797,525, cash of $20,000 and the assumption of certain
liabilities.
In connection with the AFL acquisition, assets acquired and liabilities assumed
were allocated based on estimated fair values of assets and settlement amounts
of liabilities as follows:
Cash $ 29,056
Accounts receivable 496,603
Property and equipment 23,570
Intangible assets 1,032,993
Accounts payable (700,708)
Accrued expenses (63,989)
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Net assets acquired $ 817,525
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Intangible assets acquired in the AFL acquisition consisted primarily of
software source code, customer contracts, skilled workforce and goodwill. These
intangible assets are being amortized on a straight-line basis over their
estimated useful lives of up to three years.
On December 4, 2000, the Company acquired WorkWise Software Inc. (WorkWise). The
total purchase consideration for this acquisition was approximately $580,550 and
consisted of 250,000 shares of Timeline common stock with a total fair market
value of $507,800, cash of $80,000 and the assumption of certain liabilities.
In connection with the WorkWise acquisition, assets acquired and liabilities
assumed were allocated based on estimated fair values of assets and settlement
amounts of liabilities as follows:
Accounts receivable $ 9,750
Property and equipment 7,000
Intangible assets 580,550
Accounts payable (4,000)
Accrued expenses (5,500)
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Net assets acquired $ 587,800
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The following table summarizes the pro forma results of the Company's operations
for the nine months ended December 31, 2000 and 1999 assuming that the
acquisitions discussed above had occurred as of the beginning of each fiscal
year. The pro forma results are presented for the purposes of additional
analysis only and do not purport to present the results of operations that would
have occurred for the periods presented or that may occur in the future.
Nine Months Ended December 31,
------------------------------
2000 1999
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Revenue $ 5,125,080 $9,371,497
Net (loss) income (1,609,327) 1,887,121
Diluted net (loss) income per share $ (0.38) (0.46)
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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 Nine Months Ended
December 31, December 31,
2000 1999 Change 2000 1999 Change
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(Dollars in Thousands)
Software license 367 248 48% 1,154 447 158%
Other license 2,025 0 100% 2,025 5,602 (64%)
Maintenance 186 209 (11%) 527 639 (18%)
Consulting and Other 183 175 5% 492 600 (18%)
Software development 16 5 220% 39 27 44%
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Revenues 2,777 637 336% 4,237 7,315 (42%)
- ------------------------------------------------------------------------------------------------------------------
Results of operations for the quarter ended December 31, 2000 include the
operations of Analyst Financials Limited (AFL), which we acquired as of June 30,
2000, as well as one month of operations for WorkWise Software, Inc., acquired
December 4, 2000. Both acquisitions were accounted for under the purchase method
of accounting. Accordingly, results of operations for periods in fiscal 2000
(prior to the acquisitions) and fiscal 2001 (after the acquisitions) are not
directly comparable. For the period ended December 31, 1999, AFL paid royalties
to Timeline on license and maintenance revenue under its then distributor
agreement (which amounted to $13,000 and $6,000, respectively, in the third
quarter of fiscal 2000). There was no financial relationship between WorkWise
and Timeline prior to its acquisition.
Total operating revenues of $2,777,000 for the quarter ended December 31, 2000
were 336% higher than the $637,000 of operating revenues for the quarter ended
December 31, 1999. The primary cause for the increase in total revenues was due
to $2,025,000 from a one-time patent license fee in the quarter ended December
31, 2000, whereas the comparable quarter ended December 31, 1999 did not include
any revenue from patent licensing. Revenue from ongoing operations excluding
patent licensing for the quarter ended December 31, 2000 show an 18% increase
over the comparable prior period. When comparing the nine-month periods ending
December 31, 2000 and 1999, patent license revenue contributed significantly in
both periods. In the nine-month period ended December 31, 1999, patent license
revenue totaled $5,602,000 versus $2,025,000 for the period ended December 31,
2000 (a 64%
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decrease). Without consideration of the patent license revenues, operating
revenues for the nine-month period ended December 31, 2000 exceeded those for
the like period ended in 1999 by 29%. We will continue to pursue additional
patent licenses when appropriate, and we believe that the current settlement
with Sagent regarding our patents will have a positive impact on our ability to
enter into additional patent licenses.* However, 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.*
Software license revenue for the quarter and nine-months ended December 31, 2000
increased 48% and 158%, respectively, over the results for the comparable
periods in fiscal 2000. 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, as well as contributions of license revenue
from WorkWise and its OEM partners. During the third quarter of fiscal 2001, we
had sales through 12 alliance partners, which represented an increase in the
number of revenue-generating distribution partners from 8 in the prior quarter.
We believe there is continued weakness in the enterprise resource planning (ERP)
and accounting software markets, which 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 new
alliances with Ascentis Software Corp. and Eclipse Computing PLC, and anticipate
that such channels will continue to result in increases to software licenses
during fiscal 2001 over fiscal 2000.*
Maintenance revenue decreased by 11% and 18% for the comparable three and
nine-month periods ended December 31, 2000 and 1999, respectively. This reflects
the fact that as of May 1, 2000 we started outsourcing maintenance of our older
VAX-based products. Maintenance revenue from our Microsoft-based product lines
continues to increase as more sites are installed and maintenance agreements
commence.
Consulting revenue decreased 18% for the nine-month period ended December 31,
2000, but marginally increased by 5% in the comparable three-month period. The
decrease for the nine-month period was due to reduced staffing in the first
three months of the fiscal year, prior to the acquisition of AFL. The increase
for the three-month period ended December 31, 2000 reflects an increase in the
number of consulting staff generating revenue due to the acquisition of AFL in
June 2000. We expect that, as a result of the AFL acquisition, this increase in
the number of consultants on staff will continue to show increased consulting
revenue for future periods when compared to results in periods prior to the AFL
acquisition.* The level of consulting revenue varies according to the mix of
systems directly licensed by Timeline compared to software provided through OEMs
who market the product at lower levels of functionality and use and provide
direct installation services to end-users. Because Timeline's AFL office
licenses software directly to large organizations, this has resulted in an
increased demand for consulting. However, we believe that any fluctuations in
consulting revenue levels will become less material in the future as a larger
percentage of new product licensing is transacted through OEM channels.*
Software development fee revenue was $16,000 and $5,000 in the quarters ended
December 31, 2000 and 1999, respectively, and $39,000 and $27,000 for the
nine-month periods ended December 31, 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 Nine Months Ended
December 31, December 31,
2000 1999 Change 2000 1999 Change
- --------------------------------------------------------------------------------------------------------------------------------
(Dollars in Thousands)
Gross profit 2,369 405 485% 3,349 6,440 (48%)
Percentage of operating revenues 85% 64% 79% 88%
- --------------------------------------------------------------------------------------------------------------------------------
Our gross profit increased 485% for the third quarter of fiscal 2001 over fiscal
2000, and decreased 48% for the nine-month periods ended December 31, 2000 and
1999. Gross profit for the comparable three and nine-month periods is not
directly comparable because of the relative mix of high-margin patent license
revenue in each period. Gross profit in the quarter ended December 31, 2000
represented an overall decrease in the cost of revenue as a percentage of
operating revenues due to increased revenue from patent licenses, more than
offsetting the higher
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costs of revenue caused by increased software license and consulting revenue, as
well as the costs associated with the WorkWise acquisition and continued
amortization costs 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 acquisitions of AFL and WorkWise, which resulted in
a quarterly charge of approximately $100,000, due to the amortization of
acquired technologies which is accounted for as a component of cost of goods
sold.*
SALES AND MARKETING EXPENSE
Three Months Ended Nine Months Ended
December 31, December 31,
2000 1999 Change 2000 1999 Change
- -------------------------------------------------------------------------------------------------------------------------------
(Dollars in Thousands)
Sales and marketing 369 129 186% 961 509 89%
Percentage of operating revenues 13% 20% 23% 7%
- -------------------------------------------------------------------------------------------------------------------------------
Sales and marketing expenses in actual dollar amounts increased by 186% and 89%,
respectively, between the quarters and nine-month periods ended December 31,
2000 and 1999. Sales and marketing expenses as a percentage of operating revenue
decreased to 13% from 20% for the three months ended December 31, 2000 and 1999,
and increased to 23% from 7% for the nine-months ended December 31, 2000 and
1999. The increase in actual dollar amounts in both the quarter and nine-months
in fiscal 2001 was primarily due to an increase in the number of sales and
marketing personnel as a result of the AFL and WorkWise acquisitions. The
extreme fluctuations as a percentage of operating revenue reflects not only the
increased costs from additional personnel, but also the changes in the amounts
and sources of revenue between the comparable periods relating to large patent
license fees in both fiscal 2001 and 2000. Patent license-related expenses are
typically included in general and administrative expenses due to the nature of
the licensing process.
RESEARCH AND DEVELOPMENT EXPENSE
Three Months Ended Nine Months Ended
December 31, December 31,
2000 1999 Change 2000 1999 Change
- -------------------------------------------------------------------------------------------------------------------------------
(Dollars in Thousands)
Research & development 452 277 63% 1,110 889 25%
Percentage of operating revenues 16% 43% 26% 12%
- -------------------------------------------------------------------------------------------------------------------------------
Research and development expenses increased 63% and 25%, respectively, during
the three- and nine-month periods ended December 31, 2000 and 1999. These
increases in research and development expenses were attributable to software
enhancements undertaken 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 along with an increase in the number of personnel employed in these
activities, plus an additional three employees added to this area as a result of
the WorkWise acquisition in December 2000. Research and development expenses as
a percentage of revenue for the three- and nine month periods ended December 31,
2000 and 1999 are also affected by changes in the volume of revenue due to
significant patent license fees in the third quarter just ended and in the
nine-month period ended December 31, 1999. In the three-month period ended
December 31, 2000, the portion of our staff's efforts capitalized for future
amortization was significantly less than that capitalized in the nine-month
periods ended December 31, 2000 and 1999.
We believe the actual dollar amount of research and development expenses will
increase in future quarters due to inclusion of full quarter results of the
acquisition of WorkWise. We expect that the addition of the WorkWise
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personnel involved in development will cause an increase in development staffing
costs. We also expect to hire additional personnel in future quarters to meet
the demand generated by 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,
2000 1999 Change 2000 1999 Change
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(Dollars in Thousands)
General & administrative 809 530 53% 2,079 1,709 22%
Percentage of operating revenues 29% 83% 49% 23%
- -------------------------------------------------------------------------------------------------------------------------------
General and administrative expenses in actual dollar amounts increased 53% and
22%, respectively, between the comparable three and nine-month periods ended
December 31, 2000 and 1999. The large increase in the quarter ended December 31,
2000 is primarily due to increased attorneys' fees associated with our patent
litigation, our contract litigation with Microsoft, an increase of three general
and administrative personnel through the AFL acquisition, as well as employee
bonuses relating to the settlement of the patent litigation with Sagent
Technology, Inc. For the comparable nine-month periods, the impact of increased
expenses in fiscal 2001 noted above are substantially offset by large bonuses
paid in the quarter ended June 30, 1999 as a result of the high gross revenue
generated in that quarter from patent license revenue. 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 appeal of the Microsoft decision and our patent litigation
against Oracle Corporation.*
As a percentage of revenues, these costs decreased to 29% from 83% for the
comparable quarters in fiscal 2000 and 1999, but increased to 49% from 23% for
the comparable nine-month periods in fiscal 2000 and 1999. These fluctuations as
a percentage of revenues for the comparative periods are due to the significant
changes in revenue for each period, especially the amount of revenue generated
through patent licensing.
OTHER INCOME
Other income decreased from $122,000 in the third quarter of fiscal 2000 to a
loss of $37,000 in the third quarter of fiscal 2001. The decrease is the result
of net changes in realized and unrealized gains and losses on securities held
for investment, interest expense and interest income.
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.*
RECENT ACCOUNTING PRONOUNCEMENTS
In June 1998, the Financial Accounting Standards Board (FASB) issued Statement
of Financial Accounting Standards (SFAS) No. 133, "Accounting for Derivative
Instruments and Hedging Activities." SFAS No. 133 establishes accounting and
reporting standards that require derivative instruments (including certain
derivative instruments embedded in other contracts) be recorded at fair value.
The statement requires that changes in the derivative's fair value be recognized
currently in operations unless specific hedge accounting criteria are met.
Special accounting for qualifying hedges allows a derivative's gains and losses
to offset related results on the hedged item in the statements of operations,
and requires that a company must formally document, designate, and assess the
effectiveness of transactions that are subject to hedge accounting. Pursuant to
SFAS No. 137, "Accounting for Derivative Instruments and Hedging Activities -
Deferral of the Effective Date of FASB No. 133 - an Amendment to
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FASB Statement No. 133," the effective date of SFAS No. 133 has been deferred
until fiscal years beginning after January 15, 2000. SFAS No. 133 cannot be
applied retroactively. SFAS No. 133 must be applied to (a) derivative
instruments and (b) certain derivative instruments embedded in hybrid contracts
that were issued, acquired, or substantively modified after December 31, 1998
(and, at a company's election, before January 1, 1999). The Company has not yet
quantified the impacts of adopting SFAS No. 133 on the financial statements and
has not determined the timing or method of adopting SFAS No. 133. However, the
statement could increase volatility in the consolidated statements of operations
and in other comprehensive loss.
LIQUIDITY AND CAPITAL RESOURCES
Our cash and cash equivalent and short-term investment balances at December 31,
2000 stood at approximately $783,000 compared to approximately $3,017,000 at
March 31, 2000. Additionally, available for sale securities at December 31, 2000
stood at approximately $1,142,000 compared to approximately $3,030,000 at March
31, 2000. At December 31, 2000, we also maintained a balance of $26,000 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. The substantial decrease in the total
amount of our cash and cash equivalent and short-term investment balances, as
well as the decrease in short-term restricted securities are attributable to the
operating losses during the first two quarters of fiscal 2001 and costs
associated with the acquisitions of AFL and WorkWise, and substantial decreases
in the market value of available for sale securities. We now hold 50,750 shares
of Broadbase which are classified as Marketable securities -- available for
sale. At March 31, 2000 we held 80,000 shares of Broadbase which were received
in settlement of patent litigation. All of these shares were restricted until
September 2000 (see Footnote 3 to Unaudited Consolidated Financial Statements).
Additionally, available for sale securities at December 31, 2000 includes
600,000 shares of Sagent Technologies, Inc. which are not reflected on the March
31, 2000 balance sheet as they were received in the current quarter in
settlement of patent litigation. The shares of Sagent common stock issued to the
Company are considered restricted securities under securities laws, and Sagent
has agreed to file a registration statement with the Securities and Exchange
Commission to register the shares for resale. Total obligations, excluding
deferred income items, were approximately $946,000 at December 31, 2000 as
compared to approximately $796,000 at March 31, 2000. This increase is primarily
due to expenses accrued as a result of the acquisitions of AFL and WorkWise, as
well as employee bonuses relating to the settlement of the patent litigation
with Sagent Technology, Inc.
Net cash used in operating activities was approximately $1,292,000 in the
nine-month period ended December 31, 2000. This was primarily due to our
generating net losses for the first nine months of fiscal 2001, partially offset
by a gain in the third quarter of fiscal 2001. We generated $29,000 from
investing activities and used approximately $37,000 for financing activities.
Based on current cash and cash equivalent balances, along with our current
ability to sell marketable securities, we believe we have adequate resources to
fund operations, as well as continued costs and expenses of litigation, through
fiscal 2001.*
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, OEMs and licensees of our products,
our ability to successfully integrate our business operations with AFL and
WorkWise, our ability to manage growth, our ability to integrate our products
with those of our 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 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.**
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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.*
RECENT DEVELOPMENTS
As described above in Footnote 7 to Unaudited Consolidated Financial Statements,
in December 2000, we acquired 100% of the issued and outstanding stock of
WorkWise Software, Inc., a wholly-owned subsidiary of Oralis.com. WorkWise is a
software manufacturing and services company that provides a suite of software
products that streamline key business activities for greater workplace
efficiency, generally referred to as process automation. Its flagship product,
Data Agent Server (DAS) is a software solution that monitors fields in
relational database management systems for the occurrence of a defined event,
such as the number in an inventory control system dropping below a certain
amount. When that pre-defined event occurs, it triggers a response. Using the
example of the inventory control system, this response could be an automatically
generated purchase order sent digitally to the manufacturer instructing it to
produce, ship and bill for the inventory item. WorkWise also has a product
called Business Alerts that monitors data fields for specified activity and then
automatically communicates that activity to the appropriate customer or employee
by email. The combination of a detected event and triggering of an agent
automates e-commerce by eliminating human tasks, such as the need for a person
to take inventory, fill out a purchase order, etc.
WorkWise Software, Inc. was a wholly-owned subsidiary of Oralis.com prior to
Timeline's acquisition of 100% of the issued and outstanding stock. Oralis used
(and continues to use under license) WorkWise's Data Agent Server software to
support the Oralis portal site through which it provides services and sells
goods to dentists. Specifically, the software is used to trigger communications
such as purchase orders, shipping advisements, etc. between the Oralis portal
site and the various accounting and ERP systems of the manufacturers who produce
goods that Oralis orders on behalf of its member dentist. In addition to its own
internal use, Oralis also actively marketed the WorkWise products through OEM
relationships with other third party software vendors.
We intend WorkWise to continue to sell its software products through its
existing OEM relationships and to pursue additional OEM relationships. We
believe we can increase WorkWise's revenue through cross-selling its products to
our OEM customers. We also believe that our London subsidiary, AFL, will be able
to provide introductions to potential OEM relationships in Europe where WorkWise
previously has not had a presence.**
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PART II. - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
In March 1999, Timeline filed an action in the U.S. Federal District Court for
Western Washington (Case No. C99-0414C) against Sagent Technology, Inc., seeking
monetary damages and an injunction from further unauthorized licensing of
certain products that Timeline believed infringed on Timeline's patent rights
under U.S. Patent #5,802,511, 6,023,694, and 6,026,392. Effective December 1,
2000, Timeline and Sagent entered into a Settlement Agreement and Release for
the mutual settlement of the patent infringement lawsuit filed by Timeline
against Sagent. Under the terms of the settlement, Sagent paid $600,000 in cash
and issued 600,000 shares of Sagent common stock to Timeline. Effective upon
receipt of the cash and stock from Sagent, Timeline dismissed the lawsuit
against Sagent. As part of the settlement, Sagent admitted the validity and
enforceability of the claims of Timeline's patents, but did not admit
infringement.
In July 1999, Timeline 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. In
December 2000, the Court issued a Judgment in the lawsuit holding the language
of the agreement would support Microsoft's right to sublicense its customers to
use Microsoft's SQL Server by adding code or software products to it so long as
the added code or software does not itself independently infringe Timeline's
patent. Timeline has notified the Court of its intention to appeal.
In July 2000, Timeline filed a lawsuit against Oracle Corporation seeking
monetary damages and injunctive relief. Timeline's claims are based on Oracle's
alleged introduction of elements in its product family that utilize technology
similar to Timeline's patented technology licensed to Microsoft. The litigation
process is in the discovery phase and is set for trial in January 2002.
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.*
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
In October 2000, the Company issued 32,322 shares of common stock upon exercise
of a warrant at $.06 per share. The warrant was previously granted in 1993 and
was issued in reliance on Rule 701 under the Securities Act of 1933.
Effective December 4, 2000, we acquired all of the outstanding equity of
WorkWise Software, Inc., a software manufacturing and services company, from
Oralis.com. We completed the transaction on a stock-for-stock basis and issued
225,000 shares of our common stock to Oralis.com in December 2000 in reliance on
Section 4(2) of the Securities Act of 1933. An additional 25,000 shares of our
common stock have been or will be issued in reliance on Section 4(2) of the
Securities Act of 1933 in the first six month of calendar 2001 to WorkWise
employees who joined our staff.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
None.
(b) A report on Form 8-K was filed on December 4, 2000, reporting Item 5
information relating to the mutual settlement of the patent infringement
lawsuit filed by Timeline against Sagent Technology, Inc.
A report on Form 8-K was filed on December 18, 2000, reporting Item 2
information relating to the acquisition of WorkWise Software, Inc., in
exchange for 250,000 shares of Timeline common stock. The acquisition
was effective December 4, 2000.
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SIGNATURES
In accordance with the requirements of the Exchange Act, the registrant caused
this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
Timeline, Inc.
(Registrant)
Date: February 9, 2001 By: /s/ Charles R. Osenbaugh
----------------------------------------
Charles R. Osenbaugh
President/Chief Financial Officer
Signed on behalf of registrant and as
principal financial officer.
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