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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 COMMISSION FILE NUMBER
SEPTEMBER 30, 1997 1-13524
TIMELINE, INC.
(Exact name of small business issuer as specified in its charter)
WASHINGTON 91-1590734
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
3055 112TH AVENUE N.E., STE. 106
BELLEVUE, WA 98004
(Address of principal executive offices)
(206) 822-3140
(Issuer's telephone number)
Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter
period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. Yes [X] No [ ]
State the number of shares outstanding of each of the issuer's classes of common
equity, as of the latest practicable date:
OUTSTANDING AT
CLASS OCTOBER 15, 1997
Common Stock, $.01 Par Value 3,140,953
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PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
TIMELINE, INC.
CONSOLIDATED BALANCE SHEETS
SEPTEMBER 30, 1997 MARCH 31, 1997
(UNAUDITED) (AUDITED)
------------------- --------------
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 58,401 $ 187,428
Short-term investments -- --
Accounts receivable, net of allowance
of $78,352 and $99,146 689,891 1,258,143
Prepaid expenses and other 82,452 218,365
Note receivable 458,008 --
------------- -------------
Total current assets 1,288,752 1,663,936
PROPERTY AND EQUIPMENT, net of accumulated
depreciation of $1,624,184, and $1,515,126 605,849 737,611
CAPITALIZED SOFTWARE COSTS, net of accumulated
amortization of $593,437 and $469,975 675,512 674,485
OTHER ASSETS 25,348 24,333
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Total assets $ 2,595,461 $ 3,100,365
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LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 353,499 $ 569,981
Accrued expenses 377,232 497,537
Line of credit 233,183 348,950
Deferred revenue 326,553 354,643
Current portion of long-term debt 348,623 659,782
Current portion of capital leases 19,939 19,939
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Total current liabilities 1,659,029 2,450,832
LONG-TERM DEBT, net of current portion 71,785 --
LONG TERM PORTION OF CAPITAL LEASES & DEBT 17,378 25,719
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Total liabilities 1,748,192 2,476,551
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STOCKHOLDERS' EQUITY:
Common stock 32,163 32,162
Additional paid-in capital 9,189,860 9,266,159
Unearned ESOP shares (390,449) (391,366)
Stock subscription receivable -- (95,603)
Foreign currency adjustment -- (15,910)
Accumulated deficit (7,984,305) (8,171,628)
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Total stockholders' equity 847,269 623,814
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Total liabilities and stockholders' equity $ 2,595,461 $ 3,100,365
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The accompanying notes are an integral part of these financial statements.
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TIMELINE, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
THREE MONTHS ENDED SIX MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30,
1997 1996 1997 1996
(UNAUDITED) (UNAUDITED) (UNAUDITED) (UNAUDITED)
------------ ------------ ------------ ------------
REVENUES:
Software license $ 282,045 $ 215,686 $ 484,186 $ 990,574
Software development 185,051 -- 305,851 --
Maintenance 172,345 236,146 406,662 413,101
Consulting 244,453 810,242 521,958 1,338,062
Other -- 40,841 -- 40,841
------------ ------------ ------------ ------------
Total revenues 883,894 1,302,915 1,718,657 2,782,578
COST OF REVENUES: 333,063 534,384 792,985 950,736
------------ ------------ ------------ ------------
Gross profit 550,831 768,531 925,672 1,831,842
------------ ------------ ------------ ------------
OPERATING EXPENSES:
Sales and marketing 156,261 840,585 475,932 1,711,445
Research and development 132,621 513,417 815,054 912,507
General and administrative 338,471 482,816 296,299 819,339
Depreciation 56,099 63,000 118,403 125,353
------------ ------------ ------------ ------------
Total operating expenses 683,452 1,899,818 1,705,688 3,568,644
------------ ------------ ------------ ------------
Income (loss) from operations (132,621) (1,131,287) (780,016) (1,736,802)
OTHER INCOME (EXPENSE):
Gain on Sale of Timeline Europe 1,038,409 -- 1,038,409 --
Interest income 1,208 8,375 2,114 13,579
Interest expense (36,838) (28,578) (73,183) (59,398)
------------ ------------ ------------ ------------
Total other income (expense) 1,002,779 (20,203) 967,340 (45,819)
------------ ------------ ------------ ------------
Net income (loss) $ 870,158 $ (1,151,490) $ 187,324 $ (1,782,621)
============ ============ ============ ============
Net income per common and
common equivalent share $ 0.27 $ (0.38) $ 0.06 $ (0.62)
============ ============ ============ ============
Weighted average common and common
equivalent shares outstanding 3,195,254 3,040,906 3,195,254 2,867,063
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The accompanying notes are an integral part of these financial statements.
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TIMELINE, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE SIX MONTHS ENDED SEPTEMBER 30, 1997 AND 1996
1997 1996
(UNAUDITED) (UNAUDITED)
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CASH FLOWS FROM OPERATING ACTIVITIES:
Net cash (used) generated in operations $ 65,556 $ (796,223)
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CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment (8,072) (62,500)
Capitalized software costs (155,854) (446,541)
Sales of short-term investments -- 100,890
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Net cash provided by investing activities (163,926) (408,151)
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CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from note receivable 157,214 --
Borrowings on notes payable 192,649 350,000
Payments on notes payable (373,096) (2,083)
Payments on capital lease obligations (8,341) (34,978)
Proceeds from issuance of common stock and ESOP contributions 917 2,553,425
Costs of secondary public offering -- (201,367)
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Net cash provided by (used in) financing activities (30,657) 2,664,997
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EFFECT OF EXCHANGE RATE CHANGES ON CASH -- (2,869)
NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS (129,027) 1,457,754
CASH AND CASH EQUIVALENTS, beginning of period 187,428 284,542
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CASH AND CASH EQUIVALENTS, end of period $ 58,401 $ 1,742,296
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SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the period for -
Interest $ 73,183 $ 29,733
Income taxes -- --
The accompanying notes are an integral part of these financial statements
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TIMELINE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
SEPTEMBER 30, 1997
1. INTERIM FINANCIAL STATEMENTS
The accompanying consolidated financial statements of Timeline, Inc. and
subsidiary (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 and six month
periods ended September 30, 1997 are not necessarily indicative of future
financial results.
Certain notes and other information have been condensed or omitted from the
interim financial statements presented in this Quarterly Report on Form 10-QSB.
Accordingly, these financial statements should be read in conjunction with the
Company's annual financial statements for the year ended March 31, 1997,
previously reported.
Net Loss per Common and Common Equivalent Shares
For the three and six months ended September 30, 1997, net income (loss) per
common and common equivalent share was based on the weighted average number of
common shares outstanding during each period. Common stock equivalents include
shares issuable upon the exercise of outstanding stock options or warrants.
These shares are not included in the computation of net loss per share because
the effect of including such shares would be antidilutive.
2. SHAREHOLDERS' EQUITY
Changes in shareholders' equity for the period from March 31, 1997 to September
30, 1997 were as follows:
Shareholders' equity, March 31, 1997 $623,814
Payments on subscription receivable 19,305
Amortization of deferred compensation 917
Net income 187,324
Foreign currency translation adjustment 15,910
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Shareholders' equity, September 30, 1997 $847,270
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3. SALE OF STOCK IN SUBSIDIARY
Effective July 3, 1997, the Company entered into an agreement pursuant to which
it sold a majority interest in its then wholly-owned subsidiary Timeline Europe
Limited (Timeline Europe). Under the agreement, Timeline Europe issued 87,500
new shares of common stock to certain individuals in the United Kingdom in
exchange for subscriptions totaling approximately $1,633,760 US at then current
exchange rates. Timeline, Inc. (Timeline) contributed a portion of its accounts
receivable from Timeline Europe for 12,499 additional shares in Timeline Europe.
The result of these transactions reduced
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Timeline's ownership interest in Timeline Europe to 12.5% and caused the
Timeline Europe management team and certain outside investors to obtain an 87.5%
ownership interest in Timeline Europe. Timeline Europe also repaid to Timeline
approximately $152,000 of prior advances and executed a debenture securing its
remaining intercompany obligation to make three additional installments of
approximately $152,000 each on October 31, 1997; January 31, 1998 and April 30,
1998.
In connection with the sale of the majority interest in Timeline Europe,
Timeline and Timeline Europe also executed a Distributorship Agreement and
Source Code License which allows Timeline Europe to distribute, enhance and
maintain certain Timeline, Inc. software products in exchange for licensing fees
and maintenance fees payable to Timeline. The licensing fees are based on a
percentage of revenues generated by Timeline Europe on license and maintenance
fees it charges its customers. During the term of this agreement, Timeline
Europe has the right to market and license certain of Timeline's products to the
exclusion of Timeline in Europe, the Middle East, and Africa (the
"Territories").
Management believes these transactions will allow Timeline Europe adequate
working capital to build and maintain a viable market for Timeline's products in
the Territories. Consequently, Timeline believes substantial revenues will be
generated to Timeline over time on Timeline Europe licenses and maintenance.
Furthermore, these transactions make Timeline no longer responsible for the
continued operations of Timeline Europe, thereby reducing Timeline's exposure to
negative cash flows which may be generated by Timeline Europe.
As a result of this transaction, Timeline has recognized a gain on the sale of
the 87.5% interest in Timeline Europe in the amount of $1,038,409. This amount
represents the elimination of Timeline's negative investment in Timeline Europe
due to Timeline Europe no longer being a consolidated subsidiary of Timeline.
4. NEW ACCOUNTING PRONOUNCEMENTS
In February 1997, the Financial Accounting Standards Board issued SFAS No. 128,
"Earnings Per Share", which is effective for periods beginning after December
15, 1997. SFAS No. 128 establishes new standards for computing and presenting
earnings per share (EPS). After the effective date, companies will report basic
EPS and diluted EPS in place of primary and fully diluted EPS, which are
currently reported. Under the new standard, the Company's basic and diluted EPS
for the quarter ended September 30, 1997, would be $0.28 and $0.27,
respectively. For the six month period, basic and diluted EPS would be the same
as the reported EPS of $0.06.
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
When used in this report, the words "expect", "intention", "should",
"anticipate" and similar expressions identify forward-looking statements.
Readers are cautioned not to place undue reliance on these forward-looking
statements, which speak only as of the date of this report. The Company
undertakes no obligation to republish revised forward-looking statements to
reflect events or circumstances after the date hereof or to reflect the
occurrence of unanticipated events. Readers are also urged to carefully review
and consider the various disclosures made by the Company which attempt to advise
interested parties of the factors which affect the Company's business, including
the disclosures made in this report, the Company's periodic reports on Forms
10-KSB and 10-QSB, and the Company's registration statements on Form SB-2 and
S-3, all as filed with the Securities and Exchange Commission, and those
described from time-to-time in the Company's press releases and other
communications.
RESULTS OF OPERATIONS
REVENUES
Three Months Ended Six Months Ended
September 30, September 30,
1997 1996 Change 1997 1996 Change
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(Dollars in Thousands)
Software license 282 216 31% 484 991 (51)%
Software development 185 -- N/A 306 -- N/A
Maintenance 172 236 (27)% 407 413 (1)%
Consulting and Other 245 851 (71)% 522 1,379 (62)%
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Revenues 884 1,303 (32)% 1,719 2,783 (38)%
Operating revenues for the three and six months ended September 30, 1997 were
substantially lower than the comparable periods ended September 30, 1996. The
quarter ended September 1997 represents the first quarter in which the revenues
of Timeline Europe Limited are no longer consolidated with those of Timeline,
Inc.
Software license and development fees for the quarter ended September 30, 1997
increased over the comparable quarter ended September 30, 1996. However, for the
six month periods ended on such dates, these revenue items were lower. This is
reflective of certain changes initiated during the September 30, 1996 quarter
and continuing through the current quarter, including a change in marketing
focus resulting in fewer enterprise sales and a relative increase in sales of a
lower cost version of MV Analyst, as well as a reduction in the size of the
sales force.
While maintenance revenue was relatively even for the comparable six month
periods, it decreased 27% for the comparable three month periods. This reflects
the elimination of Timeline Europe maintenance revenue as well as decreasing
maintenance fees from licensees of Timeline's Digital based product line which
more than offset continued increases in maintenance from the Company's MV
product series based on Microsoft Corporation's operating systems. Consulting
revenue decreased 71% in the comparable quarter. This is a direct result the
elimination of consulting revenue from Timeline Europe, the reduction in the
number of employees involved in consulting, and reduced software installation
projects.
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GROSS MARGIN
Three Months Ended Six Months Ended
September 30, September 30,
1997 1996 Change 1997 1996 Change
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(Dollars in Thousands)
Gross profit 551 769 (28)% 926 1,832 (49)%
Percentage of
operating revenues 62% 59% 54% 66%
The change in the Company's gross margin as a percentage of gross revenue is due
in large part to changes in the mix of higher-margin software licenses and lower
margin consulting and maintenance revenue, which is labor intensive.
Additionally, amortization of capitalized software costs was higher in fiscal
1998 due to the release of a number of new products during the last twelve
months.
The actual dollar amount of gross margin decreased in both the three and six
month periods ended in fiscal 1998 over fiscal 1997 as a direct result of the
reduction in revenues.
SALES AND MARKETING EXPENSE
Three Months Ended Six Months Ended
September 30, September 30,
1997 1996 Change 1997 1996 Change
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(Dollars in Thousands)
Sales and marketing 156 841 (81)% 476 1,711 (72)%
Percentage of
operating revenues 18% 65% 28% 61%
Sales and marketing expenses as a percentage of net sales and in actual dollar
amounts decreased substantially between the periods presented. This decrease is
due to the significant reduction in sales personnel and related expenses in the
United States, and in the three month period ended on September 30, 1997, due to
the elimination of such expenses for the previously wholly-owned Timeline Europe
Limited. Management believes, based upon the elimination of Timeline Europe
Limited costs in future quarters, that favorable comparisons with prior years
will continue. However, actual dollar amounts may vary in future quarters based
upon the volume of sales from quarter to quarter.
RESEARCH AND DEVELOPMENT EXPENSE
Three Months Ended Six Months Ended
September 30, September 30,
1997 1996 Change 1997 1996 Change
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(Dollars in Thousands)
Research & development 133 513 (74)% 815 913 (11)%
Percentage of
operating revenues 15% 39% 47% 33%
The Company has made a strategic decision not to undertake any research and
development on new products. Research and development expenses during the
quarter ended September 30, 1997 were attributable to the enhancement of the
functionality of the current product line. In addition, in certain
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instances enhancements were funded by outside third parties. This approach is a
key undertaking in management's effort to return the Company to profitability.
Management believes the actual dollar amount of research and development
expenses will increase in future quarters if the Company is successful in its
efforts to sign distribution and private label agreements with various
accounting vendors. In such situations, the Company will be called upon to make
certain modifications to its software to meet the particular needs of its
distributors and to fully integrate the Company's products with the accounting
package(s) of the various vendors.
GENERAL AND ADMINISTRATIVE EXPENSE
Three Months Ended Six Months Ended
September 30, September 30,
1997 1996 Change 1997 1996 Change
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(Dollars in Thousands)
General & administrative 338 483 (30)% 296 819 (64)%
Percentage of
operating revenues 38% 37% 17% 29%
General and administrative expenses between comparable three month periods ended
September 30, 1997 and September 30, 1996 decreased 30%, and decreased 64% for
the comparable six month periods. This decrease is a direct result of
management's efforts to reduce the workforce and related overhead expenses as
well as the elimination of Timeline Europe as a consolidated subsidiary of the
Company. Management believes that general and administrative expenses should
remain relatively stable over the next several quarters except for the effect of
legal and auditing fees which are event driven.
INCOME TAX
Income taxes are provided in the statement of operations in accordance with the
liability method. The Company has determined that the tax assets generated by
the net operating losses and research and experimentation credits do not satisfy
the recognition criteria set forth under the liability method. Accordingly, a
valuation allowance is recorded against the applicable deferred tax assets and
therefore no tax benefit is recorded.
In connection with the Company's initial public offering in January 1995, the
Company experienced a significant change in ownership, which limits the amount
of net operating loss carry forwards and credits which may be used in any given
year. However, the Company does not expect this to be a factor in fiscal 1998.
OTHER INCOME
Timeline has recognized a gain on the sale of the 87.5% interest in Timeline
Europe in the amount of $1,038,409. This amount represents the elimination of
Timeline's negative investment in Timeline Europe due to Timeline Europe no
longer being a consolidated subsidiary of Timeline.
LIQUIDITY AND CAPITAL RESOURCES
The Company's cash and cash equivalent and short-term investment balances at
September 30, 1997 stood at $58,401 compared to $187,000 at March 31, 1997. The
decrease in cash is attributable to
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operating losses incurred in the first and second quarter of fiscal 1998. Total
obligations, excluding deferred income items, totaled $1,421,638 at September
30, 1997. The fiscal 1998 obligations include a corporate guarantee of a
$302,084 bank note between the Timeline Employee Stock Ownership Trust and
Silicon Valley Bank. The Company is currently out of compliance with certain
debt covenants associated with the ESOP debt and has therefore classified this
debt as current. The President and CEO of the Company personally guaranteed this
debt with the bank.
Net cash provided by operating activities was $65,556 in the six months ended
September 30, 1997. The Company funded its operating loss through collections on
accounts receivable and increases in payables.
A sale of a majority of the stock in Timeline Europe which closed during the
September 30, 1997 quarter provides payments to the Company on the intercompany
debt totaling in excess of $450,000 during the subsequent three quarters.
Nevertheless, based on current cash and cash equivalent balances, the Company
expects additional borrowings, sales of equity or debt instruments, or
substantial sales of assets will be required to fund operations during the
remainder of fiscal 1998.
At September 30, 1997, the outstanding balance on the Company's line of credit
facility was $233,183. Timeline has a bank line of credit which, if it has
adequate qualified receivables, can be drawn up to $625,000. The line of credit
is based upon selling its accounts receivable with recourse.
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PART II. - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
None
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
None
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
At the Company's Annual Meeting of Shareholders held on July 11,
1997, two director nominees were duly elected on the following vote:
Affirmative Votes Negative Votes
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Donald K. Babcock 2,604,841 31,670
Kent L. Johnson 2,606,161 30,350
In addition, the shareholders were also asked to approve an amendment
to the company's 1994 Stock Option Plan and Directors' Nonqualified
Stock Option Plan which would increase the number of shares
authorized for issuance under such plans from a total of 250,000
shares to 400,000 shares. The amendment was approved on the following
vote:
Affirmative Votes Negative Votes Votes Abstained Unvoted
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2,364,271 114,164 32,650 210,283
ITEM 5. OTHER INFORMATION
As previously disclosed in the Company's press release dated October
8, 1997, the Company's common stock and warrants are currently listed
on The Nasdaq SmallCap Market ("Nasdaq") pursuant to an exemption
from the minimum bid price requirement under the symbol "TMLNC" and
"TMLWC," respectively. Over the past several months, the trading
price for the common stock has averaged around $1 and has fallen
below the $1 minimum bid price a number of times. The closing bid
price of the common stock on November 4, 1997 was $0.906. Nasdaq has
granted a temporary exception from the minimum bid price requirement,
subject to the Company satisfying certain conditions imposed by
Nasdaq on or before November 28, 1997. The Company has not yet
satisfied those conditions and there can be no assurance that it will
be able to meet Nasdaq's conditions in a timely manner or at
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all. In the event that the Company's securities should cease to be
listed on The Nasdaq SmallCap Market, they may be listed on the OTC
Bulletin Board.
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 July 8, 1997, reporting Item
2 information relating to a disposition of assets by the
Company through the sale of a majority interest in its
subsidiary, Timeline Europe Ltd. On August 27, 1997, the
Company filed a Form 8-K/A amending the filing on July 8,
1997, to add the pro forma financial statement information
required to be filed.
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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: November 12, 1997 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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EXHIBITS INDEX
EXHIBIT
NUMBER DESCRIPTION
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27.1 Financial Data Schedule
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