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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10-QSB
QUARTERLY REPORT UNDER SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Quarterly Period Ended Commission File Number 1-13524
September 30, 2001
TIMELINE, INC.
(Exact name of small business issuer as specified in its charter)
Washington 91-1590734
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
3055 112th Avenue N.E., Suite 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 31, 2001
Common Stock, $.01 Par Value 4,040,998
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1
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
TIMELINE, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(unaudited)
September 30, March 31,
2001 2001
-------------------- --------------------
ASSETS
Current Assets
Cash and cash equivalents $ 42,849 $ -
Marketable securities - trading 439 28,802
Marketable equity securities 481,520 1,068,981
Securities held for others - 26,000
Accounts receivable, net of allowance of $2,701 and $4,902 389,411 773,287
Prepaid expenses and other 125,878 166,687
-------------------- --------------------
Total Current Assets 1,040,097 2,063,757
Property and equipment, net of accumulated depreciation of $891,235
and $871,576 145,513 167,841
Capitalized software, net of accumulated amortization of $328,457
and $256,789 315,335 429,761
Capitalized patents, net of accumulated amortization of $20,390 and
$15,069 172,780 157,015
Intangible assets, net of accumulated amortization of $596,939 and
$380,983 1,105,722 1,393,966
-------------------- --------------------
Total assets $2,779,447 $4,212,340
==================== ====================
LIABILITIES AND STOCKHOLDERS EQUITY
Current Liabilities
Accounts payable $ 257,910 $ 441,377
Accrued expenses 386,364 520,248
Deferred revenues 454,993 533,145
-------------------- --------------------
Total current liabilities 1,099,267 1,494,770
-------------------- --------------------
Total liabilities 1,099,267 1,494,770
-------------------- --------------------
Stockholders' Equity
Common stock 40,385 40,385
Additional paid-in capital 10,424,703 10,424,703
Other comprehensive loss (431,837) (410,451)
Accumulated deficit (8,353,071) (7,337,067)
-------------------- --------------------
Total stockholders' equity 1,680,180 2,717,570
-------------------- --------------------
Total liabilities and stockholders' equity $ 2,779,447 $ 4,212,340
==================== ====================
The accompanying notes are an integral part of these financial statements
2
TIMELINE, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
For the Three Months and Six Months Ended September 30, 2001 and 2000
(unaudited)
Three Months Ended Six Months Ended
September 30, September 30,
---------------- --- ---------------- ---------------- --- ----------------
2001 2000 2001 2000
---------------- ---------------- ---------------- ----------------
REVENUES:
Software license $ 515,148 $ 675,534 $ 765,350 $ 787,925
Other licenses - - 1,100,000 -
Software development - 16,587 3,090 22,116
Maintenance 206,111 186,634 431,145 340,896
Consulting and other 168,522 236,579 323,027 309,208
---------------- ---------------- ---------------- ----------------
Total revenues 889,781 1,115,334 2,622,612 1,460,145
COST OF REVENUES: 226,484 301,486 469,181 479,926
---------------- ---------------- ---------------- ----------------
Gross profit 663,297 813,848 2,153,431 980,219
OPERATING EXPENSE:
Sales and marketing 339,224 357,411 700,980 591,748
Research and development 347,702 336,667 828,899 658,145
General and administrative 529,670 698,614 1,188,503 1,270,034
Depreciation 13,146 37,028 27,644 84,128
Amortization: intangibles and goodwill 140,248 100,494 282,543 100,494
---------------- ---------------- ---------------- ----------------
Total operating expenses 1,369,990 1,530,214 3,028,569 2,704,549
---------------- ---------------- ---------------- ----------------
Loss from operations (706,693) (716,366) (875,138) (1,724,330)
---------------- ---------------- ---------------- ----------------
OTHER (EXPENSE) INCOME:
(Loss) gain on sale of securities (124,762) 181,125 (148,580) 454,765
Interest (expense) income and other (3,701) (28,872) 7,714 (23,281)
---------------- ---------------- ---------------- ----------------
Total Other (Expense) Income (128,463) 152,253 (140,866) 431,484
---------------- ---------------- ---------------- ----------------
Loss before income taxes (835,156) (564,113) (1,016,004) (1,292,846)
---------------- ---------------- ---------------- ----------------
Net loss $ (835,156) $ (564,113) $(1,016,004) $(1,292,846)
================ ================ ================ ================
Basic net loss per common share $(0.21) $(0.15) $(0.25) $(0.36)
================ ================ ================ ================
Diluted net loss per common and common
equivalent share $(0.21) $(0.15) $(0.25) $(0.36)
================ ================ ================ ================
Shares used in calculation of basic
earnings per share 4,040,998 3,757,817 4,040,998 3,603,715
================ ================ ================ ================
Shares used in calculation of diluted
earnings per share 4,040,998 3,757,817 4,040,998 3,603,715
================ ================ ================ ================
The accompanying notes are an integral part of these financial statements
3
TIMELINE, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Six Months Ended September 30, 2001 and 2000
(unaudited)
2001 2000
----------------- -----------------
CASH FLOWS FROM OPERATING ACTIVITIES
Net cash used in operating activities $ (344,157) $(2,174,707)
----------------- -----------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Cash acquired in AFL acquisition - 29,056
Purchase of property and equipment (10,924) (19,085)
Proceeds from sale of property and equipment - 22,075
Capitalized software development costs (21,086) (87,486)
Purchase of short-term investments - (586,150)
Proceeds from sale of short-term investments 444,057 1,683,049
Issuance of note receivable - (952)
----------------- -----------------
Net cash provided by investing activities 412,047 1,040,507
----------------- -----------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Payments on capital lease obligation - (4,309)
Payment of notes payable - (35,826)
Exercise of stock options/warrants - 9,310
----------------- -----------------
Net cash used in financing activities - (30,825)
----------------- -----------------
EFFECT OF FOREIGN EXCHANGE RATE (25,041) (39,397)
NET CHANGE IN CASH AND CASH EQUIVALENTS 42,849 (1,204,422)
CASH AND CASH EQUIVALENTS, beginning of period - 1,470,703
----------------- -----------------
CASH AND CASH EQUIVALENTS, end of period $ 42,849 $ 266,281
================= =================
SUPPLEMENTAL DISCLOSURE OF CASH FLOW
INFORMATION:
Cash paid for interest during year $ 4,243 $ 4,508
Non-cash transactions:
Equity consideration for AFL acquisition - 797,525
Unrealized loss on available for sale securities (3,655) (2,219,330)
The accompanying notes are an integral part of these financial statements
4
TIMELINE, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2001
1. Interim Financial Statements
The accompanying condensed consolidated financial statements for Timeline,
Inc. (the Company) and subsidiaries 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 six-month
period ended September 30, 2001 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, 2001,
previously reported in the Company's 10-KSB.
2. Basis of Presentation
All subsidiaries of the Company are wholly-owned. The accompanying
consolidated financial statements include the accounts and operations of these
subsidiaries. All intercompany balances and transactions have been eliminated in
consolidation.
3. Marketable Securities
In December 2000, the Company settled a patent infringement lawsuit filed
against Sagent Technology, Inc. (Sagent). In connection with this settlement,
the Company received 600,000 shares of Sagent common stock with a fair market
value of $1,425,000 at the date of the settlement. Sagent filed a re-sale
registration statement with the Securities and Exchange Commission for these
shares, which was declared effective in June 2001.
At September 30, 2001, the Company held 370,400 shares of Sagent common
stock, and the total value of these shares was $481,520. 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 $398,180 at
September 30, 2001, is recorded as a component of other comprehensive loss in
the accompanying balance sheet.
5
4. Stockholders Equity
Changes in stockholders equity for the period from March 31, 2001 to
September 30, 2001 were as follows:
Stockholders' equity, March 31, 2001 $2,717,570
Foreign currency adjustment 3,655
Other comprehensive loss - unrealized loss on
available-for-sale securities (25,041)
Net loss (1,016,004)
----------
Shareholders' equity, September 30, 2001 $1,680,180
==========
5. Net Loss per Common Share
Basic net loss per share is the net loss divided by the weighted average
number of shares outstanding during the period. Diluted net loss per share is
calculated as the net loss divided by the sum of the weighted average number of
shares outstanding during the period 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
effect of including outstanding options and warrants is antidilutive for all
periods presented. Therefore, options and warrants have been excluded from the
calculation of diluted net loss per share.
The computation of basic and diluted net loss per common and common
equivalent share is as follows for the three and six-month periods ended
September 30, 2001 and 2000:
Three Months Ended Six Months Ended
September 30, September 30, September 30, September 30,
2001 2000 2001 2000
------------------ ----------------- ------------------ ----------------
Net loss $ (835,156) $ (564,113) $(1,016,004) $(1,292,846)
------------------ -------------------- ------------------ -------------------
Weighted average common and
common equivalent shares
outstanding 4,040,998 3,757,817 4,040,998 3,603,715
================== ==================== ================== ===================
Basic and diluted net loss per
common and common equivalent share
$ (0.21) $ (0.15) $ (0.25) $ (0.36)
================== ==================== ================== ===================
6. Recent Accounting Pronouncements
In June 2001, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards (SFAS) No. 141, "Business
Combinations." SFAS No. 141 establishes accounting and reporting standards for
business combinations to use the purchase method. The effective date of SFAS No.
141 is June 30, 2001. The Company is evaluating the impact of adopting SFAS No.
141. Additionally, all acquisitions by the Company have been accounted for using
the purchase method.
In June 2001, the FASB issued SFAS No. 142, "Goodwill and Other Intangible
Assets." SFAS No. 142 establishes accounting and reporting standards for
acquired goodwill and other intangible assets. The statement eliminates the
amortization of goodwill over its estimated useful life. Rather, goodwill will
be subject to at least an annual assessment for impairment by applying a
fair-value-based test. SFAS No. 142 is effective for fiscal years beginning
after December 14, 2001.
6
On October 3, 2001, the FASB issued the Statement of Financial Accounting
Standards No. 144 "Accounting for the Impairment or Disposal of Long-Lived
Assets" ("FAS 144"). FAS 144 addresses financial accounting and reporting for
the disposal of long-lived assets. FAS 144 becomes effective for financial
statements issued for fiscal years beginning after December 15, 2001 and interim
periods within those fiscal years. The Company does not expect the pronouncement
to have a material impact on its consolidated financial position, consolidated
results of operations or consolidated cash flows.*
7. Litigation
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 Memorandum Decision and Final Judgment in
January 2001 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 filed
an appeal in the Washington State Court of Appeals. No hearing date has been
set.
In June 2001, the Company filed and subsequently served a complaint against
Hyperion Solutions, Inc. in the Federal District Court for the Western District
of Washington, alleging infringement of certain of the Company's patents. The
Company intends to seek monetary damages and an injunction against Hyperion
licensing certain of its products.* A trial date was initially set for March
2003, but in connection with the proposed settlement of the Lawson litigation
described below, it is expected that the trial date will be moved to October
2002, subject to approval of the court.
In June 2001, the Company filed a complaint against Lawson Software Inc. in
the Federal District Court for the Western District of Washington, alleging
infringement of certain of the Company's patents. Additionally, Lawson is a
reseller of software provided by Hyperion. On November 12, 2001, a tentative
settlement was reached between the Company and Lawson in which the Company will
grant to Lawson a license to the Company's patented technology and Lawson will
pay a license fee of $450,000, payable over four quarters. The proposed
settlement is conditioned on, among other things, Timeline, Lawson and Hyperion
agreeing to move the trial date for a related action, Timeline vs. Hyperion,
from March 2003 to October 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.*
7
Item 2. Management's Discussion and Analysis or Plan of Operations
This Quarterly Report on Form 10-QSB includes a number of forward-looking
statements that reflect the Company's 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 used herein, the
words "anticipate," "believe," "estimate," "intend," "may," "will," "expect" and
similar expressions as they relate to the Company are intended to identify such
forward-looking statements, but are not the exclusive means of identifying such
statements. The Company's actual results, performance or achievements could
differ materially from the results expressed in, or implied by, these
forward-looking statements. The Company does not undertake any obligation to
revise these forward-looking statements to reflect any future events or
circumstances. In addition, the disclosures under the caption "Other Factors
that May Affect Operating Results" consist principally of a brief discussion of
risks which may affect future results and are thus, in their entirety,
forward-looking in nature. To facilitate readers in identifying forward-looking
statements in the other sections of this document, the Company has attempted to
mark sentences containing such statements with a single asterisk and paragraphs
containing only forward-looking statements with double asterisks. However, no
assurance can be made all such statements have been identified and marked.
Therefore, readers are urged to carefully review and consider the various
disclosures made by the Company in this report and in the Company's other
reports previously filed with the Securities and Exchange Commission (the
"SEC"), including the Company's periodic reports on Forms 10-KSB and 10-QSB, and
those described from time to time in the Company's press releases and other
communications, which attempt to advise interested parties of the risks and
factors that may affect the Company's business.
RESULTS OF OPERATIONS
Revenues
Three Months Ended Six Months Ended
September 30, September 30,
2001 2000 Change 2001 2000 Change
- ------------------------------- ------------- ------------- ------------- --------------- ------------- -------------
(Dollars in Thousands)
Software license 515 676 (24%) 765 788 (3%)
Other license 0 0 N/A 1,100 0 N/A
Maintenance 206 186 11% 431 341 26%
Consulting and Other 169 237 (29%) 323 309 5%
Software development 0 16 N/A 3 22 (86)%
------------- ------------- --------------- -------------
Revenues 890 1,115 (20%) 2,622 1,460 80%
- ------------------------------- ------------- ------------- ------------- --------------- ------------- -------------
Results of operations for fiscal 2002 include operating results of both
Analyst Financials Limited (AFL), which we acquired as of June 30, 2000, and
WorkWise Software, Inc. (WorkWise), acquired December 4, 2000. Accordingly,
results of operations for the three- and six-month periods ending September 30,
2000 (a portion of which includes the AFL acquisition but does not include
WorkWise) and the same periods of fiscal 2002 (after the acquisitions) are not
directly comparable. In addition, revenues for the six months ended September
30, 2000 include royalties paid to Timeline by AFL (prior to the acquisition) of
approximately $47,000 on license and maintenance revenue under its then
distributor agreement. There was no financial relationship between WorkWise and
Timeline prior to its acquisition.
8
Total operating revenues were $890,000 in the quarter ended September 30,
2001, compared to $1,115,000 for the same period in fiscal 2001, representing a
decrease of approximately 20%. This decrease was principally the result of lower
software license and consulting fees, partially offset by increased maintenance
revenue. The decrease in software licenses was the primary factor for lower
consulting revenue based upon fewer new installations. We believe this reduction
in license fees reflects the general weakness in the software sector of the
economy, exacerbated by the virtually complete halt in enterprise software
licensing from September 11th through the end of the quarter.
For the six months ended September 30, 2001, total operating revenue,
excluding other license revenue which includes a large patent license fee during
the first quarter of fiscal 2002, was not materially different from the prior
year six-month period.
We believe license revenue for our software products will continue to be
negatively affected by the economic slowdown. We understand many products in the
software industry, including ours, are not generally considered mission critical
and, therefore, are subject to deferral during periods of economic uncertainty
or downturns. While we have agreements in place with a larger number of
distribution partners than in comparable periods of prior years, we do not
expect this to offset the negative effects of the economic situation, leading to
lower quarter-to-quarter comparisons over the next several quarters.**
Maintenance revenue increased 11% to $206,000 for the second quarter of
fiscal 2002 as compared to $186,000 for the second quarter of fiscal 2001. The
continued growth in maintenance is due to a larger installed base of our
Timeline software. For the six-month comparative periods, maintenance increased
by 26% in fiscal 2002 over fiscal 2001. The increase in maintenance revenue not
only reflects a larger installed base, but also consolidation of AFL and
WorkWise. In addition, in May 2000, we outsourced to a third party all
maintenance on our VAX operating system-based software. Future fiscal 2002
quarters may show mixed results depending upon the commencement of new
maintenance agreements and the expiration of existing maintenance agreements.*
Consulting fees decreased 29% to $169,000 for the second quarter of fiscal
2002 from $237,000 for the same period in fiscal 2001. As discussed above,
consulting is directly affected by decreases in license revenue as a majority of
our consulting is generated in the installation of our systems in new licensees
of software. Due to the acquisition of AFL, we experienced an increase in the
number of consultants employed and generating revenue in the first quarter of
fiscal 2002 as compared to the same period in fiscal 2001 (pre-AFL acquisition).
Consequently, for the comparable six-month periods, consulting for fiscal 2002
showed a 5% increase over fiscal 2001. WorkWise consulting revenue was not
material in the first half of fiscal 2002. We believe that consulting revenue
levels will become less material in the future as a larger percentage of new
product licensing is transacted through OEM channels that provide their own
consulting services.*
9
Gross Profit
Three Months Ended Six Months Ended
September 30, September 30,
2001 2000 Change 2001 2000 Change
- -------------------------------------- ------------- ------------- ------------ --------------- ------------- -----------
(Dollars in Thousands)
Gross profit 663 814 (19%) 2,153 980 120%
Percentage of revenues 74% 73% 82% 67%
- -------------------------------------- ------------- ------------- ------------ --------------- ------------- -----------
Our gross profit for the second quarter of fiscal 2002 was 19% less than in
the comparable period in fiscal 2001. This decrease mirrors the previously
discussed decline in license revenue, which is one of our highest gross margin
business segments. For the comparable six-month periods, gross margin increased
by 120%. This is primarily due to the high-margin one-time patent license fee in
the first quarter of fiscal 2002. Without this one-time license fee, our gross
profit increased 7% in the first six months of fiscal 2002 when compared to
first six months of fiscal 2001. As a percentage of revenue, our gross profit
for the comparable three-month periods was effectively unchanged at
approximately 74%, whereas for the six-month periods this percentage increased
to 82% from 67% primarily due to the patent license fees.
Sales and Marketing Expense
Three Months Ended Six Months Ended
September 30, September 30,
2001 2000 Change 2001 2000 Change
- -------------------------------------- ------------- ------------- ------------ --------------- ------------- -----------
(Dollars in Thousands)
Sales and marketing 339 357 (5%) 701 592 18%
Percentage of revenues 38% 32% 27% 41%
- -------------------------------------- ------------- ------------- ------------ --------------- ------------- -----------
Sales and marketing expenses in actual dollar amounts decreased by 5%
between the three-month periods ended September 30, 2001 and September 30, 2000;
a difference we do not consider material. For the six-month comparable periods,
fiscal 2002 expenses increased by 18%, primarily due to an increase in the
number of sales and marketing personnel as a result of the AFL and WorkWise
acquisitions. Sales and marketing expenses are expected to be stable or decrease
quarter-to-quarter through the remainder of fiscal 2002 compared to fiscal 2001
due to staff reductions made in light of the current economic conditions and the
expected impact on our license revenue.*
Due to decreases in both patent license revenue and overall operating
revenue, sales and marketing expenses as a percentage of revenues increased to
38% the second quarter of fiscal 2002 from 32% for the same period in fiscal
2001. For the comparative six-month periods, the large patent license fee
recorded in the first quarter of fiscal 2002 caused expenses as a percentage of
revenue to actually decrease. Such costs as a percentage of revenue may vary
widely based upon the level and type of gross revenue in each quarter.*
10
Research and Development Expense
Three Months Ended Six Months Ended
September 30, September 30,
2001 2000 Change 2001 2000 Change
- -------------------------------------- ------------- ------------- ------------ --------------- ------------- -----------
(Dollars in Thousands)
Research & development 348 337 3% 829 658 26%
Percentage of revenues 39% 30% 32% 45%
- -------------------------------------- ------------- ------------- ------------ --------------- ------------- -----------
In actual dollar amounts, research and development expenses were not
materially different for the comparable quarters, increasing only 3% during the
quarter ended September 30, 2001 over the period ended September 30, 2000. The
26% increase in such expenses for the first six months of fiscal 2002 compared
to the first six months of fiscal 2001 represented an increase in the number of
employees between the periods, including development employees acquired as part
of the WorkWise acquisition. However, in the first quarter of fiscal 2002, we
made some staff reductions in this area due to normal consolidation occurring
after the combination of companies, and we made further staff reductions in
October 2001, after the end of the September 30, 2001 quarter. As a result of
the consolidation, we expect future quarters to reflect these decreases in
personnel in research and development.*
Research and development expenses during the quarters ended September 30,
2001 and September 30, 2000 were primarily attributable to the enhancement of
the functionality of the current product lines and to the integration of our
products with various accounting packages. We anticipate such efforts will
continue throughout the remainder of the 2002 fiscal year.*
General and Administrative Expense
Three Months Ended Six Months Ended
September 30, September 30,
2001 2000 Change 2001 2000 Change
- -------------------------------------- ------------- ------------- ------------ --------------- ------------- -----------
(Dollars in Thousands)
General & administrative 530 699 (24%) 1,189 1,270 (6%)
Percentage of revenues 60% 63% 45% 87%
- -------------------------------------- ------------- ------------- ------------ --------------- ------------- -----------
General and administrative expenses decreased by 24% between the comparable
three-month periods and 6% for the comparable six-month periods ended September
30, 2001 and 2000. These decreases from period to period are due in part to cost
cutting efforts associated with reducing the number of personnel and a decrease
in the level of legal fees associated with our patent litigation. General and
administrative costs will continue to vary from quarter to quarter in part due
to differing levels of legal fees and costs incurred in connection with the
various lawsuits in which we are involved.
Except for attorneys' fees and expert witness fees associated with ongoing
and anticipated patent licensing and enforcement actions, we expect general and
administrative expenses to continue to decrease slightly from the level
experienced in the second quarter of fiscal 2002. Due to the uncertainties
associated with litigation and negotiations, it is hard to estimate the level of
litigation expenses on an ongoing basis.**
Depreciation expense decreased in the quarter ended September 30, 2001 to
$13,000 from $37,000 in the quarter ended September 30, 2000. Due to the
acquisition of WorkWise, amortization of intangible assets increased from
$100,000 to $140,000 between comparable quarters. This amount will continue to
be amortized in future quarters of fiscal 2002.* We are evaluating the impact of
proposed accounting changes on amortization of acquired intangibles for fiscal
years beyond fiscal 2002 which may affect our amortization methods in future
fiscal years.*
11
Other Income (Expense)
Other income (expense) reflects net expense in the three- and six-month
periods ended September 30, 2001 of approximately ($128,000) and ($140,000),
respectively, compared to net income of approximately $152,000 and $431,000 for
the comparable periods in fiscal 2001. These net decreases in income for the
comparable quarters and six-month periods was primarily influenced by realized
losses on the sale of securities during fiscal 2002 (approximately $125,000 and
$149,000, respectively, for the three- and six-month periods ended September 30,
2001) as compared to realized gains on the sale of securities of approximately
$181,000 and $455,000 in the comparable three- and six-month periods 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 2002.*
LIQUIDITY AND CAPITAL RESOURCES
Our cash and cash equivalent and marketable securities balances at
September 30, 2001 stood at approximately $525,000 compared to approximately
$1,098,000 at March 31, 2001. These balances include available for sale
securities at September 30, 2001 of approximately $482,000 compared to
approximately $1,069,000 at March 31, 2001. At March 31, 2001, we also
maintained a balance of $26,000 of securities held for others, that we
subsequently transferred during the first quarter of fiscal 2002 pursuant to
prior agreement. Total obligations, excluding deferred income items, totaled
approximately $644,000 at September 30, 2001 as compared to approximately
$962,000 at March 31, 2001.
During the first six months of fiscal 2002, we sold some of our short-term
investments, the proceeds of which were used primarily to fund our operating
losses during fiscal 2002. The significant decrease in the value of marketable
securities and short-term investments was primarily due to the dramatic decrease
in the market value of these securities, as well as reflecting the sales of
those securities.
Net cash used in operating activities was $344,000 in the six month period
ended September 30, 2001. This was primarily due to continued losses from our
core operations. We generated $412,000 from investing activities.
During the remainder of fiscal 2002, we anticipate generating cash from
software license revenues as well as potential additional licenses of our
patented technology. We expect that our primary uses of cash will be salaries
and other expenses associated with Research and Development, Sales and
Marketing, and General and Administrative activities. We intend to continue to
monitor new license activity and our relationships with new and existing
distribution partners closely. By taking this cautious approach combined with
our current cash and cash equivalent balances and our 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 2002. However,
continued erosion of our cash and cash equivalent balances are of utmost concern
to us, and we are exploring options for alternative sources of funding. We
cannot predict our success or lack thereof in these endeavors. If license
revenues do not substantially increase quarter-to-quarter during fiscal 2002 or
in the event of continued operating losses with no outside source of financing,
we may have to lay-off additional personnel, sell operations or assets,
including our patents, merge with a stronger operating company or take more
drastic measures.**
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 (both by our
direct efforts and our distributors'), 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 manage growth and to
manage expenses, our ability to integrate our products with those of our
third-party distributors and licensees, our ability to retain qualified sales
and marketing personnel and to generate revenue from such sales and marketing
personnel, the outcome of the litigation involving Microsoft Corporation, Lawson
Software, Inc. and Hyperion Solutions, Incorporated, the outcome and costs of
pursuing patent litigation against third parties, the availability of additional
financing or capital resources, the market value of our marketable securities,
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 economic conditions in
the software industry and generally. 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.**
Recent Developments
On November 12, 2001, we signed a tentative settlement agreement with
Lawson Software, Inc. with regard to the patent infringement lawsuit we filed
against Lawson in June 2001. Pursuant to the terms of the settlement agreement,
Lawson will pay us a one-time patent license fee of $450,000 for an irrevocable,
fully-paid, worldwide license to use Timeline's patented technology. Payment of
the license fee would be made over four quarters, beginning December 3, 2001,
with Lawson having the right to prepay the license fee in full at any time.
While the license fee in this settlement is less than prior patent license fees,
we believe it is appropriate in light of the fact Lawson is an application
vendor as opposed to a provider of tools used by other software vendors. As part
of the proposed settlement, the lawsuit and all counterclaims in the litigation
would be dismissed. The proposed settlement is conditioned on, among other
things, Timeline, Lawson and Hyperion agreeing to move the trial date for a
related action, Timeline vs. Hyperion, from March 2003 to October 2002.
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PART II. - OTHER INFORMATION
Item 1. Legal Proceedings
In July 1999, we were 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 Memorandum Decision and Final Judgment in
January 2001 in the lawsuit holding the language of the agreement would support
Microsoft's right to sublicense to its customers the right 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 our patents. We have filed an
appeal of the lower court's Final Judgment in the Washington State Court of
Appeals. No hearing date has been established and we believe a decision will not
be rendered until late in fiscal 2002.*
In June 2001, we filed and subsequently served a complaint against Hyperion
Solutions, Inc. in the Federal District Court for the Western District of
Washington, alleging infringement of certain of our patents. We intend to seek
monetary damages and an injunction against Hyperion licensing certain of its
products.* A trial date was initially set for March 2003, but in connection with
the proposed settlement of the Lawson litigation described below, it is expected
that the trial date will be moved to October 2002, subject to approval of the
court.
In June 2001, we filed a complaint against Lawson Software Inc. in the
Federal District Court for the Western District of Washington, alleging
infringement of certain of our patents. Additionally, Lawson is a reseller of
software provided by Hyperion. On November 12, 2001, we signed a tentative
settlement agreement with Lawson in which we will grant to Lawson a license to
our patented technology and Lawson will pay a license fee of $450,000, payable
over four quarters. The proposed settlement is conditioned on Timeline, Lawson
and Hyperion agreeing to move the trial date for a related action, Timeline vs.
Hyperion, from March 2003 to October 2002. See "- Recent Developments" above.
From time to time, we may pursue litigation against other third parties to
enforce or protect our rights under these patents or our intellectual property
rights generally.*
Item 4. Submission of Matters to a Vote of Security Holders
At the Company's Annual Meeting of Shareholders held on July 19, 2001, two
director nominees were duly elected on the following vote:
Affirmative Votes Votes Withheld
Frederick W. Dean 3,016,571 206,125
Terry Harvey 2,801,830 206,125
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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 475,000 shares to 600,000 shares. The amendment was
approved on the following vote:
Affirmative Votes Negative Votes Abstentions
2,870,368 350,128 2,000
A third proposal, the ratification of Arthur Andersen LLP as the Company's
independent auditors for the year ending March 31, 2002 was voted on and
approved at the Company's Annual Meeting on the following vote:
Affirmative Votes Negative Votes Abstentions
2,900,541 600 11,000
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
None
(b) No reports on Form 8-K were filed during the three months ended September
30, 2001.
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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 13, 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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