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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
December 31, 2002
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 January 30, 2003
Common Stock, $.01 Par Value 4,165,998
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1
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
TIMELINE, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
As of As of
December 31, March 31,
ASSETS 2002 2002
------ ------------ ------------
CURRENT ASSETS:
Cash and cash equivalents $ 120,212 $ 82,956
Marketable securities 45,122 203,130
Accounts receivable, net of allowance for doubtful
accounts of $17,026 and $61,827 640,627 636,201
Prepaid expenses and other 57,406 142,492
------------ ------------
Total current assets 863,367 1,064,779
PROPERTY AND EQUIPMENT, net of accumulated
depreciation of $807,648 and $772,873 106,352 120,464
CAPITALIZED SOFTWARE, net of accumulated
amortization of $364,176 and $435,755 84,233 208,037
CAPITALIZED PATENTS, net of accumulated
amortization of $35,876 and $26,056 208,515 187,375
INTANGIBLE ASSETS, net of accumulated
amortization of $1,172,540 and $872,678 351,898 781,760
GOODWILL, net of accumulated
amortization of $123,938 and $48,105 70,183 34,432
OTHER ASSETS 759 --
------------ ------------
Total assets $ 1,685,307 $ 2,396,847
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
CURRENT LIABILITIES:
Accounts payable $ 82,102 $ 474,133
Accrued expenses 325,156 469,758
Deferred revenues 527,206 569,825
------------ ------------
Total current liabilities 934,464 1,513,716
------------ ------------
STOCKHOLDERS' EQUITY:
Common stock, $.01 par value, 20,000,000 shares
authorized, 4,165,998 and 4,153,498 shares issued
and outstanding 41,660 41,535
Additional paid-in capital 10,463,186 10,448,488
Accumulated other comprehensive (loss) income (33,220) 17,107
Accumulated deficit (9,720,783) (9,623,999)
------------ ------------
Total stockholders' equity 750,843 883,131
------------ ------------
Total liabilities and stockholders' equity $ 1,685,307 $ 2,396,847
============ ============
The accompanying notes are an integral part of these financial statements.
2
TIMELINE, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
For the Three Months and Nine Months Ended December 31, 2002 and 2001
(unaudited)
Three Months Ended Nine Months Ended
December 31, December 31,
-------------------------- --------------------------
2002 2001 2002 2001
----------- ----------- ----------- -----------
REVENUES:
Software license $ 241,590 $ 434,265 $ 771,205 $ 1,199,615
Patent license -- 450,000 1,074,000 1,550,000
Maintenance 285,258 247,304 828,987 678,449
Consulting and other 193,870 274,096 816,277 600,213
----------- ----------- ----------- -----------
Total revenues 720,718 1,405,665 3,490,469 4,028,277
COST OF REVENUES:
Software license 45,939 53,649 123,804 168,075
Patent license 3,394 2,748 9,820 8,069
Maintenance, consulting and
other 114,176 134,075 371,404 488,829
----------- ----------- ----------- -----------
Total cost of revenues 163,509 190,472 505,028 664,973
----------- ----------- ----------- -----------
Gross profit 557,209 1,215,193 2,985,441 3,363,304
OPERATING EXPENSE:
Sales and marketing 156,705 303,842 495,447 1,004,822
Research and development 175,855 263,446 590,171 1,092,345
General and administrative 350,906 417,699 1,163,793 1,412,949
Patents 25,350 168,837 326,064 362,591
Depreciation 9,329 13,951 34,382 41,097
Amortization: intangibles and goodwill 124,331 140,251 375,695 417,472
----------- ----------- ----------- -----------
Total operating expenses 842,476 1,308,026 2,985,552 4,331,275
----------- ----------- ----------- -----------
Loss from operations (285,267) (92,833) (111) (967,972)
----------- ----------- ----------- -----------
OTHER (EXPENSE) INCOME:
Loss on sale and impairment of
securities -- (149,797) (129,244) (298,377)
Interest income and
other 13,089 22,593 50,987 30,308
----------- ----------- ----------- -----------
Total other income (expense) 13,089 (127,204) (78,257) (268,069)
----------- ----------- ----------- -----------
Loss before income taxes (272,178) (220,037) (78,368) (1,236,041)
Provision for income tax -- -- 18,416 --
=========== =========== =========== ===========
Net loss $ (272,178) $ (220,037) $ (96,784) $(1,236,041)
=========== =========== =========== ===========
Basic and diluted net loss per
common share $ (0.07) $ (0.05) $ (0.02) $ (0.31)
=========== =========== =========== ===========
Shares used in calculation of basic
and diluted net loss per share 4,126,677 4,040,998 4,126,132 4,040,998
=========== =========== =========== ===========
The accompanying notes are an integral part of these financial statements
3
TIMELINE, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Nine Months Ended December 31, 2002 and 2001
(unaudited)
2002 2001
--------- ---------
CASH FLOWS FROM OPERATING ACTIVITIES
Net cash provided by (used in) operating activities $ 37,850 $(569,674)
--------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment (19,911) (10,924)
Capitalized software development costs (30,960) (21,086)
Proceeds from sale of short-term investments 46,861 691,467
--------- ---------
Net cash (used in) provided by investing activities (4,010) 659,457
--------- ---------
EFFECT OF FOREIGN EXCHANGE RATE 3,416 (22,539)
NET CHANGE IN CASH AND CASH EQUIVALENTS 37,256 67,244
CASH AND CASH EQUIVALENTS, beginning of period 82,956 --
--------- ---------
CASH AND CASH EQUIVALENTS, end of period $ 120,212 $ 67,244
========= =========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW
INFORMATION:
Cash paid for interest during year $ 12,242 $ 30,710
The accompanying notes are an integral part of these financial statements
4
TIMELINE, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2002
1. The Company
Organization
The accompanying consolidated financial statements are for Timeline, Inc. and
subsidiaries (the Company). The Company, which is headquartered in Bellevue,
Washington and has operations in the United Kingdom, develops, markets and
supports enterprise-wide financial management, budgeting and reporting software
and event-based notification, application integration and process automation
systems. Timeline's software products are designed to automatically access and
distribute business information with full accounting control.
Operations
The Company has historically suffered recurring operating losses and negative
cash flows from operations. As of December 31, 2002, the Company had negative
net working capital of approximately $71,000 and had an accumulated deficit of
approximately $9,721,000 with total stockholders' equity of approximately
$751,000. These condensed consolidated financial statements have been prepared
in accordance with accounting principles generally accepted in the United States
of America, assuming that the Company will continue as a going concern. Our
auditors added an explanatory paragraph to their opinion on our 2002 financial
statements stating that there was substantial doubt about our ability to
continue as a going concern. Management believes that current cash and cash
equivalent balances, along with the ability to sell marketable securities, and
any net cash provided by operations, will provide adequate resources to fund
operations through March 31, 2003. See "Liquidity and Capital Resources" below.
Management is contemplating a number of alternatives to enable the Company to
continue operating including, but not limited to:
o engaging a financial advisor to explore strategic alternatives, which
may include a merger, asset sale, joint venture or another comparable
transaction;
o raising additional capital to fund continuing operations by private
placements of equity or debt securities or through the establishment
of other funding facilities;
o forming a joint venture with a strategic partner or partners to
provide additional capital resources to fund operations; and
o loans from management or employees, salary deferrals or other cost
cutting mechanisms.
None of these potential alternatives may be available to the Company, or may
only be available on unfavorable terms. There can be no assurance that any of
these alternatives will be successful. If the Company is unable to obtain
sufficient cash when needed to fund its operations, it may be forced to seek
protection from creditors under the bankruptcy laws and/or cease operations.
The Company's inability to obtain additional cash as needed could have a
material adverse effect on its financial position, results of operations and its
ability to continue in existence. The consolidated financial statements do not
include any adjustments that might result from the outcome of this uncertainty.
5
2. Interim Financial Statements
The accompanying condensed consolidated financial statements of 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 in this Report in
conformity with accounting principles generally accepted in the United States of
America. Results of operations for the nine-month period ended December 31, 2002
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, 2002, as
previously reported in the Company's Form 10-KSB.
3. 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. Reclassifications have been made to the fiscal 2002 amounts to
conform to the fiscal 2003 presentation.
4. Marketable Securities
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. There are currently no restrictions on the sale of
these securities.
The Company has accounted for these securities as available for sale securities
under Statement of Financial Accounting Standards No. 115, "Accounting for
Certain Investments in Debt and Equity Securities" (SFAS 115). Accordingly,
these securities are stated at fair value, based on quoted market prices, with
unrealized gains and losses excluded from results of operations and reported as
a component of accumulated other comprehensive income (loss) on the Company's
balance sheet. Realized gains and losses on sales of these securities are
determined on the specific identification method and included in results of
operations. As of December 31, 2002 and March 31, 2002, the Company owned
150,800 and 203,100 shares of Sagent common stock, respectively, which had a
fair market value of $45,122 and $203,130, respectively.
The Company periodically reviews the carrying value of its available for sale
securities to determine if declines in the fair value of securities are other
than temporary. Factors considered by the Company in its review include the time
period and extent for which the quoted market prices were less than the
accounting basis, the issuing company's financial condition and overall industry
health. In performing its review in the fourth quarter of fiscal 2002, the
Company determined that the decline in the fair value of the Sagent shares
through March 31, 2002 was other than temporary. As a result, the Company
recognized a loss on the impairment of available for sale securities of $279,262
in the fourth quarter a year ago. This established a new accounting basis in the
securities. The Company subsequently determined that further declines in the
fair value of the securities from such new accounting basis in the second
quarter of fiscal 2003 were other than temporary. Accordingly, the
6
Company recorded a loss on the impairment of the available for sale securities
of an additional $123,204 in the second fiscal quarter and established another
new accounting basis in the securities.
During the third quarter, the Company recognized an unrealized gain of $18,096,
as the price of Sagent stock increased to $0.30 per share. As of February 10,
2003, the market value of the Sagent stock had decreased to $0.18 per share from
$0.30 per share on December 31, 2002.
5. Revenue Recognition
The Company recognizes revenue pursuant to the requirements of Statement of
Position No. 97-2, "Software Revenue Recognition" (SOP 97-2), as amended by
Statement of Position No. 98-9, "Software Revenue Recognition with Respect to
Certain Arrangements." Under SOP 97-2, revenue attributable to an element in a
customer arrangement is recognized when persuasive evidence of an arrangement
exists and delivery has occurred, provided the fee is fixed or determinable,
collectibility is probable and the arrangement does not require significant
customization of the software.
For all sales, the Company uses either a binding purchase order or signed
agreement, depending on the nature of the transaction, as evidence of an
arrangement. Sales through its resellers are evidenced by a master agreement
governing the relationship.
For software license fees in single element arrangements and multiple element
arrangements that do not include customization or consulting services, delivery
typically occurs when the product is shipped to customers and a license key is
issued.
At the time of each transaction, the Company assesses whether the fee associated
with its revenue transactions is fixed and determinable and whether or not
collection is reasonably assured. The Company assesses whether the fee is fixed
and determinable based on the payment terms associated with the transaction. If
a significant portion of a fee is due after the Company's normal payment terms,
is based upon a variable matrix such as a minimum level of distribution or is
subject to refund, the Company accounts for the fee as not being fixed and
determinable. In these cases, it defers revenue and recognizes it when it
becomes due and payable.
The Company assesses the probability of collection based on a number of factors,
including past transaction history with the customer and the current financial
condition of the customer. It does not request collateral from its customers. If
the Company determines that collection of a fee is not reasonably assured, it
defers revenue until the time collection becomes reasonably assured.
For multiple element arrangements, when Company-specific objective evidence of
fair value exists for all of the undelivered elements of the arrangement, but
does not exist for one or more of the delivered elements in the arrangement, the
Company recognizes revenue under the residual method.
Under the residual method, at the outset of the arrangement with a customer, the
Company defers revenue for the fair value of its undelivered elements such as
consulting services and product support and upgrades, and recognizes the revenue
for the remainder of the arrangement fee attributable to the elements initially
delivered, such as software licenses, when the criteria in SOP 97-2 have been
met. Company-specific objective evidence is established for support and upgrades
of standard products for which no installation or customization is required
based upon the amounts charged when support and upgrades are sold separately.
Company-specific objective evidence is established for consulting and
installation services based on the hourly rates charged for its employees when
they are performing these services provided the Company has the ability to
accurately estimate the hours
7
required to complete a project based upon its experience with similar projects.
For multiple element arrangements involving installation or customization,
Company-specific objective evidence is established for support and maintenance
arrangements if its customers have an optional annual renewal rate specified in
the arrangement and the rate is substantive.
The Company recognizes revenue from nonrefundable minimum royalty agreements
from distributors or resellers upon delivery of product to the distributor or
reseller, provided no significant obligations remain outstanding and the
conditions of SOP 97-2 have been met. Additional royalties are recognized as
revenue to the extent the minimums are exceeded when earned, based on the
distributor's or reseller's contractual reporting obligations.
In all other cases, the Company recognizes revenue when delivery to the end user
has occurred and the amount due from the reseller is fixed and determinable.
Most resellers are required to contact Timeline directly to request Timeline
provide a "key" to the reseller's customer that allows the software to operate.
In those situations, Timeline invoices the reseller at the time the key is
released to the customer indicating the software has been loaded on a unique
customer machine. Some resellers have the right to distribute keys to their own
customers, in which case the reseller distributes a copy of the software and
then provides a "key" to the end user. The reseller is contractually required to
have a binding license or purchase order in place with the end user before the
end user is allowed to physically load the Timeline software on a unique
machine. These distributors report to Timeline on a monthly or quarterly basis
the number and dollar amount of licenses they have distributed in the prior
period; i.e. the `keys' utilized. Based upon that report, Timeline then invoices
the reseller. Timeline records revenue at the time of invoice for the period
covered. There are no return rights offered to either the reseller or the end
user.
Revenue from support agreements is recognized on a straight-line basis over the
life of the contract.
The Company also enters into separately priced consulting agreements with its
customers to provide installation, training and other consulting services. These
agreements are generally priced on a time and materials basis and revenues are
recognized as the services are performed. The nature of the services does not
significantly alter the licensed software.
With regard to revenue generated from the licensing of patents, the Company
recognizes revenue when a patent license agreement is signed, collectibility is
probable and the amount of payment is fixed and determinable, consistent with
SOP 97-2 and Staff Accounting Bulletin 101.
6. Loss per Common Share
Basic and diluted loss per share is the net loss divided by the weighted average
number of shares outstanding during the period. The effect of including
outstanding options and warrants is anti-dilutive for all periods presented.
Shares issuable pursuant to stock options and warrants that have not been
included in the calculation of net loss per share because they are antidilutive
totaled 644,804 and 661,442 for the three-month periods ended December 31, 2002
and 2001, respectively.
8
7. Comprehensive Loss
Comprehensive loss for the three and nine months ended December 31, 2002 and
2001 were as follows:
Three months ended Nine months ended
----------------------------- -----------------------------
Dec. 31, 2002 Dec. 31, 2001 Dec. 31, 2002 Dec. 31, 2001
------------- ------------- ------------- -------------
Foreign currency
translation $ (17,298) $ 1,600 $ (68,423) $ (23,441)
Change in unrealized
gain on available for
sale securities 18,096 108,762 18,096 112,417
Net loss $ (272,178) $ (220,037) $ (96,784) $(1,236,041)
----------- ----------- ----------- -----------
Total comprehensive
loss $ (271,380) $ (109,675) $ (147,111) $(1,147,065)
=========== =========== =========== ===========
8. Intangible Assets and Goodwill
In June 2001, the Financial Accounting Standards Board (FASB) issued Statement
of Financial Accounting Standards No. 141, "Business Combinations" (SFAS 141),
and No. 142, "Goodwill and Other Intangible Assets" (SFAS 142). SFAS 141
requires that the purchase method of accounting be used for all business
combinations initiated after June 30, 2001 as well as all purchase method
business combinations completed after June 30, 2001. SFAS 141 also specifies
criteria intangible assets acquired in a purchase method business combination
must meet to be recognized and reported apart from goodwill. SFAS 142 requires
that goodwill and intangible assets with indefinite useful lives no longer be
amortized, but instead tested for impairment at least annually in accordance
with the provisions of SFAS 142. SFAS 142 also requires that intangible assets
with definite useful lives be amortized over their respective estimated useful
lives to their estimated residual values, and reviewed for impairment in
accordance with Statement of Financial Accounting Standards No. 144, "Accounting
for the Impairment or Disposal of Long-lived Assets" (SFAS 144).
The provisions of SFAS 141 were adopted effective June 30, 2001. No business
combinations have been completed since July 1, 2001. The Company adopted the
provisions of SFAS 142 on April 1, 2002.
SFAS 141 required, upon adoption of SFAS 142, that the Company evaluate its
existing intangible assets and goodwill that were acquired in a prior purchase
business combination, and make any necessary reclassifications in order to
conform with the new criteria in SFAS 141 for recognition apart from goodwill.
Upon adoption of SFAS 142, the Company was required to reassess the useful lives
and residual values of all intangible assets acquired in purchase business
combinations, and make any necessary amortization period adjustments by the end
of the first interim period after adoption. In addition, to the extent an
intangible asset was identified as having an indefinite useful life, the Company
was required to test the intangible asset for impairment in accordance with the
provisions of SFAS 142 within the first quarter of fiscal 2003. Any impairment
loss would have been measured as of April 1, 2002 and recognized as the
cumulative effect of a change in accounting principle in the first quarter of
fiscal 2003.
In connection with the transitional goodwill impairment evaluation, SFAS 142
required the Company to perform an assessment of whether there was an indication
that goodwill was impaired as of April 1, 2002. To accomplish this the Company
was required to identify its reporting units and determine the
9
carrying value of each reporting unit by assigning the assets and liabilities,
including the existing goodwill and intangible assets, to those reporting units
as of the date of adoption. The Company then had until September 30, 2002 to
determine the fair value of each reporting unit and compare it to the reporting
unit's carrying amount. To the extent a reporting unit's carrying amount exceeds
its fair value, an indication exists that the reporting unit's goodwill may be
impaired and the Company must perform the second step of the transitional
impairment test. In the second step, the Company must compare the implied fair
value of the reporting unit's goodwill, determined by allocating the reporting
unit's fair value to all of its assets (recognized and unrecognized) and
liabilities in a manner similar to a purchase price allocation in accordance
with SFAS 141, to its carrying amount, both of which would be measured as of the
date of adoption. This second step was required to be completed as soon as
possible, but no later than March 31, 2003. The Company has completed the
transitional goodwill impairment test and has determined that the Company did
not have a transitional impairment loss to record.
Upon adoption of SFAS 142 on April 1, 2002, the Company reclassified a
workforce-in-place intangible asset with an unamortized balance of $54,167 to
goodwill. As a result of the reclassification of the workforce-in-place
intangible asset to goodwill and the corresponding reduction in the related
deferred tax liability, the Company's valuation allowance for deferred tax
assets was increased resulting in income tax expense of $18,416. The Company has
also reviewed the useful lives of its identifiable intangible assets and
determined that the original estimated lives remain appropriate.
As required by SFAS 142, the Company has ceased amortization of goodwill
effective as of April 1, 2002.
Net loss and net loss per share for the three and nine months ended December 31,
2001 and for the years ended March 31, 2002 and 2001, adjusted to exclude
goodwill amortization are as follows:
Three Months Nine Months
Ended Ended Year Ended Year Ended
December 31, December 31, March 31, March 31,
2001 2001 2002 2001
----------- ----------- ----------- -----------
Net loss:
Reported net loss $ (220,037) $(1,236,041) $(2,286,932) $(1,885,632)
Goodwill amortization 17,712 53,136 70,879 53,059
----------- ----------- ----------- -----------
Adjusted net loss $ (202,325) $(1,182,905) $(2,216,053) $(1,832,573)
=========== =========== =========== ===========
Basic and diluted net loss
per share:
Reported basic and
diluted net loss per share $ (0.05) $ (0.31) $ (0.57) $ (0.48)
Goodwill amortization -- 0.02 0.02 0.01
----------- ----------- ----------- -----------
Adjusted basic and
diluted net loss per share $ (0.05) $ (0.29) $ (0.55) $ (0.47)
----------- ----------- ----------- -----------
Basic and diluted weighted
average number of shares 4,040,998 4,040,998 4,040,998 3,900,400
=========== =========== =========== ===========
10
Gross carrying amount: December 31, 2002 March 31, 2002
- ---------------------- ----------------- --------------
Goodwill $ 194,121 $ 82,537
Acquired technology 1,204,438 1,204,438
Customer/distributor contracts 320,000 320,000
Skilled workforce -- 130,000
---------- ----------
Total $1,718,559 $1,736,975
========== ==========
Accumulated Amortization:
- -------------------------
Goodwill $ 123,938 $ 48,105
Acquired technology 932,061 633,609
Customer/distributor contracts 240,479 163,236
Skilled workforce -- 75,833
---------- ----------
Total $1,296,478 $ 920,783
========== ==========
Net book value $ 422,081 $ 816,192
========== ==========
Each class of assets has a weighted average amortization period of three years.
Amortization of intangible assets was $124,331 and $140,251 in the quarters
ended December 31, 2002 and December 31, 2001, respectively, and $375,695 and
$417,472 in the nine months ended December 31, 2002 and December 31, 2001,
respectively.
Expected future amortization expense related to identifiable intangible assets
is as follows:
January 1, 2003 to March 31, 2003 $129,745
Year ending March 31, 2004 222,153
--------
Total $351,898
========
9. Impairment of Long-lived Assets
On April 1, 2002, the FASB issued Statement of Financial Accounting Standards
No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets" (SFAS
144), which supersedes certain provisions of APB Opinion No. 30, "Reporting the
Results of Operations-Reporting the Effects of Disposal of a Segment of a
Business, and Extraordinary, Unusual and Infrequently Occurring Events and
Transactions" (APB 30) and supersedes Statement of Financial Accounting
Standards No. 121, "Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to Be Disposed Of" (SFAS 121). In accordance with SFAS 144,
the Company evaluates long-lived assets, including intangible assets other than
goodwill, for impairment whenever events or changes in circumstances indicate
that the carrying value of an asset may not be recoverable based on estimated
undiscounted cash flows attributable to that asset. The amount of any impairment
is measured as the difference between the carrying value and the fair value of
the impaired asset. The Company does not currently believe that any of its
long-lived assets are impaired.
11
10. 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 in January 2001 issued
a Final 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
filed an appeal of the lower court's Final Judgment in the Washington State
Court of Appeals, and in March 2002 the Appellate Court remanded the case to the
Superior Court and ordered it to enter a judgment in the Company's favor. In
December 2002, the Washington Supreme Court denied Microsoft's motion to hear an
appeal of the case. Microsoft has filed a motion asking the Court to reform the
contract. A hearing was held January 31, 2003. No decision has been rendered by
the Court as of February 14, 2003.
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 its patents. On August 29,
2002, the Company entered into a settlement agreement with Hyperion in which it
granted to Hyperion a license to its patented technology and Hyperion agreed to
pay a license fee of $1,050,000 over a period of 4 months. The total amount was
recognized as other licenses revenue in the quarter ended September 30, 2002 and
is reflected in Patent license revenue for the nine-month period ended December
31, 2002. As of December 31, 2002, Hyperion paid $800,000 and the Company had
$250,000 in accounts receivable due from Hyperion. During January 2003, Hyperion
made the final license fee payment of $250,000.
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.
11. Segment Information
The Company follows the requirements of Statement of Financial Accounting
Standards No. 131, "Disclosures About Segments of an Enterprise and Related
Information" (SFAS 131). As defined in SFAS 131, the Company operates in two
reportable segments that are based on geographic business units in the United
States (Timeline) and Europe (Analyst Financials Ltd.). Both segments generate
revenues from the license and support of the Company's software products.
Revenues from other licenses and patent licenses are included in the Timeline
segment. The accounting policies of the segments are the same as those described
in the summary of significant accounting policies included herein and in the
Company's annual financial statements for the year ended March 31, 2002. During
the third quarters of fiscal year 2003 and fiscal year 2002, the Timeline
segment included intersegment revenues and the Analyst Financials segment
included intersegment expenses that totaled $92,619 and $92,288, respectively.
During the nine months ended December 31, 2002 and 2001, the Timeline segment
included intersegment revenues and the Analyst Financials segment included
intersegment expenses that totaled $339,910 and $250,559, respectively. These
intersegment transactions are recorded at market rates as if the transactions
occurred with third parties. The following table summarizes operations by
segment during the three and nine months ended December 31, 2002 and December
31, 2001.
12
Three Months Ended 12/31/02 Nine Months Ended 12/31/02
--------------------------- --------------------------
Analyst Analyst
Timeline Financials Total Timeline Financials Total
-------- ---------- ----- -------- ---------- -----
Revenues,
net of intersegment $ 379,739 $340,979 $ 720,718 $2,468,774 $1,021,695 $3,490,469
Operating (loss) income,
net of intersegment (340,138) 54,871 (285,267) (342,414) (342,303) (111)
Depreciation and
amortization 54,987 78,673 133,660 171,393 238,684 410,077
Long lived assets 581,674 240,266 821,940 581,674 240,266 821,940
Total assets 1,207,550 477,757 1,685,307 1,207,550 477,757 1,685,307
Three Months Ended 12/31/01 Nine Months Ended 12/31/01
--------------------------- --------------------------
Analyst Analyst
Timeline Financials Total Timeline Financials Total
-------- ---------- ----- -------- ---------- -----
Revenues,
net of intersegment $1,050,353 $355,312 $1,405,665 $3,086,744 $ 941,533 $4,028,277
Operating loss,
net of intersegment (8,768) (84,065) (92,833) (530,780) (437,192) (967,392)
Depreciation and
amortization 59,651 94,551 154,202 176,858 281,711 458,569
Long lived assets 933,448 595,278 1,528,726 933,448 595,278 1,528,726
Total assets 1,939,814 894,081 2,833,895 1,939,814 894,081 2,833,895
13
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 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, including the risks and uncertainties
described below, as well as in our annual report on Form 10-KSB for the year
ended March 31, 2002, under the respective caption "Other Factors that May
Affect Operating Results." When used in this Report, the words "anticipate,"
"believe," "predict," "intend," "may," "could," "should," "will," "expect,"
"future," "continue," "estimate," "judgment" and variations of such words 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. 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 this Report, 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 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 the
Company's business.
Critical Accounting Policies
We have identified below some of our accounting policies that we consider
critical to our business operations and the understanding of our results of
operations. This is not a complete list of all of our accounting policies, and
there may be other accounting policies that are significant or critical to the
Company. The impact and any associated risks related to these policies on our
business operations are discussed throughout Management's Discussion and
Analysis or Plan of Operation where such policies affect our reported and
expected financial results. For a detailed discussion on the application of
these and our other accounting policies, see the Notes to Condensed Consolidated
Financial Statements of this Form 10-QSB and Note 2 to the Consolidated
Financial Statements in our Annual Report on Form 10-KSB for the year ended
March 31, 2002.
The preparation of our financial statements requires us to make estimates and
assumptions that affect the reported amount of assets and liabilities,
disclosure of contingent assets and liabilities at the date of our financial
statements and the reported amounts of revenue and expenses during the reporting
period. The discussion below is intended as a brief discussion of some of the
judgments and uncertainties that can impact the application of these policies
and the specific dollar amounts reported on our financial statements. There can
be no assurance that actual results will not differ from those estimates.*
Material differences could result in the amount and timing of our results
reported on our financial statements for any period if management made different
judgments or utilized different estimates.* Many of our estimates or judgments
are based on anticipated future events or performance, and as such are
forward-looking in nature, and are subject to many risks and uncertainties,
including those discussed below and elsewhere in this Report, including under
the
14
caption "Other Factors that May Affect Operating Results." We do not undertake
any obligation to update or revise this discussion to reflect any future events
or circumstances.
Revenue Recognition
See Note 5 "Revenue Recognition" to the Company's Condensed Consolidated
Financial Statements in this Report for a detailed discussion of our revenue
recognition policies. In applying our revenue recognition policies to patent
licenses, we make certain judgments as to when payment terms (beyond standard 30
days terms) create a doubt about whether the license price is fixed and
determinable. In all cases, we have determined that extended payment terms did
not create doubt about the license price being fixed and determinable. For
example, with regard to the patent license entered into with Hyperion in August
2002, the terms of that license provided for a license fee of $1,050,000 payable
over a period of 4 months. We determined at that time, considering, among other
things, Hyperion's credit worthiness and the relative short term of payment,
that the extended payment terms did not create doubt about the license fee being
fixed and determinable, and we recognized the entire $1,050,000 in the second
quarter of fiscal 2003. Had we made a different determination, our aggregate
revenue recognized to date would have decreased by $250,000 through the third
quarter of fiscal 2003 and the revenues from the license with Hyperion would
have been deferred and recognized only as and when the payments were paid and
collected.
We recognize revenue from resellers in the period during which they deliver the
product to an end user under an end user purchase order of license agreement. We
do not require, nor do our resellers carry, inventory. We do not allow resellers
the right to return product.
Consulting revenue is billed and recognized after the service is provided. We do
not customize or modify our software products. Any programming fees earned are
for stand-alone applications which are billed and revenue is recognized upon
completion. Programming fees were not material in any period of fiscal 2002 or
2003.
Allowance for Doubtful Accounts
Our management must estimate the collectibility of our accounts receivable.
Management analyzes accounts receivable and analyzes historical bad debts,
customer concentrations, customer credit-worthiness, current economic trends and
changes in our customer payment terms when evaluating the adequacy of the
allowance for doubtful accounts. In general, we have historically and continue
today to accrue a bad debt reserve equal to 1% of any balance less than 60 days
since invoice and an additional 5% on any balance over 60 days from invoice.
Additionally, if we receive notice of a disputed receivable balance, we accrue
such additional amount as management determines is reflective of the risk of
non-collection. To date, we have not incurred material write offs of accounts
receivable. In considering the amount of bad debt allowance we rely heavily on
our history of no material write-offs and that our revenue is not dependent on
one or several customers, but is spread among a number of customers. However,
other factors which could cause management to change its estimates would be a
downturn in the economy that management determines has the potential to affect
collectibles or if we see a greater concentration of our receivables from fewer
customers. In such events, we may be required to record additional charges to
cover this exposure.* Material differences may result in the amount and timing
of our bad debt expenses for any period if management made different judgments
or utilized different estimates.*
15
Intangible Assets
See Note 8 "Intangible Assets and Goodwill" to the Company's Condensed
Consolidated Financial Statements in this Report for a detailed discussion of
our accounting policies regarding intangible assets. We carry on our balance
sheet a number of intangible assets, which are subject to amortization or
periodic review for potential impairment charges in accordance with the
provisions of SFAS 144. The amount of any amortization or impairment
adjustment(s) are expensed and reflected as such in our Consolidated Statements
of Operations and result in a reduction of the net assets reflected on our
Consolidate Balance Sheet.
All intangible assets, other than Patents and Goodwill, are amortized over a
useful life of 36 calendar months. These assets are capitalized internally
developed software, acquired software, and acquired other intangibles.
For any product or intangible asset, this estimate of a 36-month useful life is
based on our judgment that a period of 36 months reflects a reasonable estimate
of the life over which that product or other intangible will either be
commercially viable or be of significant use in developing and licensing
products and generating revenue. This estimate of useful life of 36 months would
be reduced if we determined it no longer reflects a reasonable estimate of the
life due to a determination that either the products and other intangibles were
no longer commercially viable or that the products and other intangibles were
not of significant use in developing and licensing products and generating
revenue.* This estimated life is based in large part on our estimates of future
cash flows and revenues from those products and intangibles. Specifically, the
value and life of any such asset is reflective of our judgment that the asset
will generate sufficient cash flow from licensing or cost savings to justify its
current and decreasing value at any point in time. Material differences may
result in the amount and timing of our amortization expense for any period if
management made different judgments or utilized different estimates.* During our
history, we have forecasted sales of our products based on such factors as
product history, assessment of actual and anticipated needs of customers,
distributors and resellers, and known backlog. As we introduce new products to
the marketplace and our competitors issue new products, there is a possibility
that our sales forecasting may not accurately reflect our actual product sales.*
In such event if our 36 month useful life estimate were incorrect, we would
reduce the estimated useful life, which would result in writing off our
intangible assets balances over a shorter economic life.*
Our balance of unamortized capitalized internally developed software at December
31, 2002 is $84,233. Our balance of unamortized acquired software and other
intangibles at December 31, 2002 is $351,898. All such assets were acquired in
calendar year 2000 from the acquisitions of Analyst Financials Limited and
WorkWise Software, Inc.
We also capitalize the costs to obtain patents on our technology. Such costs are
amortized over the estimated life of the patent. As a general rule, all patents
are valid for 20 years from the date of the original patent application. In the
last four years, we have generated approximately $10,252,000 from patent
licensing and an additional $2,065,000 for a combination of patent and source
code licensing to third parties. For purposes of capitalizing our patent costs,
we have estimated that our patents will generate sufficient cash flow over the
entire 20-year life of the patents in sufficient amount to justify their current
valuations.* We believe that we have opportunities to generate additional future
patent revenues based on court proceedings with respect to our patent.* All
unamortized patent acquisition costs at December 31, 2002 relate to patents with
an estimated life through February 1, 2016. Should additional patent revenues
not materialize, we would have to evaluate whether the estimated full life was
less than the remaining portion of the 20- year life, we
16
would need to write off the patent costs in the period we were to determine that
the patent was impaired and we would adopt a shorter life that we feel reflects
the expected life. This would increase the charge for amortization in each
remaining period of such new expected useful life.* Our December 31, 2002
balance of unamortized capitalized patents is $208,515.
As of April 2002, we no longer amortize goodwill and maintain a goodwill balance
of $70,183 at December 31, 2002. After April 2002, we began assessing the
impairment of goodwill in accordance with the provisions of SFAS 142. It was
determined that no impairment charge was appropriate. In making such
determination, we also look to anticipated future cash flows to determine if
such cash flows justify that the goodwill associated with continuing customer
relationships will be reflected. We also assess whenever events or changes in
circumstances indicate that the carrying value may not be recoverable. Our
judgments regarding the existence of impairment indicators are based on legal
factors, market conditions and operational performance of our acquired
businesses. We will continue to review, at least annually, any impairment of
goodwill.* Any resulting impairment loss would require us to charge the decrease
in value as an expense and would reduce the carrying value of goodwill on our
balance sheet. * See Note 8 to the Consolidated Financial Statements for a more
detailed discussion of impairment of goodwill.
Impairment of Investments
See Note 4 "Marketable Securities" to the Company's Condensed Consolidated
Financial Statements in this Report for a detailed discussion of our accounting
policies regarding impairment of investments. As part of the process of
preparing our consolidated financial statements, we periodically evaluate
whether any declines in the fair value of our investments are
other-than-temporary. At December 31, 2002 the entire amount of investments
consisted solely of shares of common stock of Sagent Technology, Inc. with a
carrying value of $45,122. The significant judgments and estimates made to
assess whether there is impairment is the market value, trend and history of the
stock; the economic health of Sagent; and the general outlook for the industry
in which Sagent operates. During the second quarter of fiscal 2003, we
determined that our investments were impaired and we recorded a charge in our
statement of operations totaling $123,204, thus creating a new accounting basis
in those securities. Gains and losses and impairment related to this security
would not impact our statement of operations, but rather flow through other
comprehensive income.*
17
RESULTS OF OPERATIONS
Revenues
Three Months Ended Nine Months Ended
December 31, December 31,
2002 2001 Change 2002 2001 Change
- ------------------------------------------------------------------------------
(Dollars in Thousands)
Software license $ 242 $ 434 (44%) $ 771 $1,120 (31%)
Patent license -- 450 N/A 1,074 1,550 (31%)
Maintenance 285 248 15% 829 678 22%
Consulting and other 194 274 (29%) 815 600 36%
--------------- ---------------
Revenues $ 721 $1,406 (49%) $3,490 $4,028 (13%)
- ------------------------------------------------------------------------------
For the quarter ended December 31, 2002, our total operating revenues were
$721,000 compared to $1,406,000 for the quarter ended December 31, 2001. This
represents a decrease of approximately 49%. If "Patent license" revenue, which
is historically very sporadic, is excluded, total revenues decreased by 25% for
the quarter ended December 31, 2002 when compared with the quarter ended
December 31, 2001. The biggest factor in the overall decrease quarter to quarter
is lower software and patent license revenue in the quarter ended December 31,
2002. Consulting and other revenue were also lower. Maintenance revenue was the
only category of revenue to increase over the prior fiscal year when comparing
the results of the quarters ended December 31, 2002 and 2001. For the nine
months ended December 31, 2002, our total operating revenues were $3,490,000
compared to $4,028,000 for the same period a year ago, a decrease of 13%. This
is due to a decrease in software and patent license revenue, offset by increased
maintenance and consulting revenues.
Software license revenue has been lower throughout fiscal 2003 when compared
with fiscal 2002. Third quarter revenue of $242,000 and nine-month revenue of
$771,000 for fiscal 2003 compare to fiscal 2002 revenue of $434,000 and
$1,120,000, respectively. This reflects a significant diminution of license
revenue generated by several key distribution partners in the United States.
European license fees received through Analyst Financials were also weaker in
both the three- and nine-month periods of fiscal 2003, but not by as wide a
margin as in the U.S. We believe this decline is due to several factors,
including the general decline in economic conditions, one of our key
distribution partners, Infinium Software, Inc., offering a competitive product
during fiscal 2003, and our reduced sales and marketing staff.
Patent license revenue is very sporadic. The timing of fees usually corresponds
to the settlement of litigation and, therefore cannot be predicted with
accuracy. There was no patent license revenue for the quarter ended December 31,
2002, and $450,000 in the quarter ended December 31, 2001. On a comparative
nine-month basis, patent license fees were $1,074,000 for fiscal 2003 compared
to $1,550,000 for fiscal 2002, representing a 31% decrease. While we intend to
continue to pursue additional patent license agreements, 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 or
amount of any such licenses.* In addition, we are currently in litigation with
Microsoft on enforcing the limitations contained in the patent license entered
into in June 1999. The ultimate outcome of this litigation may have a
significant impact on the strategy we will deploy in pursuing additional patent
licenses and, alternatively, could adversely affect our ability to enter into
additional patent licenses.*
Maintenance revenue increased 15% to $285,000 for the third quarter of fiscal
2003 as compared to $248,000 for the third quarter of fiscal 2002 and increased
22% to $829,000 for the first nine months
18
of fiscal 2003 compared to $678,000 for the first nine months of fiscal 2002.
The increase in maintenance revenue is primarily due to fees from new customers
who have installed and are using our software. Future fiscal 2003 quarters may
show mixed results depending upon the commencement of new maintenance agreements
and the expiration of existing maintenance agreements.*
The decrease in consulting in comparable quarters ending December 31, 2002 as
compared to 2001 is almost entirely due to results from our wholly-owned
subsidiary in Europe, Analyst Financials Ltd. U.S. consulting was relatively
flat as between the comparable quarters. As our European operation has been
gradually shifting its emphasis to OEM and Value Added Resellers and
de-emphasizing direct sales, we expected downward pressure on consulting
revenue, and we anticipate that the level of consulting revenue for the fourth
quarter of fiscal 2003 will be comparable to that experienced during this
quarter.*
Other revenue consists of fees for software development and private label builds
of product, neither of which were material in the quarters or nine-month periods
ending December 31, 2002 and December 31, 2001.
Cost of Revenues
Three Months Ended Nine Months Ended
December 31, December 31,
2002 2001 Change 2002 2001 Change
- -------------------------------------------------------------------------------
(Dollars in Thousands)
Software license $ 46 $ 53 (13%) $124 $168 (26%)
Patent license 4 3 33% 10 8 25%
Maintenance, consulting and
other 114 134 (15%) 371 489 (24%)
------------ ------------
Total Cost of Revenues $164 $190 (14%) $505 $665 (24%)
Percentage of revenues 23% 14% 14% 17%
- -------------------------------------------------------------------------------
Starting with the quarter ended December 31, 2002, the amortization of
capitalized expense for procurement of patents was reclassified to Cost of
Revenue. Additionally, these expenses were reclassified for all comparable
periods reflected above and in the Financial Statements reflected in this
Report. In reports for prior periods of fiscal 2003 and in all periods of fiscal
2002, this expense was reflected in General and Administrative expenses for
purposes of Management's Discussion and Analysis and in a separate line item of
Operating Expenses as part of Amortization of Intangibles & Goodwill in our
financial statements.
Cost of revenues decreased 14% for the comparable quarters, and decreased 24%
for the comparable nine-month periods. Software license costs decreased as
certain capitalized software modules were fully amortized in fiscal 2002 and
early fiscal 2003, and therefore were not reflected in the second and third
quarter of fiscal 2003 costs. Additionally, staff and salary reductions
affecting consulting personnel helped reduce costs in fiscal 2003 compared to
fiscal 2002.
Starting with the fourth quarter of fiscal 2003, the Company will reflect the
continued amortization of acquired intangibles from its December 2000
acquisition of WorkWise Software, Inc. under Cost of Revenue.* The original
amount of the acquisition costs allocated to this asset was $554,000 and has
been amortized over a useful life of three years starting in December 2000
($15,000 per month) as part of Amortization of Intangibles & Goodwill. The net
remaining amount included in Intangible
19
assets of $185,000 as of December 31, 2002 will continue to be amortized at the
same rate over the remaining 12-month useful life.* This change in presentation
reflects that this acquired technology is now incorporated in a commercial
product release announced in December 2002 and which will be part of new license
deliverables beginning in the fourth quarter of fiscal 2003 and thereafter.*
Gross Profit
Three Months Ended Nine Months Ended
December 31, December 31,
2002 2001 Change 2002 2001 Change
- --------------------------------------------------------------------------
(Dollars in Thousands)
Gross profit $557 $1,215 (54%) $2,985 $3,363 (11%)
Percentage of revenues 77% 86% 86% 83%
- --------------------------------------------------------------------------
Gross profit for the third quarter of fiscal 2003 decreased by 54% from the
comparable period in fiscal 2002 primarily reflecting lesser revenue for the
fiscal 2003 quarter, as a result of the one-time patent license fee recorded in
the third quarter fiscal 2002. Patent licenses offer relatively high gross
profits as a percentage of revenue. The nine-month periods of fiscal 2003 and
fiscal 2002 are more directly comparable as each period included significant
patent revenue, showing a decrease in gross profit of 11%. However, as in the
three-month comparison, a significant portion of this comparative decrease is
due to that a larger proportion of total revenue for the period in fiscal 2002
consisted of higher margin patent license fees.
Sales and Marketing Expense
Three Months Ended Nine Months Ended
December 31, December 31,
2002 2001 Change 2002 2001 Change
- ---------------------------------------------------------------------------
(Dollars in Thousands)
Sales and marketing $157 $304 (48%) $495 $1,005 (51%)
Percentage of revenues 22% 22% 14% 25%
- ---------------------------------------------------------------------------
Sales and marketing expenses in actual dollar amounts decreased by 48% between
the three months and 51% between the nine months ended December 31, 2002 and
December 31, 2001, primarily due to a decrease in the number of sales and
marketing personnel. Sales and marketing expenses are expected to continue to be
lower in fiscal 2003 compared to fiscal 2002 as the decrease in personnel
occurred gradually throughout fiscal 2002 and the first six months of fiscal
2003.* Sales and marketing expenses quarter-to-quarter for the remainder of
fiscal 2003 are expected to remain relatively stable.*
Sales and marketing expenses represented 22% of revenues for each of the
comparable quarters. These expenses as a percentage of revenue decreased
significantly to 14% from 25% for the nine months of fiscal 2003 over the same
period in fiscal 2002. The significant decrease for the nine-month periods is
primarily due to the reduction in the number of sales and marketing personnel
addressed above. Sales and marketing expenses as a percentage of revenue may
vary widely in future quarters based upon the level and type of gross revenue in
each quarter.*
20
Research and Development Expense
Three Months Ended Nine Months Ended
December 31, December 31,
2002 2001 Change 2002 2001 Change
- ----------------------------------------------------------------------------
(Dollars in Thousands)
Research & development $176 $263 (33%) $590 $1,092 (46%)
Percentage of revenues 24% 19% 17% 27%
- ----------------------------------------------------------------------------
Research and development expenses decreased during the quarter ended December
31, 2002 in actual dollar amounts by 33% over the quarter ended December 31,
2001, and decreased by 46% for the comparative nine-month periods. These
decreases are primarily attributable to a decrease in the number of research and
development personnel due to the consolidation of resources after the
acquisitions of WorkWise and Analyst Financials, as well as reduced headcount
from our efforts to cut costs. We expect future quarters to reflect a decrease,
when compared to the prior fiscal year, in research and development expenses due
to additional staff reductions made in fiscal 2003.* Research and development
expenses quarter-to-quarter for the remainder of fiscal 2003 are expected to
remain relatively stable.*
Research and development expenses during all periods were primarily attributable
to the enhancement of the functionality of the current product lines and to
integration of our products with various accounting packages. We anticipate such
efforts will continue throughout the remainder of the 2003 fiscal year.*
General and Administrative Expense and Patents
Three Months Ended Nine Months Ended
December 31, December 31,
2002 2001 Change 2002 2001 Change
- ----------------------------------------------------------------------------------
(Dollars in Thousands)
General & administrative $351 $418 (16%) $1,164 $1,413 (18%)
Patents 25 169 (85%) 326 363 (10%)
- ----------------------------------------------------------------------------------
Total General & administrative
and Patent Expense $376 $587 (36%) $1,490 $1,776 (16%)
Percentage of revenues 52% 42% 43% 44%
- ----------------------------------------------------------------------------------
General and administrative and patent expenses decreased by 36% between the
comparable three-month periods and 16% during the nine-month periods ended
December 31, 2002 and 2001. The overall decreases are due to a combination of
lower costs from pursuing patent litigation, cost cutting throughout the last
five fiscal quarters, and reduced salaries instituted in the fourth quarter of
fiscal 2002 to mirror the concerns related to lower new license revenue and the
weak software market in general. The lesser decrease for the comparable nine
months is primarily due to payment of attorneys fees as a partial contingency
fee in the quarter ended September 30, 2002 on settlement of the patent
litigation with Hyperion.
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 remain relatively steady throughout the remainder of
fiscal 2003 unless the economy and new license revenue numbers improve to a
level where salary reductions instituted in the fourth quarter of fiscal 2002
are
21
no longer deemed necessary. Due to the uncertainties associated with patent
litigation and negotiations, such as certain costs which are paid as incurred,
it is difficult to estimate the level of litigation expenses on an ongoing
basis.**
Depreciation and Amortization
Depreciation expense decreased in the quarter ended December 31, 2002 to $9,000
from $14,000 in the quarter ended December 30, 2001. Additionally, amortization
of intangible assets due primarily to the acquisitions of Analyst Financials and
WorkWise decreased by 12% from $140,000 in the third quarter of fiscal 2002 to
$124,000 in the third quarter of fiscal 2003. Similar amounts will continue to
be amortized in future quarters of fiscal 2003 from the acquisition of Analyst
Financials. However, as described in "Cost of Revenue" above, future
amortization of acquired intangibles from the acquisition of WorkWise will be
presented as Cost of Revenue. We adopted SFAS 142 on April 1, 2002 and
accordingly we ceased amortization of goodwill. (See Note 8 to Notes to
Condensed Consolidated Financial Statements in this Report).
Other Income (Expense)
Other income was $13,000 in the third fiscal quarter of 2003, consisting
primarily of gains from foreign currency exchange fluctuations. The $127,000
expense in the third quarter of fiscal 2002 primarily related to the realized
losses on the sale of available for sale securities as we liquidated a portion
of our investment portfolio.
The comparable nine-month periods showed expense of $78,000 in fiscal 2003
versus expense of $268,000 in fiscal 2002. The improvement between these periods
was due to a smaller loss on the sale or write down of securities in fiscal 2003
over fiscal 2002, and lower interest costs and increased benefits from foreign
currency conversions.
Income Tax
No income tax expense was recorded in either of the comparable third quarters or
in the first nine months of fiscal 2002. However, amounts for the nine months of
fiscal 2003 include deferred income tax expense of $18,000 recorded in the first
quarter of fiscal 2003. That accrual was from the reclassification of our
workforce-in-place intangible asset to goodwill upon adoption of SFAS 142 on
April 1, 2002. (See Note 8 to Notes to Condensed Consolidated Financial
Statements in this Report). As a result of the reclassification, we reduced the
deferred tax liability related to the acquired identifiable intangibles with a
corresponding decrease in goodwill. Due to the reduction in the deferred tax
liability, the valuation allowance for deferred tax assets was increased
resulting in income tax expense of approximately $18,000. Otherwise, all income
or loss is offset by appropriate adjustments to the valuation allowance of the
Company's net operating loss carry-forwards.
LIQUIDITY AND CAPITAL RESOURCES
We have historically suffered recurring operating losses and negative cash flows
from operations. As of December 31, 2002, we had negative net working capital of
$71,000 (positive working capital position of $456,000 when excluding deferred
revenue). In addition, as of December 31, 2002, our cash and cash equivalents
were $120,000 and our marketable securities were $45,000, compared to cash and
cash equivalents of $83,000 and marketable securities of $203,000 as of March
31, 2002. These balances include available for sale securities as of December
31, 2002 of approximately $45,000 compared to approximately $203,000 as of March
31, 2002. Total obligations, excluding
22
deferred income items, totaled approximately $407,000 as of December 31, 2002 as
compared to approximately $944,000 as of March 31, 2002.
The slight increase in our cash and cash equivalents is attributable to lower
costs for patent litigation, continued control of operating expenses, and
somewhat higher receivables on maintenance renewals. The decrease in our
marketable securities is attributable to the continued decline in value of stock
in Sagent Technology, Inc. which we received as partial payment of a patent
license. (As of February 10, 2003, the market value of Sagent stock was $0.18
per share, a decrease of $0.12 per share from the market value at December 31,
2002 of $.30 per share, and a decrease of $.82 per share from the market value
at March 31, 2001 of approximately $1.00 per share). Net cash flows provided by
operating activities was $38,000 in the nine-month period ended December 31,
2002.
During the balance of fiscal 2003, we expect to generate cash from increased
consulting and maintenance revenues and to a lesser extent software license
revenues and possibly additional licenses of our patented technology.* On August
29, 2002, the Company entered into a settlement agreement with Hyperion in which
we granted to Hyperion a license to our patented technology and Hyperion agreed
to pay a license fee of $1,050,000 over a period of 4 months. As of December 31,
2002, the remaining balance of $250,000 was reflected in accounts receivable and
was paid on January 2, 2003. We expect that our primary uses of cash will be
salaries and other expenses associated with General and Administrative, Research
and Development, and Sales and Marketing activities.* We intend to continue to
monitor new license activity closely and may have to reduce staff, and/or seek
outside financing or a sale or merger of the Company if consulting and
maintenance revenues and patent and software licenses do not increase
quarter-to-quarter during the last quarter of fiscal 2003 and beyond.* By taking
this cautious approach combined with our current cash and cash equivalent
balances, we believe we have adequate resources to fund operations, as well as
continued costs and expenses of litigation, through the balance of fiscal 2003.*
Our auditors added an explanatory paragraph to their opinion on our fiscal 2002
financial statements stating that there was substantial doubt about our ability
to continue as a going concern.
There can be no assurance that our efforts to monitor expenses and generate
revenue will be successful.* Accordingly, we need to contemplate other
alternatives to enable the Company to fund continuing operations, including, but
not limited to, engaging a financial advisor to explore strategic alternatives,
which may include a merger, asset sale, joint venture or another comparable
transaction, loans from management or employees, salary deferrals or other cost
cutting mechanisms, or raising additional capital by private placements of
equity or debt securities or through the establishment of other funding
facilities.* None of these potential alternatives may be available to the
Company, or may only be available on unfavorable terms.* If we are unable to
obtain sufficient cash to continue to fund our operations, we may be forced to
seek protection from creditors under the bankruptcy laws and/or cease
operations.* Our inability to obtain additional cash as needed could have a
material adverse effect on our financial position, results of operations and our
ability to continue in existence.* The consolidated financial statements do not
include any adjustments that might result from the outcome of this uncertainty.
Recent Accounting Pronouncements
In June 2001, The Financial Accounting Standards Board (FASB) issued Statement
of Financial Accounting Standards No. 143, "Accounting for Asset Retirement
Obligations," (SFAS 143) which addresses financial accounting and reporting for
legal obligations associated with the retirement of tangible long-lived assets
and the associated asset retirement costs. SFAS No. 143 is effective for
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fiscal years beginning after June 15, 2002. We are in the process of evaluating
the financial statement impact of adoption of SFAS No. 143.
In July 2002, the FASB issued Statement of Financial Accounting Standards No.
146, "Accounting for Costs Associated with Exit or Disposal Activities," (SFAS
146) which is effective for exit or disposal activities that are initiated after
December 31, 2002. SFAS No. 146 nullifies Emerging Issues Task Force Issue No.
94-3, "Liability Recognition for Certain Employee Termination Benefits and Other
Costs to Exit and Activity," (EITF 94-3). We are in the process of evaluating
the financial statement impact of adoption of SFAS No. 146.
In December 2002, the FASB issued Statement of Financial Accounting Standards
No. 148, "Accounting for Stock-Based Compensation - Transition and Disclosure,"
(SFAS 148) which amends Statement of Financial Accounting Standards No. 123,
"Accounting for Stock-Based Compensation" (SFAS 123). SFAS 148 amends the
disclosure requirements in Statement 123 for stock-based compensation for annual
periods ending after December 15, 2002 and for interim periods beginning after
December 15, 2002. These disclosure requirements apply to all companies,
including those that continue to recognize stock-based compensation under
Accounting Principles Bulletin Opinion No. 25, "Accounting for Stock Issued to
Employees" (APB 25). We are in the process of evaluating the financial statement
impact of adoption of SFAS No. 148.
Other Factors That May Affect Operating Results
Our operating results may fluctuate due to a number of factors, including, but
not limited to, the following factors:
o the ability of our third-party distributors and licensees in selling
and marketing our products,
o market acceptance of our products,
o changes in the size or volume of consulting or maintenance contracts
with existing clients and potential clients,
o our ability to develop and expand distribution channels and to develop
relationships with third-party distributors and licensees of our
products,
o our decreased emphasis on direct sales, and increased reliance on OEMs
and VARs
o competition from existing or new product offerings (such as one of our
key distribution partners, Infinium Software, Inc., offering a
competitive product during fiscal 2002),
o our ability to motivate and retain our existing employees, including
sales and marketing personnel, as well as to attract and hire new
employees in the future,
o our ability to integrate our products with those of our third-party
distributors and licensees,
o the effect of the outcome of the litigation involving Microsoft
Corporation, on our patent licensing strategies and ability to pursue
further patent licenses,
o the outcome and costs of pursuing patent litigation against third
parties,
o the availability of additional financing or capital resources,
o the volume and timing of systems sales and licenses,
o changes in the level of operating expenses, and
o 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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Item 3 Controls and Procedure
Within the 90 days prior to the filing date of this Report, we carried out an
evaluation, under the supervision and with the participation of the Company's
management, including the Chief Executive Officer/Chief Financial Officer, of
the effectiveness of the design and operation of our disclosure controls and
procedures pursuant to Exchange Act Rule 13a-15. Based upon that evaluation, our
Chief Executive Officer/Chief Financial Officer concluded that our disclosure
controls and procedures are effective. Disclosure controls and procedures are
controls and procedures that are designed to ensure that information required to
be disclosed in Company reports filed or submitted under the Exchange Act is
recorded, processed, summarized and reported within the time periods specified
in the Securities and Exchange Commission's rules and forms.
There have been no significant changes in our internal controls or in other
factors that could significantly affect internal controls subsequent to the date
we carried out this evaluation. However, in response to the Sarbanes-Oxley Act
of 2002, we are continuing a comprehensive review of our disclosure procedures
and internal controls and expect to make minor modifications and enhancements to
these controls and procedures.* In particular, we have created a disclosure
practices committee and have reviewed and implemented additional internal
controls with respect to our UK operations.
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PART II. - OTHER INFORMATION
Item 1. Legal Proceedings
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 in January 2001 issued
a Final 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
filed an appeal of the lower court's Final Judgment in the Washington State
Court of Appeals, and in March 2002 the Appellate Court remanded the case to the
Superior Court and ordered it to enter a judgment in the Company's favor. In
December 2002, the Washington Supreme Court denied Microsoft's motion to hear an
appeal of the case. Microsoft has filed a motion asking the Court to reform the
contract. A hearing was held January 31, 2003. No decision has been rendered as
of February 14, 2003.
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. On August 29, 2002,
the Company entered into a settlement agreement with Hyperion in which we
granted to Hyperion a license to our patented technology and Hyperion will pay a
license fee of $1,050,000 over a period of 4 months. As of December 31, 2002,
Hyperion paid $800,000 and we had $250,000 in accounts receivable due from
Hyperion. During January 2003, Hyperion paid the final $250,000 of the license
fee.
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 6. Exhibits and Reports on Form 8-K
(a) Exhibits
99.1 Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant
to Section 906 of the Sarbanes-Oxley Act of 2002.
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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 14, 2002 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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CERTIFICATION
I, Charles R. Osenbaugh, certify that:
1. I have reviewed this quarterly report on Form 10-QSB of Timeline, Inc.
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary in order
to make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by this
quarterly report.
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report.
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a. designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities,
particularly during the period in which this quarterly report is being
prepared;
b. evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
c. presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date.
5. The registrant's other certifying officers and I have disclosed, based on our
most recent evaluation, to the registrant's auditors and to the audit committee
of the registrant's board of directors (or persons performing the equivalent
function):
a. all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to record,
process, summarize and report financial data and have identified for the
registrant's auditors any material weaknesses in internal controls; and
b. any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's internal
controls.
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
Date: February 14, 2002
/s/ Charles R. Osenbaugh
---------------------------
Charles R. Osenbaugh
President, CEO and CFO
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