<PAGE> 1
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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
--------------------------------------------
FORM 10-QSB
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTER ENDED DECEMBER 31, 1997 COMMISSION FILE NUMBER 1-13524
TIMELINE, INC.
(Exact name of small business issuer as specified in its charter)
WASHINGTON 91-1590734
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
3055 112TH AVENUE N.E., STE. 106
BELLEVUE, WA 98004
(Address of principal executive offices)
(425) 822-3140
(Issuer's telephone number)
Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter
period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. Yes [X] No [ ]
State the number of shares outstanding of each of the issuer's classes of common
equity, as of the latest practicable date:
OUTSTANDING AT
CLASS JANUARY 15, 1998
Common Stock, $.01 Par Value 3,130,610
================================================================================
1
<PAGE> 2
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
TIMELINE, INC.
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31, 1997 MARCH 31, 1997
(UNAUDITED) (AUDITED)
----------------- -----------------
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 36,459 $ 187,428
Accounts receivable, net of allowance
of $85,635 and $99,146 733,201 1,258,143
Prepaid expenses and other 41,308 218,365
Note receivable 313,937 --
----------------- -----------------
Total current assets 1,124,905 1,663,936
PROPERTY AND EQUIPMENT, net of accumulated
depreciation of $1,681,184, and $1,515,126 550,289 737,611
CAPITALIZED SOFTWARE COSTS, net of accumulated
amortization of $674,086 and $469,975 655,697 674,485
OTHER ASSETS 21,072 24,333
----------------- -----------------
Total assets $ 2,351,963 $ 3,100,365
================= =================
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 323,432 $ 569,981
Accrued expenses 350,289 497,537
Line of credit 189,208 348,950
Deferred revenue 410,774 354,643
Current portion of long-term debt 348,623 659,782
Current portion of capital leases 19,939 19,939
----------------- -----------------
Total current liabilities 1,642,265 2,450,832
LONG-TERM DEBT, net of current portion 25,023 --
LONG TERM PORTION OF CAPITAL LEASES & DEBT 13,208 25,719
----------------- -----------------
Total liabilities 1,680,496 2,476,551
----------------- -----------------
STOCKHOLDERS' EQUITY:
Common stock 32,162 32,162
Additional paid-in capital 9,266,159 9,266,159
Unearned ESOP shares (389,908) (391,366)
Stock subscription receivable (76,298) (95,603)
Foreign currency adjustment -- (15,910)
Accumulated deficit (8,160,647) (8,171,628)
----------------- -----------------
Total stockholders' equity 671,468 623,814
----------------- -----------------
Total liabilities and stockholders' equity $ 2,351,964 $ 3,100,365
================= =================
</TABLE>
The accompanying notes are an integral part of these financial statements.
2
<PAGE> 3
TIMELINE, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31,
1997 1996 1997 1996
(UNAUDITED) (UNAUDITED) (UNAUDITED) (UNAUDITED)
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
REVENUES:
Software license $ 283,952 $ 700,978 $ 768,138 $ 1,691,552
Software development 69,163 -- 375,014 --
Maintenance 193,717 188,574 600,379 601,674
Consulting and training 243,263 732,279 757,161 2,070,340
Other -- 9,450 8,061 50,292
------------ ------------ ------------ ------------
Total revenues 790,095 1,631,281 2,508,753 4,413,858
COST OF REVENUES: 342,475 723,984 1,135,460 1,674,720
------------ ------------ ------------ ------------
Gross profit 447,620 907,297 1,373,293 2,739,138
------------ ------------ ------------ ------------
OPERATING EXPENSES:
Sales and marketing 102,285 446,709 578,217 2,312,561
Research and development 159,422 311,492 455,721 976,424
General and administrative 259,744 533,516 1,074,798 1,446,022
Depreciation 57,000 71,567 175,403 196,920
------------ ------------ ------------ ------------
Total operating expenses 578,451 1,363,284 2,284,139 4,931,927
------------ ------------ ------------ ------------
Income (loss) from operations (130,831) (455,987) (910,846) (2,192,789)
OTHER INCOME (EXPENSE):
Gain on Sale of Timeline Europe -- -- 1,038,409 --
Interest income 2,877 1,283 4,991 14,861
Interest expense (48,388) (43,403) (121,571) (102,802)
------------ ------------ ------------ ------------
Total other income (expense) (45,511) (42,120) 921,829 (87,941)
------------ ------------ ------------ ------------
Net income (loss) $ (176,342) $ (498,107) $ 10,983 $ (2,280,730)
============ ============ ============ ============
Basic and diluted earnings per share $ (0.06) $ (0.16) $ 0.00 $ (0.78)
============ ============ ============ ============
Weighted average common and common
equivalent shares outstanding 3,130,610 3,055,283 3,195,254 2,931,477
============ ============ ============ ============
</TABLE>
The accompanying notes are an integral part of these financial statements.
3
<PAGE> 4
TIMELINE, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE NINE MONTHS ENDED DECEMBER 31, 1997 AND 1996
<TABLE>
<CAPTION>
1997 1996
(UNAUDITED) (UNAUDITED)
------------ ------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net cash (used) generated in operations $ 82,465 $ (2,146,862)
------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment (9,512) (145,303)
Capitalized software costs (217,225) (595,359)
Sales of short-term investments -- 107,174
------------ ------------
Net cash provided by (used in) investing activities (226,737) (633,488)
------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from note receivable 301,285 --
Borrowings on notes payable 192,649 350,000
Payments on notes payable (489,577) (85,788)
Payments on capital lease obligations (12,512) (60,487)
Proceeds from issuance of common stock and ESOP contributions 1,458 2,553,425
Proceeds from stock option exercises -- 1,435
Costs of secondary public offering -- (251,030)
------------ ------------
Net cash provided by (used in) financing activities (6,697) 2,507,555
------------ ------------
EFFECT OF EXCHANGE RATE CHANGES ON CASH -- (9,608)
NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS (150,969) (272,795)
CASH AND CASH EQUIVALENTS, beginning of period 187,428 284,542
------------ ------------
CASH AND CASH EQUIVALENTS, end of period $ 36,459 $ 11,747
============ ============
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the period for -
Interest $ 112,661 $ 102,583
Income taxes -- --
</TABLE>
The accompanying notes are an integral part of these financial statements
4
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TIMELINE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
DECEMBER 31, 1997
1. INTERIM FINANCIAL STATEMENTS
The accompanying consolidated financial statements of Timeline, Inc. and
subsidiary (the Company) are unaudited. In the opinion of the Company's
management, the financial statements include all adjustments, consisting only of
normal recurring adjustments, necessary to state fairly the financial
information set forth therein. Results of operations for the three and nine
month periods ended December 31, 1997 are not necessarily indicative of future
financial results.
Certain notes and other information have been condensed or omitted from the
interim financial statements presented in this Quarterly Report on Form 10-QSB.
Accordingly, these financial statements should be read in conjunction with the
Company's annual financial statements for the year ended March 31, 1997,
previously reported.
Basic and Diluted Earnings Per Share
The Company adopted SFAS No. 128, "Earnings Per Share", which was effective for
periods ending after December 15, 1997 and requires retroactive restatement of
all periods presented. Basic and diluted earnings per share was based on the
weighted average number of common shares outstanding during each period. Common
stock equivalents include shares issuable upon the exercise of outstanding stock
options or warrants. These shares are not included in the computation of net
loss per share because the effect of including such shares would be antidilutive
other than for the nine months ended December 31, 1997. In that period, common
stock equivalents of 64,644 which represent dilutive stock options are included
in the weighted average common and common stock equivalents outstanding.
2. SHAREHOLDERS' EQUITY
Changes in shareholders' equity for the period from March 31, 1997 to December
31, 1997 were as follows:
<TABLE>
<S> <C>
Shareholders' equity, March 31, 1997 $623,814
Payments on subscription receivable 19,305
Amortization of deferred compensation 1,458
Net income 10,981
Foreign currency translation adjustment 15,910
-------
Shareholders' equity, December 31, 1997 $671,468
========
</TABLE>
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
This Management's Discussion and Analysis of Financial Condition and Results of
Operations includes a number of forward-looking statements which reflect the
Company's current views with respect to 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. 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. 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 the Company's registration statements on Forms SB-2 and S-3, 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
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
December 31, December 31,
1997 1996 Change 1997 1996 Change
------------- ------------- ------------- --------------- ------------- -------------
<S> <C> <C> <C> <C> <C> <C>
(Dollars in Thousands)
Software license 284 701 (59)% 768 1,691 (55)%
Software development 69 - N/A 375 - N/A
Maintenance 194 189 2% 600 602 0%
Consulting and Other 243 742 (67)% 765 2,121 (64)%
------------- ------------- --------------- -------------
Revenues 790 1,631 (52)% 2,509 4,414 (43)%
------------- ------------- ------------- --------------- ------------- -------------
</TABLE>
All categories of revenue, other than maintenance, for the three and nine months
ended December 31, 1997 are lower than the comparable periods ended December 31,
1996, in part because beginning in the quarter ended September 30, 1997, such
amounts do not include revenues of Timeline Europe Limited, which are no longer
consolidated with those of Timeline, Inc.
Software license revenue for the quarter ended December 31, 1997 decreased over
the comparable quarter ended December 31, 1996. This is due in part to the sale
of a majority of Timeline Europe Limited, whose license revenues are no longer
reflected in the Company's financial statements. The remainder of the decrease
is due to fewer sales of licenses in the U.S. compared to the prior year period.
This decrease is consistent with the Company's greater emphasis on pursuing
sales through third party joint marketing and distribution arrangements. These
third party agreements tend to take considerable time to establish and then to
generate license revenue. Typically, once an agreement in principal is reached,
the Company will undertake some development to fully integrate its products with
those of the third party distributor. The Company and the distributor typically
will jointly finance such development. Development fees in the fiscal periods
ending in 1997 generally reflect such activity. Management continues to believe
6
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third party distribution and marketing arrangements are the most pragmatic
approach to generating license fees. This is due to the Company's lack of
capital and personnel to build an adequate direct sales force, and a belief
third party distribution should offer the prospects of higher volumes over time.
Maintenance revenue was relatively even for the comparable three and nine month
periods. This reflects continued increases in maintenance from the Company's MV
product series based on Microsoft Corporation's operating systems which are
offset by decreasing maintenance fees from licensees of Timeline's Digital based
product line. Consulting revenue decreased 67% in the comparable quarter of
fiscal 1998 and 1997. This is a direct result the elimination of consulting
revenue from Timeline Europe, the reduction in the number of U.S. employees
involved in consulting, and reduced software installation projects.
GROSS MARGIN
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
December 31, December 31,
1997 1996 Change 1997 1996 Change
------------- ------------- ------------- --------------- ------------- -------------
<S> <C> <C> <C> <C> <C> <C>
(Dollars in Thousands)
Gross profit 448 907 (51)% 1,373 2,739 (50)%
Percentage of
operating revenues 57% 56% 55% 62%
------------- ------------- ------------- --------------- ------------- -------------
</TABLE>
Changes in the Company's gross margin as a percentage of gross revenue is due in
large part to variances in the mix of higher-margin software licenses and lower
margin consulting and maintenance revenue, both of which are labor intensive.
Amortization of capitalized software costs was higher in fiscal 1998 due to a
number of new products having been completed during calendar 1996. Since the
Company starts amortization on commercial release of the products developed,
these products were amortized throughout periods ending in calendar 1997.
The actual dollar amount of gross margin decreased in both the three and six
month periods ended in fiscal 1998 over fiscal 1997 as a direct result of the
reduction in revenues.
SALES AND MARKETING EXPENSE
<TABLE>
Three Months Ended Nine Months Ended
December 31, December 31,
1997 1996 Change 1997 1996 Change
------------- ------------- ------------- --------------- ------------- -------------
<S> <C> <C> <C> <C> <C> <C>
(Dollars in Thousands)
Sales and marketing 102 447 (77)% 578 2,313 (75)%
Percentage of
operating revenues 13% 27% 23% 52%
------------- ------------- ------------- --------------- ------------- -------------
</TABLE>
Sales and marketing expenses as a percentage of operating revenues and in actual
dollar amounts decreased substantially between the periods presented. This
decrease is due to the significant reduction in sales personnel and related
expenses in the United States, and in the nine month period ended on December
31, 1997, due to the elimination of such expenses for the previously
wholly-owned Timeline Europe Limited. Management expects, based upon the
elimination of Timeline Europe Limited, favorable comparisons with prior years
will continue. However, actual dollar amounts may vary based upon the volume of
sales from quarter to quarter.
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RESEARCH AND DEVELOPMENT EXPENSE
<TABLE>
Three Months Ended Nine Months Ended
December 31, December 31,
1997 1996 Change 1997 1996 Change
------------- ------------- ------------- --------------- ------------- -------------
<S> <C> <C> <C> <C> <C> <C>
(Dollars in Thousands)
Research & development 159 311 (49)% 456 976 (53)%
Percentage of
operating revenues 20% 19% 18% 22%
------------- ------------- ------------- --------------- ------------- -------------
</TABLE>
The Company has made a strategic decision not to undertake any research and
development on new products for the time being. Research and development
expenses during the quarter ended December 31, 1997 were attributable to the
enhancement of the functionality of the current product line. In addition,
certain enhancements were funded by outside third parties. This approach is a
key undertaking in management's effort to return the Company to profitability.
Management expects the actual dollar amount of research and development expenses
will increase in future quarters if the Company is successful in its efforts to
sign distribution and private label agreements with various accounting vendors.
In such situations, the Company will be called upon to make certain
modifications to its software to meet the particular needs of its distributors
and to fully integrate the Company's products with the accounting package(s) of
the various vendors.
GENERAL AND ADMINISTRATIVE EXPENSE
<TABLE>
Three Months Ended Nine Months Ended
December 31, December 31,
1997 1996 Change 1997 1996 Change
------------- ------------- ------------- --------------- ------------- -------------
<S> <C> <C> <C> <C> <C> <C>
(Dollars in Thousands)
General & administrative
260 534 (51)% 1,075 1,446 (26)%
Percentage of
operating revenues 33% 33% 43% 33%
------------- ------------- ------------- --------------- ------------- -------------
</TABLE>
General and administrative expenses decreased 51%, and 26% respectively for the
comparable three and nine month periods ended December 31, 1997 over December
31, 1996. This decrease is a direct result of management's efforts to reduce the
workforce and related overhead expenses as well as the elimination of Timeline
Europe as a consolidated subsidiary of the Company. Management believes general
and administrative expenses should remain relatively stable over the next
several quarters except for the effect of legal and auditing fees which are
event driven.
INCOME TAX
Income taxes are provided in the statement of operations in accordance with the
liability method. The Company has determined that the tax assets generated by
the net operating losses and research and experimentation credits do not satisfy
the recognition criteria set forth under the liability method. Accordingly, a
valuation allowance is recorded against the applicable deferred tax assets and
therefore no tax benefit is recorded.
8
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In connection with the Company's initial public offering in January 1995, the
Company experienced a significant change in ownership. Under current U.S. tax
laws, such a change in ownership limits the amount of net operating loss carry
forwards and credits which may be used in any given year.
OTHER INCOME
Timeline recognized a gain on the sale of the 87.5% interest in Timeline Europe
in the amount of $1,038,409 during the quarter ended September 30, 1997. This
amount represents the elimination of Timeline's negative investment in Timeline
Europe due to Timeline Europe no longer being a consolidated subsidiary of
Timeline.
LIQUIDITY AND CAPITAL RESOURCES
The Company's cash and cash equivalent and short-term investment balances at
December 31, 1997 stood at $36,459 compared to $187,428 at March 31, 1997. The
decrease in cash is attributable to operating losses incurred in fiscal 1998.
Total obligations, excluding deferred income items, totaled $1,269,722 at
December 31, 1997. The fiscal 1998 obligations include a corporate guarantee of
a $270,833 bank note between the Timeline Employee Stock Ownership Trust and
Silicon Valley Bank. The Company is currently out of compliance with certain
debt covenants associated with the ESOP debt and has therefore classified this
debt as current. The President and CEO of the Company personally guaranteed this
debt with the bank.
Net cash provided by operating activities was $82,465 in the nine months ended
December 31, 1997. The Company funded its operating loss through collections on
accounts receivable and increases in payables.
A sale of a majority of the stock in Timeline Europe, which closed during the
September 30, 1997 quarter, provides future payments to the Company of
approximately $150,000 due in each of the quarters ending March 31st and June
30th of 1998, which debt is evidenced by a note receivable. Nevertheless, based
on current cash and cash equivalent balances, the Company expects additional
borrowings, sales of equity or debt instruments, or substantial sales of assets
will be required to fund operations during the remainder of fiscal 1998.
At December 31, 1997, the outstanding balance on the Company's line of credit
facility was $250,627. Timeline has a bank line of credit which, if it has
adequate qualified receivables, can be drawn up to $625,000. The line of credit
is based upon selling its accounts receivable with recourse. At December 31,
1997, based on the qualified receivables, the Company had approximate available
borrowings for an additional $140,333.
OTHER FACTORS THAT MAY AFFECT OPERATING RESULTS
The Company's operating results may fluctuate due to a number of factors,
including, but not limited to, the ability of the Company to develop and expand
distribution channels and to develop relationships with third-party distributors
and licensees of the Company's products, the availability of additional
financing or capital resources, the volume and timing of systems sales, changes
in the product mix of revenues, changes in the level of operating expenses, and
general economic conditions in the software industry. All of the above factors
are difficult for the Company to forecast, and can materially adversely affect
the Company's business and operating results for one quarter or a series of
quarters.
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PART II. - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
None
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
None
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
ITEM 5. OTHER INFORMATION
As previously disclosed in the Company's press release dated
November 18, 1997 and its report on Form 8-K, the Company's common
stock and warrants were delisted by Nasdaq from trading on The
Nasdaq SmallCap Market ("Nasdaq") because the Company did not meet
the minimum bid price requirement. The Company stock and warrants
began trading on the OTC Bulletin Board on November 19, 1997,
under the symbols TMLN and TMLNW, respectively.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
27.1 Financial Data Schedule.
(b) A report on Form 8-K was filed on November 20, 1997,
reporting Item 5 information relating to the delisting of
the Company's stock and warrants from trading on the
Nasdaq SmallCap Market because the Company did not meet
the minimum bid price requirement.
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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 6, 1998 By: /s/ Charles R. Osenbaugh
-------------------------------------
Charles R. Osenbaugh
President/Chief Financial Officer
Signed on behalf
of registrant and
as principal
financial officer.
11
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EXHIBITS INDEX
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
<S> <C>
27.1 Financial Data Schedule
</TABLE>
12
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> MAR-31-1998
<PERIOD-END> DEC-31-1997
<CASH> 36,459
<SECURITIES> 0
<RECEIVABLES> 818,836
<ALLOWANCES> 85,635
<INVENTORY> 0
<CURRENT-ASSETS> 1,124,905
<PP&E> 2,231,473
<DEPRECIATION> 1,681,184
<TOTAL-ASSETS> 2,351,963
<CURRENT-LIABILITIES> 1,642,265
<BONDS> 0
0
0
<COMMON> 32,162
<OTHER-SE> 639,305
<TOTAL-LIABILITY-AND-EQUITY> 2,351,964
<SALES> 768,138
<TOTAL-REVENUES> 2,508,753
<CGS> 0
<TOTAL-COSTS> 1,135,460
<OTHER-EXPENSES> 2,284,139
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 121,571
<INCOME-PRETAX> 10,983
<INCOME-TAX> 0
<INCOME-CONTINUING> 10,983
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 10,983
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
</TABLE>
