<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, 1999 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, 2000
Common Stock, $.01 Par Value 3,223,709
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<PAGE> 2
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
TIMELINE, INC.
BALANCE SHEETS
(UNAUDITED)
<TABLE>
<CAPTION>
DECEMBER 31, 1999 MARCH 31, 1999
----------------- ---------------
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 2,248,085 $ 59,453
Marketable securities - trading 788,770 -
Short-term restricted investments 4,500,000 -
Accounts receivable, net of allowance
of $133,701 and $52,010 531,627 559,666
Prepaid expenses and other 7,948 56,888
Receivable from related parties 1,249 13,567
----------- -----------
Total current assets 8,077,679 689,574
PROPERTY AND EQUIPMENT, net of accumulated
depreciation of $1,755,057 and $1,624,597 297,452 371,850
CAPITALIZED SOFTWARE COSTS, net of accumulated
amortization of $219,949 and $1,131,458 688,605 628,508
OTHER ASSETS 2,185 2,185
----------- -----------
Total assets $ 9,065,921 $ 1,692,117
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 123,435 $ 142,487
Accrued expenses 302,174 355,125
Notes payable/Line of credit - 23,705
Deferred revenue 470,759 418,827
Current portion of long-term debt - 132,578
Current portion of capital leases 6,985 10,705
----------- -----------
Total current liabilities 903,353 1,083,427
OBLIGATIONS UNDER CAPITAL LEASES, net of current portion - 4,309
----------- -----------
Total liabilities 903,353 1,087,736
----------- -----------
STOCKHOLDERS' EQUITY:
Common stock 32,238 31,946
Additional paid-in capital 9,006,071 9,070,865
Other comprehensive income 4,108,000 -
Unearned ESOP shares - (135,417)
Accumulated deficit (4,983,741) (8,363,013)
----------- -----------
Total stockholders' equity 8,162,568 604,381
----------- -----------
Total liabilities and stockholders' equity $ 9,065,921 $ 1,692,117
=========== ===========
</TABLE>
The accompanying notes are an integral part of these balance sheets
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TIMELINE, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31,
1999 1998 1999 1998
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
REVENUES:
Software license $ 248,208 $ 184,389 $ 6,048,820 $ 1,431,243
Software development 4,813 1,950 27,125 28,823
Maintenance 208,532 269,300 639,006 666,104
Consulting and other 175,611 208,186 599,624 539,419
----------- ----------- ----------- -----------
Total revenues 637,164 663,825 7,314,575 2,665,589
COST OF REVENUES: 231,755 248,963 874,248 709,585
----------- ----------- ----------- -----------
Gross profit 405,409 414,862 6,440,327 1,956,004
----------- ----------- ----------- -----------
OPERATING EXPENSES:
Sales and marketing 128,763 182,278 508,820 454,385
Research and development 277,185 149,082 888,795 513,327
General and administrative 529,598 274,696 1,708,843 965,852
Depreciation 46,072 48,287 136,847 148,496
----------- ----------- ----------- -----------
Total operating expenses 981,618 654,343 3,243,305 2,082,060
----------- ----------- ----------- -----------
Income (loss) from operations (576,209) (239,481) 3,197,022 (126,056)
----------- ----------- ----------- -----------
OTHER INCOME (EXPENSE):
Interest income 35,128 3,284 78,893 11,621
Gain on sale of securities 88,770 - 88,770 -
Other income - - 40,000 -
Interest expense (2,218) (9,467) (25,414) (50,108)
----------- ----------- ----------- -----------
Total other income (expense) 121,680 (6,183) 182,249 (38,487)
----------- ----------- ----------- -----------
Net income (loss) $ (454,529) $ (245,664) $ 3,379,271 $ (164,543)
=========== =========== =========== ===========
Basic net income (loss) per common share $ (0.14) $ (0.08) $ 1.05 $ (0.05)
=========== =========== =========== ===========
Diluted net income (loss) per common and
common equivalent share $ (0.14) $ (0.08) $ 0.96 $ (0.05)
=========== =========== =========== ===========
Shares used in calculation of basic
earnings per share 3,223,709 3,164,442 3,216,526 3,164,257
=========== =========== =========== ===========
Shares used in calculation of diluted
earnings per share 3,223,709 3,164,442 3,525,321 3,164,257
=========== =========== =========== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
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TIMELINE, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE NINE MONTHS ENDED DECEMBER 31, 1999 AND 1998
(UNAUDITED)
<TABLE>
<CAPTION>
1999 1998
----------- -----------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net cash provided by operations $ 3,761,074 $ 734,980
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment (63,064) (58,769)
Capitalized software costs (207,685) (324,128)
Purchase of marketable securities and short-term
restricted investments (1,180,770) -
Proceeds from note receivable 12,318 -
----------- -----------
Net cash used in investing activities (1,439,201) (382,897)
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Borrowings under line of credit 287,012 64,892
Payments on notes payable (132,578) (146,469)
Payments on line of credit (310,717) (211,764)
Payments on capital lease obligations (8,029) (8,029)
Proceeds from exercise of common stock warrants 31,071 -
----------- -----------
Net cash used in financing activities (133,241) (301,370)
----------- -----------
NET INCREASE IN CASH AND CASH EQUIVALENTS 2,188,632 50,713
CASH AND CASH EQUIVALENTS, beginning of period 59,453 59,022
----------- -----------
CASH AND CASH EQUIVALENTS, end of period $ 2,248,085 $ 109,735
=========== ===========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the period for -
Interest $ 22,212 $ 62,197
Income taxes - -
Non-Cash Transactions
Appreciation of available for sale securities $ 4,108,000 -
Offset of accounts receivable for purchased software 125,000 -
Retirement of unallocated ESOP shares 135,417 -
</TABLE>
The accompanying notes are an integral part of these financial statements
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TIMELINE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
DECEMBER 31, 1999
1. INTERIM FINANCIAL STATEMENTS
The accompanying financial statements of Timeline, Inc. (the Company) are
unaudited. In the opinion of the Company's management, the financial statements
include all adjustments, consisting only of normal recurring adjustments,
necessary to state fairly the financial information set forth therein. Results
of operations for the three-month and nine month periods ended December 31, 1999
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, 1999,
previously reported.
2. MARKETABLE SECURITIES
The Company invests in various marketable securities through investment accounts
with brokers. At December 31, 1999, these investments included common and
preferred stock and had a fair market value of $788,770. The Company has
classified these investments as trading securities under Statement of Accounting
Standards (SFAS) 115 as it is the Company's intent to actively buy and sell
individual securities within these investment accounts. The total unrealized
gain at December 31, 1999 was $81,890.
3. SHORT-TERM RESTRICTED INVESTMENTS
In September, 1999, the Company settled a patent infringement lawsuit filed
against Broadbase Software, Inc. As part of the settlement, the Company received
40,000 shares of Broadbase restricted common stock with a total fair market
value of $392,000. The Company is restricted from hedging or selling these
securities for a period of six months and one year, respectively, from the date
that they were received. The Company has accounted for these shares as available
for sale securities as required under SFAS 115. At December 31, 1999, the fair
market value of these securities was $4,500,000. The increase in the value of
these securities is reflected as other comprehensive income.
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4. SHAREHOLDERS' EQUITY
Changes in shareholders' equity for the period from March 31, 1999 to December
31, 1999 were as follows:
<TABLE>
<S> <C> <C> <C>
Shareholders' equity, March 31, 1999 $ 604,381
Exercise of common stock warrants 31,071
Other comprehensive income - unrealized gain on
available-for-sale securities 4,108,000
Equity-based compensation 39,845
Net income 3,379,271
----------
Shareholders' equity, December 31, 1999 $8,162,568
==========
</TABLE>
5. NET INCOME PER COMMON SHARE
Basic net income per share is the net income divided by the average number of
shares outstanding during the year. Diluted net income per share is calculated
as the net income divided by the sum of the average number of shares outstanding
during the year plus the net additional shares that would have been issued had
all dilutive options been exercised, less shares that would be repurchased with
the proceeds from such exercise (Treasury Stock Method).
The computation of diluted net income (loss) per common and common equivalent
share is as follows for the three-month and nine-month periods ended December
31:
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
December 31, December 31, December 31, December 31,
1999 1998 1999 1998
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Net income (loss) $ (454,529) $ (245,664) $ 3,379,271 $ 164,543
----------- ----------- ----------- -----------
Weighted average common shares outstanding
3,223,709 3,164,442 3,216,526 3,164,257
Plus: dilutive options and warrants - - 769,322 -
Less: shares assumed repurchased with
proceeds from exercise - - 460,528 -
----------- ----------- ----------- -----------
Weighted average common and common
equivalent shares outstanding 3,223,709 3,164,442 3,525,321 3,164,257
=========== =========== =========== ===========
Diluted net income (loss) per common and
common equivalent share $ (0.14) $ (0.08) $ 0.96 $ (0.05)
=========== =========== =========== ===========
</TABLE>
6. LITIGATION
In March 1999, the Company filed an action in the U.S. Federal District Court
for Western Washington against Sagent Technologies, Inc., seeking monetary
damages and an injunction from further unauthorized licensing of certain
products that Timeline believes infringe on Timeline's patent rights under U.S.
Patent #5,802,511. The litigation process is in the discovery phase, and the
trial is set for July 2000. 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.*
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. The
Company believes the claims made by Microsoft have no merit and
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intends to vigorously defend itself in this lawsuit. This litigation process is
in the discovery phase, and the trial is set for December 2000.
In July 1999, the Company voluntarily dismissed without prejudice a lawsuit
filed against Clarus Corporation in October 1998, in the US Federal District
Court for Western Washington. This action sought monetary damages and an
injunction against the defendant from unauthorized licensing of certain products
that Timeline believed infringed on Timeline's U.S. Patent rights under U.S.
Patent #5,802,511. The Company determined there was not sufficient sales revenue
generated by the product which was subject of this dispute to justify further
expenditures on this lawsuit.
In December 1999, Clarus Corporation sued the Company in Federal District Court
in Atlanta, Georgia, for a declaratory judgment that certain of Clarus' software
products do not infringe Timeline's U.S. Patent #5,802,511, and requesting the
`511 Patent be declared invalid. The Company intends to vigorously defend the
validity of the `511 Patent and to re-examine the relevant Clarus products to
make a determination as to any infringement on the `511 Patent.*
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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," "could",
"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. TO FACILITATE READERS IN IDENTIFYING
FORWARD-LOOKING STATEMENTS, THE COMPANY HAS ATTEMPTED TO MARK SENTENCES
CONTAINING SUCH STATEMENTS WITH A SINGLE ASTERISK (*) AND PARAGRAPHS CONTAINING
ONLY FORWARD LOOKING STATEMENTS WITH DOUBLE ASTERISKS (**). HOWEVER, NO
ASSURANCE CAN BE MADE ALL SUCH STATEMENTS HAVE BEEN IDENTIFIED. Therefore,
readers are urged to carefully review and consider the various disclosures made
by the Company in this report and in the Company's other reports previously
filed with the Securities and Exchange Commission, including the Company's
periodic reports on Forms 10-KSB and 10-QSB, and those described from time to
time in the Company's press releases and other communications, which attempt to
advise interested parties of the risks and factors that may affect the Company's
business.
RESULTS OF OPERATIONS
REVENUES
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
December 31, December 31
1999 1998 Change 1999 1998 Change
----- ----- ------- ------ ----- ------
<S> <C> <C> <C> <C> <C> <C>
(Dollars in Thousands)
Software license 248 185 34% 6,049 1,431 323%
Software development 5 2 150% 27 29 (7)%
Maintenance 209 269 (22%) 639 666 (4)%
Consulting and Other 175 208 (16%) 600 539 11%
---- ---- ------ ------
Revenues 637 664 (4%) 7,315 2,666 174%
---- ---- ----- ------ ------ ----
</TABLE>
Total operating revenues of $637,000 for the quarter ended December 31, 1999
were 4% lower than the $664,000 shown for the December 31, 1998 quarter. The
nine-month periods ended December 31, 1999 and 1998, show an increase in total
revenues of 174% from approximately $2,666,000 to approximately $7,315,000.
Software license fees grew in both the comparative quarter and nine-month
revenue numbers. This increase was due to a significant fee from licensing of
rights under US Patent No. 5,802,511 (the `511 Patent) in each of the first two
quarters of fiscal 2000. In addition, the Company received a $100,000 payment
under a licensing agreement with Navision Software a/s during the December 31,
1999 quarter.
Due to the nature of patent licensing, it is impossible to predict the timing or
amount of further licensing of the `511 Patent, if any. The Company is currently
in litigation with Sagent Technologies, Inc. wherein the Company has alleged
certain of Sagent's products infringe the `511 Patent. Management believes this
litigation will be viewed as a test case of the validity of the `511 Patent as
Sagent is vigorously defending
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<PAGE> 9
against the Company's allegations on a number of grounds, including that the
`511 Patent is invalid due to material prior art.* The Company's other software
license fees, not related to the `511 Patent, continue to be low, due in large
part to the decrease in license revenue experienced by the Company's
distribution partners. Management believes this is attributable to an
industry-wide weakness as the result of Year 2000 concerns.*
Development fee revenue of $5,000 and $2,000 in the quarters ended December 31,
1999 and 1998, respectively, and $27,000 and $29,000 for the nine month periods
ended December 31, 1999 and 1998, respectively, was not significantly different
from year to year. Software development is not a focus of revenue generation for
the Company.
Maintenance revenue reversed a five-quarter trend of modest growth. This
resulted in an overall decrease in both the comparable nine-month periods, down
4% from $666,000 in 1998 to $639,000 in 1999, and three-month periods, down 22%
from $269,000 in 1998 to $209,000 in 1999. Despite the continued increase in
maintenance revenue from the Company's product series based on Microsoft
Corporation's operating systems, it was not enough to offset a significant
decrease in maintenance fees from licensees of Timeline's older VAX-based
product line. Management believes future comparative statements between fiscal
quarters may show mixed results, dependant upon the timing of new licenses and
the expiration of existing maintenance agreements.*
Consulting and other revenue decreased 16%, from $208,000 to $175,000 in the
comparable quarters. However, it increased 11%, from $539,000 to $600,000 in the
comparable nine-month periods. The December 31, 1999 quarterly results are due
to weakness in license revenue for the later half of calendar 1999, thereby
causing a lack of billable installations in the December 1999 quarter. The
relative strength of the nine-month comparisons is reflective of a more seasoned
staff in consulting able to handle more projects when work is available. The
Company believes consulting revenue growth will be moderate at best in the short
term as it does not currently have plans to increase the headcount in
consulting.*
GROSS MARGIN
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
December 31, December 31,
1999 1998 Change 1999 1998 Change
----- ----- ------ ------- ----- --------
<S> <C> <C> <C> <C> <C> <C>
(Dollars in Thousands)
Gross margin 405 415 (2%) 6,440 1,956 229%
Percentage of
operating revenues 64% 63% 88% 73%
----- ----- ----- ----- ----- -----
</TABLE>
The 229% increase in the Company's gross margin as a percentage of gross revenue
for the nine months to date is due in large part to a significantly higher
proportionate share of higher-margin software and patent licenses over lower
margin consulting and maintenance revenue which is labor intensive. Conversely,
the lack of any significant change between the quarters ended December 31, 1999
and December 31, 1998 is reflective of a comparison between two quarters where
the mix between software license and consulting revenue was more uniform.
Amortization of capitalized software development costs for the three and
nine-month periods of fiscal 2000 was $62,000 and $273,000, respectively,
compared with $69,000 and $199,000, respectively, for the three and nine-month
periods of fiscal 1999. Capitalized software costs during the quarter ended
December 31, 1999 were $49,000.
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SALES AND MARKETING EXPENSE
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
December 31, December 31,
1999 1998 Change 1999 1998 Change
---- ---- ------ ---- ---- ------
<S> <C> <C> <C> <C> <C> <C>
(Dollars in Thousands)
Sales and marketing 129 182 (29)% 509 454 12%
Percentage of
operating revenues 20% 27% 7% 17%
---- ---- ------ ---- ---- ------
</TABLE>
Sales and marketing expenses as a percentage of gross revenue decreased from 27%
to 20% for the three months ended December 31, 1998 and 1999, and from 17% to 7%
for the nine months ended December 31, 1998 and 1999. In actual dollar amounts,
these costs increased by 12% between the nine-month periods due to commissions
and bonuses related to increased patent license revenue. However, for the
comparable three-month periods, costs actually decreased by 29%. The decrease in
both real terms and as a percentage of operating revenue reflects a temporary
reduction of personnel and associated expenses due to normal attrition. Since
management intends to replace the two employees who left the department during
the last quarter, it believes actual dollar amounts and percentage of revenue
comparisons may vary in future quarters based upon the volume of sales from
quarter to quarter.*
RESEARCH AND DEVELOPMENT EXPENSE
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
December 31, December 31,
1999 1998 Change 1999 1998 Change
---- ---- ------ ---- ---- ------
<S> <C> <C> <C> <C> <C> <C>
(Dollars in Thousands)
Research & development 277 149 86% 889 513 73%
Percentage of
operating revenues 43% 22% 12% 19%
---- ---- ------ ---- ---- ------
</TABLE>
The Company's research and development expenses during the periods ended
December 31, 1999 and 1998 were attributable solely to making software
enhancements. The increases in the quarter and nine-month periods ending
December 31, 1999 over the quarter and nine-month periods ending December 31,
1998 are due to a significant shift of work effort towards maintenance and
upgrades of software which is currently expensed. For the three and nine month
periods ended December 31, 1998, a large portion of the staff's efforts was in
the area of new products, which were capitalized for future amortization. There
was only a modest increase in staffing of three employees between the periods.
Management believes the actual dollar amount of research and development
expenses will increase only slightly in future quarters. The Company has hired
additional personnel in this area during prior quarters and feels it is well
staffed for its current and anticipated needs. Consequently, over the next
several quarters, it is anticipated that unless a major new relationship
dictates otherwise, these costs will only reflect normal increases for salary
and expense inflation. **
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GENERAL AND ADMINISTRATIVE EXPENSE
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
December 31, December 31,
1999 1998 Change 1999 1998 Change
---- ---- ------ ---- ---- ------
<S> <C> <C> <C> <C> <C> <C>
(Dollars in Thousands)
General & administrative
530 275 93% 1,709 966 77%
Percentage of
operating revenues 83% 41% 23% 36%
---- ---- ------ ---- ---- ------
</TABLE>
General and administrative expenses increased 93% and 77%, respectively, between
the comparable three-month and nine-month periods ended December 31, 1999 and
1998. This increase is a direct result of substantially increased attorneys'
fees associated with the Company's patent litigation and its litigation with
Microsoft, increased compensation levels of key personnel reflecting bonuses
paid in the quarter ended June 30, 1999, and vesting of nonqualified stock
options in the quarter ended December 31, 1999. Management believes that general
and administrative expenses should remain relatively stable over the next
several quarters.* This will continue to include substantial legal fees to
pursue enforcement of its recently granted patent rights and in defense of the
lawsuit filed against the Company by Microsoft.*
INCOME TAX
Income taxes are provided in the statement of operations in accordance with the
asset and liability method. The Company has determined that the tax assets
generated by the net operating losses and research and experimentation credits
do not satisfy the recognition criteria set forth under the liability method.
Accordingly, a valuation allowance is recorded against the applicable deferred
tax assets and therefore no tax benefit is recorded.
In connection with the Company's initial public offering in January 1995, the
Company experienced a significant change in ownership, which limits the amount
of net operating loss carry forwards and credits which may be used in any given
year. However, the Company does not expect this to be a factor in fiscal 2000.*
LIQUIDITY AND CAPITAL RESOURCES
The Company's cash and cash equivalent and short-term investment balances at
December 31, 1999 stood at approximately $3,037,000 compared to approximately
$59,000 at March 30, 1999. The increase in cash is attributable to two
substantial one-time patent license fees received during the nine months ended
December 31, 1999. Total obligations, excluding deferred income items, were
approximately $433,000 at December 31, 1999 as compared to approximately
$669,000 at March 31, 1999. The March 31, 1999 obligations included a corporate
guarantee of a $104,000 bank note between the Timeline Employee Stock Ownership
Trust and Silicon Valley Bank. This note was fully paid prior to June 30, 1999.
Net cash generated in operating activities was approximately $3,761,000 in the
nine-month period ended December 31, 1999. This was primarily due to the Company
generating net income offset by payment of current liabilities. The Company used
approximately $1,439,000 for investing activities of which $1,181,000, net of
sales of those securities, was invested in short-term securities and
approximately $133,000 for financing activities.
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<PAGE> 12
In September 1999, the Company settled a patent infringement lawsuit filed
against Broadbase Software, Inc. in the U.S. Federal District Court for Western
Washington. Under the agreement reached between the parties, Broadbase has
licensed the Timeline technology covered under U.S. Patent #5,802,511 for a
license fee of $602,000, of which $210,000 was cash and the remainder was
restricted stock. An additional $40,000 in cash was received from Broadbase and
was recorded as other income. The 40,000 shares of Broadbase restricted common
stock was recorded at a value of $9.80 per share as of the date of the licensing
agreement, or $392,000 in total. At December 31, 1999, the reported value of
Broadbase's publicly traded common stock had increased to $112.50 per share. As
a result, at December 31, 1999, the Company had $4,500,000 of investments in
Broadbase securities. The Company is restricted from selling these securities
for a period of one year from the date they were received.
Based on current cash and cash equivalent balances, the Company believes it has
adequate resources to fund operations during fiscal 2000.*
At December 31, 1999, there was no outstanding balance on the Company's line of
credit facility. Timeline has a bank line of credit of up to $500,000 secured by
qualified accounts receivable. As of December 31, 1999, the Company had
approximately $500,000 available on this line of credit, based upon qualified
accounts receivable.
On January 18, 2000, the Company's 1,000,000 publicly-traded warrants and
221,125 underwriter's warrants which were issued in the initial public offering
expired by their terms without being exercised.
In February 1998, the Company sold a warrant to acquire up to 300,000 shares of
its common stock to Infinium Software, Inc. at an exercise price of $1.00 per
share. Infinium Software, Inc. paid the Company $100,000 for this warrant. On
February 4, 2000, Infinium exercised the warrant in full.
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 continue to develop
and expand distribution channels and to develop relationships with third-party
distributors and licensees of the Company's products, the ability of the Company
to integrate its products with those of its third-party distributors and
licensees, the ability of the Company to hire qualified sales and marketing
personnel and to generate revenue from such sales and marketing personnel, the
highly competitive labor market in the software industry, the outcome and costs
of the litigation involving Microsoft Corporation and of pursuing patent
litigation against third parties, the availability of additional financing or
capital resources, the volume and timing of systems sales and licenses,
reductions in the size or volume of maintenance contracts with clients, changes
in the product mix of revenues, issues relating to the Year 2000 problem
including the impact on new sales and licensing agreements, 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.**
YEAR 2000 COMPLIANCE
The Company experienced no material issues or problems as a result of the
transition into the year 2000 with regard to internal operations or the
Company's software products. The Company will continue to monitor its software
products to ensure no problems arise either with regard to Leap Year or Y2K
issues, but anticipates no material additional costs.*
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<PAGE> 13
The statements in the following section include "Year 2000 readiness disclosure"
within the meaning of the Year 2000 Information and Readiness Act. The Company
undertook a plan to address the potential impact to its business of "Year 2000
issues" (i.e., issues that may have occurred as a result of computer programs
that use only the last two, rather than all four, digits of the year). The plan
addressed Internal Matters, which were under the Company's operation and over
which the Company exercised some control, and External Matters, which were
outside the Company's control and influence.
INTERNAL MATTERS. The Company's review of Internal Matters fell into two
categories which are identified and addressed separately below.
Computer Hardware and Software:
1. The Y2K compliance status of the Microsoft products used by the Company is
found at http://www.microsoft.com/technet/topics/year2k/default.htm. All
products used by the Company are deemed compliant by Microsoft with one
exception. Microsoft Access 2.0 requires an update be applied in order to
pass Microsoft's Y2K compliance test. However, the Company's use of Access
2.0 as required for its Financial Server products has been tested and it is
the Company's belief that Financial Server using Access 2.0 is Y2K
compliant.
2. The DEC VAX system and a DEC AXP system run OpenVMS. The AXP has been
upgraded to V7.1. Compaq's Y2K position on OpenVMS V7.1 (compliant) is
stated at http://www.openvms.digital.com/openvms/products/year2000/
index.html. The upgrade of the VAX, BASIC compiler and the C Compiler was
completed during calendar year 1999.
3. PC hardware. The Company completed all necessary upgrades of its PC
hardware.
4. Various other software packages. Certain employees of the Company require
software products to assist them in their jobs. The review of the products
identified to date is completed.
5. An assessment of printers, modems and other computer hardware has been
completed.
The cost for the upgrades listed above and any replacements did not exceed
$25,000. The Company funded Year 2000 upgrades and changes through operating
cash flow and indebtedness.
Timeline Software Products:
The Company's current versions of its products and services are designed to be
Year 2000 compliant. Following is a list showing the current version number of
the software products that are believed to be Year 2000 compliant:
Vax/Alpha Version 6.0
Financial Analytics Version 2.5 and higher
MV Server Versions 2.4d and 2.5c
Analyst 1.5 compatible suite(1)
Third-Party Alliance Partner Filters
(1) Designed to be Y2K compliant, but no testing performed. Upgrade
recommended to Financial Analytics
The Company recognizes that certain customers may have made custom,
site-specific changes to software provided by the Company. The Company cannot
assess the number or nature of such customizations nor their Y2K compliance. To
the extent the customization work was performed by the Company, customers may
request a review and, if possible, an upgrade to the customization on a time and
materials basis.
13
<PAGE> 14
While the Company's above-listed products have been released as Year 2000
compliant, certain customers may not have upgraded to these versions. The
Company believes that its internal systems, products and services are currently
Year 2000 compliant and a re-testing of the current release of the software
revealed no Year 2000 compliance issues. To date, the Company experienced no
material issues or problems as a result of the transition into the year 2000.
However, there can be no assurances that the Company's products and systems
contain all necessary date codes. In addition, there can be no guarantee that
the systems of other companies on which the Company relies or with whom it does
business are Year 2000 compliant and will not have an adverse effect on the
Company's business.*
Timeline makes no representation or warranty as to, and will not address, the
Year 2000 readiness of any hardware, firmware, software, services protocols,
data, interfaces to third party systems, or user-customized functions or
features that may be used with Timeline software other than those Company
products discussed above. The Company does not plan to test any products other
than the current version and will not provide Year 2000 support for any products
other than those identified on the list. The information contained on the list
is based on data available to the Company at the time of its preparation. From
time to time, Timeline may change the information on the list without notice to
the customer.
The Company's cost to date for upgrading its products to be Year 2000 compliant
is approximately $160,000. These costs have been incurred over a several year
period and have been funded by operating cash flow. The Company anticipates no
material additional costs.*
EXTERNAL MATTERS. The Company reviewed External Matters which are outside the
Company's control and influence. This process consisted of a determination of
the customer and supplier relationships and third-party alliance partners that
could have a potential material impact upon the Company and its ongoing
operations. Confirmation of Y2K compliance was received from the building
management with regard to building systems, the telephone system and service
providers, and the Company's business equipment such as copiers, postage and fax
machines. The Company will continue to monitor its third-party alliance partners
with regard to their Year 2000 compliance status and any compatibility issues
that may arise.*
Although there can be no assurance that Year 2000 problems resulting from
customer, supplier or third-party alliance partner relationships will not have a
material adverse impact on the Company, the Company believes it has adequate
contingency planning in place to mitigate any such adverse impact.*
To date, the Company has incurred expenses of less than $20,000, and does not
anticipate future material costs.*
Although the Company believes that it has an effective plan in place that will
resolve any Year 2000 or Leap Year issues in a timely manner, the Company may be
adversely impacted if its monitoring of its software products indicate Year 2000
or Leap Year processing problems, or if third parties do not complete the
necessary remediation, in which case the Company could be subject to
interruption of its normal business activities, including its ability to meet
product development deadlines, maintain consulting schedules, generate revenue
through third-party alliance partners, deliver software to customers, invoice
customers, collect payments or engage in similar business activities. Such an
event could result in a material adverse effect on the Company's revenues or in
litigation surrounding such business interruptions. In addition, disruptions in
the economy generally resulting from Year 2000 or Leap Year issues could
materially adversely affect the Company. The amount of potential liability and
revenues cannot reasonably be estimated at this time.**
14
<PAGE> 15
PART II. - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
In March 1999, the Company filed an action in the U.S. Federal
District Court for Western Washington against Sagent Technologies,
Inc., seeking monetary damages and an injunction from further
unauthorized licensing of certain products that Timeline believes
infringe on Timeline's patent rights under U.S. Patent #5,802,511.
The litigation process is in the discovery phase, and the trial is
set for July 2000. 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.*
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. The Company believes the
claims made by Microsoft have no merit and intends to vigorously
defend itself in this lawsuit. This litigation process is in the
discovery phase, and the trial is set for December 2000.
In July 1999, the Company voluntarily dismissed without prejudice
a lawsuit filed against Clarus Corporation in October 1998, in the
US Federal District Court for Western Washington. This action
sought monetary damages and an injunction against the defendant
from unauthorized licensing of certain products that Timeline
believed infringed on Timeline's U.S. Patent rights under U.S.
Patent #5,802,511. The Company determined there was not sufficient
sales revenue generated by the product which was subject of this
dispute to justify further expenditures on this lawsuit.
In December 1999, Clarus Corporation sued the Company in Federal
District Court in Atlanta, Georgia, for a declaratory judgment
that certain of Clarus' software products do not infringe
Timeline's U.S. Patent #5,802,511, and requesting the `511 Patent
be declared invalid. The Company intends to vigorously defend the
validity of the `511 Patent and to re-examine the relevant Clarus
products to make a determination as to any infringement on the
`511 Patent.*
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
27.1 Financial Data Schedule
(b) No reports on Form 8-K were filed during the three months
ended December 31, 1999.
15
<PAGE> 16
SIGNATURES
In accordance with the requirements of the Exchange Act, the registrant caused
this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
Timeline, Inc.
(Registrant)
Date: February 9, 2000 By: /s/ Charles R. Osenbaugh
--------------------------------------
Charles R. Osenbaugh
President/Chief Financial Officer
Signed on behalf of registrant and
as principal financial officer.
16
<PAGE> 17
EXHIBITS INDEX
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
<S> <C>
27.1 Financial Data Schedule
</TABLE>
17
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS FINANCIAL INFORMATION EXTRACTED FROM THE UNAUDITED
DECEMBER 31, 1999 FINANCIAL STATEMENTS AND IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> MAR-31-2000
<PERIOD-END> DEC-31-1999
<CASH> 2,248,085
<SECURITIES> 788,770
<RECEIVABLES> 665,328
<ALLOWANCES> 133,701
<INVENTORY> 0
<CURRENT-ASSETS> 8,077,679
<PP&E> 2,052,509
<DEPRECIATION> 1,755,057
<TOTAL-ASSETS> 9,065,921
<CURRENT-LIABILITIES> 903,353
<BONDS> 0
0
0
<COMMON> 32,238
<OTHER-SE> 8,130,330
<TOTAL-LIABILITY-AND-EQUITY> 9,065,921
<SALES> 6,048,820
<TOTAL-REVENUES> 7,314,575
<CGS> 0
<TOTAL-COSTS> 874,248
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 25,414
<INCOME-PRETAX> 3,379,271
<INCOME-TAX> 0
<INCOME-CONTINUING> 3,379,271
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 3,379,271
<EPS-BASIC> 1.05
<EPS-DILUTED> 0.96
</TABLE>
