U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[x] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1998.
[ ] TRANSITION REPORT UNDER SECTION 13 or 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
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Commission File Number 0-16376
TIMBERLINE SOFTWARE CORPORATION
(Exact name of registrant as specified in its charter)
Oregon 93-0748489
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
15195 N.W. Greenbrier Parkway, Beaverton, Oregon 97006-5701
(Address of principal executive offices) (Zip code)
(503) 690-6775
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 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 [ ]
At November 10, 1998, approximately 9,401,000 shares of common stock of the
registrant were outstanding, after giving effect to the four-for-three stock
split declared by the registrant's Board of Directors to shareholders of record
on October 30, 1998 and payable on November 20, 1998.
<PAGE>
TIMBERLINE SOFTWARE CORPORATION
FORM 10-Q FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 1998
TABLE OF CONTENTS
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PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed balance sheets, September 30, 1998 and
December 31, 1997 ............................... 3
Condensed statements of operations for the three
months ended September 30, 1998 and 1997......... 4
Condensed statements of operations for the nine
months ended September 30, 1998 and 1997......... 5
Condensed statements of cash flows for the nine
months ended September 30, 1998 and 1997......... 6
Notes to condensed financial statements............ 7
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operation................. 10
PART II. OTHER INFORMATION
Item 2. Changes in Securities and Use of Proceeds.......... 17
Item 6. Exhibits and Reports on Form 8-K................... 17
SIGNATURES................................................... 17
EXHIBIT INDEX................................................ 18
<PAGE>
PART I. Financial Information
Item 1. Financial Statements
TIMBERLINE SOFTWARE CORPORATION
CONDENSED BALANCE SHEETS
SEPTEMBER 30, 1998 AND DECEMBER 31, 1997
(Amounts in thousands)
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<TABLE>
<CAPTION>
September 30, December 31,
1998 1997
----------- -----------
<S> <C> <C>
ASSETS
- ------
Current assets:
Cash and cash equivalents $ 6,689 $ 5,050
Temporary investments 5,126 5,195
Accounts receivable, less allowance
for doubtful accounts
(September 30, 1998, $188;
December 31, 1997, $199) 4,382 4,303
Inventories 272 241
Other current assets 859 1,027
----------- -----------
Total current assets 17,328 15,816
----------- -----------
Property and equipment 22,875 12,671
Less accumulated depreciation
and amortization 5,576 5,186
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Property and equipment - net 17,299 7,485
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Capitalized software costs - net 1,442 1,634
Purchased software - net 1,096 709
Other assets 92 110
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Total $37,257 $25,754
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
- ------------------------------------
Current liabilities:
Accounts payable $ 1,446 $ 1,440
Income taxes payable 114 166
Deferred revenues 9,022 7,503
Accrued employee expenses 1,752 1,861
Other current liabilities 774 507
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Total current liabilities 13,108 11,477
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Construction loan 5,555 -
Accrued rent expense 31 46
Deferred income taxes 962 965
Shareholders' equity:
Common stock, without par value
authorized, 20,000 shares;
issued - September 30, 1998, 9,400
shares; December 31, 1997,
9,304 shares 376 372
Additional paid in capital 3,571 2,907
Unrealized net gain on investments 19 17
Retained earnings 13,635 9,970
----------- -----------
Total shareholders' equity 17,601 13,266
----------- -----------
Total $37,257 $25,754
=========== ===========
</TABLE>
See notes to condensed financial statements.
<PAGE>
TIMBERLINE SOFTWARE CORPORATION
CONDENSED STATEMENTS OF OPERATIONS
FOR THE THREE MONTHS ENDED SEPTEMBER 30, 1998 AND 1997
(Amounts in thousands,except per share data)
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<TABLE>
<CAPTION>
1998 1997
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<S> <C> <C>
Net revenue:
Computer software $ 6,360 $ 4,715
Service fees 4,464 3,933
Other 254 147
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Net revenue 11,078 8,795
---------- ----------
Cost and expenses:
Cost of revenue 964 840
Customer support 2,177 1,785
Product development 2,366 1,855
Sales and marketing 1,755 1,509
General and administrative 1,185 1,169
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Total cost and expenses 8,447 7,158
---------- ----------
Income from operations 2,631 1,637
Other income 109 114
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Income before income taxes 2,740 1,751
Provision for income taxes 1,014 514
---------- ----------
Net income $ 1,726 $ 1,237
========== ==========
Earnings per share:
Basic $ 0.18 $ 0.13
Diluted 0.18 0.13
See notes to condensed financial statements.
</TABLE>
<PAGE>
TIMBERLINE SOFTWARE CORPORATION
CONDENSED STATEMENTS OF OPERATIONS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1998 AND 1997
(Amounts in thousands,except per share data)
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<TABLE>
<CAPTION>
1998 1997
---------- ----------
<S> <C> <C>
Net revenue:
Computer software $17,038 $12,766
Service fees 13,076 11,180
Other 807 582
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Net revenue 30,921 24,528
---------- ----------
Cost and expenses:
Cost of revenue 2,802 2,671
Customer support 6,195 4,940
Product development 6,600 5,397
Sales and marketing 4,923 4,578
General and administrative 3,679 3,426
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Total cost and expenses 24,199 21,012
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Income from operations 6,722 3,516
Other income 436 322
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Income before income taxes 7,158 3,838
Provision for income taxes 2,650 1,286
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Net income $ 4,508 $ 2,552
========== ==========
Earnings per share:
Basic $ 0.48 $ 0.28
Diluted 0.46 0.27
See notes to condensed financial statements.
</TABLE>
<PAGE>
TIMBERLINE SOFTWARE CORPORATION
CONDENSED STATEMENTS OF CASH FLOWS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1998 AND 1997
(Amounts in thousands)
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<TABLE>
<CAPTION>
1998 1997
---------- ----------
<S> <C> <C>
Net cash provided by
operating activities $ 7,299 $ 4,960
---------- ----------
Cash flows from investing activities:
Payments for property,
equipment and purchased software (9,800) (3,811)
Capitalized software costs (174) (664)
Proceeds from investments 5,640 2,410
Purchase of investments (5,569) (4,508)
Other 17 8
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Net cash used in investing
activities (9,886) (6,565)
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Cash flows from financing activities:
Construction loan proceeds 4,400 -
Proceeds from issuance of
common stock 669 509
Dividends paid (843) (553)
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Net cash provided by (used in)
financing activities 4,226 (44)
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Net increase (decrease) in cash
and cash equivalents 1,639 (1,649)
Cash and cash equivalents,
beginning of the year 5,050 3,129
---------- ----------
Cash and cash equivalents,
end of period $ 6,689 $ 1,480
========== ==========
Supplemental information:
Cash paid during the period for
income taxes $ 2,302 $ 1,045
========== ==========
Non-cash investing and financing
activity:
Property and equipment purchases to be
financed through construction loan $ 1,223 $ -
========== ==========
See notes to condensed financial statements.
</TABLE>
<PAGE>
TIMBERLINE SOFTWARE CORPORATION
NOTES TO CONDENSED FINANCIAL STATEMENTS
(Amounts in thousands)
1. Condensed financial statements
Certain information and note disclosures normally included in financial
statements prepared in accordance with generally accepted accounting
principles have been omitted from these condensed financial statements.
These condensed financial statements should be read in conjunction with
the financial statements and notes thereto included in the Company's
Form 10-KSB for the year ended December 31, 1997. The balance sheet at
December 31, 1997 has been condensed from the audited balance sheet as
of that date. The results of operations for the three and nine month
periods ended September 30, 1998 and 1997 are not necessarily
indicative of the operating results for the full year.
In the opinion of management, all adjustments, consisting of normal
recurring adjustments, have been made to present fairly the Company's
financial position at September 30, 1998 and the results of its
operations for the three and nine months, and its cash flows for the
nine months, ended September 30, 1998 and 1997.
2. Recent accounting pronouncement
In September 1997, the Financial Accounting Standards Board (FASB)
issued Statement of Financial Accounting Standards(SFAS) No. 131,
"Disclosures about Segments of an Enterprise and Related Information,"
which established standards for disclosure about operating segments in
annual financial statements and selected information about operating
segments in interim financial statements. It also established standards
for related disclosure about products and services, geographic areas,
and major customers. This standard is effective commencing with the
Company's annual financial statements for the year ending December 31,
1998. Selected information about operating segments is not required for
interim financial statements issued in 1998. The Company has not yet
completed its analysis of the specific additional information required
under this new standard, but believes that any segment information
required to be disclosed under SFAS No. 131 will provide expanded
disclosure about operating statement and balance sheet items.
3. Construction loan
Construction of the Company's new corporate headquarters, expected to
be completed by the end of October 1998, is being financed through a
combination of existing cash balances, temporary investments, and a
construction loan. Commencing in April 1998, some of the construction
costs have been paid from advances received under a construction loan
agreement entered into by the Company in December 1997. Because the
Company has the intent and the ability to finance construction costs on
<PAGE>
TIMBERLINE SOFTWARE CORPORATION
NOTES TO CONDENSED FINANCIAL STATEMENTS (continued)
(Amounts in thousands)
a long-term basis, construction costs paid, or to be paid, from
advances received under the construction loan agreement have been
recorded as a long-term liability.
4. Earnings per share
There were no adjustments to net income in computing diluted earnings
per share for the three and nine month periods ended September 30, 1998
and 1997. A reconciliation of the common shares used in the denominator
for computing basic and diluted earnings per share for the three and
nine month periods ended September 30, 1998 and 1997 is as follows:
Three Months Ended
September 30,
1998 1997
------- -------
Weighted-average shares outstanding,
used in computing basic earnings
per share 9,399 9,260
Effect of dilutive stock options 337 392
------- -------
Weighted-average shares outstanding,
used in computing diluted earnings
per share 9,736 9,652
======= =======
Nine Months Ended
September 30,
1998 1997
------- -------
Weighted-average shares outstanding,
used in computing basic earnings
per share 9,367 9,196
Effect of dilutive stock options 339 372
------- -------
Weighted-average shares outstanding,
used in computing diluted earnings
per share 9,706 9,568
======= =======
<PAGE>
TIMBERLINE SOFTWARE CORPORATION
NOTES TO CONDENSED FINANCIAL STATEMENTS (continued)
(Amounts in thousands)
5. Comprehensive income
In September 1997, the FASB issued SFAS No. 130, "Reporting
Comprehensive Income," which established standards for reporting
comprehensive income and its components. The Company adopted this
standard on January 1, 1998. Statements of comprehensive income for the
three and nine month periods ended September 30, 1998 and 1997 are not
presented because the difference between net income and comprehensive
income is not material. There was a $7 and $2 increase in unrealized
net gain on investments which increased net income to arrive at
comprehensive income of $1,733 and $4,510 for the three and nine month
periods ended September 30, 1998, respectively. For the three and nine
month periods ended September 30, 1997, there was an increase of $8 and
$29 in unrealized net gain on investments which increased net income to
arrive at comprehensive income of $1,245 and $2,581 for each of those
periods, respectively.
6. Common stock
At the annual meeting of the Company's shareholders on April 28, 1998,
the shareholders approved an increase in the number of authorized
shares of the Company from 8,000 shares to 20,000 shares.
Additionally, the Company's shareholders approved an incentive stock
plan for the purpose of retaining and attracting the services of key
employees, officers and directors, as well as other persons who are
integral to the ongoing success of the Company. The plan, which is
nearly identical to the stock incentive plan approved by the
shareholders in 1993, provides for the granting of various stock
options, stock appreciation rights and stock bonuses. The plan will be
administered by the compensation committee of the Company's Board of
Directors which will determine the terms and conditions of the various
grants awarded under the plan. There are 667 shares reserved under this
plan.
On October 21, 1998, the Company's Board of Directors approved a
four-for-three stock split to shareholders of record on October 30,
1998 and payable on November 20, 1998. All common shares and per share
amounts in these financial statements have been retroactively adjusted
to reflect this change.
<PAGE>
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations
TIMBERLINE SOFTWARE CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
(Amounts in thousands, except percent amounts and per share data)
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Forward-Looking Statements
- --------------------------
From time to time, the Company or its representatives have made or may make
forward-looking statements, orally or in writing, including in this Report. Such
forward-looking statements may be included in, without limitation, press
releases, oral statements made with the approval of an authorized executive
officer of the Company and filings with the Securities and Exchange Commission.
The words or phrases "anticipates," "believes," "expects," "intends," "will
continue," "estimates," "projects," or similar expressions are intended to
identify "forward-looking statements" within the meaning of the Private
Securities Litigation Reform Act of 1995.
The Company's forward-looking statements are subject to certain risks, trends,
and uncertainties that could cause actual results to vary materially from
anticipated results (including, without limitation, delays in new product
releases, delays in acceptance of the Company's products in the marketplace,
failures by the Company's outside vendors to perform as promised, changes in the
software operating systems for which the Company's products are written or
increased competition and changes in general market conditions), as well as
factors discussed in Exhibit 99, filed with the Company's Form 10-Q for the
quarterly period ended June 30, 1998, which is incorporated herein by reference.
Should any one or more of these risks or uncertainties materialize, or should
any underlying assumptions prove incorrect, actual results may vary materially
from those discussed herein as expected, believed, estimated, intended or
anticipated.
Results of Operations
- ---------------------
NET REVENUE. Net revenue increased 26 percent to $11,078 for the three months
ended September 30, 1998 compared to $8,795 for the comparable period in 1997.
Both major components of net revenue, computer software sales and service fees,
increased in 1998. Computer software sales increased 35 percent to $6,360 in the
1998 period from $4,715 in the 1997 period. Software sales increased in all
product lines, but primarily from sales of the Company's Gold Collection for
Construction Accounting, the Company's Windows-based accounting software. The
Company believes this increase is due in part to the continuing strength in the
construction industry and, to a lesser extent, the need for companies to upgrade
or replace existing computer software which is not Year 2000 compliant.
Additionally, software sales for the three months ended September 30, 1998
<PAGE>
included sales from software products that were not available during the same
period in 1997. These new products included Accounts Receivable, released in
December 1997 and the Billing module, released in May 1998, both for the Gold
Collection for Construction Accounting, and the Precision Collection Extended
Edition, which was released in September 1997. Computer software sales
represented 57 percent of net revenue in the three months ended September 30,
1998 compared to 54 percent for the same period in 1997. The Company believes
that computer software sales, as a percentage of net revenue, will likely
continue at its present level for the remainder of 1998.
Service fees from maintenance, support, consulting and training, which
represented 40 percent and 45 percent of net revenue for the three months ended
September 30, 1998 and 1997, respectively, increased 14 percent to $4,464 in the
1998 period from $3,933 for the comparable period in 1997. The increase was
principally due to the continuing increase in the Company's user base through
new product sales. Maintenance and support fees, which comprise 77 percent of
service fees for the three months ended September 30, 1998, increased 10 percent
and consulting and training fees increased 28 percent over the 1997 period. The
Company anticipates that service fees will continue to represent a significant,
but not necessarily an increasing, percentage of net revenue.
For the nine months ended September 30, 1998, net revenue increased 26 percent
to $30,921 from $24,528 for the comparable period in 1997. Computer software
sales increased 33 percent to $17,038 for the first nine months of 1998 from
$12,766 for the same period in 1997. Software sales increased in all product
lines, but primarily from sales of Gold Collection for Construction Accounting.
Part of the increased sales was due to the availability of new software products
in 1998 which were not available, or available only part of the period, for sale
during the first nine months of 1997. These products included Gold Collection
for Property Management, released in March 1997, Precision Collection Extended
Edition, released in September 1997, Accounts Receivable module, released in
December 1997 and a new Billing module, released in May 1998. The Company
believes that the strong economic condition of the construction industry was a
key factor for the increase in software sales in 1998 over 1997. The Company
also believes the need for companies to upgrade or replace their existing
software which is not Year 2000 compliant contributed, to a lesser extent, to
the increased sales. Software sales represented 55 percent of net revenue for
the nine months ended September 30, 1998 compared to 52 percent for the same
period in 1997.
Service fees, which represented 42 percent and 46 percent of net revenue for the
nine months ended September 30, 1998 and 1997, respectively, increased 17
percent to $13,076 for the 1998 period compared to $11,180 for the comparable
period in 1997. The increase was principally due to the increase in the
Company's user base through new product sales.
COST OF REVENUE. Cost of revenue, as a percentage of net revenue, was nine
percent for the three and nine months ended September 30, 1998 compared to 10
percent and 11 percent, respectively, for the comparable periods in 1997. The
<PAGE>
decrease in this percentage was primarily due to lower documentation and
fulfillment costs associated with software sales and software releases to users
on annual maintenance contracts. The decrease in these costs was partially
offset by an increase in costs associated with consulting and training. The
Company believes that cost of revenue, as a percentage of net revenue, will
remain at similar levels for the remainder of 1998.
OPERATING EXPENSES. Operating expenses increased 18 percent to $7,483 for the
three months ended September 30, 1998 from $6,318 for the comparable period in
1997. For the nine months ended September 30, 1998, operating expenses increased
17 percent to $21,397 from $18,341 for the same period in 1997. The increases
were primarily due to higher planned activities in the customer support and
product development areas.
Customer support expenses increased 22 percent to $2,177 for the three months
ended September 30, 1998 from $1,785 for the same period in 1997. For the nine
months ended September 30, 1998, these expenses increased 25 percent to $6,195
from $4,940 for the comparable period in 1997. The increases were primarily due
to additional personnel hired during 1998 to handle the increased demands for
support and consulting services as a result of the continuing increase in
Accounting software sales. The Company anticipates that customer support
expenses will continue to increase in order to meet the demands of its customers
and to maintain a high quality level of support.
Product development expenses increased 28 percent to $2,366 for the three months
ended September 30, 1998 from $1,855 for the comparable period in 1997. These
expenses increased 22 percent to $6,600 for the nine months ended September 30,
1998 from $5,397 for the same period in 1997. The increases were primarily due
to increased personnel costs for designing, developing and testing enhancements
to the Company's existing software products, as well as ongoing research for
future products. Additionally, capitalized software costs related to new
software products being developed, which reduce the amount of product
development expenses during the period, were only $21 for the three months ended
September 30, 1998 compared to $318 for the same period in 1997. For the nine
months ended September 30, 1998, capitalized software costs were $174 compared
to $664 for the comparable period in 1997. The Company expects overall product
development expenses to remain above its 1997 level for the remainder of 1998.
Sales and marketing expenses increased 16 percent to $1,755 for the three months
ended September 30, 1998 from $1,509 for the same period in 1997. For the nine
months ended September 30, 1998, these expenses increased eight percent to
$4,923 from $4,578 for the comparable period in 1997. As a percentage of net
revenue, these expenses decreased to 16 percent for the three months ended
<PAGE>
September 30, 1998 from 17 percent for the same period in 1997. For the nine
months ended September 30, 1998 and 1997, these percentages were 16 percent and
19 percent, respectively. The increased expenses for the three months ended
September 30, 1998 over the comparable period in 1997 were primarily due to
increased advertising and international marketing expenses. The increased
expenses for the nine months ended September 30, 1998 were primarily due to an
increase in advertising and trade show expenses, and higher personnel costs in
marketing. General and administrative expenses increased one percent to $1,185
for the three months ended September 30, 1998 from $1,169 for the comparable
period in 1997. For the nine months ended September 30, 1998, these expenses
increased seven percent to $3,679 from $3,426 for the same period in 1997. Those
increases were primarily due to an increase in insurance, legal and other
professional services expenses. As a percentage of net revenue, general and
administrative expenses decreased to 11 percent for the three months ended
September 30, 1998 from 13 percent for the same period in 1997. For the nine
months ended September 30, 1998 and 1997, these percentages were 12 percent and
14 percent, respectively.
PROVISION FOR INCOME TAXES. The Company's effective tax rate was 37 percent for
the three and nine month periods ended September 30, 1998. For the three and
nine month periods ended September 30, 1997, the effective tax rate was 29
percent and 34 percent, respectively. The provision for income taxes was based
on the Company's estimate of the effective tax rate for each of the respective
years.
A combination of factors caused the increase in the effective income tax rate in
1998. The lower tax rates in 1997 were primarily due to the enactment of
legislation in August 1997 to extend the federal research and development tax
credit from June 1, 1997 through June 30, 1998. Additionally, the state of
Oregon reduced the effective rate of its corporate excise tax for 1997 due to a
state budget surplus. As a result, the Company lowered its estimate of the
effective tax rate for 1997, which was reflected in the provision for income
taxes for the three and nine month periods ended September 30, 1997. The
Company's estimated effective income tax rate for 1998 takes into account
federal research and development credit available through June 30, 1998.
Capital Resources and Liquidity
- -------------------------------
During the nine months ended September 30, 1998, net cash provided by operations
was $7,299 compared to $4,960 for the same period in 1997. This increase was
primarily due to the increase in the Company's net income in the 1998 period
compared to the same period in 1997. Working capital decreased slightly to
$4,220 at September 30, 1998 from $4,339 at December 31, 1997. Net accounts
receivable at September 30, 1998 increased $79 compared to December 31, 1997.
DSO (Days Sales Outstanding) at September 30, 1998, compared to DSO at
December 31, 1997, remained constant at 36. Net property and equipment has
increased $9,814 since December 31, 1997 primarily due to $9,830 of additional
costs incurred during the first nine months of 1998 in connection with the
construction of the Company's new corporate headquarters. The Company has also
<PAGE>
purchased computer equipment for additional personnel and to replace older
computer equipment. Purchased software increased $387 primarily due to
additional costs incurred related to the Company's internal management
information system.
Deferred revenues at September 30, 1998 increased $1,519 compared to
December 31, 1997 primarily due to an increase in the billings for annual
maintenance and support services. Revenue from annual maintenance and support
service billings are recognized monthly over the terms of the contracts. An
increase in deferred revenue related to training fees also contributed to the
increase. Accrued employee expenses decreased $109 since December 31, 1997
primarily due to lower amounts accrued for profit sharing and the Company's
contribution to its 401(k) plan. Because the Company pays these expenses
subsequent to year-end, accrued employee expenses at December 31, 1997 include
those expenses for a full year, compared to only nine months of those expenses
at September 30, 1998.
Construction loan of $5,555 at September 30, 1998 represents amounts borrowed
under the construction loan agreement dated December 1997 and other construction
costs incurred which are intended to be financed under this loan agreement for
the construction of the Company's new corporate offices, which is expected to be
completed by the end of October 1998. The Company has the intent and the ability
to finance borrowings under the construction loan on a long-term basis. There
were no borrowings under the construction loan agreement at December 31, 1997.
During the first nine months of 1998, the Company declared three regular cash
dividends totaling $843, or $.09 per share, after giving effect to the
subsequent four-for-three stock split (see Note 6 of Notes to Condensed
Financial Statements). All common shares and per share amounts in this report
have been retroactively adjusted to reflect this change. In October 1998, the
Company's Board of Directors declared a regular cash dividend of $.04 per share.
The Company intends to continue to pay quarterly cash dividends. However, the
Company's construction loan agreement requires the Company to maintain certain
minimum working capital and tangible net worth levels, which could restrict the
amount of retained earnings that are available for the payment of dividends. The
Company's bank has waived requirements by the Company to maintain certain
working capital levels. Under the most restrictive requirements of the loan
agreement that have not been waived, unrestricted retained earnings at
September 30, 1998 amounted to $10,559.
Year 2000 Compliance
- --------------------
Many companies that use and/or develop computer software are addressing the
potential problem that may exist if their software is not "year 2000 compliant."
The potential problem that exists with some computer software is that it will
not process transactions properly for dates commencing in the year 2000. This is
due to the fact that many software programs were designed to make date
calculations based on the last two digits of the year. As a result, dates in the
<PAGE>
year 2000 may be identified as dates in the year 1900, which may cause incorrect
calculations, cause the transaction to not be processed or, in some cases, cause
an entire computer system to malfunction.
The Company has been aware of this problem for many years and has been
addressing it, both for its software that is being developed for sale to users
and for applications affecting internal operations that potentially may not be
year 2000 compliant. On software developed for sale to users, the Company
believes that its complete suite of current Windows-based products is already
year 2000 compliant, and modifications to its older DOS-based products to make
them year 2000 compliant are complete. The testing of these modifications by the
Company's quality assurance staff and by users at beta test site locations is
nearing completion and is expected to be available before the end of 1998.
Because the Company has been aware of the year 2000 issue for a number of years,
it has been developing and testing software with year 2000 compliance in mind
and has not budgeted separately to address it.
The Company is currently in various stages of assessing all of its internal
technical applications to ascertain whether they are year 2000 compliant. The
Company has conducted an internal assessment of its internal information and
telecommunication systems and believes that these systems are already, or are in
the process of being altered to become, year 2000 compliant. Components of those
systems which are in the process of becoming year 2000 compliant are expected to
be completed and tested for compliance by the end of the second quarter of 1999.
The assessment and estimation of completion dates for having those systems year
2000 compliant were conducted by the Company's information technology and
telecommunication staff based on their expertise in those areas and discussions
with representatives of vendors who support those systems.
The Company is also in various stages of assessing its non-technical
applications to identify areas that are not year 2000 compliant. This assessment
is expected to be completed by the end of 1998 with final compliance testing to
be completed by the end of the second quarter of 1999. Based on the Company's
current assessment of these non-technical areas for being year 2000 compliant,
the Company does not believe this area to pose any significant problems. The
Company believes that the cost of bringing its non-technical applications into
year 2000 compliance will be immaterial.
Additionally, the Company is continuing to assess its relationship with major
third parties whose inability to be year 2000 compliant in a timely manner could
have an adverse effect on the Company's operations. These third parties are
primarily vendors (banks, telephone companies, fulfillment and freight
companies, and suppliers of components for the Company's software products)
whose inability to be year 2000 compliant could delay or cancel customer orders
for the Company's products and services, delay receipt of payments by customers
for products shipped and services rendered, and disrupt other aspects of the
<PAGE>
Company's operations. Any one of these potential events could adversely affect
the Company's financial condition and results of operations.
The Company has made some formal inquiries with these major third parties with
respect to their year 2000 compliance programs and, more importantly, those
specific parts of their program that directly affect the Company's operations.
The general response that the Company has received from certain major third
parties have indicated that they are in the process of assessing and testing
their operations for year 2000 compliance and are expected to complete their
testing during 1999. The Company is continuing to identify and categorize its
third parties so that those parties who are identified as being critical to the
Company's operations receive higher priority and more attention than those third
parties who are deemed to be not as critical to the Company's operations. The
Company anticipates that it will continue to solicit information from these
third parties and monitor the progress of their year 2000 compliance programs.
The Company has not developed a contingency plan in the event the Company or any
of its third parties fail to become year 2000 compliant in a timely manner and
does not have any timetable to develop such a plan. Such a plan may be developed
after the Company has completed its assessment of its third party vendors' and
service providers' year 2000 programs and the testing of its own year 2000
program. The Company believes that a reasonable worst-case scenario for not
being year 2000 compliant would be that the Company's software products sold to
users do not address all aspects or conditions related to the year 2000
compliant issue and that the Company's vendors are not able to supply components
related to its software products. If such a scenario occurs, the Company will
have to redirect some of its product development staff to work on the software
to make it year 2000 compliant for events it did not originally consider in the
development of the software. The Company's users may also seek to hold the
Company liable for damages if the software does not function properly.
Additionally, there could be delays in delivering software to customers as the
Company finds new suppliers or methods of delivery.
Based on the assessment the Company has made to date on the year 2000 compliance
issue, the Company does not believe that it will have an adverse effect on the
Company's financial condition and results of operations. The Company will
continue to update its assessment of its year 2000 readiness as it receives
updated information from its year 2000 program.
<PAGE>
PART II. Other Information
Item 2. Changes in Securities and Use of Proceeds
In December 1997, the Company entered into a construction loan agreement with a
bank to finance a portion of the costs for its new corporate headquarters that
is currently under construction. A copy of the construction loan agreement and
related documents were filed as Exhibits 10.8, 10.9 and 10.10 in the Company's
Form 10-KSB for the year ended December 31, 1997. The agreement requires that
the Company maintain certain working capital and minimum tangible net worth
levels, which could restrict the amount of retained earnings available for the
payment of dividends. The bank has waived requirements by the Company to
maintain certain working capital levels. Under the most restrictive requirements
of the loan agreement that have not been waived, unrestricted retained earnings
at September 30, 1998 amounted to $10,559,000.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
(3.1) Amended and Restated Articles of Incorporation, as
amended through October 29, 1998
(27) Financial Data Schedule
(b) Reports on Form 8-K
No Form 8-K was filed during the three months ended
September 30, 1998.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
TIMBERLINE SOFTWARE CORPORATION
...............................
(Registrant)
/s/ Thomas P. Cox
Date: November 12, 1998 -------------------------------
Thomas P. Cox, Executive Vice
President (Chief Financial Officer)
<PAGE>
FORM 10-Q
Exhibit Index
Exhibits Page
- -------- ----
(3.1) Amended and Restated Articles of Incorporation, 19
as amended through October 29, 1998
(27) Financial Data Schedule 25
*FILED OCTOBER 29, 1998
OREGON SECRETARY OF STATE
[SEAL OF STATE OF OREGON]
Phone:(503) 986-2200
Facsimile (503) 378-4381
ARTICLES OF AMENDMENT - Business/Professional/Nonprofit
- --------------------------------------------------------------------------------
Secretary of State
Corporation Division
255 Capitol Street NE, Suite 151
Salem, OR 97310-1327
REGISTRY NUMBER: 139508-11
ATTACH ADDITIONAL SHEET IF NECESSARY
PLEASE TYPE OR PRINT LEGIBLY IN BLACK INK
1. Name of corporation prior to amendment:
Timberline Software Corporation
---------------------------------------------------------------------
2. State the article number(s) and set forth the article(s) as it is amended
to read. (Attach a separate sheet if necessary.)
See attachment Appendix A
3. The amendment was adopted on: April 28, 1998
(If more than one amendment was adopted, identify the date of adoption
of each amendment.)
4. Check the appropriate statement:
/X/ Shareholder action was required to adopt the amendment(s). The vote
was as follows:
<TABLE>
<S> <C> <C> <C> <C>
Class or Number of Number of Number of Number of
series of shares votes votes votes
shares outstanding entitled to cast for cast against
be cast
Common 7,023,453 7,009,340 5,945,448 536,013
</TABLE>
/ / Shareholder action was not required to adopt the amendment(s). The
amendment(s) was adopted by the board of directors without shareholder action.
/ / The corporation has not issued any shares of stock. Shareholder action
was not required to adopt the amendment(s). The amendment(s) was adopted by the
incorporators or by the board of directors.
6. Execution
Printed Name Signature Title
Timberline Software By: /s/Thomas P. Cox Secretary
Corporation -----------------
7. CONTACT NAME DAYTIME PHONE NUMBER
Suzanne Tinker (503) 802-2096
----------------------------------------------------------------
FEES
------
Make check for $10 payable to
"Corporation Division."
NOTE: Filing fees may be paid
with VISA or MasterCard. The
card number and expiration
date should be submitted on a
separate sheet for your
protection.
<PAGE>
APPENDIX A
TIMBERLINE SOFTWARE CORPORATION
Section 4.1 of Article 4 of the Company's Restated Articles of
Incorporation is amended in its entirety to read as follows:
"4.1 AUTHORIZED CAPITAL. The corporation is authorized
to issue one class of stock to be designated
"Common Stock." The total number of shares of
Common Stock which the corporation shall have
authority to issue shall be Twenty Million
(20,000,000) shares."
<PAGE>
*FILED IN THE OFFICE OF
THE SECRETARY OF STATE OF THE
STATE OF OREGON May 23, 1990
CORPORATION DIVISION
Submit the original THIS SPACE FOR OFFICE USE ONLY
and one true copy
$10.00
CORPORATION DIVISION-BUSINESS REGISTRY
255 Capitol Street NE, Suite 151
Salem, OR 97310
Registry Number:
139508-11
- ---------------
RESTATED ARTICLES OF INCORPORATION
Business Corporation
PLEASE TYPE OR PRINT LEGIBLY IN BLACK INK
1. Name of the corporation prior to amendment:
Timberline Software Corporation
----------------------------------------------------------------------
2. New name of the corporation (if changed): N/A
-------------------------
3. A copy of the restated articles is attached.
4. Check the appropriate statement(s):
/ / The restated articles contain amendments which do not require
shareholder approval. These amendments were duly adopted by the Board
of Directors.
/X/ The restated articles contain amendments which require shareholder
approval. The date of adoption of the restated articles was April 24,
1990, which is the date of adoption of amendments included in the
restated articles. The vote of the shareholders was as follows:
<TABLE>
<S> <C> <C> <C> <C>
Class or Number of Number of Number of Number of
series of shares votes votes votes
shares outstanding entitled to cast for cast against
be cast
N/A 2,332,860 2,332,860 2,021,531 17,515
</TABLE>
Other provisions, if applicable.
Number of Votes Abstaining = 8,806
Execution: /s/Thomas P. Cox Thomas P. Cox Secretary
---------------------------------------------------------------------
Signature Printed Name Title
Person to Contact about this filing: Julie H. Croy 503/223-6113
-------------------------------------------
Name Daytime phone number
MAKE CHECKS PAYABLE TO THE CORPORATION DIVISION. SUBMIT THE COMPLETED FORM AND
FEES TO: CORPORATION DIVISION, 158 12TH STREET NE, SALEM, OREGON 97310-0210.
IF YOU HAVE ANY QUESTIONS, PLEASE CALL (503) 378-4166.
<PAGE>
AMENDED AND RESTATED
ARTICLES OF INCORPORATION
OF
TIMBERLINE SOFTWARE CORPORATION
ARTICLE 1. NAME
The name of the corporation is Timberline Software Corporation.
ARTICLE 2. DURATION
The period of the corporation's duration shall be perpetual.
ARTICLE 3. PURPOSES AND POWERS
The purpose for which the corporation is organized is to engage in any business,
trade or activity which may be conducted lawfully by a corporation organized
under the Oregon Business Corporation Act.
The corporation shall have the authority to engage in any and all such
activities as are incidental or conducive to the attainment of the purposes of
the corporation and to exercise any and all powers authorized or permitted under
any laws that now or hereafter may be applicable or available to the
corporation.
ARTICLE 4. SHARES
4.1 AUTHORIZED CAPITAL. The corporation is authorized to issue
one class of stock to be designated "Common Stock." The
total number of shares of stock which the corporation shall
have authority to issue shall be eight million (8,000,000)
shares of Common Stock.
4.2 COMMON STOCK. The holders of shares of the Common Stock
shall be entitled to receive dividends out of funds of the
corporation legally available therefor, at the rate and at
the time or times as may be provided by the Board of
Directors. The holders of shares of Common Stock, on the
basis of one vote per share, shall have the right to vote
for the election of members of the Board of Directors of the
corporation and the right to vote on all other matters,
except those matters in which a separate class of the
corporation's shareholders vote by class or series. The
holders of the shares of the Common Stock shall be entitled
to receive distributions legally payable to shareholders on
the liquidation of the corporation.
<PAGE>
ARTICLE 5. BYLAWS
The Board of Directors shall have the power to adopt, amend or repeal the Bylaws
of the corporation and to adopt new Bylaws, subject to the power of the
shareholders to amend or repeal such Bylaws. The shareholders shall also have
the power to adopt, amend or repeal the Bylaws of the corporation and to adopt
new Bylaws.
ARTICLE 6. DIRECTORS
6.1 NUMBER. The number of Directors of the corporation shall be
determined in the manner provided in the Bylaws and may be
increased or decreased from time to time in the manner
provided therein.
6.2 VACANCIES. Any vacancy occurring on the Board of Directors
may be filled by the affirmative vote of the majority of the
remaining Directors, though less than a quorum of the Board
of Directors, or by a sole remaining Director. Any
directorship to be filled by reason of an increase in the
number of Directors of the corporation may be filled by the
affirmative vote of a majority of the number of Directors
fixed by the Bylaws prior to such increase. Any such
directorship not so filled by the Directors shall be filled
by election at the next annual meeting of shareholders or at
a special meeting of shareholders called for that purpose.
ARTICLE 7. LIMITATION OF DIRECTOR LIABILITY
To the full extent that the Oregon Business Corporation Act, as it exists on the
date hereof or hereafter may be amended, permits the limitation or elimination
of the liability of Directors, a Director of the corporation shall not be liable
to the corporation or its shareholders for any monetary damages for conduct as a
Director. Any amendment to or repeal of this Article 7 or to the Oregon Business
Corporation Act shall not adversely affect any right or protection of a Director
of the corporation for or with respect to any acts or omissions of such Director
occurring prior to such amendment or repeal.
ARTICLE 8. INDEMNIFICATION
To the full extent permitted by the Oregon Business Corporation Act, as it
exists on the date hereof or hereafter may be amended or be restricted by other
applicable law then in effect, the corporation: (i) shall indemnify any person
who is made, or threatened to be made, a party to an action, suit, or
proceeding, whether civil, criminal, administrative, investigative, or otherwise
(including an action, suit or proceeding by or in the right of the corporation),
by reason of the fact that the person is or was a director of the corporation,
or a fiduciary within the meaning of the Employee Retirement Income Security Act
of 1974 with respect to any employee benefit plan of the corporation, or serves
or served at the request of the corporation as a director, officer, or as a
fiduciary of an employee benefit plan of this or another corporation,
partnership, joint venture, trust or other enterprise, and (ii) may indemnify
any person who is made, or threatened to be made, a party to an action, suit or
<PAGE>
proceeding, whether civil, criminal, administrative, investigative, or otherwise
(including an action, suit or proceeding by or in the right of the corporation),
by reason of the fact that the person is or was an officer, employee or agent of
the corporation, or a fiduciary within the meaning of the Employee Retirement
Income Security Act of 1974 with respect to any employee benefit plan of the
corporation, or serves or served at the request of the corporation as a
director, officer, or as a fiduciary of an employee benefit plan of this or
another corporation, partnership, joint venture, trust or other enterprise. This
Article 8 shall not be deemed exclusive of any other provisions for the
indemnification of directors, officers, employees, or agents that may be
included in any statute, bylaw, agreement, resolution of shareholders or
directors or otherwise, both as to action in any official capacity and action in
any other capacity while holding office, or while an employee or agent of the
corporation.
AMENDMENT 9. AMENDMENTS TO ARTICLES OF INCORPORATION
The corporation reserves the right to amend or repeal any of the provisions
contained in these Articles of Incorporation, in any manner now or hereafter
permitted by law, and the rights of the shareholders of the corporation are
granted subject to this reservation.
ARTICLE 10. NOTICES
The address where the State of Oregon Corporation Division may mail notices to
the corporation is:
c/o Dale M. Hermann, Esq.
421 S.W. Sixth Avenue, Suite 1100
Portland, Oregon 97204
The name and telephone number of the person to contact about this filing are:
Julie H. Croy
(503) 223-6113
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM
TIMBERLINE SOFTWARE CORPORATION'S CONDENSED FINANCIAL STATEMENTS
CONTAINED IN ITS QUARTERLY REPORT ON FORM 10-Q FOR THE PERIOD ENDED
SEPTEMBER 30, 1998 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO
SUCH FINANCIAL STATEMENTS
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> SEP-30-1998
<CASH> 6,689
<SECURITIES> 5,126
<RECEIVABLES> 4,570
<ALLOWANCES> 188
<INVENTORY> 272
<CURRENT-ASSETS> 17,328
<PP&E> 22,875
<DEPRECIATION> 5,576
<TOTAL-ASSETS> 37,257
<CURRENT-LIABILITIES> 13,108
<BONDS> 5,555
<COMMON> 376
0
0
<OTHER-SE> 17,225
<TOTAL-LIABILITY-AND-EQUITY> 37,257
<SALES> 17,038
<TOTAL-REVENUES> 30,921
<CGS> 2,802
<TOTAL-COSTS> 15,597
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 7,158
<INCOME-TAX> 2,650
<INCOME-CONTINUING> 4,508
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 4,508
<EPS-PRIMARY> .48
<EPS-DILUTED> .46
</TABLE>
