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 June 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
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(Exact name of registrant as specified in its charter)
Oregon 93-0748489
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
9600 S.W. Nimbus Avenue, Beaverton, Oregon 97008
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(Address of principal executive offices) (Zip code)
(503) 626-6775
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(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 August 10, 1998, 7,050,101 shares of common stock of the registrant were
outstanding.
<PAGE>
TIMBERLINE SOFTWARE CORPORATION
FORM 10-Q FOR THE QUARTERLY PERIOD ENDED JUNE 30, 1998
TABLE OF CONTENTS
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PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed balance sheets, June 30, 1998 and
December 31, 1997 ..........................................3
Condensed statements of operations for the three months
ended June 30, 1998 and 1997................................4
Condensed statements of operations for the six months ended
June 30, 1998 and 1997......................................5
Condensed statements of cash flows for the six months ended
June 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 4. Submission of Matters to a Vote of Security
Holders......................................................17
Item 6. Exhibits and Reports on Form 8-K................................18
SIGNATURES...............................................................18
EXHIBIT INDEX............................................................19
<PAGE>
PART I. Financial Information
Item 1. Financial Statements
TIMBERLINE SOFTWARE CORPORATION
CONDENSED BALANCE SHEETS
JUNE 30, 1998 AND DECEMBER 31, 1997
(Amounts in thousands)
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<TABLE>
<CAPTION>
June 30, December 31,
1998 1997
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<S> <C> <C>
ASSETS
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Current assets:
Cash and cash equivalents $ 3,434 $ 5,050
Temporary investments 6,893 5,195
Accounts receivable, less allowance
for doubtful accounts
(June 30, 1998, $188;
December 31, 1997, $199) 3,470 4,303
Inventories 256 241
Other current assets 1,163 1,027
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Total current assets 15,216 15,816
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Property and equipment 18,394 12,671
Less accumulated depreciation
and amortization 5,319 5,186
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Property and equipment - net 13,075 7,485
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Capitalized software costs - net 1,554 1,634
Purchased software - net 948 709
Other assets 90 110
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Total $30,883 $25,754
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LIABILITIES AND SHAREHOLDERS' EQUITY
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Current liabilities:
Accounts payable $ 531 $ 1,440
Income taxes payable 45 166
Deferred revenues 8,209 7,503
Accrued employee expenses 1,387 1,861
Other current liabilities 752 507
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Total current liabilities 10,924 11,477
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Construction costs payable 2,915 -
Accrued rent expense 36 46
Deferred income taxes 953 965
Shareholders' equity:
Common stock, without par value
authorized, 20,000 shares;
issued - June 30, 1998, 7,042
shares; December 31, 1997,
6,978 shares 376 372
Additional paid in capital 3,477 2,907
Unrealized net gain on investments 11 17
Retained earnings 12,191 9,970
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Total shareholders' equity 16,055 13,266
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Total $30,883 $25,754
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</TABLE>
See notes to condensed financial statements.
<PAGE>
TIMBERLINE SOFTWARE CORPORATION
CONDENSED STATEMENTS OF OPERATIONS
FOR THE THREE MONTHS ENDED JUNE 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 $ 5,624 $ 4,282
Service fees 4,483 3,778
Other 353 165
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Net revenue 10,460 8,225
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Cost and expenses:
Cost of revenue 972 908
Customer support 2,088 1,579
Product development 2,193 1,717
Sales and marketing 1,598 1,433
General and administrative 1,227 1,116
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Total cost and expenses 8,078 6,753
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Income from operations 2,382 1,472
Other income 196 105
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Income before income taxes 2,578 1,577
Provision for income taxes 955 594
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Net income $ 1,623 $ 983
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Earnings per share:
Basic $ 0.23 $ 0.14
Diluted 0.22 0.14
See notes to condensed financial statements.
</TABLE>
<PAGE>
TIMBERLINE SOFTWARE CORPORATION
CONDENSED STATEMENTS OF OPERATIONS
FOR THE SIX MONTHS ENDED JUNE 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 $10,678 $ 8,051
Service fees 8,612 7,246
Other 553 436
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Net revenue 19,843 15,733
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Cost and expenses:
Cost of revenue 1,838 1,831
Customer support 4,018 3,155
Product development 4,234 3,542
Sales and marketing 3,168 3,069
General and administrative 2,494 2,257
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Total cost and expenses 15,752 13,854
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Income from operations 4,091 1,879
Other income 327 208
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Income before income taxes 4,418 2,087
Provision for income taxes 1,636 772
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Net income $ 2,782 $ 1,315
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Earnings per share:
Basic $ 0.40 $ 0.19
Diluted 0.38 0.18
See notes to condensed financial statements.
</TABLE>
<PAGE>
TIMBERLINE SOFTWARE CORPORATION
CONDENSED STATEMENTS OF CASH FLOWS
FOR THE SIX MONTHS ENDED JUNE 30, 1998 AND 1997
(Amounts in thousands)
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<TABLE>
<CAPTION>
1998 1997
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<S> <C> <C>
Net cash provided by
operating activities $ 4,469 $ 2,626
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Cash flows from investing activities:
Payments for property,
equipment and purchased software (5,628) (834)
Capitalized software costs (153) (346)
Proceeds from investments 2,635 1,910
Purchase of investments (4,339) (2,987)
Other (2) -
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Net cash used in investing
activities (7,487) (2,257)
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Cash flows from financing activities:
Construction loan proceeds 1,389 -
Proceeds from issuance of
common stock 574 376
Dividends paid (561) (331)
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Net cash provided by financing
activities 1,402 45
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Net increase (decrease) in cash
and cash equivalents (1,616) 414
Cash and cash equivalents,
beginning of the year 5,050 3,129
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Cash and cash equivalents,
end of period $ 3,434 $ 3,543
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Supplemental information:
Cash paid during the period for
income taxes $ 1,435 $ 632
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Non-cash investing and financing activity:
Property and equipment purchases to be
financed through construction loan $ 1,526 $ -
========== ==========
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 six month
periods ended June 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 June 30, 1998 and the results of its operations
and its cash flows for the six months ended June 30, 1998 and 1997.
2. Recent accounting pronouncement
In June 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 costs payable
Construction of the Company's new corporate headquarters is being
financed through a combination of existing cash balances, temporary
investments, and a construction loan. Commencing in April 1998, most of
the construction costs will be 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 a long term basis, construction costs paid, or to
<PAGE>
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 six month periods ended June 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 six
month periods ended June 30, 1998 and 1997 is as follows:
Three Months Ended
June 30,
1998 1997
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Weighted-average shares outstanding,
used in computing basic earnings
per share 7,027 6,907
Effect of dilutive stock options 260 242
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Weighted-average shares outstanding,
used in computing diluted earnings
per share 7,287 7,149
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Six Months Ended
June 30,
1998 1997
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Weighted-average shares outstanding,
used in computing basic earnings
per share 7,012 6,873
Effect of dilutive stock options 255 271
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Weighted-average shares outstanding,
used in computing diluted earnings
per share 7,267 7,144
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<PAGE>
5. Comprehensive income
In June 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 six month
periods ended June 30, 1998 and 1997 are not presented because the
difference between net income and comprehensive income is not material.
There was a $2 and $6 reduction in unrealized net gain on investments
which reduced net income to arrive at comprehensive income for the
three and six month periods ended June 30, 1998, respectively. For the
three and six month periods ended June 30, 1997, there was a $21
increase in unrealized net gain on investments which increased net
income to arrive at comprehensive income for each of those periods.
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 500 shares reserved under this
plan.
<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
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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 hereto, 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
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NET REVENUE. Net revenue increased 27 percent to $10,460 for the three months
ended June 30, 1998 compared to $8,225 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 31 percent to $5,624 in the
1998 period from $4,282 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 the need to upgrade or replace existing computer
software which is not Year 2000 compliant. Additionally, software sales for the
three months ended June 30, 1998 included sales from software products that were
not available during the same period in 1997. These new products included the
<PAGE>
Billing module, released in May 1998, for the Gold Collection for
Construction Accounting and the Precision Collection Extended Edition, which was
released in September 1997. Computer software sales represented 54 percent of
net revenue in the three months ended June 30, 1998 compared to 52 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 43 percent and 46 percent of net revenue for the three months ended
June 30, 1998 and 1997, respectively, increased 19 percent to $4,483 in the 1998
period from $3,778 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 75 percent of
service fees, increased 11 percent and consulting and training fees increased 50
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 six months ended June 30, 1998, net revenue increased 26 percent to
$19,843 from $15,733 for the comparable period in 1997. Computer software sales
increased 33 percent to $10,678 for the first six months of 1998 from $8,051 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 six months of 1997. These products included Gold Collection for
Property Management, released in March 1997, Precision Collection Extended
Edition, released in September 1997, and a new Billing module, released in May
1998, for the Gold Collection for Construction Accounting. The Company also
believes that the strong economic conditions in the construction industry and
the need for companies to upgrade or replace their existing software which is
not Year 2000 compliant contributed to the increased sales. Software sales
represented 54 percent of net revenue for the six months ended June 30, 1998
compared to 51 percent for the same period in 1997.
Service fees, which represented 43 percent and 46 percent of net revenue for the
six months ended June 30, 1998 and 1997, respectively, increased 19 percent to
$8,612 for the 1998 period compared to $7,246 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 six months ended June 30, 1998 compared to 11 percent
for the respective periods in 1997. The 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 with an increase in costs
<PAGE>
associated with consulting and training. The Company believes that cost of
revenue, as a percentage of net revenue, will remain at similar levels
throughout 1998.
OPERATING EXPENSES. Operating expenses increased 22 percent to $7,106 for the
three months ended June 30, 1998 from $5,845 for the comparable period in 1997.
For the six months ended June 30, 1998 operating expenses increased 16 percent
to $13,914 from $12,023 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 32 percent to $2,088 for the three months
ended June 30, 1998 from $1,579 in the same period in 1997. For the six months
ended June 30, 1998, these expenses increased 27 percent to $4,018 from $3,155
for the comparable period in 1997. The increases were primarily due to
additional personnel hired during the latter part of 1997 and the first six
months of 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 $2,193 for the three months
ended June 30, 1998 from $1,717 for the comparable period in 1997. These
expenses increased 20 percent to $4,234 for the six months ended June 30, 1998
from $3,542 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
expensed during the period, were $52 for the three months ended June 30, 1998
compared to $221 for the same period in 1997. For the six months ended June 30,
1998 capitalized software costs were $153 compared to $346 for the comparable
period in 1997. The Company expects overall product development expenses to
remain above its 1997 level throughout 1998.
Sales and marketing expenses increased 12 percent to $1,598 for the three months
ended June 30, 1998 from $1,433 for the same period in 1997. For the six months
ended June 30, 1998, these expenses increased three percent to $3,168 from
$3,069 for the comparable period in 1997. As a percentage of net revenue, these
expenses decreased to 15 percent for the three months ended June 30, 1998 from
17 percent in the same period in 1997. For the six months ended June 30, 1998
and 1997, these percentages were 16 percent and 20 percent, respectively. The
increases were primarily due to a reduction in personnel in the sales area
during the latter part of 1997. This decrease was partially offset by a slight
increase in marketing expenses, primarily in the area of trade show expenses.
General and administrative expenses increased 10 percent to $1,227 for the three
months ended June 30, 1998 from $1,116 for the comparable period in 1997. For
<PAGE>
the six months ended June 30, 1998, these expenses increased 11 percent to
$2,494 from $2,257 for the same period in 1997. The increase was partially due
to an increase in depreciation, insurance, and legal expenses. As a percentage
of net revenue, general and administrative expenses decreased to 12 percent for
the three months ended June 30, 1998 from 14 percent in the same period for
1997. For the six months ended June 30, 1998 and 1997, these percentages were 13
percent and 14 percent, respectively.
PROVISION FOR INCOME TAXES. The Company's effective tax rate was approximately
37 percent for the three and six month periods ended June 30, 1998 and 1997. The
provision was based on the Company's estimate of the effective tax rate for each
of the respective years.
Capital Resources and Liquidity
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During the six months ended June 30, 1998, net cash provided by operations was
$4,469 compared to $2,626 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
$4,292 at June 30, 1998 from $4,339 at December 31, 1997. Net accounts
receivable at June 30, 1998 decreased $833 compared to December 31, 1997
reflecting the seasonal decline in revenue in June 1998 from December 1997. Net
property and equipment has increased $5,590 since December 31, 1997 primarily
due to $5,484 of additional costs incurred during the first six months of 1998
in connection with the construction of the Company's new corporate headquarters.
The Company has also purchased computer equipment for additional personnel and
to replace older computer equipment.
Accounts payable has decreased $909 since December 31, 1997 primarily due to the
fact that most construction costs payable related to the Company's new corporate
headquarters are no longer classified in accounts payable. As of June 30, 1998,
most of these costs are shown as a long-term liability because the Company has
the intent and the ability to finance these costs on a long-term basis.
Deferred revenues at June 30, 1998 increased $706 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. Accrued employee expenses
decreased $474 since December 31, 1997, primarily as a result of the payments in
1998 of profit sharing expenses accrued at the end of 1997 and the payment of
the Company's 1997 contribution to its 401(k) plan.
During the first six months of 1998, the Company declared two regular cash
dividends totaling $.08 per share and aggregating $561. 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
<PAGE>
and tangible net worth levels, which could restrict the amount of retained
earnings that are available for the payment of dividends. Under the most
restrictive requirements of the loan agreement, unrestricted retained earnings
at June 30, 1998 amounted to $1,292.
Year 2000 Compliant Issue
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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 that last two digits of the year. As a result, dates in
the 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. These modifications are currently being
tested by the Company's quality assurance staff and by users at beta test site
locations. 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 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
<PAGE>
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 the initial 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. Although the Company cannot
determine at this time the extent of the problem that may exist in these
non-technical areas for not being year 2000 compliant, the Company does not
expect 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 in the initial stages of assessing 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 Company's operations. Any one of these potential events
could adversely affect the Company's financial condition and results of
operations.
The Company anticipates making 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 Company plans to identify and categorize its third parties so that those
parties who are identified as being critical to the Company's operations receive
<PAGE>
higher priority and more attention than those third parties who are deemed to be
not as critical to the Company's operations. The Company expects to solicit
information for these third parties and monitor the progress of their year 2000
compliant 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 does 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
compliant 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. Under the most restrictive requirements of the loan
agreement, unrestricted retained earnings at June 30, 1998 amounted to
$1,292,000.
Item 4. Submission of Matters to a Vote of Security Holders
The Company held its annual meeting of shareholders on April 28, 1998.
Shareholders took the following actions at the meeting:
1. The shareholders voted to elect all of management's nominees to the
Company's Board of Directors. The following table sets forth
information with respect to votes cast for and against each nominee:
Votes Votes Shares
For Withheld Not Voted
--------- -------- ---------
Curtis L. Peltz 6,406,524 191,336 411,480
Thomas P. Cox 6,406,999 190,861 411,480
James A. Meyer 6,406,844 191,016 411,480
Donald L. Tisdel 6,404,537 193,323 411,480
John Gorman, former Chief Executive Officer and Chairman of the Board
of Directors of the Company, and Leslie F. Clarke, II, former Executive
Vice President and Director of the Company, retired from the Company as
of May 1, 1998.
2. The shareholders voted to ratify management's selection of auditors for
1998 by the affirmative vote of 6,563,266 shares with 12,938 shares
voting against the proposal, 21,656 shares abstaining, and 411,480
shares not voted.
3. The shareholders voted to increase the number of authorized shares of
common stock of the Company by the affirmative vote of 5,945,448 shares
with 536,013 shares voting against the proposal, 24,339 abstaining, and
411,480 shares not voted. There were 92,060 broker non-votes.
4. The shareholders voted to approve the Company's 1998 Stock Incentive
Plan by the affirmative vote of 4,394,832 shares with 155,154 shares
voting against the proposal, 26,230 shares abstaining, and 411,480
shares not voted. There were 2,021,644 broker non-votes.
<PAGE>
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
(27) Financial Data Schedule
(99) Safe Harbor for Forward-Looking Statements;
Certain Cautionary Statements
(b) Reports on Form 8-K
No Form 8-K was filed during the three months ended June 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: August 12, 1998
-----------------------------
Thomas P. Cox, Executive Vice
President (Chief Financial Officer)
<PAGE>
FORM 10-Q
Exhibit Index
Exhibit Page
- ------- ------
(27) Financial Data Schedule 20
(99) Safe Harbor for Forward-Looking 21
Statements; Certain Cautionary
Statements
<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
JUNE 30, 1998 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
FINANCIAL STATEMENTS
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> JUN-30-1998
<CASH> 3,434
<SECURITIES> 6,893
<RECEIVABLES> 3,658
<ALLOWANCES> 188
<INVENTORY> 256
<CURRENT-ASSETS> 15,216
<PP&E> 18,394
<DEPRECIATION> 5,319
<TOTAL-ASSETS> 30,883
<CURRENT-LIABILITIES> 10,924
<BONDS> 2,915
0
0
<COMMON> 376
<OTHER-SE> 15,679
<TOTAL-LIABILITY-AND-EQUITY> 30,883
<SALES> 10,678
<TOTAL-REVENUES> 19,843
<CGS> 1,838
<TOTAL-COSTS> 10,090
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 4,418
<INCOME-TAX> 1,636
<INCOME-CONTINUING> 2,782
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 2,782
<EPS-PRIMARY> .40
<EPS-DILUTED> .38
</TABLE>
SAFE HARBOR FOR FORWARD-LOOKING STATEMENTS;
CERTAIN CAUTIONARY STATEMENTS
Timberline Software Corporation ("the Company") and its
representatives may make forward-looking statements (as such term is defined in
the Private Securities Litigation Reform Act of 1995) from time-to-time. The
Company invokes to the fullest extent possible the protection of the Private
Securities Litigation Reform Act and the judicially created "bespeaks caution"
doctrine with respect to such statements. Accordingly, the Company is filing
this Exhibit 99, which lists certain factors that may cause actual results to
differ materially from those contained in such forward-looking statements.
This list is not necessarily exhaustive. There can be no
assurance that this Exhibit lists all material risks to the Company at any
specific point in time.
Factors that may cause actual results to differ materially
from those contained in such forward-looking statements are as follows:
COMPETITION
The computer software market is highly competitive and subject
to change because of the rapid technological changes in the computer industry.
The number of software vendors with which the Company competes varies from
product to product and from region to region within the United States. Although
the Company believes it is a major supplier of project accounting and cost
estimating software for the construction and property management industries, and
that there are economical and technological barriers to discourage new specialty
software vendors from entering into its segment of the software market, there
can be no assurance that larger, well-known software developers will not target
this segment of the market. Such competitors are considerably larger, more
diversified, and have greater financial and other resources and enjoy greater
brand recognition for their products than the Company.
<PAGE>
The Company must also compete with other larger, well-known
software developers for the hiring and retention of highly qualified technical
personnel. As a result, the Company may have to expend additional financial
resources to hire and retain qualified technical personnel. If the Company is
not able to secure the services of employees with the level of technical
expertise it requires, the development of new products would likely be delayed
and would result in a decrease in the quality of new software products and
enhancements to its existing software products. A delay in the development, or
failure to maintain the quality of new software products by the Company would
likely have an adverse effect on the financial position and results of
operations of the Company.
DEPENDENCE ON MICROSOFT OPERATING SYSTEM; OBSOLESCENCE AND TECHNOLOGICAL CHANGES
The Company is a specialty software developer, an industry
characterized by rapid technological change. Its software is designed to work
with specific operating systems developed by Microsoft Corporation. If
substantial changes are made to those operating systems or if new operating
systems are adopted, the Company's software may not function properly,
necessitating that the Company invest additional resources to adapt its software
to those changes. Also, other operating systems may be introduced on which the
Company's software may not function, which may also cause additional resources
to be expended which would otherwise be devoted to improving the Company's
software or developing new software.
To remain competitive, the Company must continue to make
substantial expenditures for product development. Although the Company plans to
continue to enhance its existing products and to develop new products, the
Company's competitors may develop products with superior capabilities and/or
market their products more effectively at lower prices, by "bundling" of
software with other software or through other methods. The Company believes its
existing software products are widely accepted in its segment of the
marketplace. However, a delay in the release of new products or modifications to
existing products, or a delay in the acceptance by the marketplace of any new
products or modifications to existing products, could similarly delay the
recognition of revenue, or have an adverse effect on the Company's revenue and
earnings.
SUBSTANTIAL DEPENDENCE ON SINGLE INDUSTRY
Because the Company sells a large majority of its software
products and services to the construction industry, adverse economic conditions
in that industry could have a material adverse effect on the Company's revenue
and earnings. The construction industry is particularly sensitive to a
significant increase in interest rates, which in the past has resulted in
substantial financial distress across the industry. In addition, a downturn in
general economic conditions in the United States could adversely affect the
construction industry.
<PAGE>
PRODUCT PROTECTION
The Company regards its software as proprietary and attempts
to protect it by relying upon copyrights, trade secrets, internal nondisclosure
agreements and transferability restriction incorporated into its software
license agreements. The Company believes the risk of unauthorized transfers of
the Company's proprietary information is reduced because program source listings
are not released to third parties. Despite these restrictions, it may be
possible for competitors or users to copy aspects of the Company's products or
to obtain information which the Company regards as proprietary. The Company's
competitive position could be adversely affected by unauthorized use of its
proprietary information. Third parties may also assert infringement or other
claims against the Company with respect to any existing or future products.
Litigation to protect the Company's proprietary information or to determine the
validity of any third-party claims could result in significant expense to the
Company and, whether or not such litigation is determined in favor of the
Company, divert the efforts of the Company's technical and management personnel
from further development and support of the Company's software products.
