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, 1999
[ ] TRANSITION REPORT UNDER SECTION 13 or 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 For the transition period from
_____ to _____
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 August 11, 1999, 9,561,040 shares of common stock of the registrant were
outstanding.
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TIMBERLINE SOFTWARE CORPORATION
FORM 10-Q FOR THE QUARTERLY PERIOD ENDED JUNE 30, 1999
TABLE OF CONTENTS
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PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed balance sheets, June 30, 1999 and
December 31, 1998 (Unaudited)............................. 3
Condensed statements of operations for the three
months ended June 30, 1999 and 1998 (Unaudited)........... 4
Condensed statements of operations for the six
months ended June 30, 1999 and 1998 (Unaudited)........... 5
Condensed statements of cash flows for the three
months ended June 30, 1999 and 1998 (Unaudited)........... 6
Notes to condensed financial statements (Unaudited)......... 7
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operation........................... 11
PART II. OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security
Holders ..................................................... 20
Item 6. Exhibits and Reports on Form 8-K............................. 20
SIGNATURES............................................................ 20
EXHIBIT INDEX......................................................... 21
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PART I. Financial Information
Item 1. Financial Statements
TIMBERLINE SOFTWARE CORPORATION
CONDENSED BALANCE SHEETS
JUNE 30, 1999 AND DECEMBER 31, 1998 (Unaudited)
(Amounts in thousands)
- ----------------------------------------------------------------
<TABLE>
<CAPTION>
June 30, December 31,
1999 1998
----------- -----------
<S> <C> <C>
ASSETS
- ------
Current assets:
Cash and cash equivalents $ 6,456 $10,193
Temporary investments 6,944 3,767
Accounts receivable, less allowance
for doubtful accounts
(June 30, 1999, $182;
December 31, 1998, $182) 4,510 5,086
Inventories 235 272
Other current assets 1,668 1,202
----------- -----------
Total current assets 19,813 20,520
----------- -----------
Property and equipment 23,947 23,452
Less accumulated depreciation
and amortization 5,699 5,071
----------- -----------
Property and equipment - net 18,248 18,381
----------- -----------
Capitalized software costs - net 2,224 1,304
Purchased software - net 1,549 1,249
Other assets 80 95
----------- -----------
Total $41,914 $41,549
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
- ------------------------------------
Current liabilities:
Accounts payable $ 940 $ 812
Deferred revenues 12,237 10,352
Accrued employee expenses 1,718 2,312
Income taxes payable 237 373
Other current liabilities 1,316 1,171
----------- -----------
Total current liabilities 16,448 15,020
----------- -----------
Long-term debt - 5,417
Accrued rent expense 30 29
Deferred income taxes 956 1,047
Shareholders' equity:
Common stock, without par value
authorized, 20,000 shares;
issued - June 30, 1999, 9,511
shares; December 31, 1998,
9,420 shares 380 377
Additional paid in capital 4,468 3,721
Accumulated other comprehensive
income (loss) (24) 10
Retained earnings 19,656 15,928
----------- -----------
Total shareholders' equity 24,480 20,036
----------- -----------
Total $41,914 $41,549
=========== ===========
See notes to condensed financial statements.
</TABLE>
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TIMBERLINE SOFTWARE CORPORATION
CONDENSED STATEMENTS OF OPERATIONS
FOR THE THREE MONTHS ENDED JUNE 30, 1999 AND 1998 (Unaudited)
(Amounts in thousands, except per share data)
- ----------------------------------------------------------------
<TABLE>
<CAPTION>
1999 1998
---------- ----------
<S> <C> <C>
Net revenue:
Computer software $ 7,226 $ 5,624
Service fees 5,786 4,483
Other 259 353
---------- ----------
Net revenue 13,271 10,460
---------- ----------
Cost and expenses:
Cost of revenue 1,311 972
Customer support 2,507 2,088
Product development 2,546 2,193
Sales and marketing 2,019 1,598
General and administrative 1,332 1,227
---------- ----------
Total cost and expenses 9,715 8,078
---------- ----------
Operating income 3,556 2,382
Other income 142 196
---------- ----------
Income before income taxes 3,698 2,578
Provision for income taxes 1,443 955
---------- ----------
Net income $ 2,255 $ 1,623
========== ==========
Earnings per share:
Basic $ 0.24 $ 0.17
Diluted 0.23 0.17
See notes to condensed financial statements.
</TABLE>
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TIMBERLINE SOFTWARE CORPORATION
CONDENSED STATEMENTS OF OPERATIONS
FOR THE SIX MONTHS ENDED JUNE 30, 1999 AND 1998 (Unaudited)
(Amounts in thousands, except per share data)
- ----------------------------------------------------------------
<TABLE>
<CAPTION>
1999 1998
---------- ----------
<S> <C> <C>
Net revenue:
Computer software $14,698 $10,678
Service fees 11,286 8,612
Other 628 553
---------- ----------
Net revenue 26,612 19,843
---------- ----------
Cost and expenses:
Cost of revenue 2,439 1,838
Customer support 4,959 4,018
Product development 5,010 4,234
Sales and marketing 4,425 3,168
General and administrative 2,659 2,494
---------- ----------
Total cost and expenses 19,492 15,752
---------- ----------
Operating income 7,120 4,091
Other income 233 327
---------- ----------
Income before income taxes 7,353 4,418
Provision for income taxes 2,868 1,636
---------- ----------
Net income $ 4,485 $ 2,782
========== ==========
Earnings per share:
Basic $ 0.47 $ 0.30
Diluted 0.46 0.29
See notes to condensed financial statements.
</TABLE>
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TIMBERLINE SOFTWARE CORPORATION
CONDENSED STATEMENTS OF CASH FLOWS
FOR THE SIX MONTHS ENDED JUNE 30, 1999 AND 1998 (Unaudited)
(Amounts in thousands)
- ----------------------------------------------------------------
<TABLE>
<CAPTION>
1999 1998
---------- ----------
<S> <C> <C>
Net cash provided by
operating activities $ 7,385 $ 4,469
---------- ----------
Cash flows from investing activities:
Payments for property,
equipment and purchased software (1,197) (5,628)
Capitalized software costs (1,210) (153)
Proceeds from investments 2,967 2,635
Purchase of investments (6,178) (4,339)
Other 3 (2)
---------- ----------
Net cash used in investing activities (5,615) (7,487)
---------- ----------
Cash flows from financing activities:
Long-term debt proceeds - 1,389
Long-term debt payments (5,500) -
Proceeds from issuance of
common stock 750 574
Dividends paid (757) (561)
---------- ----------
Net cash provided by (used in)
financing activities (5,507) 1,402
---------- ----------
Net decrease in cash and cash
equivalents (3,737) (1,616)
Cash and cash equivalents,
beginning of the period 10,193 5,050
---------- ----------
Cash and cash equivalents,
end of period $ 6,456 $ 3,434
========== ==========
Supplemental information:
Cash paid during the period for
income taxes $ 2,651 $ 1,435
========== ==========
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>
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TIMBERLINE SOFTWARE CORPORATION
NOTES TO CONDENSED FINANCIAL STATEMENTS (Unaudited)
(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-K for the year ended December 31, 1998. The balance sheet at
December 31, 1998 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, 1999 and 1998 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, 1999 and the results of its operations
and its cash flows for the three and six month periods ended June 30,
1999 and 1998.
2. Long-term debt
At the end of 1998, the Company had construction loan borrowings of
$5,500 under its construction loan agreement with a bank in connection
with the construction of its new corporate offices, which were
substantially completed in October 1998. Because the Company had the
intent and the ability to finance construction costs on a long-term
basis, borrowings under the construction loan agreement were recorded
as long-term debt at December 31, 1998.
During the first quarter of 1999, the Company repaid these borrowings.
Based on the Company's current cash balances, its cash projections for
1999 and current mortgage interest rates, the Company reconsidered the
need for long-term mortgage financing. After further discussion with
its Board of Directors in May 1999, management of the Company decided
that long-term mortgage financing was not required at this time.
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TIMBERLINE SOFTWARE CORPORATION
NOTES TO CONDENSED FINANCIAL STATEMENTS (Unaudited)(Continued)
(Amounts in thousands)
3. 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, 1999 and
1998. 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, 1999 and 1998 is as follows:
Three Months Ended
June 30,
1999 1998
------- -------
Weighted-average shares outstanding,
used in computing basic earnings
per share 9,484 9,370
Effect of dilutive stock options 349 346
------- -------
Weighted-average shares outstanding,
used in computing diluted earnings
per share 9,833 9,716
======= =======
Six Months Ended
June 30,
1999 1998
------- -------
Weighted-average shares outstanding,
used in computing basic earnings
per share 9,464 9,350
Effect of dilutive stock options 327 339
------- -------
Weighted-average shares outstanding,
used in computing diluted earnings
per share 9,791 9,689
======= =======
4. Comprehensive income
In September 1997, the Financial Accounting Standards Board (FASB)
issued Statement of Financial Accounting Standards (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, 1999 and 1998 are
not presented because the difference between net income and
comprehensive income is not material. The only difference between the
Company's net income and comprehensive income relates to the change in
the unrealized net gain (loss) on temporary
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TIMBERLINE SOFTWARE CORPORATION
NOTES TO CONDENSED FINANCIAL STATEMENTS (Unaudited)(Continued)
Amounts in thousands)
investments. For the three months ended June 30, 1999 and 1998, net
income would have been reduced by $28 and $2, respectively, to arrive
at comprehensive income of $2,227 and $1,621, respectively, due to the
change in the unrealized net gain (loss) on temporary investments. The
change in this item also resulted in a $34 and $6 reduction in net
income to arrive at comprehensive income of $4,451 and $2,776 for the
six months ended June 30, 1999 and 1998, respectively.
5. Operating segment information
Effective December 31, 1998, the Company adopted SFAS No. 131,
"Disclosures about Segments of an Enterprise and Related Information."
The statement requires that public companies report certain financial
and descriptive information about its operating segments on both annual
and interim financial reports. Operating segments within a company are
determined based on a company's organizational structure and the way
that a company manages its businesses for making operating decisions
and assessing its performance.
The Company's operations are divided into two operating segments:
software products and software services. The Company evaluates its
performance in each segment based on its operating contribution, which
includes revenue, cost and expenses that can be specifically identified
within each segment. Product development and general and administrative
expenses are not allocated to the segments for determining its
operating contribution because such an allocation would be based on
subjective factors. Information about each operating segment and a
reconciliation of operating contribution to operating income for the
three and six month periods ended June 30, 1999 and 1998 is as follows:
Three Months Ended
June 30,
1999 1998
------- -------
Net revenue:
Software products $ 7,226 $ 5,624
Services 5,786 4,483
Other 259 353
------- -------
Net revenue $13,271 $10,460
======= =======
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TIMBERLINE SOFTWARE CORPORATION
NOTES TO CONDENSED FINANCIAL STATEMENTS (Unaudited)(Continued)
(Amounts in thousands)
Three Months Ended
June 30,
1999 1998
------- -------
Operating Contribution:
Software products $ 4,851 $ 3,838
Services 2,361 1,673
Other revenue, net of cost 222 291
Product development expenses (2,546) (2,193)
General and administrative expenses (1,332) (1,227)
------- -------
Operating income $ 3,556 $ 2,382
======= =======
Six Months Ended
June 30,
1999 1998
------- -------
Net revenue:
Software products $14,698 $10,678
Services 11,286 8,612
Other 628 553
------- -------
Net revenue $26,612 $19,843
======= =======
Six Months Ended
June 30,
1999 1998
------- -------
Operating Contribution:
Software products $ 9,726 $ 7,103
Services 4,513 3,258
Other revenue, net of 550 458
Product development expenses (5,010) (4,234)
General and administrative expenses (2,659) (2,494)
------- -------
Operating income $ 7,120 $ 4,091
======= =======
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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," "plans," "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,
increased competition, changes in general market conditions and certain risks
associated with the year 2000. These factors are discussed in further detail
below under "Risks and Uncertainties." 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. The Company undertakes no
obligation to revise or publicly release the results of any revision to these
forward-looking statements.
Results of Operations
- ---------------------
NET REVENUE. Net revenue increased 27 percent to $13,271 for the three months
ended June 30, 1999 compared to $10,460 for the comparable period in 1998. Both
major components of net revenue, computer software sales and service fees,
increased in 1999. Computer software sales increased 28 percent to $7,226 in the
1999 period from $5,624 in the 1998 period. Software sales increased in all
product lines. The Company's Gold Collection(R) for Construction Accounting, the
Company's Windows-based accounting software, continued to sell well, increasing
30 percent in the three months ended June 30, 1999 over the same period last
year. The Company believes this increase is primarily due to the continuing
strength of the construction industry and the Company's increasing market
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dominance, which enhances the Company's penetration into its market and provides
access to more prospective users. The need of many companies to upgrade or
replace existing computer software which is not Year 2000 compliant is also a
factor contributing to the increase in construction accounting software sales,
but is not believed to be as significant as the other two factors mentioned
above. Estimating software sales during the three months ended June 30, 1999
increased 12 percent over the same period last year. The largest percentage
increase in software sales this quarter came in the Company's Property
Management product line. Property Management software sales increased 76
percent, reflecting increasing acceptance of this software in the market and
sales from SamTrak for Timberline, a new maintenance management software module
added to this product line in March 1999. Total computer software sales
represented 54 percent of net revenue in the three months ended June 30, 1999
and 1998. The Company believes that computer software sales, as a percentage of
net revenue, will likely continue approximately at its present level for the
remainder of 1999.
Service fees from maintenance, support, consulting and training, which
represented 44 percent and 43 percent of net revenue for the three months ended
June 30, 1999 and 1998, respectively, increased 29 percent to $5,786 in the 1999
period from $4,483 for the comparable period in 1998. The increase was
principally due to the continuing increase in the Company's user base through
new product sales and the Company's revised maintenance and support service plan
pricing structure, which was instituted a year ago. Maintenance and support
fees, which comprise about three-fourths of total service fees for the three
months ended June 30, 1999, increased 36 percent over the same period in 1998.
Consulting and training fees increased nine percent over the 1998 period due
primarily to increased consulting revenue and training material sales. 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, 1999, net revenue increased 34 percent to
$26,612 from $19,843 for the comparable period in 1998. Computer software sales
increased 38 percent to $14,698 for the first six months of 1999, from $10,678
for the same period in 1998. Software sales increased in all product lines, but
primarily from the sales of Gold Collection for Construction Accounting, which
increased 31 percent for the first six months of 1999 compared to the same
period in 1998. The Company believes this increase is primarily due to the
continuing strength of the construction industry, the Company's increasing
market dominance and, to a lesser extent, the need by many companies to upgrade
or replace their existing computer software which is not year 2000 compliant. A
portion of the increased sales for this period was also due to the availability
of the Company's Billing module, which was released in May 1998, for all of the
1999 period. Estimating software sales increased 48 percent compared to the same
period in 1998. This was due primarily to the largest single software sale in
the Company's history during the first quarter of 1999. Property management
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software sales increased 61 percent in 1999 over the comparable period in 1998
primarily due to increasing acceptance of this software in the market and, to a
lesser extent, the introduction of SamTrak for Timberline, a maintenance
management software module added to this product line in 1999. Software sales
represented 55 percent of net revenue for the six months ended June 30, 1999
compared to 54 percent for the same period in 1998.
Service fees, which represented 42 percent and 43 percent of net revenue for the
six months ended June 30, 1999 and 1998, respectively, increased 31 percent to
$11,286 for the 1999 period compared to $8,612 for the comparable period in
1998. The increase was principally attributable to a 31 percent increase in
maintenance and support fees due to an increase in the Company's user base
through new product sales and the Company's revised maintenance and support
service plan pricing structure, which was instituted during the first quarter of
1998. Consulting and training revenue also increased 31 percent, primarily due
to increased consulting revenue from new users and an increase in training
material sales.
COST OF REVENUE. Cost of revenue, as a percentage of net revenue, was 10 percent
for the three months ended June 30, 1999 compared to nine percent for the
comparable period in 1998. The increase in this percentage was primarily due to
an increase in royalties and consulting costs. For the six months ended June 30,
1999 and 1998, cost of revenue, as a percentage of net revenue, remained
constant at nine percent. The Company believes that cost of revenue, as a
percentage of net revenue, will remain at approximately nine percent throughout
the remainder of 1999.
OPERATING EXPENSES. Operating expenses increased 18 percent to $8,404 for the
three months ended June 30, 1999 from $7,106 for the comparable period in 1998.
For the six months ended June 30, 1999, these expenses increased 23 percent to
$17,053 from $13,914 for the comparable period in 1998.
Customer support expenses increased 20 percent to $2,507 for the three months
ended June 30, 1999 from $2,088 for the same period in 1998. For the six months
ended June 30, 1999, these expenses increased 23 percent to $4,959 from $4,018
for the comparable period in 1998. The increase was primarily due to additional
personnel hired during the latter part of 1998 to handle the increased demands
for support and consulting services as a result of the continuing increase in
Accounting software sales. In 1999, the Company reorganized and changed the way
it operates in the support area. This has allowed the Company to handle a
significant increase in call volume with fewer support staff than the Company
had at the end of 1998 while providing a higher level of service to our users.
This, in turn, has freed up customer support staff to generate additional
consulting services revenue from our users.
Product development expenses increased 16 percent to $2,546 for the three months
ended June 30, 1999 from $2,193 for the comparable period in 1998. For the six
months ended June 30, 1999, these expenses increased 18 percent to $5,010 from
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$4,234 for the comparable period in 1998. The increase was primarily due to
increased personnel hirings to keep the Company's development schedule on track
for enhancements to the software as well as research and development on new
software products. The Company continues to devote more resources to quality
assurance so the Company's software is more thoroughly tested and bug-free prior
to its release to users. The Company believes that a greater emphasis on quality
assurance may have the effect of reducing the number of calls to the Company's
customer support staff, which in turn can allow faster service to its customers
and more efficient and productive use of its customer support personnel. The
Company expects overall product development expenses to remain above its 1998
level throughout 1999.
Sales and marketing expenses increased 26 percent to $2,019 for the three months
ended June 30, 1999 from $1,598 for the same period in 1998, but as a percentage
of net revenue, remained constant at 15 percent. The increase was primarily due
to an increase in sales commissions, trade show costs and international
marketing activities. For the six months ended June 30, 1999, these expenses
increased 40 percent to $4,425 from $3,168 for the comparable period in 1998. As
a percentage of net revenue, these expenses increased to 17 percent for the six
months ended June 30, 1999 from 16 percent for the same period in 1998. The
increased expense was primarily due to increased sales commissions, advertising
and trade show costs, and to a lesser extent, international marketing expenses.
The increase in sales commissions was primarily due to the large estimating
software sale in the first quarter of 1999 that was discussed above.
General and administrative expenses increased nine percent to $1,332 for the
three months ended June 30, 1999 from $1,227 for the comparable period in 1998,
but as a percentage of net revenue, declined to 10 percent from 12 percent. The
increase in expenses was primarily due to higher insurance and outside service
costs. For the six months ended June 30, 1999, general and administrative
expenses increased seven percent to $2,659 from $2,494 for the comparable period
in 1998. As a percentage of net revenue, general and administrative expenses
decreased to 10 percent for the six months ended June 30, 1999 from 13 percent
for the same period in 1998.
PROVISION FOR INCOME TAXES. The Company's effective tax rate was 39 percent for
the three and six month periods ended June 30, 1999 compared to 37 percent for
the same periods in 1998. The provision for income taxes is based on the
Company's estimate of the effective tax rate for each of the respective years.
Capital Resources and Liquidity
- -------------------------------
The Company generally meets its liquidity needs through cash generated from
operations. During the six months ended June 30, 1999, net cash provided by
operations was $7,385 compared to $4,469 for the same period in 1998. This
increase was primarily due to an increase in the profitability of the Company's
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operations for the first six months of 1999 compared to the same period in 1998.
Working capital decreased to $3,365 at June 30, 1999 from $5,500 at December 31,
1998. This decrease was primarily due to the increase in deferred revenues, as
further discussed below. Cash and cash equivalents and temporary investment were
$13,400 at June 30, 1999, a slight decrease of $560 compared to December 31,
1998. Net accounts receivable at June 30, 1999 were $4,510, a decrease of $576
compared to December 31, 1998. The decrease was primarily due to a seasonal
decline in revenue in June 1999 compared to December 1998. DSO (Days Sales
Outstanding) at June 30, 1999 decreased slightly to 31, compared to 34 at
December 31, 1998. Net capitalized software costs increased $920 since
December 31, 1998 primarily due to payments owed under an agreement with another
software company to integrate its SQL database engine with the Company's
software.
Deferred revenues at June 30, 1999 increased $1,885 since
December 31, 1998 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 $594 since December 31, 1998 primarily due to
payments for profit sharing expense accrued in 1998 and the Company's 1998
contribution to its 401(k) plan.
During the first six months of 1999, the Company declared two regular cash
dividends totaling $.08 per share, aggregating $757. The Company plans to
continue to pay quarterly cash dividends.
Risks and Uncertainties
- -----------------------
From time to time, the Company may make forward-looking statements as such term
is defined in the Federal securities laws. The following risks and
uncertainties, among others, should be considered in evaluating the Company's
forward-looking statements. Factors that may cause actual results to differ
materially from those contained in such forward-looking statements are as
follows:
YEAR 2000 COMPLIANCE. Many companies that use and/or develop computer software
are addressing the potential problem that will soon manifest 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 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
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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 which are
still maintained by the Company, to make them year 2000 compliant are complete.
The Company has released the modified software to all of its DOS-based product
users who are on a software maintenance contract with the Company. The Company
has already notified known users of its discontinued software products that the
Company will not continue support of such products. 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.
As of June 30, 1999, the Company has completed its assessment of its internal
technical applications to ascertain whether they are year 2000 compliant. The
Company has identified components of its internal information and
telecommunication systems that are not year 2000 compliant and has upgraded some
of those components and tested those changes to ensure they are year 2000
compliant. Other components of those systems that need to be upgraded are
scheduled for completion before the end of 1999. The Company continually
upgrades and expands its internal information and telecommunication systems, and
does not budget specifically for year 2000 compliant costs required for
upgrading and testing those systems. However, the Company estimates that costs
specifically related to upgrading and testing the information and
telecommunication systems for year 2000 compliance will be approximately $80 in
1999. The assessment and projections 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 has also completed its assessment of non-technical applications to
identify areas that are not year 2000 compliant. No significant applications
critical to the operations of the Company were identified in this area that were
not year 2000 compliant. The Company did not assess or test all minor
non-technical applications for being year 2000 compliant, but believes that none
of these applications pose any significant adverse risk to the Company's
operations.
Additionally, the Company is nearing completion of its assessment for year 2000
compliance of its significant third parties upon whom it relies for various
aspects of its business . 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
16
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one of these potential events could adversely and materially affect the
Company's financial condition and results of operations.
The Company has made inquiries with its significant third party vendors,
suppliers and service providers 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 these parties has 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. No parties that have responded to our
inquiries have indicated that they will not be year 2000 compliant by the end of
1999. The Company anticipates that it will continue to solicit information for
these third parties and monitor the progress of their year 2000 compliance
programs through 1999.
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
later this year if the Company does not receive adequate assurances from third
party vendors, suppliers and service providers that they will be year 2000
compliant before the end of 1999 or if the Company subsequently discovers areas
within the Company that are not year 2000 compliant. However, based on the
information the Company has received to date, it does not believe this to be a
likely scenario. 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
compliance issue, and/or 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 or find alternative suppliers for
its software components. The Company's users may also seek to hold the Company
liable for damages if the software does not function properly and the Company
may be liable to users to which it has represented that its software is year
2000 compliant. 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 this issue will have a material adverse
effect on the Company's financial condition, results of operations and cash
flows. However, that assessment is based on knowledge that is currently known to
the Company and assumes that the responses it has received to date from third
parties are representative of all significant third parties with which the
Company transacts business. Many factors outside the control of the Company
could cause the Company's current assessment on the year 2000 compliance issue
17
<PAGE>
to change significantly. For example, unfavorable rulings on current and future
litigation related to this issue could adversely affect the Company's legal
defenses if the Company were to be named in such litigation and, as a result,
could have a material adverse effect on the Company's financial condition,
results of operations and cash flows. The Company will continue to update its
assessment of its year 2000 readiness as it receives updated information from
its year 2000 program and as it monitors legal rulings concerning the year 2000
compliance issue.
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.
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 a material
adverse effect on the financial position, results of operations and cash flows
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.
18
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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" their 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.
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.
19
<PAGE>
PART II. Other Information
Item 4. Submission of Matters to a Vote of Security Holders
The Company held its annual meeting of shareholders on April 27, 1999.
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
regarding votes cast with respect each nominee:
Votes Votes Shares
For Withheld Not Voted
--------- -------- ---------
Curtis L. Peltz 8,491,884 24,239 939,146
Thomas P. Cox 8,491,652 24,471 939,146
James A. Meyer 8,492,093 24,030 939,146
Donald L. Tisdel 8,497,839 18,284 939,146
2. The shareholders voted to ratify management's selection of auditors for
1999 by the affirmative vote of 8,437,166 shares with 69,387 shares
voting against the proposal, 9,570 shares abstaining, and 939,146 shares
not voted.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
(27) Financial Data Schedule
(b) Reports on Form 8-K
No Form 8-K was filed during the three months ended June 30, 1999.
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)
Date August 11, 1999 /s/ Carl C. Asai
-----------------------------
Carl C. Asai, Vice President,
Finance (Chief Financial Officer)
20
<PAGE>
FORM 10-Q
Exhibit Index
Exhibit Page
- ------- ------
(27) Financial Data Schedule 22
21
<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, 1999 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-31-1999
<PERIOD-END> JUN-30-1999
<CASH> 6,456
<SECURITIES> 6,944
<RECEIVABLES> 4,692
<ALLOWANCES> 182
<INVENTORY> 235
<CURRENT-ASSETS> 19,813
<PP&E> 23,947
<DEPRECIATION> 5,699
<TOTAL-ASSETS> 41,914
<CURRENT-LIABILITIES> 16,448
<BONDS> 0
<COMMON> 380
0
0
<OTHER-SE> 24,100
<TOTAL-LIABILITY-AND-EQUITY> 41,914
<SALES> 14,698
<TOTAL-REVENUES> 26,612
<CGS> 2,439
<TOTAL-COSTS> 12,408
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 7,353
<INCOME-TAX> 2,868
<INCOME-CONTINUING> 4,485
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 4,485
<EPS-BASIC> .47
<EPS-DILUTED> .46
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