U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
[x] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 For the Fiscal Year Ended
December 31, 1998.
[ ] TRANSITION REPORT PURSUANT TO 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
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section
12(g) of the Act:
Common Stock, without par value
(Title of class)
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 [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K, or any amendment to
this Form 10-K. [x]
At March 12, 1999, 9,455,269 shares of common stock of the registrant were
outstanding. On such date, the aggregate market value of the voting stock held
by non-affiliates of the registrant was $125,415,729.
DOCUMENTS INCORPORATED BY REFERENCE
Parts of the Registrant's Proxy Statement dated March 19, 1999, prepared in
connection with the Annual Meeting of Shareholders to be held on April 27, 1999
are incorporated by reference into Part III of this Report.
<PAGE>
PART I
ITEM 1. BUSINESS
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GENERAL
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Timberline(R) Software Corporation (the "Company" or "Timberline") was
incorporated in Oregon in 1979. Originally incorporated under the name
Timberline Systems, Inc., the Company changed its name in 1986. The Company's
corporate headquarters are located in Beaverton, Oregon and it maintains a home
page on the World Wide Web at http://www.timberline.com.
Timberline develops, markets, and supports project accounting and cost
estimating computer software primarily for the construction and property
management industries. The software is designed to work on stand alone
microcomputers (commonly referred to as personal computers or "PC's") or in a
network of microcomputers. Timberline also provides a range of support services
for users of its software, including annual maintenance and support contracts,
classroom training at its corporate headquarters and at other sites in the
United States, and on-site training and consulting.
The Company operates predominantly within the United States, but also sells its
products in other foreign countries, including Australia and Canada. As of
December 31, 1998, the Company believes that over 20,000 entities are currently
using the Company's software products, of which more than 12,000 are currently
subscribing to one of the Company's maintenance and support service plans.
The Company's operations are divided into two operating segments: software
products and software services. For additional information about these operating
segments, see Note 8 to the Company's Financial Statements for the year ended
December 31, 1998.
SOFTWARE PRODUCTS
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Software sales are the main source of the Company's net revenue. In 1998, 1997
and 1996, software sales accounted for 56 percent, 54 percent and 52 percent of
net revenue for those years, respectively.
The Company's current software products operate in Microsoft(R) Windows 95(R),
Windows 98(R), and NT(R) operating environments. Timberline's Windows-based
software products are also compatible with other Open Database Connectivity
(ODBC)-compliant applications. ODBC, a data exchange methodology developed by
Microsoft that has been accepted as an industry standard, allows users to
directly access information stored in Timberline data format with other
databases, word processing and spreadsheet programs for greater productivity.
The Company believes that the current versions of its Windows-based products are
year 2000 compliant.
The Company also currently maintains certain software products that operate in
the MS-DOS(R) operating environment. As a result of the introduction of its
Windows-based software products, the Company generally does not offer its
MS-DOS-based software products for sale to new users, but primarily maintains
these products for existing users of the software.
<PAGE>
The Company has two main software product groups: Accounting (composed of
construction and property management software) and Estimating. Prior to October
1996, the Company also sold software specifically designed for architectural and
engineering firms.
ACCOUNTING PRODUCT GROUP SOFTWARE
- ---------------------------------
The Company's Accounting Group software is project accounting software designed
for use in the construction and property management industries. This group's
software sales accounted for over 70 percent of the Company's software sales in
1998, 1997 and 1996.
Timberline's construction accounting software products are composed of three
different levels of software. The Medallion(R) line of software was first
released in 1984 and operates only in the MS-DOS operating environment. The
Medallion line was designed specifically for the home builder/remodeler and
small to medium-sized general and specialty contractors.
Due to the popularity of the Windows environment and the Company's introduction
of Gold Collection(TM) - Standard Edition software in June 1996, as discussed
below, Medallion software sales have decreased significantly since that date and
are no longer a significant source of software sales to the Company. The Company
generally does not offer this line of software products for sale to new users.
However, the Company continues to maintain this software and generates
maintenance and support fees from users of this line of software.
Gold Collection - Extended Edition was released in October 1992 and operates in
the Windows operating environment. This line of software was designed
specifically to handle the accounting and management information needs for
medium to large-sized construction companies and for other users with more
advanced accounting and management information requirements. The Company
believes that it was the first major software company to develop software for
construction companies utilizing the advanced capabilities of the Windows
operating environment.
In June 1996, the Company released Gold Standard, an integrated accounting
management system for the small to medium-sized construction companies developed
to work with Microsoft Windows 95. The software was developed to give the
Company's Medallion users an upgrade path to take advantage of the technology
that is now available and to address a segment of the construction market which
needed an accounting and management information system that used
state-of-the-art technology, without the additional advanced features available
in and added expense of the Gold Extended software products.
All three levels of software are designed around a core set of
accounting-oriented applications (such as General Ledger, Job Cost, Accounts
Payable, Accounts Receivable and Payroll). Additional features were added to the
software to meet the industry-specific needs of construction companies. The
various applications are fully integrated, allowing for data entered into one
application to be accessed and entered electronically into another application.
Gold Standard and Gold Extended have additional features and capabilities for
users with more complex needs, including executive inquiry and customized
summary reporting capabilities.
An Equipment Cost software application for Gold Extended was released at the end
of 1995 and is also available for Gold Standard. This application is critical to
equipment-intensive construction companies. With the release of this
<PAGE>
application, Timberline believes it is able to meet the accounting and
management information needs of the heavy/highway segment of the construction
industry.
The Company released its Accounts Receivable and Contracts software product in
December 1997 and its Billing software product in May 1998 for its Gold Extended
and Standard product lines. These are applications that the Company's current
users and prospective users had been requesting that the Company develop since
Gold Extended was initially released in 1992. The Company believes that these
applications will attract new users to Timberline because the Company is now
able to provide a more complete accounting and management information solution.
The Company's property management software is an accounting and management
information system used by managers of residential and commercial properties. It
provides information to property managers regarding revenues and expenses of
various properties and generates financial reports about the properties to the
various owners, as well as reports containing other tenant and lease information
about the properties. In March 1997, the Company released its Gold Collection
for Property Management, lease-based accounting software designed to work on
Microsoft Windows 95, Windows 98 and NT platforms. Unlike traditional,
tenant-based or unit-based software programs, Timberline's software is designed
to focus on the lease document itself, which allows the software to adapt to
many various types of lease arrangements. Prior to the release of this suite of
software applications, the Company's software for the property management
industry was Property Management Gold, which was designed to work on IBM(R)
OS/2(R) and Microsoft Windows NT platforms. The Company no longer offers this
line of software to new users since the release of the Gold Collection for
Property Management.
In July 1998, the Company announced that it had formed a marketing alliance with
invata international, inc., a company that specializes in computerized
maintenance management software. Under this alliance, invata international, inc.
will develop software that will interface directly with the Company's Gold
Collection for Property Management to help property managers control their
maintenance operations. This software is expected to be available for sale in
the early part of 1999.
The Company also had a DOS-based software product for residential property
managers, called SitePro, which was released in 1992. This software was designed
specifically for on-site managers of residential properties to enable them to
track financial and tenant information. This information could then be
electronically transferred to the home office for compilation and review with
other managed properties. In September 1997, the Company entered into an
agreement with Computer Language Research, Inc. ("CLR") to provide a migration
path for users of SitePro to CLR's year 2000-compliant property management
software system. As a result, Timberline no longer distributes SitePro to new
users, but continued to support current SitePro users through 1998. SitePro
sales have not been a significant source of revenue for the Company.
ESTIMATING PRODUCT GROUP SOFTWARE
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Estimating software allows an estimator to compile a bid on construction
projects based on certain parameters such as the architectural design, building
materials required and material and labor costs. In 1987, Timberline introduced
the Precision Collection(R), a family of integrated estimating software
applications. The Precision Collection is currently designed around two core
<PAGE>
estimating products - Precision Estimating - Standard Edition and Precision
Estimating - Extended Edition. Precision Estimating Standard, released in June
1996, replaced the Company's older entry and mid-level DOS-based estimating
products. Designed specifically for Microsoft Windows 95 and Microsoft Windows
NT platforms, this estimating software is designed to allow an estimator to make
fast, accurate estimates on software that the Company believes is fairly easy to
learn and to use, while taking advantage of Windows-based technology. Precision
Estimating Extended offers a more comprehensive and sophisticated approach to
the estimating process, from the first conceptual estimate to the final bill of
materials. In September 1997, the Company released a completely re-designed,
Windows-based version of Precision Estimating Extended to replace the older DOS
version. This new group of software products is fully interoperable with the
Precision Standard products.
To complement its estimating software products, the Company also sells databases
and other software it has developed and those developed by others, which allow
estimators to be more productive and to develop more comprehensive estimates.
The core estimating product also interfaces with the Company's Job Cost
accounting application. Through interfaces developed by Timberline, the core
estimating product can be linked to Autodesk's AutoCAD(R) applications and to
scheduling software developed by Microsoft and Primavera Systems, Inc.
ARCHITECTS AND ENGINEERS
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Prior to October 1996, the Company sold software designed specifically for
architectural and engineering firms. The software provided the basic accounting
information along with the capability to generate billing information on a
project basis. Initially released in 1987, the software, called AEasy and AEasy
Plus, was developed by an outside software developer using the Company's
software standards and tools. The Company paid royalties to the developer based
on the quantity of software sold.
In September 1996, the Company sold this software, its architects and engineers
user base, and other rights and obligations to a non-affiliated, privately-held
company. According to the terms of the agreement, the Company received an
initial payment for the items listed above and will receive royalties on future
service fee revenue and software sales. The Company believes that the sale had
no significant effect on its business.
SUPPORT SERVICES
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The Company generates a significant portion of its net revenue from service
fees. Services fees are comprised primarily of maintenance and support fees,
classroom training fees, sales of training materials and on-site consulting
fees.
Users of the Company's software may purchase maintenance and support services
from the Company. These annual service contracts allow the user to obtain
program changes and enhancements as they are released and to obtain telephone
access to the Company's customer support department for answering
application-related questions. Commencing in 1998, users on maintenance and
support service contracts also have internet access to online support help
available through the Company's home page on the World Wide Web. Through this
service, users have a 24-hour-a-day communication and information tool for
self-help services, such as downloading latest versions of software, updates
<PAGE>
and software patches, and access to a knowledge base to obtain answers to most
commonly answered questions.
The Company also generates fees from training classes to teach users how to
efficiently setup and use the Company's software products. The classes are
generally held throughout the year at the Company's corporate headquarters or
near its offices in the New York and Los Angeles metropolitan areas. Commencing
in the latter part of 1998, the Company is curtailing the number of training
classes it offers as the Company's independent dealer channel assumes a more
active role in providing training classes to users in their own geographic
areas. To maintain a high, consistent standard of training to users of
Timberline software and to assist the dealers in conducting training classes,
the Company has developed a curriculum of training materials to be used at all
Timberline software classes. The Company generates revenue from the sale of
these training materials to its dealer channel.
The Company also offers consulting services to users who need or request more
specialized assistance in the set-up and use of Timberline software. In these
situations, the Company's consulting services group provides such services
on-site at the user's offices. Requests for such services are received directly
from the user or from referrals from the Company's independent dealer channel.
In certain circumstances, the Company may sub-contract these consulting services
to a group of Timberline-certified consultants. This group is composed of
independent third party providers who have met or surpassed standards imposed by
the Company of their knowledge in Timberline software products, industry
knowledge, accounting and estimating expertise, communication skills and other
relevant factors.
Service fees are a significant percentage of the Company's total net revenue. In
1998, 1997, and 1996, service fees comprised 41 percent, 44 percent and 45
percent, respectively, of total net revenue. The Company is committed to
maintaining a high level of quality related to its support services. At the end
of 1998, 42 percent of the Company's employees were directly associated with
providing support services.
SALES/DISTRIBUTION
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The Company licenses its software products and sells its services primarily in
the United States. The Company also licenses its software products into Canada,
Australia, and other foreign countries. Revenue from foreign countries has not
been significant, comprising less than six percent of the Company's total net
revenue in 1998, 1997 and 1996.
Product distribution is primarily handled by value added dealers and
distributors. The Company also maintains a direct sales force to complement its
dealer channel and to handle sales to national accounts and other large
companies.
Timberline maintains a telemarketing staff for selling maintenance and support
service contracts and classroom training to its user base. On-site consulting
fees are generated from requests for services from the users and dealers to the
Company's sales and customer support staff.
<PAGE>
Unfilled orders for software products at December 31, 1998 and 1997 were not
significant. The Company typically ships software products within three days of
receipt of the order.
PRODUCTION
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The principal materials and components used in the Company's software products
are computer media and user manuals. For each product, the Company prepares
masters of the software on CD-ROM's. Substantially all copies of the software
are made by outside vendors. The Company also relies on outside vendors to
provide software assembly and shipping services.
COMPETITION
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The 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. The Company believes that it is the
major supplier of construction accounting and estimating software in the
construction industry and is also one of the leading suppliers of accounting and
management information software in the property management industry. The Company
believes that there are barriers to entry into its segment of the software
market. First, the sophisticated programs it develops require a wide range of
programming specialization. In addition, the nature of the software requires a
company of a certain size able to support the software, including distribution
and training capabilities in a number of geographical regions as well as
continuing support, maintenance and upgrades of the software. However, should a
decision be made by the larger, well-known software developers to enter 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 believes that its emphasis on producing high quality software
products that are flexible and user-friendly enables the Company to compete
effectively. In addition, the Company believes it provides very responsive
customer support service to its end users, which enhances the marketability of
its products.
PRODUCT PROTECTION
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The Company regards its software as proprietary and attempts to protect it by
relying upon copyrights, trade secret laws, internal nondisclosure agreements
and transferability restrictions incorporated into its software license
agreements. The Company provides its software products under a perpetual paid-up
license agreement. Title does not transfer to the customer. Program source
listings are not released, which the Company believes further protects
unauthorized transfers of the Company's proprietary information, as well as the
confidentiality of the Company's trade secrets. The Company also uses a
combination of software programming and hardware devices to protect some of its
products from unauthorized use or duplication. 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 has no software patents. Although the Company's competitive position may
be adversely affected by unauthorized use of its proprietary information, the
Company believes that the rapid pace of technological change in the computer
industry makes intellectual property protection of less significance than such
<PAGE>
factors as the knowledge and experience of management personnel and the
Company's ability to develop, enhance, support and market its products.
Third parties may 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 divert the efforts of the
Company's technical and management personnel, whether or not such litigation is
determined in favor of the Company.
RESEARCH AND DEVELOPMENT
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Timberline is continually in the process of developing new software and
enhancing its existing software products in order to meet the changing needs of
its current users and the marketplace. At the end of 1998, 32 percent of the
Company's employees were directly associated with product development. Product
development expenses were $8,863,000, $7,264,000, and $5,647,000 in 1998, 1997
and 1996, respectively. Of that total, $7,822,000, $6,222,000, and $4,905,000
were incurred in 1998, 1997 and 1996, respectively, on research and development
on new software products. An additional $173,000, $927,000, and $1,127,000,
respectively, of product development expenses on new software products were
capitalized in those same years.
EMPLOYEES
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At December 31, 1998, the Company had 367 employees, of which 354 were
full-time. None of the employees are represented by unions, or subject to
collective bargaining. Timberline's business is heavily dependent on retaining
and attracting highly skilled employees. As such, the Company has an employee
benefits program that includes group health, dental, disability and life
insurance plans, paid vacations and holidays, leave privileges, and educational
reimbursement. The Company also has a pension plan under the provisions of
section 401(k) of the Internal Revenue Code in which the Company is currently
matching a certain percentage of the employee's contribution to the plan, and a
profit sharing plan covering all employees. Additionally, the Company has stock
option and stock incentive plans from which it may grant stock options and
incentives to its employees. The Company believes its relationship with its
employees is good.
ITEM 2. PROPERTIES
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In October 1998, the Company moved into its new corporate headquarters located
in Beaverton, Oregon. Nearly all of the Company's employees and operations are
located in this 89,000 square foot office and production facility, which was
constructed by the Company on land it purchased in 1997. Prior to the
construction of its new corporate headquarters, the Company's main offices were
in a leased 51,000 square foot office and production facility located close to
its present location. The lease on that facility expired in October 1998. The
Company also leases an additional 12,000 square feet of office space near its
former location, which was initially used to locate part of the Company's
operations as it outgrew its former main office facility. The lease on this
office space expires in April 2003 and is currently being subleased.
The Company also leases small regional offices under short-term lease
arrangements for some of its sales, consulting and training functions in the
following metropolitan areas: Los Angeles, CA; New York, NY; Concord, NC; and
Jacksonville, FL.
<PAGE>
The Company believes that its corporate headquarters and all of its leased
facilities are modern facilities in good condition and are adequate for its
immediate needs. Should additional office space be required, the Company has the
ability to construct an additional 20,000 square feet of office space at its
corporate headquarters.
In connection with the construction of its corporate headquarters, the Company
entered into a construction loan agreement with a bank. Borrowings under this
loan agreement are secured with a security interest in the site of the Company's
corporate headquarters.
ITEM 3. LEGAL PROCEEDINGS
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From time to time, the Company is involved in litigation relating to claims
arising out of its operations in the normal course of business. As of the date
of this Report, the Company is not a party to any legal proceedings the adverse
outcome of which would, in management's opinion, have a material adverse effect
on the Company.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
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None.
<PAGE>
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
- ------------------------------------------------------------------------------
The Company's common stock is traded on the Nasdaq National Market System under
the symbol TMBS. The high and low closing prices are as reported by the Nasdaq
National Market System. The prices have been retroactively adjusted to reflect
the four-for-three stock split in November 1998 and five-for-four stock split in
November 1997.
<TABLE>
<CAPTION>
1998 1997
High Low High Low
<S> <C> <C> <C> <C> <C> <C>
First Quarter $ 13.6875 $ 9.1406 $ 6.5250 $ 4.4250
Second Quarter 18.3750 11.2500 5.7000 4.2000
Third Quarter 20.3438 10.5000 8.8500 4.8000
Fourth Quarter 15.0000 11.5313 14.8125 7.5000
</TABLE>
As of March 9, 1999, there were 336 shareholders of record. Based upon the
number of requests for the Company's proxy material for its 1999 annual meeting
of shareholders, the Company believes there were approximately 6,000 beneficial
shareholders as of that date. Cash dividends paid in 1998 and 1997 amounted (in
thousands) to $1,236 and $833, respectively.
ITEM 6. SELECTED FINANCIAL DATA
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(Amounts in thousands, except per share amounts and ratio)
<TABLE>
<CAPTION>
1998 1997 1996 1995 1994
- ------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net revenue:
Computer software $ 24,786 $ 18,928 $ 14,983 $ 13,435 $ 12,463
Service fees 18,197 15,354 12,956 10,927 8,809
Other 1,310 958 720 457 369
- ------------------------------------------------------------------------------------------------------------------------------
Net revenue 44,293 35,240 28,659 24,819 21,641
Cost and expenses 33,518 28,740 26,004 22,731 19,866
- ------------------------------------------------------------------------------------------------------------------------------
Operating income 10,775 6,500 2,655 2,088 1,775
Other income - net 531 470 399 359 170
- ------------------------------------------------------------------------------------------------------------------------------
Income before income taxes 11,306 6,970 3,054 2,447 1,945
Provision for income taxes 4,112 2,435 870 714 751
- ------------------------------------------------------------------------------------------------------------------------------
Net income $ 7,194 $ 4,535 $ 2,184 $ 1,733 $ 1,194
==============================================================================================================================
Basic earnings per share $ 0.77 $ 0.49 $ 0.25 $ 0.20 $ 0.14
Diluted earnings per share $ 0.74 $ 0.48 $ 0.23 $ 0.19 $ 0.14
==============================================================================================================================
Cash dividends declared $ 1,236 $ 833 $ 625 $ 377 $ 68
Dividends per share 0.13 0.09 0.07 0.04 0.01
Total assets 41,549 25,754 18,042 14,385 12,350
Long-term debt 5,417 -- -- -- --
Shareholders' equity 20,036 13,266 8,915 6,361 4,744
Working capital 5,500 4,339 1,325 3,894 2,070
Current ratio 1.37 1.38 1.16 1.51 1.29
==============================================================================================================================
</TABLE>
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
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RESULTS OF OPERATIONS
- ---------------------
(Amounts in thousands, except per share and percent amounts)
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 and changes in general market conditions, and certain
risks associated with the year 2000, discussed below under "Year 2000
Compliance," 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
1998 COMPARED TO 1997
Net Revenue increased 26 percent to $44,293 in 1998 from $35,240 in 1997. The
two major components of net revenue, computer software sales and service fees,
both increased in 1998. Software sales increased 31 percent to $24,786 in 1998
from $18,928 in 1997. Software sales increased in both of the Company's product
groups: Accounting (composed of Construction Accounting and Property Management)
and Estimating. Accounting software sales increased 37 percent to $18,503 in
1998 from $13,539 in 1997 primarily due to a significant increase in sales of
the Company's Gold Collection for Construction Accounting, the Company's
Windows-based accounting software. Construction Accounting software sales
increased 34 percent in 1998 over 1997 levels. The Company believes this
increase is primarily due to the continued strength in the construction industry
and, to a lesser extent, the need for companies to upgrade or replace existing
computer software that is not year 2000 compliant. Accounting software sales
also increased due to the availability of new software products which were not
available, or available for only part of the year, in 1997. These products
<PAGE>
include the Accounts Receivable module, released in December 1997, and the
Billing module, released in May 1998. Property Management software sales
increased 59 percent in 1998 over 1997 as the Company's Gold Collection for
Property Management, released in March 1997, continues to gain greater
acceptance in that market.
Estimating software sales increased 17 percent to $6,283 in 1998 from $5,389 in
1997. The Company believes this increase is primarily due to the continued
strength in the construction industry and additional sales from the Company's
Precision Collection-Extended Edition, which was released in September 1997.
Total software sales represented 56 percent of net revenue compared to 54
percent of net revenue in 1997. In terms of revenue mix, Accounting software
sales represented 75 percent of software sales in 1998 compared to 72 percent in
1997. Estimating software sales represented 25 percent of software sales in 1998
compared to 28 percent in 1997. International (non-U.S.) software sales, as a
percentage of total software sales remained constant at six percent for 1998 and
1997, and is composed primarily of sales from Australia and Canada. The Company
plans to expand its international business in the Estimating product line, which
is not expected to have a significant impact on net revenue in the near future.
The Company believes software sales, as a percentage of net revenue, will
continue at approximately the same level in 1999 as it did in 1998.
Service fees from maintenance, support, training and consulting, which
represented 41 percent and 44 percent of net revenue in 1998 and 1997,
respectively, increased 19 percent to $18,197 in 1998 from $15,354 in 1997. The
increase in service fees is primarily due to the continuing increase in the
Company's user base through new product sales and a price increase for
maintenance and support service contracts. New users require training or on-site
consulting services, as well as annual maintenance and support service contracts
on their software. Maintenance and support fees, which comprise approximately 77
percent of total service fees in 1998, increased 14 percent in 1998 over 1997.
Consulting fees increased 22 percent in 1998 over 1997, while training fees
increased 52 percent in 1998 over 1997. Training fees have increased primarily
due to a significant increase in training materials sold to the Company's
dealers, who are taking a more active role in conducting training classes in
their own geographic areas. The Company believes that service fees as a
percentage of net revenue will continue to represent a significant, but not
necessarily an increasing, percentage of net revenue.
COST OF REVENUE consists primarily of software documentation, assembly and
shipping costs, royalties paid to outside developers, amortization of
capitalized software development costs and cost of facilities and outside
services for training and consulting. Cost of revenue, as a percentage of net
revenue, decreased to nine percent in 1998 from 10 percent in 1997. The decrease
in this percentage was primarily due to lower costs associated with software
sales and lower costs associated with software releases to users on annual
software maintenance contracts. This was partially offset by increased costs for
amortization of capitalized software development costs, royalties and training
costs. The Company believes that cost of revenue, as a percentage of net
revenue, will remain at approximately the same level in 1999 as in 1998.
OPERATING EXPENSES increased 18 percent to $29,609 in 1998 from $25,135 in 1997.
The largest increases occurred in the areas of customer support and product
development.
<PAGE>
Customer support expenses increased 26 percent to $8,496 in 1998 from $6,744 in
1997. The increase was primarily due to additional personnel hired to handle the
increased demand for support, training 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 for training and consulting services to support Accounting software
sales and to maintain a high quality level of support services.
Product development expenses increased 22 percent to $8,863 in 1998 from $7,264
in 1997. The increase was primarily due to increased personnel costs for
designing, developing and testing enhancements to the Company's existing
software products, as well as ongoing research on future products. Additionally,
capitalized software development costs, which reduce the amount of product
development expenses recognized, amounted to $173 in 1998 compared to $927 in
1997. This would account for $754 of the $1,599 increase in product development
expenses in 1998 over 1997. The Company believes that product development
expenses will continue to increase in 1999.
Sales and marketing expenses increased nine percent to $6,916 in 1998 from
$6,351 in 1997. As a percentage of net revenue, sales and marketing expenses
decreased to 16 percent in 1998 from 18 percent in 1997. The increase in these
expenses was primarily due to increased advertising and trade show expenses, and
to a lesser extent, an increase in international marketing activities. The
increase in marketing expenses was partially offset by a slight decrease in
sales expenses. The Company believes that sales and marketing expenses, as a
percentage of net revenue, will remain at approximately the same level in 1999
as in 1998.
General and administrative expenses increased 12 percent to $5,334 in 1998 from
$4,776 in 1997. As a percentage of net revenue, these expenses decreased to 12
percent in 1998 from 14 percent in 1997. The increase in these expenses was
primarily due to higher insurance, legal and other professional services costs
and expenses in the fourth quarter of 1998 related to the Company's move to its
new corporate headquarters.
1997 COMPARED TO 1996
NET REVENUE increased 23 percent to $35,240 in 1997 from $28,659 in 1996. The
two major components of net revenue, computer software sales and service fees,
both increased in 1997. Software sales increased 26 percent to $18,928 in 1998
from $14,983 in 1997. Software sales increased in both of the Company's product
groups. Accounting software sales increased 27 percent to $13,539 in 1997 from
$10,665 in 1996, primarily due to a significant increase in sales of the
Company's Gold Collection for Construction Accounting. Construction accounting
software sales increased 28 percent in 1997 over 1996, primarily due to the
continuing increase in sales of Gold Collection-Extended Edition and sales of
Gold Collection-Standard Edition, which was released in June 1996. Property
Management software sales increased 72 percent due to sales of Gold Collection
for Property Management, which was released at the end of March 1997. There were
no Architects & Engineer software sales in 1997, as that product line was sold
to an unrelated entity in September 1996. Estimating software sales increased 25
percent to $5,389 in 1997 from $4,318 in 1996. The increase was primarily due to
increased sales of Precision Collection-Standard Edition, which was released in
June 1996 and the release of Precision Collection-Extended Edition at the end of
September 1997.
<PAGE>
Total software sales represented 54 percent of net revenue in 1997 compared to
52 percent in 1996. Accounting software sales represented 72 percent of total
software sales in 1997 compared to 71 percent in 1996. Estimating software sales
represented 28 percent of total software sales in 1997 compared to 29 percent in
1996. International (non-U.S.) software sales, as a percentage of total software
sales, remained constant at six percent for 1997 and 1996 and is composed
primarily of sales from Australia and Canada.
Service fees from maintenance, support, training and consulting, which
represented 44 percent and 45 percent of net revenue in 1997 and 1996,
respectively, increased 19 percent to $15,354 in 1997 from $12,956 in 1996. The
increase in services fees was principally due to the continuing increase in the
Company's user base through new product sales. Maintenance and support fees,
which accounted for 80 percent of service fees in 1997, increased 19 percent
over 1996 levels. Consulting fees increased 32 percent in 1997 over 1996, while
training fees remained fairly constant.
COST OF REVENUE as a percentage of net revenue, decreased to 10 percent in 1997
from 12 percent in 1996. The decrease in this percentage was primarily due to
lower documentation and assembly costs associated with software sales and
software releases to users on annual software maintenance contracts. This
decrease was partially offset by an increase in the amount of amortization
related to capitalized software development costs as a result of major new
products released in 1997 and 1996.
OPERATING EXPENSES increased 12 percent to $25,135 in 1997 from $22,490 in 1996.
The largest increase came in the area of product development, which increased 29
percent to $7,264 in 1997 from $5,647 in 1996. This increase was primarily due
to increased personnel costs, additional personnel to develop online help and
training materials for the new software products, and an increase in expenses
associated with outside developers. Additionally, capitalized software
development costs declined in 1997 compared to 1996. Capitalized software
development costs amounted to $927 in 1997 compared to $1,127 in 1996.
Customer support expenses increased five percent to $6,744 in 1997 from $6,403
in 1996. The slight increase was primarily due to increased personnel costs and
equipment-related expenses. The increase in expenses was offset by a reduction
in customer support personnel during the first four months of 1997. As the
demand for support and consulting services increased during the year, primarily
due to Gold Extended and Standard Construction Accounting software sales, the
Company found it necessary to increase its customer support personnel to handle
the increased volume.
Sales and marketing expenses decreased one percent to $6,351 in 1997 from $6,397
in 1996. As a percentage of net revenue, sales and marketing expenses decreased
to 18 percent in 1997 from 22 percent in 1996. The decrease was primarily due to
a decline in the number of sales and marketing personnel and lower trade show
expenses. This was partially offset by an increase in advertising costs and
commissions to direct sales personnel.
General and administrative expenses increased 18 percent to $4,776 in 1997 from
$4,043 in 1996. As a percentage of net revenue, these expenses remained
relatively constant at approximately 14 percent in both 1997 and 1996. This
increase in expenses was primarily due to an increase in personnel and
<PAGE>
equipment-related costs, higher insurance and outside service costs, and an
increase in the provision for doubtful accounts.
OTHER INCOME AND INCOME TAXES
OTHER INCOME (EXPENSE) is primarily composed of interest income on cash and cash
equivalents and temporary investments. Interest income increased 18 percent in
both 1998 and 1997 over the previous year primarily due to an increase in
investable funds.
PROVISION FOR INCOME TAXES. The Company's effective tax rate was 36 percent, 35
percent, and 28 percent in 1998, 1997 and 1996, respectively. The lower rate in
1996 was primarily due to additional research and development tax credits
available from prior years as a result of a change in tax regulations. Although
the Company's effective tax rate was reduced by research and development tax
credits for each year, the effect of the credit on the effective tax rate
decreases due to the significant increase in the Company's pre-tax income. For
further analysis of the provision for income taxes, see Note 7 of Notes to
Financial Statements. The Company believes that the effective tax rate for 1999
will be higher than the 1998 effective tax rate.
LIQUIDITY AND CAPITAL RESOURCES
The Company generally meets its liquidity needs through cash generated from
operations. Net cash provided by operations was $12,297 in 1998 compared to
$8,686 and $3,643 in 1997 and 1996, respectively. The increase in 1998 and 1997
was due primarily to the increased profitability of the Company's operations.
Working capital increased to $5,500 at December 31, 1998 from $4,339 at
December 31, 1997 primarily due to increases in cash and cash equivalents and
accounts receivable, and a decrease in accounts payable. This was partially
offset by a decrease in temporary investments and increases in deferred revenues
and accrued employee expenses, which are discussed below. Cash and cash
equivalents and temporary investments, which represent 34 percent of total
assets at December 31, 1998, increased $3,715 during 1998 primarily due to an
increase in cash provided by operations. Accounts receivable at
December 31, 1998 increased $783 since the end of 1997 primarily due to higher
revenue in December 1998 compared to December 1997. There was a slight
improvement in DSO (days sales outstanding) in accounts receivable, to 34 days
at December 31, 1998 from 36 days at December 31, 1997.
Net property and equipment and purchased software at December 31, 1998 increased
$11,436 since the end of 1997. Property and software additions amounted to
$13,489 in 1998. Of this amount, $10,764 was expended for the construction of
the Company's new corporate headquarters, which the Company occupied in
October 1998. Other expenditures were primarily for computer equipment for new
personnel and expenditures for the Company's internal information and
telecommunication systems. The Company borrowed $5,500 from a bank to finance a
portion of the construction costs related to its new corporate headquarters.
The Company had intended to convert the borrowings under the construction loan
into a permanent mortgage loan which is permitted under the current construction
loan agreement. Subsequent to December 31, 1998, the Company repaid its
construction loan and on March 17, 1999, in light of the Company's current cash
position, its cash flow projections for 1999 and an increase in mortgage
interest rates during the first quarter of 1999, management discussed with the
Board of Directors its need for long-term mortgage financing; however, no
decision has yet been made. The Company has budgeted expenditures for equipment
and software in 1999 amounting to $1,600, which is expected to be funded
through current cash and investment balances and cash provided by operations.
<PAGE>
Net capitalized software costs at December 31, 1998 decreased $330 since
December 31, 1997. The decrease was primarily due to the amortization of
capitalized software costs, which amounted to $503 in 1998. This was partially
offset by additional capitalized software development costs in 1998 amounting to
$173, which was primarily related to the Gold Billing module that was released
in May 1998.
Accounts payable at December 31, 1998 decreased $628 since the end of 1997
primarily due to a significant decrease in the amount of construction costs
payable related to the Company's new corporate headquarters at the end of 1998
compared to the end of 1997. Accrued commissions/royalties at December 31, 1998
increased $419 since December 31, 1997 primarily due to an increase in
commissions owed to dealers for service fee revenue generated by the Company.
Deferred revenues at December 31, 1998, which primarily represents future
maintenance and support revenue to be recognized in 1999, increased $2,849 since
December 31, 1997. Billings for annual maintenance and support services have
increased due to an increase in the Company's user base and a price increase for
such services. Revenue from annual maintenance and support service billings are
recognized monthly over the terms of the contract. Accrued employee expenses at
December 31, 1998 increased $451 since the end of 1997 primarily due to
increases in accrued profit sharing expense, employee commissions and the
Company's contribution to its 401(k) plan.
The Company's Board of Directors approved a four-for-three stock split and a
five-for-four stock split effective in November 1998 and 1997, respectively. All
common share and per share amounts have been restated to reflect these stock
splits. Total dividends paid in 1998 were $1,236, or $.13 per share compared to
dividends paid in 1997 of $833, or $.09 per share. The Company plans to continue
to pay quarterly cash dividends. The Company's construction loan agreement
requires the Company to maintain certain 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 December 31, 1998 amounted to $12,995.
YEAR 2000 COMPLIANCE
Many companies that use and/or develop computer software are addressing the
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
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 the complete suite of its current versions of Windows-based
products is already year 2000 compliant, and modifications to its older
DOS-based accounting products, which are currently being maintained by the
<PAGE>
Company, 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 complete and the modified software has been made available on
request to users who are on a software maintenance plan with the Company. The
Company plans to release the modified software to users who are currently on a
software maintenance contract with the Company in early 1999. The Company has
already notified 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.
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 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 $80
in 1999. The assessment and projections for having those systems year 2000
compliant were completed 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
has not yet been completed, but the assessment and final compliance testing is
expected to be completed by the end of the second quarter of 1999. Based on the
Company's current assessment of these non-technical areas, the Company does not
believe this area poses any significant problems. The Company believes that the
cost of bringing its non-technical applications into year 2000 compliance will
not be material.
Additionally, the Company is continuing to assess whether significant third
parties upon whom it relies for various aspects of its business are year 2000
compliant. 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 events may
adversely affect the Company's financial condition, results of operations and
cash flows.
The Company has made some formal inquiries with these 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. The Company is continuing to identify and
<PAGE>
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 through 1999.
The Company has not yet 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 the year 2000
programs of its third party vendors, suppliers and service providers, 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 compliance 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, 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 we have received from third parties are
representative of all 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 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 an 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.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
- --------------------------------------------------------------------
The Company has assessed its exposure to market risks for its financial
instruments and has determined that its exposures to such risks is not material.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
- ----------------------------------------------------
The financial statements required pursuant to this item are included in Item 14
of this Annual Report on Form 10-K.
<PAGE>
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH
- ------------------------------------------
ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
- --------------------------------------------------
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
- ------------------------------------------------------------
The information called for by this item is included under the captions
"Election of Directors" and "Compliance with Section 16(a) of the Securities
Exchange Act" contained in Timberline Software Corporation's definitive proxy
statement for the annual meeting of shareholders to be held on April 27, 1999,
and is hereby incorporated by reference.
ITEM 11. EXECUTIVE COMPENSATION
- --------------------------------
The information called for by this item is included under the caption
"Executive Compensation" contained in Timberline Software Corporation's
definitive proxy statement for the annual meeting of shareholders to be held on
April 27, 1999, and is hereby incorporated by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
- ------------------------------------------------------------------------
The information called for by this item is included under the caption
"Voting Securities and Principal Holders Thereof" contained in Timberline
Software Corporation's definitive proxy statement for the annual meeting of
shareholders to be held on April 27, 1999, and is hereby incorporated by
reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
- --------------------------------------------------------
None.
<PAGE>
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
- -------------------------------------------------------------------------
a. 1. Financial Statements
The following financial statements of Timberline Software Corporation are
filed as part of this report:
<TABLE>
<CAPTION>
PAGE
<S> <C>
Statements of Operations for the years ended December 31, 1998, 1997
and 1996 F-1
Balance Sheets at December 31, 1998 and 1997 F-2
Statements of Cash Flows for the years ended December 31, 1998, 1997
and 1996 F-3
Statements of Shareholders' Equity for the years ended
December 31, 1998, 1997 and 1996 F-4
Notes to Financial Statements F-5
Independent Auditors' Report F-15
</TABLE>
2. Financial Statement Schedules
Financial statement schedules have been omitted since they are either
not required or the amounts to be included in such schedules are not
material.
3. Exhibits
Articles of Incorporation and Bylaws
3(i) - Amended and Restated Articles of Incorporation (Incorporated by
reference to Exhibit 3.1 of Quarterly Report on Form 10-Q for
the three months ended September 30, 1998)
3(ii) - Amended and Restated Bylaws (Incorporated by reference
to Exhibit 3(ii) of Quarterly Report on Form 10-QSB for the
three months ended March 31, 1997)
Material Contracts
* 10.1 - 1987 Non-Qualified Stock Option Plan (Incorporated by reference
to Exhibit 10.1 of Annual Report on Form 10-K for the year
ended December 31, 1990)
* 10.1(a) - Amendment No. 1 to 1987 Non-Qualified Stock Option Plan
(Incorporated by reference to exhibit 10.1(a) of Form
10-KSB for the year ended December 31, 1995)
* 10.2 - 1989 Non-Qualified Stock Option Plan (Incorporated by reference
to Exhibit 10.2 of Annual Report on Form 10-K for the year
ended December 31, 1990)
* 10.2(a) - Amendment No. 1 to 1989 Non-Qualified Stock Option Plan
(Incorporated by reference to Exhibit 10.2(a) of Form
10-KSB for the year ended December 31, 1995)
<PAGE>
10.3 - Form of Indemnification Agreement and signature pages for all
indemnitees (Incorporated by reference to Exhibit 10.3 of
Annual Report on Form 10-K for the year ended
December 31, 1990)
* 10.4 - Timberline Employees' Retirement Plan (Incorporated by
reference to Exhibit 10.4 of Annual Report on Form 10-K
for the year ended December 31, 1990)
* 10.5 - First and Second amendments to Timberline Software
Corporation Employees' Retirement Plan (Incorporated by
reference to Exhibit 10.5 of Annual Report on Form 10-K
for the year ended December 31, 1992)
* 10.5(a) - Article A - Appendix to Basic Plan Document of Timberline
Software Corporation Employees' Retirement Plan
(Incorporated by reference to Exhibit 10.5(a) of Annual Report
on Form 10-KSB for the year ended December 31, 1994)
* 10.5(b) - Article B - Appendix to Basic Plan Document of Timberline
Software Corporation Employees' Retirement Plan
(Incorporated by reference to Exhibit 10.5(b) of Annual Report
on Form 10-KSB for the year ended December 31, 1995)
* 10.5(c) - Third Amendment to Timberline Software Corporation Employees'
Retirement Plan (Incorporated by reference to Exhibit 10.1(c)
of Form 10-KSB for the year ended December 31, 1995)
* 10.5(d) - Fourth Amendment to Timberline Software Corporation Employees'
Retirement Plan (Incorporated by reference to Exhibit 10.5(d)
of Annual Report on Form 10-KSB for the year ended
December 31, 1997)
* 10.6 - 1993 Stock Incentive Plan (Incorporated by reference to Exhibit
10 of Quarterly Report on Form 10-Q for the three months ended
June 30, 1993)
10.7 - Warrant Agreement by and between the Company and McDonald's
Corporation dated as of March 10, 1994 (Incorporated by
reference to Exhibit 10.1 of Quarterly Report on Form 10-QSB
for the three months ended June 30, 1994)
10.8 - Construction Loan Agreement dated as of December 1, 1997
between the Company and Pacific One Bank (Incorporated by
reference to Exhibit 10.8 of Form 10-KSB for the year ended
December 31, 1997)
10.9 - Deed of Trust, Line of Credit Instrument dated as of
December 1, 1997 between the Company and Pacific One Bank
(Incorporated by reference to Exhibit 10.9 of Form 10-KSB
for the year ended December 31, 1997)
<PAGE>
10.10 - Promissory Note in the amount of $9,750,000.00 dated as of
December 1, 1997 (Incorporated by reference to Exhibit
10.10 of Form 10-KSB for the year ended December 31, 1997)
* 10.11 - 1998 Stock Incentive Plan, as amended, effective April 28, 1998
Other Documents or Statements to Security Holders
20 - Portions of definitive proxy statement for 1999
shareholders meeting (which are incorporated by reference
in this Form 10-K Annual Report) (Incorporated by reference to
definitive Proxy Statement dated March 19, 1999 for Annual
Shareholder's meeting to be held April 27, 1999)
Consents
23 - Independent Auditors' Consent
Miscellaneous
27 - Financial Data Schedule for the year ended December 31, 1998
99 - Safe Harbor for Forward-Looking Statements; Certain
Cautionary Statements (Incorporated by reference to Exhibit
99 of Quarterly Report on Form 10-Q for the three months
ended June 30, 1998)
* Management contract or compensatory plan or arrangement
b. Reports on Form 8-K
No Form 8-K was filed during the three months ended December 31, 1998.
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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
by /s/ Thomas P. Cox 3/17/99
----------------- -------
Thomas P. Cox Date
Executive Vice President
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the registrant and
in the capacities and on the dates indicated.
/s/ Curtis L. Peltz 3/17/99
- ---------------------------------- -------
Curtis L. Peltz Date
President, Chief Executive Officer
and Director
/s/ Thomas P. Cox 3/17/99
- ---------------------------- -------
Thomas P. Cox Date
Executive Vice President and
Director
/s/ Carl C. Asai 3/17/99
- ---------------------- -------
Carl C. Asai Date
Vice President-Finance
Chief Financial Officer
/s/ James A. Meyer 3/17/99
- ---------------------------------- -------
James A. Meyer Date
Chairman of the Board of Directors
/s/ Donald L. Tisdel 3/17/99
- -------------------- -------
Donald L. Tisdel Date
Director
<PAGE>
<TABLE>
<CAPTION>
TIMBERLINE SOFTWARE CORPORATION
STATEMENTS OF OPERATIONS
(Amounts in thousands, except per share amounts)
Years ended December 31,
1998 1997 1996
- -------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Net revenue:
Computer software $ 24,786 $ 18,928 $ 14,983
Service fees 18,197 15,354 12,956
Other 1,310 958 720
- -------------------------------------------------------------------------------------------------------------
Net revenue 44,293 35,240 28,659
- -------------------------------------------------------------------------------------------------------------
Cost and expenses:
Cost of revenue 3,909 3,605 3,514
Customer support 8,496 6,744 6,403
Product development 8,863 7,264 5,647
Sales and marketing 6,916 6,351 6,397
General and administrative 5,334 4,776 4,043
- -------------------------------------------------------------------------------------------------------------
Total cost and expenses 33,518 28,740 26,004
- -------------------------------------------------------------------------------------------------------------
Operating income 10,775 6,500 2,655
Other income (expense):
Interest income and other - net 548 487 401
Interest expense (17) (17) (2)
- -------------------------------------------------------------------------------------------------------------
Income before income taxes 11,306 6,970 3,054
Provision for income taxes 4,112 2,435 870
- -------------------------------------------------------------------------------------------------------------
Net income $ 7,194 $ 4,535 $ 2,184
=============================================================================================================
Basic earnings per share $ 0.77 $ 0.49 $ 0.25
=============================================================================================================
Diluted earnings per share $ 0.74 $ 0.48 $ 0.23
=============================================================================================================
Dividends per share $ 0.13 $ 0.09 $ 0.07
=============================================================================================================
</TABLE>
See notes to financial statements.
F-1
<PAGE>
<TABLE>
<CAPTION>
TIMBERLINE SOFTWARE CORPORATION
BALANCE SHEETS
(Amounts in thousands)
December 31,
1998 1997
- -------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Assets
Current assets:
Cash and cash equivalents $ 10,193 $ 5,050
Temporary investments 3,767 5,195
Accounts receivable, less allowance for doubtful accounts
(1998, $182; 1997, $199) 5,086 4,303
Other receivables 221 233
Inventories 272 241
Other current assets 981 794
- -------------------------------------------------------------------------------------------------------------
Total current assets 20,520 15,816
Property and equipment - net 18,381 7,485
Capitalized software costs, less accumulated amortization
(1998, $923; 1997, $477) 1,304 1,634
Purchased software, less accumulated amortization
(1998, $685; 1997, $702) 1,249 709
Other assets 95 110
- -------------------------------------------------------------------------------------------------------------
$ 41,549 $ 25,754
=============================================================================================================
Liabilities and Shareholders' Equity
Current liabilities:
Accounts payable $ 812 $ 1,440
Deferred revenues 10,352 7,503
Accrued employee expenses 2,312 1,861
Accrued commissions/royalties 599 180
Income taxes payable 373 166
Other current liabilities 489 327
Current portion of long-term debt 83 --
- -------------------------------------------------------------------------------------------------------------
Total current liabilities 15,020 11,477
- -------------------------------------------------------------------------------------------------------------
Long-term debt 5,417 --
Accrued rent expense 29 46
Deferred income taxes 1,047 965
Commitments
Shareholders' equity:
Common stock, no par value
Authorized - 20,000 shares
Issued - 1998, 9,420 shares; 1997, 9,304 shares 377 372
Additional paid in capital 3,721 2,907
Unrealized net gain on investments 10 17
Retained earnings 15,928 9,970
- -------------------------------------------------------------------------------------------------------------
Total shareholders' equity 20,036 13,266
- -------------------------------------------------------------------------------------------------------------
$ 41,549 $ 25,754
=============================================================================================================
</TABLE>
See notes to financial statements.
F-2
<PAGE>
<TABLE>
<CAPTION>
TIMBERLINE SOFTWARE CORPORATION
STATEMENTS OF CASH FLOWS
(Amounts in thousands)
Years ended December 31,
1998 1997 1996
- ------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income $ 7,194 $ 4,535 $ 2,184
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 1,993 1,906 1,254
Deferred income taxes 138 155 420
Net change in:
Accounts receivable (783) (609) (508)
Other receivables 12 (76) (76)
Inventories (31) 67 17
Accounts payable (628) 676 201
Deferred revenues 2,849 1,541 624
Accrued employee expenses 451 719 (5)
Accrued commissions/royalties 419 (14) (65)
Income taxes payable 207 166 (79)
Accrued rent expense (17) (20) 8
Other 493 (360) (332)
- -------------------------------------------------------------------------------------------------------------------
Net cash provided by operating activities 12,297 8,686 3,643
- -------------------------------------------------------------------------------------------------------------------
Cash flows from investing activities:
Payments for property and equipment and
purchased software (13,489) (5,246) (2,298)
Capitalized software costs (173) (927) (1,127)
Proceeds from investments 6,490 4,115 6,250
Purchase of investments (5,072) (4,517) (7,577)
Other - net 7 11 10
- --------------------------------------------------------------------------------------------------------------------
Net cash used in investing activities (12,237) (6,564) (4,742)
- --------------------------------------------------------------------------------------------------------------------
Cash flows from financing activities:
Dividends paid (1,236) (833) (625)
Common stock issued 819 632 996
Net proceeds from long-term debt 5,500 -- --
- --------------------------------------------------------------------------------------------------------------------
Net cash provided by (used in) financing activities 5,083 (201) 371
- --------------------------------------------------------------------------------------------------------------------
Net increase (decrease) in cash and cash equivalents 5,143 1,921 (728)
Cash and cash equivalents, beginning of the year 5,050 3,129 3,857
- -------------------------------------------------------------------------------------------------------------------
Cash and cash equivalents, end of the year $ 10,193 $ 5,050 $ 3,129
===================================================================================================================
Supplemental information:
Cash paid during the year for income taxes $ 3,250 $ 1,674 $ 545
===================================================================================================================
</TABLE>
See notes to financial statements.
F-3
<PAGE>
TIMBERLINE SOFTWARE CORPORATION
STATEMENTS OF SHAREHOLDERS' EQUITY
(Amounts in thousands, except per share amounts)
<TABLE>
<CAPTION>
Common Stock Additional Paid Unrealized Net
Shares In Gain On Retained
Issued Amount Capital Investments Earnings Total
- ------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Balances, January 1, 1996 8,647 $ 346 $ 1,305 $ -- $ 4,709 $ 6,360
Common stock issued 462 18 841 859
Income tax benefit on
stock options exercised 137 137
Dividends declared
($.07 per share) (625) (625)
Net income for the year 2,184 2,184
- ------------------------------------------------------------------------------------------------------------------------
Balances, December 31, 1996 9,109 364 2,283 -- 6,268 8,915
Common stock issued 195 8 365 373
Income tax benefit on
stock options exercised 259 259
Unrealized gain on
investments, net of
income taxes 17 17
Dividends declared
($.09 per share) (833) (833)
Net income for the year 4,535 4,535
- ------ -----------------------------------------------------------------------------------------------------------------
Balances, December 31, 1997 9,304 372 2,907 17 9,970 13,266
Common stock issued 116 5 298 303
Income tax benefit on
stock options exercised 516 516
Unrealized loss on
investments, net of
income taxes (7) (7)
Dividends declared
($.13 per share) (1,236) (1,236)
Net income for the year 7,194 7,194
- ------ -----------------------------------------------------------------------------------------------------------------
Balances, December 31, 1998 9,420 $ 377 $ 3,721 $ 10 $ 15,928 $ 20,036
========================================================================================================================
</TABLE>
See notes to financial statements.
F-4
<PAGE>
TIMBERLINE SOFTWARE CORPORATION
NOTES TO FINANCIAL STATEMENTS
(Amounts in thousands, except per share and percent amounts)
NOTE 1 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND LINE OF BUSINESS:
LINE OF BUSINESS AND CREDIT RISKS: The Company develops and markets computer
software programs primarily for the construction and property management
industries. The Company sells its products and services primarily to customers
and to authorized dealers throughout the United States. Credit is granted to
certain customers and dealers generally without collateral. An allowance for
doubtful accounts is provided based on historical experience and anticipated
losses.
USE OF ESTIMATES: The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect reported amounts of assets and liabilities at the
date of the financial statements and the reported amounts of revenues and
expenses during the reporting period. Actual results could differ from those
estimates.
FINANCIAL INSTRUMENTS: The carrying amount reported in the balance sheet for
cash and cash equivalents, temporary investments, accounts receivable, accounts
payable and other current assets and liabilities approximates fair value because
of the immediate or short-term maturity of these financial instruments.
REVENUE RECOGNITION: Revenue from the "license to use" computer software
programs is generally recognized at the point of shipment. Revenue from service
fees is generated from the sale of computer software maintenance and support
contracts, training classes, consulting and other support services. Revenue from
maintenance and support contracts is recognized ratably over the period the
service is provided. Revenue from other service fees is recognized at the time
the service is provided.
SOFTWARE DEVELOPMENT COSTS: Costs of developing computer software are
capitalized when technological feasibility has been established for the computer
software product. These costs are amortized over a two- to five-year period.
Costs capitalized for the development of computer software were $173 in 1998,
$927 in 1997 and $1,127 in 1996.
Amortization of capitalized computer software development costs was $503 in
1998, $403 in 1997, and $262 in 1996. Expenses incurred on research and
development of computer software products were $7,822 in 1998, $6,222 in 1997
and $4,905 in 1996.
CASH AND CASH EQUIVALENTS: Cash and cash equivalents include cash on hand, cash
deposited with banks and financial institutions, money market funds and highly
liquid debt instruments purchased with maturity dates of three months or less at
the date of acquisition.
INVESTMENTS: Prior to 1997, temporary investments represented debt securities
which had maturity dates ranging from over three months to a year from the
purchase date and non-current investments represented debt securities with
maturity dates over one year from the purchase date. The Company classified both
categories of investments as "held to maturity" and accordingly recorded these
F-5
<PAGE>
TIMBERLINE SOFTWARE CORPORATION
NOTES TO FINANCIAL STATEMENTS (continued)
(Amounts in thousands, except per share and percent amounts)
investments at amortized cost, which approximated fair value. During 1997, the
Company transferred the above investments from the "held to maturity" category
to the "available for sale" category, because these investments may not be held
to maturity. The Company used some of these investments to finance a portion of
the Company's new corporate headquarters, which was completed in 1998, or for
other purposes as additional funds were needed. Accordingly, the investments
have been recorded at fair value. The net unrealized gain or loss on these
investments is included as a separate component of shareholders' equity.
INVENTORIES: Inventories consist of marketing literature and of software
components, primarily software manuals and media ready for assembly. Inventories
are stated at the lower of average cost or market.
PROPERTY AND EQUIPMENT AND PURCHASED SOFTWARE: Property and equipment and
purchased software are recorded at cost. Depreciation on purchased software,
furniture and equipment is provided using the straight-line method over the
estimated useful lives of the related assets ranging from two to ten years. The
building is being depreciated on a straight-line basis over forty years.
ACCRUED RENT EXPENSE: Rent expense on operating leases with scheduled rent
increases is recognized on a straight-line basis over the lease term. Accrued
rent expense represents the excess of rent charged to expense over the amount of
scheduled rent paid.
EARNINGS PER SHARE: In February 1997, the Financial Accounting Standards Board
(FASB) issued Statement of Financial Accounting Standards (SFAS) No. 128,
"Earnings Per Share," which established new standards for computing and
presenting earnings per share (EPS) to entities having publicly held common
stock and potential common stock. SFAS No. 128 replaces the presentation of
primary EPS with the dual presentation of a basic EPS and diluted EPS on the
Company's statements of operations and, accordingly, EPS have been restated for
all years presented. The Company computes basic EPS by dividing net income by
the weighted-average number of common shares outstanding and diluted EPS by
dividing net income by the sum of the weighted-average number of common shares
outstanding and the dilutive effect of stock options and warrants outstanding as
if such options and warrants were exercised or converted into common shares. The
Company's computation of diluted EPS is essentially the same as the computation
of primary EPS, which was presented prior to the adoption of SFAS No. 128.
There were no adjustments to net income in computing diluted earnings per share
for the years ended December 31, 1998, 1997 and 1996. A reconciliation of the
common shares used in the denominator for computing basic and diluted EPS for
the years ended December 31, 1998, 1997 and 1996 is as follows:
<TABLE>
<CAPTION>
1998 1997 1996
- --------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Weighted-average shares outstanding,
used in computing basic EPS 9,375 9,222 8,899
Effect of dilutive securities:
Warrants -- -- 25
Stock options 325 261 494
- --------------------------------------------------------------------------------------------------------------
Weighted-average shares outstanding, and the effect
of dilutive securities, used in computing diluted EPS 9,700 9,483 9,418
==============================================================================================================
</TABLE>
F-6
<PAGE>
TIMBERLINE SOFTWARE CORPORATION
NOTES TO FINANCIAL STATEMENTS (continued)
(Amounts in thousands, except per share and percent amounts)
NOTE 2 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. However,
statements of comprehensive income are not presented for the years ended
December 31, 1998, 1997 and 1996, because the difference between the Company's
comprehensive income and net income is not material. The only component of
comprehensive income that is not included in the Company's net income is the
unrealized gain or loss on temporary investments. For 1998, the unrealized loss
on temporary investments was $7, net of income taxes, which reduced net income
to arrive at comprehensive income of $7,187. For 1997, the unrealized gain on
temporary investments was $17, net of income taxes, which increased net income
to arrive at comprehensive income of $4,552. There was no difference between
comprehensive income and net income for 1996.
NOTE 3 INVESTMENTS:
Investments at December 31, 1998 and 1997 are composed of the following:
<TABLE>
<CAPTION>
Amortized
Cost Fair Value
- --------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
1998:
Debt securities issued by the U.S. Treasury
and other U.S. government agencies $ 2,800 $ 2,812
Debt securities issued by states of the
United States and political subdivisions of the states 950 955
- --------------------------------------------------------------------------------------------------------
Total investments $ 3,750 $ 3,767
========================================================================================================
1998 net unrealized gain on investments $ 17
========================================================================================================
1997:
Debt securities issued by the U.S. Treasury
and other U.S. government agencies $ 3,581 $ 3,599
Debt securities issued by states of the
United States and political subdivisions of the states 1,587 1,596
- --------------------------------------------------------------------------------------------------------
Total investments $ 5,168 $ 5,195
========================================================================================================
1997 net unrealized gain on investments $ 27
========================================================================================================
</TABLE>
NOTE 4 PROPERTY AND EQUIPMENT:
Property and equipment at December 31, 1998 and 1997 is composed of the
following:
<TABLE>
<CAPTION>
1998 1997
- -----------------------------------------------------------------------------
<S> <C> <C>
Land $ 2,433 $ 2,433
Building 12,975 --
Tenant improvements 63 546
Furniture and fixtures 1,612 1,077
Machinery and equipment 6,369 6,404
Construction in progress -- 2,211
- -----------------------------------------------------------------------------
Total 23,452 12,671
Less accumulated depreciation and amortization 5,071 5,186
- -----------------------------------------------------------------------------
Property and equipment - net $ 18,381 $ 7,485
=============================================================================
</TABLE>
F-7
<PAGE>
TIMBERLINE SOFTWARE CORPORATION
NOTES TO FINANCIAL STATEMENTS (continued)
(Amounts in thousands, except per share and percent amounts)
NOTE 5 LONG-TERM DEBT:
In connection with the construction of its new corporate headquarters, the
Company entered into a construction loan agreement with a bank to borrow up to
$9,750. Interest accrues at the bank's prime interest rate, and borrowings under
this loan agreement are secured with a security interest in the site of the new
corporate headquarters. Borrowings, including interest, are to be repaid by May
1999, with an option to extend the final payment of the loan to November 1999.
The Company also has the option to convert the construction loan into a 10-year
term loan at the termination date of the construction loan. At December 31,
1998, there were outstanding borrowings under the construction loan amounting to
$5,500. The Company moved into its new corporate headquarters in October 1998.
The fair value of this loan approximates cost because of the variable interest
rate on the loan.
Because the Company has the intent and the ability to finance the construction
loan on a long-term basis, borrowings under the construction loan are classified
as long-term debt at December 31, 1998. Maturities of long-term debt, assuming
the conversion of the construction loan into the term loan, are as follows:
<TABLE>
<CAPTION>
<S> <C>
1999 $ 83
2000 105
2001 111
2002 118
2003 125
Thereafter 4,958
- -------------------------------------
$ 5,500
=====================================
</TABLE>
The loan agreement requires that the Company maintain certain minimum working
capital and tangible net worth levels, which could restrict the amount of
retaining earnings available to pay cash dividends. Under the most restrictive
covenants of the loan agreement, the Company had unrestricted retained earnings
of $12,995 at December 31, 1998.
Subsequent to December 31, 1998, the Company repaid its construction loan and on
March 17, 1999, in light of the Company's current cash position, its cash flow
projections for 1999 and an increase in mortgage interest rates during the first
quarter of 1999, management discussed with the Board of Directors its need for
long-term mortgage financing; however, no decision has yet been made.
NOTE 6 COMMON STOCK:
In October 1998, the Company's Board of Directors approved a four-for-three
stock split, effective in November 1998. In October 1997, the Company's Board of
Directors approved a five-for-four stock split, effective in November 1997. In
April 1996, a three-for-two stock split was approved, effective in May 1996. All
prior common stock and per share data amounts have been retroactively adjusted
to reflect these changes.
In March 1994, the Company issued warrants to purchase 375 shares of its common
stock at $2.80 per share to a large national account as part of a joint
marketing agreement to promote the Company's software products. In 1996, all of
those warrants were exercised.
As of December 31, 1998, the Company has four stock-based compensation plans.
Two nearly identical plans, adopted in 1987 and 1989, are non-qualified stock
option plans for its officers and key employees. Under these plans, the
F-8
<PAGE>
TIMBERLINE SOFTWARE CORPORATION
NOTES TO FINANCIAL STATEMENTS (continued)
(Amounts in thousands, except per share and percent amounts)
Company may grant options for up to 844 shares of common stock. Options may not
be granted under the 1987 plan and the 1989 plan after 1997 and 1999,
respectively. As of December 31, 1998, 209 shares are reserved under these
plans, of which there are 204 options outstanding.
In 1993 and 1998, the Company's shareholders approved incentive stock plans for
the main purpose of retaining and attracting the services of Company directors,
officers, employees and nonemployees. Although these plans provide for the
granting of various stock options, stock appreciation rights and stock bonuses,
the Company currently plans to grant only non-qualified stock options. Grants
under the 1993 and 1998 plans may not be granted after the year 2003 and 2008,
respectively. As of December 31, 1998, 1,239 shares are reserved under these
plans, of which there are 551 options outstanding.
All of the above plans are administered by a committee of the Company's Board of
Directors, which determines the terms and conditions of the various grants
awarded under these plans. Under these plans, the non-qualified stock options
have an exercise price equal to the market price of the Company's common stock
on the date of grant. The options vest ratably over a four or five-year period
and expire 10 years after the date of grant.
In October 1995, the FASB issued SFAS No. 123, "Accounting for Stock-Based
Compensation," which encouraged (but did not require) that stock-based
compensation cost be recognized and measured by the fair value of the equity
instrument awarded. The Company did not change its method of accounting for its
stock-based compensation plans and will continue to apply Accounting Principles
Board Opinion No. 25, "Accounting for Stock Issued to Employees," and related
interpretations in accounting for these plans. Accordingly, no compensation cost
has been recognized for these plans in the financial statements. If compensation
cost on stock options granted after 1994 under these plans had been determined
based on the fair value of the options granted as of the grant date in a method
consistent with that described in SFAS No. 123, the Company's net income and
diluted earnings per share would have been reduced to the pro forma amounts
indicated below for the years ended December 31, 1998, 1997 and 1996:
<TABLE>
<CAPTION>
1998 1997 1996
- -----------------------------------------------------------------------------------------
<S> <C> <C> <C>
Net income, as reported $ 7,194 $ 4,535 $ 2,184
Net income, pro forma 6,743 4,214 2,018
Diluted earnings per share, as reported 0.74 0.48 0.23
Diluted earnings per share, pro forma 0.70 0.44 0.21
</TABLE>
The pro forma amounts do not consider the effect of options granted prior to
1995 that vest in subsequent years. The pro forma amounts may also not be
indicative of the effects on reported net income for future years, due to the
effect of options vesting over a period of years and the awarding of stock
compensation awards in future years.
F-9
<PAGE>
TIMBERLINE SOFTWARE CORPORATION
NOTES TO FINANCIAL STATEMENTS (continued)
(Amounts in thousands, except per share and percent amounts)
The fair value of each option grant was estimated on the date of grant using the
Black-Scholes option-pricing model with the following weighted-average
assumptions used for grants in 1998, 1997 and 1996:
<TABLE>
<CAPTION>
1998 1997 1996
<S> <C> <C> <C>
Annual dividend yield 1.0% 1.1% 1.4%
Risk-free interest rate per annum 5.6% 6.2% 6.4%
Expected annual volatility 85.0% 87.4% 87.9%
Expected lives of options (years) 7.0 7.0 7.0
</TABLE>
A summary of the status of the Company's stock option plans as of December 31,
1998, 1997 and 1996, and changes during the years ending on those dates is
presented below:
<TABLE>
<CAPTION>
1998 1997 1996
- --------------------------------------------------------------------------------------------------------------------------------
Weighted-Average Weighted-Average Weighted-Average
Shares Exercise Price Shares Exercise Price Shares Exercise Price
- --------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Outstanding at
beginning of year 836 $ 3.913 812 $ 2.565 845 $ 2.292
Granted 65 12.539 245 6.830 66 5.195
Exercised (116) 2.606 (195) 1.908 (87) 1.839
Forfeited (30) 8.548 (26) 4.349 (12) 3.086
- --------------------------------------------------------------------------------------------------------------------------------
Outstanding at end of year 755 $ 4.672 836 $ 3.913 812 $ 2.565
================================================================================================================================
Options exercisable
at year-end 514 510 539
Weighted-average fair value
of options granted
during the year $ 9.112 $ 5.021 $ 3.749
</TABLE>
The following table summarizes information about stock options outstanding and
exercisable at December 31, 1998:
<TABLE>
<CAPTION>
Outstanding Exercisable
- -----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Weighted-Average
Remaining
Range of Number of Contractual Life Weighted-Average Number of Weighted-Average
Exercise Prices Options (years) Exercise Price Options Exercise Price
- -----------------------------------------------------------------------------------------------------------------
$ 1.400 - 4.950 563 5.74 $ 3.011 443 $ 2.680
5.025 - 9.094 140 8.68 8.419 58 8.260
10.031 - 15.375 52 9.41 12.622 13 12.481
=================================================================================================================
$ 1.400 - 15.375 755 6.54 $ 4.672 514 $ 3.553
</TABLE>
F-10
<PAGE>
TIMBERLINE SOFTWARE CORPORATION
NOTES TO FINANCIAL STATEMENTS (continued)
(Amounts in thousands, except per share and percent amounts)
Note 7 INCOME TAXES:
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amount of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes. The tax effects of
significant items comprising the Company's net deferred tax liability as of
December 31, 1998 and 1997 are as follows:
<TABLE>
<CAPTION>
1998 1997
- ------------------------------------------------------------------------------
<S> <C> <C>
Deferred tax liabilities:
Property and equipment $ 543 $ 335
Capitalized software costs 509 637
Maintenance costs 120 70
Other 20 24
- ------------------------------------------------------------------------------
1,192 1,066
- ------------------------------------------------------------------------------
Deferred tax assets:
Allowance for doubtful accounts 71 77
Employee expenses not currently deductible 58 40
Accrued rent expense 12 18
Other 21 36
- ------------------------------------------------------------------------------
162 171
- ------------------------------------------------------------------------------
Net deferred tax liability $ 1,030 $ 895
==============================================================================
The net deferred tax liability is classified in the balance sheet as follows:
Deferred income taxes $ 1,047 $ 965
Deferred tax assets included in other current assets (17) (70)
- ------------------------------------------------------------------------------
Net deferred tax liability $ 1,030 $ 895
==============================================================================
</TABLE>
<TABLE>
<CAPTION>
The provision for income taxes is composed of the following:
1998 1997 1996
- ---------------------------------------------------------
<S> <C> <C> <C>
Current:
Federal $ 3,300 $ 1,949 $ 350
State 674 331 100
Deferred:
Federal 111 125 338
State 27 30 82
- ---------------------------------------------------------
Total $ 4,112 $ 2,435 $ 870
=========================================================
</TABLE>
F-11
<PAGE>
TIMBERLINE SOFTWARE CORPORATION
NOTES TO FINANCIAL STATEMENTS (continued)
(Amounts in thousands, except per share and percent amounts)
A reconciliation of the difference between the provision for income taxes and
the income taxes computed at the federal statutory rate is summarized below:
<TABLE>
<CAPTION>
1998 1997 1996
- ---------------------------------------------------------------------------------------
<S> <C> <C> <C>
Income taxes based on federal statutory rate $ 3,857 $ 2,370 $ 1,038
State tax, net of federal tax benefit 469 230 112
Research and development credits (283) (251) (326)
Other 69 86 46
- ---------------------------------------------------------------------------------------
Provision for income taxes $ 4,112 $ 2,435 $ 870
=======================================================================================
</TABLE>
Research and development credits in 1996 include additional amounts which have
been made available from prior years as a result of a change in tax regulations.
This reduced the Company's provision for income taxes for the year ended
December 31, 1996 by $180.
NOTE 8 BUSINESS SEGMENT INFORMATION:
Effective December 31, 1998, the Company adopted SFAS No. 131, "Disclosures
about Segments of an Enterprise and Related Information." This statement
requires that public companies report financial and descriptive information
about its operating segments. 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. Software products encompass software product
sales across all of the Company's product lines. Software services encompass
fees for all services after the software is sold, such as annual maintenance and
support service contracts, consulting and training services. The Company
accounts for revenue and cost of revenue on these two operating segments, and
tracks specifically identifiable expenses related to the generation of revenue
for each of those segments. There are no intersegment transactions. These
segments are managed separately because of different sales and marketing
strategies and different strategic planning processes.
The accounting policies of the segments are the same as those described in the
summary of significant accounting policies in Note 1 of Notes to Financial
Statements. The Company evaluates its performance in each segment based on its
operating contribution, which includes revenue, cost and expenses that can be
specifically identified with 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. The Company also does not allocate assets by segment in evaluating the
performance of each segment. Information about each operating segment and a
reconciliation of operating contribution to operating income is as follows for
the years ended December 31, 1998, 1997 and 1996:
F-12
<PAGE>
TIMBERLINE SOFTWARE CORPORATION
NOTES TO FINANCIAL STATEMENTS (continued)
(Amounts in thousands, except per share and percent amounts)
<TABLE>
<CAPTION>
1998 1997 1996
- --------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Net revenue:
Software products $ 24,786 $ 18,928 $ 14,983
Services 18,197 15,354 12,956
Other 1,310 958 720
- --------------------------------------------------------------------------------------------
Net revenue $ 44,293 $ 35,240 $ 28,659
============================================================================================
Operating contribution:
Software products $ 16,971 $ 11,619 $ 7,531
Services 6,892 6,196 4,204
Other revenue, net of cost 1,109 725 610
Product development expenses (8,863) (7,264) (5,647)
General and administrative expenses (5,334) (4,776) (4,043)
- --------------------------------------------------------------------------------------------
Operating income $ 10,775 $ 6,500 $ 2,655
============================================================================================
</TABLE>
The Company operates primarily in the United States. In terms of net revenue,
more than 94 percent of its net revenue in 1998, 1997 and 1996 was generated
from customers located in the United States. No revenue from customers located
in a foreign country accounted for more than three percent of the Company's net
revenue during those years.
NOTE 9 COMMITMENTS:
The Company leases some equipment and office facilities under noncancelable
operating leases. Its major lease commitment relates to a lease entered into in
1996 for additional office space for expansion of its former corporate offices.
That lease, which expires in 2003 and is currently being subleased, provides for
additional payment by the Company for additional taxes, maintenance and
operating costs above a base level established by the lessor.
Total rent expense under operating leases was $825, $986 and $884 in 1998, 1997
and 1996, respectively. Future minimum rental payments under these leases as of
December 31, 1998, are as follows:
<TABLE>
<CAPTION>
Year ending December 31,
<S> <C> <C>
1999 $ 282
2000 254
2001 228
2002 219
2003 55
- --------------------------------
TOTAL $ 1,038
================================
</TABLE>
Future minimum rental payments shown above have not been reduced by future
minimum sublease rental income of $890 from a noncancelable sublease.
F-13
<PAGE>
TIMBERLINE SOFTWARE CORPORATION
NOTES TO FINANCIAL STATEMENTS (continued)
(Amounts in thousands, except per share and percent amounts)
NOTE 10 EMPLOYEE BENEFIT PLAN:
The Company has a retirement plan, under the provisions of Section 401(k) of the
Internal Revenue Code, covering substantially all employees. Under the terms of
the plan, employees may make contributions computed on a percentage of pay. The
Company may match employee contributions up to a set percentage of pay. The
Company may, at its discretion, make an additional year-end contribution out of
profits. Contributions by the Company under the plan were $479 in 1998, $393 in
1997 and $376 in 1996.
NOTE 11 QUARTERLY FINANCIAL INFORMATION (UNAUDITED):
<TABLE>
<CAPTION>
Net Cost and Net Basic Earnings Diluted Earnings
Revenue Expenses Income per Share per Share
- ----------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
1998
1st quarter $ 9,383 $ 7,674 $ 1,159 $ 0.12 $ 0.12
2nd quarter 10,460 8,078 1,623 0.17 0.17
3rd quarter 11,078 8,447 1,726 0.18 0.18
4th quarter 13,372 9,319 2,686 0.29 0.28
1997
1st quarter $ 7,508 $ 7,101 $ 332 $ 0.04 $ 0.03
2nd quarter 8,225 6,753 983 0.11 0.10
3rd quarter 8,795 7,158 1,237 0.13 0.13
4th quarter 10,712 7,728 1,983 0.21 0.21
</TABLE>
F-14
<PAGE>
INDEPENDENT AUDITORS' REPORT
Board of Directors and Shareholders
Timberline Software Corporation
Beaverton, Oregon
We have audited the accompanying balance sheets of Timberline Software
Corporation as of December 31, 1998 and 1997, and the related statements of
operations, shareholders' equity and cash flows for each of the three years in
the period ended December 31, 1998. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, such financial statements present fairly, in all material
respects, the financial position of Timberline Software Corporation as of
December 31, 1998 and 1997 and the results of its operations and its cash flows
for each of the three years in the period ended December 31, 1998, in conformity
with generally accepted accounting principles.
DELOITTE & TOUCHE LLP
Portland, Oregon
January 22, 1999
(March 17, 1999 as to Note 5)
F-15
<PAGE>
TIMBERLINE SOFTWARE CORPORATION
-------------------------------
FORM 10-K FOR YEAR ENDED DECEMBER 31, 1998
------------------------------------------
EXHIBIT INDEX*
--------------
Material Contracts
------------------
10.11 - 1998 Stock Incentive Plan, as amended
Other Documents or Statements to Security Holders
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20 - Portions of definitive proxy statement for 1999 shareholders
meeting (incorporated by reference to definitive Proxy
Statement dated March 19, 1999 for Annual Shareholder's
meeting to be held April 27, 1999)
Consents
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23 - Independent Auditors' Consent
Miscellaneous
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27 - Financial Data Schedule for the year ended December 31, 1998
* See Item 14(a)(3) of this Report for a list of all exhibits, including those
incorporated by reference.
TIMBERLINE SOFTWARE
CORPORATION
1998 STOCK INCENTIVE PLAN
(AS AMENDED AS OF FEBRUARY 17, 1999)
l. PURPOSE. The purpose of this 1998 Stock Incentive Plan (the "Plan") is to
enable Timberline Software Corporation, an Oregon corporation (the "Company " ),
to attract and retain the services of (a) selected employees, officers and
directors of the Company or of any parent or subsidiary corporation of the
Company, and (b) selected nonemployee agents, consultants, advisers and
independent contractors of the Company or any parent or subsidiary of the
Company.
2. SHARES SUBJECT TO THE PLAN. Subject to adjustment as provided below and in
paragraph 11, up to 500,000 shares of Common Stock of the Company (the "Shares")
may be offered and issued under the Plan. If an option or a stock appreciation
right granted under the Plan expires, terminates or is cancelled, the unissued
Shares subject to such option or stock appreciation right shall again be
available under the Plan. If Shares sold or awarded as a bonus under the Plan
are forfeited to the Company or repurchased by the Company, the number of Shares
forfeited or repurchased shall again be available under the Plan.
3. EFFECTIVE DATE AND DURATION OF PLAN.
(a) EFFECTIVE DATE. The Plan shall become effective when adopted by the Board of
Directors of the Company (the "Board") and approved by the shareholders at the
1998 Annual Meeting of Shareholders. However, no option granted under the Plan
shall become exercisable until the Plan is approved by the affirmative vote of
the holders of a majority of the Common Stock of the Company represented at a
shareholder meeting at which a quorum is present, and any such awards under the
Plan prior to such approval shall be conditioned upon and subject to such
approval. Subject to this limitation, options and stock appreciation rights may
be granted and Shares may be awarded as bonuses or sold under the Plan at any
time after the effective date and before termination of the Plan.
(b) DURATION. No options or stock appreciation rights or awards may be granted
under the Plan, no stock bonuses may be awarded under the Plan, and no Shares
may be sold under the Plan after April 27, 2008. However, the Plan shall
continue in effect until all Shares available for issuance under the Plan have
been issued and all restrictions on such Shares have lapsed. The Board may
suspend or terminate the Plan at any time, except with respect to options, stock
appreciation rights and Shares subject to restrictions then outstanding under
the Plan. Termination shall not affect any outstanding options, stock
appreciation rights, any right of the Company to repurchase Shares or the
forfeitability of Shares issued under the Plan.
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4. ADMINISTRATION.
(a) THE COMMITTEE. The Plan shall be administered by a committee appointed by
the Board consisting of not less than two directors (the "Committee"). The
Committee shall determine and designate from time to time the individuals to
whom awards shall be made, the amount of the awards, and the other terms and
conditions of the awards; provided, however, that only the Board may amend or
terminate the Plan as provided in paragraphs 3 and 14. At any time when the
officers and directors of the Company are subject to Section 16(b) of the
Securities Exchange Act of 1934 (the "Exchange Act"), the Committee shall
consist solely of "disinterested" directors as such term is defined from time to
time in Rule 16b-3 under the Exchange Act. No member of the Committee shall be
eligible to receive any award under the Plan while such person serves as a
Committee member, except pursuant to paragraph 10.
(b) REGULATIONS; INTERPRETATION. Subject to the provisions of the Plan, the
Committee may from time to time adopt and amend rules and regulations relating
to administration of the Plan, advance the lapse of any waiting period,
accelerate any exercise date, waive or modify any restriction applicable to
Shares (except those restrictions imposed by law) and make all other
determinations in the judgment of the Committee necessary or desirable for the
administration of the Plan. The interpretation and construction of the
provisions of the Plan and related agreements by the Committee shall be final
and conclusive. The Committee may correct any defect or supply any omission or
reconcile any inconsistency in the Plan or in any related agreement in the
manner and to the extent it shall deem expedient to carry the Plan into effect,
and it shall be the sole and final judge of such expediency.
5. TYPES OF AWARDS; ELIGIBILITY. The Committee may from time to time, take the
following actions under the Plan: (i) grant Incentive Stock Options, as defined
in Section 422 of the Internal Revenue Code of 1986, as amended (the "Code"), as
provided in paragraph 6(b); (ii) grant options other than Incentive Stock
Options ("Nonstatutory Stock Options") as provided in paragraph 6(c); (iii)
award stock bonuses as provided in paragraph 7; (iv) sell Shares as provided in
paragraph 8; and (v) grant stock appreciation rights or other awards of stock or
awards valued in whole or in part by reference to, or otherwise based on, stock
or other property of the Company ("Other Stock Unit Awards") as provided in
paragraph 9. Any such awards may be made to employees (including employees who
are officers or directors) of the Company or of any parent or subsidiary
corporation of the Company, and to other individuals described in paragraph 1
who the Committee believes have made or will make an important contribution to
the Company or its parent or subsidiaries; provided, however, that only
employees of the Company or a parent or subsidiary shall be eligible to receive
Incentive Stock Options under the Plan; and, provided further, that directors
who are not employees shall receive awards only pursuant to paragraph 10. The
Committee shall select the individuals to whom awards shall be made and shall
specify the action taken with respect to each individual to whom an award is
made under the Plan. At the discretion of the Committee, an individual may be
given an election to surrender an award in exchange for the grant of a new
award.
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6. OPTION GRANTS
(a) GRANT. Each option granted under the Plan shall be evidenced by a stock
option agreement in such form as the Committee shall prescribe from time to time
in accordance with the Plan. With respect to each option grant, the Committee
shall determine the number of Shares subject to the option, the option price,
the period of the option, and the time or times at which the option may be
exercised and whether the option is an Incentive Stock Option or a Nonstatutory
Stock Option.
(b) INCENTIVE STOCK OPTIONS. Incentive Stock Options granted under the Plan
shall be subject to the following terms and conditions:
(i) No employee may be granted Incentive Stock Options under the Plan such
that the aggregate fair market value, on the date of grant, of the Shares
with respect to which Incentive Stock Options are exercisable for the first
time by that employee during any calendar year under the Plan and under any
other incentive stock option plan (within the meaning of Section 422 of the
Code) of the Company or of any parent or subsidiary corporation of the
Company exceeds $100,000.
(ii) An Incentive Stock Option may be granted under the Plan to an employee
possessing more than 10 percent of the total combined voting power of all
classes of stock of the Company or of any parent or subsidiary corporation
of the Company only if the option price is at least 110 percent of the fair
market value, as described in paragraph 6(b) (iv), of the Shares subject to
the option on the date it is granted, and the option by its terms is not
exercisable more than five years from the date of grant.
(iii) Subject to paragraphs 6(b)(ii) and 6(d), Incentive Stock Options
granted under the Plan shall continue in effect for the period fixed by the
Committee, except that no Incentive Stock Option shall be exercisable more
than 10 years from the date of grant.
(iv) The option price per share shall be determined by the Committee at the
time of grant.
Subject to paragraph 6(b)(ii), the option price shall not be less than 100
percent of the fair market value of the Shares covered by the Incentive
Stock Option at the date the option is granted. The fair market value shall
be deemed to be the closing price for the Common Stock of the Company as
reported on the National Association of Securities Dealers, Inc. Automated
Quotation System on the day the option is granted, or if there has been no
sale on that date, on the last
<PAGE>
preceding date on which a sale occurred, or such other reported fair market
value of the Common Stock of the Company as shall be properly relied upon
by the Committee.
(v) The Committee may at any time without the consent of the optionee
convert an Incentive Stock Option into a Nonstatutory Stock Option.
(c) NONSTATUTORY STOCK OPTIONS. Nonstatutory Stock Options shall be subject to
the following terms and conditions, in addition to the above terms (which are
not inconsistent with the following):
(i) The option price for Nonstatutory Stock Options shall be determined by
the Committee at the time of grant. The option price may not be less than
85 percent of the fair market value of the Shares covered by the
Nonstatutory Stock Option on the date of grant. The fair market value of
the Shares covered by a Nonstatutory Stock Option shall be determined
pursuant to paragraph (b)(iv).
(ii) Nonstatutory Stock Options granted under the Plan shall continue in
effect for the period fixed by the Committee.
(d) EXERCISE OF OPTIONS. Except as provided in paragraph 6(f) or as determined
by the Committee, no option granted under the Plan may be exercised unless at
the time of such exercise the optionee is employed by or in the service of the
Company or any parent or subsidiary corporation of the Company and shall have
been so employed or have provided such service continuously since the date such
option was granted. Absence on leave or on account of illness or disability
under rules established by the Committee shall not, however, be deemed an
interruption of employment for purposes of the Plan. Unless otherwise determined
by the Committee, vesting of options shall not continue during an absence on
leave (including an extended illness) or on account of disability. No option may
be exercised by an officer or director of the Company within six months of the
date of grant. Except as provided in paragraphs 6(f), 11 and 12, options granted
under the Plan may be exercised from time to time over the period stated in each
option in such amounts and at such times as shall be prescribed by the
Committee; provided, however, that options shall not be exercised for fractional
shares. Unless otherwise determined by the Committee, if the optionee does not
exercise an option in any one year with respect to the full number of Shares to
which the optionee is entitled in that year, the optionee's rights shall be
cumulative and the optionee may purchase those Shares in any subsequent year
during the term of the option.
(e) NONTRANSFERABILITY. Each option granted under the Plan by its terms shall be
nonassignable and nontransferable by the optionee, either voluntarily or by
operation of law, except by will or by the laws of descent and distribution of
the state or country of the optionee's domicile at the time of death; provided,
however, that with the consent of the Committee, Nonstatutory Stock Options may
be assigned or transferred pursuant to a qualified domestic relations order as
defined by the Code or Title I of the Employee Retirement Income Security
<PAGE>
Act, as amended ("ERISA"), or the rules thereunder. Each option granted under
the Plan by its terms shall be exercisable during the optionee' s lifetime only
by the optionee, or his or her permitted assignee or transferee pursuant to such
a qualified domestic relations order.
(f) TERMINATION OF EMPLOYMENT OR SERVICE.
(i) In the event the employment or service of the optionee by the Company
or a parent or subsidiary corporation of the Company terminates for any
reason other than because of death or physical disability, the option may
be exercised at any time prior to the expiration date of the option or the
expiration of three months after the date of such termination, whichever is
the shorter period, but only if and to the extent the optionee was entitled
to exercise the option at the date of such termination.
(ii) In the event of the termination of the optionee's employment or
service with the Company or a parent or subsidiary corporation of the
Company because the optionee becomes disabled (within the meaning of
Section 22(e) (3) of the Code), the option may be exercised at any time
prior to the expiration date of the option or the expiration of one year
after the date of such termination, whichever is the shorter period, but
only if and to the extent the optionee was entitled to exercise the option
at the date of such termination.
(iii) In the event of the death of an optionee while employed by or
providing service to the Company or a parent or subsidiary corporation of
the Company, the option may be exercised at any time prior to the
expiration date of the option or the expiration of one year after the date
of such death, whichever is the shorter period, but only if and to the
extent the optionee was entitled to exercise the option on the date of
death, and only by the person or persons to whom such optionee's rights
under the option shall pass by the optionee's will or by the laws of
descent and distribution of the state or country of domicile at the time of
death.
(iv) The Committee, at the time of grant or at any time thereafter, may
extend the three-month and one-year expiration periods to any length of
time not later than the original expiration date of the option, and may
increase the portion of an option that is exercisable, subject to such
terms and conditions as the Committee may determine.
(v) To the extent that the option of any deceased optionee or of any
optionee whose employment or service terminates is not exercised within the
applicable period, all further rights to purchase Shares pursuant to such
option shall cease and terminate.
<PAGE>
(g) PURCHASE OF SHARES. Unless the Committee determines otherwise, Shares may be
acquired pursuant to an option only upon receipt by the Company of notice in
writing from the optionee of the optionee' s intention to exercise, specifying
the number of Shares as to which the optionee desires to exercise the option and
the date on which the optionee desires to complete the transaction, and, if
required to comply with the Securities Act of 1933, as amended, or state
securities laws, the notice shall include a representation that it is the
optionee's intention to acquire the Shares for investment and not with a view to
distribution. The certificates representing the Shares shall bear any legends
required by the Committee. Unless the Committee determines otherwise, on or
before the date specified for completion of the purchase of Shares pursuant to
an option, the optionee must have paid the Company the full purchase price of
such Shares in cash (including, with the consent of the Committee, cash that may
be the proceeds of a loan from the Company), or, with the consent of the
Committee, in whole or in part, in Shares valued at fair market value, as
determined pursuant to paragraph 6(b)(iv). Unless the Committee determines
otherwise, all payments made to the Company in connection with the exercise of
an option must be made by cashier's bank check or by the transfer of immediately
available federal funds. No Shares shall be issued until full payment therefor
has been made. With the consent of the Committee, an optionee may request the
Company to apply automatically the Shares to be received upon the exercise of a
portion of a stock option (even though stock certificates have not yet been
issued) to satisfy the purchase price for additional portions of the stock
option. Each optionee who has exercised an option shall immediately upon
notification of the amount due, if any, pay to the Company in cash amounts
necessary to satisfy any applicable federal, state and local tax withholding
requirements. If additional withholding is or becomes required beyond any amount
deposited before delivery of the certificates, the optionee shall pay such
amount to the Company on demand. If the optionee fails to pay the amount
demanded, the Company or any parent or subsidiary corporation of the Company may
withhold that amount from other amounts or property payable to the optionee by
the Company or by the parent or subsidiary corporation, including salary and
Shares issuable upon exercise of any option under this Plan, subject to
applicable law. With the consent of the Committee, an optionee may deliver
Shares to the Company to satisfy the withholding obligation.
7. STOCK BONUSES. The Committee may award Shares under the Plan as stock
bonuses. Shares awarded as a stock bonus shall be subject to such terms,
conditions, and restrictions as shall be determined by the Committee. The
restrictions may include restrictions concerning transferability, repurchase by
the Company and forfeiture of the Shares issued, together with such other
restrictions as may be determined by the Committee. The Committee may not
require the recipient to pay any monetary consideration other than amounts
necessary to satisfy tax withholding requirements. The certificates representing
the Shares awarded shall bear any legends required by the Committee. The Company
may require any recipient of a stock bonus to pay to the Company in cash upon
demand amounts necessary to satisfy any applicable federal, state or local tax
withholding requirements. If the recipient fails to pay the amount demanded, the
Company or any parent or subsidiary corporation of the Company may withhold that
amount from other amounts payable to the recipient by the Company or the parent
or subsidiary corporation, including salary, subject to applicable law. With the
consent of the Committee, a recipient may deliver Shares to the Company to
<PAGE>
satisfy the withholding obligation. In addition to stock bonus awards
hereinabove authorized in this paragraph 7, the Committee may also authorize the
issuance of stock bonus Shares in connection with an employee stock ownership
plan ("ESOP"), in which case the Shares so authorized shall be issued to and
held by the employee stock ownership trust established in connection with the
ESOP and approved by the Board. The Committee may only exercise its authority in
this regard upon the Board's approval of an ESOP that complies with all
applicable provisions of the Code and all other governing laws and the Board's
delegation of authority to the Committee to administer the ESOP.
8. STOCK SALES. The Committee may issue Shares under the Plan for such
consideration (including promissory notes and services) as determined by the
Committee; provided, however, that in no event shall the consideration be less
than 85 percent of the fair market value of the Shares at the time of issuance,
determined pursuant to paragraph 6(b)(iv). Shares issued under this paragraph 8
shall be subject to the terms, conditions and restrictions determined by the
Committee. The restrictions may include restrictions concerning transferability,
repurchase by the Company and forfeiture of the Shares issued, together with
such other restrictions as may be determined by the Committee. The certificates
representing the Shares shall bear any legends required by the Committee. The
Company may require any purchaser of Shares issued under this paragraph 8 to pay
to the Company in cash upon demand amounts necessary to satisfy any applicable
federal, state or local tax withholding requirements. If the purchaser fails to
pay the amount demanded, the Company or any parent or subsidiary corporation of
the Company may withhold that amount from other amounts payable to the purchaser
by the Company or any parent or subsidiary corporation, including salary,
subject to applicable law. With the consent of the Committee, a purchaser say
deliver Shares to the Company to satisfy the withholding obligation.
9. STOCK APPRECIATION RIGHTS AND OTHER STOCK UNIT AWARDS.
(a) STOCK APPRECIATION RIGHTS.
(i) GRANT. Stock appreciation rights may be granted under the Plan by the
Committee, subject to such rules, terms, and conditions as the Committee
prescribes.
(ii) EXERCISE.
(A) A stock appreciation right shall be exercisable only at the time or
times established by the Committee. If a stock appreciation right is
granted in connection with an option, the stock appreciation right shall be
exercisable only to the extent and on the same conditions that the related
option could be exercised. Upon exercise of a stock appreciation right, any
option or portion thereof to which the stock appreciation right relates
terminates. If a stock appreciation right is granted in connection with an
option, upon exercise of the
<PAGE>
option, the stock appreciation right or portion thereof to which the option
relates terminates. No stock appreciation right granted to an officer or
director may be exercised during the first six months following the date of
grant.
(B) The Committee may withdraw any stock appreciation right granted under
the Plan at any time and may impose any conditions upon the exercise of a
stock appreciation right or adopt rules and regulations from time to time
affecting the rights of holders of stock appreciation rights. Such rules
and regulations may govern the right to exercise stock appreciation rights
granted before adoption or amendment of such rules and regulations as well
as stock appreciation rights granted thereafter.
(C) Each stock appreciation right shall entitle the holder, upon exercise,
to receive from the Company in exchange therefor an amount equal in value
to the excess of the fair market value on the date of exercise of one Share
over its fair market value on the date of grant (or, in the case of a stock
appreciation right granted in connection with an option, the option price
per Share under the option to which the stock appreciation right relates),
multiplied by the number of Shares covered by the stock appreciation right
or the option, or portion thereof, that is surrendered. No stock
appreciation right shall be exercisable at a time that the amount
determined under this subparagraph is negative. Payment by the Company upon
exercise of a stock appreciation right may be made in Shares valued at fair
market value, in cash, or partly in Shares and partly in cash, all as
determined by the Committee.
(D) For purposes of this paragraph 9, the fair market value of the Shares
shall be determined pursuant to paragraph 6(b)(iv), as of the trading day
preceding the date the stock appreciation right is exercised.
(E) No fractional Shares shall be issued upon exercise of a stock
appreciation right. In lieu thereof, cash may be paid in an amount equal to
the value of the fraction or, if the Committee shall determine, the number
of Shares may be rounded downward to the next whole Share.
(F) Each participant who has exercised a stock appreciation right shall,
upon notification of the amount due, pay to the Company in cash amounts
necessary to satisfy any applicable federal, state or local tax withholding
requirements. If the participant fails to pay the amount demanded, the
Company or any parent or subsidiary corporation of the Company may withhold
that amount from other amounts payable to the participant by the Company or
any parent or subsidiary corporation, including salary, subject to
applicable law. With the consent of the Committee, a participant may
satisfy this obligation, in whole or in part, by having the Company
withhold from any
<PAGE>
Shares to be issued upon the exercise that number of Shares that would
satisfy the withholding amount due or by delivering Shares to the Company
to satisfy the withholding amount.
(G) Upon the exercise of a stock appreciation right for Shares, the number
of Shares reserved for issuance under the Plan shall be reduced by the
number of Shares issued. Cash payments of stock appreciation rights shall
not reduce the number of Shares reserved for issuance under the Plan.
(b) OTHER STOCK UNIT AWARDS. The Committee shall also be authorized to grant to
participants, either alone or in addition to other awards granted under the
Plan, awards of Shares and other awards that are valued in whole or in part by
reference to, or otherwise based on, Common Stock or other property. These Other
Stock Unit Awards may be paid in Common Stock of the Company, cash, or any other
form of property as the Committee shall determine. The Committee shall determine
the participants to whom Other Stock Unit Awards are to be made, the times at
which such awards are to made, the number of Shares to be granted pursuant to
such awards, and all other conditions of such awards. The provisions of Other
Stock Unit Awards need not be the same with respect to each recipient. The
participant shall not be permitted to sell, assign, transfer, pledge or
otherwise encumber the Shares so awarded prior to the later of the date on which
the Shares are issued, or the date on which any applicable restriction,
performance or deferral period lapses. For any such award or Shares subject to
any such award, the transferability of which is conditional only on the passage
of time, such restriction period shall be a minimum of one (1) year. Shares
(including securities convertible into Shares) granted pursuant to Other Stock
Unit Awards may be issued for no cash consideration or for such minimum
consideration as may be required by applicable law. Shares (including securities
convertible into Shares) purchased pursuant to purchase rights granted pursuant
to Other Stock Unit Awards may be purchased for such consideration as the
Committee shall determine, which price shall not be less than the fair market
value of such Shares or other securities on the date of grant.
10. OPTION GRANTS TO NON-EMPLOYEE DIRECTORS.
(a) AUTOMATIC GRANTS. Upon the adjournment of each annual Shareholder's Meeting,
each Non-Employee Director shall automatically be granted a Non-Statutory Stock
Option to purchase 5,000 Shares. A "Non-Employee Director" is a director of the
Company who is not an employee of the Company or of any parent or subsidiary
corporation of the Company on the date the option is granted.
(b) TERMS OF OPTIONS. The exercise price for options granted under this
paragraph 10 shall be the fair market value of the Shares on the date of grant,
determined pursuant to paragraph 6(b)(iv). Each such option shall have a 10-year
term from the date of grant, unless earlier terminated as provided in paragraph
6(f). The first option granted to any Non-Employee Director under this paragraph
10 shall become exercisable with respect to 20 percent of its underlying Shares
<PAGE>
six months after the date of grant and with respect to the remaining Shares in
20 percent annual increments (measured from the date of grant) so that the
option is fully exercisable on and after the fourth anniversary date of grant
thereof. Each subsequent option granted to any Non-Employee Director shall
become exercisable with respect to 25 percent of its underlying Shares on the
first anniversary of the date of grant and with respect to the remaining Shares
in 25 percent annual increments (measured from the date of grant) so that the
option is fully exercisable on and after the fourth anniversary date of grant
thereof.
11. CHANGES IN CAPITAL STRUCTURE. If the outstanding shares of Common Stock of
the Company are hereafter increased or decreased or changed into or exchanged
for a different number or kind of shares or other securities of the Company or
of another corporation by reason of any recapitalization, reclassification,
stock split, combination of shares or dividend payable in shares, the Committee
shall make appropriate adjustments (i) in the number and kind of shares
available for awards under the Plan; and (ii) in the price and number and kind
of shares as to which outstanding options and stock appreciation rights, or
portions thereof then unexercised, shall be exercisable, so that the
participant's proportionate interest before and after the occurrence of the
event is maintained; provided, however, that this paragraph 11 shall not apply
with respect to transactions referred to in paragraph 12. The Committee may also
require that any securities issued in respect of or exchanged for Shares issued
hereunder that are subject to restrictions be subject to similar restrictions.
Notwithstanding the foregoing, the Committee shall have no obligation to effect
any adjustment that would or might result in the issuance of fractional shares,
and any fractional shares resulting from any adjustment may be disregarded or
provided for in any manner determined by the Committee. Any such adjustment made
by the Committee shall be conclusive.
12. EFFECT OF REORGANIZATION OR LIQUIDATION.
(a) CASH, STOCK OR OTHER PROPERTY FOR STOCK. Except as provided in paragraph
12(b), upon a merger, consolidation, reorganization, plan of exchange or
liquidation involving the Company, as a result of which the shareholders of the
Company receive cash, stock or other property in exchange for or in connection
with their Common Stock (any such transaction to be referred to in this
paragraph 12 as an "Accelerating Event"), any option or stock appreciation right
or other stock unit award granted hereunder shall terminate, except as specified
in the following sentence, but the optionee shall have the right during the
30-day period immediately prior to any such Accelerating Event to elect to
exercise his or her option or stock appreciation right or award, in whole or in
part, without any limitation on exercisability; provided, however, that such
exercise shall be deemed to occur immediately prior to such Accelerating Event
and shall be contingent upon the occurrence of such Accelerating Event. With
respect to an option or stock appreciation right or other stock unit award
granted to an officer or director less than six months prior to any Accelerating
Event, such officer or director shall have the right to require the Company to
purchase such option or stock appreciation right or award, at a purchase price
computed pursuant to paragraph 12(c) during the 30-day period following the
<PAGE>
expiration of six months following the date of such grant, and this right shall
apply even if the option or stock appreciation right or other award has
otherwise terminated pursuant to paragraph 6(f) following such Accelerating
Event.
(b) STOCK FOR STOCK. If the shareholders of the Company receive capital stock of
another corporation ("Exchange Stock") in exchange for their Common Stock in any
transaction involving a merger, consolidation, reorganization, or plan of
exchange, all options granted hereunder shall be converted into options to
purchase shares of Exchange Stock and all stock appreciation rights and other
stock unit awards granted hereunder shall be converted into stock appreciation
rights and awards measured by the Exchange Stock, unless the Committee, in its
sole discretion, determines that any or all such options or stock appreciation
rights or other stock unit awards granted hereunder shall not be converted, but
instead shall terminate in accordance with the provisions of paragraph 12(a).
The amount and price of converted options, stock appreciation rights and other
stock unit awards shall be determined by adjusting the amount and price of the
options or stock appreciation rights or other awards granted hereunder to take
into account the relative values of the Exchange Stock and the Common Stock in
the transaction.
(c) PURCHASE PRICE FOR CERTAIN OFFICERS AND DIRECTORS. With respect to an
option, right or other award granted to an officer or director less than six
months prior to an Accelerating Event, the purchase price payable pursuant to
paragraph 12(a) shall be the product of (A) the excess, if any, of the purchase
price paid for each Share in the Accelerating Event over the award price,
multiplied by (B) the number of Shares covered by the option, stock appreciation
right or other stock unit award. However, no right to require the purchase of
any option or stock appreciation right or other stock unit award may be
exercised in connection with an Accelerating Event if the purchase price
determined under this paragraph 12(c) is negative.
(d) TRANSFERABILITY. The rights set forth in this paragraph 12 shall be
transferable only to the extent the related option or stock appreciation right
or other stock unit award is transferable.
13. CORPORATE MERGERS, ACQUISITIONS, ETC. The Committee may also grant options,
stock appreciation rights, or other stock unit awards, award stock bonuses and
sell stock under the Plan having terms, conditions and provisions that vary from
those specified in the Plan; provided, however, that any such awards are granted
in substitution for, or in connection with the assumption of, existing options,
stock appreciation rights, other awards, stock bonuses and stock sold or awarded
by another corporation and assumed or otherwise agreed to be provided for by the
Company pursuant to or by reason of a transaction involving a corporate merger,
consolidation, acquisition of property or stock, separation, reorganization or
liquidation to which the Company or a parent or subsidiary corporation of the
Company is a party.
14. AMENDMENT OF PLAN.
(a) AMENDMENT BY BOARD. The Board may at any time and from time to time, modify
<PAGE>
or amend the Plan in such respects as it shall deem advisable because of changes
in the law while the Plan is in effect or for any other reason. Except as
provided in paragraphs 6(b)(v), 10, 11 and 12, however, no change in an award
already granted shall be made without the written consent of the holder of such
award.
(b) PARAGRAPH 10 AMENDMENT. Notwithstanding any other provision in the Plan,
paragraph 10 may be amended or modified by the Board or the shareholders of the
Company only once in any six-month period, except as may be required to comport
with changes in the Code, or ERISA, or the rules promulgated thereunder.
15. APPROVALS. The obligations of the Company under the Plan are subject to the
approval of state and federal authorities or agencies with jurisdiction in the
matter. The Company shall not be obligated to issue or deliver Shares under the
Plan if such issuance or delivery would violate applicable state or federal
securities laws, or if compliance with such laws would, in the opinion of the
Company, be unduly burdensome or require the disclosure of information which
would not be in the Company's best interests.
16. EMPLOYMENT AND SERVICE RIGHTS. Nothing in the Plan or any award pursuant to
the Plan shall (i) confer upon any employee any right to be continued in the
employment of the Company or any parent or subsidiary corporation of the Company
or interfere in any way with the right of the Company or any parent or
subsidiary corporation of the Company by whom such employee is employed to
terminate such employee's employment at any time, for any reason, with or
without cause, or increase or decrease such employee's compensation or benefits;
or (ii) confer upon any person engaged by the Company or any parent or
subsidiary corporation of the Company any right to be retained or employed by
the Company or any parent or subsidiary corporation of the Company or to the
continuation, extension, renewal, or modification of any compensation, contract,
or arrangement with or by the Company or any parent or subsidiary corporation of
the Company.
17. RIGHTS AS A SHAREHOLDER. The recipient of any award under the Plan shall
have no rights as a shareholder with respect to any Shares until the date of
issue to the recipient of such Shares. Except as otherwise expressly provided in
the Plan, no adjustment shall be made for dividends or other rights for which
the record date is prior to the date such Shares are issued.
Independent Auditors' Consent
To the Board of Directors and Stockholders of
Timberline Software Corporation
Beaverton, Oregon
We consent to the incorporation by reference in Registration Statements Nos.
33-46716 and 33-69820 on Form S-8 of our report dated January 22, 1999
(March 17, 1999 as to Note 5) appearing in this Annual Report on Form 10-K of
Timberline Software Corporation for the year ended December 31, 1998.
Deloitte & Touche LLP
Portland, Oregon
March 29, 1999
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM
TIMBERLINE SOFTWARE CORPORATION'S FINANCIAL STATEMENTS CONTAINED IN ITS
ANNUAL REPORT ON FORM 10-K FOR THE YEAR ENDED DECEMBER 31, 1998 AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
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0
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