U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[x] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 For the quarterly period ended September 30, 1999
[ ] TRANSITION REPORT UNDER SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 For the transition period from _____ to _____
Commission File Number 0-16376
TIMBERLINE SOFTWARE CORPORATION
(Exact name of registrant as specified in its charter)
Oregon 93-0748489
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
15195 N.W. Greenbrier Parkway, Beaverton, Oregon 97006-5701
(Address of principal executive offices) (Zip code)
(503) 690-6775
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days. Yes [x] No [ ]
At November 12, 1999, approximately 12,794,000 shares of common stock of the
registrant were outstanding, after giving effect to the four-for-three stock
split declared by the Board of Directors to shareholders of record on October
29, 1999 and payable on November 19, 1999. All common share and per share
amounts reported herein have been adjusted to reflect this distribution.
<PAGE>
TIMBERLINE SOFTWARE CORPORATION
FORM 10-Q FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 1999
TABLE OF CONTENTS
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed balance sheets, September 30, 1999 and
December 31, 1998 ............................... 3
Condensed statements of operations for the three months
ended September 30, 1999 and 1998 ................ 4
Condensed statements of operations for the nine months
ended September 30, 1999 and 1998 ................ 5
Condensed statements of cash flows for the nine months
ended September 30, 1999 and 1998................. 6
Notes to condensed financial statements ............... 7
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations ............... 11
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K .................. 20
SIGNATURES ................................................. 20
EXHIBIT INDEX .............................................. 21
<PAGE>
PART I. Financial Information
Item 1. Financial Statements
TIMBERLINE SOFTWARE CORPORATION
CONDENSED BALANCE SHEETS
SEPTEMBER 30, 1999 (Unaudited) AND DECEMBER 31, 1998
(Amounts in thousands)
<TABLE>
<CAPTION>
September 30, December 31,
1999 1998
----------- -----------
<S> <C> <C>
ASSETS
- ------
Current assets:
Cash and cash equivalents $ 7,396 $10,193
Temporary investments 9,720 3,767
Accounts receivable, less allowance
for doubtful accounts
(September 30, 1999, $143;
December 31, 1998, $182) 5,227 5,086
Inventories 253 272
Other current assets 1,276 1,202
----------- -----------
Total current assets 23,872 20,520
----------- -----------
Property and equipment 24,265 23,452
Less accumulated depreciation
and amortization 6,005 5,071
----------- -----------
Property and equipment - net 18,260 18,381
----------- -----------
Capitalized software costs - net 2,235 1,304
Purchased software - net 2,012 1,249
Other assets 82 95
----------- -----------
Total $46,461 $41,549
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
- ------------------------------------
Current liabilities:
Accounts payable $ 1,054 $ 812
Deferred revenues 13,069 10,352
Accrued employee expenses 2,194 2,312
Income taxes payable 993 373
Other current liabilities 885 1,171
----------- -----------
Total current liabilities 18,195 15,020
----------- -----------
Long-term debt - 5,417
Accrued rent expense 30 29
Deferred income taxes 1,036 1,047
Shareholders' equity:
Common stock, without par value
authorized, 20,000 shares;
issued - September 30, 1999, 12,779
shares; December 31, 1998,
12,560 shares 384 377
Additional paid in capital 5,110 3,721
Accumulated other comprehensive
income (loss) (33) 10
Retained earnings 21,739 15,928
----------- -----------
Total shareholders' equity 27,200 20,036
----------- -----------
Total $46,461 $41,549
=========== ===========
See notes to condensed financial statements.
</TABLE>
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TIMBERLINE SOFTWARE CORPORATION
CONDENSED STATEMENTS OF OPERATIONS
FOR THE THREE MONTHS ENDED SEPTEMBER 30, 1999 AND 1998 (Unaudited)
(Amounts in thousands, except per share data)
<TABLE>
<CAPTION>
1999 1998
---------- ----------
Net revenue:
<S> <C> <C>
Computer software $ 6,749 $ 6,360
Service fees 6,204 4,464
Other 397 254
---------- ----------
Net revenue 13,350 11,078
---------- ----------
Cost and expenses:
Cost of revenue 1,144 964
Customer support 2,573 2,177
Product development 2,671 2,366
Sales and marketing 1,857 1,755
General and administrative 1,273 1,185
---------- ----------
Total cost and expenses 9,518 8,447
---------- ----------
Operating income 3,832 2,631
Other income 210 109
---------- ----------
Income before income taxes 4,042 2,740
Provision for income taxes 1,577 1,014
---------- ----------
Net income $ 2,465 $ 1,726
========== ==========
Earnings per share:
Basic $ 0.19 $ 0.14
Diluted 0.19 0.13
See notes to condensed financial statements.
</TABLE>
4
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TIMBERLINE SOFTWARE CORPORATION
CONDENSED STATEMENTS OF OPERATIONS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1999 AND 1998 (Unaudited)
(Amounts in thousands, except per share data)
<TABLE>
<CAPTION>
1999 1998
---------- ----------
Net revenue:
<S> <C> <C>
Computer software $21,447 $17,038
Service fees 17,490 13,076
Other 1,025 807
---------- ----------
Net revenue 39,962 30,921
---------- ----------
Cost and expenses:
Cost of revenue 3,583 2,802
Customer support 7,532 6,195
Product development 7,681 6,600
Sales and marketing 6,282 4,923
General and administrative 3,932 3,679
---------- ----------
Total cost and expenses 29,010 24,199
---------- ----------
Operating income 10,952 6,722
Other income 443 436
---------- ----------
Income before income taxes 11,395 7,158
Provision for income taxes 4,445 2,650
---------- ----------
Net income $ 6,950 $ 4,508
========== ==========
Earnings per share:
Basic $ 0.55 $ 0.36
Diluted 0.53 0.35
See notes to condensed financial statements.
</TABLE>
5
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TIMBERLINE SOFTWARE CORPORATION
CONDENSED STATEMENTS OF CASH FLOWS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1999 AND 1998 (Unaudited)
(Amounts in thousands)
<TABLE>
<CAPTION>
1999 1998
---------- ----------
<S> <C> <C>
Net cash provided by
operating activities $11,938 $ 7,299
---------- ----------
Cash flows from investing
activities:
Payments for property,
equipment and purchased software (2,131) (9,800)
Capitalized software costs (1,367) (174)
Proceeds from investments 2,166 5,640
Purchase of investments (8,161) (5,569)
Other 2 17
---------- ----------
Net cash used in investing activities (9,491) (9,886)
---------- ----------
Cash flows from financing
activities:
Construction loan proceeds 4,400
Long-term debt payments (5,500)
Proceeds from issuance of
common stock 1,395 669
Dividends paid (1,139) (843)
---------- ----------
Net cash provided by (used in)
financing activities (5,244) 4,226
---------- ----------
Net increase (decrease) in cash
and cash equivalents (2,797) 1,639
Cash and cash equivalents,
beginning of the period 10,193 5,050
---------- ----------
Cash and cash equivalents,
end of period $ 7,396 $ 6,689
========== ==========
Supplemental information:
Cash paid during the period for
income taxes $ 2,999 $ 2,302
========== ==========
Non-cash investing and financing
activity:
Property and equipment purchases to be
financed through construction loan $ - $ 1,223
========== ==========
See notes to condensed financial statements.
</TABLE>
6
<PAGE>
TIMBERLINE SOFTWARE CORPORATION
NOTES TO CONDENSED FINANCIAL STATEMENTS
FOR THE THREE AND NINE MONTH PERIODS
ENDED SEPTEMBER 30, 1999 AND 1998
(Unaudited)
(Amounts in thousands)
1. Condensed financial statements
Certain information and note disclosures normally included in financial
statements prepared in accordance with generally accepted accounting
principles have been omitted from these condensed financial statements.
These condensed financial statements should be read in conjunction with
the financial statements and notes thereto included in the Company's Form
10-K for the year ended December 31, 1998. The balance sheet at December
31, 1998 has been condensed from the audited balance sheet as of that
date. The results of operations for the three and nine month periods
ended September 30, 1999 and 1998 are not necessarily indicative of the
operating results for the full year.
In the opinion of management, all adjustments, consisting of normal
recurring adjustments, have been made to present fairly the Company's
financial position at September 30, 1999 and the results of its
operations and its cash flows for the three and nine month periods ended
September 30, 1999 and 1998.
2. Long-term debt
At the end of 1998, the Company had construction loan borrowings of
$5,500 under its construction loan agreement with a bank in connection
with the construction of its new corporate offices, which were
substantially completed in October 1998. Because the Company had the
intent and the ability to finance construction costs on a long-term
basis, borrowings under the construction loan agreement were recorded as
long-term debt at December 31, 1998.
During the first quarter of 1999, the Company repaid these borrowings.
Based on the Company's current cash balances, its cash projections for
1999 and current mortgage interest rates, the Company reconsidered the
need for long-term mortgage financing. After further discussion with its
Board of Directors in May 1999, management of the Company decided that
long-term mortgage financing was not required at this time.
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3. Earnings per share
A reconciliation of the common shares used in the denominator for
computing basic and diluted earnings per share for the three and nine
month periods ended September 30, 1999 and 1998 is as follows:
Three Months Ended
September 30,
-------------------
1999 1998
-------- --------
Weighted-average shares outstanding,
used in computing basic earnings
per share 12,736 12,532
Effect of dilutive stock options 444 449
-------- --------
Weighted-average shares outstanding,
used in computing diluted earnings
per share 13,180 12,981
======== ========
Nine Months Ended
September 30,
-------------------
1999 1998
-------- --------
Weighted-average shares outstanding,
used in computing basic earnings
per share 12,658 12,489
Effect of dilutive stock options 465 452
-------- --------
Weighted-average shares outstanding,
used in computing diluted earnings
per share 13,123 12,941
======== ========
4. Comprehensive income
In June 1997, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards (SFAS) No. 130, "Reporting
Comprehensive Income," which established standards for reporting
comprehensive income and its components. The Company adopted this
standard on January 1, 1998. Statements of comprehensive income for the
three and nine month periods ended September 30, 1999 and 1998 are not
presented because the difference between net income and comprehensive
income is not material. The only difference between the Company's net
income and comprehensive income relates to the change in the unrealized
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net gain (loss) on temporary investments. For the three months ended
September 30, 1999 and 1998, net income would have been reduced by $9 and
increased by $7, respectively, to arrive at comprehensive income of
$2,456 and $1,733, respectively, due to the change in the unrealized net
gain (loss) on temporary investments. The change in this item also
resulted in a $43 reduction and $2 increase in net income to arrive at
comprehensive income of $6,907 and $4,510 for the nine months ended
September 30, 1999 and 1998, respectively.
5. Operating segment information
Effective December 31, 1998, the Company adopted SFAS No. 131,
"Disclosures about Segments of an Enterprise and Related Information."
The statement requires that public companies report certain financial and
descriptive information about its operating segments on both annual and
interim financial reports. Operating segments within a company are
determined based on a company's organizational structure and the way that
a company manages its businesses for making operating decisions and
assessing its performance.
The Company's operations are divided into two operating segments:
software products and software services. The Company evaluates its
performance in each segment based on its operating contribution, which
includes revenue, cost and expenses that can be specifically identified
within each segment. Product development and general and administrative
expenses are not allocated to the segments for determining its operating
contribution because such an allocation would be based on subjective
factors. Information about each operating segment and a reconciliation of
operating contribution to operating income for the three and nine month
periods ended September 30, 1999 and 1998 is as follows:
Three Months Ended
September 30,
-------------------
1999 1998
-------- --------
Net revenue:
Software products $ 6,749 $ 6,360
Services 6,204 4,464
Other 397 254
-------- --------
Net revenue $13,350 $11,078
======== ========
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Three Months Ended
September 30,
-------------------
1999 1998
-------- --------
Operating Contribution:
Software products $ 4,744 $ 4,382
Services 2,733 1,604
Other revenue, net of cost 299 196
Product development expenses (2,671) (2,366)
General and administrative expenses (1,273) (1,185)
-------- --------
Operating income $ 3,832 $ 2,631
-------- --------
Nine Months Ended
September 30,
-------------------
1999 1998
-------- --------
Net revenue:
Software products $21,447 $17,038
Services 17,490 13,076
Other 1,025 807
-------- --------
Net revenue $39,962 $30,921
======== ========
Nine Months Ended
September 30,
-------------------
1999 1998
-------- --------
Operating Contribution:
Software products $14,470 $11,485
Services 7,246 4,862
Other revenue, net of cost 849 654
Product development expenses (7,681) (6,600)
General and administrative expenses (3,932) (3,679)
-------- --------
Operating income $10,952 $ 6,722
======== ========
6. Subsequent event - stock split
On October 14, 1999, the Company's Board of Directors approved a
four-for-three stock split to shareholders of record on October 29, 1999
and payable on November 19, 1999. All common share and per share amounts
have been retroactively adjusted to reflect this change.
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Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations (Amounts in thousands, except percent amounts
and per share data)
Forward-Looking Statements
From time to time, the Company or its representatives have made or may make
forward-looking statements, orally or in writing. 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, including
this Report. The words or phrases "anticipates," "believes," "expects,"
"intends," "will continue," "estimates," "plans," "projects," or similar
expressions are intended to identify "forward-looking statements" within the
meaning of the Private Securities Litigation Reform Act of 1995.
The Company's forward-looking statements are subject to certain risks, trends,
and uncertainties that could cause actual results to vary materially from
anticipated results, including, without limitation, delays in new product
releases, delays in acceptance of the Company's products in the marketplace,
failures by the Company's outside vendors to perform as promised, changes in
the software operating systems for which the Company's products are written,
increased competition, changes in general market conditions and certain risks
associated with the year 2000. These factors are discussed in further detail
below under "Risks and Uncertainties." Should any one or more of these risks
or uncertainties materialize, or should any underlying assumptions prove
incorrect, actual results may vary materially from those discussed herein as
expected, believed, estimated, intended or anticipated. The Company undertakes
no obligation to revise or publicly release the results of any revision to
these forward-looking statements.
Results of Operations
- ---------------------
NET REVENUE. Net revenue increased 21 percent to $13,350 for the three months
ended September 30, 1999 compared to $11,078 for the comparable period in
1998. Both major components of net revenue, computer software sales and
service fees, increased in 1999 as compared to the same three month period in
1998. Computer software sales increased six percent to $6,749 in the 1999
period from $6,360 in the 1998 period. The third quarter is the busiest time
of year for most contractors and it was believed to be particularly busy for
them this year due to the high level of activity in the industry and the
necessity to deal with operational problems, such as labor and material
shortages that have been recently reported. Consequently, many contractors had
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<PAGE>
less time to consider software purchases, which is believed to have resulted
in prospective users deferring their decision to purchase software this
quarter. Software sales increased modestly in all product lines. The Company's
Gold Collection(r) for Construction Accounting, its Windows-based accounting
software, increased seven percent in the three months ended September 30, 1999
over the same period last year. Estimating software sales and Property
Management software sales increased three percent and 11 percent,
respectively, in the three months ended September 30, 1999 as compared to the
same period in 1998. Total computer software sales represented 51 percent and
57 percent of net revenue in the three months ended September 30, 1999 and
1998, respectively
Service fees from maintenance, support, consulting and training, which
represented 46 percent and 40 percent of net revenue for the three months
ended September 30, 1999 and 1998, respectively, increased 39 percent to
$6,204 in the 1999 period from $4,464 for the comparable period in 1998.
Maintenance and support fees, which comprise about three-fourths of total
service fees increased 43 percent over the comparable period in 1998. This
increase was principally due to the continuing increase in the Company's user
base through new product sales, the Company's revised maintenance and support
service plan pricing structure, which was instituted over a year ago, and an
increase in the percentage of users renewing their subscription plan.
Consulting and training fees increased 25 percent over the 1998 period.
For the nine months ended September 30, 1999, net revenue increased 29 percent
to $39,962 from $30,921 for the comparable period in 1998. Computer software
sales increased 26 percent to $21,447 for the first nine months of 1999, from
$17,038 for the same period in 1998. Software sales increased in all product
lines. Sales of Gold Collection for Construction Accounting increased 22
percent for the first nine months of 1999 compared to the same period in 1998.
The Company believes this increase is primarily due to the continuing strength
in the construction industry, the Company's increasing market dominance and,
to a lesser extent, the need by many companies to upgrade or replace their
existing computer software which was not year 2000 compliant. Estimating
software sales increased 32 percent compared to the same period in 1998. This
was due primarily to the largest single software sale in the Company's history
during the first quarter of 1999. Property Management software sales increased
38 percent in 1999 over the comparable period in 1998 primarily due to
increasing acceptance of this software in the market and, to a lesser extent,
the introduction of maintenance management software to this product line in
1999. Software sales represented 54 percent of net revenue for the nine months
ended September 30, 1999 compared to 55 percent for the same period in 1998.
Service fees, which represented 44 percent and 42 percent of net revenue for
the nine months ended September 30, 1999 and 1998, respectively, increased 34
percent to $17,490 for the 1999 period compared to $13,076 for the comparable
period in 1998. The increase was principally attributable to a 35 percent
increase in maintenance and support fees due to an increase in the Company's
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user base through new product sales and the Company's revised maintenance and
support service plan pricing structure, which was instituted during the first
quarter of 1998 and an increase in the percentage of users renewing their
annual service plan. Consulting and training revenue increased 29 percent,
primarily due to increased consulting revenue from new users and an increase
in training material sales.
COST OF REVENUE. Cost of revenue, as a percentage of net revenue, was nine
percent for the three and nine month periods ended September 30, 1999 and
1998.
OPERATING EXPENSES. Operating expenses increased 12 percent to $8,374 for the
three months ended September 30, 1999 from $7,483 for the comparable period in
1998. For the nine months ended September 30, 1999, these expenses increased
19 percent to $25,427 from $21,397 for the comparable period in 1998.
Customer support expenses increased 18 percent to $2,573 for the three months
ended September 30, 1999 from $2,177 for the same period in 1998. For the nine
months ended September 30, 1999, these expenses increased 22 percent to $7,532
from $6,195 for the comparable period in 1998. The increase was primarily due
to additional personnel hired to handle the increased demands for support and
consulting services as a result of the continuing increase in Accounting
software sales. In 1999, the Company reorganized and changed the way it
operates in the support area. This has allowed the Company to handle a
significant increase in call volume without a corresponding increase in
support personnel, while providing a higher level of service to our users.
This, in turn, has freed up customer support staff to generate additional
consulting services revenue from its users.
Product development expenses increased 13 percent to $2,671 for the three
months ended September 30, 1999 from $2,366 for the comparable period in 1998.
For the nine months ended September 30, 1999, these expenses increased 16
percent to $7,681 from $6,600 for the comparable period in 1998. The increase
was primarily due to increased personnel hirings to keep the Company's
development schedule on track for enhancements to the software as well as
research and development on new software products. The Company continues to
devote significant resources to quality assurance so the Company's software is
more thoroughly tested and bug-free prior to its release to users. The Company
believes that a greater emphasis on quality assurance may have the effect of
reducing the number of calls to the Company's customer support staff, which in
turn can allow faster service to its customers and more efficient and
productive use of its customer support personnel. The Company expects overall
product development expenses to remain above its 1998 level throughout 1999.
Sales and marketing expenses increased six percent to $1,857 for the three
months ended September 30, 1999 from $1,755 for the same period in 1998. As a
percentage of net revenue, these expenses decreased to 14 percent for the
three months ended September 30, 1999 from 16 percent for the same period in
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1998. For the nine months ended September 30, 1999, these expenses increased
28 percent to $6,282 from $4,923 for the comparable period in 1998 but as a
percentage of net revenue, remained constant at 16 percent. The increase in
expenses for this period was primarily due to an increase in sales
commissions, trade show costs and international marketing activities.
General and administrative expenses increased seven percent to $1,273 for the
three months ended September 30, 1999 from $1,185 for the comparable period in
1998, but as a percentage of net revenue, declined to 10 percent from 11
percent. The increase in expenses was primarily due to higher insurance and
outside service costs. For the nine months ended September 30, 1999, general
and administrative expenses increased seven percent to $3,932 from $3,679 for
the comparable period in 1998. As a percentage of net revenue, general and
administrative expenses decreased to 10 percent for the nine months ended
September 30, 1999 from 12 percent for the same period in 1998.
PROVISION FOR INCOME TAXES. The Company's effective tax rate was 39 percent
for the three and nine month periods ended September 30, 1999 compared to 37
percent for the same periods in 1998. The provision for income taxes is based
on the Company's estimate of the effective tax rate for each of the respective
years.
Capital Resources and Liquidity
- -------------------------------
The Company generally meets its liquidity needs through cash generated from
operations. During the nine months ended September 30, 1999, net cash provided
by operations was $11,938 compared to $7,299 for the same period in 1998. This
increase was primarily due to an increase in the profitability of the
Company's operations for the first nine months of 1999 compared to the same
period in 1998. Working capital increased slightly to $5,677 at September 30,
1999 from $5,500 at December 31, 1998. Cash and cash equivalents and temporary
investments increased $3,156 to $17,116 at September 30, 1999, from $13,960 at
December 31, 1998. Net accounts receivable at September 30, 1999 was $5,227,
an increase of $141 compared to December 31, 1998. DSO (Days Sales
Outstanding) at September 30, 1999 increased slightly to 35, compared to 34 at
December 31, 1998. Net capitalized software costs increased $931 since
December 31, 1998 primarily due to payments owed under an agreement with
another software company to integrate its SQL database engine with the
Company's software. Purchased software increased $763 to $2,012 at September
30, 1999, from 1,249 at December 31, 1998, primarily related to costs incurred
for the Company's new management information system.
Deferred revenues at September 30, 1999 increased $2,717 since December 31,
1998 primarily due to an increase in the billings for annual maintenance and
support services. Revenue from annual maintenance and support service billings
are recognized monthly over the terms of the contracts. Accrued employee
expenses decreased $118 since December 31, 1998 primarily due to lower amounts
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accrued for profit sharing and the Company's contribution to its 401(k) plan.
Because the Company pays these expenses subsequent to year-end, accrued
employee expenses at December 31, 1998 include those expenses for a full year,
compared to only nine months of those expenses at September 30, 1999.
During the first nine months of 1999, the Company declared three regular cash
dividends aggregating $1,139, or $.09 per share, after giving effect to the
subsequent four-for-three stock split (see Note 6 of Notes to Condensed
Financial Statements). All common shares and per share amounts in this report
have been retroactively adjusted to reflect this change. The Company plans to
continue to pay quarterly cash dividends consistent with its capital needs and
income levels.
Risks and Uncertainties
- -----------------------
From time to time, the Company may make forward-looking statements as such
term is defined in the Federal securities laws. The following risks and
uncertainties, among others, should be considered in evaluating the Company's
forward-looking statements. Factors that may cause actual results to differ
materially from those contained in such forward-looking statements are as
follows:
YEAR 2000 COMPLIANCE. Many companies that use and/or develop computer software
are addressing the potential problem that will soon manifest if their software
is not year 2000 compliant. The potential problem that exists with some
computer software is that it will not process transactions properly for dates
commencing in the year 2000. This is due to the fact that many software
programs were designed to make date calculations based on the last two digits
of the year. As a result, dates in the year 2000 may be identified as dates in
the year 1900, which may cause incorrect calculations, cause the transaction
to not be processed or, in some cases, cause an entire computer system to
malfunction.
The Company has been aware of this problem for many years and has been
addressing it, both for its software that is being developed for sale to users
and for applications affecting internal operations that potentially may not be
year 2000 compliant. On software developed for sale to users, the Company
believes that its complete suite of current Windows-based products is already
year 2000 compliant, and modifications to its older DOS-based products which
are still maintained by the Company, to make them year 2000 compliant are
complete. The Company has released the modified software to all of its
DOS-based product users who are on a software maintenance contract with the
Company. The Company has already notified known users of its discontinued
software products that the Company will not continue support of such products.
Because the Company has been aware of the year 2000 issue for a number of
years, it has been developing and testing software with year 2000 compliance
in mind and has not budgeted separately to address it.
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As of September 30, 1999, the Company has completed its assessment of its
internal technical applications to ascertain whether they are year 2000
compliant. The Company has identified components of its internal information
and telecommunication systems that are not year 2000 compliant and has
upgraded most of those components and tested those changes to ensure they are
year 2000 compliant. The Company continually upgrades and expands its internal
information and telecommunication systems, and does not budget specifically
for year 2000 compliant costs required for upgrading and testing those
systems. However, the Company estimates that costs specifically related to
upgrading and testing the information and telecommunication systems for year
2000 compliance will be approximately $80 in 1999. The assessment and
projections for having those systems year 2000 compliant were conducted by the
Company's information technology and telecommunication staff based on their
expertise in those areas and discussions with representatives of vendors who
support those systems.
The Company has also completed its assessment of non-technical applications to
identify areas that are not year 2000 compliant. No significant applications
critical to the operations of the Company were identified in this area that
were not year 2000 compliant. The Company did not assess or test all minor
non-technical applications for being year 2000 compliant, but believes that
none of these applications pose any significant adverse risk to the Company's
operations.
Additionally, the Company is nearing completion of its assessment for year
2000 compliance of its significant third parties upon whom it relies for
various aspects of its business . These third parties are primarily vendors
(banks, telephone companies, fulfillment and freight companies, and suppliers
of components for the Company's software products) whose inability to be year
2000 compliant could delay or cancel customer orders for the Company's
products and services, delay receipt of payments by customers for products
shipped and services rendered, and disrupt other aspects of the Company's
operations. Any one of these potential events could adversely and materially
affect the Company's financial condition and results of operations.
The Company has made inquiries with its significant third party vendors,
suppliers and service providers with respect to their year 2000 compliance
programs and, more importantly, those specific parts of their program that
directly affect the Company's operations. The general response that the
Company has received from these parties has indicated that they have completed
or are in the process of assessing and testing their operations for year 2000
compliance and are expected to complete their testing during 1999. No parties
that have responded to our inquiries have indicated that they will not be year
2000 compliant by the end of 1999. The Company anticipates that it will
continue to solicit information for these third parties and monitor the
progress of their year 2000 compliance programs through 1999.
16
<PAGE>
The Company has not developed a contingency plan in the event the Company or
any of its third parties fail to become year 2000 compliant in a timely
manner. Based on the information the Company has received to date, it does not
believe this to be a likely scenario. The Company believes that a reasonable
worst-case scenario for not being year 2000 compliant would be that the
Company's software products sold to users do not address all aspects or
conditions related to the year 2000 compliance issue, and/or that the
Company's vendors are not able to supply components related to its software
products. If such a scenario occurs, the Company will have to redirect some of
its product development staff to work on the software to make it year 2000
compliant for events it did not originally consider in the development of the
software or find alternative suppliers for its software components. The
Company's users may also seek to hold the Company liable for damages if the
software does not function properly and the Company may be held liable to
users to which it has represented that its software is year 2000 compliant.
Additionally, there could be delays in delivering software to customers as the
Company finds new suppliers or methods of delivery.
Based on the assessment the Company has made to date on the year 2000
compliant issue, the Company does not believe that this issue will have a
material adverse effect on the Company's financial condition, results of
operations and cash flows. However, that assessment is based on information
that is currently known to the Company and assumes that significant third
parties with which the Company transacts business will be year 2000 compliant
by the end of 1999. 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 a material adverse effect on the Company's financial condition,
results of operations and cash flows. The Company will continue to update its
assessment of its year 2000 readiness as it receives updated information from
its year 2000 program and as it monitors legal rulings concerning the year
2000 compliance issue.
Various of the Company's disclosures and announcements concerning its products
and year 2000 programs are intended to constitute "Year 2000 Readiness
Disclosures" as defined in the Year 2000 Information and Readiness Disclosures
Act. This Act provides added protection from liability for certain public and
private statements concerning an entity's year 2000 readiness and the year
2000 readiness of its products and services. It also potentially provides
added protection from liability for certain types of year 2000 disclosures
made after January 1, 1996 and before the date of enactment of the Act.
17
<PAGE>
COMPETITION. The computer software market is highly competitive and subject to
change because of the rapid technological changes in the computer industry.
The number of software vendors with which the Company competes varies from
product to product and from region to region within the United States.
Although the Company believes it is a major supplier of project accounting and
cost estimating software for the construction and property management
industries, and that there are economical and technological barriers to
discourage new specialty software vendors from entering into its segment of
the software market, there can be no assurance that larger, well-known
software developers will not target this segment of the market. Such
competitors are considerably larger, more diversified, and have greater
financial and other resources and enjoy greater brand recognition for their
products than the Company.
The Company must also compete with other larger, well-known software
developers for the hiring and retention of highly qualified technical
personnel. As a result, the Company may have to expend additional financial
resources to hire and retain qualified technical personnel. If the Company is
not able to secure the services of employees with the level of technical
expertise it requires, the development of new products would likely be delayed
and would result in a decrease in the quality of new software products and
enhancements to its existing software products. A delay in the development, or
failure to maintain the quality of new software products by the Company would
likely have a material adverse effect on the financial position, results of
operations and cash flows of the Company.
DEPENDENCE ON MICROSOFT OPERATING SYSTEM;OBSOLESCENCE AND TECHNOLOGICAL
CHANGES. The Company is a specialty software developer, an industry
characterized by rapid technological change. Its software is designed to work
with specific operating systems developed by Microsoft Corporation. If
substantial changes are made to those operating systems or if new operating
systems are adopted, the Company's software may not function properly,
necessitating that the Company invest additional resources to adapt its
software to those changes. Also, other operating systems may be introduced on
which the Company's software may not function, which may also cause additional
resources to be expended which would otherwise be devoted to improving the
Company's software or developing new software.
To remain competitive, the Company must continue to make substantial
expenditures for product development. Although the Company plans to continue
to enhance its existing products and to develop new products, the Company's
competitors may develop products with superior capabilities and/or market
their products more effectively at lower prices, by "bundling" their software
with other software or through other methods. The Company believes its
existing software products are widely accepted in its segment of the
marketplace. However, a delay in the release of new products or modifications
to existing products, or a delay in the acceptance by the marketplace of any
18
<PAGE>
new products or modifications to existing products, could similarly delay the
recognition of revenue, or have an adverse effect on the Company's revenue and
earnings.
SUBSTANTIAL DEPENDENCE ON SINGLE INDUSTRY. Because the Company sells a large
majority of its software products and services to the construction industry,
adverse economic conditions in that industry could have a material adverse
effect on the Company's revenue and earnings. The construction industry is
particularly sensitive to a significant increase in interest rates, which in
the past has resulted in substantial financial distress across the industry.
In addition, a downturn in general economic conditions in the United States
could adversely affect the construction industry.
PRODUCT PROTECTION. The Company regards its software as proprietary and
attempts to protect it by relying upon copyrights, trade secrets, internal
nondisclosure agreements and transferability restriction incorporated into its
software license agreements. The Company believes the risk of unauthorized
transfers of the Company's proprietary information is reduced because program
source listings are not released to third parties. Despite these restrictions,
it may be possible for competitors or users to copy aspects of the Company's
products or to obtain information which the Company regards as proprietary.
The Company's competitive position could be adversely affected by unauthorized
use of its proprietary information. Third parties may also assert infringement
or other claims against the Company with respect to any existing or future
products. Litigation to protect the Company's proprietary information or to
determine the validity of any third-party claims could result in significant
expense to the Company and, whether or not such litigation is determined in
favor of the Company, divert the efforts of the Company's technical and
management personnel from further development and support of the Company's
software products.
19
<PAGE>
PART II. Other Information
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
(27) Financial Data Schedule
(b) Reports on Form 8-K
No Form 8-K was filed during the three months ended September 30,
1999.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
TIMBERLINE SOFTWARE CORPORATION
(Registrant)
Date: November 12, 1999 /s/ Carl C. Asai
-------------------------------------------
Carl C. Asai, Vice President,
Finance (Chief Financial Officer)
20
<PAGE>
FORM 10-Q
Exhibit Index
Exhibit Page
(27) Financial Data Schedule 22
21
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<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM
TIMBERLINE SOFTWARE CORPORATION'S CONDENSED FINANCIAL STATEMENTS
CONTAINED IN ITS QUARTERLY REPORT ON FORM 10-Q FOR THE PERIOD ENDED
SEPTEMBER 30, 1999 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
FINANCIAL STATEMENTS
</LEGEND>
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<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-END> SEP-30-1999
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<SECURITIES> 9,720
<RECEIVABLES> 5,370
<ALLOWANCES> 143
<INVENTORY> 253
<CURRENT-ASSETS> 23,872
<PP&E> 24,265
<DEPRECIATION> 6,005
<TOTAL-ASSETS> 46,461
<CURRENT-LIABILITIES> 18,195
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<COMMON> 384
0
0
<OTHER-SE> 26,816
<TOTAL-LIABILITY-AND-EQUITY> 46,461
<SALES> 21,447
<TOTAL-REVENUES> 39,962
<CGS> 3,583
<TOTAL-COSTS> 18,796
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
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<INCOME-PRETAX> 11,395
<INCOME-TAX> 4,445
<INCOME-CONTINUING> 6,950
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