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, 2000
[_] 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
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(Address of principal executive offices) (Zip code)
(503) 690-6775
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(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days. Yes [x] No [ ]
At November 9, 2000, 11,949,668 shares of common stock of the registrant were
outstanding.
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TIMBERLINE SOFTWARE CORPORATION
FORM 10-Q FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2000
TABLE OF CONTENTS
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PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed consolidated balance sheets, September 30,
2000 and December 31, 1999...................................3
Condensed consolidated statements of operations
for the three months ended September 30, 2000 and
1999.........................................................4
Condensed consolidated statements of operations
for the nine months ended September 30, 2000 and
1999.........................................................5
Condensed consolidated statements of cash flows
for the nine months ended September 30, 2000 and
1999.........................................................6
Notes to condensed consolidated 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
SIGNATURE...................................................................21
EXHIBIT INDEX...............................................................22
2
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PART I. Financial Information
Item 1. Financial Statements
TIMBERLINE SOFTWARE CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
SEPTEMBER 30, 2000 (Unaudited) AND DECEMBER 31, 1999
(Amounts in thousands)
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<TABLE>
<CAPTION>
September 30, December 31,
2000 1999
----------- -----------
<S> <C> <C>
ASSETS
------
Current assets:
Cash and cash equivalents $ 6,063 $ 7,642
Temporary investments 9,034 12,738
Accounts receivable, less allowance
for doubtful accounts
(September 30, 2000, $142;
December 31, 1999, $143) 4,752 5,025
Inventories 263 221
Other current assets 1,307 1,501
----------- -----------
Total current assets 21,419 27,127
----------- -----------
Property and equipment 29,744 27,749
Less accumulated depreciation
and amortization 8,476 7,329
----------- -----------
Property and equipment - net 21,268 20,420
----------- -----------
Capitalized software costs - net 5,440 2,715
Other assets 216 85
----------- -----------
Total $48,343 $50,347
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
------------------------------------
Current liabilities:
Accounts payable $ 1,130 $ 864
Deferred revenues 14,040 13,725
Accrued employee expenses 1,856 2,184
Income taxes payable - 467
Other current liabilities 960 1,185
----------- -----------
Total current liabilities 17,986 18,425
----------- -----------
Accrued rent expense 184 30
Deferred income taxes 2,582 1,725
Shareholders' equity:
Common stock, without par value
authorized, 20,000 shares;
issued - September 30, 2000, 12,331
shares; December 31, 1999,
12,822 shares 370 385
Additional paid in capital 5,460 5,405
Accumulated other comprehensive
loss (29) (70)
Retained earnings 21,790 24,447
----------- -----------
Total shareholders' equity 27,591 30,167
----------- -----------
Total $48,343 $50,347
=========== ===========
See notes to condensed consolidated financial statements.
</TABLE>
3
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TIMBERLINE SOFTWARE CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2000 AND 1999 (Unaudited)
(Amounts in thousands, except per share data)
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<TABLE>
<CAPTION>
2000 1999
---------- ----------
<S> <C> <C>
Net revenue:
Software license fees $ 5,978 $ 6,749
Service fees 6,900 6,204
Other 145 397
---------- ----------
Net revenue 13,023 13,350
---------- ----------
Cost and expenses:
Cost of revenue 1,173 1,144
Client services 3,194 2,573
Product development 3,482 2,671
Sales and marketing 2,512 1,857
General and administrative 1,678 1,273
---------- ----------
Total cost and expenses 12,039 9,518
---------- ----------
Operating income 984 3,832
Other income 247 210
---------- ----------
Income before income taxes 1,231 4,042
Provision for income taxes 449 1,577
---------- ----------
Net income $ 782 $ 2,465
========== ==========
Earnings per share:
Basic $ 0.06 $ 0.19
Diluted 0.06 0.19
See notes to condensed consolidated financial statements.
</TABLE>
4
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TIMBERLINE SOFTWARE CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2000 AND 1999 (Unaudited)
(Amounts in thousands, except per share data)
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<TABLE>
<CAPTION>
2000 1999
---------- ----------
<S> <C> <C>
Net revenue:
Software license fees $16,664 $21,447
Service fees 20,175 17,490
Other 665 1,025
---------- ----------
Net revenue 37,504 39,962
---------- ----------
Cost and expenses:
Cost of revenue 3,785 3,583
Client services 9,140 7,532
Product development 9,865 7,681
Sales and marketing 6,884 6,282
General and administrative 4,994 3,932
---------- ----------
Total cost and expenses 34,668 29,010
---------- ----------
Operating income 2,836 10,952
Other income 816 443
---------- ----------
Income before income taxes 3,652 11,395
Provision for income taxes 1,333 4,445
---------- ----------
Net income $ 2,319 $ 6,950
========== ==========
Earnings per share:
Basic $ 0.18 $ 0.55
Diluted 0.18 0.53
See notes to condensed consolidated financial statements.
</TABLE>
5
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TIMBERLINE SOFTWARE CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2000 AND 1999 (Unaudited)
(Amounts in thousands)
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<TABLE>
<CAPTION>
2000 1999
---------- ----------
<S> <C> <C>
Net cash provided by
operating activities $ 5,714 $11,938
---------- ----------
Cash flows from investing
activities:
Payments for property and
equipment (2,594) (2,131)
Capitalized software costs (3,523) (1,367)
Proceeds from investments 3,745 2,166
Purchase of investments - (8,161)
Other 15 2
---------- ----------
Net cash used in investing
activities (2,357) (9,491)
---------- ----------
Cash flows from financing
activities:
Long-term debt payments - (5,500)
Proceeds from issuance of
common stock 302 1,395
Common stock reacquired (3,702) -
Dividends paid (1,536) (1,139)
---------- ----------
Net cash used in financing
activities (4,936) (5,244)
---------- ----------
Net decrease in cash
and cash equivalents (1,579) (2,797)
Cash and cash equivalents,
beginning of the period 7,642 10,193
---------- ----------
Cash and cash equivalents,
end of the period $ 6,063 $ 7,396
========== ==========
Supplemental information:
Cash paid during the period for
income taxes $ 1,165 $ 2,999
========== ==========
See notes to condensed consolidated financial statements.
</TABLE>
6
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TIMBERLINE SOFTWARE CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE AND NINE MONTH PERIODS ENDED SEPTEMBER 30, 2000
AND 1999 (Unaudited)
(Amounts in thousands)
1. Condensed consolidated financial statements
Certain information and note disclosures normally included in financial
statements prepared in accordance with accounting principles generally
accepted in the United States of America 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, 1999. The balance sheet at December 31, 1999 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, 2000 and 1999 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, 2000 and the results of its
operations and its cash flows for the three and nine month periods ended
September 30, 2000 and 1999.
Certain reclassifications have been made in the 1999 financial statements
to conform to the 2000 presentation.
The accompanying financial statements include the accounts of the Company
as well as its wholly-owned subsidiary, which was opened in Australia
during March 2000. The functional currency of the subsidiary is
Australian dollars. Gains and losses resulting from foreign currency
translation are recorded as other comprehensive income and accumulated as
a separate component of shareholders' equity. All significant
intercompany balances and transactions are eliminated in consolidation.
2. Recent accounting pronouncements
In December 1999, the Securities and Exchange Commission (the SEC)
released Staff Accounting Bulletin ("SAB") No. 101, "Revenue Recognition
in Financial Statements." SAB No. 101 summarizes certain of the SEC's
views in applying generally accepted accounting principles to revenue
recognition in financial statements and will be effective for the Company
in the fourth quarter of fiscal 2000. The Company believes that the
effect, if any, of the adoption of this standard will not be material to
the Company's consolidated financial position, results of operations or
cash flows.
7
<PAGE>
In June 1998, the Financial Accounting Standards Board issued SFAS No.
133, "Accounting for Derivative Instruments and Hedging Activities." This
statement establishes accounting and
8
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TIMBERLINE SOFTWARE CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE AND NINE MONTH PERIODS ENDED SEPTEMBER 30, 2000 AND 1999
(Unaudited)(Continued)
(Amounts in thousands)
reporting standards for derivative instruments and hedging activities. It
requires that an entity recognizes all derivatives as either assets or
liabilities in the statement of financial position and measures those
instruments at fair value. This statement, as amended, is effective
beginning for the Company's fiscal year ending December 31, 2001.
Currently, the Company does not have any derivative instruments and
believes that the adoption of this statement will not have a material
impact on its consolidated financial statements.
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, 2000 and 1999 is as follows:
Three Months Ended
September 30,
------------------
2000 1999
------- -------
Weighted-average shares outstanding,
used in computing basic earnings
per share 12,626 12,736
Effect of dilutive stock options 179 444
------- -------
Weighted-average shares outstanding,
used in computing diluted earnings
per share 12,805 13,180
======= =======
Nine Months Ended
September 30,
------------------
2000 1999
------- -------
Weighted-average shares outstanding,
used in computing basic earnings
per share 12,751 12,658
Effect of dilutive stock options 241 465
------- -------
Weighted-average shares outstanding,
used in computing diluted earnings
per share 12,992 13,123
======= =======
9
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TIMBERLINE SOFTWARE CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE AND NINE MONTH PERIODS ENDED SEPTEMBER 30, 2000 AND 1999
(Unaudited)(Continued)
(Amounts in thousands)
4. Comprehensive income
Statements of comprehensive income for the three and nine month periods
ended September 30, 2000 and 1999 are not presented because the
difference between net income and comprehensive income is not material.
The difference between the Company's net income and comprehensive income
relates to the change in the unrealized net gain (loss) on temporary
investments and translation gain (loss) related to the consolidation of
the Company's wholly-owned foreign subsidiary. For the three months ended
September 30, 2000 and 1999, net income would have been increased by $38
and reduced by $9, respectively, to arrive at comprehensive income of
$820 and $2,456, respectively. For the nine months ended September 30,
2000 and 1999, net income would have been increased by $41 and reduced by
$43, respectively, to arrive at comprehensive income of $2,360 and
$6,907, respectively.
5. Operating segment information
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, 2000 and 1999 is as follows:
Three Months Ended
September 30,
------------------
2000 1999
------- -------
Net revenue:
Software products $ 5,978 $ 6,749
Services 6,900 6,204
Other 145 397
------- -------
Net revenue $13,023 $13,350
======= =======
10
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TIMBERLINE SOFTWARE CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE AND NINE MONTH PERIODS ENDED SEPTEMBER 30, 2000 AND 1999
(Unaudited)(Continued)
(Amounts in thousands)
Three Months Ended
September 30,
------------------
2000 1999
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Operating Contribution:
Software products $ 3,080 $ 4,744
Services 2,977 2,733
Other revenue, net of cost 87 299
Product development expenses (3,482) (2,671)
General and administrative expenses (1,678) (1,273)
------- -------
Operating income $ 984 $ 3,832
======= =======
Nine Months Ended
September 30,
------------------
2000 1999
------- -------
Net revenue:
Software products $16,664 $21,447
Services 20,175 17,490
Other 665 1,025
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Net revenue $37,504 $39,962
======= =======
Nine Months Ended
September 30,
------------------
2000 1999
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Operating Contribution:
Software products $ 8,520 $14,470
Services 8,686 7,246
Other revenue, net of cost 489 849
Product development expenses (9,865) (7,681)
General and administrative expenses (4,994) (3,932)
------- -------
Operating income $ 2,836 $10,952
======= =======
11
<PAGE>
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations
TIMBERLINE SOFTWARE CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
(Amounts in thousands, except percentages and per share data)
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Forward-Looking Statements
--------------------------
This Report includes forward-looking statements. 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. 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
---------------------
The Company's results of operations for the three and nine month periods ended
September 30, 2000 and 1999 and the changes on a period over period comparison
are set forth below:
12
<PAGE>
Three Months Ended
September 30, Percentage
------------------- Increase Increase
2000 1999 (Decrease) (Decrease)
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Net revenue:
Software license fees $ 5,978 $ 6,749 $ (771) (11.4)%
Service fees 6,900 6,204 696 11.2
Other 145 397 (252) (63.5)
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Net revenue 13,023 13,350 (327) (2.4)
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Cost and expenses:
Cost of revenue 1,173 1,144 29 2.5
Client services 3,194 2,573 621 24.1
Product development 3,482 2,671 811 30.4
Sales and marketing 2,512 1,857 655 35.3
General and administrative 1,678 1,273 405 31.8
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Total cost and expenses 12,039 9,518 2,521 26.5
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Operating income 984 3,832 (2,848) (74.3)
Other income 247 210 37 17.6
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Income before income taxes 1,231 4,042 (2,811) (69.5)
Provision for income taxes 449 1,577 (1,128) (71.5)
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Net income $ 782 $ 2,465 $(1,683) (68.3)%
==========================================================================
Nine Months Ended
September 30, Percentage
------------------- Increase Increase
2000 1999 (Decrease) (Decrease)
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Net revenue:
Software license fees $16,664 $21,447 $(4,783) (22.3)%
Service fees 20,175 17,490 2,685 15.4
Other 665 1,025 (360) (35.1)
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Net revenue 37,504 39,962 (2,458) (6.2)
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Cost and expenses:
Cost of revenue 3,785 3,583 202 5.6
Client services 9,140 7,532 1,608 21.3
Product development 9,865 7,681 2,184 28.4
Sales and marketing 6,884 6,282 602 9.6
General and administrative 4,994 3,932 1,062 27.0
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Total cost and expenses 34,668 29,010 5,658 19.5
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Operating income 2,836 10,952 (8,116) (74.1)
Other income 816 443 373 84.2
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Income before income taxes 3,652 11,395 (7,743) (68.0)
Provision for income taxes 1,333 4,445 (3,112) (70.0)
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Net income $ 2,319 $ 6,950 $(4,631) (66.6)%
==========================================================================
13
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The following tables present the Company's operating statement data expressed
as a percentage of net revenue for the three and nine months ended September
30, 2000 and 1999:
Three Months Ended
September 30,
------------------
2000 1999
-------------------------------------------------
Net revenue:
Software license fees 45.9% 50.6%
Service fees 53.0 46.4
Other 1.1 3.0
-------------------------------------------------
Net revenue 100.0 100.0
-------------------------------------------------
Cost and expenses:
Cost of revenue 9.0 8.6
Client services 24.5 19.3
Product development 26.7 20.0
Sales and marketing 19.3 13.9
General and administrative 12.9 9.5
-------------------------------------------------
Total cost and expenses 92.4 71.3
-------------------------------------------------
Operating income 7.6 28.7
Other income 1.9 1.6
-------------------------------------------------
Income before income taxes 9.5 30.3
Provision for income taxes 3.5 11.8
-------------------------------------------------
Net income 6.0% 18.5%
=================================================
Nine Months Ended
September 30,
-----------------
2000 1999
-------------------------------------------------
Net revenue:
Software license fees 44.4% 53.7%
Service fees 53.8 43.8
Other 1.8 2.5
-------------------------------------------------
Net revenue 100.0 100.0
-------------------------------------------------
Cost and expenses:
Cost of revenue 10.1 9.0
Client services 24.4 18.9
Product development 26.3 19.2
Sales and marketing 18.3 15.7
General and administrative 13.3 9.8
-------------------------------------------------
Total cost and expenses 92.4 72.6
-------------------------------------------------
Operating income 7.6 27.4
Other income 2.2 1.1
-------------------------------------------------
Income before income taxes 9.8 28.5
Provision for income taxes 3.6 11.1
-------------------------------------------------
Net income 6.2% 17.4%
=================================================
14
<PAGE>
NET REVENUE. Net revenue for the three months ended September 30, 2000 was the
highest quarterly revenue of the year for the Company, but remained slightly
behind the net revenue amount reported in the same quarter last year. Most of
the decrease was due to the decline in software license revenue. Software
license revenue in 1999 benefited from the increased demand because of the Y2K
effect, for which there was virtually no demand from this effect in 2000.
Primarily as a result of this, software license revenue from the Company's
Accounting products declined 15 percent compared to the third quarter last
year. The lower software revenue in 2000 was partially offset by revenue
generated from the August release of the Company's Service Management
applications. The Company believes these applications will allow the Company
to compete effectively in the specialty contractor area, which the Company
believes is an important segment of the construction industry. Orders with
Service Management applications garnered $380,000 in software revenue during
the three months ended September 30, 2000. Also offsetting the decline in
software revenue from the Company's Accounting products for this period was a
16 percent increase in Estimating software revenue over the same period last
year. Overall software revenue increased sequentially over the second quarter
this year by 16 percent, with double digit percentage increases in all of the
Company's product lines.
Service fee revenue increased due to an increase in revenue from maintenance
and support plans. Revenue from these service plans, which accounted for 88
percent of total service fees for the quarter ended September 30, 2000,
increased 24 percent over the same period last year. This increase was
primarily due to the increase in the Company's user base through new software
orders during 1999 and an increase in the percentage of users renewing their
annual service plans. The increase in revenue from service plans was partially
offset by a 39 percent decline in consulting revenue and a 34 percent decline
in training revenue, compared to the same period last year. These declines
were primarily due to the decrease in new software orders in 2000.
For the nine months ended September 30, 2000 net revenue declined slightly
compared to the same period in 1999, primarily due to a decrease in software
license revenue. The Company believes this decrease was due to a slowdown in
software orders, primarily due to the post Y2K effect and longer sales cycles.
Additionally, the decline in software license revenue from 1999 was partially
due to the shipment of an Estimating software order during the first quarter
of 1999, which was the single, largest software order in the Company's
history. The Company had no comparable software order in 2000. These negative
factors were partially offset by the additional software revenue generated
from the release of the Company's Service Management applications in August
2000. Overall, the Company's Accounting products declined 26 percent during
the nine months ended September 30, 2000 compared to the same period in 1999
15
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and the Company's Estimating products decreased 12 percent. Excluding the
large software order mentioned above from Estimating software license revenue
in 1999, Estimating software revenue for the first nine months of 2000
increased approximately 10 percent over 1999.
The increase in service fee revenue for the nine months ended September 30,
2000 over the same period last year was due to an increase in revenue from
maintenance and support plans. Revenue from these service plans, which
accounted for 85 percent of total service fees for the nine months ended
September 30, 2000, increased 26 percent over the same period last year. This
increase was primarily due to the increase in the Company's user base through
new software orders during 1999 and an increase in the percentage of users
renewing their annual service plans. The increase in revenue from service
plans was partially offset by a 19 percent decrease in consulting revenue and
a 30 percent decrease in training revenue, compared to the same period last
year. These declines were primarily due to the decrease in new software orders
in 2000.
COST OF REVENUE. Cost of revenue, as a percentage of net revenue, increased
slightly during the three and nine-month periods ended September 30, 2000,
over the same periods in 1999. This was primarily due to higher royalty
payments and additional amortization of capitalized software costs.
OPERATING EXPENSES. Operating expenses increased 30 percent for the three
months ended September 30, 2000, over the same period last year. For the nine
months ended September 30, 2000 these expenses increased 21 percent over the
same period last year.
Client services expenses increased for the three months ended September 30,
2000 over the same period last year, primarily due to increased personnel
costs and additional training expenses for both its internal technical support
group and the Company's independent certified consultants and trainers. For
the nine months ended September 30, 2000, these costs increased, primarily due
to additional expenses incurred in restructuring the consulting services
practice and the increased personnel and training costs mentioned above. The
Company expects client services expenses to remain above 1999's level for the
remainder of the year.
Product development expenses increased for the three and nine month periods
ended September 30, 2000 over the same periods last year. The increases were
primarily due to additional personnel hired and contract software developers
retained to keep the development schedule on track for enhancements to the
Company's existing software as well as research and development on new
software products. The Company expects overall product development expenses
to remain above its 1999 level for the remainder of the year.
Sales and marketing expenses increased during the three months ended September
16
<PAGE>
30, 2000, over the same period last year, primarily as a result of increased
advertising-related expenses and sales expenses. The increase in sales
expenses is attributable to the 46 percent increase in software revenue from
the direct sales staff this quarter over the comparable quarter last year. For
the nine months ended September 30, 2000 sales and marketing expenses
increased over the same period last year, primarily due to an increase in
advertising-related expenses and additional personnel expenses in the sales
area.
General and administrative expenses increased for the three and nine month
periods ended September 30, 2000 over the same periods last year. The increase
was primarily due to increased depreciation and amortization expense, mainly
related to a new IS system that was implemented in September 1999, additional
personnel costs as the Company established a Human Resources/Legal Affairs
group within the Company and an increase in legal and insurance costs. As a
percentage of the Company's total operating expenses, general and
administrative expenses remained at 15 percent for the three month periods
ended September 30, 2000 and 1999 and increased slightly to 16 percent for the
first nine months of 2000 from 15 percent for the same period in 1999.
OTHER INCOME. Other income, composed almost entirely of interest income,
increased slightly during the three months ended September 30, 2000 over the
same period last year, but increased significantly for the first nine months
of 2000 compared to the comparable period in 1999. These increases were
primarily due to an increase in interest rates earned on cash equivalents and
an increase in the amount of funds invested in 2000 compared to 1999.
PROVISION FOR INCOME TAXES. The Company's effective tax rate for the three and
nine month periods ended September 30, 2000 was 36.5 percent compared to 39.0
percent for the comparable periods in 1999. 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, 2000, net cash
provided by operations was $5,714 compared to $11,938 for the same period in
1999. This decrease was primarily due to the decrease in the profitability
of the Company's operations for the first nine months of 2000 compared to the
same period in 1999. Working capital decreased to $3,433 at September 30, 2000
from $8,702 at December 31, 1999, as a result of several factors discussed
below. Cash and temporary investments decreased $5,283 since the end of 1999,
primarily due to the investment in new products (capitalized software costs)
and the repurchase of the Company's common stock. Net accounts receivable at
September 30, 2000 declined $273 since December 31, 1999, primarily due to the
17
<PAGE>
decline in software license fee revenue during the month of September in
comparison to December 1999. DSO (Days Sales Outstanding) at September 30,
2000 increased slightly to 33, compared to 30 at December 31, 1999. Net
capitalized software costs increased $2,725 to $5,440 at September 30, 2000
from $2,715 at December 31, 1999, primarily due to costs incurred in the
development of new products which will support the Company's e-commerce and
Project Management strategy.
Deferred revenues at September 30, 2000 increased $315 to $14,040 from $13,725
at December 31, 1999 primarily due to an increase in the billings for annual
maintenance and support service plans. Revenue from annual maintenance and
support service billings is recognized ratably over the service plan period.
Accrued employee expenses decreased $328 to $1,856 at September 30, 2000, from
$2,184 at December 31, 1999, primarily due to the payment in 2000 of the
Company's 1999 profit sharing expense. There was no income taxes payable at
September 30, 2000 due to the payment of income taxes for 1999 and estimated
tax payments for 2000.
During the first nine months, the Company declared three regular quarterly
cash dividends totaling $.12 per share, aggregating $1,536. The Company plans
to continue to pay quarterly cash dividends consistent with its capital needs
and income levels.
On March 31, 2000 the Company's Board of Directors authorized management to
repurchase up to 1,300 shares of the Company's common stock in the open
market. Through September 30, 2000, the Company repurchased 549 shares at a
total cost of $3,702.
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:
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 accounting and cost
estimating software for the construction and property management industries,
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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
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.
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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.
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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,
2000.
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SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
TIMBERLINE SOFTWARE CORPORATION
...............................
(Registrant)
/s/ Carl C. Asai
Date November 13, 2000 ----------------------------------
Carl C. Asai, Sr. Vice President,
Finance (Chief Financial Officer)
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FORM 10-Q
Exhibit Index
Exhibit Page
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(27) Financial Data Schedule 23
