Item 1. Business
General
Timberline(R) Software Corporation (the "Company" or "Timberline") was incorporated in Oregon in 1979. 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 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 plans, classroom training, and on-site training and consulting.
The Company operates predominantly within the United States, but also licenses its products in other foreign countries, including Australia and Canada. As of December 31, 2000, the Company believes that approximately 25,000 entities are currently using the Company's software products, of which more than 13,000 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 6 to the Company's consolidated financial statements for the year ended December 31, 2000.
Software Products
Software license revenue is a major source of the Company's net revenue. In 2000, 1999 and 1998, software license revenue accounted for 45 percent, 53 percent and 56 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.
In 2000, the Company embedded an SQL database engine into its Windows-based software applications. This replaced the proprietary database that was being used in earlier versions of its software. With this change, the Company expects some users, especially those with many concurrent users on the software, to see a significant increase in the performance of the software. All users should see a much improved integrity of their database.
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.
The Company has two main software product lines: Accounting (composed of construction and property management software) and Estimating.
In July 1999, the Company announced plans to offer software for the construction project management market. Because the project manager's job encompasses both accounting and estimating functions as well as strict project management functions, Timberline will be able to offer a fully integrated solution that takes into account all of these functions to streamline the project management process. The Company is in the process of developing the project management software and integrating it with its current accounting and estimating software applications.
In May 2000, the Company announced its e-commerce initiative. Currently, many companies, especially in the construction industry, rely on paper, facsimile and phone communication in conducting their business. The time and effort required to process, communicate and coordinate these activities is significant and the Company believes increased productivity and efficiencies can be gained by processing these transactions electronically. Timberline is currently developing new functionality to its current suite of accounting and estimating products, which will enable users of its software to conduct business-to-business e-commerce through Internet portals or directly from desktop to desktop. Timberline users will be able to communicate and share information with existing and future online construction portals, other software systems, or companies that only have an Internet connection. Using eXtensible Markup Language (XML) and Timberline's new patent-pending technology, Timberline users will be able to send electronic construction documents that mimic their current paper-based documents to their suppliers, partners and other interested parties. They, in turn, will be able to open, edit and re-send these documents back to the originator of the documents, providing all parties with significant processing efficiencies.
Accounting Software
The Company's Accounting software is designed for use in the construction and property management industries. This group's software license revenue accounted for over 69 percent, 72 percent and 75 percent of the Company's software license revenue in 2000, 1999 and 1998 respectively.
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 license revenue has decreased significantly since that date and is no longer a significant source of revenue 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. 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 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 have 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.
At the end of 1999, the Company released Purchase Order and Inventory software applications and in August 2000, released Service Management applications. These applications, bundled with its current construction accounting applications, allow the Company to meet the needs of the specialty contractors, such as the plumbing, painting, electrical, roofing, siding, heating and air conditioning companies. The specialty contractor area is a significant segment of the construction industry to which, until the release of the above applications, Timberline was not able to provide a complete accounting 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. (invata), a company that specializes in computerized maintenance management software. Under this alliance, invata would 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 was released for distribution in the first quarter of 1999. In October 1999, the Company purchased this software product from invata.
Estimating Software
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 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 licenses 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.
In June 2000, the Company released Precision Palm Estimating, its first application for hand-held personal digital assistants (PDA's). This will enable estimators to use a PDA to take off key project information at the job site and then synchronize the device with the Company's desktop estimating software to quickly generate a detailed estimate.
The Company plans to continue to enhance its current estimating software applications. In 2001, the Company plans to release a conceptual database product allowing quick estimates on new projects using parametric input, a modeling feature which will allow estimators to analyze various what-if scenarios for facility and financial planning purposes, and a CAD integrator product, which will automatically generate a construction estimate using dimensional attributes captured from CAD systems that have adopted the new Industry Foundation Classes Standard.
Support Services
The Company generates a significant portion of its net revenue from service fees. Service fees consist 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 plans 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 plans 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 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 curtailed the number of training classes it offered as the Company's independent reseller channel assumed 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 resellers in conducting training classes, the Company 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 reseller 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 professional 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 reseller 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 2000, 1999, and 1998, service fees comprised 53 percent, 44 percent and 41 percent, respectively, of total net revenue. Maintenance and support fees accounted for over 75 percent of the Company's service fee revenue in those years. The Company is committed to maintaining a high level of quality related to its support services. At the end of 2000, 38 percent of the Company's employees were directly associated with providing client services.
Sales/Distribution
The Company licenses its software products and sells its services primarily in the United States. The Company also licenses its software products and provides related services 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 2000, 1999 and 1998.
Product distribution is primarily handled by value added resellers and distributors. The Company also maintains a direct sales force to complement its reseller channel and to handle sales to national accounts and other large companies.
Timberline maintains a telemarketing staff for selling maintenance and support service plans and classroom training to its user base. On-site consulting fees are generated from requests for services from the users and resellers to the Company's sales and client services staff.
Unfilled orders for software products at December 31, 2000 and 1999 were not significant. The Company typically ships software products within three days of receipt of the order.
Production
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 other software-related materials and shipping services.
Competition
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, better-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
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 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
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 2000, 39 percent of the Company's employees were directly associated with product development. Product development expenses were $13,254,000, $10,624,000 and $8,863,000 in 2000, 1999 and 1998, respectively. Of that total, $11,522,000, $9,325,000, and $7,822,000 were incurred in 2000, 1999 and 1998, respectively, on research and development on new software products. An additional $5,183,000, $2,015,000 and $173,000, respectively, of product development expenses on new software products were capitalized in those same years.
Employees
At December 31, 2000, the Company had 509 employees, of which 475 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, vision, 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. In 2000 and 1999, the Company granted stock options to substantially all employees and plans to continue this practice in the future. The Company believes its relationship with its employees is good.
Item 2.
Item 2. Properties
In October 1998, the Company moved into its new corporate headquarters located in Beaverton, Oregon. Most 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.
In July 2000, the Company entered into a lease for additional office space in close proximity to its corporate headquarters to locate part of its product development group. Under this lease, the Company is currently leasing 24,000 square feet and will be leasing another 24,000 square feet in July 2001. This lease expires in 2011.
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; Nashville, TN; and Jacksonville, FL.
In March 2000, the Company opened its first regional office outside the United States in Sydney, Australia.
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 believes it has the ability to construct additional office space on its corporate properties where it currently maintains its corporate headquarters.
Item 3.
Item 3. Legal Proceedings
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.
Item 4. Submission of Matters to a Vote of Security Holders
None.
PART II
Item 5.
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.
2000 1999 ----------------------- ---------------------- High Low High Low
First Quarter $ 13.63 $ 8.13 $ 12.84 $ 8.53 Second Quarter 9.31 7.31 14.44 8.81 Third Quarter 7.38 5.38 14.77 11.67 Fourth Quarter 6.00 3.38 15.38 11.48
As of March 2, 2001, there were 318 shareholders of record. Based upon the requests for the Company's proxy material for its 2001 annual meeting of shareholders, the Company believes there were approximately 6,600 beneficial shareholders as of that date. Cash dividends paid in 2000 and 1999 amounted (in thousands) to $2,015 and $1,675, respectively.
Item 6.
Item 6. Selected Financial Data
(Amounts in thousands, except per share amounts and percentages)
Year ended December 31, ---------------------------------------- 2000 1999 1998 1997 1996 ----------------------------------------------------------------------- Net revenue: Software license fees $22,950 $29,291 $24,786 $18,928 $14,983 Service fees 27,064 24,176 18,197 15,354 12,956 Other 1,162 1,647 1,310 958 720 ----------------------------------------------------------------------- Net revenue 51,176 55,114 44,293 35,240 28,659 Cost and expenses 47,205 39,762 33,518 28,740 26,004 ----------------------------------------------------------------------- Operating income 3,971 15,352 10,775 6,500 2,655 Other income - net 1,006 749 531 470 399 ----------------------------------------------------------------------- Income before income taxes 4,977 16,101 11,306 6,970 3,054 Provision for income taxes 1,646 5,907 4,112 2,435 870 ----------------------------------------------------------------------- Net income $ 3,331 $10,194 $ 7,194 $ 4,535 $ 2,184 ======================================================================= Basic earnings per share $ 0.27 $ 0.80 $ 0.58 $ 0.37 $ 0.18 Diluted earnings per share $ 0.26 $ 0.78 $ 0.56 $ 0.36 $ 0.17 ======================================================================= Cash dividends $ 2,015 $ 1,675 $ 1,236 833 $ 625 Cash Dividends per share 0.16 0.13 0.10 0.07 0.05 Total assets 48,968 50,347 41,549 25,754 18,042 Long-term debt - - 5,417 - - Shareholders' equity 25,362 30,167 20,036 13,266 8,915 Working capital (33) 8,702 5,500 4,339 1,325 Current ratio 1.00 1.47 1.37 1.38 1.16 =======================================================================
Item 7.
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations
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. 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.
The Company
Timberline Software Corporation develops, manufactures and licenses accounting, cost estimating, and service management software primarily for the construction and property management industries. The Company also provides related services to its users, including annual maintenance and support service plans, on-site consulting services, and training. Approximately, twenty-five thousand companies use one or more of the Company's software products.
Results of Operations
The Company's consolidated results of operations for the years ended December 31, 2000, 1999 and 1998 and the changes on a year over year comparison are set forth below: % Increase/(Decrease) Increase/(Decrease) ----------------- -------------- Year ended December 31, 2000 1999 2000 1999 ------------------------- vs. vs. vs. vs. 2000 1999 1998 1999 1998 1999 1998 ----------------------------------------------------------------------------------------------- Net revenue: Software license fees $22,950 $29,291 $24,786 $(6,341) $ 4,505 (21.6)% 18.2% Service fees 27,064 24,176 18,197 2,888 5,979 11.9 32.9 Other 1,162 1,647 1,310 (485) 337 (29.4) 25.7 ----------------------------------------------------------------------------------------------- Net revenue 51,176 55,114 44,293 (3,938) 10,821 (7.1) 24.4 ----------------------------------------------------------------------------------------------- Cost and expenses: Cost of revenue 5,071 4,793 3,909 278 884 5.8 22.6 Client services 12,459 10,353 8,496 2,106 1,857 20.3 21.9 Product development 13,254 10,624 8,863 2,630 1,761 24.8 19.9 Sales and marketing 9,781 8,451 6,916 1,330 1,535 15.7 22.2 General and administrative 6,640 5,541 5,334 1,099 207 19.8 3.9 ----------------------------------------------------------------------------------------------- Total cost and expenses 47,205 39,762 33,518 7,443 6,244 18.7 18.6 ----------------------------------------------------------------------------------------------- Operating income 3,971 15,352 10,775 (11,381) 4,577 (74.1) 42.5 Other income 1,006 749 531 257 218 34.3 41.1 ----------------------------------------------------------------------------------------------- Income before income taxes 4,977 16,101 11,306 (11,124) 4,795 (69.1) 42.4 Provision for income taxes 1,646 5,907 4,112 (4,261) 1,795 (72.1) 43.7 ----------------------------------------------------------------------------------------------- Net income $ 3,331 $10,194 $7,194 $(6,863) $ 3,000 (67.3)% 41.7% ===============================================================================================
The following table presents the Company's consolidated operating statement data expressed as a percentage of net revenue for the years indicated:
Year ended December 31, -------------------------------- 2000 1999 1998 ------------------------------------------------------------------------------- Net revenue: Software license fees 44.8% 53.1% 56.0% Service fees 52.9 43.9 41.1 Other 2.3 3.0 2.9 ------------------------------------------------------------------------------- Net revenue 100.0% 100.0% 100.0% ------------------------------------------------------------------------------- Cost and expenses: Cost of revenue 9.9 8.7 8.8 Client services 24.3 18.8 19.2 Product development 25.9 19.3 20.0 Sales and marketing 19.1 15.3 15.6 General and administrative 13.0 10.0 12.1 ------------------------------------------------------------------------------- Total cost and expenses 92.2 72.1 75.7 ------------------------------------------------------------------------------- Operating income 7.8 27.9 24.3 Other income 1.9 1.3 1.2 ------------------------------------------------------------------------------- Income before income taxes 9.7 29.2 25.5 Provision for income taxes 3.2 10.7 9.3 ------------------------------------------------------------------------------- Net income 6.5% 18.5% 16.2% ===============================================================================
Net Revenue. Net revenue is composed primarily of software license revenue and service fee revenue. Service fee revenue increased in 2000 and 1999 over the previous years, but the Company's software license revenue in 2000 experienced its first year-over-year decline since 1991. Software license revenue decreased across all of the Company's product lines. In 2000, Accounting software license revenue, which accounted for 69% of the Company's total software license revenue decreased 26%, while Estimating license revenue, which accounted for 31% of the total software license revenue, decreased 12%. The Company believes the decrease in the Accounting software license revenue was primarily due to the decrease in the demand for software. Many companies in the few years prior to 2000 upgraded or replaced their existing software that was not year 2000 compliant, resulting in lower demand in 2000.
Additionally, because of the uncertainty in the U.S. economy and signs of a slowdown in the construction industry during the latter part of 2000, the Company believes many prospective buyers delayed their computer software purchasing decision. Partially offsetting the effect of the decline in the demand was additional revenue from new products introduced in 2000. These new products include the purchase order and inventory applications, which were introduced at the end of 1999 and service management applications, which were introduced in August 2000. These applications enable the Company to penetrate the specialty contractor market, which is a new area the Company has targeted to further expand into the various segments of the construction industry. Estimating software revenue declined in 2000 compared to 1999, primarily as a result of a large software order in 1999, which was the single largest software order in the Company's history. Excluding that order from 1999, Estimating software revenue in 2000 increased slightly over 1999.
In 1999, Accounting software license revenue, which accounted for 72% of the Company's total software license revenue, increased 14% over 1998 and Estimating software license revenue, which account for 28% of total software license fees, increased 30%. The increase in Accounting software revenue was primarily due to an increase in revenue generated from the Company's Gold Collection for Construction Accounting. The Company believes this increase was primarily due to three factors: the continued strength in the construction industry, the increasing dominance of our products in our targeted markets, and the need by many companies to upgrade or replace their existing software which was not year 2000 compliant. Estimating software revenue increased in 1999 compared to 1998, primarily due to an Estimating software licensing arrangement during the first quarter of 1999, which was the single largest software order in the Company's history.
In terms of revenue mix, software license revenue accounted for 45%, 53% and 56% of net revenue in 2000, 1999 and 1998, respectively. A large majority of software licensing arrangements are made in the United States. International (non-U.S.) software revenue, as a percentage of total software revenue, increased slightly in 2000 to 7% from 6% for 1999 and 1998.
Service fee revenue is comprised primarily of fees from annual maintenance and support service plans and fees for consulting and training. The increase in service fee revenue was due to the increase in revenue from annual maintenance and support service plans. Revenue from these plans, which comprised 86% of the total service fee revenue for 2000, increased 23% over 1999. This was partially offset by a decline in consulting and training revenue, primarily due to a lower demand for these services as a direct result of the decline in the Company's software license revenue. Service fee revenue in 1999 increased significantly over 1998 primarily due to an increase in revenue from annual maintenance and support service plans. Fees from these service plans, which accounted for over 78% of the Company's total service fees in 1999, increased 35%, primarily due to the increase in the Company's user base through new
product sales, the revision in the pricing structure for these plans which was instituted during the first quarter of 1998, and an increase in the percentage of users renewing their annual service plans. The Company also believes the increase was due to a higher quality of service being provided to its users as a result of a significant re-engineering and restructuring of the way it provides telephone support. Consulting fees in 1999 increased 55% over the prior year. Although this is not a large percentage of net revenue, the Company targeted this area as a source for future growth. Training fees in 1999 remained essentially flat compared to 1998 because, in the latter part of 1998, the Company transferred the primary responsibility of holding training classes for users to its reseller channel. The reduction in training revenue was offset with increased sales of training materials.
Cost of 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 in 2000 increased slightly, and as a percentage of net revenue, increased to 10% from 9% in 1999. The increase was primarily due to an increase in royalties and amortization of capitalized software costs. Cost of revenue increased significantly in 1999 over 1998, but as a percentage of net revenue remained constant at 9%. The increase in the dollar amount for cost of revenue was primarily due to higher costs related to software license and consulting revenue. These sources of revenue increased significantly in 1999 over 1998.
Operating Expenses. Operating expenses amounted to $42,134, $34,969, and $29,609 in 2000, 1999 and 1998, respectively. These expenses increased 20% in 2000 and 18% in 1999 over the previous years. As a percentage of net revenue, operating expenses increased to 82% in 2000 from 63% in 1999 and 67% in 1998.
Client services expenses increased in 2000 primarily as a result of an increase in personnel and internal training costs in order to manage and service the increased level and quality of support services being provided to its customers. The call volume to the Company's client services group in 2000 increased 20% over 1999's level. Internal training costs increased due to the new products added during the year and an increase in the number of people who needed to be trained. The Company doubled its internal training staff from a year ago in order to properly train its employees, certified consultants and trainers on the new products as well as to train new employees on the Company's existing products. As a percentage of service fees, client services expenses increased to 46% in 2000 from 43% in 1999.
Client services expenses increased in 1999 over 1998 primarily due to two factors. About a third of the increase was due to an increase in personnel costs for performing consulting services, for which the Company's revenue from this service grew 55% in 1999. The remainder of the increase is primarily related to higher personnel costs required to retain and hire highly-qualified technical support specialists to handle the telephone support volume and outside costs incurred to assist the Company in re-engineering and restructuring the customer support organization to make it more efficient. Call volume in 1999 increased about 33% over the previous year, while support staff dedicated to this function remained fairly constant. As a percentage of service fees, customer support expenses decreased to 43% in 1999 from 47% in 1998.
Product development expenses represent expenses for research on new software products as well as enhancements and ongoing updates to the Company's existing software products. In 2000 and 1999, product development expenses increased over the previous years, primarily due to an increase in personnel and the additional use of outside contract developers to maintain and enhance the Company's current software products. Personnel costs were also higher due to the competitive environment for attracting and retaining highly qualified people in the local area in which the Company's operations are located.
The Company is continually working on a number of enhancements to its existing product lines to meet the needs of its existing customers and to improve the marketability of the products. The Company has also added new products in 2000, which increased the number of software applications that must be maintained and enhanced. Consequently, the Company believes that it will continue to commit a significant amount of its resources toward product development in 2001.
Sales and marketing expenses increased in 2000 over 1999 and also increased as a percentage of net revenue. A portion of the increase was due to an increase in sales personnel. The Company opened a sales office in Sydney Australia during the first quarter of 2000 to increase its presence in the Asia Pacific region and to provide better support to its distribution channel in that region. The Company also added sales personnel to boost its software revenue in certain areas within the U.S. where the Company believed it had a greater opportunity to increase its current market share. Sales personnel were also added as the Company targeted two additional segments within the construction industry - the specialty contractors and owners and design/build firms - to market its products and services. Marketing expenses increased due to increased personnel, advertising, trade show costs and outside service costs. The Company is aggressively marketing into the two segments mentioned above. The Company spent additional funds in 2000 on a new marketing campaign and public relations to increase its presence in these new areas, as well as to gain more exposure to its customers and prospects of its e-commerce and project management strategy.
Sales and marketing expenses in 1999 increased significantly over 1998, but as a percentage of net revenue, declined slightly from the previous year. The increase was primarily due to an increase in personnel and trade show costs in the marketing area, increased sales commissions related to the Company's direct sales, and an increase in international marketing expenses.
General and administrative expenses in 2000 increased over 1999 in both absolute dollar amounts and as a percentage of net revenue. The increase was primarily due to increase in personnel costs, depreciation and amortization, and outside service costs. The increase in personnel costs was primarily due to the Company establishing a human resources and legal affairs group to coordinate these functions within the Company. The increase in depreciation and amortization was primarily due to additional capital expenditures in 2000 and 1999 to expand the capabilities and functionality of its telecommunication system and information system, the latter of which became operational in September 1999. Outside service costs increased primarily due to higher insurance and legal fees.
General and administrative expenses in 1999 increased slightly from the previous year, but declined as a percentage of net revenue. The increase in expense was primarily due to higher amortization expense, primarily related to the Company's new information system which became operational in September 1999, and an increase in outside service costs for insurance and legal services. The increase in these costs was partially offset by the moving costs the Company incurred in 1998 related to the move to its current corporate offices.
Other Income. Other income is primarily composed of interest income on cash and cash equivalents and temporary investments. Other income increased in 2000 and 1999 primarily due to an increase in the amount of average funds invested in 2000 and 1999 over the previous year, and higher interest rates in 2000.
Provision for Income Taxes. The Company's effective tax rate was 33%, 37% and 36% in 2000, 1999 and 1998, respectively. The decrease in this rate in 2000 over the previous two years is primarily due to the decrease in the Company's pre-tax earnings and a greater effect of the research tax credit on its 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 $8,532 in 2000 compared to $16,763 and $12,297 in 1999 and 1998, respectively. The changes in the amount of cash generated from operations from year-to-year were primarily due to the level of profitability during those years. Working capital decreased in 2000 primarily due to large uses of cash and an increase in deferred revenues during the year, which are further discussed below.
The Company's financial position continues to be strong. The Company has no long-term debt. Cash and cash equivalents and temporary investments amounted to $11,865 at December 31, 2000 and represent 24% of the Company's total assets. These cash resources have decreased $8,515 since the end of 1999, primarily due to the Company's investment in product development on new applications supporting its e-commerce and project management strategy, capital expenditures, and share repurchases under the Company's Stock Repurchase Plan. During 2000, the Company expended $5,183 for capitalized software development costs. The Company also spent $6,606 to repurchase 1,131 shares, representing 9% of the Company's shares outstanding at March 31, 2000, the date that the Company announced its share repurchase plan. There remains 169 shares that the Company may repurchase under current authorization from the Board of Directors. There are no current plans to increase the number of shares the Company may repurchase beyond the amount previously authorized.
Capital expenditures amounted to $3,769, $2,721 and $13,489 in 2000, 1999 and 1998, respectively. Normal capital expenditures are computers for new employees, periodic upgrades of existing computers for employees, and expansion of the Company's telecommunication and internal information system. In 2000, there were additional capital expenditures for work related to the design of the future development and expansion of the Company's corporate properties and productivity software for its Client Services group. In 1999, there were additional expenditures related to its new internal information system, which became operational in September 1999. The large amount of capital expenditures in 1998 was primarily related to the construction of the Company's current corporate offices.
Accounts receivable, net at December 31, 2000 increased slightly since the end of 1999, primarily due to an increase in service plans billings. DSO's (Days Sales Outstanding) in accounts receivable increased to 34 days from 30 days at December 31, 1999.
Other receivables increased $1,045 during 2000, primarily due to refundable income taxes.
Accounts payable at the end of 2000 increased $668 since the end of 1999, primarily due to amounts owed at the end of the year for outside developers, property and equipment purchases, outside marketing services and shipping costs.
Deferred revenues, which consist primarily of billings related to the Company's maintenance and support service plans, increased $1,690 during 2000 to $15,415 at December 31, 2000. Because billings for these plans generally cover a twelve-month period, practically all of the deferred revenues at the end of 2000 will be recognized as revenue in 2001.
Income taxes payable decreased since the end of 1999 due to the Company's current income tax situation as mentioned above. Accrued employee expenses decreased, primarily due to a decrease in employee bonuses for the year 2000.
Deferred income taxes increased primarily as a result of the deferred tax liability related to capitalized software development costs.
The Company believes that its current cash balances and temporary investments, along with future cash generated from operations will be sufficient to meet its operating needs for at least the next 12 months. The Company plans to continue to invest significant resources toward product development, which may include internal software development, acquiring new technology or new products which will complement its existing product lines, and other strategic opportunities that arise. Other future cash needs will, or may, include additional investments for equipment for Company personnel, upgrading and expanding its telecommunication and internal information systems, additional expenditures for expansion of the Company's corporate offices, and the payment of cash dividends. The Company currently pays regular quarterly cash dividends and plans to continue to pay such dividends, consistent with its capital needs, income levels and its long-term dividend policy. Total cash dividends paid in 2000 amounted to $2,015 or $.16 per share, compared to $1,675 or $.13 per share in 1999 and $1,236 or $.10 per share in 1998.
Although the Company believes that it has sufficient cash and temporary investments on hand to meet its operating needs and other cash requirements for at least the next twelve months, events may occur that require funds in excess of what the Company has available. If such events were to occur, the Company may borrow money against its real properties or seek other debt or equity financing.
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, 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.
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 restrictions 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.
Item 7A.
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.
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. Selected quarterly financial information is included in Note 9 of the Notes to Consolidated Financial Statements included in this Report.
Item 9.
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
None.
PART III
Item 10.
Item 10. Directors and Executive Officers of the Registrant
The information called for by this item is included under the caption "Agenda Item 1, Election of Directors" contained in Timberline Software Corporation's definitive proxy statement for the annual meeting of shareholders to be held on April 24, 2001, and is hereby incorporated by reference.
Item 11.
Item 11. Executive Compensation
The information called for by this item is included under the caption "Executive Compensation" within "Agenda Item 1, Election of Directors" contained in Timberline Software Corporation's definitive proxy statement for the annual meeting of shareholders to be held on April 24, 2001, and is hereby incorporated by reference.
Item 12.
Item 12. Security Ownership of Certain Beneficial Owners and Management
The information called for by this item is included under the caption "Stock Ownership of Certain Beneficial Owners and Management" contained in Timberline Software Corporation's definitive proxy statement for the annual meeting of shareholders to be held on April 24, 2001, and is hereby incorporated by reference.
Item 13.
Item 13. Certain Relationships and Related Transactions
None.
PART IV
Item 14.
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K
a(1). Financial Statements
The following consolidated financial statements of Timberline Software Corporation are filed as part of this report:
PAGE
Consolidated Statements of Operations for the years ended December 31, 2000, 1999 and 1998
Consolidated Balance Sheets at December 31, 2000 and 1999
Consolidated Statements of Cash Flows for the years ended December 31, 2000, 1999 and 1998
Consolidated Statements of Shareholders' Equity for the years ended December 31, 2000, 1999 and 1998
Notes to Consolidated Financial Statements
Independent Auditors' Report
a(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.
a(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)
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 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)
*10.5 1998 Stock Incentive Plan, as amended, effective April 28, 1998 (Incorporated by reference to Exhibit 10.11 of Form 10-K for the year ended December 31, 1998)
*10.6 2000 Stock Incentive Plan (Incorporated by reference to the registration statement on Form S-8 (Commission File No. 333-39424) as filed on June 16, 2000)
Consents
23 Independent Auditors' Consent
* 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, 2000.
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/ Carl C. Asai 3/20/01 ------------------------------- ----------------- Carl C. Asai Date Senior Vice President - Finance
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 3/20/01 ------------------------------------ ----------------- Curtis L. Peltz Date President, Chief Executive Officer and Director
/s/Carl C. Asai 3/20/01 ------------------------------------ ----------------- Carl C. Asai Date Senior Vice President - Finance and Chief Financial Officer
/s/ James A. Meyer 3/20/01 ------------------------------------ ----------------- James A. Meyer Date Chairman of the Board of Directors
/s/ Thomas P. Cox 3/20/01 ------------------------------------ ----------------- Thomas P. Cox Date Director
/s/ Donald L. Tisdel 3/20/01 ------------------------------------ ----------------- Donald L. Tisdel Date Director
TIMBERLINE SOFTWARE CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(Amounts in thousands, except per share amounts and percentages)
Year ended December 31, --------------------------------- 2000 1999 1998 ----------------------------------------------------------------- Net revenue: Software license fees $ 22,950 $ 29,291 $ 24,786 Service fees 27,064 24,176 18,197 Other 1,162 1,647 1,310 ----------------------------------------------------------------- Net revenue 51,176 55,114 44,293 ----------------------------------------------------------------- Cost and expenses: Cost of revenue 5,071 4,793 3,909 Client services 12,459 10,353 8,496 Product development 13,254 10,624 8,863 Sales and marketing 9,781 8,451 6,916 General and administrative 6,640 5,541 5,334 ----------------------------------------------------------------- Total cost and expenses 47,205 39,762 33,518 ----------------------------------------------------------------- Operating income 3,971 15,352 10,775 Other income (expense): Interest income and other - net 1,017 784 548 Interest expense (11) (35) (17) ----------------------------------------------------------------- Income before income taxes 4,977 16,101 11,306 Provision for income taxes 1,646 5,907 4,112 ----------------------------------------------------------------- Net income $ 3,331 $ 10,194 $ 7,194 ================================================================= Basic earnings per share $ 0.27 $ 0.80 $ 0.58 ================================================================= Diluted earnings per share $ 0.26 $ 0.78 $ 0.56 ================================================================= Cash dividends per share $ 0.16 $ 0.13 $ 0.10 =================================================================
See notes to consolidated financial statements.
TIMBERLINE SOFTWARE CORPORATION
CONSOLIDATED BALANCE SHEETS
(Amounts in thousands, except per share amounts and percentages)
December 31, --------------------- 2000 1999 ----------------------------------------------------------------------- Assets Current assets: Cash and cash equivalents $ 3,620 $ 7,642 Temporary investments 8,245 12,738 Accounts receivable, less allowance for doubtful accounts (2000, $138; 1999, $143) 5,183 5,025 Other receivables 1,418 373 Inventories 275 221 Other current assets 1,340 1,128 ----------------------------------------------------------------------- Total current assets 20,081 27,127 ----------------------------------------------------------------------- Property and equipment - net 21,834 20,420 Capitalized software costs, less accumulated amortization (2000, $2,596; 1999, $1,525) 6,827 2,715 Other assets 226 85 ----------------------------------------------------------------------- Total assets $ 48,968 $ 50,347 =======================================================================
Liabilities and Shareholders' Equity Current liabilities: Accounts payable $ 1,532 $ 864 Deferred revenues 15,415 13,725 Accrued employee expenses 1,830 2,184 Accrued commissions/royalties 961 774 Income taxes payable 36 467 Other current liabilities 340 411
----------------------------------------------------------------------- Total current liabilities 20,114 18,425 -----------------------------------------------------------------------
Accrued rent expense 293 30 Deferred income taxes 3,199 1,725 Commitments Shareholders' equity: Common stock, no par value Authorized - 20,000 shares Issued - 2000, 11,773 shares; 1999, 12,822 shares 353 385 Additional paid in capital 5,297 5,405 Accumulated other comprehensive income (loss) 20 (70) Retained earnings 19,692 24,447 ----------------------------------------------------------------------- Total shareholders' equity 25,362 30,167 ----------------------------------------------------------------------- Total liabilities and shareholders' equity $ 48,968 $ 50,347 =======================================================================
See notes to consolidated financial statements.
TIMBERLINE SOFTWARE CORPORATION
CONSLIDATED STATEMENTS OF CASH FLOWS
(Amounts in thousands, except per share amounts and percentages)
Year ended December 31, --------------------------------- 2000 1999 1998 -------------------------------------------------------------------------------- Cash flows from operating activities: Net income $ 3,331 $ 10,194 $ 7,194 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 3,499 2,545 1,993 Deferred income taxes 1,452 712 138 Net change in: Accounts receivable (158) 61 (783) Other receivables (1,045) (152) 12 Inventories (54) 51 (31) Accounts payable 668 52 (628) Deferred revenues 1,690 3,373 2,849 Accrued employee expenses (354) (128) 451 Accrued commissions/royalties 187 175 419 Income taxes payable (431) 94 207 Accrued rent expense 263 1 (17) Other (516) (215) 493 -------------------------------------------------------------------------------- Net cash provided by operating activities 8,532 16,763 12,297 -------------------------------------------------------------------------------- Cash flows from investing activities: Payments for property and equipment (3,769) (2,721) (13,489) Capitalized software costs (5,183) (2,015) (173) Proceeds from investments 4,650 3,550 6,490 Purchase of investments (40) (12,652) (5,072) Other - net 14 7 7 -------------------------------------------------------------------------------- Net cash used in investing activities (4,328) (13,831) (12,237) -------------------------------------------------------------------------------- Cash flows from financing activities: Cash dividends (2,015) (1,675) (1,236) Common stock issued 395 1,692 819 Common stock repurchased (6,606) Proceeds from (payments on) long-term debt (5,500) 5,500 -------------------------------------------------------------------------------- Net cash provided by (used in) financing activities (8,226) (5,483) 5,083 -------------------------------------------------------------------------------- Net increase (decrease) in cash and cash equivalents (4,022) (2,551) 5,143 Cash and cash equivalents, beginning of the year 7,642 10,193 5,050 -------------------------------------------------------------------------------- Cash and cash equivalents, end of the year $ 3,620 $ 7,642 $ 10,193 ================================================================================ Supplemental information: Cash paid during the year for income taxes $ 1,318 $ 4,036 $ 3,250 ================================================================================
See notes to consolidated financial statements.
TIMBERLINE SOFTWARE CORPORATION
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(Amounts in thousands, except per share amounts and percentages)
Accumulated Common Stock Add'l Other -------------- Paid in Comprehensive Shares Amount Capital Income Retained Total Issued (Loss) Earnings --------------------------------------------------------------------------------------- Balances, January 1, 1998 12,403 $372 $2,907 $17 $9,970 $13,266 Components of comprehensive income: Net income for the year 7,194 7,194 Unrealized loss on investments (net of income tax benefit of $3) (7) (7) ----- Total comprehensive income 7,187 ----- Common stock issued 155 5 298 303 Income tax benefit on stock options exercised 516 516 Cash dividends ($.10 per share) (1,236) (1,236) --------------------------------------------------------------------------------------- Balances, December 31, 1998 12,558 377 3,721 10 15,928 20,036 Components of comprehensive income: Net income for the year 10,194 10,194 Unrealized loss on investments (net of income tax benefit of $51) (80) (80) ------ Total comprehensive income 10,114 ------ Common stock issued 264 8 618 626 Income tax benefit on Stock options exercised 1,066 1,066 Cash dividends ($.13 per share) (1,675) (1,675) --------------------------------------------------------------------------------------- Balances, December 31, 1999 12,822 385 5,405 (70) 24,447 30,167 Components of comprehensive income: Net income for the year 3,331 3,331 Unrealized gain on investments (net of income taxes of $45) 72 72 Unrealized gain on foreign currency translation (net of income taxes of $0) 18 18 ----- Total comprehensive income 3,421 ----- Common stock issued 82 2 204 206 Income tax benefit on stock options exercised 189 189 Common stock repurchased (1,131) (34) (501) (6,071) (6,606) Cash dividends ($.16 per share) (2,015) (2,015) --------------------------------------------------------------------------------------- Balances, December 31, 2000 11,773 $353 $5,297 $20 $19,692 $25,362 =======================================================================================
See notes to consolidated financial statements.
TIMBERLINE SOFTWARE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands, except per share amounts and percentages)
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 resellers (Timberline Solution Providers) throughout the United States. Credit is granted to certain customers and Timberline Solution Providers 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 accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect reported amounts of assets and liabilities and contingent 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.
CONSOLIDATED FINANCIAL STATEMENTS: 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.
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 technical support plans, training classes, consulting and other client services. Revenue from maintenance and technical support plans 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 four-year period. Costs capitalized for the development of computer software were $5,183 in 2000, $2,015 in 1999 and $173 in 1998. Amortization of capitalized computer software development costs was $1,071 in 2000, $604 in 1999 and $503 in 1998. Expenses incurred on research and development of computer software products were $11,522 in 2000, $9,325 in 1999 and $7,822 in 1998.
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.
TIMBERLINE SOFTWARE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands, except per share amounts and percentages)
TEMPORARY INVESTMENTS: Temporary investments represent debt securities which have maturity dates over three months from the purchase date. The Company has classified these investments as "available for sale" because the Company may decide not to hold these investments to maturity. Accordingly, the investments have been recorded at fair value. The unrealized gain or loss on these investments, net of income taxes, is reported as accumulated other comprehensive income (loss) within the shareholders' equity section of the balance sheet.
INVENTORIES: Inventories consist of marketing literature and of software components. Inventories are stated at the lower of average cost or market.
PROPERTY AND EQUIPMENT: Property and equipment are recorded at cost. Depreciation on 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.
INCOME TAXES: Deferred tax assets and liabilities are established based on the temporary differences between the carrying amount of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. These assets and liabilities are recorded at the enacted tax rates expected to be in effect when they are realized or settled.
STOCK OPTIONS: The Company applies the intrinsic value-based method described in Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees," in accounting for its stock options.
EARNINGS PER SHARE (EPS): 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 outstanding as if such options were exercised or converted into common shares.
A reconciliation of the common shares used in the denominator for computing basic and diluted EPS for the years ended December 31, 2000, 1999 and 1998 is as follows:
2000 1999 1998 ----------------------------------------------------------------------------- Weighted-average shares outstanding, used in computing basic EPS 12,563 12,694 12,500 Effect of dilutive stock options 219 417 434 ----------------------------------------------------------------------------- Weighted-average shares outstanding, and the effect of dilutive stock options, used in computing diluted EPS 12,782 13,111 12,934 =============================================================================
RECLASSIFICATIONS: Certain reclassifications have been made in the 1999 and 1998 financial statements to conform to the 2000 presentation.
TIMBERLINE SOFTWARE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands, except per share amounts and percentages)
Note 2 Investments
Investments at December 31, 2000 and 1999 are composed of the following:
Amortized Fair Cost Value ------------------------------------------------------------------------------ 2000: Debt securities issued by the U.S. Treasury and other U.S. government agencies $ 7,744 $ 7,749 Debt securities issued by states of the United States and political subdivisions of the states 498 496 ------------------------------------------------------------------------------ Total investments $ 8,242 $ 8,245 ============================================================================== 2000 net unrealized gain on investments $ 3 ==============================================================================
1999: Debt securities issued by the U.S. Treasury and other U.S. government agencies $ 12,356 $ 12,248 Debt securities issued by states of the United States and political subdivisions of the states 496 490 ------------------------------------------------------------------------------ Total investments $ 12,852 $ 12,738 ============================================================================== 1999 net unrealized (loss) on investments $ (114) ==============================================================================
Note 3 Property and equipment
Property and equipment at December 31, 2000 and 1999 is composed of the following:
2000 1999 ------------------------------------------------------------------------------ Land $ 2,433 $ 2,433 Building 13,253 13,220 Tenant improvements 127 63 Furniture and fixtures 2,074 1,744 Machinery and equipment 12,089 10,289 Capital projects in progress 646 ------------------------------------------------------------------------------ Total 30,622 27,749 Less accumulated depreciation and amortization 8,788 7,329 ------------------------------------------------------------------------------ Property and equipment - net $ 21,834 $ 20,420 ==============================================================================
TIMBERLINE SOFTWARE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands, except per share amounts and percentages)
Note 4 Common stock
In October 1999 and 1998, the Company's Board of Directors approved four-for-three stock splits, effective in November 1999 and 1998. All prior common stock and per share data amounts have been retroactively adjusted to reflect these changes.
As of December 31, 2000, the Company has five 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 Company may grant options for up to 1,125 shares of common stock. Options could not be granted under the 1987 plan and the 1989 plan after 1997 and 1999, respectively. As of December 31, 2000, 141 shares are reserved under these plans, of which there are 141 options outstanding.
In 1993, 1998 and 2000, the Company's shareholders approved incentive stock plans for the main purpose of retaining and attracting the services of Company directors, officers, employees and non-employees. 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. Stock options under the 1993, 1998 and 2000 plans may not be granted after the years 2003, 2008 and 2010, respectively. As of December 31, 2000, 2,936 shares are reserved under these plans, of which there are 1,929 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.
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 Statement of Financial Accounting Standards No. 123, "Accounting for Stock-Based Compensation," 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, 2000, 1999 and 1998:
2000 1999 1998 ------------------------------------------------------------------------------ Net income, as reported $ 3,331 $ 10,194 $ 7,194 Net income, pro forma 1,533 9,202 6,743
Diluted earnings per share, as reported 0.26 0.78 0.56 Diluted earnings per share, pro forma 0.12 0.70 0.52
TIMBERLINE SOFTWARE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands, except per share amounts and percentages)
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.
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 2000, 1999 and 1998:
2000 1999 1998 ------------------------------------------------------------------------------ Annual dividend yield 2.0% 1.0% 1.0% Risk-free interest rate per annum 6.1% 5.2% 5.6% Expected annual volatility 71.2% 79.2% 85.0% Expected lives of options (years) 7.0 7.0 7.0
A summary of the status of the Company's stock option plans as of December 31, 2000, 1999 and 1998, and changes during the years ending on those dates is presented below:
2000 1999 1998 ------------------ ------------------ ----------------- Weighted- Weighted- Weighted- Average Average Average Exercise Exercise Exercise Shares Price Shares Price Shares Price ------------------------------------------------------------------------------------------ Outstanding at beginning of year ....... 1,228 $ 6.130 1,006 $ 3.504 1,115 $ 2.935 Granted (1)................ 1,121 7.664 513 9.435 86 9.404 Exercised ................. (82) 2.523 (264) 2.371 (155) 1.955 Forfeited ................. (197) 8.643 (27) 7.730 (40) 6.411 ------------------------------------------------------------------------------------------ Outstanding at end of year 2,070 $ 6.864 1,228 $ 6.131 1,006 $ 3.504 ========================================================================================== Options exercisable at year-end ............. 652 586 685 Weighted-average fair value of options granted during the year .......... $ 4.272 $ 6.594 $ 6.834
------------------------------------ (1) Commencing in 1999, the Company extended the granting of stock options to substantially all employees.
TIMBERLINE SOFTWARE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands, except per share amounts and percentages)
The following table summarizes information about stock options outstanding and exercisable at December 31, 2000:
Outstanding Exercisable -------------------------------------- ----------------------- Weighted- Average Number Remaining Weighted- Number Weighted- Range of of Contractual Average of Average Exercise Prices Options Life (years) Exercise Price Options Exercise Price -------------------------------------------------------------------------------- $ 1.05 - 4.94 471 4.5 $ 2.609 434 $ 2.497 5.00 - 9.98 1,522 8.8 7.912 198 8.133 10.05 - 15.38 77 8.4 12.133 20 11.983 -------------------------------------------------------------------------------- $ 1.05 - 15.38 2,070 7.8 $ 6.864 652 $ 4.502 ================================================================================
Note 5 Income taxes
The tax effects of significant items comprising the Company's net deferred tax liability as of December 31, 2000 and 1999 are as follows:
2000 1999 ------------------------------------------------------------------------------ Deferred tax liabilities: Property and equipment $ 1,016 $ 928 Capitalized software costs 2,296 853 Maintenance costs 75 80 Other 104 14 ------------------------------------------------------------------------------ Deferred tax liabilities 3,491 1,875 ------------------------------------------------------------------------------ Deferred tax assets: Allowance for doubtful accounts 54 56 Employee expenses not currently deductible 51 51 Accrued rent expense 114 12 Other 84 65 ------------------------------------------------------------------------------ Deferred tax assets 303 184 ------------------------------------------------------------------------------ Net deferred tax liability $ 3,188 $ 1,691 ==============================================================================
The net deferred tax liability is classified in the balance sheet as follows:
2000 1999 ------------------------------------------------------------------------------ Deferred income taxes $ 3,199 $ 1,725 Deferred tax assets included in other current assets (11) (34) ------------------------------------------------------------------------------ Net deferred tax liability $ 3,188 $ 1,691 ==============================================================================
TIMBERLINE SOFTWARE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands, except per share amounts and percentages)
The provision for income taxes is composed of the following:
2000 1999 1998 ------------------------------------------------------------------------------ Current: Federal $ 121 $ 4,302 $ 3,300 State 56 893 674 Foreign 17 Deferred: Federal 1,190 575 111 State 262 137 27 ------------------------------------------------------------------------------ Total $ 1,646 $ 5,907 $ 4,112 ==============================================================================
A reconciliation of the difference between the provision for income taxes and the income taxes computed at the federal statutory rate is summarized below:
2000 1999 1998 ------------------------------------------------------------------------------ Income taxes based on federal statutory rate $ 1,692 $ 5,568 $ 3,857 State tax, net of federal tax benefit 211 691 469 Research and development credits (417) (324) (283) Non-deductible expenses for tax purposes 133 96 93 Other 27 (124) (24) ------------------------------------------------------------------------------ Provision for income taxes $ 1,646 $ 5,907 $ 4,112 ==============================================================================
Note 6 Business segment information
The Company's operations are divided into two operating segments: software products and software services. Software products encompass software product revenue 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 technical support service plans, 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 revenue 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. 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, 2000, 1999 and 1998:
TIMBERLINE SOFTWARE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands, except per share amounts and percentages)
2000 1999 1998 ----------------------------------------------------------------------------- Net revenue: Software products $22,950 $29,291 $24,786 Services 27,064 24,176 18,197 Other 1,162 1,647 1,310 ----------------------------------------------------------------------------- Net revenue $51,176 $55,114 $44,293 ============================================================================= Operating contribution: Software products $11,522 $19,968 $16,971 Services 11,415 10,112 6,892 Other revenue, net of cost 928 1,437 1,109 Product development expenses (13,254) (10,624) (8,863) General and administrative expenses (6,640) (5,541) (5,334) ----------------------------------------------------------------------------- Operating income $ 3,971 $15,352 $10,775 =============================================================================
The Company operates primarily in the United States. In terms of net revenue, more than 94 percent of its net revenue in 2000, 1999 and 1998 was generated from customers located in the United States. No revenue from customers located in any one foreign country accounted for more than three percent of the Company's net revenue during those years.
Note 7 Commitments
The Company leases some equipment and office facilities under noncancelable operating leases. Its major lease commitment relates to a lease entered into in 2000 and expiring in 2011 for additional office space for expansion of its corporate offices. Additionally, the Company had entered into a lease in 1996 for expansion of its previous corporate offices which expires in 2003. That office space is currently being subleased for the balance of the lease term.
Total rent expense under operating leases, net of sublease rental income, was $537, $188 and $825 in 2000, 1999 and 1998, respectively. Future minimum rental payments under these leases as of December 31, 2000, are as follows:
Year ending December 31, ------------------------ 2001 $ 815 2002 828 2003 677 2004 612 2005 601 Thereafter 2,962 ------------------------ Total $ 6,495 ========================
Future minimum rental payments shown above have not been reduced by future minimum sublease rental income of $456 from a noncancelable sublease.
TIMBERLINE SOFTWARE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands, except per share amounts and percentages)
Note 8 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 $689 in 2000, $598 in 1999 and $479 in 1998.
Note 9 Quarterly financial information (unaudited)
Basic Diluted Net Cost and Net Earnings Earnings Revenue Expenses Income per Share per Share ------------------------------------------------------------------------------- 1st quarter $12,340 $11,113 $ 948 $ 0.07 $ 0.07 2nd quarter 12,141 11,516 589 0.05 0.05 3rd quarter 13,023 12,039 782 0.06 0.06 4th quarter 13,672 12,537 1,012 0.08 0.08
1st quarter $13,341 $ 9,777 $ 2,230 $ 0.18 $ 0.17 2nd quarter 13,271 9,715 2,255 0.18 0.17 3rd quarter 13,350 9,518 2,465 0.19 0.19 4th quarter 15,152 10,752 3,244 0.25 0.25
INDEPENDENT AUDITORS' REPORT
Board of Directors and Shareholders Timberline Software Corporation Beaverton, Oregon
We have audited the accompanying consolidated balance sheets of Timberline Software Corporation and subsidiary as of December 31, 2000 and 1999, and the related consolidated statements of operations, shareholders' equity and cash flows for each of the three years in the period ended December 31, 2000. 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 auditing standards generally accepted in the United States of America. 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 consolidated financial statements present fairly, in all material respects, the financial position of Timberline Software Corporation and subsidiary as of December 31, 2000 and 1999 and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2000, in conformity with accounting principles generally accepted in the United States of America.
/s/ DELOITTE & TOUCHE LLP
DELOITTE & TOUCHE LLP Portland, Oregon January 26, 2001
TIMBERLINE SOFTWARE CORPORATION
FORM 10-K FOR YEAR ENDED DECEMBER 31, 2000
EXHIBIT INDEX*
Consents
23 Independent Auditors' Consent
* See Item 14(a)(3) of this Report for a list of all exhibits, including those incorporated by reference.
Independent Auditors' Consent
Board of Directors and Shareholders of Timberline Software Corporation Beaverton, Oregon
We consent to the incorporation by reference in Registration Statements Nos. 33-46716, 33-69820, 333-77135, and 333-39424 on Form S-8 of our report dated January 26, 2001 appearing in this Annual Report on Form 10-K of Timberline Software Corporation for the year ended December 31, 2000.
/s/ DELOITTE & TOUCHE LLP
DELOITTE & TOUCHE LLP Portland, Oregon March 26, 2001