UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(x) QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934.
For the quarterly period ended March 31,June 30, 2002
OR
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934.
Commission File Number 1-10485
TYLER TECHNOLOGIES, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 75-2303920
(State or other jurisdiction of (I.R.S. employer
incorporation or organization) identification no.)
5949 SHERRY LANE, SUITE 1400
DALLAS, TEXAS
75225
(Address of principal executive offices)
(Zip code)
(214) 547-4000
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes [X] No [ ]
Number of shares of common stock of registrant outstanding at May 6,August 2, 2002:
47,621,56447,706,733
TYLER TECHNOLOGIES, INC.
INDEX
PAGE NO.
Part I - Financial Information (Unaudited)
Item 1. Financial Statements
Condensed Consolidated Balance Sheets...................................3Sheets ..................... 3
Condensed Consolidated Statements of Operations.........................4Operations ........... 4
Condensed Consolidated Statements of Cash Flows.........................5Flows ........... 5
Notes to Condensed Consolidated Financial Statements....................6Statements ...... 6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations....................................12Operations ....................... 12
Part II - Other Information
Item 1. Legal Proceedings......................................................17Proceedings ......................................... 18
Item 4. Submission of Matters to a Vote of Security Holders ....... 18
Item 6. Exhibits and Reports on Form 8-K.......................................17
Signatures...............................................................................188-K .......................... 18
Signatures ..................................................................... 19
Certifications ................................................................. 19
2
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
TYLER TECHNOLOGIES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands, except par value and number of shares)
March 31,June 30,
2002 December 31,
(Unaudited) 2001
------------ ------------
ASSETS
Current assets:
Cash and cash equivalents $ 7,18910,089 $ 5,271
Accounts receivable (less allowance for losses
of $1,153$1,078 in 2002 and $1,275 in 2001) 31,68435,185 35,256
Income taxes receivable 95 356
Prepaid expenses and other current assets 3,828 3,3184,314 3,674
Deferred income taxes 1,329 1,329
------------ ------------
Total current assets 44,12550,917 45,530
Net non-current assets of discontinued operations 1,000-- 1,000
Property and equipment, net 7,0396,986 6,967
Other assets:
Investment securities available-for-sale 26,69026,578 11,238
Goodwill and other intangibles, net 81,86682,354 82,211
Sundry 365407 234
------------ ------------
$ 161,085167,242 $ 147,180
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 2,3931,960 $ 2,036
Accrued liabilities 5,9088,343 9,651
Income taxes payable 279 --
Current portion of long-term obligations 103116 123
Net current liabilities of discontinued operations 1,4641,336 786
Deferred revenue 26,72629,336 27,215
------------ ------------
Total current liabilities 36,59441,370 39,811
Long-term obligations, less current portion 2,8942,864 2,910
Deferred income taxes 7,0166,976 3,575
Commitments and contingencies
Shareholders' equity:
Preferred stock, $10.00 par value; 1,000,000
shares authorized, none issued -- --
Common stock, $.01 par value; 100,000,000 shares
authorized; 48,147,969 shares issued
in both years2002 and 2001 481 481
Additional paid-in capital 157,109156,850 157,242
Accumulated deficit (48,381)(47,091) (48,943)
Accumulated other comprehensive income (loss) -
unrealized holding gain (loss) on securities
available-for-sale, net of tax 7,0897,017 (4,545)
Treasury stock, at cost: 548,805442,436 and 920,205 shares
in 2002 and 2001, respectively (1,717)(1,225) (3,351)
------------ ------------
Total shareholders' equity 114,581116,032 100,884
------------ ------------
$ 161,085167,242 $ 147,180
============ ============
See accompanying notes.
3
TYLER TECHNOLOGIES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share amounts)
(Unaudited)
Three months ended March 31,
---------------------------Six months ended
June 30, June 30,
------------------------- --------------------------
2002 2001 ------------ ------------2002 2001
---------- ---------- ---------- ----------
Revenues:
Software licenses $ 5,1585,123 $ 3,6014,585 $ 10,281 $ 8,186
Professional services 12,002 11,58615,734 15,076 27,736 26,662
Maintenance 10,187 9,86011,196 9,849 21,383 19,709
Hardware and other 1,309 2,225
------------ ------------1,263 1,467 2,572 3,692
---------- ---------- ---------- ----------
Total revenues 28,656 27,27233,316 30,977 61,972 58,249
Cost of revenues:
Software licenses 1,064 6211,372 1,004 2,436 1,625
Professional services and maintenance 16,846 16,19019,224 18,758 36,070 34,948
Hardware and other 1,012 1,840
------------ ------------1,083 2,024 2,923
---------- ---------- ---------- ----------
Total cost of revenues 18,922 18,651
------------ ------------21,608 20,845 40,530 39,496
---------- ---------- ---------- ----------
Gross profit 9,734 8,62111,708 10,132 21,442 18,753
Selling, general and administrative expenses 8,020 7,5808,756 7,782 16,776 15,362
Recovery of certain acquisition costs previously expensed -- (235) -- (235)
Amortization of acquisition intangibles 834 1,737
------------ ------------831 1,719 1,665 3,456
---------- ---------- ---------- ----------
Operating income (loss) 880 (696)2,121 866 3,001 170
Interest income (expense) 37 (161)
------------ ------------expense (income) 5 121 (32) 282
---------- ---------- ---------- ----------
Income (loss) from continuing operations before
income tax provision (benefit) 917 (857)2,116 745 3,033 (112)
Income tax provision (benefit) 355 (343)
------------ ------------826 373 1,181 30
---------- ---------- ---------- ----------
Income (loss) from continuing operations 562 (514)1,290 372 1,852 (142)
Loss from disposal of discontinued operations, net of income taxes -- (14)
------------ ------------(1) -- (15)
---------- ---------- ---------- ----------
Net income (loss) $ 5621,290 $ (528)
============ ============371 $ 1,852 $ (157)
========== ========== ========== ==========
Basic and diluted earnings (loss) per common share:
Continuing operations $ 0.03 $ 0.01 $ (0.01)0.04 $ (0.00)
Discontinued operations -- (0.00) ------------ -------------- (0.00)
---------- ---------- ---------- ----------
Net earnings (loss) per common share $ 0.03 $ 0.01 $ (0.01)
============ ============0.04 $ (0.00)
========== ========== ========== ==========
Weighted average common shares outstanding:
Basic 47,386 47,17947,647 47,149 47,517 47,164
Diluted 49,725 47,17950,405 47,425 50,066 47,164
See accompanying notes.
4
TYLER TECHNOLOGIES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
ThreeSix months ended March 31,
----------------------------June 30,
------------------------------
2002 2001
------------ ------------
Cash flows from operating activities:
Net income (loss) $ 5621,852 $ (528)(157)
Adjustments to reconcile net income (loss) from operations
to net cash provided (used) by operations:
Depreciation and amortization 2,092 2,5164,218 5,196
Deferred income taxes -- (179)(108)
Non-cash charges 289 120
Discontinued operations - noncashnon-cash charges and
changes in operating assets and liabilities (48) (1,431)(47) (2,148)
Changes in operating assets and liabilities, exclusive of
effects of discontinued operations (413) 277583 (4,526)
------------ ------------
Net cash provided (used) by operating activities 2,193 6556,895 (1,623)
------------ ------------
Cash flows from investing activities:
Additions to property and equipment (665) (672)(1,472) (1,603)
Software development costs (1,539) (1,743)(3,562) (3,212)
Assets acquired for discontinued operations -- (1,342)(1,353)
Proceeds from note receivablesale of a discontinued operation 800operations 822 575
Proceeds from sale of assets of discontinued operations 961 --
Other 1 34(7) 11
------------ ------------
Net cash used by investing activities (1,403) (3,723)(3,258) (5,582)
------------ ------------
Cash flows from financing activities:
Net paymentsborrowings on revolving credit facility -- (4,350)239
Payments on notes payable (36) (77)(53) (155)
Payment of debt of discontinued operations (74) (192)(179) (384)
Proceeds from salesexercise of treasury shares under employee benefit plan 1,365stock options 1,598 --
Other (127) --Debt issuance costs (185) (116)
------------ ------------
Net cash provided (used) by financing activities 1,128 (4,619)1,181 (416)
------------ ------------
Net increase (decrease) in cash and cash equivalents 1,918 (7,687)4,818 (7,621)
Cash and cash equivalents at beginning of period 5,271 8,217
------------ ------------
Cash and cash equivalents at end of period $ 7,18910,089 $ 530596
============ ============
See accompanying notesnotes.
5
Tyler Technologies, Inc.
Notes to Condensed Consolidated Financial Statements
(Unaudited)
(Tables in thousands, except per share data)
(1) Basis of Presentation
We prepared the accompanying condensed consolidated financial statements
following the requirements of the Securities and Exchange Commission and
GAAP (accounting principles generally accepted in the United States) for
interim reporting. As permitted under those rules, certain footnotes or
other financial information that are normally required by GAAP can be
condensed or omitted.omitted for interim periods. Balance sheet amounts are as of
March 31,June 30, 2002 and December 31, 2001 and operating result amounts are for the
three and six months ended March 31,June 30, 2002 and 2001 and include all normal and
recurring adjustments that we considered necessary for the fair summarized
presentation of our financial position and operating results. As these are
condensed financial statements, one should also read the financial
statements and notes included in our latest Form 10-K for the year ended
December 31, 2001. Revenues, expenses, assets and liabilities can vary
during each quarter of the year. Therefore, the results and trends in these
interim financial statements may not be the same as those for the full year.
Although we have a number of operating subsidiaries, separate segment data
has not been presented as they meet the criteria set forth in SFAS
(Statement of Financial Accounting Standards) No. 131, "Disclosures About
Segments of an Enterprise and Related Information" to be presented as one
segment.
(2) Discontinued Operations
Discontinued operations include the operating results of the information and
property records services segment in which our Board of Directors approved a
formal plan of disposal in December 2000. Discontinued operations also
include the results of two non-operating subsidiaries relating to a formerly
owned subsidiary that we sold in December 1995. The business units within
the information and property records services segment were sold in 2000 and
2001. One of the business units previously included in the information and
property records services segment was sold in May 2001 for $575,000 cash,
approximately 60,000 shares of Tyler stock, a promissory note of $750,000 at
9% interest and other contingent consideration. In 2002, the buyer of this
business unit requested to renegotiate the $750,000 promissory note and the
contingent consideration. As a result of this renegotiation in March 2002,
we received additional cash of approximately $800,000 and a subordinated
note receivable amounting to $200,000, to fully settle the promissory note
and other contingent consideration in connection with this previous sale.
The subordinated note is payable in 16 equal quarterly principal payments
with interest at a rate of 6%. Because the subordinated note receivable is
highly dependent upon future operations of the buyer, we are recording its
value when the cash is received which is our historical practice. During the
three months ended June 30, 2002, we received payments of $15,000 on the
note. Since the original $750,000 promissory note was not credited to income
when itthe note was initially received, the cash proceeds from the accelerated
promissory note repayment resulted in a gain on the disposal of discontinued
operations, net of income taxes. However, this net gain was offset in the
first quarter of 2002 due to a similar increase in the loss reserve. This
increase can be attributed to the inherent uncertainties associated with the
value of the remaining assets of our discontinued businesses primarily consisting of a building
held for sale in Austin, Texas and the
ultimate settlement obligations of the outstanding liabilities including certain equipment and
facility lease obligations and the bankruptcy filing of Swan Transportation
Company (See Note 3 - Commitments and Contingencies). In our opinion and
based upon information available at this time, no material adverse
adjustment is anticipated to this loss reserve and we believe the loss
reserve remains adequate.
Two of our non-operating subsidiaries are involved in various claims for
work-related injuries and physical conditions relating to a formerly-owned
subsidiary that we sold in 1995. For the three and six months ended March 31,June 30,
2001, we expensed and included in discontinued operations $22,000$1,000 (net of
taxes of $-0-) and $15,000 (net of taxes of $8,000), respectively, for trial
and related costs (See Note 3 - Commitments and Contingencies).
(3) Commitments and Contingencies
One of our non-operating subsidiaries, Swan Transportation Company (Swan),
has been and is currently involved in various claims raised by hundreds of
former employees of a foundry that was once owned by an affiliate of Swan
and Tyler. These claims are for alleged work related injuries and physical
conditions resulting from alleged exposure to silica, asbestos, and/or
related industrial dusts during their employment at the foundry. We sold the
operating assets of the foundry on December 1, 1995. As a non-operating
subsidiary of Tyler, the assets of Swan consist primarily of various
insurance policies issued to Swan during the relevant time periods and
restricted cash of $2.3$2.2 million at March 31,June 30, 2002. Swan has tendered the
defense and indemnity
6
obligations arising from these claims to its insurance carriers, who have
entered into settlement agreements with approximately 275 of the plaintiffs,
each of whom agreed to release Swan, Tyler, and its subsidiaries and
affiliates from all such claims in exchange for payments made by the
insurance carriers.
6
On December 20, 2001, Swan filed a petition under Chapter 11 of the U.S.
Bankruptcy Code in the United States Bankruptcy Court for the District of
Delaware. The bankruptcy filing by Swan was the result of extensive
negotiations between Tyler, Swan, their respective insurance carriers, and
an ad hoc committee of plaintiff attorneys representing substantially all of
the then known plaintiffs. Swan filed its plan of reorganization in February
2002. The principal features of the plan of reorganization include: (a) the
creation of a trust, which is to be funded principally by fifteen insurance
carriers pursuant to certain settlement agreements executed pre-petition
between Swan, Tyler, and such carriers; (b) the implementation of a claims
resolution procedure pursuant to which all present and future claimants may
assert claims against such trust for alleged injuries; (c) the issuance of
certain injunctions under the federal bankruptcy laws requiring any such
claims to be asserted against the trust and barring such claims from being
asserted, either now or in the future, against Swan, Tyler, all of Tyler's
affected affiliates, and the insurers participating in the funding of the
trust; and (d) the full and final release of each of Swan, Tyler, all of
Tyler's affected affiliates, and the insurers participating in the funding
of the trust from any and all claims associated with the once-owned foundry
by all claimants that assert a claim against, and receive compensation from,
the trust. In order to receive the foregoing benefits, we have agreed, among
other things, to make certain cash contributions to the trust, the amount of
which is not expected to be in excess of the settlement liability previously
recorded by Tyler in its condensed consolidated financial statements.
We anticipate the creditors of Swan will vote on Swan's plan of
reorganization during the thirdfourth quarter of 2002. Tyler anticipates the
plan, as currently contemplated will be approved by Swan's creditors because
the material terms of the plan of reorganization have been pre-negotiated
between the various affected parties. After the creditors approve the plan
it will be presented to the bankruptcy court for final approval. If the plan
of reorganization as currently contemplated is approved, we anticipate that
all of the liabilities associated with the foundry formerly owned by our
affiliates will be eliminated at an amount no greater than the liability
reflected in the condensed consolidated financial statements. There can be
no assurance that the creditors of Swan will approve the plan of
reorganization as currently contemplated, and if approved by such creditors,
will be approved in such form by the bankruptcy court, if at all. Because of
the inherent uncertainties, it is reasonably possible that the amounts
recorded as liabilities for Swan related matters could change in the near
term by amounts that would be material to the condensed consolidated
financial statements.
See Note 6 - Investment Securities Available-for-Sale,Available for Sale, for discussion of
litigation in connection with HTE's attempted cash redemption of all shares
of HTE common stock currently owned by Tyler.
(4) Earnings Per Share
The following table details the computation of basic and diluted earnings
(loss) per share:
THREE MONTHS ENDED MARCH 31,
---------------------------SIX MONTHS ENDED
JUNE 30, JUNE 30,
----------------------- -----------------------
2002 2001 ------------ ------------2002 2001
---------- ---------- ---------- ----------
Numerators for basic and diluted earnings per share:
Income (loss) from continuing operations ............................... $ 5621,290 $ (514)
============ ============372 $ 1,852 $ (142)
========== ========== ========== ==========
Denominator:
Denominator for basic earnings per share-
Weighted-average common shares outstanding .......... 47,386 47,179............. 47,647 47,149 47,517 47,164
Effect of dilutive securities:
Employee stock options ........................... 1,413............................... 1,587 276 1,500 --
Warrants ......................................... 926............................................. 1,171 -- ------------ ------------1,049 --
---------- ---------- ---------- ----------
Dilutive potential common shares ........................ 2,339........................... 2,758 276 2,549 --
------------ ---------------------- ---------- ---------- ----------
Denominator for diluted earnings per share-
Adjusted weighted-average
shares andfor assumed conversion ...................... 49,725 47,179
============ ============........................ 50,405 47,425 50,066 47,164
========== ========== ========== ==========
Basic and diluted earnings (loss) per share
from continuing operations ............................................................ $ 0.03 $ 0.01 $ (0.01)
============ ============0.04 $ (0.00)
========== ========== ========== ==========
7
Due to our loss from continuing operations for the threesix months ended March
31,June 30,
2001, we did not adjust the denominator for potentialpotentially dilutive securities
because they would have been antidilutive, or made the loss per share
smaller.
7
(5) Income Tax Provision
We had an effective income tax rate of 39% for the three and six months
ended March
31, 2002, compared toJune 30, 2002. For the three months ended June 30, 2001, we had an
effective income tax benefit rate of 40% for50%. For the threesix months ended March 31, 2001.June 30, 2001, we
had a loss from continuing operations before income taxes of $112,000 and an
income tax provision of $30,000. The effective income tax rates are
estimated based on projected pre-tax income for the entire fiscal year and
the resulting amount of income taxes. The effective income tax rates for the
periods presented were different from the statutory United States Federal
income tax rate of 35% primarily due to state income taxes, non-deductible
meals and entertainment costs, and in periods prior to January 1, 2002,
non-deductible goodwill amortization expensed for financial reporting
purposes.
(6) Investment Securities Available-for-Sale
Pursuant to an agreement with two major shareholders of H.T.E., Inc. (HTE),
we acquired approximately 32% of HTE's common stock in two separate
transactions in 1999. On August 17, 1999, we exchanged 2.3 million shares of
our common stock for 4.7 million shares of HTE common stock. This initial
investment in HTE common stock was recorded at $14.0 million. The second
transaction occurred on December 21, 1999, in which we exchanged 484,000
shares of our common stock for 969,000 shares of HTE common stock. The
additional investment was recorded at $1.8 million. The investment in HTE
common stock is classified as a non-current asset because we made the
investment for a continuing business purpose.
Florida state corporation law restricts the voting rights of "control
shares", as defined, acquired by a third party in certain types of
acquisitions. These restrictions may be removed by a vote of the
shareholders of HTE. The courts have not interpreted the Florida "control
share" statute. HTE has taken the position that, under the Florida statute,
all of the shares acquired by us constitute "control shares" and therefore
do not have voting rights until such time as shareholders of HTE, other than
Tyler, restore voting rights to those shares. We believe only the shares
acquired in excess of 20% of the outstanding shares of HTE constitute
"control shares". Therefore, we believe we currently have the right to vote
all HTE shares we own up to at least 20% of the outstanding shares of HTE.
On November 16, 2000, the shareholders of HTE, other than Tyler, voted to
deny Tyler its right to vote the "control shares" of HTE.
On October 29, 2001, HTE notified us that it had attempted a cash redemption
of all 5.6 million shares of HTE common stock currently owned by us at price
of $1.30 per share. We believe that the attempted redemption of our HTE
shares was invalid and we take exception to the manner in which fair value
was calculated. Management of HTE contends that its ability to redeem the
HTE shares of common stock owned by us and the manner of calculation of fair
value by HTE is in accordance with Florida state statutes for "control
shares." On October 29, 2001, we notified HTE that its purported redemption
of our HTE shares was invalid and contrary to Florida law, and in any event,
the calculation by HTE of fair value for such shares was incorrect. On
October 30, 2001, HTE filed a complaint in a civil court in Seminole County,
Florida requesting the court to enter a declaratory judgment declaring HTE's
purported redemption of all of our HTE shares at a redemption price of $1.30
per share was lawful and to effect the redemption and cancel our HTE shares.
We removed the case to the United States District Court, Middle District of
Florida, Orlando Division, and requested a declaratory judgment from the
court declaring, among other things, (a) that HTE's purported redemption of
any or all of our shares was illegal under Florida law, (b) in the
alternative, that HTE's right of redemption, if any, under Florida law only
applies to the "control shares" owned by us (i.e., those shares in excess of
20% of the issued and outstanding shares of common stock of HTE as of the
date that we acquired such shares), (c) in the alternative, that HTE's
calculation of fair value for the redemption of any or all of our HTE shares
was grossly understated, and (d) that we maintain the ability to vote up to
20% of the issued and outstanding shares of HTE common stock owned by us.
Although we believe that the attempted stock redemption by HTE is invalid,
there can be no assurance that the court will rule in our favor. HTE
subsequently amended its complaint alleging that we tortiously interfered
with the severance agreements of the major shareholders of HTE and
tortiously interfered with the advantageous business relationship between
such shareholders and HTE. HTE has alleged that our ownership of 5.6 million
shares "damaged" HTE. Based on the advice of legal counsel, we believe this
claim has no merit.
We account for our investment in HTE pursuant to the provisions of SFAS No.
115, "Accounting for Certain Investments in Debt and Equity Securities".
These securities are classified as available-for-sale and are recorded at
fair value as determined by quoted market prices for HTE common stock.
Unrealized holding gains and losses, net of the related tax effect, are
excluded from earnings and are reported as a separate component of
shareholders' equity until the securities are sold. Realized gains and
losses
8
from the sale of available-for-sale securities are determined on a specific
identification basis. A decline in the market value of any
available-for-sale security below cost that we consider to be other than
temporary results in a reduction in the cost basis to fair value. The
impairment is charged to earnings and a new cost basis for the security is
established.
8
The cost, fair value and gross unrealized holding gains (losses) of the
investment securities available-for-sale, based on the quoted market price
for HTE common stock (amounts in millions, except per share amounts) are
presented below. In accordance with SFAS No. 115, we used quoted market
price per share in calculating fair value to be used for financial reporting
purposes. SFAS No. 115 does not permit the adjustment of quoted market
prices in the determination of fair value and, accordingly, the ultimate
value we could realize because of our significant investment could vary
materially from the amount presented.
Quoted Market Gross Unrealized
Holding
Per Share Cost Fair Value Holding Gains (Losses)
------------- ---- ---------- ----------------------------------------------
March 31,June 30, 2002 $4.75$4.73 $ 15.8 $ 26.7 $10.9$26.6 $10.8
December 31, 2001 2.00 15.8 11.2 (4.6)
March 31,June 30, 2001 1.592.52 15.8 9.0 (6.8)14.2 (1.6)
If the uncertainty regarding the "control shares" is resolved in our favor,
we will retroactively adopt the equity method of accounting for this
investment. Therefore, our results of operations and retained earnings for
periods beginning with the 1999 acquisition will be retroactively restated
to reflect our investment in HTE for all periods in which we held an
investment in the common stock of HTE. Under the equity method, the original
investment is recorded at cost and is adjusted periodically to recognize our
share of HTE's earnings or losses after the respective dates of acquisition.
Our investment in HTE would include the unamortized excess of our investment
over our equity in the net assets of HTE.HTE through December 31, 2001.
Effective January 1, 2002, under the newly adopted provisions of SFAS No.
142, the excess investment over our equity in the net assets would no longer
be amortized if it consisted of goodwill. Had our investment in HTE been
accounted for under the equity method, our investment at March 31,June 30, 2002 would
have been $12.1$12.6 million and the equity in income of HTE for the three and
six months ended March 31,June 30, 2002 would have been $566,000.$509,000 and $1.1 million,
respectively. At March 31,June 30, 2001, our investment would have been $11.5 million
and our equity in loss of HTE for the three and six months ended March 31,June 30,
2001 would have been $513,000.$3,000 and $516,000, respectively.
(7) Comprehensive Income
The components of comprehensive income are as follows:
THREE MONTHS ENDED MARCH 31,SIX MONTHS ENDED
JUNE 30, JUNE 30,
---------------------------- ---------------------------
2002 2001 2002 2001
------------ ------------ ------------ ------------
Net income (loss) ...................................................................................... $ 5621,290 $ (528)371 $ 1,852 $ (157)
Change in fair value of securities available-for-sale
(net of deferred tax effectbenefit of $3,818 in$40 for the three
months ended June 30, 2002 only) ..... 11,634 3,864and deferred tax expense of
$3,778 for the six months ended June 30, 2002) ........... (72) 5,204 11,562 9,068
------------ ------------ ------------ ------------
Comprehensive income ............................................................ $ 12,1961,218 $ 3,3365,575 $ 13,414 $ 8,911
============ ============ ============ ============
(8) Goodwill and Intangible Assets
In July 2001, the Financial Accounting Standards Board (FASB) issued SFAS
No. 141, Business Combinations,"Business Combinations", and SFAS No. 142, Goodwill"Goodwill and Other
Intangible Assets.Assets". SFAS No. 141 requires that all business combinations be
accounted for under the purchase method only and that certain acquired
intangible assets in a business combination be recognized as assets apart
from goodwill. SFAS No. 142 requires that ratable amortization of goodwill
be discontinued and replaced with periodic tests of the goodwill's
impairment and that intangible assets other than goodwill be amortized over
their useful lives. We are requiredThe intangible asset impairment test which compares the
fair values of our reporting units to complete our impairment testing by no
later thantheir respective carrying values, was
completed during the three months ended June 30, 2002. Although we have
not fully completed our impairment analysis, we do not anticipate the
adoptionNo impairments were
recognized as a result of SFAS No. 142 will result in an impairment charge in 2002 upon
full adoption.this test. SFAS No. 141 is effective for all
business combinations initiated after June 30, 2001 and for all business
combinations accounted for by the purchase method for which the date of
acquisition is after June 30, 2001. We have adopted the provisions of SFAS
No. 141.
9
Under SFAS No. 142, assembled workforce, net of related deferred taxes, is
subsumed into goodwill upon the adoption of the Statement as of January 1,
2002. In periods prior to January 1, 2002, our effective income tax rate for
determining the quarterly income tax provision varied significantly because
of the significant amount of non-deductible goodwill in relation to the
estimated annual pre-tax income or loss. The adoption of SFAS No. 142, in
which goodwill is no longer amortized for financial reporting purposes, has
resulted in our ability to more accurately estimate our effective income tax
rate on an annual and on a quarterly basis. In determining the pro forma
operating results on a quarterly basis, as shown below, we used our pro
forma annual effective income tax rate as applied to our quarterly pro forma
pretax income or loss in computing our adjusted net income. If we had
accounted for goodwill (including workforce) under the non-amortization
approach of SFAS No. 142, our net lossincome (loss) and net lossrelated per share
amounts would have been as follows for the three monthsperiods ended March 31,June 30, 2001:
Three Six
months months
------------ ------------
Reported net loss ..................................income (loss) ............................ $ (528)371 $ (157)
Add back goodwill amortization, net of tax ......... 546............ 608 1,154
------------ ------------
Adjusted net income ............................................... $ 18979 $ 997
============ ============
Basic and diluted net lossincome (loss) per share ........................ $ (0.01)0.01 $ (0.00)
Goodwill amortization, net of tax ....................................... 0.01 0.02
------------ ------------
Basic and diluted net income per share ......... $ 0.000.02 $ 0.02
============ ============
The allocation of assets following our adoption of SFAS No. 142 is
summarized in the following table:
March 31,June 30, 2002 December 31, 2001
------------------------- -------------------------------------------------------- -----------------------------
Gross Gross
Carrying Accumulated Carrying Accumulated
Amount Amortization Amount Amortization
------------ ------------ ------------ ------------
Intangibles no longer amortized:
Goodwill .......................................................... $ 46,298 $ -- $ 51,063 $ 7,771
Assembled workforce .................................... -- -- 6,191 2,808
Amortizable intangibles:
Customer base ................................................ 17,997 2,6992,916 17,997 2,480
Software acquired ........................................ 12,158 7,7368,344 12,158 7,128
Non-compete agreements .............................. 163 133139 163 128
The changes in the carrying amount of goodwill for the quartersix months ended March 31,June
30, 2002 are as follows:
Balance as of December 31, 2001............................................................... $43,2922001 ........................................... $ 43,292
Goodwill adjustments during the first quarter
relating to workforce, net of deferred taxes of
$377, being subsumed into goodwill upon the adoption
of SFAS No. 142 on January 1, 2002.........................................................2002 ..................................... 3,006
-------------------
Balance as of March 31, 2002.................................................................. $46,298
=======June 30, 2002 ............................................... $ 46,298
============
10
Estimated annual amortization expense relating to acquisition intangibles is
as follows:
Year ending
December 31,
-------------------------
2002.......2002...... $3,300
2003.......2003...... 2,800
2004.......2004...... 1,500
2005.......2005...... 900
2006.......2006...... 900
10
(9) Subsequent Events
One of our operating subsidiaries has a subcontract with Arthur Andersen
LLP (Andersen) to provide property tax reassessment of properties located
in Lake County, Indiana. Andersen's prime contractNew Accounting Standards
In June 2001, the FASB issued SFAS No. 143, "Accounting for this project was
withAsset Retirement
Obligations". SFAS No. 143 requires that the State of Indiana. As of March 31, 2002, we have billed Andersen
$2.0 million, and have recognized as revenue approximately $1.9 million
since the beginningfair value of the contract.liability for
an asset retirement obligation be recognized in the period in which it is
incurred if a reasonable estimate of fair value can be made. The associated
asset retirement costs are capitalized as part of the carrying amount of the
long-lived asset. SFAS No. 143 is effective for fiscal years beginning after
June 15, 2002. We are currently evaluating the requirements and impact of
the Statement, but its adoption is not expected to have a material impact on
our results of operations and financial position.
In August 2001, the FASB issued SFAS No. 144, "Accounting for the Impairment
or Disposal of Long-Lived Assets." SFAS No. 144 addresses financial
accounting and reporting for the impairment of long-lived assets and for
long-lived assets to be disposed of. Under SFAS No. 144, an impairment loss
is recognized only if the carrying amount of a long-lived asset to be held
and used is not recoverable from its undiscounted cash flows and the loss is
measured as the difference between the carrying amount and the fair value of
the asset. Long-lived assets to be disposed of by sale are to be measured at
the lower of their carrying amount or fair value, less cost to sell, and
depreciation related to such long-lived assets is required to be
discontinued.
In addition, SFAS No. 144 retains the basic provisions of APB Opinion No. 30
for the presentation of discontinued operations in the income statement but
broadens that presentation to include a component of an entity rather than a
segment of a business. The provisions of this Statement are effective for
financial statements issued for fiscal years beginning after December 15,
2001, and interim periods within those fiscal years, with early application
encouraged. The provisions of this Statement generally are to be applied
prospectively. To date, Andersen has made no payments
to usthe extent applicable, we adopted the provisions of this
Statement and it did not have a material effect on the determination of
carrying amounts for our subcontracting services. Onlong-lived assets.
In April 30, 2002, the StateFASB issued SFAS No. 145, "Rescission of Indiana announcedFASB Statements
No. 4, 44 and 64, Amendment of FASB Statement No. 13, and Technical
Corrections". Among other items, this Statement no longer classifies in the
income statement the early extinguishment of debt as an extraordinary item.
We do not anticipate that they terminated their contract with Andersen and
said they intend to negotiate a final amount to pay Andersen for work
previously performed by Andersen and its subcontractors. The press release
by the State of Indiana said that Andersen has billed the State $6.7
million to date. The contract between our operating subsidiary and Andersen
requires Andersen to pay us within 30 days after Andersen receives funds
from the State of Indiana. Based upon information currently available to
our management, the receivable from Andersen is considered probable of
collection and we have not established a loss reserve for any of the
amounts due to us. However, this receivable is subject to continual
management review due to concerns about Andersen resulting from litigation
involving the firm.
(10) Segment and Related Information
Although weStatement will have a numbermaterial impact on our
results of operating subsidiaries, separate segment data
has not been presented as they meet the criteria set forth in SFAS No. 131,
"Disclosures About Segments of an Enterpriseoperations and Related Information" to be
presented as one segment.financial position.
11
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
FORWARD-LOOKING STATEMENTS
The statements in this discussion that are not historical statements are
"forward-looking statements" within the meaning of the Private Securities
Litigation Reform Act of 1995. These forward-looking statements include
statements about our business, financial condition, business strategy, plans and
the objectives of our management, and future prospects. In addition, we have
made in the past and may make in the future other written or oral
forward-looking statements, including statements regarding future operating
performance, short- and long-term revenue and earnings growth, the timing of the
revenue and earnings impact for new contracts, backlog, the value of new
contract signings, business pipeline, and in industry growth rates and our
performance relative thereto. Any forward-looking statements may rely on a
number of assumptions concerning future events and be subject to a number of
uncertainties and other factors, many of which are outside our control that
could cause actual results to differ materially from such statements. These
include, but are not limited to: our ability to improve productivity and achieve
synergies from acquired businesses; technological risks associated with the
development of new products and the enhancement of existing products; changes in
the budgets and regulating environments of our government customers; competition
in the industry in which we conduct business and the impact of competition on
pricing, revenues and margins; with respect to customer contracts accounted for
under percentage-of-completion method of accounting, the performance of such
contracts in accordance with our cost and revenue estimates; our ability to
maintain health and other insurance coverage and capacity due to changes in the
insurance market and the impact of increasing insurance costs on the results of
operations; the costs to attract and retain qualified personnel, changes in
product demand, the availability of products, economic conditions, changes in
tax risks and other risks indicated in our filings with the Securities and
Exchange Commission. Except to the extent required by law, we are not obligated
to update or revise any forward-looking statements whether as a result of new
information, future events or otherwise. When used in this Quarterly Report, the
words "believes," "plans," "estimates," "expects," "anticipates," "intends,"
"continue," "may," "will," "should", "projects", "forecast", "might", "could" or
the negative of such terms and similar expressions as they relate to the companyTyler or
itsour management are intended to identify forward-looking statements.
GENERAL
Tyler provides integrated software systems and related services for local
governments. We develop and market a broad line of software products and
services to address the information technology (IT) needs of cities, counties,
schools and other local government entities. We provide professional IT services
to our customers, including software and hardware installation, data conversion,
training and product modifications, along with continuing maintenance and
support for customers using our systems. We also provide property appraisal
outsourcing services for taxing jurisdictions.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
The discussion and analysis of our financial condition and results of operations
are based upon our condensed consolidated financial statements. These condensed
consolidated financial statements have been prepared following the requirements
of accounting principles generally accepted in the United States for interim
periods and require us to make estimates and judgments that affect the reported
amounts of assets, liabilities, revenues and expenses, and related disclosure of
contingent assets and liabilities. On an on-going basis, we evaluate our
estimates, including those related to investments, intangible assets, bad debts
and long-term service contracts, deferred income tax assets, reserve for
discontinued operations and contingencies and litigation. As these are condensed
financial statements one should also read our Form 10-K for the year ended
December 31, 2001, regarding expanded information about our critical accounting
policies and estimates.
12
ANALYSIS OF RESULTS OF OPERATIONS
The following table sets forth items from our unaudited condensed consolidated
statements of operations and the percentage change in the amounts between the
periods presented. The amounts shown in the table are in thousands, except the
per share data. Revenues and expenses can vary during each quarter of the year.
Therefore, the results and trends in these interim financial statements may not
be the same as those for the full year.
Three months ended March 31,
-----------------------------June 30, Six months ended June 30,
--------------------------------- ---------------------------------
% %
2002 2001 % Change ------------ ------------ ---------2002 2001 Change
-------- -------- -------- -------- -------- --------
Revenues:
Software licenses .............................. $ 5,1585,123 $ 3,601 43%4,585 12% $ 10,281 $ 8,186 26%
Professional services 12,002 11,586.......................... 15,734 15,076 4 27,736 26,662 4
Maintenance 10,187 9,860 3.................................... 11,196 9,849 14 21,383 19,709 8
Hardware and other 1,309 2,225 (41)
------------ ------------............................. 1,263 1,467 (14) 2,572 3,692 (30)
-------- -------- -------- --------
Total revenues 28,656 27,272 5................................... 33,316 30,977 8 61,972 58,249 6
Cost of revenues:
Software licenses 1,064 621 71.............................. 1,372 1,004 37 2,436 1,625 50
Professional services and maintenance 16,846 16,190 4.......... 19,224 18,758 2 36,070 34,948 3
Hardware and other ............................. 1,012 1,840 (45)
------------ ------------1,083 (7) 2,024 2,923 (31)
-------- -------- -------- --------
Total cost of revenues 18,922 18,651 1........................... 21,608 20,845 4 40,530 39,496 3
% of revenues 66.0% 68.4%.................................. 64.9% 67.3% 65.4% 67.8%
Gross profit 9,734 8,621 13..................................... 11,708 10,132 16 21,442 18,753 14
% of revenues 34.0% 31.6%.................................. 35.1% 32.7% 34.6% 32.2%
Selling, general and administrative expenses 8,020 7,580 6..... 8,756 7,782 13 16,776 15,362 9
% of revenues 28.0% 27.8%.................................. 26.3% 25.1% 27.1% 26.4%
Recovery of acquisition costs .................... -- (235) # -- (235) #
Amortization of acquisition intangibles 834 1,737.......... 831 1,719 (52) ------------ ------------1,665 3,456 (52)
-------- -------- -------- --------
Operating income (loss) 880 (696)................................. 2,121 866 145 3,001 170 #
% of revenues 3.1% (2.6)%.................................. 6.4% 2.8% 4.8% 0.3%
Interest income (expense) 37 (161)expense (income) ........................ 5 121 (96) (32) 282 #
------------ -------------------- -------- -------- --------
Income (loss) before income taxes 917 (857)................ 2,116 745 184 3,033 (112) #
% of revenues 3.2% (3.1)%.................................. 6.4% 2.4% 4.9% (0.2%)
Income tax provision (benefit) 355 (343)............................. 826 373 121 1,181 30 #
------------ -------------------- -------- -------- --------
Effective income tax (benefit) rate 38.7% 40.0%...................... 39.0% 50.1% 38.9% (26.8%)
Income (loss) from continuing operations ......... $ 5621,290 $ (514)372 247 $ 1,852 $ (142) #
% of revenues 2.0% (1.9)%.................................. 3.9% 1.2% 3.0% (0.2%)
Earnings (loss) per share
from continuing operations ..................... $ 0.03 $ 0.01 200 $ (0.01)0.04 $ (0.00) #
EBITDA* .......................................... $ 2,9724,247 $ 1,820 633,311 28 $ 7,219 $ 5,131 41
Cash flows fromprovided by (used by) operating
activities ..................................... $ 2,1934,702 $ 655 235(2,278) # $ 6,895 $ (1,623) #
# Not meaningful
* EBITDA*EBITDA consists of income or loss from continuing operations
before interest, income taxes, depreciation, amortization and
amortization.recovery of acquisition costs previously expensed. EBITDA is not
calculated in accordance with GAAP, but we believe that it is
widely used as a measure of operating performance. EBITDA should
only be considered together with other measures of operating
performance such as operating income, cash flows from operating
activities, or any other measure for determining operating
performance or liquidity that is calculated in accordance with
GAAP. EBITDA is not necessarily an indication of amounts that may
be available for us to reinvest or for any other discretionary
uses.
13
REVENUES
The following table compares the components of revenue as a percent of total
revenues for the periods presented:
Three months ended March 31,
----------------------------June 30, Six months ended June 30,
-------------------------- --------------------------
2002 2001 ------------ ------------2002 2001
---------- ---------- ---------- ----------
Software licenses 18.0% 13.2%15.4% 14.8% 16.6% 14.1%
Professional services 41.9% 42.5%47.2% 48.7% 44.8% 45.8%
Maintenance 35.5% 36.2%33.6% 31.8% 34.5% 33.8%
Hardware and other 4.6% 8.1%
------------ ------------3.8% 4.7% 4.1% 6.3%
---------- ---------- ---------- ----------
100.0% 100.0% 100.0% 100.0%
Software license revenues. Software license revenues increased $538,000, or 12%,
and $2.1 million, or 26%, for the quarterthree and six months ended March
31,June 30, 2002,
increased $1.6 million or 43%respectively, compared to the prior year period.same periods last year. Sales of our financial and
city solutions products and real estate appraisal software provided the majority
of the increase. The financial and city solutions division provides software
products that automate accounting systems for cities, counties, school
districts, public utilities and not-for-profit organizations. The following
are some of the factors which contributed to the software revenue increase:
o In the last half of 2001, we released several upgraded/new financial
software products.
o* A portion of the software license revenue increase resulted from
geographical expansion, particularly in the Midwest United States. Over
the last year, we have added to the sales staff serving the Midwest and
increased our efforts to add new business in this region.
o Additionally, sales* In the last half of third-party2001, we released several upgraded/new financial
software products including
report-writing and document scanning software, increased. These products
provide additional functionality to our proprietary software products.such releases are ongoing.
Professional services revenues. ProfessionalFor the three and six months ended June 30,
2002, professional services revenues increased $416,000$658,000 and $1.1 million, or 4%,
respectively, compared to the priorsame periods last year, period as a result of increased
software license activities.activities and increased appraisal services revenue. Typically,
contracts for software include services such as installation of the software,
converting the customers' data to be compatible with the software and training
customer personnel to use the software. Also, during the second quarter of 2002,
we accelerated work on our appraisal contract for Lake County, Indiana, which
was first awarded in December 2001. We have contracted to provide professional
services and technology to reassess most of the real property in Lake County,
which is the second largest county in the state of Indiana with a population of
approximately 485,000. The increasetotal contract is worth approximately $15.9 million
and is expected to be completed by late 2003. Also included in professional
serviceservices revenue associated with new
software salesfor the three and six months ended June 30, 2002, was offset somewhat by lower product modification services$3.5
million and $6.0 million, respectively, of appraisal revenue related to property appraisal software. Product modification services are
dependent on customer needs and vary somewhat from periodour
contract with Nassau County, New York Board of Assessors. The contract with
Nassau County is expected to period.be complete by early 2003.
Maintenance revenues. Maintenance revenues for the quarter ended June 30, 2002,
increased $327,000$1.3 million, or 3%14%, compared to the prior year period.quarter. Maintenance
revenues for the six months ended June 30, 2002, increased $1.7 million, or 8%,
compared to the six months ended June 30, 2001. We provide maintenance and
support services for our software products, property appraisal products, and third party software and hardware.
The maintenance revenue increase was due to growth in our installed customer
base and slightly higher rates. InDuring the first quarterthree months of 2001, we
received a one-time settlement of approximately $650,000 from a third party
provider of maintenance services relating to past services. Excluding this
settlement, maintenance revenue increased approximately 11%.12% for the six months
ended June 30, 2002, compared to the same period last year.
Hardware and other revenues. HardwareFor the three and other revenuesix months ended June 30, 2002,
hardware revenues decreased $916,000 or
41%$204,000 and $1.1 million, respectively, compared to
the same prior year period.periods. The change in hardware revenue is a result of the
timing of installations of equipment on customer contracts and is dependent on
the contract size and on varying customer hardware needs. We have de-emphasized
this aspect of our business in recent periods.periods due to pressures on margins for
hardware. The six-month period in the prior year
period included revenue of
approximately $850,000, which related to hardware sold in connection with
sizable contracts with Nassau County and counties in the State of Hawaii.
14
COST OF REVENUES
Cost of software license revenues. CostFor the three and six months ended June
30, 2002, cost of software license revenues increased $443,000$368,000, or 71%37%, and
$811,000, or 50%, respectively, compared to the prior year periodperiods, due to
higher amortization expense of software development costs. In 2001, we had
several products in the development stage, which were released beginning in
the third quarter of 2001. Once a product is released, we begin to expense
the costs associated 14
with the development over the estimated useful life of
the product. Development costs mainly consist of personnel costs, such as
salary and benefits paid to our developers.
Cost of professional service and maintenance revenues. Costs of professional
services and maintenance increased $656,000 or 4%2% and 3% for the three and six-month
periods, respectively, which is consistent with professional services and
maintenance revenue increases.
Cost of hardware and other revenues. Costs of hardware and other revenues
decreased by $828,000 or 45%$71,000 and $899,000, respectively, for the three and six month
periods, which is consistent with hardware and other revenue decreases.
GROSS MARGIN
GrossFor the three and six months ended June 30, 2002, our overall gross margin
increased to 34%35% from 33% and 32% compared tofor the first quartersame periods of 2001.2001,
respectively. This increase is mainly due to higher software license sales.sales
and maintenance revenues. Software license revenue has lower costs
associated with it than other revenues such as professional services maintenance and
hardware. In addition, utilization of our personnel that provide services
and support has improved, which has increased our overall gross margin.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
Selling, general and administrative expenses, or SG&A, increased $440,000$974,000,
or 6%.13%, and $1.4 million, or 9%, for the three and six months ended June 30,
2002, respectively. For the second quarter of 2002, SG&A as a percent of
revenue remained constant at 28%increased to 26% from 25% for both the first quartersame prior year period. For the
six months ended June 30, 2002, SG&A as a percent of 2002revenue increased to
27% from 26% for the same period of 2001. The increase in SG&A is related
primarily to higher costs related to sales commissions, costs related to
marketing our new Odyssey Case Management software system, such as additions
of marketing personnel and 2001.travel expenses, increases in health and other
insurance expenses, and HTE matters.
AMORTIZATION OF ACQUISITION INTANGIBLES
Prior year amortization expense included amortization of goodwill and
workforce. Effective January 1, 2002, we adopted SFAS No. 142, Goodwill and
Other Intangible Assets. As a result of adopting SFAS No. 142, we ceased
amortizing goodwill and workforce after December 31, 2001. Amortization
expense for goodwill and workforce charged to the statement of operations
for the three and six months ended March 31,June 30, 2001 was $910,000.$894,000 and $1.8
million, respectively. The remaining amortization consists of those costs
allocated to our customer base and acquisition date software. See further
discussion of the effect of adopting SFAS No. 142 in Note 108 to our condensed
consolidated financial statements.
RECOVERY OF CERTAIN ACQUISITION COSTS PREVIOUSLY EXPENSED
In March 1999, we entered into a merger agreement in which we considered
acquiring all of the outstanding common stock of CPS Systems, Inc., or CPS.
Under the agreement, we provided CPS with bridge financing in the form of
notes secured by a second lien on substantially all of the assets of CPS. In
January 2000, CPS filed a voluntary petition for relief under Chapter 11 of
the United States Bankruptcy Code. In March 2000, the bankruptcy court
conducted a public auction of the assets of CPS. The aggregate bridge
financings and related accrued interest receivable and other costs amounting
to $1.9 million were expensed in the 1999 consolidated financial statements.
In 2001 we received cash of approximately $235,000 through CPS bankruptcy
proceedings in connection with the notes.
INTEREST INCOME (EXPENSE)EXPENSE (INCOME)
Our cash balances have increased significantly compared to the first quarter ofthree and six
months ended June 30, 2001 due to cash generated from operations and disposalsthe
proceeds from the sale of certain discontinued businesses in 2001.businesses. As a result, we
had net interest incomeexpense of $5,000 for the firstsecond quarter of 2002 ascompared
to $121,000 for the same period in 2001. For the six months ended June 30,
2002, we had interest income of $32,000, compared to interest expense inof
$282,000 for the first quarter of 2001.same prior year period. In addition, in the first quarter ofthree and six
months ended June 30, 2002, we capitalized $69,000$71,000 and $140,000,
respectively, of interest costs related to internally developedcapitalized software projects.development
costs.
15
INCOME TAX PROVISION
We had an effective income tax rate of 39% for the three and six months
ended June 30, 2002. For the three months ended June 30, 2001, we had an
effective income tax rate of 50%. For the six months ended June 30, 2001, we
had a loss from continuing operations before income taxes of $112,000 and an
income tax provision of $30,000. Our effective income tax rate of 38.7% in the first quarter of 2002 exceeded the
federal statutory rate of 35% due primarily to the net effect of state
income taxes and items that are non-deductible for federal income tax
purposes.
DISCONTINUED OPERATIONS
Discontinued operations include the operating results of the information and
property records services segment forin which our Board of Directors approved a
formal plan of disposal in December 2000. Discontinued operations also
include the results of two non-operating subsidiaries relating to a formerly
owned subsidiary that we sold in December 1995. The business units within
the information and property records services segment were sold in 2000 and
2001. One of the business units previously included in the information and
property records services segment was sold in May 2001 for $575,000 cash,
approximately 60,000 shares of Tyler stock, a promissory note of $750,000 at
9% interest and other contingent consideration. In 2002, the buyer of this
business unit requested to renegotiate the $750,000 promissory note and the
contingent consideration. As a result of this renegotiation in March 2002,
we received additional cash of approximately $800,000 and a subordinated
note receivable amounting to $200,000, to fully settle the promissory note
and other contingent consideration in connection with this previous sale.
The subordinated note is payable in 16 equal quarterly principal payments
with interest at a rate of 6%. Because the subordinated note receivable is
highly dependent upon future operations of the buyer, we are recording its
value when the cash is received which is our historical practice. During the
three months ended June 30, 2002, we received payments of $15,000 on the
note. Since the original $750,000 promissory note was not credited to income
when itthe note was initially received, the cash proceeds from the accelerated
promissory note repayment resulted in a gain on the disposal of discontinued
operations, net of income taxes. However, this net gain was offset in the
first quarter of 2002 due to a similar increase in the loss 15
reserve. This
increase can be attributed to the inherent uncertainties associated with the
value of the remaining assets of our discontinued businesses primarily consisting of a building held for sale in Austin, Texas and the
ultimate settlement obligations of the outstanding liabilities including certain
equipment and
facility lease obligations and the bankruptcy filing of Swan Transportation
Company (See Note 3 - Commitments and Contingencies). In our opinion and
based upon information available at this time, no material adverse
adjustment is anticipated to this loss reserve and we believe the loss
reserve remains adequate.
Two of our non-operating subsidiaries are involved in various claims for
work-related injuries and physical conditions relating to a formerly-owned
subsidiary that we sold in 1995. For the three and six months ended March 31,June 30,
2001, the
Companywe expensed and included in discontinued operations $22,000$1,000 (net of
taxes of $-0-) and $15,000 (net of taxes of $8,000), respectively, for trial
and related costs (See Note 3 - CommitmentCommitments and Contingencies to the condensed consolidating financial statements)Contingencies).
LIQUIDITY AND CAPITAL RESOURCES
On March 5, 2002, we entered into a new $10.0 million revolving credit
agreement with a bank.
The credit agreementbank, which matures January 1, 2005, and we are able to borrow up to
$10.0 million.2005. Our borrowings are
limited to 80% of eligible accounts receivable. Thereceivable and interest rate is charged at
either the prime rate or at the London Interbank Offered Rate plus a margin
of 3%. The credit agreement is secured by our personal property and the
common stock of our operating subsidiaries. The credit agreement is also
guaranteed by our operating subsidiaries. In addition, we must maintain
certain financial ratios and other financial conditions and cannot make
certain investments, advances, cash dividends or loans.
During the first quartersix months of 2002, our bank issued letters of credit
totaling $2.9$3.3 million under our credit agreement to secure performance bonds
required by some of our customer contracts. Our borrowing base under the
credit agreement is limited by the amount of eligible receivables and was
reduced by the letters of credit at March 31,June 30, 2002. At March 31,June 30, 2002, we had
no outstanding bank borrowings under the credit agreement and had an
available borrowing base of $6.8$5.2 million.
At March 31,June 30, 2002, our capitalization was made upconsisted of $3.0 million of long-term
obligations (including the current portion of that debt) and $114.6$116.0 million
of shareholders' equity. Our total debt-to-capital ratio (total debt divided
by the sum of total shareholders' equity and total debt) was 2.5%3% at March 31,June 30,
2002.
During the first quartersix months of 2002, we made capital expenditures of $2.2$5.0
million, including $1.5$3.6 million for software development costs. The other
expenditures related to computer equipment and expansions related to
internal growth. Capital expenditures were funded from cash generated from
operations.
16
In March 2002, we received cash of approximately $800,000 and a $200,000
subordinated note receivable to fully settle an existing promissory note and
other contingent consideration in connection with the sale in May of 2001 of
a business unit previously included in the information and property records
services segment.
In June 2002, we sold the building of a business unit previously included in
the information and property records service segment. Net proceeds from the
sale totaled approximately $961,000.
During the first quartersix months ended June 30, 2002, we received $1.4$1.6 million from the
purchase of 371,000478,000 treasury shares upon the exercise of stock options under
our employee stock option plan.
Absent acquisitions, we believe our current cash balances and expected
future cash flows from operations will be sufficient to meet our anticipated
cash needs for working capital, capital expenditures and other activities
through the next twelve months. If operating cash flows are not sufficient
to meet our needs, we may borrow under our credit agreement.
1617
Part II. OTHER INFORMATION
Item 1. Legal Proceedings
For a discussion of legal proceedings see Part I, Item 1. "Financial
Statements - Notes to Condensed Consolidated Financial Statements -
Commitments"Commitments and Contingencies" on page 6, of this document.
Item 4. Submission of Matters to a Vote of Security Holders
We held our annual meeting of stockholders on May 9, 2002. The results of
the matters voted on at the meeting are as follows:
(a) With respect to the election of directors, our shares were voted as
follows:
NOMINEE NUMBER OF VOTES FOR NUMBER OF VOTES WITHHELD
------- -------------------- -------------------------
John S. Marr 39,066,464 3,335,325
Ben T. Morris 40,464,921 1,936,868
G. Stuart Reeves 40,464,578 1,937,211
Michael D. Richards 39,041,809 3,359,980
Glenn A. Smith 40,465,721 1,936,068
John D. Woolf 40,417,066 1,984,723
John M. Yeaman 39,064,921 3,336,868
(b) With respect to amendments to our stock option plan to increase the
number of shares of our stock that may be issued under the stock
option plan from 5,500,000 shares to 6,500,000 shares. The votes
were as follows:
FOR AGAINST ABSTAIN
--- ------- -------
38,679,118 3,036,266 686,405
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
None.
(b) Reports on Form 8-K
Form 8-K Item
Reported Date Reported Exhibits Filed
-
------------- -------- --------------
4/9/02 5 News release issued by Tyler Technologies, Inc.
dated April 8, 2002, announcing election of G. Stuart
Reeves as Chairman of the Board.
Item 3 of Part I and Items 2, 3, 4, and 5 of Part II were not applicable and have
been omitted.
1718
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
TYLER TECHNOLOGIES, INC.
Dated: August 5, 2002 By: /s/ Theodore L. Bathurst
--------------------------------------------------------------------------------
Theodore L. Bathurst Vice President and
Chief Financial Officer (principal financial
officer and an authorized signatory)
Dated: August 5, 2002 By: /s/ Terri L. Alford
--------------------------------------------------------------------------------
Terri L. Alford
Controller
(principal accounting officer and
an authorized signatory)
Date: May 8,CERTIFICATION PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Quarterly Report of Tyler Technologies, Inc. (the
"Company") on Form 10-Q for the quarterly period ended June 30, 2002, as filed
with the Securities and Exchange Commission on the date hereof (the "Report"),
the undersigned, in the capacities and dates indicated below, hereby certify
pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002, that: (1) The Report fully complies with the
requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934;
and (2) The information contained in the Report fairly presents, in all
material respects, the financial condition and results of operations of the
Company.
Dated: August 5, 2002 By: /s/ JOHN M. YEAMAN
-----------------------------------------
John M. Yeaman
Chief Executive Officer
Dated: August 5, 2002 By: /s/ THEODORE L. BATHURST
-----------------------------------------
Theodore L. Bathurst
Vice President and Chief Financial Officer
19