================================================================================UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES AND EXCHANGE ACT OF 1934
| | |
| þ | | ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES AND EXCHANGE ACT OF 1934 |
For the Fiscal Year Ended December 31, 2002
2005
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
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| | |
| o | | 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
(Exact name of registrant as specified in its charter)
DELAWARE 75-2303920
(State or other jurisdiction (I.R.S. employer
of incorporation or identification no.)
organization)
5949 SHERRY LANE, SUITE 1400 75225
DALLAS, TEXAS (Zip code)
(Address of principal
executive offices)
Registrant's
| | |
| DELAWARE | | 75-2303920 |
| (State or other jurisdiction | | (I.R.S. employer |
| of incorporation or | | identification no.) |
| organization) | | |
| | |
| 5949 Sherry Lane, Suite 1400 | | 75225 |
| Dallas, Texas | | (Zip code) |
| (Address of principal | | |
| executive offices) | | |
Registrant’s telephone number, including area code:(972) 713-3700
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Securities registered pursuant to Section 12(b) of the Act:
NAME OF EACH EXCHANGE
TITLE OF EACH CLASS ON WHICH REGISTERED
- -------------------------------- -------------------------
COMMON STOCK, $0.01 PAR VALUE NEW YORK STOCK EXCHANGE
| | |
| | Name of each exchange |
| Title of each class | | on which registered |
| | |
| COMMON STOCK, $0.01 PAR VALUE | | NEW YORK STOCK EXCHANGE |
Securities registered pursuant to Section 12(g) of the Act:
NONE
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INDICATE BY CHECK MARK WHETHER THE REGISTRANT
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. YESþ NOo
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Act. YESo NOþ
Indicate by check mark whether the registrant (1) HAS FILED ALL REPORTS
REQUIRED TO BE FILED BY SECTIONhas filed all reports required to be filed by Section 13 ORor 15(d) OF THE SECURITIES EXCHANGE ACT OFof the Securities Exchange Act of 1934 DURING THE PRECEDINGduring the preceding 12 MONTHS (OR FOR SUCH SHORTER PERIOD THAT THE
REGISTRANT WAS REQUIRED TO FILE SUCH REPORTS)months (or for such shorter period that the registrant was required to file such reports), ANDand (2) HAS BEEN SUBJECT TO SUCH
FILING REQUIREMENTS FOR THE PASThas been subject to such filing requirements for the past 90 DAYS.days. YES [X]þ NO [ ]
INDICATE BY CHECK MARK IF DISCLOSURE OF DELINQUENT FILERS PURSUANT TO ITEMo
Indicate by check mark if disclosure of delinquent filer pursuant to Item 405 OF REGULATIONof Regulation S-K IS NOT CONTAINED HEREIN, AND WILL NOT BE CONTAINED, TO THE
BEST OF REGISTRANT'S KNOWLEDGE, IN DEFINITIVE PROXY OR INFORMATION STATEMENTS
INCORPORATED BY REFERENCE IN PARTis not contained herein, and will not be contained, to the best of the registrant’s knowledge, in definitive proxy or information statements incorporate by reference in Part III OF THE FORMof the Form 10-K OR ANY AMENDMENT TO THIS
FORMor any amendment to the Form 10-K. YES [X]þ NO [ ]
THE AGGREGATE MARKET VALUE OF THE VOTING STOCK HELD BY NON-AFFILIATES OF THE
REGISTRANT ON FEBRUARY 25, 2003 WAS $166,250,000.
THE NUMBER OF SHARES OF COMMON STOCK OF THE REGISTRANT OUTSTANDING ON
FEBRUARY 25, 2003 WAS 42,737,736.
o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filero Accelerated filerþ Non-accelerated filero
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act.) YESo NOþ
The aggregate market value of the voting stock held by non-affiliates of the registrant was $274,178,000 based on the reported last sale price of common stock on June 30, 2005, which is the last business day of the registrant’s most recently completed second fiscal quarter.
The number of shares of common stock of the registrant outstanding on February 27, 2006 was 39,176,437
DOCUMENTS INCORPORATED BY REFERENCE
CERTAIN INFORMATION REQUIRED BY PART
Certain information required by Part III
OF THIS ANNUAL REPORT IS
INCORPORATED BY REFERENCE FROM THE REGISTRANT'S DEFINITIVE PROXY STATEMENT FOR
ITS ANNUAL MEETING OF STOCKHOLDERS TO BE HELD ONof this annual report is incorporated by reference from the registrant’s definitive proxy statement for its annual meeting of stockholders to be held on May
1, 2003.
================================================================================
18, 2006.
TYLER TECHNOLOGIES, INC.
FORM 10-K
TABLE OF CONTENTS
2
PART I
ITEM 1. BUSINESS.
DESCRIPTION OF BUSINESS
Tyler Technologies, Inc. ("Tyler"(“Tyler”) is a leadingmajor provider of integrated information management solutions and services for local governments. We partner with clients to make local government more accessible to the public, more responsive to the needs of citizens and more efficient in its operations. We have a broad line of software products and services to address the information technology ("IT"(“IT”) needs of virtually every major area of operation for cities, counties, schools and other local government entities. Most of our customers have our software installed in-house. For customers who prefer not to physically acquire the software and hardware, we provide outsourced hosting for some of our applications at one of our data centers through an applications service provider ("ASP"(“ASP”) arrangement. We provide professional IT services to our customers, including software and hardware installation, data conversion, training and, at times, product modifications. In addition, we are the nation'snation’s largest provider of outsourced property appraisal services for taxing jurisdictions. We also provide continuing customer support services to ensure proper product performance and reliability, which provides us with long-term customer relationships and a significant base of recurring maintenance revenue.
Tyler was founded in 1966. Prior to early 1998, we operated as a diversified industrial conglomerate, with diversified operations in various industrial, retail and distribution businesses, all of which have been sold.sold or otherwise disposed. In 1997, we embarked on a multi-phase growth plan focused on serving the specialized information management needs of local governments nationwide. In 1998 and 1999, we made a series of strategic acquisitions of leading companies in the local government IT market.
In addition to our continuing operations in the software and services business described above, we also operated from 1998 through 2000 a business segment focused on providing outsourced property records management for local governments and reselling related data. In late 2000, we decided to dispose of the information and property records services segment in order to strengthen our balance sheet and allow us to focus our resources on the segment of business that we believe offers the greatest growth and profit opportunities. We expect to continue to capitalize on these opportunities by leveraging our large national client base, our long-term relationships with local government customers, and our deep domain expertise in local government operations through the development of state-of-the-art technologies and new nationally branded applications solutions. We began in 2000 and are continuing to develop ahave developed new generation ofsoftware products, some of our software productswhich are based on n-tier architecture, SQL-compliant databases, browser compatibility and component-based technology.
Our historical revenues from continuing operations have grown from $23.4 million
in 1998 to $133.9 million in 2002. In addition to growth through acquisitions,
our business units have experienced significant internal growth during this
period. On a pro forma basis, revenues from continuing operations have grown
from $83.7 million in 1998 to $133.9 million in 2002.
MARKET OVERVIEW
The state local and municipallocal government market is one of the largest and most decentralized IT markets in the country, consisting of all 50 states, approximately 3,2003,100 counties, 36,000 cities and over 40,000 municipalitiestowns and other agencies.14,500 school districts. This market is also comprised of hundreds of various governmentapproximately 35,000 special districts and other agencies, each with specialized delegated responsibilities and unique information management requirements.
Traditionally, local government bodies and agencies performed state-mandated duties, including property assessment, record keeping, road maintenance, law enforcement, administration of election and judicial functions, and the provision of welfare assistance. Today, a host of emerging and urgent issues are confronting local governments, each of which demands a service response. These areas include criminal justice and corrections, administration and finance, public safety, health and human services, and public works. Transfers of responsibility from the federal and state governments to county and municipal governments and agencies in these and other areas also place additional service and financial requirements on these local government units. In addition, constituents of local governments are increasingly demanding improved service and better access to information from public entities. As a result, local governments recognize the increasing value of information management systems and services to, among other things, improve revenue collection, provide increased access to information, and streamline delivery of services to their constituents. Local government bodies are now recognizing that
"e-government"“e-government” is an additional responsibility for community development. From integrated tax systems to integrated civil and criminal justice information systems, many counties and cities have benefited significantly from the implementation of jurisdiction-wide systems that allow different agencies or government offices to share data
3
and provide a more comprehensive approach to information management. Many city and county governmental agencies also have unique individual information management requirements, which must be tailored to the specific functions of each particular office.3
Many local governments also have difficulties attracting and retaining the staff necessary to support their IT functions. As a result, they seek to establish long-term relationships with reliable providers of high quality IT products and services such as Tyler.
Although local governments generally face budgetary constraints in their operations, thetheir primary revenue source of local government issources are usually property tax,taxes, and to a lesser extent, utility fees, which tendstend to be a relatively stable source of revenue.stable. In addition, the acquisition of new technology typically enables local governmentgovernments to operate more efficiently, and often provides a measurable return on investment that justifies the purchase of software and related services.
Gartner Dataquest currently estimates that state and local government spending for information technology productssoftware and IT services will grow from $44$44.2 billion in 20022005 to $56$55.0 billion in 2005.2008, with local government accounting for $21.7 billion of IT spending in 2005 and $26.9 billion in 2008. The external services and software segments of the market, in which we arewhere our business is primarily focused, are expected to be the most rapidly growing areas of the local government IT market.
market, expanding from $10.9 billion in 2005 to $13.5 billion in 2008.
PRODUCTS AND SERVICES
We provide a comprehensive and flexible suite of products and services that address the information technology needs of cities, counties, schools and other local government entities. We derive our revenues from four primary sources:
- software licensing;
- software services;
- appraisal services; and
- maintenance and support.
| • | | sales of software licenses; |
|
| • | | software services; |
|
| • | | maintenance and support; and |
|
| • | | appraisal services. |
We design, develop and market a broad range of software products to serve mission-critical "back-office"“back-office” functions of local governments. Our software applications are designed primarily for use on hardware supporting UNIX/NT operating systems. Many of our software applications include Internet-accessible solutions that allow for real-time public access to a variety of information or that allow the public to transact business with local governments via the Internet. Our software products and services are generally grouped in four major product areas:
- Financial and City Solutions;
- Justice and Courts;
- Property Appraisal and Tax; and
- Recording.
| • | | Financials; |
|
| • | | Courts and Justice; |
|
| • | | Property Appraisal and Tax; and |
|
| • | | Document Management. |
Each of our core software systems consists of several fully integrated application modules. For customers who acquire the software for use in-house, we generally license our systems under standard license agreements whichthat provide the customer with a fully-paid,fully paid, nonexclusive, nontransferable right to use the software. In some of the product areas, such as financials and property tax,appraisal, we offer multiple solutions designed to meet the needs of different sized governments.
We also offer certain software products on an outsourced basis for customers who do not wish to maintain, update and operate these systems or to make large up-front capital expenditures to implement these advanced technologies. For these customers, we either host the applications and data at one of our data centers, or maintain the hardware and software at the client'sclient’s site. Customers typically pay monthly fees under multi-year contracts for these services.
Historically, we have had a
higher concentrationgreater proportion of
salesour annual revenues in the second half of our fiscal year due to governmental budget and spending
tendencies.
4
Financialcycles and City Solutions
the timing of system implementations for customers desiring to “go live” at the beginning of the calendar year.4
A description of our suite of products and services follows:
Software Licensing
Financials
Our Financial and City Solutionsfinancials products are ERP (Enterprise Resource Planning) systems for local governments, which integrate information across all facets of a client organization. Our financial products include modular fund accounting systems that can be tailored to meet the needs of virtually any government agency or not-for-profit entity. Our financial systems include modules for general ledger, budget preparation, fixed assets, purchasing,requisitions, purchase orders, bid management, accounts payable, contract management, accounts receivable, investment management, inventory control, project and grant accounting, work orders, job costing, GASB 34 reporting, payroll and human resources. All of our financial systems are intended to conform to government auditing and financial reporting requirements and generally accepted accounting principles.
We sell utility billing systems that support the billing and collection of metered and non-metered services, along with multiple billing cycles. Our Web-enabled utility billing solutions allow customers to access information online such as average consumption and transaction history. In addition, our systems can accept secured Internet payments via credit cards and checks.
We also offer specialized products that automate numerous city functions, including municipal courts, parking tickets, equipment and project costing, inventory,animal licenses, business licenses, permits and inspections, code enforcement, citizen complaint tracking, ambulance billing, fleet maintenance, and cemetery records management.
In January, 2006, we acquired two companies whose products will be included within our Financials division. MazikUSA, Inc. offers a Student Information System for K-12 schools, which manages such applications as scheduling, grades and attendance. TACS, Inc. offers software products to manage public sector pension funds. These acquisitions added products that were not previously a part of Tyler’s portfolio.
Tyler’s financial products include Web components that enhance local governments’ service capabilities by facilitating online access to information for both employees and citizens and enabling online transactions.
Courts and Justice and Courts
We offer a complete, integrated suite of products designed to automate, track and manage the law enforcement and judicial process, from the initiation of incidents in computer-aided dispatch/emergency 911 systems through the process of arrest, court appearances and final disposition to probation. These applications may be installed on a stand-alone basis or integrated with our other products to eliminate duplicate entries and improve efficiency.
Our Web-enabled court systems are designed to automate the tracking and management of information involved in criminal and civil court cases, including municipal, family and probate courts. These applications track the status of criminal and civil cases, process fines and fees and generate the specialized judgment and sentencing documents, citations, notices and forms required in court proceedings. Additional judicial applications automate the management of court calendars, coordinate judge'sjudge’s schedules, generate court dockets, manage justice of the peace processes and automate district attorney and prosecutor functions. Related products include jury selection, "hot"“hot” check processing, and adult and juvenile probation management applications. Our courtroom technologies allow judges to review cases, calendars, and to scan documents and mug shots using a Web browser. Additionally, document-imaging options include the ability to scan, store, retrieve and archive a variety of criminal and civil case-related documents.
Our law enforcement systems automate police and sheriff functions from dispatch and records management through booking and jail management. Searching, reporting and tracking features are integrated, allowing reliable, up-to-date access to current arrest and incarceration data. The systems also provide warrant checks for visitors or book-ins, inmate classification and risk assessment, commissary, property and medical processing, and automation of statistics and state and federal reporting. Our computer-aided dispatch/emergency E-911911 system tracks calls and the availability of emergency response vehicles, interfaces with local and state searches, and generally assists dispatchers in processing emergency situations. The law enforcement and jail management systems are fully integrated with the suite of court products that managemanages the judicial process.
Our court and law enforcement systems allow the public to access, via the Internet, a variety of information, including criminal and civil court records, jail booking and release information, bond and bondsmen information, and court calendars and dockets. In
5
addition, our systems allow cities and counties to accept payments for traffic and parking tickets over the Internet, with a seamless and automatic interface to back-office justice and financial systems.
We recently
In 2002 we introduced Odyssey, an all-new unified court case management system which is slatedthat became available for general release in mid-2003.the third quarter of 2003. Odyssey uses enhanced Web-browser concepts to render a unique user interface. It incorporates the
latestcurrent technology -— XML, n-tier architecture, component-based design, and an ultra-thin client footprint -— to maximize the value of a court'scourt’s investment in new software. We believe that some of Odyssey'sOdyssey’s design concepts, including embedded imaging functionality, COM+ objects to enable local customization, and an architecture that enables multiple deployment options, are firstunique in the court automation marketplace. Odyssey iswas the first of our new generation of n-tier, browser-based products and our initial marketing efforts for the new court case
management system have beenOdyssey were focused on states and large cities and counties.
Property Appraisal and Tax
We provide systems
and software that automate the appraisal and assessment of real and personal property, including record keeping, mass appraisal, inquiry and protest tracking, appraisal and tax roll generation, tax statement processing, and electronic state-level reporting.
5
These systems are image- and video-enabled to facilitate the storage of and access to the many property-related documents and for the online storage of digital photographs of properties for use in defending values in protest situations. Other related tax applications are available for agencies that bill and collect taxes, including cities, counties, school tax offices, and special taxing and collection agencies. These systems support billing, collections, lock box operations, mortgage company electronic payments, and various reporting requirements.We are currently developinghave also developed a new appraisal system, Orion, based on the same technology platform that we used for Odyssey. We expect to introduce Orion, which became available for general release during 2004, will ultimately replace several legacy products, during early 2003.
Recording
UNIX based products. Orion provides an intuitive, browser-based interface, integration for Geographic Information System applications, valuation, assessment administration and tax billing and collection.
Document Management
We offer a number of specialized applications designed to help county governments enhance and automate courthouse operations. These systems record and index information for the many documents maintained at the courthouse, such as deeds, mortgages, liens, UCC financing statements and vital records (birth, death and marriage certificates). We also offer applications to automate such
functions as child support tracking, motor vehicle registration, voter
registration and election result tabulation.
Software Services
We provide a variety of professional IT services to customers who utilize our software products. Virtually all of our customers contract with us for installation, training, and data conversion services in connection with their purchase of Tyler’s software products. The complete implementation process for a typical system includes planning, design, data conversion, set-up and testing. At the culmination of the implementation process, an installation team travels to the customer'scustomer’s facility to ensure the smooth transfer of data to the new system. Installation fees are charged separately to customers on either a fixed-fee or hourly charge basis, depending on the contract, with full pass-through to customers of travel and other out-of-pocket expenses.
Both in connection with the installation of new systems and on an ongoing basis, we provide extensive training services and programs related to our products and services. Training can be provided in our training centers, onsite at customers'customers’ locations, or at meetings and conferences, and can be customized to meet customers'customers’ requirements. The vast majority of our customers contract with us for training services, both to improve their employees'employees’ proficiency and productivity and to fully utilize the functionality of our systems. Training services are generally billed on an hourly basis, along with travel and other expenses.
Maintenance and Support
Following the implementation of our software systems, we provide ongoing software support services to assist our customers in operating the systems and to periodically update the software. Support is provided over the phone to customers through help desks staffed by our customer support representatives. For more complicated issues, our staff, with the customers’ permission, can log on to customers’ systems remotely. We maintain our customers’ software largely through releases that contain improvements and incremental additions, along with updates necessary because of legislative or regulatory changes.
6
Virtually all of our software customers contract with us for maintenance and support, which provides us with a significant source of recurring revenue. We generally provide maintenance and support under annual contracts, with a typical fee based on a percentage of the software product’s license fee. These fees can be increased annually and may also increase as new license fees increase. Maintenance and support fees are generally paid in advance for the entire maintenance contract period. Most maintenance contracts automatically renew unless the customer or Tyler gives notice of termination prior to expiration. Similar support is provided to our ASP customers, and is included in their overall monthly fees.
Appraisal Services
We are the nation'snation’s largest provider of real property appraisal outsourcing services for local government taxing authorities. These services include:
- the physical inspection of all commercial and residential
properties;
- data collection and processing;
- sophisticated computer analyses for property valuation;
- preparation of tax rolls;
- community education regarding the assessment process; and
- arbitration between taxpayers and the assessing jurisdiction.
| • | | the physical inspection of commercial and residential properties; |
|
| • | | data collection and processing; |
|
| • | | sophisticated computer analyses for property valuation; |
|
| • | | preparation of tax rolls; |
|
| • | | community education regarding the assessment process; and |
|
| • | | arbitration between taxpayers and the assessing jurisdiction. |
Local government taxing entities normally reappraise real properties from time to time to update values for tax assessment purposes and to maintain equity in the taxing process. In some jurisdictions, reassessment cycles are mandated by law; in others, they are discretionary. While some taxing jurisdictions perform reappraisals in-house, many local governments outsource this function because of its cyclical nature and because of the specialized knowledge and expertise requirements associated with it. Our business unit that provides appraisal outsourcing services to local governments has been in this business since 1938.
In some instances, we also sell property tax and/or appraisal software products in connection with appraisal outsourcing
contracts,projects, while other customers may only engage us to provide appraisal services. Appraisal outsourcing services are somewhat seasonal in nature to the extent that winter weather conditions reduce the productivity of data collection activities in connection with those projects.
6
MaintenanceIn the second quarter of 2005, we reorganized our appraisal services business to better align the organization and Support
Following the implementation of our software systems, we provide ongoing
software support services to assist our customers in operating the systems and
to periodically update the software. Support is provided over the phone to
customers through help desks staffed by our customer support representatives.
For more complicated issues, our staff,cost structure with the customer's permission, can log
on to customers' systems remotely. We maintain our customers' software largely
through releases that contain improvementsexpected revenue levels. As part of the reorganization, we eliminated approximately 120 positions and incremental additions, along with
updates necessary becauserecorded a pretax charge of legislative or regulatory changes.
Virtually all of our software customers contract$1.3 million for maintenance and support
from us, which provides a significant source of recurring revenue. We generally
provide maintenance and support under annual contracts, with a typical fee based
on the software product's license fee. These fees can be increased annually and
may also increase as new license fees increase. Maintenance and support fees are
generally paid in advance for the entire maintenance contract period. Most
maintenance contracts automatically renew unless we or the customer gives notice
of termination prior to expiration. Similar support is provided to our ASP
customers, and is included in their monthly overall fees.
related employee severance costs.
STRATEGY
Our objective is to grow our revenue and earnings internally, supplemented by focused strategic acquisitions. The key components of our business strategy are to:
- Provide high quality, value-added products and services to our
clients. We compete on the basis of, among other things,
delivering to customers our deep domain expertise in local
government operations through the highest value products and
services in the market. We believe we have achieved a
reputation as a premium product and service provider to the
local government market.
- Continue to expand our product and service offerings. While we
already have what we believe to be the broadest line of
software products for local governments, we continually
upgrade our core software applications and expand our
complementary product and service offerings to respond to
technological advancements and the changing needs of our
clients. For example, we offer solutions that allow the public
to access data and conduct transactions with local
governments, such as paying traffic tickets, property taxes
and utility bills, via the Internet. We believe that the
addition of such features enhances the market appeal of our
core products. In 2001, we also began offering certain of our
software products in an ASP environment, a delivery model that
we believe will have increasing appeal to local governments
and that will be expanded to include more applications. We
have also increased our offerings of consulting and business
process reengineering services.
- Leverage a core technology framework across multiple product
development efforts. We have developed a core technology
framework upon which we intend to develop a new generation of
a number of products. By leveraging the core framework, which
is based on an n-tier, browser-based architecture, for the
development of multiple products, we believe we can develop
new-generation products more efficiently, and at a lower total
cost. In addition, utilizing a core framework is also expected
to help us bring new products to market more rapidly. By
having more products built on a common technology framework,
we expect to enhance our cross-selling opportunities and be
able to provide maintenance and other services more
efficiently.
- Expand our customer base. We seek to establish long-term
relationships with new customers primarily through our sales
and marketing efforts. While we currently have customers in 49
states, Canada and Puerto Rico, not all of our product lines
have nationwide geographic penetration. We intend to expand
into new geographic markets by adding sales staff and
targeting marketing efforts by product in those areas. We also
intend to continue to expand our customer base to include
larger governments. While our traditional market focus has
primarily been on small and mid-sized governments, our
increased size and market presence, together with the
technological advances and improved scalability of certain of
our products, are allowing us to achieve success in selling to
larger customers.
- Expand our existing customer relationships. Our existing
customer base of nearly 6,000 local government offices offers
significant opportunities for additional sales of IT products
and services that we currently offer, but that existing
customers do not fully utilize. Add-on sales to existing
customers typically involve lower sales and marketing expenses
than sales to new customers.
| • | | Provide high quality, value–added products and services to our clients. We compete on the basis of, among other things, delivering to customers our deep domain expertise in local government operations through the highest value products and services in the market. We believe we have achieved a reputation as a premium product and service provider to the local government market. |
|
| • | | Continue to expand our product and service offerings. While we already have what we believe to be the broadest line of software products for local governments, we continually upgrade our core software applications and expand our complementary product and service offerings to respond to technological advancements and the changing needs of our clients. For example, we offer solutions that allow the public to access data and conduct transactions with local governments, such as paying traffic tickets, property taxes and utility bills, via the Internet. We believe that the addition of such features enhance the market appeal of our core products. Since 2001, we have also offered certain of our software products in an ASP environment, a delivery model that we believe will, over time, have increasing appeal to local governments and will be expanded to include more applications. We have also increased our offerings of consulting and business process reengineering services. |
7
- Grow recurring revenue. We have a large recurring revenue base
from maintenance and support, with an annual run rate in
excess of $40 million. We have historically experienced very
low customer turnover (less than 1% annually for our major
software business units) and recurring revenues continue to
grow as the installed customer base increases. In addition,
since the beginning of 2001, we have established a growing
recurring revenue stream from ASP hosting and other similar
services.
- Maximize economies of scale and take advantage of financial
leverage in our business. We seek to develop and maintain a
large client base to create economies of scale, enabling us to
provide value-added products and services to our customers
while expanding our operating margins. Because we sell
primarily "off-the-shelf" software, increased sales of the
same products result in incrementally higher gross margins. In
addition, we believe that we have a marketing and
administrative infrastructure in place that we can leverage to
accommodate significant growth without proportionately
increasing selling, general and administrative expenses.
- Attract and retain highly qualified employees. We believe that
the depth and quality of our operating management and staff is
one of our significant strengths, and that the ability to
retain such employees is crucial to our continued growth and
success. We believe that our stable management team, financial
strength and growth opportunities, as well as our leadership
position in the local government market, enhance our
attractiveness as an employer for highly skilled employees.
- Pursue selected strategic acquisitions. While we expect to
grow primarily internally, we may from time to time
selectively pursue strategic acquisitions that provide us with
one or more of the following:
- products and services to complement our existing
offerings;
- entry into new markets related to local governments;
and
- new customers and/or geographic expansion.
| • | | Leverage a core technology framework across multiple product development efforts. We have developed a core technology framework upon which we have developed or are developing a new generation of a number of products. By leveraging the core framework, which is based on an n-tier, browser-based architecture, for the development of multiple products, we believe we can develop new-generation products more efficiently, and at a lower total cost. In addition, utilizing a core framework is also expected to help us bring new products to market more rapidly. By having more products built on a common technology framework, we expect to enhance our cross-selling opportunities and be able to provide maintenance and other services more efficiently. |
|
| • | | Expand our customer base. We seek to establish long-term relationships with new customers primarily through our sales and marketing efforts. While we currently have customers in all 50 states, Canada, Puerto Rico, and the United Kingdom, not all of our product lines have nationwide geographic penetration. We intend to continue to expand into new geographic markets by adding sales staff and targeting marketing efforts by product in those areas. We also intend to continue to expand our customer base to include larger governments. While our traditional market focus has primarily been on small and mid-sized governments, our increased size and market presence, together with the technological advances and improved scalability of certain of our products, are allowing us to achieve success in selling to larger customers. |
|
| • | | Expand our existing customer relationships. Our existing customer base offers significant opportunities for additional sales of IT products and services that we currently offer, but that existing customers do not fully utilize. Add-on sales to existing customers typically involve lower sales and marketing expenses than sales to new customers. |
|
| • | | Grow recurring revenue. We have a large recurring revenue base from maintenance and support, with an annual run rate of $65 million. We have historically experienced very low customer turnover (less than 2% annually for our major software business units) and recurring revenues continue to grow as the installed customer base increases. In addition, since the beginning of 2001, we have established a growing recurring revenue stream from ASP hosting and other similar services. |
|
| • | | Maximize economies of scale and take advantage of financial leverage in our business. We seek to build and maintain a large client base to create economies of scale, enabling us to provide value-added products and services to our customers while expanding our operating margins. Because we sell primarily “off-the-shelf” software, increased sales of the same products result in incrementally higher gross margins. In addition, we believe that we have a marketing and administrative infrastructure in place that we can leverage to accommodate significant long-term growth without proportionately increasing selling, general and administrative expenses. |
|
| • | | Attract and retain highly qualified employees. We believe that the depth and quality of our operating management and staff is one of our significant strengths, and that the ability to retain such employees is crucial to our continued growth and success. We believe that our stable management team, financial strength and growth opportunities, as well as our leadership position in the local government market, enhance our attractiveness as an employer for highly skilled employees. |
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| • | | Pursue selected strategic acquisitions. While we expect to primarily grow internally, we may from time to time selectively pursue strategic acquisitions that provide us with one or more of the following: |
| q | | products and services to complement our existing offerings; |
|
| q | | entry into new markets related to local governments; and |
|
| q | | new customers and/or geographic expansion. |
When considering acquisition opportunities, we generally focus on companies with strong management teams and employee bases and excellent customer relationships. OurIn January, 2006, we acquired two companies whose products will be included within our Financials division. MazikUSA, Inc. offers a Student Information System for K-12 schools, which manages such applications as scheduling, grades and attendance. TACS, Inc. offers software products to manage public sector pension funds. These acquisitions added products that were not previously a part of Tyler’s portfolio. In December 2003, we acquired Eden Systems, Inc. (“Eden”), a provider of financial, personnel and citizen services systems for local governments. In December 2003, we also acquired certain assets of a business that provides forms software to users of some of our software products. Prior to these acquisitions, our most recent acquisition included in our continuing operations was completed in November 1999.
8
SALES, MARKETING, AND CUSTOMERS
We market our products and services through direct sales and marketing personnel located throughout the United States. Other in-house marketing staff focusfocuses on add-on sales, professional services and support.
Sales of new systems are typically generated from referrals from other governmentalgovernment offices or departments within a county or municipality, referrals from other local governments, relationships established between sales representatives and county or local officials, contacts at trade shows, direct mailings, and direct contact from prospects already familiar with us. We are active in numerous national, state, county, and local government associations, and participate in annual meetings, trade shows, and educational events.
Customers consist primarily of county and municipal agencies, school districts and other local government offices. In counties, customers include the auditor, treasurer, tax assessor/collector, county clerk, district clerk, county and district court judges, probation officers, sheriff, and county appraiser. At municipal government sites, customers include directors from various departments, including administration, finance, utilities, public works, code enforcement, personnel, purchasing, taxation, municipal court, and police. In
2002, one customer accounted for approximately 10% of our total revenues.
Contracts for software products and services are generally implemented over periods of three months to one year, with annually renewing servicemaintenance and softwaresupport update agreements thereafter. Although either the customer or we can terminate these agreements, can be terminated by
either us or the customer, historically almost all support and maintenance agreements are automatically renewed annually. Contracts for appraisal outsourcing services are generally one to three years in duration. During 2002,2005, approximately 30%38% of the Company'sour revenue was attributable to ongoing support and maintenance agreements.
COMPETITION
We compete with numerous local, regional, and national firms that provide or offer some or many of the
same products and services
provided by us.that we provide. Most of these competitors are smaller companies that may be able to offer less expensive solutions than ours.
Many of these firms operate within a specific geographic area and/or in a narrow product or service niche. We also compete with national firms, some of which have greater financial and technical resources than
us,we do, including
PeopleSoft, Inc.,
J. D. Edwards & Company,Oracle Corporation, Lawson Software, Inc.,
Maximus,SAP AG, MAXIMUS, Inc., Affiliated Computer Services, Inc.,
Tier Technologies, Inc.,
8
SunGard Data Systems, Inc., New World Systems and Manatron, Inc. In addition, we sometimes compete with consulting and systems integration firms, such as BearingPoint, Inc. and Accenture Ltd., which develop custom systems, primarily for larger governments. We also occasionally compete with central internal information service departments of county or local governments, which require us to persuade the end-user department to discontinue service by its own personnel and outsource the service to us. We compete on a variety of factors, including price, service, name recognition, reputation, technological capabilities, and the ability to modify existing products and services to accommodate the individual requirements of the customer. Our ability to offer an integrated system of applications for several offices or departments is often a competitive strength. County and localLocal governmental units often are required to seek competitive proposals.
proposals through a request for proposal process.SUPPLIERS
All computers, peripherals, printers, scanners, operating system software, office automation software, and other equipment necessary for the implementation and provision of our software systems and services are presently available from several third-party sources. Hardware is purchased on original equipment manufacturer or distributor terms at discounts from retail. We have not experienced any significant supply problems.
BACKLOG
At December 31, 2002, we2005, our estimated our sales backlog was approximately $89.1$165.4 million, compared to $96.3$142.2 million at December 31, 2001.2004. The backlog represents signed contracts thatunder which the products have not been signed but not delivered or the services have not been performed as of year-end. Approximately $79.0$130.5 million of the backlog is expected to be installed or services are expected to be performed during 2003.
2006.
INTELLECTUAL PROPERTY, PROPRIETARY RIGHTS, AND LICENSES
We regard certain features of our internal operations, software, and documentation as confidential and proprietary and rely on a combination of contractual restrictions, trade secret laws and other measures to protect our proprietary intellectual property. We generally do not rely on patents. We believe that, due to the rapid rate of technological change in the computer software industry, trade secrets and copyright protection are less significant than factors such as knowledge, ability and experience of our employees, frequent product enhancements, and timeliness and quality of support services. We typically license our software products under exclusivenon-exclusive license agreements which are generally non-transferable and have a perpetual term.
9
EMPLOYEES
At December 31, 2002,2005, we had approximately 1,2301,360 employees. Appraisal outsourcing projects are periodiccyclical in nature and can be widely dispersed geographically. We often hire temporary employees to assist in these projects whose term of employment generally ends with the project'sproject’s completion. None of our employees are represented by a labor union or are subject to collective bargaining agreements. We consider our relations with our employees to be positive.
INTERNET WEBSITE AND AVAILABILITY OF PUBLIC FILINGS
Our
We file annual, quarterly, current and other reports, proxy statements and other information with the Securities and Exchange Commission, or SEC, pursuant to the Securities Exchange Act. You may read and copy any materials we file with the SEC at the SEC’s Public Reference Room by calling the SEC at 1-800-SEC-0330. The SEC maintains an Internet site that contains reports, proxy and other information statements, and other information regarding issuers, including us, that file electronically with the SEC. The address of site is www.tylertechnologies.com.http://www.sec.gov.
We also maintain an Internet site atwww.tylerworks.com. We make available free of charge onthrough this site our Internet website, our annual reportAnnual Report on Form 10-K, quarterly
reportsQuarterly Reports on Form 10-Q, current reportsForms 4 and 5, Current Reports on Form 8-K, and amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Securities
Exchange Act of 1934 as soon as reasonably practicable after we electronically file such material with, or furnish such materialit to, the SEC. Our “Code of Business Conduct and Ethics” is also available on our Web site. We intend to satisfy the disclosure requirements regarding amendments to, or waivers from, a provision of our Code of Business Conduct and Ethics by posting such information on our Web site.
ITEM 1A. RISK FACTORS
An investment in our common stock involves a high degree of risk. Investors evaluating our company should carefully consider the factors described below and all other information contained in this Annual Report. Any of the following factors could materially harm our business, operating results, and financial condition. Additional factors and uncertainties not currently known to us or that we currently consider immaterial could also harm our business, operating results, and financial condition. This section should be read in conjunction with the Consolidated Financial Statements and related Notes and Management’s Discussion and Analysis of Financial Condition and Results of Operations included in this Annual Report. We may make forward-looking statements from time to time, both written and oral. We undertake no obligation to revise or publicly release the results of any revisions to these forward-looking statements. Our actual results may differ materially from those projected in any such forward-looking statements due to a number of factors, including those set forth below and elsewhere in this Annual Report.
A decline in information technology spending may result in a decrease in our revenues or lower our growth rate.
A decline in the demand for information technology among our current and prospective customers may result in decreased revenues or a lower growth rate for us because our sales depend, in part, on our customers’ level of funding for new or additional information technology systems and services. Moreover, demand for our solutions may be reduced by a decline in overall demand for computer software and services. Accordingly, we cannot assure you that we will be able to increase or maintain our revenues.
We may experience fluctuations in quarterly revenue that could adversely impact our stock price and our operating results.
Our actual revenues in a quarter could fall below expectations, which could lead to a decline in our stock price. Our revenues and operating results are difficult to predict and may fluctuate substantially from quarter to quarter. Revenues from license fees in any quarter depend substantially upon our contracting activity and our ability to recognize revenues in that quarter in accordance with our revenue recognition policies. Our quarterly revenue may fluctuate and may be difficult to forecast for a variety of reasons, including the following:
| • | | a significant number of our prospective customers’ decisions regarding whether to enter into license agreements with us are made within the last few weeks of each quarter; |
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| • | | the size of license transactions can vary significantly; |
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| • | | customers may unexpectedly postpone or cancel orders due to changes in their strategic priorities, project objectives, budget or personnel; |
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| • | | customer purchasing processes vary significantly and a customer’s internal approval, expenditure authorization and contract negotiation processes can be difficult and time consuming to complete, even after selection of a vendor; |
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| • | | the number, timing, and significance of software product enhancements and new software product announcements by us and our competitors may affect purchase decisions; and |
|
| • | | we may have to defer revenues under our revenue recognition policies. |
Fluctuation in our quarterly revenues may adversely affect our operating results. In each fiscal quarter our expense levels, operating costs, and hiring plans are based on projections of future revenues and are relatively fixed. If our actual revenues fall below expectations, we could experience a reduction in operating results.
As with other software vendors, we may be required to delay revenue recognition into future periods, which could adversely impact our operating results.
We have in the past had to, and in the future may have to, defer revenue recognition for license fees due to several factors, including whether:
| • | | license agreements include applications that are under development or other undelivered elements; |
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| • | | we must deliver services that are considered essential to the functionality of the software, including significant modifications, customization, or complex interfaces, which could delay product delivery or acceptance; |
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| • | | the transaction involves acceptance criteria; |
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| • | | the transaction involves contingent payment terms or fees; |
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| • | | we are required to accept a fixed-fee services contract; or |
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| • | | we are required to accept extended payment terms. |
Because of the factors listed above and other specific requirements under generally accepted accounting principles in the United States for software revenue recognition, we must have very precise terms in our license agreements in order to recognize revenue when we initially deliver and install software or perform services. Negotiation of mutually acceptable terms and conditions can extend the sales cycle, and sometimes we do not obtain terms and conditions that permit revenue recognition at the time of delivery or even as work on the project is completed.
Compliance with changing regulation of corporate governance and public disclosure may result in additional expenses.
Changing laws, regulations, and standards relating to corporate governance and public disclosure, including the Sarbanes-Oxley Act of 2002, new Securities and Exchange Commission regulations and New York Stock Exchange rules, are creating uncertainty for companies such as ours. The costs required to comply with such evolving laws are difficult to predict. To maintain high standards of corporate governance and public disclosure, we intend to invest all reasonably necessary resources to comply with evolving standards. This investment may result in an unforeseen increase in general and administrative expenses and a diversion of management time and attention from revenue-generating activities, which may harm our business, financial condition, or results of operations.
Increases in service revenue as a percentage of total revenues could decrease overall margins and adversely affect our operating results.
We realize lower margins on software and appraisal service revenues than on license revenue. The majority of our contracts include both software licenses and professional services. Therefore, an increase in the percentage of software service and appraisal service revenue compared to license revenue could have a detrimental impact on our overall gross margins and could adversely affect operating results.
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Selling products and services into the public sector poses unique challenges.
We derive substantially all of our revenues from sales of software and services to state, county and city governments, other municipal agencies, and other public entities. We expect that sales to public sector customers will continue to account for substantially all of our revenues in the future. We face many risks and challenges associated with contracting with governmental entities, including:
| • | | the sales cycle of governmental agencies may be complex and lengthy; |
|
| • | | payments under some public sector contracts are subject to achieving implementation milestones, and we have had, and may in the future have, differences with customers as to whether milestones have been achieved; |
|
| • | | political resistance to the concept of government agencies contracting with third parties to provide information technology solutions; |
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| • | | changes in legislation authorizing government’s contracting with third parties; |
|
| • | | the internal review process by governmental agencies for bid acceptance; |
|
| • | | changes to the bidding procedures by governmental agencies; |
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| • | | changes in governmental administrations and personnel; |
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| • | | limitations on governmental resources placed by budgetary restraints, which in some circumstances, may provide for a termination of executed contracts because of a lack of future funding; and |
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| • | | the general effect of economic downturns and other changes on local governments’ ability to spend public funds on outsourcing arrangements. |
Each of these risks is outside our control. If we fail to adequately adapt to these risks and uncertainties, our financial performance could be adversely affected.
The open bidding process for governmental contracts creates uncertainty in predicting future contract awards.
Many governmental agencies purchase products and services through an open bidding process. Generally, a governmental entity will publish an established list of requirements requesting potential vendors to propose solutions for the established requirements. To respond successfully to these requests for proposals, we must accurately estimate our cost structure for servicing a proposed contract, the time required to establish operations for the proposed client, and the likely terms of any other third party proposals submitted. We cannot guarantee that we will win any bids in the future through the request for proposal process, or that any winning bids will ultimately result in contracts on favorable terms. Our failure to secure contracts through the open bidding process, or to secure such contracts on favorable terms, may adversely affect our business, financial condition, and results of operations.
Fixed-price contracts may affect our profits.
Some of our present contracts are on a fixed-priced basis, which can lead to various risks, including:
| • | | the failure to accurately estimate the resources and time required for an engagement; |
|
| • | | the failure to effectively manage governmental agencies’ and other customers’ expectations regarding the scope of services to be delivered for an estimated price; and |
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| • | | the failure to timely complete fixed-price engagements within budget to the customers’ satisfaction. |
If we do not adequately assess these and other risks, we may be subject to cost overruns and penalties, which may harm our business, financial condition, or results of operations.
We face significant competition from other vendors and potential new entrants into our markets.
We believe we are a leading provider of integrated solutions for the public sector. However, we face competition from a variety of software vendors that offer products and services similar to those offered by us, as well as from companies offering to develop custom software. We compete on the basis of a number of factors, including:
| • | | the attractiveness of the business strategy and services we offer; |
|
| • | | the breadth of products and services we offer; |
|
| • | | price; |
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| • | | quality of products and service; |
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| • | | technological innovation; |
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| • | | name recognition; and |
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| • | | our ability to modify existing products and services to accommodate the particular needs of our customers. |
We believe the market is highly fragmented with a large number of competitors that vary in size, primary computer platforms, and overall product scope. Our competitors include the consulting divisions of national and regional accounting firms, publicly held companies that focus on selected segments of the public sector market, and a significant number of smaller, privately held companies. Certain competitors have greater technical, marketing, and financial resources than we do. We cannot assure you that such competitors will not develop products or offer services that are superior to our products or services or that achieve greater market acceptance.
We also compete with internal, centralized information service departments of governmental entities, which requires us to persuade the end-user to stop the internal service and outsource to us. In addition, our customers may elect in the future to provide information management services internally through new or existing departments, which could reduce the market for our services.
We could face additional competition as other established and emerging companies enter the public sector software application market and new products and technologies are introduced. Increased competition could result in price reductions, fewer customer orders, reduced gross margins, and loss of market share. In addition, current and potential competitors may make strategic acquisitions or establish cooperative relationships among themselves or with third-parties, thereby increasing the ability of their products to address the needs of our prospective customers. It is possible that new competitors or alliances among current and new competitors may emerge and rapidly gain significant market share. Further, competitive pressures could require us to reduce the price of our software licenses and related services. We cannot assure you that we will be able to compete successfully against current and future competitors, and the failure to do so would have material adverse effect upon our business, operating results, and financial condition.
We must respond to rapid technological changes to be competitive.
The market for our products is characterized by rapid technological change, evolving industry standards in computer hardware and software technology, changes in customer requirements, and frequent new product introductions and enhancements. The introduction of products embodying new technologies and the emergence of new industry standards can render existing products obsolete and unmarketable. As a result, our future success will depend, in part, upon our ability to continue to enhance existing products and develop and introduce in a timely manner or acquire new products that keep pace with technological developments, satisfy increasingly sophisticated customer requirements, and achieve market acceptance. We cannot assure you that we will successfully identify new product opportunities and develop and bring new products to market in a timely and cost-effective manner. Further, we cannot assure you that the products, capabilities, or technologies developed by others will not render our products or technologies obsolete or noncompetitive. If we are unable to develop or acquire on a timely and cost-effective basis new software products or enhancements to existing products, or if such new products or enhancements do not achieve market acceptance, our business, operating results, and financial condition may be materially adversely affected.
Our failure to properly manage growth could adversely affect our business.
We have expanded our operations since February 1998, when we entered the business of providing software solutions and services to the public sector. We intend to continue expansion in the foreseeable future to pursue existing and potential market opportunities. This growth places a significant demand on management and operational resources. In order to manage growth effectively, we must implement and improve our operational systems, procedures, and controls on a timely basis. We must also identify, hire, train, and manage key managerial and technical personnel. If we fail to implement these systems or employ and retain such qualified personnel, our business, financial condition, and results of operations may be materially adversely affected.
We may be unable to hire, integrate, and retain qualified personnel.
Our continued success will depend upon the availability and performance of our key management, sales, marketing, customer support, and product development personnel. The loss of key management or technical personnel could adversely affect us. We believe that our continued success will depend in large part upon our ability to attract, integrate, and retain such personnel. We have at times experienced and continue to experience difficulty in recruiting qualified personnel. Competition for qualified software development, sales, and other personnel is intense, and we cannot assure you that we will be successful in attracting and retaining such personnel.
13
We may experience difficulties in executing our acquisition strategy.
In addition, a significant portion of our growth has resulted from strategic acquisitions in new product and geographic markets. Although our future focus will be on internal growth, we will continue to identify and pursue strategic acquisitions and alliances with suitable candidates. Our future success will depend, in part, on our ability to successfully integrate future acquisitions and other strategic alliances into our operations. Acquisitions may involve a number of special risks, including diversion of management’s attention, failure to retain key acquired personnel, unanticipated events or circumstances, legal liabilities, and amortization of certain acquired intangible assets. Some or all of these risks could have a material adverse effect on our business, financial condition, and results of operations. Although we conduct due diligence reviews of potential acquisition candidates, we may not identify all material liabilities or risks related to acquisition candidates. There can be no assurance that any such strategic acquisitions or alliances will be accomplished on favorable terms or will result in profitable operations.
We may be unable to protect our proprietary rights.
Many of our product and service offerings incorporate proprietary information, trade secrets, know-how, and other intellectual property rights. We rely on a combination of contracts, copyrights, and trade secret laws to establish and protect our proprietary rights in our technology. We cannot be certain that we have taken all appropriate steps to deter misappropriation of our intellectual property. In addition, there has been significant litigation in the United States in recent years involving intellectual property rights. We are not currently involved in any material intellectual property litigation. We may, however, be a party to intellectual property litigation in the future to protect our proprietary information, trade secrets, know-how, and other intellectual property rights. Further, we cannot assure you that third parties will not assert infringement or misappropriation claims against us in the future with respect to current or future products. Any claims or litigation, with or without merit, could be time-consuming and result in costly litigation and diversion of management’s attention. Further, any claims and litigation could cause product shipment delays or require us to enter into royalty or licensing arrangements. Such royalty or licensing arrangements, if required, may not be available on terms acceptable to us, if at all. Thus, litigation to defend and enforce our intellectual property rights could have a material adverse effect on our business, financial condition, and results of operations, regardless of the final outcome of such litigation.
Our products are complex and we run the risk of errors or defects with new product introductions or enhancements.
Software products as complex as those developed by us may contain errors or defects, especially when first introduced or when new versions or enhancements are released. Although we have not experienced material adverse effects resulting from any such defects or errors to date, we cannot assure you that material defects and errors will not be found after commencement of product shipments. Any such defects could result in loss of revenues or delay market acceptance.
Our license agreements with our customers typically contain provisions designed to limit our exposure to potential liability claims. It is possible, however, that we may not always be able to negotiate such provisions in our contracts with customers or that the limitation of liability provisions contained in our license agreements may not be effective as a result of existing or future federal, state or local laws, ordinances, or judicial decisions. Although we maintain errors and omissions and general liability insurance, and we try to structure our contracts to include limitations on liability, we cannot assure you that a successful claim could not be made or would not have a material adverse effect on our business, financial condition, and results of operations.
Our Application Service Provider strategy has yet to gain widespread acceptance.
Some businesses choose to access enterprise software applications through application service providers, or ASPs, which are businesses that host applications and provide access to software on a subscription basis. The public sector market for ASP solutions is new and unproven. Acceptance of our ASP model depends upon the ability and willingness of different governmental entities to accept and implement ASP solutions. Some prospective clients have expressed security and privacy concerns with the ASP model, including a concern regarding the confidential nature of the information and transactions available from and conducted with governments and concerns regarding off-site storage of such information. We have limited experience selling our solutions through ASPs and may not be successful in generating revenue from this distribution channel.
14
Changes in the insurance markets may affect our ability to win some contract awards and may lead to increased expenses.
Some of our customers, primarily those for our property appraisal services, require that we secure performance bonds before they will select us as their vendor. The number of qualified, high-rated insurance companies that offer performance bonds has decreased in recent years, while the costs associated with securing these bonds has increased dramatically. In addition, we are generally required to issue a letter of credit as security for the issuance of a performance bond. Each letter of credit we issue without corresponding cash collateral reduces our borrowing capacity under our senior secured credit agreement. We cannot guarantee that we will be able to secure such performance bonds in the future on terms that are favorable to us, if at all. Our inability to obtain performance bonds on favorable terms or at all could impact our future ability to win some contract awards, particularly large property appraisal services contracts, which could have a material adverse effect on our business, financial condition, and results of operations.
Recent volatility in the stock markets, increasing shareholder litigation, the adoption of expansive legislation that redefines corporate controls (in particular, legislation adopted to prevent future corporate and accounting scandals), as well as other factors have recently led to significant increases in premiums for directors’ and officers’ liability insurance. The number of insurers offering directors and officers insurance at competitive rates has also decreased in recent years. We cannot predict when the insurance market for such coverage will stabilize, if at all. The continued volatility of the insurance market may result in future increases in our general and administrative expenses, which may adversely affect future operating results.
Our stock price may be volatile.
The market price of our common stock may be volatile and may be significantly affected by many different factors. Some examples of factors that can have a significant impact on our stock price include:
| • | | actual or anticipated fluctuations in our operating results; |
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| • | | announcements of technological innovations, new products, or new contracts by us or our competitors; |
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| • | | developments with respect to patents, copyrights, or other proprietary rights; |
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| • | | conditions and trends in the software and other technology industries; |
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| • | | adoption of new accounting standards affecting the software industry; |
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| • | | changes in financial estimates by securities analysts; and |
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| • | | general market conditions and other factors. |
In addition, the stock market has from time to time experienced significant price and volume fluctuations that have particularly affected the market prices for the common stock of technology companies. These broad market fluctuations may adversely affect the market price of our common stock. In the past, following periods of volatility in the market price of a particular company’s securities, securities class action litigation has often been brought against that company. We cannot assure you that similar litigation will not occur in the future with respect to us. Such litigation could result in substantial costs and a diversion of management’s attention and resources, which could have a material adverse effect upon our business, operating results, and financial condition.
Historically, we have not paid dividends on our common stock.
We have not declared or paid a cash dividend since we entered the business of providing software solutions and services to the public sector in February 1998. Our credit agreement restricts our ability to pay cash dividends. We intend to retain earnings for use in the operation and expansion of our business. We do not anticipate paying any cash dividends on our common stock in the foreseeable future.
Provisions in our certificate of incorporation, bylaws, and Delaware law could deter takeover attempts.
Our board of directors may issue up to 1,000,000 shares of preferred stock and may determine the price, rights, preferences, privileges, and restrictions, including voting and conversion rights, of these shares of preferred stock. These determinations may be made without any further vote or action by our stockholders. The rights of the holders of our common stock will be subject to, and may be adversely affected by, the rights of the holders of any preferred stock that may be issued in the future. The issuance of preferred stock may make it more difficult for a third party to acquire a majority of our outstanding voting stock. In addition, some provisions of our Certificate of Incorporation, Bylaws, and of the Delaware General Corporation Law could also delay, prevent, or make more difficult a merger, tender offer, or proxy contest involving us.
15
Financial Outlook
From time to time in press releases and otherwise, we may publish forecasts or other forward-looking statements regarding our results, including estimated revenues or net earnings. Any forecast of our future performance reflects various assumptions. These assumptions are subject to significant uncertainties, and as a matter of course, any number of them may prove to be incorrect. Further, the achievement of any forecast depends on numerous risks and other factors (including those described in this discussion), many of which are beyond our control. As a result, we cannot be certain that our performance will be consistent with any management forecasts or that the variation from such forecasts will not be material and adverse. Current and potential stockholders are cautioned not to base their entire analysis of our business and prospects upon isolated predictions, but instead are encouraged to utilize our entire publicly available mix of historical and forward-looking information, as well as other available information regarding us, our products and services, and the software industry when evaluating our prospective results of operations.
ITEM 1B. UNRESOLVED STAFF COMMENTS
Not applicable.
ITEM 2. PROPERTIES.
We occupy a total of approximately 300,000280,000 square feet of office and warehouse space, 27,00030,000 of which we own. We lease our principal executive office located in Dallas, Texas, as well as other offices facilities and project offices for our operating companiesdivisions in California, Colorado, Connecticut, Florida, Georgia,
Idaho, Indiana, Iowa, Maine, Massachusetts, Michigan, New Hampshire, New York,
North Carolina, Ohio, Pennsylvania, Rhode Island, Texas and Wisconsin.
Washington.
ITEM 3. LEGAL PROCEEDINGS.
On
October 29, 2001, H.T.E.September 9, 2005, Affiliated Computer Services, Inc. (“ACS”) filed litigation in Dallas County, Texas against thirty-three defendants, including Tyler and John M. Yeaman, our Chairman of the Board (“Yeaman”). The other named defendants include entities affiliated with William D. Oates (“Oates”),
Inc. ("HTE") notified us that, pursuant to the
Florida "control share" statute, it had redeemed all 5.6 million sharesa former director of
HTE
common stock ownedours, and certain individuals employed by
us for a cash price of $1.30 per share.such entities. The
5.6 million
shares represent a current ownership interest of approximately 35% of HTE, a
company whose common stock is traded on the NASDAQ National Market System. On
October 29, 2001, we notified HTE that its purported redemption of our HTE
shares was invalid and contrary to Florida
9
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,lawsuit alleges, among other things, that HTE's purported redemption of any
orwe breached the non-competition and non-solicitation covenants set forth in the Stock Purchase Agreement dated December 29, 2000 (the “SPA”) between ACS and us pursuant to which we sold to ACS for cash all of our shares was illegal under Florida law and that we had the ability
to vote up to 20% of the issued and outstanding sharescapital stock of HTE common stockBusiness Resources Corporation (“BRC”), which comprised a significant portion of our then existing property records business. In the SPA, we agreed to certain five-year non-competition and non-solicitation covenants, which expired on December 29, 2005. In addition, the SPA contained a closing condition pursuant to which Oates agreed to amend his then existing three-year non-competition and non-solicitation covenants so that the restricted activities would conform to the language of our restricted activities, which covenants expired on December 29, 2003. The lawsuit alleges that Oates (or entities owned by Oates) solicited ACS employees and re-entered the land records business after the expiration of his three-year covenants, but prior to the expiration of our five-year covenants, and further alleges that we, through our non-compete, are legally responsible for Oates’ actions. The lawsuit further alleges that Oates “controlled Tyler,” “manipulated Tyler,” and was a “legal representative” of ours for a significant, but unspecified, period of time following the sale of BRC, even though Oates has not been a member of our board since 2001, has not been employed by us since the sale of BRC, has had limited contact with our management since the sale of BRC, and to our knowledge, has not owned any stock in us since May 2003. The lawsuit further alleges that we fraudulently induced ACS to enter into the SPA because we allegedly knew that Oates (or entities owned by Oates) would re-enter the land records business after three years, even though the SPA specifically contained different covenants with respect to Oates and us. On September 18, 2002, the court issued an order declaring that HTE's purported
redemption was invalid. Accordingly, we continue to own 5.6 million shares of
HTE common stock. On September 24, 2002, weACS entered into a settlement agreement with HTE in which HTE agreed that it would not attempt any other redemption of
our shares. In addition, HTE agreed to dismiss and release us from the tort
claims it alleged against us as disclosed in previous filings. On December 11,
2002, the court issued a further order declaring that all of our HTE shares are
"control shares" and therefore none of our shares have voting rights. The court
further ruled that voting rights would be restored to our HTE shares if we were
to sell or otherwise transfer our HTE shares to an unaffiliated third party in a
transaction that did not constitute a "control share acquisition."
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 the plaintiffs' 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 $1.3 million at
December 31, 2002. Swan tendered the defense and indemnity obligations arising
from these claims to its insurance carriers, who, prior to December 20, 2001,
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.
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 plandefendants other than Yeaman and us, the terms of reorganizationwhich are currently confidential; however, management believes that the settlement agreement extends the non-compete for Oates and his related entities for some period of time.We vehemently deny all allegations contained in February 2002. The
principal featuresthe lawsuit. Management believes that we have not breached any non-competition covenants, have not solicited ACS employees, and have not misappropriated ACS confidential information. Management further believes that the “factual” allegations made against us are false and inaccurate and that the legal theories asserted by ACS are without merit. Management further believes based on discovery that has taken place to date that even if the allegations as currently set forth in the petition were true, that ACS has suffered no or nominal damage, particularly in light of the plansettlement agreement with Oates and his related entities.
We have filed counterclaims against ACS, including claims for business disparagement and defamation, alleging that ACS has published factually inaccurate and defamatory statements about us to third parties, including our customers and prospective customers, with malice and/or negligence regarding the truth of reorganization include: (a)those statements. We intend to defend 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,lawsuit and pursue our counterclaims vigorously. The future costs associated with such carriers; (b) the implementation of a claims resolution procedure pursuant
to which all presentdefense 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 fundingpursuit of the trust;counterclaims are uncertain and (d) the fulldifficult to predict 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.
The confirmation hearings on Swan's plan of reorganization were held on December
9, 2002. The plan of reorganization received the affirmative vote of
approximately 99% of the total votes cast. All objections to the plan were
resolved prior to the confirmation hearing, and the final confirmation order
will therefore notmay be subject to appeal. The confirmation order discharges,
releases, and extinguishes all of the foundry-related obligations and
liabilities of Tyler, Swan, their affected affiliates, and the insurers
participating in the funding of the trust. Further, the confirmation order
includes the issuance of injunctions that channel all present and future
foundry-related claims into the trust and forever bar any such claims from being
asserted, either now or in the future, against Swan, Tyler, their affected
affiliates, and the participating insurers. In order to receive the benefits
described above, we have agreed, among other things, to transfer all of the
capital stock of Swan to the trust so that the trust can directly pursue claims
against insurers who have not participated in the funding of the trust. In
addition, we have agreed to contribute $1.5 million in cash to the trust, which
is due as follows: $750,000 within ten days of the confirmation order becoming a
final order; $500,000 on the first anniversary of the date the confirmation
order becomes a final order; and $250,000 on the second anniversary of the date
the confirmation order becomes a final order. The confirmation order will become
a final order thirty days after execution by both the bankruptcy and district
court judges, which is expected to occur by the end of the first quarter of
2003.
material.
16
Other than ordinary course, routine litigation incidental to our business and except as described in this Annual Report, there are no material legal proceedings pending to which we
or our subsidiaries are
partiesparty or to which any of our properties are subject.
10
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
Not applicable.
PART II
ITEM 5. MARKET FOR REGISTRANT'SREGISTRANT’S COMMON EQUITY, AND RELATED STOCKHOLDER MATTERS.
MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES.
Our common stock is traded on the New York Stock Exchange under the symbol "TYL."“TYL.” At December 31, 2002,2005, we had approximately 2,6002,300 stockholders of record. A number of our stockholders hold their shares in street name; therefore, there are substantially more than 2,6002,300 beneficial owners of our common stock.
The following table sets forth for the calendar periods indicated the high and low sales price per share of our common stock as reported on the New York Stock Exchange.
HIGH LOW
---- ---
2001: First Quarter................................ $ 2.25 $ 1.00
Second Quarter............................... 3.04 1.35
Third Quarter................................ 3.81 1.99
Fourth Quarter............................... 4.60 2.73
2002: First Quarter ............................... $ 5.95 $ 3.75
Second Quarter............................... 6.01 3.85
Third Quarter................................ 5.25 3.05
Fourth Quarter............................... 4.85 3.80
2002: First Quarter (through February 25, 2003).. $ 4.40 $ 3.50
| | | | | | | | | | | |
| | | | | High | | Low |
| 2004: | | First Quarter | | $ | 11.05 | | | $ | 8.75 | |
| | | Second Quarter | | | 10.10 | | | | 8.17 | |
| | | Third Quarter | | | 9.47 | | | | 7.97 | |
| | | Fourth Quarter | | | 9.99 | | | | 7.60 | |
| 2005: | | First Quarter | | $ | 8.45 | | | $ | 6.29 | |
| | | Second Quarter | | | 7.90 | | | | 5.25 | |
| | | Third Quarter | | | 8.69 | | | | 7.25 | |
| | | Fourth Quarter | | | 9.15 | | | | 7.88 | |
| 2006: | | First Quarter (through February 27, 2006) | | $ | 10.00 | | | $ | 8.40 |
We did not pay any cash dividends in
20022005 or
2001.2004. Our bank credit agreement contains restrictions on the payment of cash dividends. Also, we intend to retain earnings for use in the operation and expansion of our business, and, therefore, we do not anticipate declaring a cash dividend in the foreseeable future.
11
The following table summarizes certain information related to our stock option plan and our Employee Stock Purchase Plan (“ESPP”). There are no warrants or rights related to our equity compensation plans as of December 31, 2005.
| | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | Number of securities remaining | |
| | | Number of securities to be issued upon | | | | | | | | | | | available for future issuance under | |
| | | exercise of outstanding options, | | | Weighted average exercise | | | | | | | equity compensation plans (excluding | |
| | | warrants and rights as of | | | price of outstanding options, | | | | | | | securities reflected in initial column as | |
| Plan Category | | December 31, 2005 | | | warrants and rights | | | | | | | of December 31, 2005) | |
| Equity compensation plans approved by security shareholders: | | | | | | | | | | | | | | | | |
| Stock options | | | 4,607,590 | | | $ | 4.99 | | | | | | | | 73,461 | |
| ESPP | | | 29,658 | | | | 7.46 | | | | | | | | 755,477 | |
| Equity compensation plans not approved by security shareholders | | | — | | | | — | | | | | | | | — | |
| | | | | | | | | | | | | |
| | | | 4,637,248 | | | $ | 5.01 | | | | | | | | 828,938 | |
17
During 2005, we purchased approximately 2.5 million shares of our common stock for an aggregate cash purchase price of $17.7 million. A summary of the repurchase activity during 2005 is as follows:
| | | | | | | | | | | | | | | | | |
| | | | | | | Additional | | | | | | | Maximum number | |
| | | Total number | | | number of shares | | | Average | | | of shares that may | |
| | | of shares | | | authorized that | | | price paid | | | be repurchased under | |
| Period | | repurchased | | | may be repurchased | | | per share | | | current authorization | |
| Three months ended March 31 | | | 1,169,000 | | | | — | | | $ | 6.93 | | | | 1,352,000 | |
| Three months ended June 30 | | | 411,000 | | | | — | | | | 6.47 | | | | 941,000 | |
| Three months ended September 30 | | | 601,000 | | | | — | | | | 7.76 | | | | 340,000 | |
| Additional authorization by the board of directors | | | — | | | | 2,000,000 | | | | — | | | | 2,340,000 | |
| October 1 through October 31 | | | 198,000 | | | | — | | | | 8.02 | | | | 2,142,000 | |
| November 1 through November 30 | | | 37,000 | | | | — | | | | 8.10 | | | | 2,105,000 | |
| December 1 through December 31 | | | 41,000 | | | | — | | | | 8.82 | | | | 2,064,000 | |
| | | | | | | | | | | | | |
| Total year ended December 31, 2005 | | | 2,457,000 | | | | 2,000,000 | | | $ | 7.20 | | | | 2,064,000 | |
| | | | | | | | | | | | | |
| | The repurchase program, which was approved by our board of directors, was announced in October 2002, and was amended in April and July 2003, October 2004 and October 2005. On October 25, 2005, our board of directors authorized the repurchase of an additional 2.0 million shares for a total authorization to repurchase 2.3 million shares of our common stock. As of December 31, 2005, we had remaining authorization to repurchase up to 2.1 million additional shares of our common stock. There is no expiration date specified for the authorization and we intend to repurchase stock under the plan from time to time in the future. |
18
ITEM 6. SELECTED FINANCIAL DATA.
(In
(In thousands, except per share data)
| | | | | | | | | | | | | | | | | | | | | |
| | | FOR THE YEARS ENDED DECEMBER 31, | |
| | | 2005 | | | 2004 | | | 2003 | | | 2002 | | | 2001 | |
STATEMENT OF OPERATIONS DATA(1): | | | | | | | | | | | | | | | | | | | | |
| Revenues | | $ | 170,457 | | | $ | 172,270 | | | $ | 145,454 | | | $ | 133,897 | | | $ | 118,816 | |
| Costs and expenses: | | | | | | | | | | | | | | | | | | | | |
| Cost of revenues | | | 108,970 | | | | 108,432 | | | | 90,627 | | | | 88,347 | | | | 81,229 | |
| Selling, general and administrative expenses | | | 46,242 | | | | 45,451 | | | | 38,390 | | | | 33,914 | | | | 30,830 | |
| Restructuring charge | | | 1,260 | | | | — | | | | — | | | | — | | | | — | |
Amortization of customer and trade name intangibles(2) | | | 1,266 | | | | 1,267 | | | | 925 | | | | 897 | | | | 4,466 | |
| | | | | | | | | | | | | | | | |
| Operating income | | | 12,719 | | | | 17,120 | | | | 15,512 | | | | 10,739 | | | | 2,291 | |
Realized gain on sale of investment in H.T.E., Inc.(3) | | | — | | | | — | | | | 23,233 | | | | — | | | | — | |
| Other income (expense), net | | | 906 | | | | 317 | | | | 339 | | | | (698 | ) | | | (479 | ) |
| | | | | | | | | | | | | | | | |
| Income from continuing operations before income taxes | | | 13,625 | | | | 17,437 | | | | 39,084 | | | | 10,041 | | | | 1,812 | |
| Income tax provision | | | 5,432 | | | | 7,309 | | | | 13,106 | | | | 3,869 | | | | 1,540 | |
| | | | | | | | | | | | | | | | |
| Income from continuing operations | | $ | 8,193 | | | $ | 10,128 | | | $ | 25,978 | | | $ | 6,172 | | | $ | 272 | |
| | | | | | | | | | | | | | | | |
| Income from continuing operations per diluted share | | $ | 0.19 | | | $ | 0.23 | | | $ | 0.58 | | | $ | 0.12 | | | $ | 0.01 | |
| | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | |
| Weighted average diluted shares | | | 42,075 | | | | 44,566 | | | | 45,035 | | | | 49,493 | | | | 47,984 | |
| | | | | | | | | | | | | | | | | | | | | |
| STATEMENT OF CASH FLOWS DATA: | | | | | | | | | | | | | | | | | | | | |
| Cash flows provided by operating activities | | $ | 21,187 | | | $ | 22,159 | | | $ | 22,535 | | | $ | 19,845 | | | $ | 12,744 | |
| Cash flows provided by (used in) investing activities | | | 1,820 | | | | (9,914 | ) | | | (590 | ) | | | (7,974 | ) | | | (9,706 | ) |
| Cash flows used by financing activities | | | (14,847 | ) | | | (9,940 | ) | | | (25,421 | ) | | | (3,398 | ) | | | (5,984 | ) |
| | | | | | | | | | | | | | | | | | | | | |
| BALANCE SHEET DATA: | | | | | | | | | | | | | | | | | | | | |
| Total assets | | $ | 194,437 | | | $ | 190,487 | | | $ | 186,396 | | | $ | 169,845 | | | $ | 146,975 | |
| Long-term obligations, less current portion | | | — | | | | — | | | | — | | | | 2,550 | | | | 2,910 | |
| Shareholders’ equity | | | 112,197 | | | | 118,400 | | | | 117,907 | | | | 118,656 | | | | 100,884 | |
FOR THE YEARS ENDED DECEMBER 31,
---------------------------------------------------------------------------------- | | |
| (1) | | In December 2003, we acquired Eden Systems, Inc. (“Eden”), a provider of financial, personnel and citizen services software for local governments. These results include the results of the operations of Eden from the date of its acquisition. |
|
| (2) | | Effective January 1, 2002, 2001 2000 1999 1998
------------ ------------ ------------ ------------ ----------
STATEMENT OF OPERATIONS DATA: (1)
Revenues (2)............................ $ 133,897 $ 118,816 $ 93,933 $ 71,416 $ 23,440
Costswe adopted the provisions of Statement of Financial Accounting Standards No. 142 “Goodwill and expenses:
CostOther Intangible Assets”. Under the standard, goodwill and intangible assets with indefinite useful lives are no longer amortized but are instead tested for impairment at least annually. In accordance with the standard, results of revenues (2)................. 85,915 78,797 59,658 37,027 13,143
Selling, generaloperations for years prior to 2002 are reported under the previous accounting standards for goodwill and administrative expenses............ 33,914 30,830 32,805 29,404 11,680intangible assets. Amortization expense net of acquisition
intangibles (3).................... 3,329 6,898 6,903 4,966 1,499
--------- ---------- --------- --------- ---------
Operating income (loss) ............. 10,739 2,291 (5,433) 19 (2,882)
Legal fees associatedtaxes, related to goodwill (including assembled workforce subsumed into goodwill) no longer expensed under the standard was $2,960 in 2001. |
|
| (3) | | On March 25, 2003, we received cash proceeds of $39.3 million in connection with affiliated investment.............. 704 -- -- -- --
Interest (income) expense, net....... (6) 479 4,884 1,797 234
--------- ---------- --------- --------- ---------
Income (loss) from continuing operations
before income taxes.................. 10,041 1,812 (10,317) (1,778) (3,116)
Income tax provision (benefit).......... 3,869 1,540 (2,810) 188 (652)
--------- ---------- --------- --------- ---------
Income (loss) from continuing operations $ 6,172 $ 272 $ (7,507) $(1,966) $ (2,464)
========= ========== ========= ========= ==========
Income (loss) from continuing operationsa transaction to sell all of our 5.6 million shares of H.T.E., Inc. (“HTE”) common stock to SunGard Data Systems Inc. for $7.00 cash per share. Our original cost basis in the HTE shares was $15.8 million. After transaction and other costs, we recorded a gross realized gain of $23.2 million ($16.2 million or $0.36 per diluted share.................... $ 0.12 $ 0.01 $ (0.17) $ (0.05) $ (0.08)
========= ========== ========= ========= ==========
Weighted average diluted shares......... 49,493 47,984 45,380 39,105 32,612
OTHER DATA:
EBITDA (4)......................... $ 18,557 $ 13,203 $ 4,253 $ 6,130 $ (890)
STATEMENTshare after income taxes of $7.0 million) for the year ended December 31, 2003. |
19
| | |
| ITEM 7. | | MANAGEMENT’S DISCUSSION AND ANALYSIS OF CASH FLOWS DATA:
Cash flows from operating activities.... $ 19,845 $ 12,744 $ (7,126) $ 715 $ 1,758
Cash flows from investing activities.... (7,974) (9,706) 65,401 (24,743) (36,787)
Cash flows from financing activities.... (3,398) (5,984) (52,022) 24,955 27,893
|
ASFINANCIAL CONDITION AND RESULTS OF DECEMBER 31,
---------------------------------------------------------------
2002 2001 2000 1999 1998
--------- --------- --------- ---------- ----------
BALANCE SHEET DATA: (1)
Total assets......................... $ 169,845 $ 146,975 $ 150,712 $ 243,260 $ 124,328
Long-term obligations, less
current portion................... 2,550 2,910 7,747 61,530 37,189
Shareholders' equity................. 118,656 100,884 96,122 138,904 76,346
OPERATIONS.
12
(1) For the years 1998 through 2002, results of operations include the results
of the continuing companies that were formerly the software systems and
services segment, from the respective dates we acquired the companies, and
exclude the results of operations of the discontinued information and
property records services segment and automotive parts segment. Prior
years' selected financial data has been restated to reflect discontinuation
of the information and property records services segment in 2000 and the
automotive parts segment in 1998. See Note 3 in Notes to Consolidated
Financial Statements.
(2) Pursuant to Financial Accounting Standards Board Emerging Issues Task Force
("EITF") Issue No. 01-14, "Income Statement Characterization of
Reimbursements Received for 'Out-of-Pocket' Expenses Incurred," customer
reimbursements for out-of-pocket expenses are to be included in net
revenues and the related costs in cost of revenues. Because these
additional net revenues are offset by the associated reimbursable expenses
included in cost of revenues, the adoption of EITF No. 01-14 in 2002 did
not impact income (loss) from continuing operations for all periods
presented. Net revenues and cost of revenues for 2001 and 2000 were recast
to reclassify certain reimbursable expenses to conform to the current year
presentation in accordance with EITF No. 01-14. Periods prior to 2000 were
not recast because reimbursable expenses were immaterial. See Note 17 in
Notes to Consolidated Financial Statements.
(3) Effective January 1, 2002, we adopted the provisions of Statement of
Financial Accounting Standards No. 142 "Goodwill and other Intangible
Assets". Under the new standard, goodwill and intangible assets with
indefinite useful lives are no longer amortized but instead tested for
impairment at least annually. In accordance with the new standard, results
of operations for years prior to 2002 are reported under the previous
accounting standards for goodwill and intangible assets. Amortization
expense net of income taxes, related to goodwill (including assembled
workforce subsumed into goodwill) no longer expensed under the new standard
was $2,960 in 2001, $2,934 in 2000, $2,199 in 1999 and $836 in 1998.
(4) EBITDA consists of income from continuing operations before interest,
income taxes, depreciation and amortization. EBITDA is not calculated in
accordance with accounting principles generally accepted in the United
States, 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 accounting
principles generally accepted in the United States. EBITDA is not
necessarily an indication of amounts that may be available for us to
reinvest or for any other discretionary uses and does not take into account
our debt service requirements and other commitments. In addition, since all
companies do not calculate EBITDA the same way, it may not be comparable to
other companies' similarly titled measures. The following reconciles to
EBITDA from income (loss) from continuing operations before income taxes
for the periods presented:
FOR THE YEARS ENDED DECEMBER 31,
------------------------------------------------------------------------
2002 2001 2000 1999 1998
---------- --------- --------- --------- ---------
Income (loss) from continuing operations before
income taxes............................... $ 10,041 $ 1,812 $ (10,317) $ (1,778) $ (3,116)
Amortization of acquisition intangibles... 3,329 6,898 6,903 4,966 1,499
Depreciation and amortization included
in cost of revenues and selling,
general and administrative expenses.... 5,193 4,014 2,783 1,145 493
Interest (income) expense, net ........... (6) 479 4,884 1,797 234
--------- --------- --------- --------- ---------
EBITDA $ 18,557 $ 13,203 $ 4,253 $ 6,130 $ (890)
========= ========= ========= ========= =========
13
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.
FORWARD - LOOKING STATEMENTS
In addition to historical information, this Annual Report on Form 10-K contains forward-looking statements. The forward-looking statements are made in reliance upon safe harbor provisions of the Private Securities Litigation Reform Act of 1995. The forward-looking statements are subject to certain risks and uncertainties that could cause actual results to differ materially from those reflected in the forward-looking statements. Factors that might cause such a difference include, but are not limited to, those discussed in the section
entitled Management's Discussion and Analysis of Financial Condition and Results
of Operations - "Factors That May Affect Our Future Results and Market Price of
Our Stock."Item 1A, “Risk Factors.” Readers are cautioned not to place undue reliance on these forward-looking statements, which reflect management'smanagement’s opinions only as of the date hereof. We undertake no obligation to revise or publicly release the results of any revision to these forward-looking statements. Readers should carefully review the risk factors described in this Annual Report and other documents we file from time to time with the SEC.
When used in this Annual Report, the words "believes," "plans," "estimates,"
"expects," "anticipates," "intends," "continue," "may," "will," "should,"
"projects," "forecasts," "might," "could"“believes,” “plans,” “estimates,” “expects,” “anticipates,” “intends,” “continue,” “may,” “will,” “should,” “projects,” “forecasts,” “might,” “could” or the negative of such terms and similar expressions are intended to identify forward-looking statements.
GENERAL
OVERVIEW
We provide integrated information management solutions and services for local governments. We havedevelop and market a broad line of software products and services to address the information technology ("IT"(“IT”) needs of virtually every area of operation for cities, counties, schools and other local government entities. Most of our
customers have our software installed in-house. For customers who prefer not to
physically acquire the software and hardware,In addition, we provide outsourced hosting for
some of our applications at one of our data centers through an applications
service provider ("ASP") arrangement. We provide professional IT services to our customers, including software and hardware installation, data conversion, training and at times,for certain customers, product modifications. In addition, wemodifications, along with continuing maintenance and support for customers using our systems. We also provide outsourced property appraisal outsourcing services for taxing jurisdictions.
Our products are generally grouped into four major areas:
| • | | Financials; |
|
| • | | Courts and Justice; |
|
| • | | Property Appraisal and Tax; and |
|
| • | | Document Management. |
We also provide
continuing customer support servicesmonitor and analyze several key performance indicators in order to ensure proper product performancemanage our business and reliability.
evaluate our financial and operating performance. These indicators include the following:
| • | | Revenues — We derive our revenues from four primary sources: sale of software licenses; software services; appraisal services; and maintenance and support. Because we sell primarily “off-the-shelf” software, increased sales of software products generally result in incrementally higher gross margins. Thus, the most significant driver to our business is the number and size of software license sales. In addition, new software license sales generally generate implementation services revenues as well as future maintenance and support revenues, which we view as a recurring revenue source. We also monitor our customer base and churn since our maintenance and support revenue should increase due to our historically low customer turnover. |
|
| • | | Cost of Revenues and Gross Margins — Our primary cost component is personnel expenses in connection with providing software implementation and appraisal services to our customers. We can improve gross margins by controlling headcount and related costs and by expanding our revenue base, especially from those products and services that produce incremental revenue with minimal incremental cost, such as software licenses and maintenance and support. Our appraisal projects are seasonal in nature, and we often employ appraisal personnel on a short-term basis to coincide with the life of a project. |
|
| • | | Selling, General and Administrative (“SG&A”) Expenses — The primary components of SG&A expense are administrative and sales personnel salaries and commissions, marketing expense, research and development costs, rent and professional fees. Sales commissions generally fluctuate with revenues but other administrative expenses tend to grow at a slower rate than revenues; however, these costs have recently grown disproportionately because of the requirements of corporate governance legislation. Research and development costs fluctuate from year-to-year depending on product development activity. |
20
| • | | Liquidity and Cash Flows — The primary driver of our cash flows is net income. In addition, 2003 cash flow was positively impacted when we sold our investment in H.T.E., Inc. and received $39.3 million in cash proceeds. Uses of cash include capital investments in software development and property and equipment and the discretionary purchases of treasury stock. In 2005, we purchased 2.5 million shares of our common stock at an aggregate cash purchase price of $17.7 million. Our working capital needs are fairly stable throughout the year with the significant components of cash outflows being payment of personnel expenses offset by cash inflows representing collection of accounts receivable and cash receipts from customers in advance of revenue being earned. |
|
| • | | Balance Sheet — Cash, accounts receivable and days sales outstanding and deferred revenue balances are important indicators of our business. |
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
Our discussion and analysis of financial condition and results of operations is based upon our consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States ("GAAP"(“GAAP”). The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of assets and liabilities at the date of the financial statements, the reported amounts of revenues, cost of revenues and expenses during the reporting period, and related disclosure of contingent assets and liabilities. The Notes to the Consolidated Financial Statements contained hereinincluded as part of this Annual Report describe our significant accounting policies used in the preparation of the consolidated financial statements. On an on goingon-going basis, we evaluate our estimates, including, but not limited to, those related to intangible assets, bad debts and our long-term service contracts. We base our estimates on historical experience and on various other assumptions that we believe to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions.
We believe the following critical accounting policies affect significant judgments and estimates used in the preparation of our consolidated financial statements:
statements.
Revenue Recognition.Recognition. We recognize revenues in accordance with the provisions of
the American Institute of Certified Public Accountants Statement of Position
("SOP"(“SOP”) 97-2,
"Software“Software Revenue Recognition,
"” as amended by SOP 98-4 and SOP 98-9, as well as Technical Practice Aids issued from time to time by the American Institute of Certified Public Accountants, and in accordance with the
SECSecurities and Exchange Commission Staff Accounting Bulletin No.
101 "Revenue Recognition in Financial
Statements."104 “Revenue Recognition.” We recognize revenue on our appraisal services contracts using the proportionate performance method of accounting, with considerations for the provisions of Emerging Issue Task Force No. 00-21, “Revenue Arrangements with Multiple Deliverables.” Our revenues are derived from
sale of software licenses,
hardware,
postcontract customer support/appraisal services, maintenance
and support, and services that typically range from installation, training and basic consulting to software modification and customization to meet specific customer needs. For multiple element software arrangements, which do not entail the performance of services that are considered essential to the functionality of the software, we generally record revenue when the delivered products or performed services result in a legally enforceable
and non-refundable claim. We maintain allowances for doubtful accounts
and sales adjustments,
and estimated cost of product warranties, which are provided at the time the revenue is recognized.
SinceBecause most of our customers are governmental entities, we rarely incur a loss resulting from the inability of a customer to make required
14
payments. Occasionally, customers may becomeIn a limited number of cases, we encounter a customer who is dissatisfied with the functionalitysome aspect of the software products and/product or our service, and we may offer a “concession” to such customer. In those limited situations where we grant a concession, we rarely reduce the quality ofcontract arrangement fee, but alternatively may perform additional services, such as additional training or programming a minor feature the services and request a
reduction of the total contract price or similar concession. While we engagecustomer had in extensive product and service quality assurance programs and processes, our
allowances for these contract price reductions may need to be revised in the
future.their prior software solution. These amounts have historically been considered nominal. In connection with our customer contracts and the adequacy of related allowances and measures of progress towards contract completion, our project managers are charged with the responsibility to continually review the status of each customer on a specific contract basis. Also, management at our corporate offices as well as at our operating companies review, on at least a quarterly basis, significant past due accounts receivable and the adequacy of related reserves. Events or changes in circumstances that indicate that the carrying amount for the allowances for doubtful accounts and sales adjustments and estimated
cost of product warranties may require revision, include, but are not limited to, deterioration of a customer'scustomer’s financial condition, failure to manage our customer'scustomer’s expectations regarding the scope of the services to be delivered, and defects or errors in new versions or enhancements of our software products. For those minimal number of software arrangements that include customization of the software, which is considered essential to its functionality, and for substantially all of our real estate appraisal outsourcing projects, we recognize revenue and profit as the work progresses using the percentage-of-completion method. This method reliesand the proportionate performance method of revenue recognition. These methods rely on estimates of total expected contract revenue, billings and collections and expected contract costs.costs, as well as measures of progress toward completion. We follow this method sincebelieve reasonably dependable estimates of revenue and costs and progress applicable to various stages of a contract can be made. At times, we perform additional and/or non-contractual services for little to no incremental fee to satisfy
21
customer expectations. If changes occur in delivery, productivity or other factors used in developing our estimates of expected costs or revenues, we revise our cost and revenue estimates, and any revisions are charged to income in the period in which the facts that give rise to that revision first become known.
We use contract accounting, primarily the percentage-of-completion method, for those software arrangements that include customization or modification of the software, or where our software services are otherwise considered essential to the functionality of the software. In addition, we recognize revenue using the proportionate performance method of revenue recognition for our property appraisal projects, some of which can range up to three years. In connection with these and certain other contracts, we may perform the work prior to when the services are billable and/or payable pursuant to the contract. The termination clauses in most of our contracts provide for the payment for the fair value of products delivered and services performed in the event of an early termination. In connection with certain of our contracts, we have recorded retentions receivable or unbilled receivables consisting of costs and estimated profit in excess of billings as of the balance sheet date. Many of the contracts which give rise to unbilled receivables at a given balance sheet date are subject to billings in the subsequent accounting period. Management reviews unbilled receivables and related contract provisions to ensure we are justified in recognizing revenue prior to billing the customer and that we have objective evidence which allows us to recognize such revenue. In addition, we have a sizable amount of deferred revenue which represents billings in excess of revenue earned. This liability primarily consists of maintenance billings in which payments are made in advance and the revenue is ratably earned over the maintenance period, generally one year. We also have deferred revenue for those contracts in which we receive a deposit and the conditions in which to record revenue for the service or product has not been met. On a periodic basis, we review by customer the detail components of our deferred revenue to ensure our accounting remains appropriate.
Intangible Assets and Goodwill.Goodwill. Our business acquisitions typically result in the creation of goodwill and other intangible asset balances, and these balances affect the amount and timing of future period amortization expense, as well as expense we could possibly incur as a result of an impairment charge. The cost of acquired companies is allocated to identifiable tangible and intangible assets based on estimated fair value, with the excess allocated to goodwill. Accordingly, we have a significant balance of acquisition date intangible assets, including software, customer
baserelated intangibles, trade name and goodwill. In addition, we capitalize software development costs incurred subsequent to the establishment of technological
feasibility on a specific software project.feasibility. Certain of these intangible assets are amortized over their estimated useful lives. All intangible assets with definite and indefinite lives are reviewed for impairment annually or whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability of goodwill is generally measured by a comparison of the carrying amount of an asset to its fair value, generally determined by estimated future net cash flows expected to be generated by the asset. Recoverability of other intangible assets is generally measured by comparison of the carrying amount to estimated undiscounted future cash flows. The assessment of recoverability or of the estimated useful life for amortization purposes will be affected if the timing or the amount of estimated future operating cash flows is not achieved. Events or changes in circumstances that indicate the carrying amount may not be recoverable include, but are not limited to, a significant decrease in the market value of the business or asset acquired, a significant adverse change in the extent or manner in which the business or asset acquired is used, or a significant adverse change in the business climate. In addition, products, capabilities, or technologies developed by others may render our software products obsolete or non-competitive.
15
22
ANALYSIS OF RESULTS OF OPERATIONS AND OTHER
2002
The following discussion compares the historical results of operations on a basis consistent with GAAP for the years ended December 31, 2005, 2004 and 2003. These results include the results of the operations of Eden from the date of its acquisition on December 2, 2003. See Note 2 in the Notes to the Consolidated Financial Statements.
2005 Compared to 2001
2004
Revenues
The following table
includes items from our audited consolidated financial
statements andsets forth a comparison of the
relevant percentage change in the amounts between the periods
presented. The amounts shown in the table are in thousands, except the per share
data:
Years Ended December 31,
----------------------------------------------
2002 2001 % Change
-------- -------- ---------
Revenues:
Software licenses $ 24,278 $ 19,491 25%
Software services 25,703 21,538 19
Maintenance 40,667 36,587 11
Appraisal services 37,319 34,727 7
Hardware and other 5,930 6,473 (8)
-------- --------
Total revenues 133,897 118,816 13
Cost of revenues:
Software licenses 5,482 4,130 33
Software services and maintenance 50,175 46,024 9
Appraisal services 25,512 23,894 7
Hardware and other 4,746 4,749 (0)
-------- --------
Total cost of revenues 85,915 78,797 9
% of revenues 64.2% 66.3%
Gross profit 47,982 40,019 20
% of revenues 35.8% 33.7%
Selling, general and administrative expenses 33,914 30,830 10
% of revenues 25.3% 25.9%
Amortization of acquisition intangibles 3,329 6,898 (52)
------- ------
Operating income 10,739 2,291 369
Legal fees associated with affiliated investment 704 -
Interest (income) expense (6) 479
-------- --------
Income before income taxes 10,041 1,812
Income tax provision 3,869 1,540
-------- --------
Effective income tax rate 38.5% 85.0%
Income from continuing operations $ 6,172 $ 272
======== ========
Diluted earnings per share from
continuing operations $ 0.12 $ 0.01
======== ========
Cash flows provided by operating activities $ 19,845 $ 12,744
Cash balance at December 31 13,744 5,271
Capital expenditures:
Sofware development costs 7,210 6,225
Property and equipment 2,508 3,101
16
REVENUES
The following table compares thekey components of revenue as a percentage of totalour revenues for the periods presented:
Years ended
December 31,
-----------------------------
2002 2001
-------- --------
Software licenses 18.1 % 16.4 %
Software services 19.2 18.1
Maintenance 30.4 30.8
Appraisal services 27.9 29.2
Hardware and other 4.4 5.5
----- -----
100.0 % 100.0 %
Software license revenues. Software license revenues increased $4.8 million, or
25%, for the yearfollowing years ended December 31, 2002, compared to 2001. During 2002, we
recognized approximately $2.4 million in license revenues from four customers
for real estate appraisal software, while we recorded minimal license revenues
from appraisal software in 2001. The remainder of the increase31:| | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | % of | | | | | | | % of | | | 2005 vs. 2004 | |
| ($ in thousands) | | 2005 | | | Total | | | 2004 | | | Total | | | $ | | | % | |
| Software licenses | | $ | 29,552 | | | | 17 | % | | $ | 30,258 | | | | 18 | % | | $ | (706 | ) | | | (2 | )% |
| Software services | | | 51,532 | | | | 30 | | | | 49,786 | | | | 29 | | | | 1,746 | | | | 4 | |
| Maintenance | | | 64,728 | | | | 38 | | | | 57,760 | | | | 33 | | | | 6,968 | | | | 12 | |
| Appraisal services | | | 18,374 | | | | 11 | | | | 27,394 | | | | 16 | | | | (9,020 | ) | | | (33 | ) |
| Hardware and other | | | 6,271 | | | | 4 | | | | 7,072 | | | | 4 | | | | (801 | ) | | | (11 | ) |
| | | | | | | | | | | | | | | | | | | | |
| Total revenues | | $ | 170,457 | | | | 100 | % | | $ | 172,270 | | | | 100 | % | | $ | (1,813 | ) | | | (1 | )% |
| | | | | | | | | | | | | | | | | | | | |
Software licenses. Changes in software license revenues was related to expansionconsist of our financial and city solutions
software products into the midwest and the western United States, and was aided
by the release of several new financial and city solutions products and
enhancements. Our financial and city solutions software products automate
accounting systems for cities, counties, school districts, public utilities and
not-for-profit organizations.
following components:
| • | | Software license revenue related to financial products, which comprise approximately 80% of our software license revenues in the years presented, increased slightly compared to the prior year primarily due to third party software products which enhance the functionality of our proprietary software. Our financial software products automate accounting systems for cities, counties, school districts, public utilities and not-for-profit organizations. |
|
| • | | Software license revenue related to our Odyssey courts and justice product declined in 2005 compared to 2004. The prior year was unusually high because it included approximately $900,000 of license fees earned upon final acceptance for two original Odyssey installation sites. In 2005 we had fifteen Odyssey contracts in process compared to seven Odyssey contracts in 2004. The implementation cycle for Odyssey products ranges from nine to thirty-six months depending on the scope of the contract and modification complexity. We have recognized revenue on these contracts using contract accounting. |
Software services revenues. For the year ended December 31, 2002,. Changes in software services revenues increased $4.2 million, or 19%, compared to 2001. The increase
in software services is primarily related to higher software license sales.
Typically, contracts for software licenses include services such as installationconsist of the software, conversion of customer data to be compatible with the new
software and training customer personnel to use the software. In addition,
software services revenues for 2002 included approximately $1.9 million for
services performed under an $11.0 million contract signed with the State of
Minnesota in July 2002 to install our new Odyssey court case management system.
The Minnesota contract includes both software license and software services but
no license revenues were recognized under the contract in 2002. Approximately
70% of the installation is expected to be performed by late 2003. The remainder
of the installation is expected to be performed from 2004 through 2006.
following components:
| • | | Software services revenue related to financial products, which comprise more than half of our software service revenue in the years presented, increased moderately in 2005 compared to the prior year. Typically, software contracts include services such as installing the software, converting the customers’ data to be compatible with the software and training customer personnel to use the software. Approximately one-half of our financial software services revenue increase related to training and the remaining increases were due to new customers for our application service provider hosting and disaster recovery services and other miscellaneous services. We increased our training staff in 2005 which enabled us to deliver our backlog at a faster rate. |
|
| • | | Software services revenue related to our Odyssey courts and justice product increased significantly in 2005 compared to the prior year mainly due to a new $1.4 million contract for follow-on services to an existing customer that had previously implemented and accepted the software. |
|
| • | | Software services revenue related to appraisal and tax products declined substantially in 2005. This decline was mainly associated with the completion of several legacy appraisal and tax contracts in 2004 and early 2005. |
23
Maintenance revenues. For the year ended December 31, 2002, maintenance revenue
increased $4.1 million, or 11%, from $36.6 million for 2001.. We provide maintenance and support services for our software products and third party software. Maintenance revenues increased due to growth in our installed customer base as evidenced by our software license revenue and slightly higher maintenance rates on certain product lines.
Appraisal services.The decrease in appraisal services revenues is due to the completion in 2004 of certain significant appraisal contracts. These larger projects are often relatively discretionary in nature compared to smaller projects which tend to occur on a more consistent basis, and the larger projects we recently completed have not been replaced by similar projects. The appraisal services business is driven in part by revaluation cycles in various states and based on our new business pipeline, we expect that appraisal services revenues in the foreseeable future will remain at historically low levels consistent with 2005.
Cost of Revenues and Gross Margins
The following table sets forth a comparison of the key components of our cost of revenues and associated gross margins, and those components stated as a percentage of related revenues for the following years ended December 31:
| | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | % of | | | | | | | % of | | | | |
| | | | | | | related | | | | | | | related | | | 2005 vs. 2004 | |
| ($ in thousands) | | 2005 | | | revenues | | | 2004 | | | revenues | | | $ | | | % | |
| Software licenses | | $ | 9,101 | | | | 31 | % | | $ | 8,819 | | | | 29 | % | | $ | 282 | | | | 3 | % |
| Acquired software | | | 794 | | | | 3 | | | | 1,447 | | | | 5 | | | | (653 | ) | | | (45 | ) |
| Software services & maintenance | | | 80,347 | | | | 69 | | | | 72,609 | | | | 68 | | | | 7,738 | | | | 11 | |
| Appraisal services | | | 14,188 | | | | 77 | | | | 20,132 | | | | 73 | | | | (5,944 | ) | | | (30 | ) |
| Hardware and other | | | 4,540 | | | | 72 | | | | 5,425 | | | | 77 | | | | (885 | ) | | | (16 | ) |
| | | | | | | | | | | | | | | | | | | | | | |
| Total cost of revenues | | $ | 108,970 | | | | 64 | % | | $ | 108,432 | | | | 63 | % | | $ | 538 | | | | 0 | % |
| | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | |
| Overall gross margin | | | 36 | % | | | | | | | 37 | % | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | |
Cost of software license revenues.The main component of our cost of software license revenues is amortization expense for capitalized development costs on certain software products, with third party software costs making up the balance. Once a new product is released, we begin to amortize the costs associated with its development. Amortization expense is determined on a product-by-product basis at an annual rate not less than straight-line basis over the product’s estimated life, but not to exceed five years. Development costs consist mainly of personnel costs, such as salary and hardware.benefits paid to our developers. Amortization expense for capitalized software products declined from $6.1 million in 2004 to $5.9 million in 2005, because certain software products became fully amortized during 2005, which offset new amortization expense from software products released in 2004.
Cost of acquired software.When we complete an acquisition we allocate the excess purchase price over the fair value of net tangible assets acquired to amortizable software, customer and trade name intangibles, with the remainder allocated to goodwill that is not subject to amortization. Amortization expense of acquired software is recorded as cost of revenues while amortization expense of other acquisition intangibles is recorded as amortization of customer and trademark intangibles. In 2005 cost of acquired software declined compared to the prior year because certain acquired software assets recorded for previous acquisitions became fully amortized. The estimated useful life of acquired software ranges from 3 to 5 years. Estimated annual amortization expense relating to acquired software, excluding acquisitions completed in 2006, for the next five years is as follows (in thousands):
| | | | | |
| 2006 | | $ | 794 | |
| 2007 | | | 742 | |
| 2008 | | | 680 | |
| 2009 | | | 0 | |
| 2010 | | | 0 | |
| We have not finalized the allocation of the excess purchase price over the fair value of the net identifiable assets for the companies acquired in January 2006, but expect this allocation will significantly increase related amortization expense over the next five years. |
Cost of software services and maintenance revenues.Cost of software services and maintenance revenues primarily consists of expenses such as personnel costs related to installation of our software products, conversion of customer data, training customer personnel, support activities and various other services such as application service provider (“ASP”) and disaster recovery. In 2005
24
cost of software services and maintenance grew 11% while the related software services and maintenance revenues increased 8% compared to the prior year period. During 2005, costs increased at a faster rate than related software services and maintenance revenues, which reflects lower utilization of personnel in our appraisal and tax software division, costs to support our recently released Orion products, a shift in the roles of certain of our development personnel whose costs were capitalized in 2004 to projects that were expensed in 2005, and higher health care costs.
Cost of appraisal services revenues.The decline in the cost of appraisal services revenues is the result of lower appraisal services revenues. We often hire temporary employees to assist in appraisal projects whose term of employment generally ends with the projects’ completion. In addition, in the second quarter of 2005 we made significant organizational changes to our appraisal services division because of the declining gross margins. See “Restructuring Charge.”
Gross margin.The overall gross margin for 2005 was 36% compared to 37% in 2004. The margin decline was due to cost inefficiencies associated with lower appraisal services revenues and efforts and costs to support our recently released Orion products, as well as a shift in the roles of certain of our development personnel whose costs were capitalized in 2004 to projects that are being expensed in 2005 and higher health care costs.
Selling, General and Administrative Expenses
The following table sets forth a comparison of our selling, general and administrative (“SG&A”) expenses for the following years ended December 31:
| | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | % of | | | | | | % of | | 2005 vs. 2004 |
| ($ in thousands) | | 2005 | | revenues | | 2004 | | revenues | | $ | | % |
| Selling, general and administrative expenses | | $ | 46,242 | | | | 27 | % | | $ | 45,451 | | | | 26 | % | | $ | 791 | | | | 2 | % |
Selling, general and administrative expenses increased mainly due to higher health care costs and an increase in the number of marketing personnel. These increases were offset somewhat by lower consulting fees associated with documenting our internal control processes.
Restructuring Charge
Because of unsatisfactory financial performance early in 2005, we made significant organizational changes to those areas of our business that were not performing to our expectations. Our goal was to bring costs in line with expected levels of revenue while improving the efficiency of our organizational structure to ensure that clients continue to receive superior service.
We currently anticipate that revenues in our appraisal services business are likely to remain at historically low levels in the foreseeable future, consistent with 2005 and have reorganized that division to eliminate levels of management and reduce overhead expense. We have also taken action to reduce headcount and costs in our appraisal and tax software division. These cost reductions were made in the second quarter of 2005. As a result, we reduced headcount in the appraisal services and appraisal and tax software businesses, as well as in the corporate office, by eliminating approximately 120 positions, including management, staff and project-related personnel. Additionally we have made changes in both management personnel and organizational structures at those business units and have reorganized our corporate structure to consolidate certain senior management positions.
In connection with the reorganization, we incurred certain charges in the second quarter of 2005. Those charges, which were primarily comprised of employee severance costs and related fringe benefits, totaled approximately $1.3 million before income taxes. The related payments were made during the second and third quarter in 2005.
25
Amortization of Customer and Trade Name Intangibles
Acquisition intangibles are composed of the excess of the purchase price over the fair value of net tangible assets acquired that is allocated to acquired and amortizable software, customer and trade name intangibles with the remainder allocated to goodwill that is not subject to amortization. However, amortization expense related to acquired software is included with cost of revenues while amortization expense of customer and trade name intangibles is recorded as a non-operating expense. The estimated useful lives of customer and trade name intangibles are 20 to 25 years and 5 to 25 years, respectively. The following table sets forth a comparison of amortization of customer and trade name intangibles for the following years ended December 31:
| | | | | | | | | | | | | | | | | |
| | | | | | | | | | | 2005 vs. 2004 |
| ($ in thousands) | | 2005 | | 2004 | | $ | | % |
| Amortization of customer and trade name intangibles | | $ | 1,266 | | | $ | 1,267 | | | $ | (1 | ) | | | — | % |
Estimated annual amortization expense relating to customer and trade name acquisition intangibles, excluding acquired software for which the amortization expense is recorded as cost of revenues and excluding acquisitions completed in 2006, for the next five years is as follows (in thousands):
| | | | | |
| 2006 | | $ | 1,266 | |
| 2007 | | | 1,266 | |
| 2008 | | | 1,241 | |
| 2009 | | | 1,155 | |
| 2010 | | | 1,155 | |
Other
Interest income is the main component of other income, which also includes non-usage and other fees associated with our credit agreement, gain on sale of certain assets, gain on risk management assets associated with a foreign exchange contract and miscellaneous other items. Other income increased compared to 2004 mainly due to higher interest rates and a small gain on sale of certain assets.
Income Tax Provision
The following table sets forth a comparison of our income tax provision for the following years ended December 31:
| | | | | | | | | | | | | | | | | |
| | | | | | | | | | | 2005 vs. 2004 |
| ($ in thousands) | | 2005 | | 2004 | | $ | | % |
| Income tax provision | | $ | 5,432 | | | $ | 7,309 | | | $ | (1,877 | ) | | | (26 | )% |
| | | | | | | | | | | | | | | | | |
| Effective income tax rate | | | 40 | % | | | 42 | % | | | | | | | | |
The effective income tax rate declined 2% from 2004 due to the qualified manufacturing activities deduction enacted in 2005 and a corporate reorganization in 2005 which favorably impacted our state income tax provision.
26
2004 Compared to 2003
Revenues
The following table sets forth a comparison of the key components of our revenues for the following years ended December 31:
| | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | % of | | | | | | | % of | | | 2004 vs. 2003 | |
| ($ in thousands) | | 2004 | | | Total | | | 2003 | | | Total | | | $ | | | % | |
| Software licenses | | $ | 30,258 | | | | 18 | % | | $ | 25,914 | | | | 18 | % | | $ | 4,344 | | | | 17 | % |
| Software services | | | 49,786 | | | | 29 | | | | 37,128 | | | | 25 | | | | 12,658 | | | | 34 | |
| Maintenance | | | 57,760 | | | | 33 | | | | 47,157 | | | | 32 | | | | 10,603 | | | | 22 | |
| Appraisal services | | | 27,394 | | | | 16 | | | | 30,011 | | | | 21 | | | | (2,617 | ) | | | (9 | ) |
| Hardware and other | | | 7,072 | | | | 4 | | | | 5,244 | | | | 4 | | | | 1,828 | | | | 35 | |
| | | | | | | | | | | | | | | | | | | | |
| Total revenues | | $ | 172,270 | | | | 100 | % | | $ | 145,454 | | | | 100 | % | | $ | 26,816 | | | | 18 | % |
| | | | | | | | | | | | | | | | | | | | |
Software licenses. For the year ended December 31, 2004, software license revenues included $3.5 million related to Eden Systems, compared to $100,000 for the same prior year period. Excluding the software license revenue related to Eden, the increase in software license revenues from 2003 to 2004 was approximately $900,000 or 3%. The change was the result of the following factors:
| • | | Financials software license revenues, which comprise approximately two-thirds of our software license revenues in the years presented (excluding Eden), increased $4.9 million due to a combination of geographic expansion on the west coast and in the southwest United States, and an increase in our implementation staff, which has allowed us to install software products more quickly. In addition, the completion in March 2004 of software enhancements to one of our financial software products has enabled us to expand into larger cities and counties, resulting in larger contracts. |
|
| • | | Courts and justice software license revenues decreased $3.5 million compared to the prior year with approximately $1.4 million of the decline due to lower revenues from Odyssey courts and justice product. In September 2003, we successfully installed the first phase of Odyssey in the State of Minnesota and Lee County, Florida. The contract with the State of Minnesota was the largest software contract in our history, and we recorded $3.4 million of software license revenue in 2003 for both Minnesota and Lee County. In 2004, we had seven Odyssey contracts in process, several of which began late in the year. We recognized revenue on these contracts using contract accounting and recorded approximately $2.0 million of revenue for Odyssey contracts in 2004. The remaining decline reflects lower sales of our legacy courts and justice products. |
Software services. Software services revenues increased $4.9 million, or 13%, compared to the prior year period after excluding the increase in software services revenues generated by Eden of $7.7 million. Higher software services revenues were attributable to the following factors:
| • | | Excluding Eden, software services revenues from our financials products comprised almost half of our software service revenue in the years presented and were $2.5 million, or 14%, higher in 2004, primarily as a result of the increase in related software licenses sales over the prior year. Increased staffing levels also allowed for faster implementation of our backlog. In addition, we expanded our ASP and disaster recovery markets, which contributed approximately $750,000 to the increase in 2004. |
|
| • | | Software services revenues related to appraisal and tax software products for the year ended December 31, 2004 were $1.6 million higher than the prior year. Sales of Orion, our new appraisal and tax product generated approximately $1.4 million of the increase. |
|
| • | | In 2004, our document management division entered into a $1.9 million contract to convert data into a microfilm format, which generated a $675,000 increase in software services revenue over the prior year. |
Maintenance. Maintenance revenues for the year ended December 31, 2004 included $4.1 million from Eden, compared to $300,000 for the same prior year period. Excluding the impact of Eden, maintenance revenues during the year ended December 31, 2004
27
increased approximately 15% compared to 2003 due to growth in our installed customer base and slightly higher rates. During 2001, we received and
recorded as revenue a one-time settlement of approximately $650,000 from a third
party provider of maintenance rates on certain product lines.
Appraisal services. The decrease in appraisal services relating to past services. Excluding this
settlement, maintenance revenue increased approximately 13% for the year ended
December 31, 2002 comparedrevenues is due to the prior year.
Appraisal services revenues. Appraisal services revenues increased $2.6 million,
or 7%, forcompletion of certain significant appraisal contracts, particularly the year ended December 31, 2002, compared to 2001. The increase was
primarily related tocompletion of our contract with Lake County, Indiana which was first
awarded in December 2001. the fourth quarter of 2003.
Cost of Revenues and Gross Margins
The contract to provide professional services and
technology to reassess real property in Lake County is valued at $15.9 million,
of which $14.4 million relates to appraisal services, and is expected to be
completed by late 2003. During 2002, appraisal services revenue also included
$12.1 million of appraisal revenue related to our contract with the Nassau
County, New York Board of Assessors ("Nassau County"), which was comparable to
the amount recognized in 2001. Substantially allfollowing table sets forth a comparison of the workkey components of our cost of revenues and associated gross margins, and those components stated as a percentage of related to Nassau
County contract had been completed as ofrevenues for the following years ended December 31, 2002.
COST OF REVENUES
31:
| | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | % of | | | | | | | % of | | | | |
| | | | | | | related | | | | | | | related | | | 2004 vs. 2003 | |
| ($ in thousands) | | 2004 | | | revenues | | | 2003 | | | revenues | | | $ | | | % | |
| Software licenses | | $ | 8,819 | | | | 29 | % | | $ | 6,610 | | | | 26 | % | | $ | 2,209 | | | | 33 | % |
| Acquired software | | | 1,447 | | | | 5 | | | | 2,006 | | | | 8 | | | | (559 | ) | | | (28 | ) |
| Software services & maintenance | | | 72,609 | | | | 68 | | | | 56,892 | | | | 67 | | | | 15,717 | | | | 28 | |
| Appraisal services | | | 20,132 | | | | 73 | | | | 21,275 | | | | 71 | | | | (1,143 | ) | | | (5 | ) |
| Hardware and other | | | 5,425 | | | | 77 | | | | 3,844 | | | | 73 | | | | 1,581 | | | | 41 | |
| | | | | | | | | | | | | | | | | | | | | | |
| Total cost of revenues | | $ | 108,432 | | | | 63 | % | | $ | 90,627 | | | | 62 | % | | $ | 17,805 | | | | 20 | % |
| | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | |
| Overall gross margin | | | 37 | % | | | | | | | 38 | % | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | |
Cost of software license revenues. Forrevenues. The increase is related to the general release of several software development products and the commencement of the related amortization expense. Product releases in 2004 include Orion appraisal and tax products and an enhancement to one of our financial products. Amortization expense for 2004 also includes a full year of expense related to the Odyssey courts and justice product versus only four months in 2003.
Cost of acquired software.In 2004 cost of acquired software declined compared to 2003 because certain acquired software assets recorded for previous acquisitions became fully amortized beginning mid 2003 and throughout 2004. This decline was offset somewhat by the amortization expense for acquisition software recorded for the acquisition of Eden in December 2003.
Cost of software services and maintenance revenues. During the year ended December 31,
2002,2004, Eden contributed cost of software
licenseservices and maintenance revenues
increased $1.4of $7.9 million,
or 33%, compared to
$500,000 in the prior
year, primarily 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 available for
general release, we begin to expense the costs associated with the development
generally over the estimated useful life of the product.
17
Development costs mainly consist of personnel costs, such as salary and benefits
paid to our software developers, rent for related office space and capitalized
interest costs.
Cost of software service and maintenance revenues. For the year ended December
31, 2002,year. Excluding Eden, cost of software services and maintenance revenues increased $4.2$8.3 million, or 9%15%, comparedduring 2004. In 2004 we added additional staff to 2001. This increase is consistent with the higherprovide faster implementation of our backlog. Excluding Eden, software services and maintenance revenues for the same period, although
software services and maintenance revenues grew at a higher rate than the cost
of those revenues, which is reflective of more efficient utilization of our
support and maintenance staff and economies of scale. As a percentage of related
revenues, cost of software services and maintenance was 76% in 2002 compared to
79% in 2001.
Cost of appraisal services revenues. For the year ended December 31, 2002, cost
of appraisal service revenue increased approximately $1.6 million, or 7%,
compared to the year ended December 31, 2001. This increase is consistent with
the increase in appraisal services revenue, which also rose 7% compared to the
prior year. Cost of appraisal services revenues as a percentage of appraisal
services revenue was 68% for 2002 compared to 69% for 2001.
GROSS PROFIT
For the years ended December 31, 2002 and 2001, our overall gross margin was 36%
and 34%, respectively. The 2002 gross margin benefited from a product mix that
included more software license revenues and higher maintenance revenues than the
prior year. Software license revenues have lower associated costs than other
revenues such as software and appraisal services, third party software and
hardware. In addition, utilization of our personnel that provide services and
support has improved, which has increased our overall gross profit. The increase
in our gross profit was offset slightly by higher software development
amortization during 2002.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
Selling, general and administrative expenses, or SG&A, increased $3.1 million,
or 10%,14% for the year ended December 31, 20022004 compared to 2003. Cost of software services and maintenance revenues increased more than the associated revenues due to the time required to train and orient additional personnel hired during 2004 before they can effectively perform revenue-generating tasks, such as training and implementations. In addition, expenses increased as the costs related to certain employees who previously worked on new software development products ceased to be capitalized as those projects were completed and these employees moved into implementation and support functions. Cost of appraisal services revenues. The decline in the cost of appraisal services revenues is consistent with lower appraisal services revenues. In 2004, appraisal revenues declined at a faster rate than cost of appraisal revenues due to the use of subcontractors to supplement our appraisal staff on some of our larger contracts during 2004, resulting in lower margins. The nature and timing of these contracts required us to retain staff on either short notice or with specific qualifications, thus increasing the associated costs as a percentage of appraisal revenues.
Gross margin.Excluding the results of Eden, our gross margin for 2004 was 37% compared to 38% in the prior year. AsThe decline in gross margin from the prior year period was due to the following factors:
| • | | Higher amortization costs of our software development products released from mid-year 2003 through 2004; and |
|
| • | | The utilization of sub-contractors by our property appraisal and tax and document management divisions during 2004. |
28
Selling, General and Administrative Expenses
The following table sets forth a percentagecomparison of revenues, our selling, general and administrative (“SG&A”) expenses for the following years ended December 31:
| | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | % of | | | | | | % of | | 2004 vs. 2003 |
| ($ in thousands) | | 2004 | | revenues | | 2003 | | revenues | | $ | | % |
| Selling, general and administrative expenses | | $ | 45,451 | | | | 26 | % | | $ | 38,390 | | | | 26 | % | | $ | 7,061 | | | | 18 | % |
SG&A was 25%associated with Eden amounted to $4.4 million in 20022004 compared to 26%$350,000 in 2001.2003. Excluding Eden, SG&A increased 8% year-over-year. The $3.1
million increase in SG&A is a result of the following factors:
| • | | Costs to comply with corporate governance and public disclosure requirements of the Sarbanes-Oxley Act of 2002 and New York Stock Exchange rules, including those associated with documenting and testing internal controls. Compliance costs were very high and significantly exceeded our original estimates. These costs consisted of the engagement of a third party firm to consult with us on the development and testing of our controls, as well as the incremental costs associated with the independent auditors attesting to the effectiveness of these controls. While some of the expenses we incurred in 2004 may be considered “one-time” costs, it is clear that the new regulatory environment places an expensive burden on companies that will continue into the future; |
|
| • | | Increased headcount in our sales and marketing areas to support geographic expansion; |
|
| • | | Higher commissions related to higher revenue levels; and |
|
| • | | Higher research and development costs. |
Amortization of Customer and Trade Name Intangibles
Amortization of customer and trade name intangibles increased in 2004 because it included a full year of amortization expense related to the December 2003 acquisition of Eden.
Realized Gain on Sale of Investment in H.T.E., Inc.
On March 25, 2003, we received cash proceeds of $39.3 million in connection with a transaction to sell all of our 5.6 million shares of H.T.E., Inc. (“HTE”) common stock to SunGard Data Systems Inc. for $7.00 cash per share. Our original cost basis in the HTE shares was related primarily to higher costs with respect to
sales commissions, and increases in health$15.8 million. After transaction and other insurance expenses.
AMORTIZATION OF ACQUISITION INTANGIBLES
Our amortizationcosts, we recorded a gross realized gain of acquisition intangibles$23.2 million ($16.2 million or $0.36 per diluted share after income taxes of $7.0 million) for the year ended December 31, 2001
amounted2003.
Income Tax Provision
The following table sets forth a comparison of our income tax provision for the following years ended December 31:
| | | | | | | | | | | | | | | | | |
| | | | | | | | | | | 2004 vs. 2003 |
| ($ in thousands) | | 2004 | | 2003 | | $ | | % |
| Income tax provision | | $ | 7,309 | | | $ | 13,106 | | | $ | (5,797 | ) | | | (44 | )% |
| |
| Effective income tax rate | | | 42 | % | | | 34 | % | | | | | | | | |
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 $6.9 million, including $3.6 million for amortization of goodwill
and workforce costs. Effective January 1, 2002, we adopted Statement of
Financial Accounting Standards ("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. The remaining amortization consisted of those
costs allocated to our customer base and acquisition date software. See further
discussionthe utilization of the effect of adopting SFAS No. 142capital loss carryforward in Note 7 in Notes to the
Consolidated Financial Statements.
INTEREST (INCOME) EXPENSE
Our cash balances have2003, increased significantly during 2002 due to cash generated
from operations, the receipt of proceeds from the sale of certain discontinued
businessesstate income taxes and the exercise of stock options. In 2002 we invested excess cash in
money market investments. Offsetting interestnon-deductible meals and entertainment costs.
The income
from these money market
investments was $255,000 of interest expense for an outstanding $2.5 million
note payable. As a result, we had net interest income of $6,000tax provision for the year ended December 31,
2002 compared to net interest2003 includes income tax expense of
$479,000 for 2001.
In addition, during$7.0 million relating to the
years ended December 31, 2002 and 2001, we capitalized
$269,000 and $578,000, respectively,realized gain from the sale of
interest costsour investment in HTE (after reduction in valuation allowance related to
capitalized
software development costs.
INCOME TAX PROVISION
We had an effective income tax ratethe utilization of
39% for the year ended December 31, 2002.a capital loss carryforward amounting to $1.1 million on a tax-effected basis). For
the year ended December 31, 2001,2003, we had an effective income tax rate of
85%. Our effective income tax rate38% (excluding the effect of the HTE gain) compared to 42% in
both years exceeded2004. The majority of the
federal statutory
rate of 35%increase was due
primarily to
the net effect ofhigher state income taxes
because in 2004 we had more sales and
items that
are non-deductible for federal income tax purposes, including certain non
tax-deductible goodwill amortizationprofitability in
periodshighly taxed states than in the prior
to 2002.
18
DISCONTINUED OPERATIONS
year. 29
Discontinued operations consistsOperations
One of
the operating results of the information and
property records services segment which we discontinued in December 2000, twoour non-operating subsidiaries,
relating toSwan Transportation Company (“Swan”), had been involved in various claims raised by former employees of a
formerlyfoundry that was owned
subsidiary that we sold
in December 1995 and an automotive parts distributor that we sold in March 1999.
On September 29, 2000, we sold certain net assets of Kofile, Inc. and another
subsidiary, our interest in a certain intangible work product, and a building
and related building improvements (the "Kofile Sale") for a cash sale price of
$14.4 million. Effective December 29, 2000, we sold for cash our land records
business unit, consisting of Business Resources Corporation ("Resources"), toby an affiliate of
Affiliated Computer Services, Inc. ("ACS") (the "Resources Sale".)
The Resources Sale was valued at approximately $71.0 million. ConcurrentSwan and Tyler prior to December 1995. These claims were for alleged work-related injuries and physical conditions resulting from alleged exposure to silica, asbestos, and/or related industrial dusts. After a series of bankruptcy court filings involving Swan, on December 23, 2003, Tyler in accordance with the
Resources Sale, our management, with our Boardterms of
Directors' approval,
adopted a formalthe plan of
disposal forreorganization, transferred the
remaining businesses and assetsstock of
the
information and property records services segment. This restructuring program
was designed to focus our resources on our software systems and services segment
and to reduce debt. The businesses and assets divested or identified for
divesture were classified as discontinued operations in the accompanying
consolidated financial statements in 2000 and the prior periods' financial
statements were restated to report separately their operations in compliance
with APB Opinion No. 30. The net gain on the Kofile Sale and the Resources Sale
amounted to approximately $1.5 million (net of an income tax benefit of $2.4
million).
Our formal plan of disposal provided for the remaining businesses and assets of
the information and property records services segment to be disposed of by
December 29, 2001. The estimated loss on the disposal of these remaining
businesses and assets at December 29, 2000 amounted to $13.6 million (after an
income tax benefit of $3.8 million). This loss consisted of an estimated loss on
disposal of the businesses of $11.5 million (net of an income tax benefit of
$2.7 million) and a provision of $2.1 million (after an income tax benefit of
$1.1 million) for anticipated operating losses from the measurement date of
December 29, 2000Swan to the
estimated disposal dates.Swan Asbestos and Silica Trust (the “Trust”), an unaffiliated entity that will oversee the processing and payment of all present and future claims related to the foundry. On
May 16, 2001,December 23, 2003, we
soldpaid $1.48 million to the Trust in full and final release from all
of the common stock of one of the remaining
businesses in the discontinued information and property records services
segment. In connectionliability for claims associated with the
sale, we received cash proceeds of $575,000,
approximately 60,000 shares of Tyler common stock, a promissory note of $750,000
payable in 58 monthly installments at an interest rate of 9%, and other
contingent consideration. On September 21, 2001, we sold all of the common stock
of Capital Commerce Reporter, Inc. for $3.1 million in cash.
We renegotiated certain aspects of the May 16, 2001 sale transaction and asonce-owned foundry (the “Swan Matter”). As a result of
this renegotiationthe release, any claimant is barred from asserting any such claim, either now or in
March 2002, we received additional cash of
approximately $800,000 and a subordinated note receivable for $200,000, to fully
settle the
promissory note and other contingent consideration received in
connection with this 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 recordingagainst Tyler or its
value when the cash is received which is our
historical practice. During 2002, we received receipts of $46,000 on the
subordinated note.affected affiliates. During the year ended December 31,
2002,2003, the
IRS issued temporary regulations,
which in effect allowed us to deduct for tax purposes losses attributable to the
March 1999 sale of our automotive parts subsidiary that were previously not
allowed. The tax benefit of allowing the deduction of this loss amounted to
approximately $970,000. In addition, we renegotiated a note receivable and
certain contingent consideration in connection with a subsidiary sold in 2001
and received proceeds of approximately $846,000 in 2002. We initially assigned
no value for accounting purposes to the note receivable and contingent
consideration when the loss on the disposal of the discontinued operations was
first established in 2000 and when the note was first received in 2001. In
addition, we settled in the fourth quarter of 2002 our asbestos litigation for
an amount that was approximately $200,000 less than the liability initially
established for this matter (See Note 16 in Notes to Consolidated Financial
Statements). The aggregate effects of these events, net of the related tax
effects, and other minor adjustments to the reserve for discontinued operations,
resulted in a credit to discontinued operations of $1.8 million in 2002. In our
opinion and based on information available at this time, we believe the net
liabilities related to discontinued operations are adequate.
The income tax expense or benefit associated with the gains or losses on the
respective sales of the businesses in the information and property records
services segment differs from the statutory income tax rate of 35% due to the
elimination of deferred taxes related to the basis difference between amounts
reported for income taxes and financial reporting purposes and the utilization
of available capital loss carryforwards which were fully reserved in the
valuation account prior to the respective sales.
19
One of our non-operating subsidiaries is involved in various claims for
work-related injuries and physical conditions relating to a formerly-owned
subsidiary that we sold in 1995. For the years ended December 31, 2001 and 2000,
we expensed and included in discontinued operations, net of related tax effect,
$3,000 and $748,000, respectively, for trial and related costs (See Note 16 in
the Notes to the Consolidated Financial Statements).
INVESTMENT SECURITY AVAILABLE-FOR-SALE
Pursuant to an agreement with two major shareholders of H.T.E., Inc. ("HTE"), we
acquired approximately 5.6 million shares of HTE's common stock in exchange for
approximately 2.8 million shares of our common stock. The exchange occurred in
two transactions, one in August 1999 and the other in December 1999. The 5.6
million shares represent a current ownership interest of approximately 35% of
HTE. The cost of the investment was recorded at $15.8 million and is classified
as a non-current asset.
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. On November
16, 2000, the shareholders of HTE, other than Tyler, voted to deny Tyler its
right to vote the "control shares" of HTE. When we acquired the HTE shares, HTE
took the position that all of our shares were "control shares" and therefore did
not have voting rights. We disputed this contention and asserted that the
"control shares" were only those shares in excess of 20% of the outstanding
shares of HTE, and it was only those shares that lacked voting rights. At the
time of our acquisition, no court had interpreted the Florida "control share"
statute.
On October 29, 2001, HTE notified us that, pursuant to the Florida "control
share" statute, it had redeemed all 5.6 million shares of HTE common stock owned
by us for a cash price of $1.30 per share. 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 our
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, that HTE's purported
redemption of any or all of our shares was illegal under Florida law and that we
had the ability to vote up to 20% of the issued and outstanding shares of HTE
common stock owned by us.
On September 18, 2002, the court issued an order declaring that HTE's purported
redemption was invalid. On September 24, 2002, we entered into a settlement
agreement with HTE in which HTE agreed that it would not attempt any other
redemption of our shares. In addition, HTE agreed to dismiss and release us from
the tort claims it alleged against us as disclosed in previous filings. On
December 11, 2002, the court issued a further order declaring that all of our
HTE shares are "control shares" and therefore none of our shares have voting
rights. The court further ruled that voting rights would be restored to our HTE
shares if we were to sell or otherwise transfer our HTE shares to an
unaffiliated third party in a transaction that did not constitute a "control
share acquisition." During 2002, approximately $704,000 of legal and other
related costs associated with these matters were charged to non-operating
expenses.
Under GAAP, a 20% investment in the voting stock of another company creates the
presumption that the investor has significant influence over the operating and
financial policies of that company, unless there is evidence to the contrary.
Our management has concluded that we do not have such influence. Accordingly, 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.
On February 4, 2003, we entered into an agreement with SunGard Data Systems,
Inc. ("SDS") in which we agreed to tender all of our HTE shares in a tender
offer to be commenced by SDS for the acquisition of HTE. On February 5, 2003,
SDS and HTE announced a definitive agreement for the acquisition of all of the
shares of HTE for $7.00 per share in cash. SDS and HTE also announced that the
consummation of the transaction is subject to customary conditions, including
the tender of at least a majority of the outstanding shares of HTE in the tender
offer and the expiration of the waiting period under the Hart-Scott-Rodino
Antitrust Improvements Act of 1976, as amended. SDS and HTE further announced
that certain shareholders owning approximately 49.6% of the total outstanding
shares of HTE had agreed to tender their shares. According to the press release
issued by SDS and HTE, the acquisition is expected to close in the first quarter
of 2003. Assuming the acquisition is consummated, we will receive approximately
$39.3 million in gross cash proceeds from the sale of our HTE shares. There can
be no assurance that the acquisition of HTE by SDS will be consummated on the
terms as disclosed, if at all. If SDS does not acquire HTE, we will continue to
classify our investment as an available-for-sale security in accordance with
SFAS No. 115 and as a non-current asset since the investment was initially made
for a continuing business purpose.
20
NET INCOME
Net income was $8.0 million in 2002 compared to $269,000 in 2001. For 2002 and
2001, diluted earnings per share was $0.16 and $0.01, respectively. Net income
for 2002 included a gain on disposal of discontinued operations of $424,000 primarily resulted because we fully settled the Swan Matter at an amount less than initially recorded and certain aspects of the settlement were structured in a beneficial tax manner. Accordingly, we recognized for the first time certain tax benefits associated with payments on behalf of the Swan Matter. Net Income
The following table sets forth a comparison of our net of taxes,
of $1.8 million, or $0.04income, earnings per diluted share, income from continuing operations per diluted share and netdiluted weighted average shares outstanding for the following years ended December 31:
| | | | | | | | | | | | | | | | | |
| | | | | | | | | | | 2004 vs. 2003 |
| ($ in thousands, except per share data) | | 2004 | | 2003 | | $ | | % |
| Net income | | $ | 10,128 | | | $ | 26,402 | | | $ | (16,274 | ) | | | (62 | )% |
| Earnings per diluted share | | | 0.23 | | | | 0.59 | | | | (0.36 | ) | | | (61 | ) |
| Income from continuing operations per diluted share | | | 0.23 | | | | 0.58 | | | | (0.35 | ) | | | (60 | ) |
| | | | | | | | | | | | | | | | | |
| Diluted weighted average shares outstanding | | | 44,566 | | | | 45,035 | | | | (469 | ) | | | (1 | ) |
Net income for 2001 included a
loss on discontinued operations, net of taxes, of $3,000, or $0.00 per diluted
share.
2001 COMPARED TO 2000
REVENUES
Revenues were $118.8 million for the yeartwelve months ended December 31, 2001,2003 included a 26%
increase$16.2 million realized gain after income taxes relating to the sale of our investment in HTE, which had a diluted earnings per share effect of $0.36 per diluted share.
FINANCIAL CONDITION AND LIQUIDITY
Historically, we have funded our operations and cash expenditures primarily with cash generated from revenuesoperating activities. As of $93.9 million for the prior year.
Software license revenues. Software license revenues increased each quarter
during 2001 from $4.0 million in the first quarter to $5.8 million in the fourth
quarter. For the year ended December 31, 2001, software license revenue2005, our balance in cash and cash equivalents was $19.5$20.7 million and we had short-term investments of $11.7 million, compared to $19.3cash and cash equivalents of $12.6 million and short-term investments of $13.8 million at December 31, 2004. Cash provided by operating activities was $21.2 million compared to cash provided by operating activities of $22.2 million in 2004 and $22.5 million in 2003. Cash and short-term investments increased primarily due to continued strong operating performance and higher deferred revenue due to additional maintenance customers and new contract signings.
At December 31, 2005, our days sales outstanding (“DSOs”) were 101 days compared to DSOs of 89 days at December 31, 2004. The increase in DSOs is due primarily to timing of billings. DSOs are calculated based on accounts receivable (excluding long-term receivables) divided by the quotient of annualized quarterly revenues divided by 360 days.
Investing activities provided cash of $1.8 million in 2005 compared to a use of cash of $9.9 million in 2004 and $590,000 in 2003. In 2005 we significantly reduced our capitalized investments in software development and property and equipment and liquidated some short term investments and reinvested the proceeds in cash equivalents. The cash used in investing activities in 2004 was comprised of investments in software development costs and property and equipment, short-term bond funds and additional purchase price payments related to the Eden acquisition. Investing activities in 2003 included $39.3 million of gross proceeds on the sale of our investment in H.T.E., Inc. which was offset by the investment of such proceeds in short-term bond funds, software development costs, property and equipment and the acquisition of Eden.
During 2005, we made capital expenditures of $2.7 million, including $1.7 million for computer equipment, furniture and fixtures and
30
expansions related to internal growth. The other expenditures related to software development costs. Capital expenditures were funded from cash generated from operations.
Proceeds from sales of short-term investments were $19.0 million during 2005. During 2005, the year endedshort-term investments earned interest income of $290,000 which was reinvested. We also earned interest income of $450,000 from money market investments and interest income of $170,000 from an investment in a restricted certificate of deposit.
Pursuant to our purchase agreement with Eden, two of the shareholders of Eden were granted the right to “put” their remaining shares to Tyler and we were also granted the right to “call” the remaining shares. In 2004, we purchased the remaining 2,500 shares for $725,000 in cash.
Financing activities used cash of $14.8 million in 2005 compared to $9.9 million in 2004 and $25.4 million in 2003. Cash used in financing activities was primarily comprised of purchases of treasury shares, net of proceeds from stock option exercises. Financing activities in 2003 included the purchase of approximately 6.0 million shares of our common stock through our modified Dutch Auction tender offer and purchases on the open market for $24.1 million.
During 2005, we purchased approximately 2.5 million shares of our common stock for an aggregate cash purchase price of $17.7 million.
In 2005, we received $1.8 million from the exercise of options to purchase approximately 436,000 shares of our common stock under our employee stock option plan. During 2004 we issued 680,000 shares of common stock and received $1.9 million in aggregate proceeds, upon exercise of stock options and during 2003 we issued 554,000 shares of common stock and received $1.7 million in aggregate proceeds upon exercise of stock options.
During 2005, we received $1.0 million for contributions to the Tyler Technologies, Inc. Employee Stock Purchase Plan (“the ESPP”), which was adopted by our shareholders in May 2004.
Subsequent to December 31, 2000.
The increase was due mainly to sales of third-party software that provided
additional functionality to certain modules2005 and through February 27, 2006 we purchased approximately 250,000 shares of our proprietary software, salescommon stock for an aggregate cash purchase price of proprietary software to new customers and in new geographic areas, primarily
the midwestern United States, and sales of upgraded financial and utility
software modules to existing customers. The increase was somewhat offset by
lower tax and appraisal software sales.
Software services revenues. Software services revenues grew 11% to $21.5 million
for the year ended December 31, 2001, from $19.4 million for the year ended
December 31, 2000. The increase was due to higher proprietary software sales, as
we offer services, such as installation of the software, conversion of the
customers' data to be compatible with the software and training of the customer
personnel to use the software. In addition, during 2001,$2.2 million.
On February 11, 2005, we entered into more
service-intensive contracts, particularly relateda revolving bank credit agreement (the “Credit Facility”). The Credit Facility matures February 11, 2008 and provides for total borrowings of up to our tax products.
Maintenance revenues. For$30.0 million and a $10.0 million Letter of Credit facility under which the year endedbanks will issue cash collateralized letters of credit. As of December 31, 2001, maintenance revenue
increased 26%, to $36.6 million, from $29.1 million for 2000. Higher maintenance
revenues were due to an increase in2005, our baseeffective interest rate was 5.9% under the Credit Facility. As of installed software and systems
products and maintenance rate increases for several product lines. Maintenance
and support services are provided for our software and related products.
Appraisal services revenues. For the year ended December 31, 2001, appraisal
services revenues were $34.72005 we had no debt and outstanding letters of credit totaling $4.1 million compared to $20.9 million insecure surety bonds required by some of our customer contracts. As of February 27, 2006, we had no outstanding borrowings under the prior
year.Credit Facility.
In January 2006, we acquired two companies, MazikUSA, Inc. and TACS, Inc. The
66% increasecombined purchase price for the
year in appraisal services revenuestwo companies was
primarily
due to our continued progress on our contract with Nassau County. The contract
to provide outsourced assessment services for Nassau County, together with tax
assessment administration softwareapproximately $14.2 million, comprised of approximately $11.3 million cash and
training, is valued at approximately
$34.0 million. Implementation325,000 shares of Tyler common stock. We have not finalized the allocation of the
Nassau County contract began in September
2000. For the year ended December 31, 2001, we recorded $14.4 million of
professional services revenue related to Nassau County.
Hardware and other revenues. Hardware and other revenues increased $1.3 million
for the year ended December 31, 2001 from $5.2 million for the same period of
2000. Approximately $700,000 of the increase related to the Nassau County
contract. Other increases were due to timing of installations of equipment on
customer contracts and are dependent on the contract size and on varying
customer hardware needs.
COST OF REVENUES
For the year ended December 31, 2001, cost of revenues was $78.8 million
compared to $59.7 million for the year ended December 31, 2000. The increase in
cost of revenues was primarily due to the increase in revenues.
Gross margin was 34% for the year ended December 31, 2001, compared to 36% for
the year ended December 31, 2000. Overall gross margin was lower because our
2001 revenue mix included more appraisal services compared to 2000.
Historically, gross profit is higher for software licenses than for software and
appraisal services due to personnel costs associated with services. In addition,
software license costs increased during 2001 compared to 2000, due to increased
amortization of software development costs. We released several new products
during the second and third quarters of 2001, at which time we began to amortize
the related software development costs.
21
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
Selling, general and administrative expenses for the year ended December 31,
2001 was $30.8 million compared to $32.8 million in the prior year. Selling,
general and administrative expenses as a percentage of revenues declined to 26%
in 2001 from 35% in 2000 because such expenses are primarily fixed and therefore
did not increase in proportion to our revenue growth. The decline in selling,
general and administrative expenses was due to a reduction in corporate costs
following the sale of the information and property records services segment,
lower acquisition-related costs such as legal and travel expenses and lower
research and development costs which are expensed.
AMORTIZATION OF ACQUISITION INTANGIBLES
We accounted for all of our past acquisitions using the purchase method of
accounting for business combinations. Prior to the adoption of SFAS No. 142, the
excess of the purchase price over the fair value of the net identifiable assets of the acquired companies ("goodwill") was amortized using the straight-line
method of amortization over their respective estimated useful lives.
Amortization expense of acquisition intangibles was $6.9 millionbut expect this allocation will result in 2001 and
2000.
NET INTEREST EXPENSE
Net interest expense was $479,000 for the year ended December 31, 2001, compared
to $4.9 million for the year ended December 31, 2000. Interest expense declined
due tonon-cash charges that will have a significant reduction in bank debt with the proceeds from the disposal
of our former information and property records services segment. In addition,
during 2001 we capitalized $578,000 of interest costs related to internally
developed software products, compared to $586,000 for 2000.
INCOME TAX PROVISION
For the year ended December 31, 2001, we had income from continuing operations
before income taxes of $1.8 million and an income tax provision of $1.5 million,
resulting in an effective tax rate of 85%. The high effective income tax rate is
primarily attributable to non tax-deductible goodwill amortization. For 2000, we
incurred a loss from continuing operations before income tax benefit of $10.3
million and an income tax benefit of $2.8 million, resulting in an effective
benefit rate of 27%.
NET INCOME
Net income was $269,000 in 2001 compared to a net loss of $24.6 million in 2000.
For 2001, dilutedsmall dilutive effect on earnings per share was $0.01 and, for 2000, diluted loss per
share was $0.54. Income from continuing operations was $272,000, or $0.01 per
diluted share in 2001, compared to a loss from continuing operations of $7.5
million, or $0.17 per diluted share in 2000.
ACCOUNTING PRONOUNCEMENTS NOT YET ADOPTED
In June 2001, the Financial Accounting Standards Board ("FASB") issued SFAS No.
143, "Accounting for Asset Retirement Obligations." SFAS No. 143 requires us to
record the fair value of an asset retirement obligation as a liability in the
period in which it incurs a legal obligation associated with the retirement of
tangible long-lived assets that result from the acquisition, construction,
development, and/or normal use of the assets. A corresponding asset is also
recorded and depreciated over the life of the asset. After the initial
measurement of the asset retirement obligation, the obligation will be adjusted
at the end of each period to reflect the passage of time and changes in the
estimated future cash flows relating to the obligation. We are required to adopt
SFAS No. 143 on January 1, 2003. The adoption of SFAS No. 143 is not expected to
have a material effect on our financial statements.
In April 2002, the FASB issued SFAS No. 145, "Rescission of FASB Statements No.
4, 44 and 64, Amendment of FASB Statement No. 13, and Technical Corrections".
SFAS No. 145 amends existing guidance on reporting gains and losses on the
extinguishment of debt to prohibit the classification of the gain or loss as
extraordinary, as the use of such extinguishments have become part of the risk
management strategy of many companies. SFAS No. 145 also amends SFAS No. 13 to
require sale-leaseback accounting for certain lease modifications that have
economic effects similar to sale-leaseback transactions. The provisions of SFAS
No. 145 related to the rescission of Statement No. 4, are applied in fiscal
years beginning after May 15, 2002. Earlier application of these provisions is
encouraged. The provisions of SFAS No. 145 related to Statement No. 13 were also
effective for transactions occurring after May 15, 2002, with early application
encouraged. The adoption of SFAS No. 145 is not expected to have a material
effect on our financial statements.
22
In June 2002, the FASB issued SFAS No. 146, "Accounting for Costs Associated
with Exit or Disposal Activities." SFAS No. 146 addresses financial accounting
and reporting for costs associated with exit or disposal activities and
nullifies Emerging Issues Task Force ("EITF") Issue 94-3, "Liability Recognition
for Certain Employee Termination Benefits and Other Costs to Exit an Activity."
The provisions of this Statement are effective for exit or disposal activities
that are initiated after December 31, 2002, with early application encouraged.
The adoption of SFAS No. 146 is not expected to have a material effect on our
financial statements.
In November 2002, the FASB issued Interpretation No. 45, "Guarantor's Accounting
and Disclosure Requirements for Guarantees, Including Indirect Guarantees of
Indebtedness to Others," an interpretation of FASB Statements No. 5, 57 and 107
and a rescission of FASB Interpretation No. 34. This Interpretation elaborates
on the disclosures to be made by a guarantor in its interim and annual financial
statements about its obligations under guarantees issued. The Interpretation
also clarifies that a guarantor is required to recognize, at inception of a
guarantee, a liability for the fair value of the obligation undertaken. The
initial recognition and measurement provisions of the Interpretation are
applicable to guarantees issued or modified after December 31, 2002 and are not
expected to have a material effect on our financial statements. The disclosure
requirements are effective for financial statements of interim and annual
periods ending after December 31, 2002.
In January 2003, the FASB issued Interpretation No. 46, "Consolidation of
Variable Interest Entities, an interpretation of Accounting Research Bulletin
("ARB") No. 51." This Interpretation addresses the consolidation by business
enterprises of variable interest entities as defined in the Interpretation. The
Interpretation applies immediately to variable interests in variable interest
entities created after January 31, 2003, and to variable interests in variable
interest entities obtained after January 31, 2003. The application of this
Interpretation is not expected to have a material effect on our financial
statements.
FINANCIAL CONDITION AND LIQUIDITY
On March 5, 2002, we entered into a new $10.0 million revolving bank credit
agreement which matures January 1, 2005. Our borrowings are limited to 80% of
eligible accounts receivable and bear interest 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.
As of December 31, 2002, our bank has issued under our credit agreement letters
of credit totaling $3.7 million 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 December 31, 2002. At December 31, 2002, we had no outstanding bank
borrowings under the credit agreement and had an available borrowing base of
$6.3 million.
As of December 31, 2002, our cash balance was $13.7 million, compared to $5.3
million at December 31, 2001. Cash increased primarily due to cash received from
disposition of certain discontinued businesses and assets of discontinued
business, cash generated from operations, exercise of stock options and improved
cash collections. At December 31, 2002, our days sales outstanding ("DSO's")
(accounts receivable divided by the quotient of annualized quarterly revenues
divided by 360 days) were 85 compared to DSO's of 103 at December 31, 2001.
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 2001 of a
business unit previously included in the information and property records
services segment, which had been discontinued.
In June 2002, we sold the building of a business unit previously included in the
discontinued information and property records service segment. Net proceeds from
the sale were approximately $961,000.
During the year ended December 31, 2002, we received $1.6 million from the
issuance of 491,000 treasury shares upon the exercise of stock options under our
employee stock option plan.
During 2002, we made capital expenditures of $9.7 million, including $7.2
million for software development costs. The other expenditures related to
computer equipment and expansions related to internal growth. Capital
expenditures were funded principally from cash generated from operations.
23
2006. Excluding acquisitions, we anticipate that 20032006 capital spending will be approximately $12.0between $3.5 million approximately $9.0and $4.0 million, the majority of which will be related to computer equipment and software development.for infrastructure expansions. Capital spending in 20032006 is expected to be funded from existing cash balances and cash flows from operations.
On August 15, 2002,
From time to time we consummated an agreementwill engage in discussions with potential acquisition candidates. In order to repurchase 1.1 millionpursue such opportunities, which could require significant commitments of capital, we may be required to incur debt or to issue additional potentially dilutive securities in the future. No assurance can be given as to our common sharesfuture acquisition opportunities and how such opportunities will be financed. In the absence of future acquisitions of other businesses, we believe our current cash balances and expected future cash flows from William D. Oates, a former director of Tyler,operations will be sufficient to meet our anticipated cash needs for aworking capital, capital expenditures and other activities through the next twelve months. If operating cash purchase price of $4.0 million.
flows are not sufficient to meet our needs, we may borrow under our credit agreement.
We lease
certain offices,office facilities, as well as transportation, computer and other equipment used in our
continuing operations under
noncancelablenon-cancelable operating lease agreements expiring at various dates through
2012.2013. Most leases contain renewal options and some contain purchase options. Following are the future obligations under
noncancelablenon-cancelable leases
and maturities of long-term obligations at December 31,
20022005 (in
millions)thousands):
2003 2004 2005 2006 2007 Thereafter Total
---- ---- ---- ---- ---- ---------- -----
Future rental payments under operating
leases............................... $ 3.5 $ 3.2 $ 3.0 $ 2.7 $ 2.5 $ 9.5 $ 24.4
Notes payable and other................. .5 0.0 2.5 -- -- -- 3.0
------- ------- ------- ------- ------- -------- ----------
$ 4.0 $ 3.2 $ 5.5 $ 2.7 $ 2.5 $ 9.5 $ 27.4
======= ======= ======= ======= ======= ======== ==========
In August 2002,31
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | 2006 | | 2007 | | 2008 | | 2009 | | 2010 | | Thereafter | | Total |
| Future rental payments under operating leases | | $ | 4,400 | | | $ | 4,251 | | | $ | 4,113 | | | $ | 3,905 | | | $ | 2,696 | | | $ | 3,358 | | | $ | 22,723 | |
It is not our Boardusual business practice to enter into off-balance sheet arrangements. Moreover, it is not our normal policy to issue guarantees to third parties. As of Directors approved a plan to repurchase up to 1.0
million shares of our common stock. Subsequent to December 31, 2002 and through
February 21, 2003,2005 we have repurchased 339,000 sharesno material purchase commitments, except for an aggregatethe operating lease commitments listed above.
CAPITALIZATION
At December 31, 2005, our capitalization consisted of $112.2 million of shareholders’ equity.
NEW ACCOUNTING PRONOUNCEMENTS
Effective January 1, 2006, we will be required to adopt Statement of Financial Accounting Standards (“SFAS”) No. 123R, “Share-Based Payment” which, among other things, will require the recording in the financial statements of non-cash compensation expense related to stock options and employee stock purchase plan transactions. Prior to 2006, we have only disclosed, as permitted by SFAS No. 123, “Accounting for Stock-Based Compensation”, pro forma financial results including the effects of share-based compensation expense in the footnotes to the financial statements. We have chosen the “modified prospective” method of implementing SFAS No. 123R. Under the “modified prospective” method, new awards will be valued and accounted for prospectively upon adoption. Outstanding prior awards that are unvested as of December 31, 2005 will be recognized as compensation cost over the remaining requisite service period. Prior periods will not be restated. Based on stock options granted to employees through December 31, 2005, we expect the adoption of SFAS No. 123R on January 1, 2006, will reduce first quarter net earnings by approximately $320,000 ($0.01 per share, diluted) and reduce full year 2006 net earnings by approximately $1.3 million ($0.03 per share, diluted).
SFAS No. 123R also requires employee stock purchase plans (ESPP) with purchase price of $1.4 million.
On February 4, 2003, we entered into an agreement with SunGard Data Systems Inc.
("SDS") in which we agreeddiscounts greater than 5% to tender all of our HTE sharesbe compensatory. Our ESPP has a 15% purchase price discount, but the plan can be modified at any time. We expect the related compensatory charge would reduce first quarter 2006 net earnings by approximately $50,000 ($0.00 per share, diluted) and reduce full year 2006 net earnings by approximately $200,000 ($0.01 per share, diluted).
SFAS No. 123R includes several modifications to the way that income taxes are recorded in the
tender offerfinancial statements. The expense for certain types of option grants is only deductible for tax purposes at the time that the taxable event takes place, which could cause variability in our effective tax rates recorded throughout the year. SFAS No. 123R does not allow companies to
“predict” when these taxable events will take place. Furthermore, it requires that the benefits associated with the tax deductions in excess of recognized compensation cost be
commenced by SDSreported as a financing cash flow, rather than as an operating cash flow as required under current literature. This requirement will reduce net operating cash flows and increase net financing cash flows in periods after the effective date. These future amounts cannot be estimated, because they depend on, among other things, when employees exercise stock options. However, the amount of operating cash flows recognized in prior periods for
the acquisitionsuch excess tax deductions, as shown in our consolidated statement of
HTE. On February 5, 2003, SDScash flows, were $313,000, $582,000, and
HTE announced a definitive agreement$292,000, respectively, for
the acquisition of all of the shares of
HTE for $7.00 per share in cash. Assuming the acquisition is consummated, we
will receive approximately $39.3 million in gross cash proceeds from the sale of
our HTE shares.
As part of the plan of reorganization of Swan Transportation Company, one of our
non-operating subsidiaries, we have agreed to contribute approximately $1.5
million over the next three years to a trust that was set up as part of the
reorganization.2005, 2004, and 2003. See
Note 16Notes 1 and 12 in the Notes to the Consolidated Financial
Statements.
From time to time, we have discussions relating to acquisitions and we expect to
continue to assess these and other strategic acquisition opportunities as they
arise. We may also require additional financing if we decide to make additional
acquisitions. There can be no assurance, however, that any such opportunities
will arise, that any such acquisitions will be consummated or that any needed
additional financing will be available when required on terms satisfactory to
us. Absent any acquisitions, we anticipate that existing cash balances, cash
flows from operations, working capital and available borrowing capacity under
our revolving credit facility will provide sufficient funds to meet our needsStatements for
at least the next year.
CAPITALIZATION
At December 31, 2002, our capitalization consisted of $3.0 million of long-term
obligations (including the current portion of those obligations) and $118.7
million of shareholders' equity. Our total debt-to-capital ratio (total debt
divided by the sum of total shareholders' equity and total long-term
obligations) was 2% at December 31, 2002.
FACTORS THAT MAY AFFECT FUTURE RESULTS AND MARKET PRICE OF OUR STOCK
An investment in our common stock involves a high degree of risk. Investors
evaluating our company should carefully consider the factors described below and
all otherfurther information
contained in this Annual Report. Any of the following
factors could materially harm our business, operating results, and financial
condition. Additional factors and uncertainties not currently known to us or
that we currently consider immaterial could also harm our business, operating
results, and financial condition. This section should be read in conjunction
with the Consolidated Financial Statements and related Notes and Management's
Discussion and Analysis of Financial Condition and Results of Operations
included in this Annual Report. We may make forward-looking statements from time
to time, both written and oral. We undertake no obligation to revise or publicly
release the results of any revisions to these forward-looking statements. Our
actual results may differ materially from those projected in any such
forward-looking statements due to a number of factors, including those set forth
below and elsewhere in this Annual Report.
24
A decline in information technology spending may result in a decrease in our
revenues or lower our growth rate.
A decline in the demand for information technology among our current and
prospective customers may result in decreased revenues or a lower growth rate
for us because our sales depend, in part, on our customers' level of funding for
new or additional information technology systems and services. Moreover, demand
for our solutions may be reduced by a decline in overall demand for computer
software and services. The current technology recession and decline in overall
technology spending, terrorist activity, and threats of hostilities in the
Middle East and Asia may cause our customers to reduce or eliminate information
technology spending and cause price erosion for our solutions, which would
substantially reduce the number of new software licenses we sell and the average
sales price for these licenses. Because of these market and economic conditions,
we believe there will continue to be uncertainty in the level of demand for our
products and services. Accordingly, we cannot assure you that we will be able to
increase or maintain our revenues.
We may experience fluctuations in quarterly revenue that could adversely impact
our stock price and our operating results.
Our actual revenues in a quarter could fall below expectations, which could lead
to a decline in our stock price. Our revenues and operating results are
difficult to predict and may fluctuate substantially from quarter to quarter.
Revenues from license fees in any quarter depend substantially upon our
contracting activity and our ability to recognize revenues in that quarter in
accordance with our revenue recognition policies. Our quarterly revenue may
fluctuate and may be difficult to forecast for a variety of reasons, including
the following:
- a significant number of our prospective customers' decisions
regarding whether to enter into license agreements with us are
made within the last few weeks of each quarter;
- we have historically had a higher concentration of revenues in
the second half of our fiscal year due to governmental budget
and spending tendencies;
- the size of license transactions can vary significantly;
- customers may unexpectedly postpone or cancel orders due to
changes in their strategic priorities, project objectives,
budget or personnel;
- customer purchasing processes vary significantly and a
customer's internal approval and expenditure authorization
process can be difficult and time consuming to complete, even
after selection of a vendor;
- the number, timing, and significance of software product
enhancements and new software product announcements by us and
our competitors may affect purchase decisions; and
- we may have to defer revenues under our revenue recognition
policies.
Fluctuation in our quarterly revenues may adversely affect our operating
results. In each fiscal quarter our expense levels, operating costs, and hiring
plans are based on projections of future revenues and are relatively fixed. If
our actual revenues fall below expectations, we could experience a reduction in
operating results.
As with other software vendors, we may be required to delay revenue recognition
into future periods, which could adversely impact our operating results.
We have in the past had to, and in the future may have to, defer revenue
recognition for license fees due to several factors, including whether:
- license agreements include applications that are under
development or other undelivered elements;
- we must deliver services, including significant modifications,
customization, or complex interfaces, which could delay
product delivery or acceptance;
- the transaction involves acceptance criteria;
- the transaction involves contingent payment terms or fees;
- we are required to accept a fixed-fee services contract; or
- we are required to accept extended payment terms.
Because of the factors listed above and other specific requirements under
generally accepted accounting principles in the United States for software
revenue recognition, we must have very precise terms in our license agreements
in order to recognize revenue when we initially deliver and install software or
perform services. Negotiation of mutually acceptable terms and conditions can
extend the sales
25
cycle, and sometimes we do not obtain terms and conditions that permit revenue
recognition at the time of delivery or even as work on the project is completed.
Increases in service revenue as a percentage of total revenues could decrease
overall margins and adversely affect our operating results.
We realize lower margins on software and appraisal service revenues than on
license revenue. The majority of our contracts involve both the license of
software and the provision of professional services. Therefore, an increase in
the percentage of software service and appraisal service revenue compared to
license revenue could have a detrimental impact on our overall gross margins and
could adversely affect operating results.
Selling products and services into the public sector poses unique challenges.
We derive substantially all of our revenues from sales of software and services
to state, county and city governments, other municipal agencies, and other
public entities. We expect that sales to public sector customers will continue
to account for substantially all of our revenues in the future. We face many
risks and challenges associated with contracting with governmental entities,
including:
- the sales cycle of governmental agencies may be complex and
lengthy;
- payments under some public sector contracts are subject to
achieving implementation milestones, and we have had, and may
in the future have, differences with customers as to whether
milestones have been achieved;
- political resistance to the concept of government agencies
contracting with third parties to provide information
technology solutions;
- changes in legislation authorizing government's contracting
with third parties;
- the internal review process by governmental agencies for bid
acceptance;
- changes to the bidding procedures by governmental agencies;
- changes in governmental administrations and personnel;
- limitations on governmental resources placed by budgetary
restraints, which in some circumstances, may provide for a
termination of executed contracts because of a lack of future
funding; and
- the general effect of economic downturns and other changes on
local governments' ability to spend public funds on
outsourcing arrangements.
Each of these risks is outside our control. If we fail to adequately adapt to
these risks and uncertainties, our financial performance could be adversely
affected.
The open bidding process for governmental contracts creates uncertainty in
predicting future contract awards.
Many governmental agencies purchase products and services through an open
bidding process. Generally, a governmental entity will publish an established
list of requirements requesting potential vendors to propose solutions for the
established requirements. To respond successfully to these requests for
proposals, we must accurately estimate our cost structure for servicing a
proposed contract, the time required to establish operations for the proposed
client, and the likely terms of any other third party proposals submitted. We
cannot guarantee that we will win any bids in the future through the request for
proposal process, or that any winning bids will ultimately result in contracts
on favorable terms. Our failure to secure contracts through the open bidding
process, or to secure such contracts on favorable terms, may adversely affect
our business, financial condition, and results of operations.
Fixed price contracts may affect our profits.
Some of our present contracts are on a fixed-priced basis, which can lead to
various risks, including:
- the failure to accurately estimate the resources and time
required for an engagement;
- the failure to effectively manage governmental agencies' and
other customers' expectations regarding the scope of services
to be delivered for an estimated price; and
- the failure to timely complete fixed-price engagements within
budget to the customers' satisfaction.
If we do not adequately assess these and other risks, we may be subject to cost
overruns and penalties, which may harm our business, financial condition, or
results of operations.
26
We face significant competition from other vendors and potential new entrants
into our markets.
We believe we are a leading provider of integrated solutions for the public
sector. However, we face competition from a variety of software vendors that
offer products and services similar to those offered by us, as well as from
companies offering to develop custom software. We compete on the basis of a
number of factors, including:
- the attractiveness of the business strategy and services we
offer;
- the breadth of products and services we offer;
- price;
- quality of products and service;
- technological innovation;
- name recognition; and
- our ability to modify existing products and services to
accommodate the particular needs of our customers.
We believe the market is highly fragmented with a large number of competitors
that vary in size, primary computer platforms, and overall product scope. Our
competitors include the consulting divisions of national and regional accounting
firms, publicly held companies that focus on selected segments of the public
sector market, and a significant number of smaller, privately held companies.
Certain competitors have greater technical, marketing, and financial resources
than us. We cannot assure you that such competitors will not develop products or
offer services that are superior to our products or services or that achieve
greater market acceptance.
We also compete with internal, centralized information service departments of
governmental entities, which require us to persuade the end-user to stop the
internal service and outsource to us. In addition, our customers may elect in
the future to provide information management services internally through new or
existing departments, which will reduce the market for our services.
We could face additional competition as other established and emerging companies
enter the public sector software application market and new products and
technologies are introduced. Increased competition could result in price
reductions, fewer customer orders, reduced gross margins, and loss of market
share. In addition, current and potential competitors may make strategic
acquisitions or establish cooperative relationships among themselves or with
third-parties, thereby increasing the ability of their products to address the
needs of our prospective customers. It is possible that new competitors or
alliances among current and new competitors may emerge and rapidly gain
significant market share. Further, competitive pressures could require us to
reduce the price of our software licenses and related services. We cannot assure
you that we will be able to compete successfully against current and future
competitors, and the failure to do so would have material adverse effect upon
our business, operating results, and financial condition.
We must respond to rapid technological changes to be competitive.
The market for our products is characterized by rapid technological change,
evolving industry standards in computer hardware and software technology,
changes in customer requirements, and frequent new product introductions and
enhancements. The introduction of products embodying new technologies and the
emergence of new industry standards can render existing products obsolete and
unmarketable. As a result, our future success will depend, in part, upon our
ability to continue to enhance existing products and develop and introduce in a
timely manner or acquire new products that keep pace with technological
developments, satisfy increasingly sophisticated customer requirements, and
achieve market acceptance. We cannot assure you that we will successfully
identify new product opportunities and develop and bring new products to market
in a timely and cost-effective manner. Further, we cannot assure you that the
products, capabilities, or technologies developed by others will not render our
products or technologies obsolete or noncompetitive. If we are unable to develop
or acquire on a timely and cost-effective basis new software products or
enhancements to existing products, or if such new products or enhancements do
not achieve market acceptance, our business, operating results, and financial
condition may be materially adversely affected.
Our failure to properly manage growth could adversely affect our business.
We have expanded our operations rapidly since February 1998, when we entered the
business of providing software solutions and services to the public sector. We
intend to continue expansion in the foreseeable future to pursue existing and
potential market opportunities. This rapid growth places a significant demand on
management and operational resources. In order to manage growth effectively, we
must implement and improve our operational systems, procedures, and controls on
a timely basis. We must also identify, hire, train, and manage key managerial
and technical personnel. If we fail to implement these systems or employ and
retain such qualified personnel, our business, financial condition, and results
of operations may be materially and adversely affected.
27
In addition, a significant portion of our growth has resulted from strategic
acquisitions in new product and geographic markets. Although our future focus
will be on internal growth, we will continue to identify and pursue strategic
acquisitions and alliances with suitable candidates. Our future success will
depend, in part, on our ability to successfully integrate past and future
acquisitions and other strategic alliances into our operations. Acquisitions may
involve a number of special risks, including diversion of management's
attention, failure to retain key acquired personnel, unanticipated events or
circumstances, legal liabilities, and amortization of certain acquired
intangible assets. Some or all of these risks could have a material adverse
effect on our business, financial condition, and results of operations. Although
we conduct due diligence reviews of potential acquisition candidates, we may not
identify all material liabilities or risks related to acquisition candidates.
There can be no assurance that any such strategic acquisitions or alliances will
be accomplished on favorable terms or will result in profitable operations.
We may be unable to hire, integrate, and retain qualified personnel.
Our continued success will depend upon the availability and performance of our
key management, sales, marketing, customer support, and product development
personnel. The loss of key management or technical personnel could adversely
affect us. We believe that our continued success will depend in large part upon
our ability to attract, integrate, and retain such personnel. We have at times
experienced and continue to experience difficulty in recruiting qualified
personnel. Competition for qualified software development, sales, and other
personnel is intense, and we cannot assure you that we will be successful in
attracting and retaining such personnel.
We may be unable to protect our proprietary rights.
Many of our product and service offerings incorporate proprietary information,
trade secrets, know-how, and other intellectual property rights. We rely on a
combination of contracts, copyrights, and trade secret laws to establish and
protect our proprietary rights in our technology. We cannot be certain that we
have taken all appropriate steps to deter misappropriation of our intellectual
property. In addition, there has been significant litigation in the United
States in recent years involving intellectual property rights. We are not
currently involved in any material intellectual property litigation. We may,
however, be a party to intellectual property litigation in the future to protect
our proprietary information, trade secrets, know-how, and other intellectual
property rights. Further, we cannot assure you that third parties will not
assert infringement or misappropriation claims against us in the future with
respect to current or future products. Any claims or litigation, with or without
merit, could be time-consuming and result in costly litigation and diversion of
management's attention. Further, any claims and litigation could cause product
shipment delays or require us to enter into royalty or licensing arrangements.
Such royalty or licensing arrangements, if required, may not be available on
terms acceptable to us, if at all. Thus, litigation to defend and enforce our
intellectual property rights could have a material adverse effect on our
business, financial condition, and results of operations, regardless of the
final outcome of such litigation.
Our products are complex and, as such, we run the risk of errors or defects with
new product introductions or enhancements.
Software products as complex as those developed by us may contain errors or
defects, especially when first introduced or when new versions or enhancements
are released. Although we have not experienced material adverse effects
resulting from any such defects or errors to date, we cannot assure you that
material defects and errors will not be found after commencement of product
shipments. Any such defects could result in loss of revenues or delay market
acceptance.
Our license agreements with our customers typically contain provisions designed
to limit our exposure to potential liability claims. It is possible, however,
that the limitation of liability provisions contained in our license agreements
may not be effective as a result of existing or future federal, state or local
laws or ordinances or judicial decisions. Although we maintain errors and
omissions and general liability insurance, and we try to structure our contracts
to include limitations on liability, we cannot assure you that a successful
claim would not have a material adverse effect on our business, financial
condition, and results of operations.
Our Application Service Provider strategy has yet to gain widespread acceptance.
Some businesses choose to access enterprise software applications through
application service providers, or ASPs, which are businesses that host
applications and provide access to software on a subscription basis. The public
sector market for ASP solutions is new and unproven. Acceptance of our ASP model
depends upon the ability and willingness of different governmental entities to
accept and implement ASP solutions. Our clients have expressed security and
privacy concerns with the ASP model, including a concern regarding the
confidential nature of the information and transactions available from and
conducted with governments and concerns regarding off-site storage of such
information. We have limited experience selling our solutions through ASPs and
may not be successful in generating revenue from this distribution channel.
28
Changes in the insurance markets may affect our ability to win some contract
awards and may lead to increased expenses.
Some of our customers, primarily those for our property appraisal services,
require that we secure performance bonds before they will select us as their
vendor. The number of qualified, high-rated insurance companies that offer
performance bonds has decreased in recent years, while the costs associated with
securing these bonds has increased dramatically. In addition, we are generally
required to issue a letter of credit as security for the issuance of a
performance bond. Each letter of credit we issue reduces our borrowing capacity
under our senior secured credit agreement. We cannot guarantee that we will be
able to secure such performance bonds in the future on terms that are favorable
to us, if at all. Our inability to obtain performance bonds on favorable terms
or at all could impact our future ability to win some contract awards,
particularly large property appraisal services contracts, which could have a
material adverse effect on our business, financial condition, and results of
operations.
Recent volatility in the stock markets, increasing shareholder litigation, the
adoption of expansive legislation that redefines corporate controls (in
particular, legislation adopted to prevent future corporate and accounting
scandals), as well as other factors have recently led to significant increases
in premiums for directors' and officers' liability insurance. The number of
insurers offering directors and officers insurance at competitive rates has also
decreased in recent years. We cannot predict when the insurance market for such
coverage will stabilize, if at all. The continued volatility of the insurance
market may result in future increases in our general and administrative
expenses, which may adversely affect future operating results.
Compliance with changing regulation of corporate governance and public
disclosure may result in additional expenses.
Changing laws, regulations, and standards relating to corporate governance and
public disclosure, including the Sarbanes-Oxley Act of 2002, new Securities and
Exchange Commission regulations and New York Stock Exchange rules, are creating
uncertainty for companies such as ours. To maintain high standards of corporate
governance and public disclosure, we intend to invest all reasonably necessary
resources to comply with evolving standards. This investment may result in
increased general and administrative expenses and a diversion of management time
and attention from revenue-generating activities.
Our stock price may be volatile.
The market price of our common stock may be volatile and may be significantly
affected by many different factors. Some examples of factors that can have a
significant impact on our stock price include:
- actual or anticipated fluctuations in our operating results;
- announcements of technological innovations, new products, or
new contracts by us or our competitors;
- developments with respect to patents, copyrights, or other
proprietary rights;
- conditions and trends in the software and other technology
industries;
- adoption of new accounting standards affecting the software
industry;
- changes in financial estimates by securities analysts; and
- general market conditions and other factors.
In addition, the stock market has from time to time experienced significant
price and volume fluctuations that have particularly affected the market prices
for the common stock of technology companies. These broad market fluctuations
may adversely affect the market price of our common stock. In the past,
following periods of volatility in the market price of a particular company's
securities, securities class action litigation has often been brought against
that company. We cannot assure you that similar litigation will not occur in the
future with respect to us. Such litigation could result in substantial costs and
a diversion of management's attention and resources, which could have a material
adverse effect upon our business, operating results, and financial condition.
Historically, we have not paid dividends on our common stock.
We have not declared or paid a cash dividend since we entered the business of
providing software solutions and services to the public sector in February 1998.
Our credit agreement restricts our ability to pay cash dividends. We intend to
retain earnings for use in the operation and expansion of our business. We do
not anticipate paying any cash dividends on our common stock in the foreseeable
future.
29
Provisions in our certificate of incorporation, bylaws, and Delaware law could
deter takeover attempts.
Our Board of Directors may issue up to 1,000,000 shares of Preferred Stock and
may determine the price, rights, preferences, privileges, and restrictions,
including voting and conversion rights, of these shares of Preferred Stock.
These determinations may be made without any further vote or action by our
stockholders. The rights of the holders of our common stock will be subject to,
and may be adversely affected by, the rights of the holders of any Preferred
Stock that may be issued in the future. The issuance of Preferred Stock may make
it more difficult for a third party to acquire a majority of our outstanding
voting stock. In addition, some provisions of our Certificate of Incorporation,
Bylaws, and of the Delaware General Corporation Law could also delay, prevent,
or make more difficult a merger, tender offer, or proxy contest involving us.
Financial Outlook.
From time to time in press releases and otherwise, we may publish forecasts or
other forward-looking statements regarding our results, including estimated
revenues or net earnings. Any forecast of our future performance reflects
various assumptions. These assumptions are subject to significant uncertainties,
and as a matter of course, any number of them may prove to be incorrect.
Further, the achievement of any forecast depends on numerous risks and other
factors (including those described in this discussion), many of which are beyond
our control. As a result, we cannot be certain that our performance will be
consistent with any management forecasts or that the variation from such
forecasts will not be material and adverse. Current and potential stockholders
are cautioned not to base their entire analysis of our business and prospects
upon isolated predictions, but instead are encouraged to utilize our entire
publicly available mix of historical and forward-looking information, as well as
other available information regarding us, our products and services, and the
software industry when evaluating our prospective results of operations.
stock-based compensation plans. ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
We
Market risk represents the risk of loss that may affect us due to adverse changes in financial market prices and interest rates. As of December 31, 2005, we had funds invested in auction rate municipal bonds, which we accounted for in accordance with SFAS No. 115, “Accounting for Certain Investments in Debt and Equity Securities.” These investments were treated as available-for-sale under SFAS No. 115. The carrying value of these investments approximates fair market value. Due to the nature of this investment, we are not materially exposedsubject to significant market risk from changes inrate risk.
We have no outstanding debt at December 31, 2005, and we therefore are not subject to any interest rates,
equity prices orrate risk.
In order to enhance our ability to manage foreign currency risk associated with one contract, in December 2005, we contracted with a commercial bank to enter into a series of forward contracts, at no material cost to us, to acquire Canadian dollars through 2009 at fixed prices. These forward contracts have been entered into for periods consistent with the related underlying exposure in this contract and do not constitute positions independent of this exposure. We had approximately $100,000 of current risk management assets associated with these foreign exchange rates.
contracts at December 31, 2005. If the applicable exchange rate was to increase or decrease
32
10% from the rate at December 31, 2005, our current risk management assets would increase or decrease approximately $300,000. We do not enter into derivative contracts for speculative purposes, nor are we a party to any leveraged derivative instrument. At December 31, 2004 we did not have any forward contracts in place.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
Information required by this item is incorporated by reference from the
Independent Auditors' Report on page 39
The reports of our 2002 Annual Report to
Shareholders ("2002 Annual Report")independent registered public accounting firm and from theour consolidated financial statements, related notes, and supplementary data are included as part of this Annual Report beginning on pages 40 through 61page F-1.
| | |
| ITEM 9. | | CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE. |
None.
ITEM 9A. CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures— Our chief executive officer and our chief financial officer have evaluated the effectiveness of the design and operation of our 2002 Annual Report.
disclosure controls and procedures (as defined in Securities Exchange Act Rules 13a-15(e)) as of December 31, 2005. Based on such evaluation, our chief executive officer and chief financial officer have concluded that as of December 31, 2005 such disclosure controls and procedures were effective and designed to ensure that information required to be disclosed by us in the reports we file or submit under the Securities Exchange Act is recorded, processed, summarized, and reported within the time periods specified in the SEC’s rules and forms, and include controls and procedures designed to ensure that information required to be disclosed by us in such reports is accumulated and communicated to our management, including the chief executive officer and chief financial officer, as appropriate to allow timely decisions regarding required disclosure.
Internal Control Over Financial Reporting— During the quarter ended December 31, 2005, there were no changes in our internal controls over financial reporting, as defined in Securities Exchange Act Rule 13a-15(f) and 15d-15(f), that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
Management’s Report on Internal Control Over Financial Reporting— Tyler’s management is responsible for establishing and maintaining effective internal control over financial reporting as defined in Securities Exchange Act Rule 13a-15(f). Tyler’s internal control over financial reporting is designed to provide reasonable assurance to Tyler’s management and board of directors regarding the preparation and fair presentation of published financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Therefore, even those systems determined to be effective can provide only reasonable assurance with respect to financial statement preparation and presentation.
Management assessed the effectiveness of Tyler’s internal control over financial reporting as of December 31, 2005. In making this assessment, management used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) inInternal Control — Integrated Framework. Based on our assessment, we believe that, as of December 31, 2005, Tyler’s internal control over financial reporting is effective based on those criteria.
Management’s assessment of the effectiveness of internal control over financial reporting as of December 31, 2005 has been audited by Ernst & Young, LLP, the independent registered public accounting firm who also audited Tyler’s consolidated financial statements. Ernst & Young’s attestation report on management’s assessment of Tyler’s internal control over financial reporting appears on page F-2 hereof.
33
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
9B. OTHER INFORMATION
PART III
See the information under the following captions in Tyler'sTyler’s definitive Proxy Statement, which is incorporated herein by reference. Only those sections of the Proxy Statement that specifically address the items set forth herein are incorporated by reference. Such incorporation by reference does not include the Compensation Committee Report, the Audit Committee Report or the Stock Performance Graphs, which are included in the Proxy Statement.
| | | | |
| | | | Headings in Proxy Statement
----------------------------------------------
|
|
ITEM 10. Directors and Executive Officers of the Registrant. "Directors, Nominees for Director and
Executive Officers"
| | DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT. | | “Tyler Management” |
| | | | |
| | EXECUTIVE COMPENSATION. | | “Executive Compensation. "Executive Compensation"
Compensation” |
| | | | |
| | SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS. | | “Security Ownership of Certain Beneficial Owners and "Security Ownership of Directors, Nominees for
Management Director, Executive
Officers and Principal Shareholders"
Management” |
| | | | |
ITEM 13. Certain Relationships and Related Transactions. "Employment Contracts"
| | CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS. | | “Executive Compensation — Employment Contracts” |
| | | | |
| | PRINCIPAL ACCOUNTING FEES AND SERVICES. | | |
PART IV
ITEM 14. CONTROLS AND PROCEDURES
(a) EvaluationThe information required under this item may be found under the section captioned “Proposals For Consideration — Proposal Three — Ratification of
disclosure controls and procedures.Ernst & Young LLP as Our
chief executive
officer and our chief financial officer, after evaluating the
effectiveness of the Company's "disclosure controls and procedures"
(as defined in the Securities Exchange Act of 1934 Rules 13a-14(c) and
15-d-14(c)) as of a date (the "Evaluation Date") within 90 days before
the filing date of this annual report, have concluded that as of the
Evaluation Date, our disclosure controls and procedures were adequate
and designed to ensure that material information relating to us and
our consolidated subsidiaries would be made known to them by others
within those entities.
(b) Changes in internal controls. There were no significant changesIndependent Auditors for Fiscal Year 2006” in our
internal controls or to our knowledge, in other factors that could
significantly affect our disclosure controlsProxy Statement and
procedures subsequent
to the Evaluation Date.
31
is incorporated herein by reference. 34
PART IV
ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULE AND REPORTS ON FORM 8-K.
SCHEDULE.
The following documents from our 2002 Annual Report are incorporated by
reference into Item 8 of Part II of this Annual Report:
(a) (1) The consolidated financial statements are filed as part of this Annual Report.
PAGE
Report of Independent Auditors.................. 39
Consolidated Statements of Operations
for the years ended December 31,
2002, 2001 and 2000........................ 40
Consolidated Balance Sheets as of December
31, 2002 and 2001.......................... 41
Consolidated Statements of Shareholders' Equity
for the years ended December 31, 2002
2001 and 2000.............................. 42
Consolidated Statements of Cash Flows for the
years ended December 31, 2002, 2001
and 2000................................... 43
Notes to Consolidated Financial Statements...... 44
(2) The following financial statement schedule is filed as
part of this report.
Schedule II--Valuation and Qualifying Accounts
for the years ended December 31, 2002, 2001
and 2000................................... 61
All other schedules for which provision is made in the
applicable accounting regulation of the Securities and
Exchange Commission are not required under the related
instructions or are inapplicable and, therefore, have
been omitted.
(3) Exhibits
Certain of the exhibits to this Annual Report are hereby incorporated by
reference, as specified:
Report:
EXHIBIT
NUMBER DESCRIPTION
- ----------------------------------------------------------
| | | | | | | | |
| (a) | | (1) | | The consolidated financial statements are filed as part of this Annual Report. | | | | |
| | | | | | | | |
| | | | | | Page |
| | | | | | | |
| | | | | | | | |
| | | | Reports of Independent Registered Public Accounting Firm | | | F-1 | |
| | | | | | | | |
| | | | Consolidated Statements of Operations for the years ended December 31, 2005, 2004, and 2003 | | | F-3 | |
| | | | | | | | |
| | | | Consolidated Balance Sheets as of December 31, 2005 and 2004 | | | F-4 | |
| | | | | | | | |
| | | | Consolidated Statements of Shareholders' Equity for the years ended December 31, 2005, 2004 and 2003 | | | F-5 | |
| | | | | | | | |
| | | | Consolidated Statements of Cash Flows for the years ended December 31, 2005, 2004 and 2003 | | | F-6 | |
| | | | | | | | |
| | | | Notes to Consolidated Financial Statements | | | F-7 | |
| | | | | | | | |
| | (2) | | The following financial statement schedule is filed as part of this Report. | | | | |
| | | | | | | | |
| | | | Schedule II—Valuation and Qualifying Accounts for the years ended December 31, 2005, 2004 and 2003 | | | F-23 | |
| | | | | | | | |
| | | | All other schedules for which provision is made in the applicable accounting regulation of the Securities and Exchange Commission are not required under the related instructions or are inapplicable and, therefore, have been omitted. | | | | |
| | | | | | | | |
| | (3) | | Exhibits | | | | |
| | | | | | | | |
| | | | Certain of the exhibits to this Annual Report are hereby incorporated by reference, as specified: | | | | |
| | |
| Exhibit | | |
| Number | | Description |
| 3.1 | | Restated Certificate of Incorporation of Tyler Three, as amended through May 14, 1990, and Certificate of Designation of Series A Junior Participating Preferred Stock (filed as Exhibit 3.1 to our Form 10-Q for the quarter ended June 30, 1990, and incorporated by reference herein). |
| | |
| 3.2 | | Certificate of Amendment to the Restated Certificate of Incorporation (filed as Exhibit 3.1 to our Form 8-K, dated February 19, 1998, and incorporated by reference herein). |
| | |
| 3.3 | | Amended and Restated By-Laws of Tyler Corporation, dated November 4, 1997 (filed as Exhibit 3.3 to our Form 10-K for the year ended December 31, 1997, and incorporated by reference herein). |
35
| | |
| Exhibit | | |
| Number | | Description |
| 3.4 | | Certificate of Amendment dated May 19, 1999 to the Restated Certificate of Incorporation (filed as Exhibit 3.4 to our Form 10-K for the year ended December 31, 2000, and incorporated by reference herein). |
| | |
| 4.1 | | Specimen of Common Stock Certificate (filed as Exhibit 4.1 to our registration statement no. 33-33505 and incorporated by reference herein). |
| | |
| 10.1 | | Amended and Restated Credit Agreement by and between Tyler Technologies, Inc. and Bank of Texas, N.A. as Administrative Agent, Letter of Credit Issuer and Lender, and Texas Capital Bank, as Lender. (filed as Exhibit 99.2 to our Form 8-K, dated effective February 15, 2005 and incorporated by reference herein). |
| | |
| 10.2 | | Form of Indemnification Agreement for directors and officers (filed as Exhibit 10.1 to our Form 10-K for the year ended December 31, 2002 and incorporated by reference herein). |
| | |
| 10.3 | | Stock Option Plan amended and restated as of May 12, 2000 (filed as Exhibit 4.1 to our registration statement no. 333-98929 and incorporated by reference herein and amended by Exhibit 4.2). |
| | |
| 10.4 | | Purchase Agreement between Tyler Corporation, Richmond Partners, Ltd. and Louis A. Waters, dated August 20, 1997 (filed as Exhibit 10.24 to our Form 8-K, dated September 2, 1997, and incorporated by reference herein). |
| | |
| 10.5 | | Employment and Non-Competition Agreement between Tyler Technologies, Inc. and John S. Marr Jr. dated July 1, 2003 (filed as Exhibit 10.1 to our Form 10-Q for the quarter ended June 30, 2003 and incorporated by reference herein). |
| | |
| 10.6 | | Employment and Non-Competition Agreement between Tyler Technologies, Inc. and John M. Yeaman dated July 1, 2003 (filed as Exhibit 10.2 to our Form 10-Q for the quarter ended March 31, 2003 and incorporated by reference herein). |
| | |
| 10.7 | | Employment and Non-Competition Agreement between Tyler Technologies, Inc. and Dustin R. Womble dated July 1, 2003 (filed as Exhibit 10.8 to our Form 10-K for the year ended December 31, 2003 and incorporated by reference herein). |
| | |
| 10.8 | | Employment Agreement between Tyler Technologies, Inc. and Brian K. Miller, dated December 1, 1997. (Filed as Exhibit 10.16 to our Form 10-K for the year ended December 31, 1997 and incorporated by reference herein.) |
| | |
| 10.9 | | Employee Stock Purchase Plan (filed as Exhibit 4.1 to our registration statement 333-116406 dated June 10, 2004 and incorporated by reference herein). |
32
4.1 Specimen of Common Stock Certificate (filed
as Exhibit 4.1 to our registration statement
no. 33-33505 and incorporated herein).
4.2 Warrant to purchase common stock of Tyler
Technologies, Inc. (filed as Exhibit 4.5 to
our Form 10-Q for the quarter ended June 30,
2000, and incorporated herein).
4.3 Credit Agreement dated as of February 27,
2002, by and between Tyler Technologies, Inc.
and Bank of Texas, N.A. (filed as Exhibit 4.6
to our Form 10-K for the year ended December
31, 2001 and incorporated herein).
4.4 First Amendment to Credit Agreement by and
between Tyler Technologies, Inc. and Bank of
Texas, N.A. dated March 5, 2002, (filed as
Exhibit 4.7 to our Form 10-K for the year
ended December 31, 2001 and incorporated
herein).
*4.5 Second Amendment to Credit Agreement, First
Amendment to Pledge and Security Agreement,
and Lenders Consent and Waiver by and Among
Tyler Technologies, Inc. and Bank of Texas
N.A.
*10.1 Form of Indemnification Agreement for
directors and officers.
10.2 Stock Option Plan amended and restated as of
May 12, 2000 (filed as Exhibit 4.1 to our
registration statement no. 333-98929 and
incorporated herein and amended by Exhibit
4.2).
10.3 Acquisition Agreement dated as of November
20, 1995, by and among the Registrants, Tyler
Pipe Industries, Inc. and Ransom Industries,
Inc., formerly known as Union Acquisition
Corporation (filed as Exhibit 2.1 to our Form
8-K, dated December 14, 1995, and
incorporated herein).
10.4 Purchase Agreement between Tyler Corporation,
Richmond Partners, Ltd. and Louis A. Waters,
dated August 20, 1997 (filed as Exhibit 10.24
to our Form 8-K, dated September 2, 1997, and
incorporated herein).
10.5 Employment agreement between Tyler
Technologies, Inc. and Theodore L. Bathurst,
dated October 7, 1998, (filed as Exhibit
10.18 to our Form 10-Q for the quarter ended
September 30, 1998, and incorporated herein).
*21 Subsidiaries of Tyler
*23 Consent of Ernst & Young LLP
*99.1 Certifications pursuant to Section 1350 of
Chapter 63 of Title 18 of the United States
Code.
33
*99.2 Certifications pursuant to Section 1350 of
Chapter 63 of Title 18 of the United States
Code.
We will furnish copies of these exhibits to
shareholders upon written request and payment
for copying charges of $0.15 per page.
* Filed herewith.
(b) Reports on Form 8-K
Form 8-K Item
Reported Date Reported Exhibits Filed
------------- --------- ------------------------------
November 1, 2002 5 News release issued by Tyler
Technologies, Inc. dated October
31, 2002
34
36
| | |
| Exhibit | | |
| Number | | Description |
| *23 | | Consent of Independent Registered Public Accounting Firm |
| | |
| *31.1 | | Rule 13a-14(a) Certification by Principal Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. |
| | |
| *31.2 | | Rule 13a-14(a) Certification by Principal Financial Officer, pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. |
| | |
| *32.1 | | Certification by Principal Executive Officer pursuant to 18 U.S.C. Section 1330, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. |
| | |
| *32.2 | | Certification by Principal Financial Officer pursuant to 18 U.S.C. Section 1330, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. |
37
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.
TYLER TECHNOLOGIES, INC.
Date: February 25, 2003 By: /s/ John M. Yeaman
-----------------------------------
John M. Yeaman
Chief Executive Officer and President
(principal
| | | | | | |
| | TYLER TECHNOLOGIES, INC. |
| | | | | | |
| Date: February 28, 2006 | | By: | | /s/ John S. Marr | | |
| | | | John S. Marr | | |
| | | | Chief Executive Officer and President | | |
| | | | (principal executive officer) | | |
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.
Date: February 25, 2003 By: /s/ G. Stuart Reeves
----------------------------
G. Stuart Reeves
Chairman of the Board
Date: February 25, 2003 By: /s/ John M. Yeaman
----------------------------
John M. Yeaman
| | | | | | |
| Date: February 28, 2006 | | By: | | /s/ John S. Marr | | |
| | | | John S. Marr | | |
| | | | Chief Executive Officer and
President
Director
(principal executive officer)
Date: February 25, 2003 By: /s/ Theodore L. Bathurst
----------------------------
Theodore L. Bathurst
Vice President and Chief
Financial Officer
(principal financial officer)
Date: February 25, 2003 By: /s/ Brian K. Miller
----------------------------
Brian K. Miller
Vice President - Finance and
Treasurer
Date: February 25, 2003 By: /s/ Terri L. Alford
----------------------------
Terri L. Alford
Controller
(principal accounting officer)
35
Date: February 25, 2003 By: /s/ Ben T. Morris
----------------------------
Ben T. Morris
Director
Date: February 25, 2003 By: /s/ John S. Marr
----------------------------
John S. Marr
Director
Date: February 25, 2003 By: /s/ Michael D. Richards
----------------------------
Michael D. Richards
Director
Date: February 25, 2003 By: /s/ Glenn A. Smith
----------------------------
Glenn A. Smith
Director
36
CERTIFICATIONS
I, John M. Yeaman, certify that:
1. I have reviewed this annual report on Form 10-K of Tyler Technologies,
Inc.;
2. Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary
to make the statements made, in light of the circumstances under which
such statements were made, not misleading with respect to the period
covered by this annual report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all
material respects the financial condition, results of operations and
cash flows of the registrant as of, and for, the periods presented in
this annual report;
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and
we have:
a) designed such disclosure controls and procedures to ensure
that material information relating to the registrant,
including its consolidated subsidiaries, is made known to us
by others within those entities, particularly during the
period in which this annual report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to
the filing date of this annual report (the "Evaluation Date");
and
c) presented in this annual report our conclusions about the
effectiveness of the disclosure controls and procedures based
on our evaluation as of the Evaluation Date;
5. The registrant's other certifying officer and I have disclosed, based
on our most recent evaluation, to the registrant's auditors and the
audit committee of registrant's board of directors (or persons
performing the equivalent function):
a) all significant deficiencies in the design or operation of
internal controls which could adversely affect the
registrant's ability to record, process, summarize and report
financial data and have identified for the registrant's
auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management
or other employees who have a significant role in the
registrant's internal controls; and
6. The registrant's other certifying officer and I have indicated in this
annual report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation,
including any corrective actions with regard to significant
deficiencies and material weaknesses.
Dated: February 25, 2003 By: /s/ John M. Yeaman
------------------
John M. Yeaman
President and Chief Executive Officer
37
I, Theodore L. Bathurst, certify that:
1. I have reviewed this annual report on Form 10-K of Tyler Technologies,
Inc.;
2. Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary
to make the statements made, in light of the circumstances under which
such statements were made, not misleading with respect to the period
covered by this annual report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all
material respects the financial condition, results of operations and
cash flows of the registrant as of, and for, the periods presented in
this annual report;
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and
we have:
a) designed such disclosure controls and procedures to ensure
that material information relating to the registrant,
including its consolidated subsidiaries, is made known to us
by others within those entities, particularly during the
period in which this annual report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to
the filing date of this annual report (the "Evaluation Date");
and
c) presented in this annual report our conclusions about the
effectiveness of the disclosure controls and procedures based
on our evaluation as of the Evaluation Date;
5. The registrant's other certifying officer and I have disclosed, based
on our most recent evaluation, to the registrant's auditors and the
audit committee of registrant's board of directors (or persons
performing the equivalent function):
a) all significant deficiencies in the design or operation of
internal controls which could adversely affect the
registrant's ability to record, process, summarize and report
financial data and have identified for the registrant's
auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management
or other employees who have a significant role in the
registrant's internal controls; and
6. The registrant's other certifying officer and I have indicated in this
annual report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation,
including any corrective actions with regard to significant
deficiencies and material weaknesses.
Dated: February 25, 2003 By: /s/ Theodore L. Bathurst
------------------------
Theodore L. Bathurst
Vice President and Chief Financial Officer and President | | |
| | | | Director | | |
| | | | (principal executive officer) | | |
| | | | | | |
| Date: February 28, 2006 | | By: | | /s/ John M. Yeaman | | |
| | | | John M. Yeaman | | |
| | | | Chairman of the Board | | |
| | | | | | |
| Date: February 28, 2006 | | By: | | /s/ Brian K. Miller | | |
| | | | Brian K. Miller | | |
| | | | Senior Vice President and Chief | | |
| | | | Financial Officer | | |
| | | | (principal financial officer) | | |
| | | | | | |
| Date: February 28, 2006 | | By: | | /s/ Terri L. Alford | | |
| | | | Terri L. Alford | | |
| | | | Controller | | |
| | | | (principal accounting officer) | | |
38
| | | | | | |
| Date: February 28, 2006 | | By: | | /s/ Donald R. Brattain | | |
| | | | Donald R. Brattain | | |
| | | | Director | | |
| | | | | | |
| Date: February 28, 2006 | | By: | | /s/ J. Luther King | | |
| | | | J. Luther King | | |
| | | | Director | | |
| | | | | | |
| Date: February 28, 2006 | | By: | | /s/ G. Stuart Reeves | | |
| | | | G. Stuart Reeves | �� | |
| | | | Director | | |
| | | | | | |
| Date: February 28, 2006 | | By: | | /s/ Michael D. Richards | | |
| | | | Michael D. Richards | | |
| | | | Director | | |
| | | | | | |
| Date: February 28, 2006 | | By: | | /s/ Dustin R. Womble | | |
| | | | Dustin R. Womble | | |
| | | | Director | | |
39
REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
REGISTERED PUBLIC ACCOUNTING FIRM
The Board of Directors and Shareholders
Tyler Technologies, Inc.
We have audited the accompanying consolidated balance sheets of Tyler Technologies, Inc. and subsidiaries as of December 31, 20022005 and 2001,2004, and the related consolidated statements of operations, shareholders'shareholders’ equity, and cash flows for each of the three years in the period ended December 31, 2002.2005. Our audits also included the financial statement schedule listed in the Index at Item 15(a). These financial statements and schedule are the responsibility of the Company'sCompany’s management. Our responsibility is to express an opinion on these financial statements and schedule based on our audits.
We conducted our audits in accordance with auditingthe standards generally accepted
inof the United States.Public Company Accounting Oversight Board (United States). 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, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of Tyler Technologies, Inc. and subsidiaries at December 31, 20022005 and 2001,2004, and the consolidated results of their operations and their cash flows for each of the three years in the period ended December 31, 2002,2005, in conformity with accounting principlesU.S. generally accepted in the United States.accounting principles. Also, in our opinion, the related financial statement schedule, when considered in relation to the basic financial statements taken as a whole, presents fairly in all material respects the information set forth therein.
As discussed
We also have audited, in Note 7accordance with the standards of the Public Company Accounting Oversight Board (United States), the effectiveness of Tyler Technologies, Inc.’s internal control over financial reporting as of December 31, 2005, based on criteria established in Internal Control—Integrated Framework issued by the Notes toCommittee of Sponsoring Organizations of the Consolidated Financial Statements,
the Company changed its method of accounting for goodwill.
Treadway Commission and our report dated February 23, 2006 expressed an unqualified opinion thereon.
ERNST & YOUNG LLP
Dallas, Texas
February
21, 2003
39
23, 2006F-1
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The Board of Directors and Shareholders
Tyler Technologies, Inc.
We have audited management’s assessment, included in the accompanying Management’s Report on Internal Controls over Financial Reporting, that Tyler Technologies, Inc. maintained effective internal control over financial reporting as of December 31, 2005, based on criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (the COSO criteria). Tyler Technologies, Inc.’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting. Our responsibility is to express an opinion on management’s assessment and an opinion on the effectiveness of the company’s internal control over financial reporting based on our audit.
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, evaluating management’s assessment, testing and evaluating the design and operating effectiveness of internal control, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
In our opinion, management’s assessment that Tyler Technologies, Inc. maintained effective internal control over financial reporting as of December 31, 2005, is fairly stated, in all material respects, based on the COSO criteria. Also, in our opinion, Tyler Technologies, Inc. maintained, in all material respects, effective internal control over financial reporting as of December 31, 2005, based on the COSO criteria.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheets of Tyler Technologies, Inc. as of December 31, 2005 and 2004, and the related consolidated statements of operations, shareholders’ equity, and cash flows for each of the three years in the period ended December 31, 2005 and our report dated February 23, 2006 expressed an unqualified opinion thereon.
ERNST & YOUNG LLP
Dallas, Texas
February 23, 2006
F-2
Tyler Technologies, Inc.
Consolidated Statements of Operations
For the years ended December 31
In thousands, except per share amounts
2002 2001 2000
--------- --------- --------
Revenues:
Software licenses $ 24,278 $ 19,491 $ 19,312
Software services 25,703 21,538 19,425
Maintenance 40,667 36,587 29,108
Appraisal services 37,319 34,727 20,909
Hardware and other 5,930 6,473 5,179
-------- -------- --------
Total revenues 133,897 118,816 93,933
Cost of revenues:
Software licenses 5,482 4,130 2,605
Software services and maintenance 50,175 46,024 38,355
Appraisal services 25,512 23,894 14,681
Hardware and other 4,746 4,749 4,017
-------- -------- --------
Total cost of revenues 85,915 78,797 59,658
-------- -------- --------
Gross profit 47,982 40,019 34,275
Selling, general and administrative expenses 33,914 30,830 32,805
Amortization of acquisition intangibles 3,329 6,898 6,903
-------- -------- --------
Operating income (loss) 10,739 2,291 (5,433)
Legal fees associated with affiliated
investment 704 -- --
Interest expense 187 630 4,914
Interest income (193) (151) (30)
-------- -------- --------
Income (loss) from continuing operations
before income taxes 10,041 1,812 (10,317)
Income tax provision (benefit) 3,869 1,540 (2,810)
-------- -------- --------
Income (loss) from continuing operations 6,172 272 (7,507)
Discontinued operations:
Loss from operations, after income taxes -- -- (4,251)
Gain (loss) on disposal, after income taxes 1,817 (3) (12,839)
-------- -------- --------
Gain (loss) from discontinued operations 1,817 (3) (17,090)
-------- -------- --------
Net income (loss) $ 7,989 $ 269 $(24,597)
======== ======== ========
Basic income (loss) per common share:
Continuing operations $ 0.13 $ 0.01 $ (0.17)
Discontinued operations 0.04 (0.00) (0.37)
-------- -------- --------
Net income (loss) per common share $ 0.17 $ 0.01 $ (0.54)
======== ======== ========
Diluted income (loss) per common share:
Continuing operations $ 0.12 $ 0.01 $ (0.17)
Discontinued operations 0.04 (0.00) (0.37)
-------- -------- --------
Net income (loss) per common share $ 0.16 $ 0.01 $ (0.54)
======== ======== ========
Basic weighted average common shares
outstanding 47,136 47,181 45,380
Diluted weighted average common shares
outstanding 49,493 47,984 45,380
| | | | | | | | | | | | | |
| | | 2005 | | | 2004 | | | 2003 | |
| Revenues: | | | | | | | | | | | | |
| Software licenses | | $ | 29,552 | | | $ | 30,258 | | | $ | 25,914 | |
| Software services | | | 51,532 | | | | 49,786 | | | | 37,128 | |
| Maintenance | | | 64,728 | | | | 57,760 | | | | 47,157 | |
| Appraisal services | | | 18,374 | | | | 27,394 | | | | 30,011 | |
| Hardware and other | | | 6,271 | | | | 7,072 | | | | 5,244 | |
| | | | | | | | | | |
| Total revenues | | | 170,457 | | | | 172,270 | | | | 145,454 | |
| | | | | | | | | | | | | |
| Cost of revenues: | | | | | | | | | | | | |
| Software licenses | | | 9,101 | | | | 8,819 | | | | 6,610 | |
| Acquired software | | | 794 | | | | 1,447 | | | | 2,006 | |
| Software services and maintenance | | | 80,347 | | | | 72,609 | | | | 56,892 | |
| Appraisal services | | | 14,188 | | | | 20,132 | | | | 21,275 | |
| Hardware and other | | | 4,540 | | | | 5,425 | | | | 3,844 | |
| | | | | | | | | | |
| Total cost of revenues | | | 108,970 | | | | 108,432 | | | | 90,627 | |
| | | | | | | | | | |
| | | | | | | | | | | | | |
| Gross profit | | | 61,487 | | | | 63,838 | | | | 54,827 | |
| | | | | | | | | | | | | |
| Selling, general and administrative expenses | | | 46,242 | | | | 45,451 | | | | 38,390 | |
| Restructuring charge | | | 1,260 | | | | — | | | | — | |
| Amortization of customer and trade name intangibles | | | 1,266 | | | | 1,267 | | | | 925 | |
| | | | | | | | | | |
| | | | | | | | | | | | | |
| Operating income | | | 12,719 | | | | 17,120 | | | | 15,512 | |
| | | | | | | | | | | | | |
| Realized gain on sale of investment in H.T.E., Inc. | | | — | | | | — | | | | 23,233 | |
| Other income, net | | | 906 | | | | 317 | | | | 339 | |
| | | | | | | | | | |
| | | | | | | | | | | | | |
| Income from continuing operations before income taxes | | | 13,625 | | | | 17,437 | | | | 39,084 | |
| Income tax provision | | | 5,432 | | | | 7,309 | | | | 13,106 | |
| | | | | | | | | | |
| Income from continuing operations | | | 8,193 | | | | 10,128 | | | | 25,978 | |
| | | | | | | | | | | | | |
| Gain on disposal of discontinued operations, after income taxes | | | — | | | | — | | | | 424 | |
| | | | | | | | | | |
| Net income | | $ | 8,193 | | | $ | 10,128 | | | $ | 26,402 | |
| | | | | | | | | | |
| | | | | | | | | | | | | |
| Basic income per common share: | | | | | | | | | | | | |
| Continuing operations | | $ | 0.21 | | | $ | 0.25 | | | $ | 0.61 | |
| Discontinued operations | | | — | | | | — | | | | 0.01 | |
| | | | | | | | | | |
| Net income per common share | | $ | 0.21 | | | $ | 0.25 | | | $ | 0.62 | |
| | | | | | | | | | |
| | | | | | | | | | | | | |
| Diluted income per common share: | | | | | | | | | | | | |
| Continuing operations | | $ | 0.19 | | | $ | 0.23 | | | $ | 0.58 | |
| Discontinued operations | | | — | | | | — | | | | 0.01 | |
| | | | | | | | | | |
| Net income per common share | | $ | 0.19 | | | $ | 0.23 | | | $ | 0.59 | |
| | | | | | | | | | |
| | | | | | | | | | | | | |
| Basic weighted average common shares outstanding | | | 39,439 | | | | 41,288 | | | | 42,547 | |
| Diluted weighted average common shares outstanding | | | 42,075 | | | | 44,566 | | | | 45,035 | |
See accompanying notes
40
notes. F-3
Tyler Technologies, Inc.
Consolidated Balance Sheets
December 31
In thousands, except share and per share amounts
2002 2001
---------- ----------
ASSETS
Current assets:
Cash and cash equivalents $ 13,744 $ 5,271
Accounts receivable (less allowance for losses of $690
in 2002 and $1,275 in 2001) 33,510 35,256
Income taxes receivable -- 151
Prepaid expenses and other current assets 4,009 3,318
Deferred income taxes 1,197 1,329
--------- ---------
Total current assets 52,460 45,325
Net assets of discontinued operations -- 1,000
Property and equipment, net 6,819 6,967
Other assets:
Investment security available - for - sale 27,196 11,238
Goodwill 46,298 43,292
Customer base, net 14,645 15,518
Software, net 21,933 19,982
Other acquisition intangibles 10 3,419
Sundry 484 234
--------- ---------
$ 169,845 $ 146,975
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 2,390 $ 2,036
Accrued liabilities 11,186 9,774
Net current liabilities of discontinued operations 442 581
Deferred revenue 26,208 27,215
--------- ---------
Total current liabilities 40,226 39,606
Long-term obligations, less current portion 2,550 2,910
Deferred income taxes 8,413 3,575
Commitments and contingencies
Shareholders' equity:
Preferred stock, $10.00 par value; 1,000,000 shares
authorized none issued -- --
Common stock, $0.01 par value; 100,000,000 shares
authorized; 48,147,969 shares issued in 2002 and 2001 481 481
Additional paid-in capital 156,898 157,242
Accumulated deficit (40,954) (48,943)
Accumulated other comprehensive income (loss), net of
tax 7,418 (4,545)
Treasury stock, at cost; 1,928,636 and 920,205 shares
in 2002 and 2001, respectively (5,187) (3,351)
--------- ---------
Total shareholders' equity 118,656 100,884
--------- ---------
$ 169,845 $ 146,975
========= =========
| | | | | | | | | |
| | | 2005 | | | 2004 | |
| ASSETS | | | | | | | | |
| Current assets: | | | | | | | | |
| Cash and cash equivalents | | $ | 20,733 | | | $ | 12,573 | |
| Short-term investments available-for-sale | | | 11,750 | | | | 13,832 | |
| Restricted certificate of deposit | | | 4,750 | | | | — | |
| Accounts receivable (less allowance for losses of $1,991 in 2005 and $986 in 2004) | | | 49,644 | | | | 44,180 | |
| Prepaid expenses | | | 5,158 | | | | 3,574 | |
| Other current assets | | | 2,201 | | | | 1,468 | |
| Deferred income taxes | | | 2,128 | | | | 1,611 | |
| | | | | | | |
| Total current assets | | | 96,364 | | | | 77,238 | |
| | | | | | | | | |
| Accounts receivable, long-term portion | | | 1,547 | | | | 1,621 | |
| Property and equipment, net | | | 5,759 | | | | 6,624 | |
| | | | | | | | | |
| Other assets: | | | | | | | | |
| Restricted certificate of deposit | | | 250 | | | | 7,500 | |
| Goodwill | | | 53,709 | | | | 53,709 | |
| Customer related intangibles, net | | | 17,696 | | | | 18,855 | |
| Software, net | | | 17,645 | | | | 23,385 | |
| Trade name, net | | | 1,262 | | | | 1,369 | |
| Sundry | | | 205 | | | | 186 | |
| | | | | | | |
| | | $ | 194,437 | | | $ | 190,487 | |
| | | | | | | |
| | | | | | | | | |
| LIABILITIES AND SHAREHOLDERS’ EQUITY | | | | | | | | |
| Current liabilities: | | | | | | | | |
| Accounts payable | | $ | 3,330 | | | $ | 2,890 | |
| Accrued liabilities | | | 16,027 | | | | 13,660 | |
| Deferred revenue | | | 51,304 | | | | 41,541 | |
| Income taxes payable | | | 289 | | | | 1,023 | |
| | | | | | | |
| Total current liabilities | | | 70,950 | | | | 59,114 | |
| | | | | | | | | |
| Deferred income taxes | | | 11,290 | | | | 12,973 | |
| | | | | | | | | |
| Commitments and contingencies | | | | | | | | |
| | | | | | | | | |
| Shareholders’ equity: | | | | | | | | |
| Preferred stock, $10.00 par value; 1,000,000 shares authorized, none issued | | | — | | | | — | |
| Common stock, $0.01 par value; 100,000,000 shares authorized; 48,147,969 shares issued in 2005 and 2004 | | | 481 | | | | 481 | |
| Additional paid-in capital | | | 151,515 | | | | 152,870 | |
| Retained earnings (deficit) | | | 3,769 | | | | (4,424 | ) |
| Treasury stock, at cost; 9,273,342 and 7,423,361 shares in 2005 and 2004, respectively | | | (43,568 | ) | | | (30,527 | ) |
| | | | | | | |
| Total shareholders’ equity | | | 112,197 | | | | 118,400 | |
| | | | | | | |
| | | $ | 194,437 | | | $ | 190,487 | |
| | | | | | | |
See accompanying notes.
41
F-4
Tyler Technologies, Inc.
Consolidated Statements of
Shareholders'Shareholders’ Equity
For the years ended December 31,
2002, 20012005, 2004 and
2000
2003In thousands
ACCUMULATED
COMMON STOCK ADDITIONAL OTHER TREASURY STOCK TOTAL
-------------- PAID-IN COMPREHENSIVE ACCUMULATED ----------------- SHAREHOLDERS'
SHARES AMOUNT CAPITAL INCOME (LOSS) DEFICIT SHARES AMOUNT EQUITY
------ ------ ----------- ------------- ----------- ------ ------- ------
Balance at December 31, 1999 44,709 $ 447 $151,298 $ 17,931 $(24,615) (1,418) $ (6,157) $ 138,904
Comprehensive loss:
Net loss -- -- -- -- (24,597) -- -- (24,597)
Unrealized loss on investment
security -- -- -- (28,622) -- -- -- (28,622)
---------
Total comprehensive loss (53,219)
---------
Issuance of shares pursuant
to stock compensation plans -- -- (1,759) -- -- 555 2,926 1,167
Shares issued for private investment 3,334 33 9,237 -- -- -- -- 9,270
------ ------ -------- --------- -------- ------ --------- ---------
Balance at December 31, 2000 48,043 480 158,776 (10,691) (49,212) (863) (3,231) 96,122
Comprehensive income:
Net income -- -- -- -- 269 -- -- 269
Unrealized gain on investment
security -- -- -- 6,146 -- -- -- 6,146
---------
Total comprehensive income 6,415
---------
Issuance of shares pursuant
to stock compensation plans 105 1 221 -- -- 3 8 230
Federal income tax benefit related
to exercise of stock options -- -- 33 -- -- -- -- 33
Shares received from sale of
discontinued business -- -- -- -- -- (60) (128) (128)
Adjustment in connection with
previous acquisition -- -- (1,788) -- -- -- -- (1,788)
------ ------ -------- --------- -------- ------ --------- ---------
Balance at December 31, 2001 48,148 481 157,242 (4,545) (48,943) (920) (3,351) 100,884
Comprehensive income:
Net income -- -- -- -- 7,989 -- -- 7,989
Unrealized gain on investment
security, net of tax -- -- -- 11,963 -- -- -- 11,963
---------
Total comprehensive income 19,952
---------
Issuance of shares pursuant
to stock compensation plans -- -- (542) -- -- 491 2,164 1,622
Treasury stock purchases -- -- -- -- -- (1,500) (4,000) (4,000)
Federal income tax benefit related
to exercise of stock options -- -- 198 -- -- -- -- 198
------ ------ -------- --------- -------- ------ --------- ---------
Balance at December 31, 2002 48,148 $ 481 $156,898 $ 7,418 $(40,954) (1,929) $(5,187) $ 118,656
====== ====== ======== ========= ======== ====== ========= =========
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | Accumulated | | | | | | | | | | | | | | | |
| | | | | | | | | | | Additional | | | Other | | | Retained | | | | | | | | | | | Total | |
| | | Common Stock | | | Paid-in | | | Comprehensive | | | Earnings | | | Treasury Stock | | | Shareholders’ | |
| | | Shares | | | Amount | | | Capital | | | Income (Loss) | | | (Deficit) | | | Shares | | | Amount | | | Equity | |
| Balance at December 31, 2002 | | | 48,148 | | | $ | 481 | | | $ | 156,898 | | | $ | 7,418 | | | $ | (40,954 | ) | | | (1,929 | ) | | $ | (5,187 | ) | | $ | 118,656 | |
| Comprehensive income: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Net income | | | — | | | | — | | | | — | | | | — | | | | 26,402 | | | | — | | | | — | | | | 26,402 | |
| Unrealized loss on investment securities, net of tax | | | — | | | | — | | | | — | | | | (32 | ) | | | — | | | | — | | | | — | | | | (32 | ) |
| Reclassification adjustment, net of income taxes of $3,995 | | | — | | | | — | | | | — | | | | (7,418 | ) | | | — | | | | — | | | | — | | | | (7,418 | ) |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Total comprehensive income | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | 18,952 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Issuance of shares pursuant to stock compensation plan | | | — | | | | — | | | | (645 | ) | | | — | | | | — | | | | 554 | | | | 2,318 | | | | 1,673 | |
| Treasury stock purchases | | | — | | | | — | | | | — | | | | — | | | | — | | | | (6,019 | ) | | | (24,104 | ) | | | (24,104 | ) |
| Stock warrant exercises | | | — | | | | — | | | | (1,584 | ) | | | — | | | | — | | | | 393 | | | | 1,584 | | | | — | |
| Federal income tax benefit related to exercise of stock options | | | — | | | | — | | | | 292 | | | | — | | | | — | | | | — | | | | — | | | | 292 | |
| Shares issued for acquisitions | | | — | | | | — | | | | 1,240 | | | | — | | | | — | | | | 297 | | | | 1,198 | | | | 2,438 | |
| | | | | | | | | | | | | | | | | | | | | | | | | |
| Balance at December 31, 2003 | | | 48,148 | | | | 481 | | | | 156,201 | | | | (32 | ) | | | (14,552 | ) | | | (6,704 | ) | | | (24,191 | ) | | | 117,907 | |
| Comprehensive income: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Net income | | | — | | | | — | | | | — | | | | — | | | | 10,128 | | | | — | | | | — | | | | 10,128 | |
| Unrealized loss on investment securities, net of tax | | | — | | | | — | | | | — | | | | (37 | ) | | | — | | | | — | | | | — | | | | (37 | ) |
| Reclassification adjustment, net of income taxes of $37 | | | — | | | | — | | | | — | | | | 69 | | | | — | | | | — | | | | — | | | | 69 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Total comprehensive income | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | 10,160 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Issuance of shares pursuant to stock compensation plan | | | — | | | | — | | | | (3,704 | ) | | | — | | | | — | | | | 680 | | | | 5,644 | | | | 1,940 | |
| Treasury stock purchases | | | — | | | | — | | | | — | | | | — | | | | — | | | | (1,459 | ) | | | (12,518 | ) | | | (12,518 | ) |
| Stock warrant exercises | | | — | | | | — | | | | (143 | ) | | | — | | | | — | | | | 16 | | | | 143 | | | | — | |
| Issuance of shares pursuant to Employee Stock Purchase Plan | | | — | | | | — | | | | (66 | ) | | | — | | | | — | | | | 44 | | | | 395 | | | | 329 | |
| Federal income tax benefit related to exercise of stock options | | | — | | | | — | | | | 582 | | | | — | | | | — | | | | — | | | | — | | | | 582 | |
| | | | | | | | | | | | | | | | | | | | | | | | | |
| Balance at December 31, 2004 | | | 48,148 | | | | 481 | | | | 152,870 | | | | — | | | | (4,424 | ) | | | (7,423 | ) | | | (30,527 | ) | | | 118,400 | |
| Comprehensive income: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Net income | | | — | | | | — | | | | — | | | | — | | | | 8,193 | | | | — | | | | — | | | | 8,193 | |
| Unrealized loss on investment securities, net of tax | | | — | | | | — | | | | — | | | | (8 | ) | | | — | | | | — | | | | — | | | | (8 | ) |
| Reclassification adjustment, net of income taxes of $5 | | | — | | | | — | | | | — | | | | 8 | | | | — | | | | — | | | | — | | | | 8 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Total comprehensive income | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | 8,193 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Issuance of shares pursuant to stock compensation plan | | | — | | | | — | | | | (1,570 | ) | | | — | | | | — | | | | 436 | | | | 3,370 | | | | 1,800 | |
| Stock compensation | | | — | | | | — | | | | 18 | | | | — | | | | — | | | | — | | | | — | | | | 18 | |
| Treasury stock purchases | | | — | | | | — | | | | — | | | | — | | | | — | | | | (2,457 | ) | | | (17,683 | ) | | | (17,683 | ) |
| Issuance of shares pursuant to Employee Stock Purchase Plan | | | — | | | | — | | | | (116 | ) | | | — | | | | — | | | | 171 | | | | 1,272 | | | | 1,156 | |
| Federal income tax benefit related to exercise of stock options | | | — | | | | — | | | | 313 | | | | — | | | | — | | | | — | | | | — | | | | 313 | |
| | | | | | | | | | | | | | | | | | | | | | | | | |
| Balance at December 31, 2005 | | | 48,148 | | | $ | 481 | | | $ | 151,515 | | | $ | — | | | $ | 3,769 | | | | (9,273 | ) | | $ | (43,568 | ) | | $ | 112,197 | |
| | | | | | | | | | | | | | | | | | | | | | | | | |
See accompanying notes.
42
F-5
Tyler Technologies, Inc.
Consolidated Statements of Cash Flows
For the years ended December 31
In thousands
2002 2001 2000
--------- --------- ---------
Cash flows from operating activities:
Net income (loss) $ 7,989 $ 269 $(24,597)
Adjustments to reconcile net income (loss)
to net cash provided (used) by operations:
Depreciation and amortization 8,522 10,910 9,686
Non-cash interest and other charges 348 361 2,069
Provision for losses -- accounts receivable 727 1,681 1,438
Deferred income tax provision (benefit) 3,384 1,258 (2,890)
Discontinued operations - noncash charges and
changes in operating assets and liabilities (2,458) (2,590) 8,215
Changes in operating assets and liabilities,
exclusive of effects of acquired companies and
discontinued operations:
Accounts receivable 1,019 (258) (7,052)
Income tax receivable 151 172 2,571
Prepaid expenses and other current assets (279) (853) 48
Other receivables -- -- 85
Accounts payable 354 (2,263) 697
Accrued liabilities 1,095 (2,092) 1,370
Deferred revenue (1,007) 6,149 1,234
-------- -------- --------
Net cash provided (used) by operating
activities 19,845 12,744 (7,126)
-------- -------- --------
Cash flows from investing activities:
Additions to property and equipment (2,508) (3,101) (2,645)
Software development costs (7,210) (6,225) (6,714)
Cost of acquisitions, net of cash acquired -- (2,750) --
Cost of acquisitions subsequently discontinued -- -- (3,073)
Capital expenditures of discontinued operations -- (1,353) (2,201)
Proceeds from disposal of discontinued operations
and related assets 1,807 3,675 79,821
Other (63) 48 213
-------- -------- --------
Net cash (used) provided by investing
activities (7,974) (9,706) 65,401
-------- -------- --------
Cash flows from financing activities:
Net payments on revolving credit facility -- (4,750) (56,250)
Payments on notes payable (456) (354) (836)
Payment of debt of discontinued operations (324) (992) (2,925)
Issuance of common stock -- -- 9,270
Repurchase of common stock (4,000) -- --
Proceeds from exercise of stock options 1,622 230 19
Debt issuance costs (240) (118) (1,300)
-------- -------- --------
Net cash used by financing activities (3,398) (5,984) (52,022)
-------- -------- --------
Net increase (decrease) in cash and cash equivalents 8,473 (2,946) 6,253
Cash and cash equivalents at beginning of year 5,271 8,217 1,964
-------- -------- --------
Cash and cash equivalents at end of year $ 13,744 $ 5,271 $ 8,217
======== ======== ========
| | | | | | | | | | | | | |
| | | 2005 | | | 2004 | | | 2003 | |
| Cash flows from operating activities: | | | | | | | | | | | | |
| Net income | | $ | 8,193 | | | $ | 10,128 | | | $ | 26,402 | |
| Adjustments to reconcile net income to net cash provided by operations: | | | | | | | | | | | | |
| Depreciation and amortization | | | 10,443 | | | | 11,386 | | | | 9,396 | |
| Realized gain on sale of investment in H.T.E., Inc. | | | — | | | | — | | | | (23,233 | ) |
| Realized net losses on sales of investment securities | | | — | | | | 106 | | | | 39 | |
| Non-cash interest and other charges | | | (73 | ) | | | 88 | | | | 219 | |
| Provision for losses — accounts receivable | | | 1,641 | | | | 796 | | | | 1,104 | |
| Deferred income tax (benefit) provision | | | (2,200 | ) | | | (300 | ) | | | 4,628 | |
| Discontinued operations — noncash charges and changes in operating assets and liabilities | | | — | | | | — | | | | (843 | ) |
| Changes in operating assets and liabilities, exclusive of effects of acquired companies and discontinued operations: | | | | | | | | | | | | |
| Accounts receivable | | | (7,031 | ) | | | (3,760 | ) | | | (7,354 | ) |
| Income tax payable | | | (421 | ) | | | 1,063 | | | | 728 | |
| Prepaid expenses and other current assets | | | (2,117 | ) | | | (1,084 | ) | | | (77 | ) |
| Accounts payable | | | 561 | | | | 511 | | | | (238 | ) |
| Accrued liabilities | | | 2,428 | | | | (961 | ) | | | 2,603 | |
| Deferred revenue | | | 9,763 | | | | 4,186 | | | | 9,161 | |
| | | | | | | | | | |
| Net cash provided by operating activities | | | 21,187 | | | | 22,159 | | | | 22,535 | |
| | | | | | | | | | |
| | | | | | | | | | | | | |
| Cash flows from investing activities: | | | | | | | | | | | | |
| Purchases of short-term investments | | | (16,882 | ) | | | (12,277 | ) | | | (27,758 | ) |
| Proceeds from sales of short-term investments | | | 18,964 | | | | 10,055 | | | | 16,000 | |
| Proceeds from sale of investment in H.T.E., Inc. | | | — | | | | — | | | | 39,333 | |
| Cost of acquisitions, net of cash acquired | | | — | | | | (946 | ) | | | (12,109 | ) |
| Decrease (increase) in restricted certificate of deposit | | | 2,500 | | | | — | | | | (7,500 | ) |
| Investment in software development costs | | | (1,002 | ) | | | (4,575 | ) | | | (6,761 | ) |
| Additions to property and equipment | | | (1,734 | ) | | | (2,267 | ) | | | (1,796 | ) |
| Other | | | (26 | ) | | | 96 | | | | 1 | |
| | | | | | | | | | |
| Net cash provided by (used in) investing activities | | | 1,820 | | | | (9,914 | ) | | | (590 | ) |
| | | | | | | | | | |
| | | | | | | | | | | | | |
| Cash flows from financing activities: | | | | | | | | | | | | |
| Payments on notes payable | | | — | | | | (35 | ) | | | (2,990 | ) |
| Purchase of treasury shares | | | (17,683 | ) | | | (12,518 | ) | | | (24,104 | ) |
| Contributions from employee stock purchase plan | | | 1,036 | | | | 673 | | | | — | |
| Proceeds from exercise of stock options | | | 1,800 | | | | 1,940 | | | | 1,673 | |
| | | | | | | | | | |
| Net cash used by financing activities | | | (14,847 | ) | | | (9,940 | ) | | | (25,421 | ) |
| | | | | | | | | | |
| | | | | | | | | | | | | |
| Net increase (decrease) in cash and cash equivalents | | | 8,160 | | | | 2,305 | | | | (3,476 | ) |
| Cash and cash equivalents at beginning of year | | | 12,573 | | | | 10,268 | | | | 13,744 | |
| | | | | | | | | | |
| | | | | | | | | | | | | |
| Cash and cash equivalents at end of year | | $ | 20,733 | | | $ | 12,573 | | | $ | 10,268 | |
| | | | | | | | | | |
See accompanying notes.
43
F-6
Tyler Technologies, Inc.
Notes to Consolidated Financial Statements
(Tables
(Tables in thousands, except per share data)
December 31, 20022005 and 2001
2004
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
DESCRIPTION OF BUSINESS
We provide 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"(“IT”) needs of cities, counties, schools and other local government entities. In addition, we provide professional IT services to our customers, including software and hardware installation, data conversion, training, and for certain customers, product modifications, along with continuing maintenance and support for customers using our systems. We also provide property appraisal outsourcing services for taxing jurisdictions.
We discontinued the operations
Tyler’s business is subject to risks and uncertainties including dependence on information technology spending by customers, fluctuations of quarterly results, a lengthy and variable sales cycle, dependence on key personnel, dependence on principal products and third-party technology and rapid technological change.
PRINCIPLES OF CONSOLIDATION
In 2005, we merged all of our information and property records services
segment in 2000. See Note 3 - Discontinued Operations.
PRINCIPLES OF CONSOLIDATIONsubsidiaries into the parent company. The consolidated financial statements as of December 31, 2004 include our parent company and our subsidiaries, all of which arewere wholly-owned. All significant intercompany
balances and transactions have been eliminated in consolidation.
CASH, AND CASH EQUIVALENTS, SHORT-TERM INVESTMENTS AND OTHER
Cash equivalents include items almost as liquid as cash, such as money market investments with maturity periodsinsignificant interest rate risk and original maturities of three months or less when purchased.at the time of purchase. For purposes of the statements of cash flows, we consider all investments with original maturities of three months or less to be cash equivalents.
In accordance with Statement of Financial Accounting Standards (“SFAS”) No. 115, “Accounting for Certain Investments in Debt and Equity Securities,” we determine the appropriate classification of debt and equity securities at the time of purchase and re-evaluate the classification as of each balance sheet date. At December 31, 2005 and 2004, we classified our short-term investments as available-for-sale securities pursuant to SFAS No. 115. Investments which are classified as available-for-sale are recorded at fair value as determined by quoted market price and unrealized holding gains and losses, net of the related tax effect, if any, are not reflected in earnings but are reported as a separate component of other comprehensive income until realized. Interest and dividends earned on these securities are reinvested in the securities. The cost basis of securities sold is determined using the average cost method. Following is a summary of short-term investments:
| | | | | | | | | | | | | | | | | |
| | | | | | | Unrealized | | Unrealized | | Estimated |
| December 31, 2005 | | Cost | | Gains | | Losses | | Fair Value |
| |
| Auction rate municipal bonds | | $ | 11,750 | | | $ | — | | | $ | — | | | $ | 11,750 | |
| | | | | | | | | | | | | | | | | |
| | | | | | | Unrealized | | | Unrealized | | | Estimated | |
| December 31, 2004 | | Cost | | | Gains | | | Losses | | | Fair Value | |
| |
| Auction rate municipal bonds | | $ | 8,925 | | | $ | — | | | $ | — | | | $ | 8,925 | |
| State and municipal bond mutual fund | | | 4,907 | | | | — | | | | — | | | | 4,907 | |
| | | | | | | | | | | | | |
| | | $ | 13,832 | | | $ | — | | | $ | — | | | $ | 13,832 | |
| | | | | | | | | | | | | |
We have a $5.0 million restricted certificate of deposit which collateralizes letters of credit required under our surety bond program. These letters of credit expire during 2006 and early 2007.
F-7
REVENUE RECOGNITION
We recognize revenue related to our software arrangements pursuant to the provisions of Statement of Position (“SOP”) 97-2, “Software Revenue Recognition,” as amended by SOP 98-4 and SOP 98-9, and related interpretations, as well as the Securities and Exchange Commission (“SEC”) Staff Accounting Bulletin No. 104, “Revenue Recognition.” We recognize revenue on our appraisal services contracts using the proportionate performance method of accounting, with considerations for the provisions of Emerging Issues Task Force (“EITF”) No. 00-21, “Revenue Arrangements with Multiple Deliverables.”
Software Arrangements:
We earn revenue from software licenses, postcontractpost-contract customer support ("PCS"(“PCS” or "maintenance"“maintenance”), hardware, software related services and appraisal services.hardware. PCS includes telephone support, bug fixes, and rights to upgrades on a when-and-if available basis. We provide services that range from installation, training, and basic consulting to software modification and customization to meet specific customer needs. In software arrangements that include rights to multiple software products, specified upgrades, PCS, and/or other services, we allocate the total arrangement fee among each deliverable based on the relative fair value of each.
We typically enter into multiple element arrangements, which include software licenses, software services, PCS and occasionally hardware. The majority of our software arrangements are multiple element arrangements, but for those arrangements that include customization or significant modification of the software, or where software services are otherwise considered essential to the functionality of the software in the customer’s environment, we use contract accounting and apply the provisions of SOP 81-1 “Accounting for Performance of Construction — Type and Certain Production — Type Contracts.”
If the arrangement does not require significant modification or customization, revenue is recognized when all of the following conditions are met:
| i. | | persuasive evidence of an arrangement exists; |
|
| ii. | | delivery has occurred; |
|
| iii. | | our fee is fixed or determinable; and |
|
| iv. | | collectibility is probable. |
For multiple element arrangements, each element of the arrangement is analyzed and we allocate a portion of the total arrangement fee to the elements based on the fair value of the element using vendor-specific objective evidence of fair value (“VSOE”), regardless of any separate prices stated within the contract for each element. Fair valuesvalue is considered the price a customer would be required to pay if the element was sold separately based on our historical experience of stand-alone sales of these elements to third parties. For PCS, we use renewal rates for continued support arrangements to determine fair value. For software services, we use the fair value we charge our customers when those services are estimated using vendor specific objective
evidence.
We recognize revenue fromsold separately. In software transactionsarrangements in accordance with Statementwhich we have the fair value of Position ("SOP") 97-2, "Software Revenue Recognition,"all undelivered elements but not of a delivered element, we apply the “residual method” as amended by SOP 98-4
andallowed under SOP 98-9 in accounting for any element of a multiple element arrangement involving software that remains undelivered such that any discount inherent in a contract is allocated to the delivered element. Under the residual method, if the fair value of all undelivered elements is determinable, the fair value of the undelivered elements is deferred and the remaining portion of the arrangement fee is allocated to the delivered element(s) and is recognized as follows:
revenue assuming the other revenue recognition criteria are met. In software arrangements in which we do not have VSOE for all undelivered elements, revenue is deferred until fair value is determined or all elements for which we do not have VSOE have been delivered. Alternatively, if sufficient VSOE does not exist and the only undelivered element is services that do not involve significant modification or customization of the software, the entire fee is recognized over the period during which the services are expected to be performed.
Software Licenses and Appraisal Services:
We recognize the revenue allocable to software licenses and specified upgrades upon delivery of the software product or upgrade to the customer, unless the fee is not fixed or determinable or collectibility is not probable. If the fee is not fixed or determinable, including new customers whose payment terms are three months or more from shipment, revenue is generally recognized as payments become due from the customer. If collectibility is not considered probable, revenue is recognized when the fee is collected. Arrangements that include software services, such as training or installation, are evaluated to determine whether those services are essential to the product'sproduct’s functionality.
F-8
A majority of our software arrangements involve
"off-the-shelf"“off-the-shelf” software. We consider software to be off-the-shelf software if it can be added to an arrangement with minor changes in the underlying code and it can be used by the customer for the
customer'scustomer’s purpose upon installation. For off-the-shelf software arrangements, we recognize the software license fee as revenue after delivery has occurred, customer acceptance is reasonably assured, that portion of the fee represents
ana non-refundable enforceable claim and is probable of collection, and the remaining services such as training are not considered essential to the
product'sproduct’s functionality.
44
For arrangements that include customization or modification of the software, or where software services are otherwise considered essential, we recognize revenue using contract accounting. We generally use the percentage-of-completion method to recognize revenue from these arrangements. We measure progress-to-completion primarily using labor hours incurred, or value added. The percentage of
completionpercentage-of-completion methodology generally results in the recognition of reasonably consistent profit margins over the life of a contract since we have the ability to produce reasonably dependable estimates of contract billings and contract costs. We generally use the level of profit marginsmargin that areis most likely to occur on a contract. If the most likely profit marginsmargin cannot be precisely determined, the lowest probable level of profit in the range of estimates is used for the contract until the results can be estimated more precisely. These arrangements are often implemented over an extended time period and occasionally require us to revise total cost estimates. Amounts recognized in revenue are calculated using the progress-to-completion measurement after giving effect to any changes in our cost estimates. Changes to total estimated contract costs, if any, are recorded in the period they are determined. Estimated losses on uncompleted contracts are recorded in the period in which we first determine that a loss is apparent.
For arrangements that include new product releases for which it is difficult to estimate final profitability except to assume that no loss will ultimately be incurred, we recognize revenue under the completed contract method. Under the completed contract method, revenue is recognized only when a contract is completed or substantially complete. Historically these amounts have been immaterial.
Software Services:
Services
Some of our software arrangements include services considered essential for the customer to use the software for the customer'scustomer’s purposes. For these software arrangements, both the software license revenue and the services revenue are recognized as the services are performed using the percentage-of-completion contract accounting method. When software services are not considered essential, the fee allocable to the service element is recognized as revenue as we perform the services.
Appraisal Services:
For our real estate appraisal projects, we recognize revenue using contract
accounting. We measure progress-to-completion primarily using units completed
and these arrangements are often implemented over a one to three year time
period.
Computer Hardware Equipment:
Equipment
Revenue allocable to computer hardware equipment, which is based on vendor specific objective evidence of
fair valueVSOE, is recognized when we deliver the equipment and collection is probable.
Postcontract Customer Support:
Support
Our customers generally enter into PCS agreements when they purchase theour software license.licenses. Our PCS agreements are generallytypically renewable every year.annually. Revenue allocated to PCS is recognized on a straight-line basis over the period the PCS is provided. All significant costs and expenses associated with PCS are expensed as incurred. Fair value for the maintenance and support obligations for software licenses is based upon the specific sale renewals to customers or upon renewal rates quoted in the contracts.
Appraisal Services:
For our property appraisal projects, we recognize revenue using the proportionate performance method of revenue recognition since many of these projects are implemented over one to three year periods and consist of various unique activities. Under this method of revenue recognition, we identify each activity for the appraisal project, with a typical project generally calling for bonding, office set up, training, routing of map information, data entry, data collection, data verification, informal hearings, appeals and project management. Each activity or act is specifically identified and assigned an estimated cost. Costs which are considered to be associated with indirect activities, such as bonding costs and office set up, are expensed as incurred. These costs are typically billed as incurred and are recognized as revenue equal to cost. Direct contract fulfillment activities and related supervisory costs such as data collection, data entry and verification are expensed as incurred. The direct costs for these activities are determined and the total contract value is then allocated to each activity based on a consistent profit margin. Each activity is assigned a consistent unit of measure to determine progress towards completion and revenue is recognized for each activity based upon the percentage complete as applied to the estimated revenue for that activity. Progress for the fulfillment activities is typically based on labor hours or an output measure such as the number of parcel counts completed for that activity. Estimated losses on uncompleted contracts are recorded in the period in which we first determine that a loss is apparent.
F-9
Other:
Deferred revenue consists primarily of unearned support and maintenance revenue that has been billed based on contractual terms in the underlying arrangement with the remaining balance consisting of payments received in advance of revenue being earned under software licensing, software services and hardware installation, support and maintenance contracts.installation. Unbilled revenue is not billable at the balance sheet datesdate but is recoverable over the remaining life of the contract through billings made in accordance with contractual agreements. The termination clauses in most of our contracts provide for the payment for the fair value of products delivered and services performed in the event of an early termination.
Prepaid expenses and other current assets include direct and incremental costs, consisting primarily of third party sub-contractor payments and commissions associated with arrangements for which revenue recognition has been deferred. Such costs are expensed at the time the related revenue is recognized.
USE OF ESTIMATES
The preparation of our consolidated financial statements in conformity with accounting principles generally accepted in the United States ("GAAP"(“GAAP”) requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Significant items subject to such estimates and assumptions include the application of the percentagepercentage-of-completion and proportionate performance methods of completion method,revenue recognition, the carrying amount and estimated useful lives of intangible assets and valuation allowancesallowance for receivables
and deferred income tax assets.receivables. Actual results could differ from those estimates.
PROPERTY AND EQUIPMENT, NET
Property, equipment and purchased software are recorded at original cost and increased by the cost of any significant improvements after purchase. We
recordexpense maintenance and repairs
as expense when incurred. Depreciation and amortization is calculated using the straight-line method over the shorter of the
asset'sasset’s estimated useful life or the term of the lease in the case of leasehold improvements. For income tax purposes, we use accelerated depreciation methods as allowed by tax laws.
INTEREST COST
We capitalize interest cost as a component of capitalized software development
costs. We capitalized interest costs of $269,000 during 2002, $578,000 during
2001 and $586,000 during 2000.
45
RESEARCH AND DEVELOPMENT COSTS
We record all research
Research and development costs as expenseare included with selling, general and administrative expenses and are expensed when incurred. We expensed research and development costs of $611,000$2.4 million during 2002, $412,0002005, $2.5 million during 20012004, and $973,000$1.1 million during 2000.
2003.
INCOME TAXES
Income taxes are accounted for under the asset and liability method. Deferred taxes arise because of different treatment between financial statement accounting and tax accounting, known as "temporary“temporary differences."” We record the tax effect of these temporary differences as "deferred“deferred tax assets"assets” (generally items that can be used as a tax deduction or credit in the future periods) and "deferred“deferred tax liabilities"liabilities” (generally items that we received a tax deduction for, which have not yet been recorded in the income statement). The deferred tax assets and liabilities are measured using enacted tax rules and laws that are expected to be in effect when the temporary differences are expected to be recovered or settled. A valuation allowance would be established to reduce deferred tax assets if it is likely that a deferred tax asset will not be realized.
STOCK COMPENSATION
In accordance with Statement of Financial Accounting Standards ("SFAS")SFAS No. 123, "Accounting“Accounting for Stock-Based Compensation,"” we elected to account for our stock-based compensation under Accounting Principles Board ("APB"(“APB”) Opinion No. 25, "Accounting“Accounting for Stock Issued to Employees,"” as amended, and related interpretations including FASB Interpretation No. 44, "Accounting for Certain
Transactions involving Stock Compensation," an interpretation of APB Opinion No.
25, issued in March 2000.interpretations. Under APB No. 25's25’s intrinsic value method, compensation expense is determined on the measurement date; that is, the first date on which both the number of shares the option holder is entitled to receive, and the exercise price, if any, are known. Compensation expense, if any, is measured based on the award'saward’s intrinsic value -— the excess of the market price of the stock over the exercise price on the measurement date. The exercise price of all of our stock options granted equals the market price on the measurement date. Therefore, we have not recorded any compensation expense related to grants of stock options.
F-10
The weighted-average fair value per stock option granted was
$3.61$3.47 for
2002,
$1.282005, $6.03 for
20012004, and
$2.02$3.41 for
2000.2003. We estimated the fair values using the Black-Scholes option pricing model and the following assumptions for the periods presented:
YEARS ENDED DECEMBER 31,
----------------------------------
2002 2001 2000
--------- --------- ---------
Expected dividend yield..................... 0% 0% 0%
Risk-free interest rate..................... 4.9% 5.1% 6.1%
Expected stock price volatility............. 77.0% 78.0% 73.0%
Expected term until exercise (years) ....... 7 7 7
| | | | | | | | | | | | | |
| | | Years ended December 31, |
| | | 2005 | | 2004 | | 2003 |
| Expected dividend yield | | | 0 | % | | | 0 | % | | | 0 | % |
| Risk-free interest rate | | | 4.1 | % | | | 3.7 | % | | | 3.3 | % |
| Expected stock price volatility | | | 48.4 | % | | | 79.1 | % | | | 86.5 | % |
| Expected term until exercise (years) | | | 5 | | | | 5 | | | | 5 | |
Pro forma information regarding net income
(loss) and earnings
(loss) per share is required by SFAS No. 123 for awards granted after December 31, 1994, as if we had accounted for our stock-based awards to employees under the fair value method of SFAS No.
123. The pro forma impact of applying SFAS No. 123
in 2005, 2004 and
2003 will not necessarily be representative of the pro forma impact in future years. Our pro forma information is as follows:
YEARS ENDED DECEMBER 31,
--------------------------------------
2002 2001 2000
---------- ---------- ----------
Net income (loss)................................................. $ 7,989 $ 269 $ (24,597)
Add stock-based employee compensation cost included in net income
(loss), net of related tax benefit................................ -- -- --
Deduct total stock-based employee compensation expense determined
under fair-value-based method for all rewards, net of related
tax benefit.................................................... (1,394) (1,188) (1,399)
--------- -------- ---------
Pro forma net income (loss)....................................... $ 6,595 $ (919) $ (25,996)
========= ======== =========
Pro forma net income (loss) per basic share....................... $ 0.14 $ (0.02) $ (0.57)
========= ======== =========
Pro forma net income (loss) per diluted share..................... $ 0.13 $ (0.02) $ (0.57)
========= ======== =========
46
| | | | | | | | | | | | | |
| | | Years ended December 31, | |
| | | 2005 | | | 2004 | | | 2003 | |
| Net income as reported | | $ | 8,193 | | | $ | 10,128 | | | $ | 26,402 | |
| Add stock-based employee compensation cost included in net income, net of related tax benefit | | | — | | | | — | | | | — | |
| Deduct total stock-based employee compensation expense determined under fair-value-based method for all awards, net of related tax benefit | | | (831 | ) | | | (1,086 | ) | | | (1,915 | ) |
| | | | | | | | | | |
| Pro forma net income | | $ | 7,362 | | | $ | 9,042 | | | $ | 24,487 | |
| | | | | | | | | | |
| | | | | | | | | | | | | |
| Basic earnings per share: | | | | | | | | | | | | |
| As reported | | $ | 0.21 | | | $ | 0.25 | | | $ | 0.62 | |
| | | | | | | | | | |
| Pro forma | | $ | 0.19 | | | $ | 0.22 | | | $ | 0.58 | |
| | | | | | | | | | |
| | | | | | | | | | | | | |
| Diluted earnings per share: | | | | | | | | | | | | |
| As reported | | $ | 0.19 | | | $ | 0.23 | | | $ | 0.59 | |
| | | | | | | | | | |
| Pro forma | | $ | 0.17 | | | $ | 0.20 | | | $ | 0.54 | |
| | | | | | | | | | |
In December 2004, the FASB issued SFAS No. 123R, “Share-Based Payment.” SFAS No. 123R is a revision of SFAS No. 123 and supersedes APB No. 25. Among other items, SFAS No. 123R eliminates the use of APB No. 25 and the intrinsic value method of accounting, and requires companies to recognize the cost of employee services received in exchange for awards of equity instruments, based on the grant date fair value of those awards, in the financial statements. Pro forma disclosure is no longer an alternative under the new standard. Although early adoption is allowed, we will adopt SFAS No. 123R as of the required effective date for calendar year companies, which is January 1, 2006.
We currently utilize a standard option pricing model (i.e., Black-Scholes) to measure the fair value of stock options granted to employees. While SFAS No. 123R permits entities to continue to use such a model, the standard also permits the use of a more complex binomial, or “lattice” model. Based upon our research on the alternative models available to value option grants, and in conjunction with the type and number of stock options expected to be issued in the future, we have determined that we will continue to use the Black-Scholes model for option valuation as of the current time.
SFAS No. 123R includes several modifications to the way that income taxes are recorded in the financial statements. The expense for certain types of option grants is only deductible for tax purposes at the time that the taxable event takes place, which could cause variability in our effective tax rates recorded throughout the year. SFAS No. 123R does not allow companies to “predict” when these taxable events will take place. Furthermore, it requires that the benefits associated with the tax deductions in excess of recognized compensation cost be reported as a financing cash flow, rather than as an operating cash flow as required under current literature. This requirement will reduce net operating cash flows and increase net financing cash flows in periods after the effective date. These future amounts cannot be estimated, because they depend on, among other things, when employees exercise stock options. However, the amounts of operating cash flows recognized in prior periods for such excess tax deductions, as shown in our consolidated statements of cash flows, were $313,000, $582,000, and $292,000, respectively, for 2005, 2004, and 2003.
We have chosen the “modified prospective” method of implementing SFAS No. 123R. Under the “modified prospective” method, new awards will be valued and accounted for prospectively upon adoption. Outstanding prior awards that are unvested as of December 31, 2005 will be recognized as compensation cost over the remaining requisite service period. Prior periods will not be restated. Based on stock options granted to employees through December 31, 2005, we expect the adoption of SFAS No. 123R on
F-11
January 1, 2006, will reduce first quarter net earnings by approximately $320,000 ($0.01 per share, diluted) and reduce full year 2006 net earnings by approximately $1.3 million ($0.03 per share, diluted).
SFAS No. 123R also requires employee stock purchase plans (“ESPP”) with purchase price discounts greater than 5% to be compensatory. Our ESPP currently has a 15% purchase price discount, but the plan can be modified at any time. We expect the related compensatory charge would reduce first quarter 2006 net earnings approximately $50,000 ($0.00 per share, diluted) and reduce full year 2006 net earnings approximately $200,000 ($0.01 per share, diluted).
See Note 12 for further information on our stock-based compensation plans.
COMPREHENSIVE INCOME (LOSS)
Changes in accumulated other comprehensive income
(loss)are as follows:
YEARS ENDED DECEMBER 31,
------------------------------------------
2002 2001 2000
---------- ---------- ----------
Net income (loss)................................................. $ 7,989 $ 269 $ (24,597)
Other comprehensive income (loss):
Change in fair value of securities available-for-sale (net of
deferred tax expense of $3,995 for 2002)...................... 11,963 6,146 (28,622)
---------- ---------- ---------
Total comprehensive income (loss)................................. $ 19,952 $ 6,415 $ (53,219)
========== ========== =========
We did not record a tax benefit in connection with the change in the unrealized
gain (loss) for 2001 or 2000 since we could not conclude it was more likely than
not that the tax benefit would be realized on the cumulative unrealized holding
loss.
| | | | | | | | | | | | | |
| | | Years ended December 31, | |
| | | 2005 | | | 2004 | | | 2003 | |
| Net income | | $ | 8,193 | | | $ | 10,128 | | | $ | 26,402 | |
| Other comprehensive income (loss): | | | | | | | | | | | | |
| Change in fair value of short-term investments available-for-sale (net of deferred tax benefit of $4 in 2005 and $20 in 2004) | | | (8 | ) | | | (37 | ) | | | (32 | ) |
| Reclassification adjustment for unrealized gain related to investment in H.T.E., Inc. (net of deferred tax expense of $3,995) | | | — | | | | — | | | | (7,418 | ) |
| Reclassification adjustment for unrealized gain related to investments available-for-sale (net of deferred tax expense of $5 in 2005 and $37 in 2004) | | | 8 | | | | 69 | | | | — | |
| | | | | | | | | | |
| Total comprehensive income | | $ | 8,193 | | | $ | 10,160 | | | $ | 18,952 | |
| | | | | | | | | | |
SEGMENT AND RELATED INFORMATION
Although we have a number of operating subsidiaries,divisions, separate segment data has not been presented as they meet the criteria for aggregation as permitted by SFAS No. 131, "Disclosures“Disclosures About Segments of an Enterprise and Related Information."
”
GOODWILL AND OTHER INTANGIBLE ASSETS
We have used the purchase method of accounting for all of our business combinations. Our business acquisitions result in the allocation of the purchase price to goodwill and other intangible assets. We allocate the cost of acquired companies first to identifiable assets based on estimated fair values. The excess of the purchase price over the fair value of identifiable assets acquired, net of liabilities assumed, is recorded as goodwill.
On January 1, 2002 we adopted the provisions of SFAS No. 141, "Business
Combinations," and
Under SFAS No. 142
"Goodwill“Goodwill and Other Intangible
Assets." SFAS
No. 141 eliminates the pooling of interest method of accounting for business
combinations initiated after June 30, 2001. The adoption of SFAS No. 141 did not
impact our results of operations or financial position.
With the adoption of SFAS No. 142Assets,” we will evaluate goodwill
and intangible assets not subject to
amortization are tested annually for impairment
and are tested for impairmentannually as of April 1st, or more frequently if
events and circumstances indicate that the asset might be
impaired.impairment indicators arise. An impairment loss is recognized to the extent that the carrying amount exceeds the
asset'sasset’s fair value.
Prior toIn the
adoptionimplementation of SFAS No. 142,
goodwill was amortized onwe identified two reporting units for impairment testing. The appraisal services and appraisal software stand-alone business unit qualified as a
straight-line
basis overreporting unit since it is one level below an operating segment, discrete financial information exists for the
expected periods to be benefitedbusiness unit and
assessedthe executive management group directly reviews this business unit. The other software business units were aggregated into the other single reporting unit. The appraisal services and appraisal software stand-alone business unit is organized in such a manner that both of its revenue sources are tightly integrated with each other and discrete financial information at the operating profit level does not exist for
recoverability
by determining whether the amortization of the goodwill balance over its
remaining life could be recovered through undiscounted future operating cash
flows of the acquired operation. All other intangible assets were amortized on a
straight-line basis. The amount of goodwill and other intangible asset
impairment, if any, was measured by the amount by which the carrying amount of
the assets exceeded the fair value of the assets. Fair value was determined
based on projected discounted future operating cash flows using a discount rate
reflecting our average cost of funds.
47
this business unit’s respective revenue sources. IMPAIRMENT OF LONG-LIVED ASSETS
SFAS No. 144 provides a single accounting model for
We periodically evaluate whether current facts or circumstances indicate that the carrying value of our property and equipment or other long-lived assets to be disposed of. SFAS No. 144 also changes the criteria for classifying an asset as
held for sale; and broadens the scope of businesses to be disposed of that
qualify for reporting as discontinued operations and changes the timing of
recognizing losses on discontinued operations. We adopted SFAS No. 144 on
January 1, 2002. The adoption of SFAS No. 144 did not affect our results of
operations or financial position.
In accordance with SFAS No. 144, long-lived assets, such as property, plant, and
equipment, and purchased intangibles subject to amortization, are reviewed for
impairment whenever events or changes in circumstances indicate that the amount
we have recorded for an assetused may not be recoverable. RecoverabilityIf such circumstances are determined to exist, we measure the recoverability of assets to be held and used is measured by a comparison of the carrying amount of anthe asset toor appropriate grouping of assets and the estimated undiscounted future cash flows expected to be generated by the asset.assets. If the carrying amount of an assetthe assets exceeds itstheir estimated future cash flows, an impairment charge is recognized byfor the amount by which the carrying amount of the assetassets exceeds the fair value of the asset.assets. Assets to be disposed of would be separately presented in the balance sheet and reported at the lower of the carrying amount or fair value less costs to sell, and are no longer depreciated. The assets and liabilities of a disposed group classified as held for sale would be presented separately in the appropriate asset and liability sections of the balance sheet.
Prior to the adoption of SFAS No. 144, we accounted for long-lived assets in
accordance with SFAS No. 121, "Accounting for Impairment of Long-Lived Assets
and for Long-Lived Assets to be Disposed Of."
F-12
COSTS OF COMPUTER SOFTWARE
Software development costs have been accounted for in accordance with SFAS No. 86, "Accounting“Accounting for the Costs of Computer Software to be Sold, Leased, or Otherwise Marketed."” Under SFAS No. 86, capitalization of software development costs begins upon the establishment of technological feasibility and prior to the availability of the product for general release to customers. We capitalized software development costs of approximately $7.2$1.0 million during 2002, $6.22005, $4.6 million during 20012004 and $6.7$6.8 million during 2000.2003. Software development costs primarily consist of personnel costs and rent for related office space and
capitalized interest cost.space. We begin to amortize capitalized costs when a product is available for general release to customers. Amortization expense is determined on a product-by-product basis at a rate not less than straight-line basis over the product'sproduct’s remaining estimated economic life.life but not to exceed five years. Amortization of software development costs was approximately $2.8$5.9 million in 2005, $6.1 million during 2002, $1.72004, and $4.1 million during 20012003 and $622,000 during 2000.
is included in cost of software license revenue in the accompanying consolidated statements of operations.
FAIR VALUE OF FINANCIAL INSTRUMENTS
We used the following methods and assumptions to estimate the fair value of each
class of financial instruments at the balance sheet date:
-
Cash and cash equivalents, accounts receivables, trade accounts payables, deferred revenues and certain other assets:
Costsassets at cost approximate fair value because of the short maturity of these instruments. Our available-for-sale investments are recorded at fair value based on quoted market prices.
- Long-term obligations: Cost/carrying values approximates
In order to enhance our ability to manage foreign currency risk associated with one contract, in December 2005, we contracted with a commercial bank to enter into a series of forward contracts, at no material cost to us, to acquire Canadian dollars through 2009 at fixed prices. These forward contracts have been entered into for periods consistent with the related underlying exposure in this contract and do not constitute positions independent of this exposure. These forward contracts are recorded in our consolidated balance sheet as either an asset or liability measured at fair value, either due towith changes in the variable nature of their stated
interest rates or the stated interest rates approximate market
rates. These estimated fair value amounts have been determined
using available market information orrecorded in earnings. We had approximately $100,000 of current risk management assets associated with these foreign exchange contracts at December 31, 2005 and we recorded related gains in other appropriate
valuation methodologies.
-income of approximately $100,000. We do not enter into derivative contracts for speculative purposes, nor are we a party to any leveraged derivative instrument. At December 31, 2004 we did not have any derivative financial instruments, including
those for speculative or trading purposes.
forward contracts in place.
CONCENTRATIONS OF CREDIT RISK AND UNBILLED RECEIVABLES
Concentrations of credit risk with respect to receivables are limited due to the
wide varietysize and geographical diversity of
customers and markets into which our
products and services are
provided, as well as their dispersion across many different geographic areas.customer base. Historically, our credit losses have not been significant. As a result,
as of
December 31, 2002, we do not believe we have any significant concentrations of credit
risk.
48
risk as of December 31, 2005.We maintain allowances for doubtful accounts and sales adjustments, which are provided at the time the revenue is recognized. Since most of our customers are domestic governmental entities, we rarely incur a loss resulting from the inability of a customer to make required payments. Events or changes in circumstances that indicate that the carrying amount for the allowances for doubtful accounts and sales adjustments may require revision, include, but are not limited to, deterioration of a customer’s financial condition, failure to manage our customer’s expectations regarding the scope of the services to be delivered, and defects or errors in new versions or enhancements of our software products.
The termination clauses in most of our contracts provide for the payment for the fair value of products delivered or services performed in the event of early termination. Our property appraisal outsourcing service contracts can range up to three years and, in one case, as long as six years in duration. In connection with these percentage of completion contracts, and foras well as certain software service contracts, we may perform the work prior to when the software and services are billable and/or payable pursuant to the contract. We have historically recorded retentions andsuch unbilled receivables (costs and estimated profit in excess of billings) in connection with (1) property appraisal services contracts accounted for using proportionate performance accounting in which the revenue is earned based upon activities performed in one accounting period but the billing normally occurs shortly thereafter and may span another accounting period; (2) software services contracts accounted for using the percentage-of-completion method of approximately $6.2revenue recognition using labor hours as a measure of progress towards completion in which the services are performed in one accounting period but the billing for the software element of the arrangement may be based upon the specific phase of the implementation; (3) software revenue for which we have objective evidence that the customer-specified objective criteria has been met but the billing has not yet been submitted to the customer; and (4) in a limited number of cases, we may grant extended payment terms generally to existing customers with whom we have a long-term relationship and favorable collection history. In addition, certain of our property appraisal outsourcing contracts are required by law to have an amount withheld from a progress billing (generally a 10% retention) until final and satisfactory project completion is achieved, typically upon the completion of fieldwork or formal hearings.
F-13
In connection with this activity, we have recorded unbilled receivables of $7.1 million and $7.5$10.0 million at December 31, 20022005 and 2001,2004, respectively, in connection with such contracts. Retentions are
included in trade accountsbilling primarily dependent on a fixed payment schedule based on specific calendar dates. We also have recorded retention receivable and amounted to $2.6of $1.7 million at both December 31, 2002,2005 and 2004, and these retentions become payable upon the completion of which $168,000 isour field work and formal hearings. Unbilled receivables and retention receivables expected to be collected in excess of one year.
One customer accounted for approximately 10% during 2002 and 13% during 2001,year have been classified as non-current receivables in the accompanying consolidated balance sheets.
INDEMNIFICATION
Most of our total consolidated revenues. No singlesoftware license agreements indemnify our customers in the event that the software sold infringes upon the intellectual property rights of a third party. These agreements typically provide that in such event we will either modify or replace the software so that it becomes non-infringing or procure for the customer accounted for greater than
10%the right to use the software. We have recorded no liability associated with these indemnifications, as we are not aware of total consolidated revenues during 2000.
RECLASSIFICATIONS
Pursuantany pending or threatened infringement actions that are possible losses. We believe the estimated fair value of these intellectual property indemnification clauses is minimal.
We have also agreed to Financial Accounting Standards Board Emerging Issues Task Force
("EITF") Issue No. 01-14, "Income Statement Characterization of Reimbursements
Received for 'Out-of-Pocket' Expenses Incurred," customer reimbursements for
out-of-pocket expensesindemnify our officers and board members if they are named or threatened to be includednamed as a party to any proceeding by reason of the fact that they acted in net revenuessuch capacity. A form of the indemnification agreement was filed as Exhibit 10.1 to our Form 10-K for the year ended December 31, 2002. We maintain directors’ and officers’ insurance coverage to protect against any such losses. We have recorded no liability associated with these indemnifications. Because of our insurance coverage, we believe the related costs
in costestimated fair value of revenues. Because these additional net revenues are offset by the
associated reimbursable expenses included in cost of revenues, the adoption of
EITF No. 01-14 in 2002 did not impact income (loss) from continuing operations
or net income (loss) for all periods presented. Net revenues and cost of
revenues for 2001 and 2000 were recast to reclassify certain reimbursable
expenses to conform to the current year presentation in accordance with EITF No.
01-14. See Note 17 - Quarterly Financial Information.
In addition, certain otherindemnification agreements is minimal.
RECLASSIFICATIONS
Certain amounts for previous years have been reclassified to conform to the current year presentation.
(2) ACQUISITIONS
On November 4, 1999,
During December 2003, we acquired selected95% of one company, Eden Systems, Inc. (“Eden”), and certain assets and assumed selected
liabilities of Cole Layer Trumble Company ("CLT") from a privately held company
("Seller"). Partanother business that provides forms software to users of thesome of our software products, for an aggregate purchase price consisted of the issuance$15.5 million, consisting of 1.0$13.1 million restricted sharescash and $2.4 million of Tyler common stock and included a price protection on the
sale of the stock. The price protection, which expired November 4, 2001, was
equal to the difference between the actual sale proceeds of the Tyler common
stock and $6.25 on a per share basis. The price protection was limited to $2.75
million. During the year ended December 31, 2001,In 2004 we received a claim from the
Seller under the price protection provision, which qualifiedpaid $725,000 cash for the maximum
amountremaining 5% of the price protection. Contingent considerationEden. The results of this nature does not
change the recorded costs of the acquisition and the claim is first recorded
when submitted. Accordingly, the claim submitted in 2001 of $2.75 million, net
of the deferred tax benefit of $963,000, was charged to paid-in capital during
2001. The purchase agreement contained a number of post-closing adjustments
which resulted in a receivable of approximately $1.4 million due to us from the
Seller. During the year ended December 31, 2001 and concurrent with the
settlement of the price protection provision, we paid the Seller $1.35 million
in cash on a net basis and eliminated the $1.4 million receivable due to us. We
entered into a mutual release agreement with the Seller to fully settle the
price protection and related purchase agreement provisions.
In January 2000 we paid $3.0 million in cash (among other consideration) for
Capital Commerce Reporter, Inc. ("CCR") which was included in our information
and property records services segment that was discontinued in December 2000.
Wethese acquisitions have used the purchase method of accounting for all of our business
combinations. Results of operations of acquired entities arebeen included in our consolidated financial statements from thesince their respective dates of acquisition. Eden provides financial, personnel and citizen services applications software for local governments.
The following unaudited pro forma information presents the consolidated results of operations for 2003 as if our acquisition of Eden occurred as of the beginning of 2003, after giving effect to certain adjustments, including amortization of intangibles, interest and income tax effects. Pro forma information does not include acquisitions that are not considered material to our results of operations. The pro forma information does not purport to represent what our results of operations actually would have been had such transaction or event occurred on the dates specified, or to project our results of operations for any future period.
| | | | | |
| Revenues | | $ | 157,248 | |
| Income from continuing operations | | | 26,295 | |
| Net income | | | 26,719 | |
| Net income per diluted share | | $ | 0.59 | |
(3) DISCONTINUED OPERATIONS
Discontinued operations includes the operating results of the information and
property records services segment which we discontinued in December 2002, two
non-operating subsidiaries relating to a formerly owned subsidiary that we sold
in December 1995 and an automotive parts distributor that we sold in March 1999.
On September 29, 2000, we sold certain net assets of Kofile, Inc. and another
subsidiary, our interest in a certain intangible work product, and a building
and related building improvements ("Kofile Sale") for a cash sale price of $14.4
million. Effective December 29, 2000, we sold for cash our land records business
unit, consisting of Business Resources Corporation ("Resources"), to an
affiliate of Affiliated Computer Services, Inc. (the "Resources Sale"). The
Resources Sale was valued at approximately $71.0 million. Concurrent with the
Resources Sale, our management with our Board of Directors' approval adopted a
formal plan of disposal for the remaining businesses and assets of the
information and property records services segment. This restructuring program
was designed
49
to focus our resources on our software systems and services segment and to
reduce debt. The businesses and assets divested or identified for divesture were
classified as discontinued operations in the accompanying consolidated financial
statements in 2000 and the prior periods' financial statements were restated to
report separately their operations in compliance with APB Opinion No. 30. The
net gain on the Kofile Sale and the Resources Sale amounted to approximately
$1.5 million (net of an income tax benefit of $2.4 million).
Our formal plan of disposal provided for the remaining businesses and assets of
the information and property records services segment to be disposed of by
December 29, 2001. The estimated loss on the disposal of these remaining
businesses and assets at December 29, 2000 amounted to $13.6 million (after an
income tax benefit of $3.8 million). This loss consisted of an estimated loss on
disposal of the businesses of $11.5 million (net of an income tax benefit of
$2.7 million) and a provision of $2.1 million (after an income tax benefit of
$1.1 million) for anticipated operating losses from the measurement date of
December 29, 2000 to the estimated disposal dates.
On May 16, 2001, we sold all of the common stock of one of the businesses in the
discontinued information and property records services segment. In connection
with the sale, we received cash proceeds of $575,000, approximately 60,000
shares of Tyler common stock, a promissory note of $750,000 payable in 58
monthly installments at an interest rate of 9%, and other contingent
consideration. On September 21, 2001, we sold all of the common stock of CCR for
$3.1 million in cash.
We renegotiated certain aspects of the May 16, 2001 sale transaction and 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 received
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 2002, we received payments of $46,000 on the
subordinated note.
During the year ended December 31, 2002, the IRS issued temporary regulations
that in effect allowed us to deduct for tax purposes losses attributable to the
March 1999 sale of our automotive parts subsidiary that were previously not
allowed. The tax benefit of allowing the deduction of this loss amounted to
approximately $970,000. In addition, we renegotiated a note receivable and
certain contingent consideration in connection with a subsidiary sold in 2001
and received proceeds of approximately $846,000 in 2002. We initially assigned
no value for accounting purposes to the note receivable and contingent
consideration when the loss on the disposal of the discontinued operation was
first established in 2000 and when the note was first received in 2001. In
addition, we settled in the fourth quarter of 2002 our asbestos litigation for
an amount that was approximately $200,000 less than the liability initially
established for this matter. See Note 16 - Commitments and Contingencies. The
aggregate effects of these events, net of the related tax effects, and other
minor adjustments to the reserve for discontinued operations resulted in a
credit to discontinued operations of $1.8 million in 2002. In our opinion and
based on information available at this time, we believe that our net liabilities
related to discontinued operations are adequate.
The income tax expense or benefit associated with the gains or losses on the
respective sales of the businesses in the information and property records
services segment differs from the statutory income tax rate of 35% due to the
elimination of deferred taxes related to the basis difference between amounts
reported for income taxes and financial reporting purposes and the utilization
of available capital loss carryforwards which were fully reserved in the
valuation account prior to the respective sales.
Net assets of discontinued operations of the information and property records
services segment and two of our non-operating subsidiaries included in the
consolidated balance sheets as of December 31, 2002 and 2001 includes the
following:
2002 2001
--------- --------
Restricted asbestosis settlement cash with
offsetting amount in current liabilities........ $ 1,325 $ 2,310
Accounts receivable................................ -- 100
Deferred taxes..................................... 1,705 2,192
Other current liabilities primarily consisting
of asbestosis settlement obligations (see
Note 16)........................................ (3,472) (5,183)
-------- --------
Net current liabilities.......................... (442) (581)
-------- --------
Property and equipment held for sale .............. -- 1,000
-------- --------
Net (liability) assets........................... $ (442) $ 419
======== ========
50
The condensed statements of operations relating to the information and property
records services segment for the year ended December 31, 2000 is presented
below:
2000
--------
Revenues...................................... $ 39,680
Costs and expenses............................ 44,635
--------
Loss before income tax benefit................ (4,955)
Income tax benefit............................ (704)
--------
Net loss...................................... $ (4,251)
========
Other
One of our non-operating subsidiaries, isSwan Transportation Company (“Swan”), had been involved in various claims raised by former employees of a foundry that was owned by an affiliate of Swan and Tyler prior to December 1995. These claims were for work-relatedalleged work related injuries and physical conditions relatingresulting from alleged exposure to silica, asbestos, and/or related industrial dusts. After a formerly owned
subsidiaryseries of bankruptcy court filings involving Swan, on December 23, 2003, Tyler, in accordance with the terms of the plan of reorganization, transferred the stock of Swan to the Swan Asbestos and Silica Trust (the “Trust”), an unaffiliated entity that was soldwill oversee the processing and payment of all present and future claims related to the foundry. On December 23, 2003, we paid $1.48 million to the Trust in 1995.full and final release from all liability for claims associated with the once-owned foundry (the “Swan Matter”). As a result of the release, any claimant is barred from asserting any such claim, either now or in the future, against Tyler or its affected affiliates. We recorded net losses, neta gain on disposal of relateddiscontinued operations of $424,000 because we fully settled the Swan Matter at an amount less than initially recorded and certain aspects of the settlement were structured in a beneficial tax effect,manner. Accordingly, we recognized for the first time certain tax benefits associated with payments on behalf of $3,000 during 2001the Swan Matter.
F-14
(4) RESTRUCTURING CHARGE
Because of unsatisfactory financial performance early in 2005, we made significant organizational changes in the second quarter of 2005 to those areas of our business that were not performing to our expectations. Our goal was to bring costs in line with expected levels of revenue while improving the efficiency of our organizational structure to ensure that clients continue to receive superior service.
We currently anticipate that revenues in our appraisal services business are likely to remain at historically low levels in the foreseeable future and $748,000we reorganized that division to eliminate levels of management and reduce overhead expense. We also took actions to reduce headcount and costs in 2000 for trialour appraisal and tax software division, and we consolidated certain senior management positions at the corporate office. These cost reductions were made in the second quarter of 2005. As a result, we reduced headcount in the appraisal services and appraisal and tax software businesses, as well as in the corporate office, by eliminating approximately 120 positions, including management, staff and project-related personnel.
In connection with the reorganization, we incurred certain charges which were primarily comprised of employee severance costs and related costs.
See Note 16 - Commitmentsfringe benefits, and Contingencies.
(4) RELATED PARTY TRANSACTIONS
On September 29, 2000, we sold for cashtotaled approximately $1.3 million before income taxes. The related payments were paid in 2005.
The following is a summary of
$14.4 million certain net assets of
Kofile and another subsidiary, our interest in a certain intangible work
product, and a building and related building improvements to investment entities
beneficially owned by a principal shareholder of Tyler, who was also a director
at the
time.
From time to time, we charter aircraft from businesses in which a member of
management is an owner. We recorded rental expense related to such arrangements
with a non-corporate officer management member of $69,000 during 2002, $83,000
during 2001 and $81,000 during 2000.
During 2000, we chartered an aircraft from a former director. The rental expense
related to these charters was $325,000.
As disclosed in Note 11 - Shareholders' Equity, we purchased 1.5 million shares
of our common stock from a former director in 2002.
We have three office building lease agreements with various shareholders and
non-corporate officer management members. Total rental expense related to such
leases was $1.2 million during 2002, $1.1 million during 2001 and $679,000
during 2000.
Total future minimum rental under noncancelable related party operating leases
as of December 31, 2002, are as follows:
2003........ $ 1,204
2004........ 1,198
2005........ 1,136
2006........ 1,149
2007........ 1,179
Thereafter.. 2,778
restructuring liability: | | | | | | | | | | | | | |
| | | Charged to expense | | | | | | | |
| | | in the quarter ended | | | Cash | | | Liability as of | |
| | | June 30, 2005 | | | Payments | | | December 31, 2005 | |
| Severance and related fringe benefits | | $ | 1,237 | | | $ | 1,237 | | | $ | — | |
| Other | | | 23 | | | | 23 | | | | — | |
| | | | | | | | | | |
| Total | | $ | 1,260 | | | $ | 1,260 | | | $ | — | |
| | | | | | | | | | |
(5) PROPERTY AND EQUIPMENT, NET
Property and equipment,
net consists of the following at December 31:
USEFUL
LIVES
(YEARS) 2002 2001
------- ------- --------
Land........................................ -- $ 115 $ 115
Transportation equipment.................... 5 385 390
Computer equipment and purchased software... 3-7 8,909 7,542
Furniture and fixtures...................... 3-7 3,797 3,515
Building and leasehold improvements......... 3-35 1,751 1,338
------- --------
14,957 12,900
Accumulated depreciation and amortization... (8,138) (5,933)
------- --------
Property and equipment, net.............. $ 6,819 $ 6,967
======= ========
| | | | | | | | | | | | | |
| | | Useful | | | | | | | |
| | | Lives | | | | | | | |
| | | (years) | | | 2005 | | | 2004 | |
| Land | | | — | | | $ | 115 | | | $ | 115 | |
| Transportation equipment | | | 5 | | | | 389 | | | | 398 | |
| Computer equipment and purchased software | | | 3—7 | | | | 11,722 | | | | 11,259 | |
| Furniture and fixtures | | | 3—7 | | | | 4,347 | | | | 4,038 | |
| Building and leasehold improvements | | | 5—25 | | | | 2,376 | | | | 2,332 | |
| | | | | | | | | | | |
| | | | | | | | 18,949 | | | | 18,142 | |
| Accumulated depreciation and amortization | | | | | | | (13,190 | ) | | | (11,518 | ) |
| | | | | | | | | | | |
| Property and equipment, net | | | | | | $ | 5,759 | | | $ | 6,624 | |
| | | | | | | | | | | |
Depreciation expense was $2.5 million during 2005, $2.5 million during 2004, and $2.4 million during 2002, $2.32003.
(6) GAIN ON SALE OF INVESTMENT
On March 25, 2003, we received cash proceeds of $39.3 million
during 2001 and
$2.0in connection with a transaction to sell all of our 5.6 million
during 2000.
51
(6) INVESTMENT SECURITY AVAILABLE-FOR-SALE
Pursuant to an agreement with two major shareholdersshares of H.T.E., Inc. ("HTE"(“HTE”), we
acquired approximately 5.6 million shares of HTE's common stock in exchange for
approximately 2.8 million shares of our common stock. The exchange occurred in
two transactions, one in August 1999 and the other in December 1999. The 5.6
million shares represent a current ownership interest of approximately 35% of
HTE. The cost of the investment was recorded at $15.8 million and is classified
as a non-current asset.
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. On November
16, 2000, the shareholders of HTE, other than Tyler, voted to deny Tyler its
right to vote the "control shares" of HTE. When we acquired the HTE shares, HTE
took the position that all of our shares were "control shares" and therefore did
not have voting rights. We disputed this contention and asserted that the
"control shares" were only those shares in excess of 20% of the outstanding
shares of HTE, and it was only those shares that lacked voting rights. At the
time of our acquisition, no court had interpreted the Florida "control share"
statute.
On October 29, 2001, HTE notified us that, pursuant to the Florida "control
share" statute, it had redeemed all 5.6 million shares of HTE common stock owned
by us for a cash price of $1.30 per share. 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 our
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, that HTE's purported
redemption of any or all of our shares was illegal under Florida law and that we
had the ability to vote up to 20% of the issued and outstanding shares of HTE
common stock owned by us.
On September 18, 2002, the court issued an order declaring that HTE's purported
redemption was invalid. On September 24, 2002, we entered into a settlement
agreement with HTE in which HTE agreed that it would not attempt any other
redemption of our shares. In addition, HTE agreed to dismiss and release us from
the tort claims it alleged against us as disclosed in previous filings. On
December 11, 2002, the court issued a further order declaring that all of our
HTE shares are "control shares" and therefore none of our shares have voting
rights. The court further ruled that voting rights would be restored to our HTE
shares if we were to sell or otherwise transfer our HTE shares to an
unaffiliated third party in a transaction that did not constitute a "control
share acquisition." During 2002 we incurred approximately $704,000 of legal and
other related costs associated with these matters which are classified as
non-operating expenses.
Under GAAP, a 20% investment in the voting stock of another company creates the
presumption that the investor has significant influence over the operating and
financial policies of that company, unless there is evidence to the contrary.
Our management has concluded that we do not have such influence. Accordingly, 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 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.
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.
QUOTED MARKET GROSS UNREALIZED
PER SHARE COST FAIR VALUE HOLDING GAINS (LOSSES)
------------- ------ ---------- ----------------------
December 31, 2002 $4.84 $15.8 $27.2 $11.4
December 31, 2001 2.00 15.8 11.2 (4.6)
February 25, 2003 6.94 15.8 38.9 23.1
On February 4, 2003, we entered into an agreement with SunGard Data Systems Inc. ("SDS")for $7.00 cash per share, pursuant to a Tender and Voting Agreement dated February 4, 2003. Our original cost basis in which we agreed to tender all of ourthe HTE shares in the tender
offer to be commenced by SDS for the acquisitionwas $15.8 million. After transaction and other costs, we recorded a realized gross gain of HTE. On February 5, 2003,
SDS and HTE announced
52
a definitive agreement for the acquisition$23.2 million ($16.2 million after income taxes of all of the shares of HTE for $7.00
per share in cash. SDS and HTE also announced that the consummation of the
transaction is subject to customary conditions,$7.0 million, including the tender of at leastutilization for tax purposes and reduction in valuation allowance for accounting purposes related to a majority of the outstanding shares of HTE in the tender offer and the
expiration of the waiting period under the Hart-Scott-Rodino Antitrust
Improvements Act of 1976, as amended. SDS and HTE further announced that certain
shareholders owning approximately 49.6% of the total outstanding shares of HTE
had agreedcapital loss carryforward amounting to tender their shares. According to the press release issued by SDS
and HTE, the acquisition is expected to close in the first quarter of 2003.
Assuming the acquisition is consummated, we will receive approximately $39.3$1.1 million in gross cash proceeds from the sale of our HTE shares. There can be no
assurance that the acquisition of HTE by SDS will be consummated on the terms as
disclosed, if at all. If SDS does not acquire HTE, we will continue to classify
our investment as an available-for-sale security in accordance with SFAS No. 115
and as a non-current asset since the investment was initially made for a
continuing business purpose.
tax effected basis). F-15
(7) GOODWILL AND OTHER INTANGIBLE ASSETS
Goodwill, other intangible
Intangible assets and related accumulated amortization consists of the following at December 31:
2002 2001
--------- ---------
Gross carrying amount of acquisition intangibles:
Goodwill........................................ $ 46,298 $ 51,063
Customer base................................... 17,997 17,997
Software acquired............................... 12,158 12,158
Workforce....................................... -- 6,191
Non-compete agreements.......................... 163 163
--------- ---------
76,616 87,572
Accumulated amortization........................... (13,066) (20,314)
--------- ---------
Acquisition intangibles, net.................... $ 63,550 $ 67,258
========= =========
Post acquisition software development costs........ $ 24,560 $ 17,369
Accumulated amortization........................... (5,224) (2,416)
--------- ---------
Post acquisition software costs, net............ $ 19,336 $ 14,953
========= =========
| | | | | | | | | |
| | | 2005 | | | 2004 | |
| Gross carrying amount of acquisition intangibles: | | | | | | | | |
| Goodwill | | $ | 53,709 | | | $ | 53,709 | |
| Customer related intangibles | | | 24,278 | | | | 24,278 | |
| Software acquired | | | 16,023 | | | | 16,023 | |
| Trade name | | | 1,643 | | | | 1,643 | |
| | | | | | | |
| | | | 95,653 | | | | 95,653 | |
| Accumulated amortization | | | (20,771 | ) | | | (18,711 | ) |
| | | | | | | |
| Acquisition intangibles, net | | $ | 74,882 | | | $ | 76,942 | |
| | | | | | | |
| | | | | | | | | |
| Post acquisition software development costs | | $ | 36,756 | | | $ | 35,783 | |
| Accumulated amortization | | | (21,326 | ) | | | (15,407 | ) |
| | | | | | | |
| Post acquisition software costs, net | | $ | 15,430 | | | $ | 20,376 | |
| | | | | | | |
Total amortization expense
for acquisition related intangibles and post acquisition software development costs was
$6.1$8.0 million during
2002, $8.62005, $8.8 million during
20012004, and
$7.5$7.0 million during
2000.
As discussed in Note 1 - Summary of Significant Accounting Policies, on January
1, 2002, we adopted the provisions of SFAS No. 141, "Business Combinations" and
SFAS No. 142, "Goodwill and Other Intangible Assets."
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.
If we had accounted for goodwill (including workforce) under the
non-amortization approach of SFAS No. 142, our net income (loss) and related per
share amounts would have been as follows for the years ended December 31, 2001
and 2000:
2001 2000
---------- ----------
Reported net income (loss).................................. $ 269 $ (24,597)
Add back goodwill amortization, net of income taxes......... 2,960 2,934
--------- ---------
Adjusted net income (loss)........................... $ 3,229 $ (21,663)
========= =========
Basic and diluted net income (loss) per share............... $ 0.01 $ (0.54)
Goodwill amortization, net of income taxes, per share....... 0.06 0.06
--------- ---------
Basic and diluted net income (loss) per share........ $ 0.07 $ (0.48)
========= =========
SFAS No. 142's transitional goodwill impairment evaluation required us to
perform an assessment of whether there was an indication that goodwill was
impaired as of the date of adoption. To accomplish this, we identified our
reporting units and determined the carrying value of each reporting unit by
assigning the assets and liabilities, including the existing goodwill and
intangible assets, to those reporting units as of January 1, 2002. We determined
the fair value of each reporting unit and compared it to the carrying amount of
the reporting unit and concluded there was no impairment. In addition to the
transitional goodwill impairment test, we are required to perform, at least
annually, a goodwill impairment test and designate a consistent date for such
annual testing. We determined the fair value of each reporting unit and compared
it to the carrying amount of the reporting unit at March 31, 2002 and concluded
there was no impairment.
53
2003.The allocation of acquisition intangible assets
following our adoption of SFAS
No. 142 is summarized in the following table:
December 31, 2002
--------------------------------------------
Weighted
Gross Average
Carrying Amortization Accumulated
Amount Period Amortization
---------- ------------ --------------
Intangibles no longer amortized:
Goodwill........................... $ 46,298 -- $ --
Amortizable intangibles:
Customer base...................... 17,997 21 years 3,352
Software acquired.................. 12,158 5 years 9,561
Non-compete agreements............. 163 4 years 153
| | | | | | | | | | | | | | | | | | | | | | | | | |
| | | December 31, 2005 | | December 31, 2004 |
| | | | | | | Weighted | | | | | | | | | | Weighted | | |
| | | Gross | | Average | | | | | | Gross | | Average | | |
| | | Carrying | | Amortization | | Accumulated | | Carrying | | Amortization | | Accumulated |
| | | Amount | | Period | | Amortization | | Amount | | Period | | Amortization |
| Intangibles no longer amortized: | | | | | | | | | | | | | | | | | | | | | | | | |
| Goodwill | | $ | 53,709 | | | | — | | | $ | — | | | $ | 53,709 | | | | — | | | $ | — | |
| Amortizable intangibles: | | | | | | | | | | | | | | | | | | | | | | | | |
| Customer related intangibles | | | 24,278 | | | | 22 years | | | | 6,582 | | | | 24,278 | | | | 22 years | | | | 5,423 | |
| Software acquired | | | 16,023 | | | | 5 years | | | | 13,808 | | | | 16,023 | | | | 5 years | | | | 13,014 | |
| Trade name | | | 1,643 | | | | 21 years | | | | 381 | | | | 1,643 | | | | 21 years | | | | 274 | |
The changes in the carrying amount of goodwill for the
yeartwo years ended December 31,
20022005 are as follows:
Balance as of December 31, 2001
(cost of $51,063 and accumulated amortization of $7,771) .................. $43,292
Goodwill adjustments during 2002 relating to workforce (cost of
$6,191 and accumulated amortization of $2,808 at January
1, 2002), net of deferred taxes of $377, being subsumed
into goodwill upon the adoption of SFAS No. 142 on January
1, 2002.................................................................... 3,006
-------
Balance as of December 31, 2002................................................. $46,298
=======
| | | | | |
| Balance as of December 31, 2003 | | $ | 53,932 | |
| Goodwill acquired during the year related to the purchase of minority interest in Eden | | | 687 | |
| Adjustments to finalize purchase price allocations for 2003 acquisitions | | | (910 | ) |
| | | | |
| Balance as of December 31, 2004 and December 31, 2005 | | $ | 53,709 | |
| | | | |
Estimated annual amortization expense relating to acquisition intangibles, including acquired software for which the amortization expense is recorded as cost of revenues and excluding acquisitions completed in 2006, is as follows:
YEAR ENDING DECEMBER
Year ending December 31,
2003............. $ 2,800
2004............. 1,500
2005............. 900
2006............. 900
2007............. 900
| | | | | |
| 2006 | | $ | 2,060 | |
| 2007 | | | 2,008 | |
| 2008 | | | 1,921 | |
| 2009 | | | 1,155 | |
| 2010 | | | 1,155 | |
(8) ACCRUED LIABILITIES
Accrued liabilities
consistsconsist of the following at December 31:
2002 2001
------- --------
Accrued wages and commissions................... $ 7,667 $ 7,071
Other accrued liabilities....................... 3,079 2,580
Current portion of long-term obligations........ 440 123
------- --------
$11,186 $ 9,774
======= ========
| | | | | | | | | |
| | | 2005 | | | 2004 | |
| Accrued wages, bonuses and commissions | | $ | 9,381 | | | $ | 8,926 | |
| Other accrued liabilities | | | 3,907 | | | | 2,776 | |
| Accrued health claims | | | 1,379 | | | | 1,110 | |
| Accrued third party contract costs | | | 1,360 | | | | 848 | |
| | | | | | | |
| | | $ | 16,027 | | | $ | 13,660 | |
| | | | | | | |
F-16
(9) LONG-TERM OBLIGATIONS
Long-term obligations consists of the following at December 31:
2002 2001
------- --------
10% promissory notes payable due January 2005... $ 2,520 $ 2,800
Other........................................... 470 233
------- --------
Total obligations........................... 2,990 3,033
Less current portion............................ 440 123
------- --------
Total long-term obligations................. $ 2,550 $ 2,910
======= ========
Long-term debt outstanding at December 31, 2002 matures as follows:
2003 - $440,000; 2004 - $30,000; and the remainder in 2005.
We paid interest of $377,000 in 2002, $814,000 in 2001 and $8.8 million in 2000.
On
March 5, 2002,February 11, 2005, we entered into a revolving bank credit
agreement. Our credit
agreement
(the “Credit Facility”). The Credit Facility matures
January 1, 2005February 11, 2008 and provides for total
availabilityborrowings of up to
$10.0$30.0 million. Borrowings bear interest at either prime rate or at
the London Interbank Offered Rate
(“LIBOR”) plus a margin of
3% and are limited to 80%1.5%. As of
eligible
accounts receivable.December 31, 2005, the effective interest rate was 5.9%. The
credit agreementCredit Facility is secured by substantially all of our
54
personal property, by a pledge of the common stock of our operating
subsidiaries, and is also guaranteed by our operating subsidiaries.property. The credit
agreementCredit Facility requires us to maintain certain financial ratios and other financial conditions and prohibits us from making certain investments, advances, cash dividends or loans. As of December 31, 2005, we were in compliance with those covenants. The credit agreement also includes a $10.0 million Letter of Credit facility under which the banks will issue cash collateralized letters of credit.At December 31, 2002,2005, we had no debt outstanding under the Credit Facility and our bank hashad issued outstanding letters of credit totaling $3.7$4.1 million under our credit agreement to secure performancesurety 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 theThese letters of credit at December 31, 2002. At December 31, 2002, we had no outstanding bank
borrowings underhave been collateralized by restricted cash balances invested in a certificate of deposit.
We paid interest of $184,000 in 2005, $105,000 in 2004, and $238,000 in 2003, which includes non-usage and other fees associated with the credit agreement and had an available borrowing base of
$6.3 million.
agreement.
(10) INCOME TAX
The income tax provision
(benefit) on income
(loss) from continuing operations consisted of the following:
YEARS ENDED DECEMBER 31,
---------------------------------
2002 2001 2000
--------- --------- ---------
Current:
Federal.... $ -- $ -- $ --
State...... 485 282 80
--------- --------- ---------
485 282 80
Deferred...... 3,384 1,258 (2,890)
--------- --------- ---------
$ 3,869 $ 1,540 $ (2,810)
========= ========= =========
| | | | | | | | | | | | | |
| | | Years ended December 31, | |
| | | 2005 | | | 2004 | | | 2003 | |
| Current: | | | | | | | | | | | | |
| Federal | | $ | 6,340 | | | $ | 5,978 | | | $ | 7,710 | |
| State | | | 1,292 | | | | 1,631 | | | | 768 | |
| | | | | | | | | | |
| | | | 7,632 | | | | 7,609 | | | | 8,478 | |
| Deferred | | | (2,200 | ) | | | (300 | ) | | | 4,628 | |
| | | | | | | | | | |
| | | $ | 5,432 | | | $ | 7,309 | | | $ | 13,106 | |
| | | | | | | | | | |
Reconciliation of the U.S. statutory income tax rate to our effective income tax expense
(benefit) rate for continuing operations follows:
YEARS ENDED DECEMBER 31,
----------------------------------
2002 2001 2000
--------- --------- ---------
Income tax expense (benefit) at statutory rate... $ 3,514 $ 634 $ (3,611)
State income tax, net of federal income tax
benefit....................................... 315 183 52
Non-deductible amortization...................... -- 635 640
Non-deductible business expenses................. 40 83 110
Other, net....................................... -- 5 (1)
-------- -------- --------
$ 3,869 $ 1,540 $ (2,810)
======== ======== ========
| | | | | | | | | | | | | |
| | | Years ended December 31, | |
| | | 2005 | | | 2004 | | | 2003 | |
| Income tax expense at statutory rate | | $ | 4,769 | | | $ | 6,103 | | | $ | 13,679 | |
| State income tax, net of federal income tax benefit | | | 778 | | | | 1,060 | | | | 499 | |
| Non-deductible business expenses | | | 182 | | | | 195 | | | | 129 | |
| Qualified manufacturing activities | | | (149 | ) | | | — | | | | — | |
| Utilization of capital loss carryforward | | | — | | | | — | | | | (1,114 | ) |
| Other, net | | | (148 | ) | | | (49 | ) | | | (87 | ) |
| | | | | | | | | | |
| | | $ | 5,432 | | | $ | 7,309 | | | $ | 13,106 | |
| | | | | | | | | | |
The tax effects of the major items recorded as deferred tax assets and liabilities as of December 31 are:
2002 2001
-------- --------
Deferred income tax assets:
Net operating loss carryforward........................ $ 3,734 $ 3,667
Capital loss carryfoward............................... 1,114 --
Basis difference on investment security................ -- 1,591
Operating expenses not currently deductible............ 865 967
Employee benefit plans................................. 345 299
Minimum tax credits.................................... 268 268
Research tax credits................................... 78 78
Other.................................................. -- 100
-------- --------
Net deferred income tax assets before valuation
allowance........................................ 6,404 6,970
Less valuation allowance............................... (1,114) (1,690)
-------- --------
Net deferred income tax assets...................... 5,290 5,280
Deferred income tax liabilities:
Basis difference on investment security................ (3,995) --
Property and equipment................................. (1,148) (1,069)
Intangible assets...................................... (7,363) (6,442)
Other.................................................. -- (15)
-------- --------
Total deferred income tax liabilities............... (12,506) (7,526)
-------- --------
Net deferred income tax liabilities....................... $ (7,216) $ (2,246)
======== ========
At December 31, 2002,| | | | | | | | | |
| | | 2005 | | | 2004 | |
| Deferred income tax assets: | | | | | | | | |
| Operating expenses not currently deductible | | $ | 1,530 | | | $ | 1,093 | |
| Employee benefit plans | | | 819 | | | | 763 | |
| | | | | | | |
| Total deferred income tax assets | | | 2,349 | | | | 1,856 | |
| |
| Deferred income tax liabilities: | | | | | | | | |
| Property and equipment | | | (94 | ) | | | (356 | ) |
| Intangible assets | | | (11,202 | ) | | | (12,617 | ) |
| Other | | | (215 | ) | | | (245 | ) |
| | | | | | | |
| Total deferred income tax liabilities | | | (11,511 | ) | | | (13,218 | ) |
| | | | | | | |
| Net deferred income tax liabilities | | $ | (9,162 | ) | | $ | (11,362 | ) |
| | | | | | | |
In 2003, we
had available approximately $10.7utilized our capital loss carryforward of $1.1 million
of net tax
operating loss carryforwards for federal income tax purposes. These
carryforwards, which may provide future tax benefits, expire from 2011 through
2022. During the year ended December 31, 2002, we claimedon a
deduction for the
write off of preferred stock which was deemed worthless for tax purposes. The
preferred stock had an initial tax value of $3 million and was receivedtax-effected basis in connection with
a realized gain from the sale of our
discontinued automotive parts
55
subsidiary which was soldinvestment in March 1999. At December 31, 2002, we had available
approximately $3.2 millionHTE. See Note 6 – Gain on Sale of capital loss carryforwards for federal income tax
purposes which expire December 31, 2006.
Investment. F-17
Although realization is not assured, we believe it is more likely than not that all the deferred tax assets except for the asset relating to the capital loss
carryforwardat December 31, 2005 and 2004 will be realized. Accordingly, we believe no valuation allowance is required for the remaining deferred tax assets. However, the amount of the deferred tax asset considered realizable could be adjusted in the future if estimates of reversing taxable temporary differences are revised.
We paid income taxes, net of refunds received, of $455,000$8.1 million in 20022005, $6.5 million in 2004, and $273,000$6.5 million in 2001. 2003.
(11) SHAREHOLDERS’ EQUITY
The following table details activity in our common stock:
| | | | | | | | | | | | | | | | | | | | | | | | | |
| | | Years ended December 31, |
| | | 2005 | | 2004 | | 2003 |
| | | Shares | | Amount | | Shares | | Amount | | Shares | | Amount |
| Purchases of common stock | | | 2,457 | | | $ | 17,683 | | | | 1,459 | | | $ | 12,518 | | | | 6,019 | | | $ | 24,104 | |
| Stock option exercises | | | 436 | | | | 1,800 | | | | 680 | | | | 1,940 | | | | 554 | | | | 1,673 | |
| Employee stock plan purchases | | | 171 | | | | 1,156 | | | | 44 | | | | 329 | | | | — | | | | — | |
Subsequent to December 31, 2005 and through February 27, 2006, we have repurchased 250,000 shares for an aggregate purchase price of $2.2 million. As of February 27, 2006 we have authorization from our board of directors to repurchase up to 1.8 million additional shares of our common stock.
In 20002003, through a modified Dutch Auction tender offer, we receivedpurchased 5.1 million shares of our common stock at a refundcash purchase price of prior years' income taxes$4.00 per share and incurred transaction costs of $2.7approximately $150,000, for a total cost of $20.6 million. (11) SHAREHOLDERS' EQUITY
In May 2000,addition, during 2003 we sold 3.3 millionalso repurchased 912,800 shares of common stock and 333,380 warrants in
a private placementon the open market for approximately $10.0 million in gross cash proceeds,
before deducting commissions and offering expenses of approximately $730,000.
Each warrant is convertible into one share of common stock at an exerciseaggregate purchase price of $3.60 per share. The warrants expire$3.5 million.
In November 2003, we exchanged a warrant issued in May 2005.
As of December 31, 2002, we have an additional warrant outstandingJuly 1997 to purchase 2.0 million shares of our common stock at $2.50 per share. This warrant expires
in September 2007.
In August 2002, we consummated an agreementshare into six separate warrants to purchase 1.1 milliona total of our
common shares from William D. Oates, a former director of Tyler, for a cash
purchase price of $4.0 million. In October 2002, we repurchased an additional
400,000 of our shares as part of the initial agreement by assigning our rights
and obligations under a Data License and Update Agreement associated with our
discontinued information property records service business to eiStream. eiStream
is an affiliate of William D. Oates. The repurchase of all 1.5 million shares
was charged to treasury stock to the extent cash was paid.
In August 2002, our Board of Directors approved a plan to repurchase up to 1.02.0 million shares of our common stock.stock at $2.50 per share. Subsequent to the exchange in 2003, several parties exercised their warrants to purchase 375,000 shares of our common stock by way of cashless exercise and were issued, on a net basis, 247,620 shares of our common stock from our treasury. In March 2004, another warrant holder exercised his warrant to purchase 21,234 shares of our common stock by way of cashless exercise and was issued on a net basis, 15,780 shares of our common stock from our treasury shares. As of December 31, 2002 and through
February 21, 2003,2005, we have repurchased 339,000warrants outstanding to purchase 1.6 million shares for anof common stock at $2.50 per share. These warrants expire in September 2007.
In August 2003, Sanders Morris Harris Inc. (“SMH”) exercised its warrant issued in May 2000 to purchase 333,380 shares of our common stock. The exercise price per share was $3.60 payable either in cash or by the surrender of shares subject to the warrant with a value equal to the aggregate purchaseexercise price as determined by the market price of $1.4 million.
our stock on the date of exercise. On August 27, 2003, SMH exercised the full amount of the warrant by way of cashless exercise and was issued, on a net basis, 145,413 shares of our common stock from our treasury shares.
F-18
(12) STOCK OPTION PLAN
PLANS
We have a stock option plan that provides for
grantingthe grant of stock options to key employees and directors. Options become fully exercisable after three to
eightfive years of continuous employment and expire ten years after the grant date. Once exercisable, the employee can purchase shares of our common stock at the market price on the date we granted the option.
In 2005 we also issued 65,000 non-qualified stock options to a non-employee who provides consulting services. These options were granted at their fair market value on the date of the grant, vest over a period of three years and expire ten years from the date of grant. As of December 31,
20022005, there were
1.2
million73,000 shares available for future grants under the plan from the
original 6.57.5 million shares
previously approved by the stockholders.
56
The following table summarizes our stock option
plan'splan’s transactions for the three-year period ended December 31,
2002:
NUMBER OF WEIGHTED-AVERAGE
SHARES EXERCISE PRICES
----------- ----------------
Options outstanding at December 31, 1999.... 3,418 $5.55
Granted................................ 498 2.76
Forfeited.............................. (417) 6.16
Exercised.............................. (5) 3.88
-----
Options outstanding at December 31, 2000.... 3,494 5.08
Granted................................ 2,185 1.70
Forfeited.............................. (933) 5.18
Exercised.............................. (108) 2.13
-----
Options outstanding at December 31, 2001.... 4,638 3.54
Granted................................ 280 4.86
Forfeited.............................. (322) 5.65
Exercised.............................. (491) 3.29
-----
Options outstanding at December 31, 2002.... 4,105 $3.49
Exercisable options:
December 31, 2000...................... 1,385 $5.04
December 31, 2001...................... 1,504 5.20
December 31, 2002...................... 1,910 4.26
2005:| | | | | | | | | |
| | | Number of | | Weighted-Average |
| | | Shares | | Exercise Prices |
| Options outstanding at December 31, 2002 | | | 4,105 | | | $ | 3.49 | |
| |
| Granted | | | 1,184 | | | | 4.92 | |
| Forfeited | | | (105 | ) | | | 2.49 | |
| Exercised | | | (554 | ) | | | 3.01 | |
| | | | | | | | | |
| Options outstanding at December 31, 2003 | | | 4,630 | | | | 3.94 | |
| | | | | | | | | |
| Granted | | | 62 | | | | 9.18 | |
| Forfeited | | | (48 | ) | | | 3.18 | |
| Exercised | | | (680 | ) | | | 2.85 | |
| | | | | | | | | |
| Options outstanding at December 31, 2004 | | | 3,964 | | | | 4.21 | |
| | | | | | | | | |
| Granted | | | 1,135 | | | | 7.49 | |
| Forfeited | | | (55 | ) | | | 7.49 | |
| Exercised | | | (436 | ) | | | 4.12 | |
| | | | | | | | | |
| Options outstanding at December 31, 2005 | | | 4,608 | | | $ | 4.99 | |
| | | | | | | | | |
| Exercisable options: | | | | | | | | |
| December 31, 2003 | | | 2,408 | | | $ | 4.02 | |
| December 31, 2004 | | | 2,925 | | | | 3.92 | |
| December 31, 2005 | | | 2,891 | | | | 3.99 | |
The following table summarizes information concerning outstanding and exercisable options at December 31,
2002:
WEIGHTED
WEIGHTED AVERAGE NUMBER OF AVERAGE PRICE NUMBER OF WEIGHTED AVERAGE
RANGE OF EXERCISE REMAINING OUTSTANDING OF OUTSTANDING EXERCISABLE PRICE OF EXERCISABLE
PRICES CONTRACTUAL LIFE OPTIONS OPTIONS OPTIONS OPTIONS
- ----------------- ---------------- ----------- -------------- ----------- --------------------
$ 0.00 - $ 2.19 8.3 years 2,018 $ 1.64 634 $ 1.63
2.19 - 3.28 8.4 140 2.62 38 2.63
3.28 - 4.38 7.1 527 4.02 283 3.99
4.38 - 5.47 6.5 720 5.24 432 5.26
5.47 - 6.56 6.0 448 6.18 321 6.22
6.56 - 7.66 5.1 216 7.63 173 7.63
7.66 - 8.75 5.8 6 7.75 5 7.75
9.84 - 10.19 5.3 30 10.19 24 10.19
We previously granted an employee 50,0002005:| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | Weighted Average | | | | |
| | | | | | | | | | | | | Weighted Average | | Number of | | Price of | | Number of | | Weighted Average |
| Range of Exercise | | Remaining | | Outstanding | | Outstanding | | Exercisable | | Price of Exercisable |
| Prices | | Contractual Life | | Options | | Options | | Options | | Options |
| $ | 1.09 | | | | — | | | $ | 2.19 | | | | 5.3 | | | | 947 | | | $ | 1.63 | | | | 947 | | | $ | 1.63 | |
| | 2.19 | | | | — | | | | 3.28 | | | | 5.4 | | | | 23 | | | | 2.62 | | | | 23 | | | | 2.62 | |
| | 3.28 | | | | — | | | | 4.38 | | | | 4.6 | | | | 441 | | | | 3.93 | | | | 418 | | | | 3.95 | |
| | 4.38 | | | | — | | | | 5.47 | | | | 5.9 | | | | 1,658 | | | | 4.86 | | | | 1,168 | | | | 4.96 | |
| | 5.47 | | | | — | | | | 6.56 | | | | 4.4 | | | | 199 | | | | 6.07 | | | | 154 | | | | 6.11 | |
| | 6.56 | | | | — | | | | 7.66 | | | | 9.0 | | | | 1,107 | | | | 7.53 | | | | 82 | | | | 7.63 | |
| | 7.66 | | | | — | | | | 8.75 | | | | 9.0 | | | | 91 | | | | 8.04 | | | | 12 | | | | 7.80 | |
| | 8.75 | | | | — | | | | 9.84 | | | | 8.1 | | | | 112 | | | | 9.15 | | | | 57 | | | | 9.09 | |
| | 9.84 | | | | — | | | | 10.19 | | | | 2.3 | | | | 30 | | | | 10.19 | | | | 30 | | | | 10.19 | |
In May 2004, our shareholders voted to adopt the Tyler Technologies, Inc. Employee Stock Purchase Plan (“ESPP”) and to reserve 1.0 million shares of restrictedour common stock with
a fair valuefor issuance under the ESPP. Under the ESPP, participants may contribute up to 15% of $303,000 at the grant date. We recordedtheir annual compensation expenseto purchase common shares of $151,500 forTyler. The purchase price of the year endedshares is equal to 85% of the closing price of Tyler shares on the last day of each quarterly offering period. During 2005, employees contributed $1.0 million to the ESPP and we issued approximately 171,000 shares of common stock in 2005. As of December 31, 2000, based on2005, there were 785,000 shares available for future grants under the service
period providedplan from the 1.0 million shares reserved for inissuance under the agreement and the vesting period over which the
restrictions lapse.
ESPP.
F-19
(13) EARNINGS (LOSS) PER SHARE
Basic earnings and diluted earnings
(loss) per
common share data was computed as follows:
YEARS ENDED DECEMBER 31,
-------------------------------------------
2002 2001 2000
--------- --------- ---------
Numerator:
Income (loss) from continuing operations for basic and diluted earnings
per share .............................................................. $ 6,172 $ 272 $ (7,507)
Denominator:
Denominator for basic earnings per share -
Weighted-average shares................................................. 47,136 47,181 45,380
Effect of dilutive securities:
Employee stock options.................................................. 1,386 593 --
Warrants................................................................ 971 210 --
--------- --------- ---------
Potentially dilutive common shares........................................ 2,357 803 --
--------- --------- ---------
Denominator for diluted earnings per share - Adjusted
weighted-average shares................................................. 49,493 47,984 45,380
--------- --------- ---------
Basic earnings (loss) per common share from continuing operations............ $ 0.13 $ 0.01 $ (0.17)
========= ========= =========
Diluted earnings (loss) per common share from continuing operations.......... $ 0.12 $ 0.01 $ (0.17)
========= ========= =========
57
| | | | | | | | | | | | | |
| | | Years Ended December 31, | |
| | | 2005 | | | 2004 | | | 2003 | |
| Numerator: | | | | | | | | | | | | |
| Income from continuing operations for basic and diluted earnings per share | | $ | 8,193 | | | $ | 10,128 | | | $ | 25,978 | |
| Denominator: | | | | | | | | | | | | |
| Denominator for basic earnings per share – | | | | | | | | | | | | |
| Weighted-average shares | | | 39,439 | | | | 41,288 | | | | 42,547 | |
| Effect of dilutive securities: | | | | | | | | | | | | |
| Employee stock options | | | 1,561 | | | | 2,114 | | | | 1,496 | |
| Warrants | | | 1,075 | | | | 1,164 | | | | 992 | |
| | | | | | | | | | |
| Potentially dilutive shares | | | 2,636 | | | | 3,278 | | | | 2,488 | |
| | | | | | | | | | |
| Denominator for diluted earnings per share — Adjusted weighted-average shares | | | 42,075 | | | | 44,566 | | | | 45,035 | |
| | | | | | | | | | |
| | | | | | | | | | | | | |
| Basic earnings per share from continuing operations | | $ | 0.21 | | | $ | 0.25 | | | $ | 0.61 | |
| | | | | | | | | | |
| Diluted earnings per share from continuing operations | | $ | 0.19 | | | $ | 0.23 | | | $ | 0.58 | |
| | | | | | | | | | |
Stock options issuable underrepresenting the stock option plan representingright to purchase common stock equivalents of 1.3229,000 shares in 2005, 110,000 shares in 2004, and 1.1 million during 2002, 2.3 million during 2001 and 3.5 million
during 2000shares in 2003, had exercise prices greater than the average quoted market price of our common stock. These common stock equivalentsoptions were outstanding during 2002,
20012005, 2004 and 20002003, but were not included in the computation of diluted earnings per share because their inclusion would have had an antidilutive effect.
Additionally, warrants to purchase 333,380, and 2.3 million shares of our common
stock for 2001 and 2000, respectively, were not included in the computation of
diluted earnings per share because the effect would have been antidilutive.
(14) LEASES
We lease offices,office facilities for use in our operations as well as transportation, computer and other equipment for use in our
operations.equipment. We also have two office facility lease agreements with a shareholder and certain division managers. Most of these leases are noncancelable operating lease agreements and they expire at various dates through 2012.2013. In addition to rent, the leases generally require us to pay taxes, maintenance, insurance and certain other operating expenses.
Rent expense was approximately $3.4$4.6 million in 2002, $2.82005, $4.6 million in 20012004, and $2.1$4.3 million in 2000.
2003, which included rent expense associated with related party lease agreements of $1.5 million in 2005, $1.4 million in 2004, and $1.5 million in 2003.
Future minimum lease payments under all noncancelable leases at December 31,
2002 are:
OPERATING
FISCAL YEAR LEASES
- ------------------------------------------- ---------
2003....................................... $ 3,504
2004....................................... 3,171
2005....................................... 2,972
2006....................................... 2,682
2007....................................... 2,572
Thereafter................................. 9,538
--------
Total future minimum lease payments........ $ 24,439
========
2005 are as follows:| | | | | |
| Years ending December 31, | | | | |
| 2006 | | $ | 4,400 | |
| 2007 | | | 4,251 | |
| 2008 | | | 4,113 | |
| 2009 | | | 3,905 | |
| 2010 | | | 2,696 | |
| Thereafter | | | 3,358 | |
| | | | |
| | | $ | 22,723 | |
| | | | |
Included in future minimum lease payments are noncancelable payments due to related parties of $1.7 million each in 2006, 2007, 2008 and 2009; $552,000 in 2010 and none thereafter.
(15) EMPLOYEE BENEFIT PLANS
We provide a defined contribution plan for the majority of our employees meeting minimum service requirements. The employees can contribute up to 15%30% of their current compensation to the plan subject to certain statutory limitations. We contribute up to a maximum of 2%2.5% of an employee'semployee’s compensation to the plan. We made contributions to the plan and charged continuing operations $881,000$1.0 million during 2002, $868,0002005, $801,000 during 2001,2004, and $761,000$931,000 during 2000.
2003.
F-20
(16) COMMITMENTS AND CONTINGENCIES
One of
On September 9, 2005, Affiliated Computer Services, Inc. (“ACS”) filed litigation in Dallas County, Texas against thirty-three defendants, including Tyler and John M. Yeaman, 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 the plaintiff's employment at the foundry. We sold the operating
assetsChairman of the
foundry on December 1, 1995. AsBoard (“Yeaman”). The other named defendants include entities affiliated with William D. Oates (“Oates”), a
non-operating subsidiaryformer director of
Tyler,ours, and certain individuals employed by such entities. The lawsuit alleges, among other things, that we breached the
assets of Swan consist primarily of various insurance policies issued
to Swan during the relevant time periodsnon-competition and
restricted cash of $1.3 million at
December 31, 2002. Swan tendered the defense and indemnity obligations arising
from these claims to its insurance carriers, who, prior to December 20, 2001,
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.
58
On December 20, 2001, Swan filed a petition under Chapter 11 of the U.S.
Bankruptcy Codenon-solicitation covenants set forth in the United States Bankruptcy CourtStock Purchase Agreement dated December 29, 2000 (the “SPA”) between ACS and us pursuant to which we sold to ACS 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 substantiallycash all of the issued and outstanding capital stock of Business Resources Corporation (“BRC”), which comprised a significant portion of our then known plaintiffs. Swan filed its plan of reorganization in February 2002. The
principal features ofexisting property records business. In the plan of reorganization include: (a) the creation of a
trust, which is to be funded principally by fifteen insurance carriers pursuantSPA, we agreed to certain settlement agreements executed pre-petition between Swan, Tyler,five-year non-competition and such carriers; (b)non-solicitation covenants, which expired on December 29, 2005. In addition, the implementation ofSPA contained a claims resolution procedureclosing condition pursuant to which all presentOates agreed to amend his then existing three-year non-competition and future claimants may assert claims against such trust
for alleged injuries; (c)non-solicitation covenants so that the issuancerestricted activities would conform to the language 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.
The confirmation hearings on Swan's plan of reorganization were heldour restricted activities, which covenants expired on December 9, 2002.29, 2003. The planlawsuit alleges that Oates (or entities owned by Oates) solicited ACS employees and re-entered the land records business after the expiration of reorganization received the affirmative vote of
approximately 99% of the total votes cast. All objections to the plan were
resolvedhis three-year covenants, but prior to the confirmation hearing,expiration of our five-year covenants, and further alleges that we, through our non-compete, are legally responsible for Oates’ actions. The lawsuit further alleges that Oates “controlled Tyler”, “manipulated Tyler”, and was a “legal representative” of ours for a significant, but unspecified, period of time following the final confirmation order
will thereforesale of BRC, even though Oates has not be subjectbeen a member of our board since 2001, has not been employed by us since the sale of BRC, has had limited contact with our management since the sale of BRC, and to appeal.our knowledge, has not owned any stock in us since May 2003. The confirmation order will discharge,
release,lawsuit further alleges that we fraudulently induced ACS to enter into the SPA because we allegedly knew that Oates (or entities owned by Oates) would re-enter the land records business after three years, even though the SPA specifically contained different covenants with respect to Oates and extinguishus. ACS entered into a settlement agreement with all of the foundry-related obligationsdefendants other than Yeaman and liabilitiesus, the terms of Tyler, Swan, their affected affiliates,which are currently confidential; however, management believes that the settlement agreement extends the non-compete for Oates and the insurers participatinghis related entities for some period of time. We vehemently deny all allegations contained in the fundinglawsuit. Management believes that we have not breached any non-competition covenants, have not solicited ACS employees, and have not misappropriated ACS confidential information. Management further believes that the “factual” allegations made against us are false and inaccurate and that the legal theories asserted by ACS are without merit. Management further believes based on discovery that has taken place to date that even if the allegations as currently set forth in the petition were true, that ACS has suffered no or nominal damage, particularly in light of the trust. Further,settlement agreement with Oates and his related entities.
We have filed counterclaims against ACS, including claims for business disparagement and defamation, alleging that ACS has published factually inaccurate and defamatory statements about us to third parties, including our customers and prospective customers, with malice and/or negligence regarding the confirmation order will includetruth of those statements. We intend to defend the issuance
of injunctions that channel all presentlawsuit and pursue our counterclaims vigorously. The future foundry-related claims into
the trustcosts associated with such defense and forever bar any such claims from being asserted, either now or in the future, against Swan, Tyler, their affected affiliates, and the
participating insurers. In order to receive the benefits described above, we
have agreed, among other things, to transfer allpursuit of the capital stock of Swancounterclaims are uncertain and difficult to the trust (net assets of Swan at December 31, 2002 were $309,000) so that the
trust can directly pursue claims against insurers who have not participated in
the funding of the trust. In addition, we have agreed to contribute $1.5 million
in cash to the trust, which is due as follows: $750,000 within ten days of the
confirmation order becoming a final order; $500,000 on the first anniversary of
the date the confirmation order becomes a final order;predict and $250,000 on the
second anniversary of the date the confirmation order becomes a final order. The
confirmation order will become a final order thirty days after execution by both
the bankruptcy and district court judges, which is expected to occur by the end
of the first quarter of 2003. Our ultimate settlement obligation under the plan
of reorganization of $1.5 million is approximately $200,000 less than the
remaining carrying amount of the liability initially recorded for this matter.
Accordingly, $200,000 ($130,000 net of tax) was included in the $1.8 million
credit recorded for discontinued operations in 2002. See Note 3 - Discontinued
Operations.
We initially provided for estimated claim settlement costs when minimum levels
canmay be reasonably estimated. If the best estimate of claim costs could only be
identified within a range and no specific amount within that range could be
determined more likely than any other amount within the range, the minimum of
the range was accrued. Based on an initial assessment of claims and contingent
claims that may result in future litigation, a reserve for the minimum amount of
$2.0 million for claim settlements was initially recorded in 1996. Legal and
related professional services costs to defend litigation of this nature have
been expensed as incurred.
material.
Other than ordinary course, routine litigation incidental to our business and except as described herein, there are no material legal proceedings pending to which we or our subsidiaries are partiesparty or to which any of our properties are subject.
See Note 6 - Investment Securities Available-for-Sale,
(17) SUBSEQUENT EVENTS
In January 2006, we acquired two companies whose products will be included within our Financials division. MazikUSA, Inc. offers a Student Information System for
discussionK-12 schools, which manages such applications as scheduling, grades and attendance. TACS, Inc. offers software products to manage public sector pension funds. These acquisitions added products that were not previously a part of
litigation in connection with HTE's attemptedTyler’s portfolio. The combined purchase price for the two companies was approximately $14.2 million, comprised of approximately $11.3 million cash
redemption of alland 325,000 shares of
HTETyler common
stock currently owned by Tyler.
59
(17)stock. We have not finalized the allocation of the excess purchase price over the fair value of the net identifiable assets of the acquired companies. F-21
(18) QUARTERLY FINANCIAL INFORMATION (UNAUDITED)
(unaudited)
The following tables contain selected financial information from unaudited consolidated statements of operations for each quarter of 20022005 and 2001.
2004.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | Quarter Ended | |
| | | 2005 | | | 2004 | |
| | | Dec. 31 | | | Sept. 30 | | | June 30(B) | | | Mar. 31 | | | Dec. 31 | | | Sept. 30 | | | June 30 | | | Mar. 31 | |
| Revenues | | $ | 44,307 | | | $ | 42,306 | | | $ | 43,185 | | | $ | 40,659 | | | $ | 44,734 | | | $ | 41,811 | | | $ | 44,263 | | | $ | 41,462 | |
Gross profit(A) | | | 16,700 | | | | 15,822 | | | | 16,050 | | | | 12,915 | | | | 17,843 | | | | 15,029 | | | | 16,747 | | | | 14,219 | |
| Income before income taxes | | | 5,097 | | | | 4,284 | | | | 3,444 | | | | 800 | | | | 5,361 | | | | 3,539 | | | | 5,059 | | | | 3,478 | |
| Net income | | | 3,121 | | | | 2,581 | | | | 2,021 | | | | 470 | | | | 3,030 | | | | 2,032 | | | | 2,975 | | | | 2,091 | |
| Earnings per diluted share | | | 0.07 | | | | 0.06 | | | | 0.05 | | | | 0.01 | | | | 0.07 | | | | 0.05 | | | | 0.07 | | | | 0.05 | |
| |
| Shares used in computing diluted earnings per share | | | 41,869 | | | | 41,771 | | | | 41,943 | | | | 42,735 | | | | 44,056 | | | | 44,350 | | | | 44,803 | | | | 45,062 | |
QUARTER ENDED
-------------------------------------------------------------------------------------
2002 2001
------------------------------------------ -----------------------------------------
Dec. 31 Sept. 30 June 30 Mar. 31 Dec. 31 Sept. 30 June 30 Mar. 31
--------- --------- --------- --------- --------- --------- --------- --------
Revenues(1)................................. $ 36,396 $ 34,974 $ 33,605 $ 28,922 $ 31,463 $ 28,658 $ 31,237 $ 27,458
Gross profit................................ 14,228 12,312 11,708 9,734 11,346 9,920 10,132 8,621
Income (loss) | | |
| (A) | | In the fourth quarter of 2005 we reclassified amortization cost of acquired software from continuing operations
before income taxes....................... 4,086 2,922 2,116 917 1,310 614 745 (857)
Income (loss) from continuing operations.... 2,581 1,739 1,290 562 163 251 372 (514)
Income (loss) from discontinued operations.. 1,817 -- -- -- 35 (23) (1) (14)
--------- --------- --------- --------- --------- --------- --------- --------
Net income (loss)........................... $ 4,398 $ 1,739 $ 1,290 $ 562 $ 198 $ 228 $ 371 $ (528)
========= ========= ========= ========= ========= ========= ========= ========
Diluted earnings (loss) from continuing
operations................................ $ 0.05 $ 0.04 $ 0.03 $ 0.01 $ 0.00 $ 0.01 $ 0.01 $ (0.01)
Diluted earnings (loss) from discontinued
operations................................ 0.04 -- -- -- 0.00 (0.01) (0.00) (0.00)
--------- --------- --------- --------- --------- --------- --------- --------
Net earnings (loss) per diluted share....... $ 0.09 $ 0.04 $ 0.03 $ 0.01 $ 0.00 $ 0.00 $ 0.01 $ (0.01)
========= ========= ========= ========= ========= ========= ========= ========
Shares usedamortization of acquisition intangibles to cost of revenues. The reconciliation of gross profit to the 2004 Form 10-K and 2005 Form 10-Qs is as follows: |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | 2005 | | | 2004 | |
| | | Dec. 31 | | | Sept. 30 | | | June 30 | | | Mar. 31 | | | Dec. 31 | | | Sept. 30 | | | June 30 | | | Mar. 31 | |
| Gross profit per Form 10-K or Form 10-Q | | $ | 16,700 | | | $ | 16,020 | | | $ | 16,249 | | | $ | 13,113 | | | $ | 18,064 | | | $ | 15,296 | | | $ | 17,100 | | | $ | 14,825 | |
| Reclass acquired software amortization expense | | | — | | | | (198 | ) | | | (199 | ) | | | (198 | ) | | | (221 | ) | | | (267 | ) | | | (353 | ) | | | (606 | ) |
| Adjusted gross profit | | $ | 16,700 | | | $ | 15,822 | | | $ | 16,050 | | | $ | 12,915 | | | $ | 17,843 | | | $ | 15,029 | | | $ | 16,747 | | | $ | 14,219 | |
| (B) | | We made significant organizational changes in computing diluted earnings
(loss) per share.......................... 48,482 49,372 50,405 49,725 48,915 48,396 47,425 47,179
the second quarter of 2005 to areas of our business that were not performing to our expectations. In connection with the reorganization we recorded a restructuring charge of $1.3 million. |
(1) Previously reported amounts for revenues and cost of revenues for quarterly
periods prior to October 1, 2002 have been reclassified to report certain
reimbursable customer expenses as revenues and as cost of revenue in
accordance with EITF 01-14 as discussed in Note 1 - Summary of Significant
Accounting Policies. We increased quarterly revenues and the related cost of
revenues from the previously reported amounts for the following three month
periods ended:
F-22
March 31, 2001................. $ 186
June 30, 2001.................. 260
September 30, 2001............. 223
December 31, 2001.............. 259
March 31, 2002................. 266
June 30, 2002.................. 289
September 30, 2002............. 281
60
TYLER TECHNOLOGIES, INC.
SCHEDULE II -— VALUATION AND QUALIFYING ACCOUNTS
(IN
(IN THOUSANDS)
Years ended December 31, 2002, 2001 and 2000
YEARS ENDED DECEMBER 31,
--------------------------------
2002 2001 2000
--------- --------- ---------
ALLOWANCE FOR LOSSES - ACCOUNTS RECEIVABLE
- ------------------------------------------
Balance at beginning of year....................... $ 1,275 $ 1,505 $ 826
Additions charged to costs and expenses............ 727 1,681 1,438
Deductions for accounts charged off or credits
issued............................................. (1,312) (1,911) (759)
---------- ---------- ---------
Balance at end of year.................... $ 690 $ 1,275 $ 1,505
========= ========= =========
VALUATION ALLOWANCE - DEFERRED TAX ASSETS YEARS ENDED DECEMBER 31,
- ----------------------------------------- --------------------------------
2002 2001 2000
--------- --------- ---------
Balance at beginning of year....................... $ 1,690 $ 3,657 $ 10,863
Utilization of capital loss carryforward........... (99) -- (16,138)
Adjustment to actual capital loss carryforwards
arising from a previous sale....................... 1,114 -- (901)
Change in basis difference on investment security.. (1,591) (1,967) 9,833
--------- --------- ---------
Balance at end of year.................... $ 1,114 $ 1,690 $ 3,657
========= ========= =========
61
EXHIBIT INDEX
EXHIBIT
NUMBER DESCRIPTION
- ------- ----------------------------------------------------------------
3.1 Restated Certificate of Incorporation of Tyler Three, as amended
through May 14, 1990, and Certificate of Designation of Series A
Junior Participating Preferred Stock (filed as Exhibit 3.1 to our
Form 10-Q for the quarter ended June 30, 1990, and incorporated
herein).
3.2 Certificate of Amendment to the Restated Certificate of
Incorporation (filed as Exhibit 3.1 to our Form 8-K, dated
February 19, 1998, and incorporated herein).
3.3 Amended and Restated By-Laws of Tyler Corporation, dated November
4, 1997 (filed as Exhibit 3.3 to our Form 10-K for the year ended
December 31, 1997, and incorporated herein).
3.4 Certificate of Amendment dated May 19, 1999 to the Restated
Certificate of Incorporation (filed as Exhibit 3.4 to our Form
10-K for the year ended December 31, 2000, and incorporated
herein).
4.1 Specimen of Common Stock Certificate (filed as Exhibit 4.1 to our
registration statement no. 33-33505 and incorporated herein).
4.2 Warrant to purchase common stock of Tyler Technologies, Inc.
(filed as Exhibit 4.5 to our Form 10-Q for the quarter ended June
30, 2000, and incorporated herein).
4.3 Credit Agreement dated as of February 27, 2002, by and between
Tyler Technologies, Inc. and Bank of Texas, N.A. (filed as
Exhibit 4.6 to our Form 10-K for the year ended December 31, 2001
and incorporated herein).
4.4 First Amendment to Credit Agreement by and between Tyler
Technologies, Inc. and Bank of Texas, N.A. dated March 5, 2002.
(filed as Exhibit 4.7 to our Form 10-K for the year ended
December 31, 2001 and incorporated herein).
*4.5 Second Amendment to Credit Agreement, First Amendment to Pledge
and Security Agreement, and Lenders Consent and Waiver by and
Among Tyler Technologies, Inc. and Bank of Texas N.A.
*10.1 Form of Indemnification Agreement for directors and officers.
10.2 Stock Option Plan amended and restated as of May 12, 2000 (filed
as Exhibit 4.1 to our registration statement no. 333-98929 and
incorporated herein and amended by Exhibit 4.2).
10.3 Acquisition Agreement dated as of November 20, 1995, by and among
the Registrants, Tyler Pipe Industries, Inc. and Ransom
Industries, Inc., formerly known as Union Acquisition Corporation
(filed as Exhibit 2.1 to our Form 8-K, dated December 14, 1995,
and incorporated herein).
10.4 Purchase Agreement between Tyler Corporation, Richmond Partners,
Ltd. and Louis A. Waters, dated August 20, 1997 (filed as Exhibit
10.24 to our Form 8-K, dated September 2, 1997, and incorporated
herein).
10.5 Employment agreement between Tyler Technologies, Inc. and
Theodore L. Bathurst, dated October 7, 1998, (filed as Exhibit
10.18 to our Form 10-Q for the quarter ended September 30, 1998,
and incorporated herein).
*21 Subsidiaries of Tyler
*23 Consent of Ernst & Young LLP
*99.1 Certifications pursuant to Section 1350 of Chapter 63 of Title 18
of the United States Code.
*99.2 Certifications pursuant to Section 1350 of Chapter 63 of Title 18
of the United States Code.
We will furnish copies of these exhibits to shareholders upon
written request and payment for copying charges of $0.15 per
page.
* Filed herewith.
| | | | | | | | | | | | | |
| | | Years ended December 31, | |
| | | 2005 | | | 2004 | | | 2003 | |
| Allowance For Losses — Accounts Receivable | | | | | | | | | | | | |
| Balance at beginning of year | | $ | 986 | | | $ | 1,094 | | | $ | 690 | |
| Additions charged to costs and expenses | | | 1,641 | | | | 796 | | | | 1,104 | |
| Collection of accounts previously written off | | | — | | | | (271 | ) | | | — | |
| Deductions for accounts charged off or credits issued | | | (636 | ) | | | (633 | ) | | | (700 | ) |
| | | | | | | | | | |
| Balance at end of year | | $ | 1,991 | | | $ | 986 | | | $ | 1,094 | |
| | | | | | | | | | |
| | | | | | | | | | | | | |
| | | Years ended December 31, | |
| | | 2005 | | | 2004 | | | 2003 | |
| Valuation Allowance — Deferred Tax Assets | | | |
| Balance at beginning of year | | $ | — | | | $ | — | | | $ | 1,114 | |
| Utilization of capital loss carryforward | | | — | | | | — | | | | (1,114 | ) |
| | | | | | | | | | |
| Balance at end of year | | $ | — | | | $ | — | | | $ | — | |
| | | | | | | | | | |
F-23