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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934.
For the quarterly period ended March 31, 2001
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13
OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934.
Commission File Number 1-10485
TYLER TECHNOLOGIES, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 75-2303920
(State or other jurisdiction of (I.R.S. employer
incorporation or organization) identification no.)
2800 WEST MOCKINGBIRD LANE
DALLAS, TEXAS 75235
(Address of principal executive offices)
(Zip code)
(214) 902-5086
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes [X] No [ ]
Number of shares of common stock of registrant outstanding at May 7, 2001:
47,179,371
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TYLER TECHNOLOGIES, INC.
INDEX
PAGE NO.
Part I - Financial Information (Unaudited)
Item 1. Financial Statements
Condensed Consolidated Balance Sheets......................... 3
Condensed Consolidated Statements of Operations............... 4
Condensed Consolidated Statements of Cash Flows............... 5
Notes to Condensed Consolidated Financial Statements.......... 6
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations.................................... 11
Part II - Other Information
Item 1. Legal Proceedings............................................ 15
Item 6. Exhibits and Reports on Form 8-K............................. 15
Signatures.......................................................................... 16
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PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
TYLER TECHNOLOGIES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands, except share amounts)
(Unaudited)
March 31, December 31,
2001 2000
----------- ------------
ASSETS
Current assets:
Cash and cash equivalents $ 517 $ 8,930
Accounts receivable (less allowance for losses of $1,320 in 2001
and $1,505 in 2000) 31,917 36,599
Income tax receivable 501 323
Prepaid expenses and other current assets 2,507 2,465
Deferred income taxes 1,503 1,503
--------- ---------
Total current assets 36,945 49,820
Net assets of discontinued operations 8,049 6,339
Property and equipment, net 6,285 6,175
Other assets:
Investment securities available-for-sale 8,956 5,092
Goodwill and other intangibles, net 84,476 84,700
Sundry 502 580
--------- ---------
$ 145,213 $ 152,706
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 3,141 $ 4,906
Accrued liabilities 10,664 11,880
Current portion of long-term obligations 307 353
Net current liabilities of discontinued operations 3,899 5,132
Deferred revenue 19,049 21,066
--------- ---------
Total current liabilities 37,060 43,337
Long-term obligations, less current portion 3,366 7,747
Deferred income taxes 3,364 3,543
Other liabilities 1,965 1,957
Commitments and contingencies
Shareholders' equity:
Preferred stock, $10.00 par value; 1,000,000 shares authorized,
none issued -- --
Common stock, $.01 par value; 100,000,000 shares authorized;
48,042,969 shares issued in 2001 and 2000 480 480
Additional paid-in capital 158,776 158,776
Accumulated deficit (49,740) (49,212)
Accumulated other comprehensive income -
unrealized loss on securities available-for-sale (6,827) (10,691)
Treasury stock, at cost; 863,598 and 863,522 shares
in 2001 and 2000, respectively (3,231) (3,231)
--------- ---------
Total shareholders' equity 99,458 96,122
--------- ---------
$ 145,213 $ 152,706
========= =========
See accompanying notes.
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TYLER TECHNOLOGIES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share data)
(Unaudited)
For the three months ended March 31,
-------------------------------------
2001 2000
-------- --------
Revenues:
Software licenses $ 3,601 $ 3,984
Professional services 11,586 9,028
Maintenance 9,860 7,735
Hardware and other 2,225 1,050
-------- --------
Total revenues 27,272 21,797
Cost of revenues:
Software licenses 621 457
Professional services and maintenance 16,190 12,429
Hardware and other 1,840 881
-------- --------
Total cost of revenues 18,651 13,767
-------- --------
Gross profit 8,621 8,030
Selling, general and administrative expenses 7,580 8,507
Amortization of acquisition intangibles 1,737 1,919
-------- --------
Operating loss (696) (2,396)
Interest expense 161 883
-------- --------
Loss from continuing operations before
income tax benefit (857) (3,279)
Income tax benefit (343) (942)
-------- --------
Loss from continuing operations (514) (2,337)
Loss from operations of discontinued operations,
net of income taxes (14) (1,382)
-------- --------
Net loss $ (528) $ (3,719)
======== ========
Basic and diluted loss per common share:
Continuing operations $ (0.01) $ (0.06)
Discontinued operations (0.00) (0.03)
-------- --------
Net loss per common share $ (0.01) $ (0.09)
======== ========
Weighted average common shares outstanding:
Basic and diluted 47,179 43,291
See accompanying notes.
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TYLER TECHNOLOGIES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
Three months ended March 31,
----------------------------
2001 2000
------- --------
Cash flows from operating activities:
Net loss $ (528) $(3,719)
Adjustments to reconcile net loss from operations
to net cash used by operations:
Depreciation and amortization 2,516 2,395
Deferred income taxes (179) (472)
Discontinued operations - noncash charges and
changes in operating assets and liabilities (1,409) 1,180
Changes in operating assets and liabilities, exclusive of
effects of acquired companies and discontinued operations (471) (305)
------- -------
Net cash used by operating activities (71) (921)
------- -------
Cash flows from investing activities:
Additions to property and equipment (672) (596)
Software development costs (1,743) (1,746)
Cost of acquisitions subsequently discontinued -- (3,073)
Assets acquired for discontinued operations (1,342) (1,839)
Other 34 (169)
------- -------
Net cash used by investing activities (3,723) (7,423)
------- -------
Cash flows from financing activities:
Net borrowings (payments) on revolving credit facility (4,350) 9,150
Payments on notes payable and capital lease obligations (77) (69)
Payments on debt of discontinued operations (192) (2,285)
------- -------
Net cash provided (used) by financing activities (4,619) 6,796
------- -------
Net decrease in cash and cash equivalents (8,413) (1,548)
Cash and cash equivalents at beginning of period 8,930 1,987
------- -------
Cash and cash equivalents at end of period $ 517 $ 439
======= =======
See accompanying notes.
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Tyler Technologies, Inc.
Notes to Condensed Consolidated Financial Statements
(Unaudited)
(1) Basis of Presentation
The accompanying unaudited information for Tyler Technologies, Inc.
("Tyler" or the "Company") includes all adjustments which are, in the
opinion of the Company's management, of a normal or recurring nature and
necessary for a fair summarized presentation of the condensed
consolidated balance sheet at March 31, 2001, and the condensed
consolidated results of operations and cash flows for the periods
presented. Such financial statements have been prepared in accordance
with accounting principles generally accepted in the United States for
interim financial information. Accordingly, the financial statements do
not include all of the information and footnotes required by accounting
principles generally accepted in the United States for complete financial
statements. The consolidated results of operations for interim periods
may not necessarily be indicative of the results of operations for any
other interim period or for the full year and should be read in
conjunction with the Company's Annual Report on Form 10-K for the year
ended December 31, 2000.
The balance sheet at December 31, 2000 has been derived from the audited
financial statements at that date but does not include all of the
information and footnotes required by generally accepted accounting
principles for complete financial statements.
(2) Discontinued Operations
On September 29, 2000, the Company sold for cash certain net assets of
Kofile, Inc. ("Kofile") and another subsidiary, the Company's interest in
a certain intangible work product, and a building and related building
improvements (the "Kofile Sale"). The gain on the Kofile Sale, after
transaction costs, amounted to $403,000 (net of an income tax benefit of
$200,000) and was recorded during the three month period ended September
30, 2000.
Effective December 29, 2000, the Company sold for cash its land records
business unit, Business Resources Corporation ("Resources"), including
among others, Resources' wholly-owned subsidiaries, Government Records
Services, Inc. and Title Records Corporation, to an affiliate of
Affiliated Computer Services, Inc. ("ACS") (the "Resources Sale"). The
Resources Sale was valued at approximately $71.0 million, consisting of
$70.0 million in cash and the assumption by ACS of $1.0 million of
capital lease obligations. Concurrent with the Resources Sale, management
of the Company with the Board of Director's 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 to focus the Company's resources on its software
systems and services segment and to reduce debt. The business and assets
divested or identified for divesture have been classified as discontinued
operations in the accompanying consolidated financial statements with
prior periods' financial statements restated to report separately their
operations in compliance with Accounting Principle Board ("APB") Opinion
No. 30. The gain on the Resources Sale, after transaction costs, amounted
to $1.1 million (net of an income tax benefit of $2.2 million) was
recorded during the three months ended December 31, 2000. Transaction
costs and certain costs directly related to the Resources Sale were
estimated to be $4.1 million, including investment banking fees,
professional fees, cash payments to departing employees, and
approximately $844,000 in connection with the issuance of 500,000 shares
of restricted common stock to departing employees.
The Company's formal plan of disposal provides for the remaining
businesses and assets of the information and property records services
segment to be disposed of by December 29, 2001. One of the remaining
assets consists of a start-up company which has been engaged in
constructing a Web-enabled national repository of public records data.
Another remaining business is Capitol Commerce Reporter, Inc. ("CCR"),
which was purchased in January 2000 and provides public records research,
principally UCCs in Texas. The interdependency of these operations with
those of Resources resulted in the Company's decision to discontinue the
development of the database and other related products and exit the land
records business following the Resources Sale. During the three months
ended December 31, 2000, the Company charged discontinued operations for
the estimated loss on the disposal on the remaining businesses. The
estimated loss on the disposal of these remaining businesses and assets
amounted to $13.6 million (after an income tax benefit of $3.8 million),
consisting 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. The anticipated operating losses to
the disposal dates include the effects of the settlement of certain
employment contracts, losses on real property leases, severance costs and
similar closing related costs. The amounts the Company will ultimately
realize could differ materially from the amounts assumed in arriving at
the loss on disposal of the discontinued operations.
Revenues from the information and property records services segment
amounted to $10.7 million for the three months ended March 31, 2000.
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Two of the Company's non-operating subsidiaries are involved in various
claims for work-related injuries and physical conditions and for
environmental claims relating to a formerly-owned subsidiary that was
sold in 1995. For the three months ended March 31, 2001 and 2000, the
Company expensed and included in discontinued operations $22,000 (net of
taxes of $8,000) and $419,000 (net of taxes of $226,000), respectively,
for trial and related costs (See Note 4 - Commitments and
Contingencies).
(3) Acquisitions, Dispositions and Related Matters
On January 3, 2000, the Company acquired CCR. CCR was included in the
information and property records services segment, which was
discontinued in December 2000. (See Note 2 - Discontinued Operations.)
The following unaudited pro forma information (in thousands, except per
share data) presents the consolidated results of operations as if the
Company's disposition of the information and property records services
segment occurred on January 1, 2000, after giving effect to certain
adjustments, interest and income tax effects. The pro forma information
does not purport to represent what the Company's results of operations
actually would have been had such transactions or events occurred on the
dates specified, or to project the Company's results of operations for
any future period.
THREE MONTHS ENDED MARCH 31,
-------------------------------
2001 2000
-------- --------
Revenues .............................................. $ 27,272 $ 21,797
Loss from continuing operations ....................... $ (514) $ (1,708)
Loss from continuing operations per diluted share ..... $ (0.01) $ (0.04)
(4) Commitments and Contingencies
Two of the Company's non-operating subsidiaries, Swan Transportation
Company ("Swan") and TPI of Texas, Inc. ("TPI"), have been and/or are
currently involved in various claims raised by approximately 550 former
TPI employees for work related injuries and physical conditions resulting
from alleged exposure to silica, asbestos, and/or related industrial
dusts during their employment by TPI. Swan was the parent company of TPI,
which owned and operated a foundry in Tyler, Texas for approximately 28
years. As non-operating subsidiaries of the Company, the assets of Swan
and TPI consist primarily of various insurance policies issued to each
company during the relevant time periods. In accordance with a standstill
agreement entered into in March 2000, Swan and TPI have tendered the
defense and indemnity obligations arising from these claims to their
insurance carriers. To date, Swan's insurance carriers have entered into
settlement agreements with over 250 of the plaintiffs, each of which
agreed to release Swan, TPI, the Company, and its subsidiaries and
affiliates from all such claims in exchange for payments made by the
insurance carriers.
Because of the inherent uncertainties discussed above, it is reasonably
possible that the amounts recorded as liabilities for TPI and Swan
related matters could change in the near term by amounts that would be
material to the consolidated financial statements.
(5) Revenue Recognition
The Company derives revenue from software licenses, postcontract customer
support ("PCS" or "maintenance"), and services. PCS includes telephone
support, bug fixes, and rights to upgrade on a when-and-if available
basis. Services 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, the Company
allocates the total arrangement fee among each deliverable based on the
relative fair value of each of the deliverables as determined based on
vendor specific objective evidence.
The Company recognizes revenue from software transactions in accordance
with Statement of Position 97-2, "Software Revenue Recognition", as
amended as follows:
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Software Licenses - The Company recognizes the revenue allocable to
software licenses and specified upgrades upon delivery and installation
of the software product or upgrade to the end user, unless the fee is not
fixed or determinable or collectibility is not probable. If the fee is
not fixed or determinable, revenue is 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 functionality of
other elements of the arrangement.
A majority of the Company's software arrangements involve "off-the-shelf"
software, and the other elements are not considered essential to the
functionality of the software. For those software arrangements in which
services are not considered essential, the software license fee is
recognized as revenue after delivery and installation have occurred,
customer acceptance is reasonably assured, the fee represents an
enforceable claim and probable of collection and the remaining services
such as training are considered nominal.
Software Services - When software services are considered essential,
revenue under the entire arrangement is 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 the services are
performed.
Computer Hardware Equipment - Revenue allocable to equipment based on
vendor specific evidence of fair value is recognized when the equipment
is delivered and collection is probable.
Postcontract Customer Support - PCS agreements are generally entered into
in connection with initial license sales and subsequent renewals. 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.
Contract Accounting - For arrangements that include customization or
modification of the software, or where software services are otherwise
considered essential, or for real estate mass appraisal projects, revenue
is recognized using contract accounting. Revenue from these arrangements
is recognized on a percentage-of-completion method with
progress-to-completion measured based primarily upon labor hours incurred
or units completed.
Deferred revenue consists primarily of payments received in advance of
revenue being earned under software licensing, software and hardware
installation, support and maintenance contracts.
(6) Earnings Per Share
In accordance with Statement of Financial Accounting Standards ("SFAS")
No. 128 "Earnings per Share", the Company has presented basic income
(loss) per share, computed on the basis of the weighted average number of
common shares outstanding during the period, and diluted income (loss)
per share, computed on the basis of the weighted average number of common
shares and all dilutive potential common shares outstanding during the
period. The Company incurred a loss from continuing operations for the
three-month periods ended March 31, 2001 and 2000. As a result, the
denominator was not adjusted for dilutive securities in these periods, as
the effect would have been antidilutive.
(7) Income Tax Provision
For the three months ended March 31, 2001, the Company had a loss from
continuing operations before income taxes of $857,000, and an income tax
benefit of $343,000. The resulting effective tax rate for the three-month
period was 40%. For the three months ended March 31, 2000, the Company
had a loss from continuing operations before income taxes of $3.3
million, and an income tax benefit of $942,000. The effective tax rate
for this three month period was 29%. The effective tax rates are
estimated based on projected operating income for the year and the
resulting amount of income taxes, and the effective rates for the three
month period ended March 31, 2001 and 2000 were different from the
statutory United States federal income tax rate of 35% due to
non-deductible items such as goodwill amortization as compared to the
relative amount of pretax earnings or loss.
(8) Investment Securities Available-for-Sale
Pursuant to an agreement with two major shareholders of H.T.E., Inc.
("HTE"), the Company acquired approximately 32% of HTE's common stock in
two separate transactions in 1999. On August 17, 1999, the Company
exchanged 2.3 million shares of its common stock for 4.7 million shares
of HTE common stock. This initial investment was recorded at $14.0
million. The second transaction occurred on December 21, 1999, in which
the Company exchanged 484,000 shares of its common stock for 969,000
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shares of HTE common stock. The additional investment was recorded at
$1.8 million. The investment in HTE common stock is classified as a
non-current asset since it was made for a continuing business purpose.
Florida state corporation law restricts the voting rights of "control
shares", as defined, acquired by a third party in certain types of
acquisitions, which restrictions may be removed by a vote of the
shareholders. The courts have not interpreted the Florida "control share"
statute. HTE has taken the position that, under the Florida statute, all
of the shares acquired by the Company constitute "control shares" and
therefore do not have voting rights until such time as shareholders of
HTE, other than the Company, restore voting rights to those shares.
Management of the Company believes that only the shares acquired in
excess of 20% of the outstanding shares of HTE constitute "control
shares" and therefore believes it currently has the right to vote all HTE
shares it owns up to at least 20% of the outstanding shares of HTE. On
November 16, 2000, the shareholders of HTE, other than Tyler, voted to
deny the Company its right to vote the "control shares" of HTE.
Accordingly, the Company accounts for its 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. Unrealized holding gains and losses, net of the related
tax effect, on available-for-sale securities are excluded from earnings
and are reported as a separate component of shareholders' equity until
realized. Realized gains and losses from the sale of available-for-sale
securities are determined on a specific identification basis.
The cost, fair value and gross unrealized holding losses of the
investment securities available-for-sale amounted to the following, based
on the quoted market price for HTE common stock:
Gross Unrealized
Per Share Cost Fair Value Holding Gains (Losses)
--------- ------- ---------- ----------------------
March 31, 2001 $ 1.59 $ 15.8 $ 9.0 $ (6.8)
December 31, 2000 0.91 15.8 5.1 (10.7)
March 31, 2000 3.22 15.8 18.1 2.3
May 7, 2001 1.90 15.8 10.7 (5.1)
A decline in the market value of any available for sale security below
cost that is deemed to be other than temporary results in a reduction in
the carrying amount to fair value. The impairment is charged to earnings
and a new cost basis for the security is established. At this time,
management of the Company does not believe the decline in the market
value is other than temporary. In making this determination, management
concluded it has both the intent and the ability to hold the investment
for a period of time sufficient to allow for the anticipated recovery in
fair value. Other conditions considered, among others, included the
conditions in the local government software industry, the financial
condition of the issuer, and recent favorable public statements by the
issuer concerning its future prospects.
If the uncertainty regarding the voting shares is resolved in the
Company's favor, the Company will retroactively adopt the equity method
of accounting for this investment. Therefore, the Company's results of
operations and retained earnings for periods beginning with the 1999
acquisition will be retroactively restated to reflect the Company's
investment in HTE for all periods in which it held an investment in the
voting stock of HTE. Under the equity method, the original investment is
recorded at cost and is adjusted periodically to recognize the investor's
share of earnings or losses after the respective dates of acquisition.
The Company's investment in HTE would include the unamortized excess of
the Company's investment over its equity in the net assets of HTE. This
excess would be amortized on a straight-line basis over the estimated
economic useful life of ten years. Had the Company's investment in HTE
been accounted for under the equity method, the Company's investment at
March 31, 2001 would have been $11.5 million and the equity in loss of
HTE for the three months ended March 31, 2001 would have been $513,000.
At March 31, 2000, the Company's investment would have been $13.2 million
and the equity in loss of HTE for the three months ended March 31, 2000
would have been $1.3 million.
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(9) Long-term Obligations
In December 2000, the Company amended its revolving credit agreement with
a group of banks (the "Senior Credit Facility") to provide for total
borrowings of up to $15.0 million and a maturity date of July 1, 2002.
Borrowings under the Senior Credit Facility, as amended, initially bear
interest at the lead bank's prime rate plus a margin of 2.00%, which
margin increases by 0.50% quarterly through January 1, 2002. Borrowings
under the Senior Credit Facility are limited to 80% of eligible accounts
receivable. At March 31, 2001, the Company had outstanding borrowings of
$400,000 and an unused available borrowing capacity of $12.3 million
under the Senior Credit Facility. The interest rate at March 31, 2001 was
10.0%. The effective average interest rates for borrowings during the
three months ended March 31, 2001 and 2000 were 11.0% and 8.9%,
respectively.
The Senior Credit Facility is secured by substantially all of the
Company's real and personal property and by a pledge of its common stock
of present and future significant operating subsidiaries. The Senior
Credit Facility is also guaranteed by such subsidiaries. Under the terms
of the Senior Credit Facility, the Company is required to maintain
certain financial ratios and other financial conditions. The Senior
Credit Facility also prohibits the Company from making certain
investments, advances or loans and restricts substantial asset sales,
capital expenditures and cash dividends. At March 31, 2001, the Company
is in compliance with its various covenants under the Senior Credit
Facility, as amended.
(10) Comprehensive Income (Loss)
For the three months ended March 31, 2001, the Company had a total
comprehensive income of $3.3 million, consisting of a net loss of
$528,000 and an unrealized gain of $3.9 million, associated with the
decrease in the unrealized loss on securities classified as
available-for-sale. Total comprehensive loss for the three months ended
March 31, 2000 was $19.3 million, including an unrealized loss of $15.6
million associated with securities classified as available-for-sale.
(11) Adoption of Accounting Pronouncements
In June 1999, SFAS No. 137 "Accounting for Derivative Instruments and
Hedging Activities-Deferral of Effective Date of FASB Statement No. 133"
was issued by the Financial Accounting Standards Board ("FASB"). The
Statement deferred for one year the effective date of FASB Statement No.
133, "Accounting for Derivative Instruments and Hedging Activities". The
rule now applies to all fiscal years beginning after June 15, 2000. FASB
Statement No. 133 requires the Company to recognize all derivatives on
the balance sheet at fair value. Derivatives that are not hedges must be
adjusted to fair value through income. If the derivative is a hedge,
depending on the nature of the hedge, changes in the fair value of
derivatives are offset against the change in fair value of the hedged
assets, liabilities, or firm commitments through earnings or recognized
in other comprehensive income until the hedged item is recognized in
earnings. The adoption of SFAS No. 133 as of January 1, 2000, did not
have a material impact on the Company's consolidated financial statements
and related disclosures.
(12) Segment and Related Information
The Company has adopted SFAS No. 131, "Disclosures About Segments of an
Enterprise and Related Information", which establishes standards for
reporting information about operating segments. As this statement
pertains to disclosure and informational requirements, it has no impact
on the Company's operating results or financial position. Although the
Company has a number of operating subsidiaries, separate segment data has
not been presented as they meet the criteria set forth in SFAS No. 131
for aggregation.
(13) Reclassifications
As a result of the implementation of a new management information system,
the Company has been able to more accurately allocate certain costs
between cost of revenues and selling, general and administrative expense.
Accordingly, certain amounts for previous years have been reclassified to
conform to the 2001 presentation.
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
FORWARD-LOOKING STATEMENTS
This Quarterly Report on Form 10-Q contains forward-looking statements
within the meaning of Section 27A of the Securities Act of 1933, as
amended, and Section 21E of the Securities Exchange Act of 1934, as
amended. All statements other than historical or current facts,
including, without limitation, statements about the business, financial
condition, business strategy, plans and objectives of management, and
prospects of the Company are forward-looking statements. Although the
Company believes that the expectations reflected in such forward-looking
statements are reasonable, such forward-looking statements are subject to
risks and uncertainties that could cause actual results to differ
materially from these expectations. Such risks and uncertainties include,
without limitation, the ability of the Company to successfully integrate
the operations of acquired companies, technological risks associated with
the development of new products and the enhancement of existing products,
changes in the budgets and regulating environments of the Company's
government customers, the ability to attract and retain qualified
personnel, changes in product demand, the availability of products,
changes in competition, economic conditions, changes in tax risks and
other risks indicated in the Company's filings with the Securities and
Exchange Commission. These risks and uncertainties are beyond the ability
of the Company to control, and in many cases, the Company cannot predict
the risks and uncertainties that could cause its actual results to differ
materially from those indicated by the forward-looking statements.
When used in this Quarterly Report, the words "believes," "plans,"
"estimates," "expects," "anticipates," "intends," "continue," "may,"
"will," "should", "projects", "forecast", "might", "could" or the
negative of such terms and similar expressions as they relate to the
Company or its management are intended to identify forward-looking
statements.
GENERAL
The Company provides county, local and municipal governments with
software systems and services to serve their information technology and
automation needs. The Company's software products are integrated with
computer equipment from hardware vendors, third-party database
management applications and office automation software. In addition, the
Company also assists local and county governments with all aspects of
software and hardware selection, network design and management,
installation and training and on-going support and related services. The
Company also provides mass property appraisal services to taxing
jurisdictions, including physical inspection of all properties in the
assessing jurisdiction, data collection and processing, computer
analysis for property valuation and preparation of tax rolls.
The Company discontinued the operations of its information and property
records services segment in December 2000 (See Note 2 for discussion of
discontinued businesses).
ANALYSIS OF RESULTS OF OPERATIONS
REVENUES
Revenues from continuing operations were $27.3 million for the three
months ended March 31, 2001, an increase of 25% over the $21.8 million
reported for the three months ended March 31, 2000.
Revenues from software licenses declined $383,000 for the three months
ended March 31, 2001, from $3.9 million for the three months ended March
31, 2000. The decrease was due in part to customers delaying purchases in
anticipation of selected financial and city solution software modules
which are scheduled to be released later this year.
Revenues from professional services grew 28% from $9.0 million for the
three months ended March 31, 2000, to $11.6 million for the three months
ended March 31, 2001. Professional services for the three month period
ended March 31, 2001, included approximately $2.5 million of appraisal
services relating to the Company's contract with Nassau County, New York
Board of Assessors ("Nassau County"). The Nassau County contract to
reassess all residential and commercial properties in Nassau County and
provide assessment administration software and training to help maintain
equity and manage the property tax process is valued at $34.0 million.
Implementation of the Nassau County contract began in September 2000 and
is expected to be completed late 2002.
Maintenance revenue was $9.9 million for the three months ended March 31,
2001, an increase of 27% over the $7.7 million for the comparable prior
year period. The increase was due to an increase in the Company's base
of installed software and systems products and maintenance rate
increases for several product lines. Maintenance
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and support services are provided for the Company's software products,
including property appraisal products, and third party software and
hardware.
Hardware and other revenues increased to $2.2 million in the first
quarter of 2001, from $1.1 million in the first quarter of 2000. The
increase in hardware and other revenues was primarily due to $850,000 of
hardware included in the Nassau County and State of Hawaii contracts.
COST OF REVENUES
For the three months ended March 31, 2001, cost of revenues was $18.7
million, compared to $13.8 million for the three months ended March 31,
2000, respectively. The increase in cost of revenues was primarily due to
the increase in revenues.
Overall gross margin was 32% for the three months ended March 31, 2001,
compared to 37% for the three months ended March 31, 2000. During the
first quarter of 2001, cost of revenues included amortization of post
acquisition software development costs for which there were no comparable
amortization costs in the first quarter of 2000. Software development
costs, which consist primarily of personnel costs, are not amortized
until the general release of the related software licenses occur. In
addition, gross margin was negatively impacted because the product mix in
the first quarter of 2001 included more lower margin appraisal service
and hardware revenues as compared to the first quarter of 2000. The
change in product mix is due mainly to the Company's larger contracts,
specifically its contract with Nassau County.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
Selling, general and administrative expenses for the three months ended
March 31, 2001, were $7.6 million, compared to $8.5 million in the
comparable prior year period. Selling, general and administrative
expenses as a percentage of revenues was 28% and 39% for the three months
ended March 31, 2001 and 2000, respectively. The selling, general and
administrative expense comparisons were positively impacted primarily by
the higher sales volume. The decline in selling, general and
administrative expense was due to lower research and development costs
which were expensed as well as a reduction in corporate costs following
the sale of the information and property records services segment.
AMORTIZATION OF ACQUISITION INTANGIBLES
The Company has accounted for all acquisitions using the purchase method
of accounting for business combinations. Unallocated purchase price over
the fair value of net identifiable assets of the acquired companies
("goodwill") and intangibles associated with acquisition is amortized
using the straight-line method of amortization over their respective
useful lives beginning when a company is first acquired.
INTEREST EXPENSE
Interest expense was $161,000 and $883,000 for the three months ended
March 31, 2001 and 2000, respectively. Interest expense declined mainly
due to a significant reduction in debt volume as the proceeds from the
sale of Business Resources Corporation ("Resources") to Affiliated
Computer Services ("ACS") (see Note 2) were used to pay down debt. In
addition, in connection with certain internally developed software
projects, the Company capitalized $145,000 of interest costs in the three
months ended March 31, 2001, while no interest costs for continuing
operations were capitalized in the comparable prior year period.
INCOME TAX PROVISION
For the three months ended March 31, 2001, the Company had a loss from
continuing operations before income taxes of $857,000, and an income tax
benefit of $343,000. The resulting effective tax rate for the three-month
period was 40%. For the three months ended March 31, 2000, the Company
had a loss from continuing operations before income taxes of $3.3
million, and an income tax benefit of $942,000. The effective tax rate
for this three month period ended March 31, 2000 was 29%. The effective
tax rates are estimated based on projected operating income for the year
and the resulting amount of income taxes, and the effective rates for the
three months ended March 31, 2001 and 2000 were different from the
statutory United States Federal income tax rate of 35% due to
non-deductible items such as goodwill amortization as compared to the
relative amount of pretax earnings or loss.
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DISCONTINUED OPERATIONS
On September 29, 2000, the Company sold for cash certain net assets of
Kofile, Inc. ("Kofile") and another subsidiary, the Company's interest in
a certain intangible work product, and a building and related building
improvements (the "Kofile sale"). The gain on the Kofile Sale after
transaction costs, amounted to $403,000 (net of an income tax benefit of
$200,000) and was recorded during the three month period ended September
30, 2000.
Effective December 29, 2000, the Company sold for cash its land records
business unit, Resources, including among others, Resources' wholly-owned
subsidiaries Government Records Services, Inc. and Title Records
Corporation, to an affiliate of ACS (the "Resources Sale"). The Resources
Sale was valued at approximately $71.0 million, consisting of $70.0
million in cash and the assumption by ACS of $1.0 million of capital
lease obligations. Concurrent with the Resources Sale, management of the
Company with the Board of Director's 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 to focus the Company's resources on its software systems and
services segment and to reduce debt. The business and assets divested or
identified for divesture have been classified as discontinued operations
in the accompanying consolidated financial statements with prior periods'
financial statements restated to report separately their operations in
compliance with Accounting Principle Board ("APB") Opinion No. 30. The
gain on the Resources Sale, after transaction costs, amounted to $1.1
million (net of an income tax benefit of $2.2 million) was recorded
during the three months ended December 31, 2000. Transaction costs and
certain costs directly related to the Resources Sale were estimated to be
$4.1 million and included investment banking fees, professional fees,
cash payments to departing employees, and approximately $844,000 in
connection with the issuance of 500,000 shares of restricted common stock
to departing employees.
The Company's formal plan of disposal provides for the remaining
businesses and assets of the information and property records services
segment to be disposed of by December 29, 2001. One of the remaining
assets consists of a start-up company which has been engaged in
constructing a Web-enabled national repository of public records data.
Another remaining business is Capitol Commerce Reporter, Inc. ("CCR"),
which was purchased in January 2000 and provides public records research,
principally UCCs in Texas. The interdependency of these operations with
those of Resources resulted in the Company's decision to discontinue the
development of the database and other related products and exit the land
records business following the Resources Sale. During the three months
ended December 31, 2000, the Company charged discontinued operations for
the estimated loss on the disposal on the remaining businesses. The
estimated loss on the disposal of these remaining businesses and assets
amounted to $13.6 million (after an income tax benefit of $3.8 million),
consisting 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. The anticipated operating losses to
the disposal dates include the effects of the settlement of certain
employment contracts, losses on real property leases, severance costs and
similar closing related costs. The amounts the Company will ultimately
realize could differ materially from the amounts assumed in arriving at
the loss on disposal of the discontinued operations.
Revenues from the information and property records services segment
amounted to $10.7 million for the three months ended March 31, 2000.
Two of the Company's non-operating subsidiaries are involved in various
claims for work-related injuries and physical conditions and for
environmental claims relating to a formerly owned subsidiary that was
sold in 1995. For the three months ended March 31, 2001 and 2000, the
Company expensed $22,000 (net of taxes of $8,000) and $419,000 (net of
taxes of $226,000), respectively, for trial and related costs (See Note 4
Commitments and Contingencies).
NET LOSS AND OTHER MEASURES
Net loss was $528,000 for the three months ended March 31, 2001, compared
to net loss of $3.7 million for the three months ended March 31, 2000.
Net loss from continuing operations was $514,000 for the three months
ended March 31, 2001 compared to $2.3 million for the three months ended
March 31, 2000. For the three months ended March 31, 2001, diluted loss
per share from continuing operations was $0.01, compared to $0.06 for the
three months ended March 31, 2000.
Earnings before interest, taxes, depreciation and amortization ("EBITDA")
from continuing operations for the three months ended March 31, 2001, was
$1.8 million compared to a loss before interest, taxes, depreciation and
amortization of $1,000 for the
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comparable prior year periods. EBITDA consists of income or loss from
continuing operations before interest, income taxes, depreciation and
amortization. Although EBITDA is not calculated in accordance with
accounting principles generally accepted in the United States, the
Company believes that EBITDA is widely used as a measure of operating
performance. Nevertheless, the measure should not be considered in
isolation or as a substitute for operating income, cash flows from
operating activities, or any other measure for determining the Company's
operating performance or liquidity that is calculated in accordance with
accounting principles generally accepted in the United States. EBITDA is
not necessarily indicative of amounts that may be available for
reinvestment in the Company's business or other discretionary uses. In
addition, since all companies do not calculate EBITDA in the same manner,
this measure may not be comparable to similarly titled measures reported
by other companies. Cash flows used by operating activities for the three
months ended March 31, 2001 and 2000 were $71,000 and $921,000,
respectively.
FINANCIAL CONDITION AND LIQUIDITY
In December 2000, the Company amended its revolving credit agreement with
a group of banks ("Senior Credit Facility") to provide for total
borrowings of up to $15.0 million and a maturity date of July 1, 2002.
Borrowings under the Senior Credit Facility, as amended, initially bear
interest at the lead bank's prime rate plus a margin of 2.00%, which
margin increases by 0.50% quarterly through January 1, 2002. Borrowings
under the Senior Credit Facility are limited to 80% of eligible accounts
receivable. At March 31, 2001, the Company had outstanding borrowings of
$400,000 and unused available borrowing capacity of $12.3 million under
the Senior Credit Facility. The interest rate at March 31, 2001 was
10.0%. The effective average interest rates for borrowings during the
first quarters of 2001 and 2000 were 11.0% and 8.9%, respectively.
In addition, at March 31, 2001, the Company had several promissory notes
payable, and other installment notes totaling $3.3 million (including
current portion of $307,000). Fixed interest rates on the promissory and
installment notes ranged from 6.1% to 10.0%. The Company made principal
payments of $77,000 on these notes during the first quarter of 2001.
For the three months ended March 31, 2001, the Company made capital
expenditures of $2.4 million for continuing operations. These
expenditures included $1.7 million relating to software development. The
remaining expenditures were primarily for computer equipment and
expansions required for internal growth. In connection with the software
development, the Company capitalized interest costs of $145,000 for the
three months ended March 31, 2001. The Company capitalized no similar
interest costs for continuing operations during the three months ended
March 31, 2000. The Company also purchased a formerly leased building for
$1.3 million in connection with an existing obligation of the
discontinued information and property records service segment. The
building, which is held for sale, is included in net assets of
discontinued operations on the condensed consolidated balance sheet at
March 31, 2001.
These expenditures were primarily funded by borrowings under the
Company's Senior Credit Facility.
On November 4, 1999, the Company purchased Cole Layer Trumble Company
("CLT") from a privately held company ("Seller"). A portion of the
consideration consisted of restricted shares of Tyler common stock and
included a price protection on the future sale of the Company's common
stock by the Seller, which expires late 2001. The price protection is
equal to the difference between the actual sale proceeds of the Tyler
common stock and $6.25 on a per share basis, but is limited to $2.8
million. The purchase agreement contained a number of post-closing
adjustments and, in addition, certain CLT customers inadvertently
submitted post-closing cash receipts to the Seller. As a result of this
activity, the Company has recorded a receivable from the Seller amounting
to $1.3 million at March 31, 2001.
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Part II. OTHER INFORMATION
Item 1. Legal Proceedings
For a discussion of legal proceedings see Part I, Item 1. "Financial
Statements - Notes to Condensed Consolidated Financial Statements -
Commitments and Contingencies" on page 7 of this document.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibit
None.
(b) Reports on Form 8-K
Form 8-K Item
Reported Date Reported Exhibits Filed
1/16/01 2 Stock Purchase Agreement dated
December 29, 2000 among
Affiliated Computer Services,
Inc., ACS Enterprise Solutions,
Inc., Tyler Technologies, Inc.
and Business Resources
Corporation.
5 Authorization of disposition by
the Board of Directors of Tyler
Technologies, Inc., of the
remaining operations of the
information and property records
services segment.
7(b) Pro forma condensed consolidated
financial statements as of
September 30, 2000 and for the
year ended December 31, 1999 and
the nine months ended September
30, 2000.
Item 3 of Part I and Items 2, 3, 4, and 5 of Part II were not applicable and
have been omitted.
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Pursuant to the requirements of the Securities Exchange Act of 1934, the Company
has duly caused this report to be signed on its behalf by the undersigned
thereunto duly authorized.
TYLER TECHNOLOGIES, INC.
By: /s/ Theodore L. Bathurst
-----------------------------------------------
Theodore L. Bathurst Vice President and Chief
Financial Officer (principal financial officer and
an authorized signatory)
By: /s/ Terri L. Alford
-----------------------------------------------
Terri L. Alford
Controller
(principal accounting officer and an authorized
signatory)
Date: May 10, 2001
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