1
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 June 30, 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.)
5949 SHERRY LANE
SUITE 1400, DALLAS, TEXAS 75225
(Address of principal executive offices)
(Zip code)
(214) 547-4000
(Registrant's telephone number, including area code)
2800 WEST MOCKINGBIRD LANE
DALLAS, TEXAS 75235
(Former name, former address and former fiscal year,
if changed since last report)
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 August 6, 2001:
47,118,764
2
TYLER TECHNOLOGIES, INC.
INDEX
<Table>
<Caption>
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.......................... 12
Part II - Other Information
Item 1. Legal Proceedings............................................ 17
Item 4. Submission of Matters to a Vote of Security Holders.......... 17
Item 6. Exhibits and Reports on Form 8-K............................. 17
Signatures.......................................................................... 18
</Table>
2
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PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
TYLER TECHNOLOGIES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands, except par value and number of shares)
<Table>
<Caption>
(Unaudited)
June 30, December 31,
2001 2000
------------ ------------
ASSETS
Current assets:
Cash and cash equivalents $ 596 $ 8,217
Accounts receivable (less allowance for losses of $1,138 in 2001
and $1,505 in 2000) 38,304 36,599
Net current assets of discontinued operations 353 --
Income taxes receivable 164 323
Prepaid expenses and other current assets 2,503 2,465
Deferred income taxes 1,731 1,469
------------ ------------
Total current assets 43,651 49,073
Net assets of discontinued operations 2,736 3,450
Property and equipment, net 6,625 6,175
Other assets:
Investment securities available-for-sale 14,160 5,092
Goodwill and other intangibles, net 83,853 84,700
Sundry 579 577
------------ ------------
$ 151,604 $ 149,067
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 1,999 $ 4,299
Accrued liabilities 10,510 11,745
Current portion of long-term obligations 242 353
Net current liabilities of discontinued operations -- 3,542
Deferred revenue 21,659 21,066
------------ ------------
Total current liabilities 34,410 41,005
Long-term obligations, less current portion 7,942 7,747
Deferred income taxes 4,347 4,193
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 (49,369) (49,212)
Accumulated other comprehensive income -
unrealized loss on securities available-for-sale (1,623) (10,691)
Treasury stock, at cost: 924,205 and 863,522 shares
in 2001 and 2000, respectively (3,359) (3,231)
------------ ------------
Total shareholders' equity 104,905 96,122
------------ ------------
$ 151,604 $ 149,067
============ ============
</Table>
See accompanying notes.
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TYLER TECHNOLOGIES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share amounts)
(Unaudited)
<Table>
<Caption>
Three months ended Six months ended
June 30, June 30,
------------------------ ------------------------
2001 2000 2001 2000
---------- ---------- ---------- ----------
Revenues:
Software licenses $ 4,585 $ 3,802 $ 8,186 $ 7,786
Professional services 15,076 8,991 26,662 18,019
Maintenance 9,849 7,997 19,709 15,732
Hardware and other 1,467 871 3,692 1,921
---------- ---------- ---------- ----------
Total revenues 30,977 21,661 58,249 43,458
Cost of revenues:
Software licenses 1,004 469 1,625 926
Professional services and maintenance 18,758 12,852 34,948 25,281
Hardware and other 1,083 757 2,923 1,638
---------- ---------- ---------- ----------
Total cost of revenues 20,845 14,078 39,496 27,845
---------- ---------- ---------- ----------
Gross profit 10,132 7,583 18,753 15,613
Selling, general and administrative expenses 7,782 8,527 15,362 17,034
Recovery of certain acquisition costs previously expensed (235) -- (235) --
Amortization of acquisition intangibles 1,719 1,832 3,456 3,751
---------- ---------- ---------- ----------
Operating income (loss) 866 (2,776) 170 (5,172)
Interest expense 121 965 282 1,848
---------- ---------- ---------- ----------
Income (loss) from continuing operations before
income tax provision (benefit) 745 (3,741) (112) (7,020)
Income tax provision (benefit) 373 (1,103) 30 (2,045)
---------- ---------- ---------- ----------
Income (loss) from continuing operations 372 (2,638) (142) (4,975)
Loss from disposal of discontinued operations,
net of income taxes (1) (1,341) (15) (2,723)
---------- ---------- ---------- ----------
Net income (loss) $ 371 $ (3,979) $ (157) $ (7,698)
========== ========== ========== ==========
Basic and diluted earnings (loss) per common share:
Continuing operations $ 0.01 $ (0.06) $ (0.00) $ (0.12)
Discontinued operations (0.00) (0.03) (0.00) (0.06)
---------- ---------- ---------- ----------
Net earnings (loss) per common share $ 0.01 $ (0.09) $ (0.00) $ (0.18)
========== ========== ========== ==========
Weighted average common shares outstanding:
Basic 47,149 44,894 47,164 44,092
Diluted 47,425 44,894 47,164 44,092
</Table>
See accompanying notes.
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TYLER TECHNOLOGIES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
<Table>
<Caption>
Six months ended June 30,
----------------------------
2001 2000
---------- ----------
Cash flows from operating activities:
Net loss $ (157) $ (7,698)
Adjustments to reconcile net loss from operations
to net cash used by operations:
Depreciation and amortization 5,195 5,070
Deferred income taxes (108) (849)
Non-cash interest expense 120 295
Discontinued operations - noncash charges and
changes in operating assets and liabilities (2,147) (132)
Changes in operating assets and liabilities, exclusive of
effects of discontinued operations (4,526) (1,798)
---------- ----------
Net cash used by operating activities (1,623) (5,112)
---------- ----------
Cash flows from investing activities:
Additions to property and equipment (1,603) (975)
Software development costs (3,212) (3,600)
Assets acquired for discontinued operations (1,353) (3,383)
Cost of acquisitions subsequently discontinued -- (3,073)
Proceeds from sale of discontinued operations 575 --
Other 11 (524)
---------- ----------
Net cash used by investing activities (5,582) (11,555)
---------- ----------
Cash flows from financing activities:
Net borrowings on revolving credit facility 239 10,800
Payments on notes payable (155) (648)
Proceeds from sale of common stock, net of issuance costs -- 9,270
Payment of debt of discontinued operations (384) (2,697)
Sale of treasury shares to employee benefit plan -- 19
Debt issuance costs (116) (850)
---------- ----------
Net cash (used) provided by financing activities (416) 15,894
---------- ----------
Net decrease in cash and cash equivalents (7,621) (773)
Cash and cash equivalents at beginning of period 8,217 1,964
---------- ----------
Cash and cash equivalents at end of period $ 596 $ 1,191
========== ==========
</Table>
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
June 30, 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 accounting principles generally
accepted in the United States for complete financial statements. 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. The Company also reclassified certain balance sheet
accounts of discontinued operations as of December 31, 2000.
(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, consisting of Business Resources Corporation ("Resources"),
to an affiliate of Affiliated Computer Services, Inc. ("ACS") (the
"Resources Sale"). The Resources Sale was valued at approximately $71.0
million. 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 businesses 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) and was recorded during the three months ended
December 31, 2000.
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 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.
On May 16, 2001, the Company sold all of its common stock in one of its
remaining businesses which was previously designated as a discontinued
operation. In connection with the sale, the Company received cash proceeds
of $575,000, approximately 60,000 shares of Company common stock, a
promissory note of $750,000 payable in 58 monthly installments at an
interest rate of 9%,
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and other contingent consideration. Because collection of the note
receivable is highly dependent upon future operations of the buyer, the
Company will record its value as cash is received. Since the loss on the
sale was estimated as of the measurement date of December 29, 2000, when the
decision to discontinue the business was made, no additional adjustments to
the estimated loss on the disposals of the discontinued businesses are
considered appropriate at this time.
Revenues from the information and property records services segment amounted
to $10.5 million and $21.2 million for the three and six months ended June
30, 2000, respectively.
Two of the Company's non-operating subsidiaries are involved in various
claims for work-related injuries and physical conditions relating to a
formerly owned subsidiary that was sold in 1995. For the three and six
months ended June 30, 2001, the Company recorded net losses in discontinued
operations of $1,000 (net of taxes of $-0-) and $15,000 (net of taxes of
$8,000), respectively, and $68,000 (net of taxes of $37,000) and $487,000
(net of taxes of $263,000) for the three and six months ended June 30, 2000,
respectively, primarily for trial and related costs. The estimated net
liability for the settlements of the remaining work related injuries and
physical condition claims have been included in the net assets of
discontinued operations in the accompanying condensed consolidated balance
sheet as of June 30, 2001.
(3) Acquisitions, Dispositions and Related Matters
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 pro
forma 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.
<Table>
<Caption>
SIX MONTHS ENDED JUNE 30,
---------------------------
2001 2000
-------- --------
Revenues.............................................. $ 58,249 $ 43,458
Loss from continuing operations....................... $ (142) $ (3,667)
Loss from continuing operations per diluted share..... $ (0.00) $ (0.08)
</Table>
During the year ended December 31, 1999, the Company charged operations for
a note receivable and related accrued interest which management deemed was
not collectible. The note was received in contemplation of an acquisition of
all the outstanding common stock of CPS Systems, Inc. During the three
months ended June 30, 2001, the Company received cash of approximately
$235,000 through CPS Systems, Inc. bankruptcy proceedings in connection with
the note.
(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 proceeds and policies issued to each
company during the relevant time periods. Swan and TPI have tendered the
defense and indemnity obligations arising from these claims to their
insurance carriers. To date, certain of the insurance carriers have entered
into settlement agreements with over 275 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 or on behalf of 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.
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(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:
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.
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(6) Earnings Per Share
The following table sets forth the computation of basic and diluted earnings
(loss) per share (in thousands, except per share amounts):
<Table>
<Caption>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
----------------------- ------------------------
2001 2000 2001 2000
---------- ---------- ---------- ----------
Numerators for basic and diluted earnings per share:
Income (loss) from continuing operations ............ $ 372 $ (2,638) $ (142) $ (4,975)
========== ========== ========== ==========
Denominator:
Denominator for basic earnings per share-
Weighted-average common shares outstanding .......... 47,149 44,894 47,164 44,092
Effect of dilutive securities:
Employee stock options .............................. 276 -- -- --
Warrants ............................................ -- -- -- --
---------- ---------- ---------- ----------
Dilutive potential common shares ........................ 276 -- -- --
---------- ---------- ---------- ----------
Denominator for diluted earnings per share-
Adjusted weighted-average
shares and assumed conversion ...................... 47,425 44,894 47,164 44,092
========== ========== ========== ==========
Basic and diluted earnings (loss) per share
from continuing operations .............................. $ 0.01 $ (0.06) $ (0.00) $ (0.12)
========== ========== ========== ==========
</Table>
(7) Income Tax Provision
For the three months ended June 30, 2001, the Company had income from
continuing operations before income taxes of $745,000 and an income tax
provision of $373,000, resulting in an effective tax rate of 50%. For the
same period in 2000, the Company's loss from continuing operations before
income taxes and income tax benefit was $3.7 million and $1.1 million,
respectively. The resulting effective benefit rate was 29%. For the six
months ended June 30, 2001, the Company had a loss from continuing
operations before income taxes of $112,000 and an income tax provision of
$30,000. For the six months ended June 30, 2000, the Company had a loss from
continuing operations before income taxes of $7.0 million and an income tax
benefit of $2.0 million. The effective income tax rates are estimated based
on projected income for the year and the resulting amount of income taxes.
The effective income tax rates for the three and six months ended June 30,
2001, were different from the statutory United States Federal income tax
rate of 35% primarily 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 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 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 Statements of Financial Accounting Standards ("SFAS") No. 115,
"Accounting for Certain Investments in Debt and Equity Securities". These
securities are classified
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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 (amounts in millions, except per share
amounts):
<Table>
<Caption>
Quoted Market
Price Gross Unrealized
Per Share Cost Fair Value Holding Losses
------------- ------ ---------- ----------------
June 30, 2001 $ 2.52 $ 15.8 $ 14.2 $ (1.6)
December 31, 2000 0.91 15.8 5.1 (10.7)
June 30, 2000 1.31 15.8 7.4 (8.4)
August 6, 2001 2.17 15.8 12.2 (3.6)
</Table>
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 up to the date of
adopting SFAS 142, "Goodwill and Other Intangible Assets" (see Note 11 New
Accounting Pronouncements). Had the Company's investment in HTE been
accounted for under the equity method, after the affects of amortization of
the excess purchase price over the book value of the shares, the Company's
investment at June 30, 2001 would have been $11.5 million and the equity in
loss of HTE for the three and six months ended June 30, 2001 would have been
$3,000 and $516,000, respectively. At June 30, 2000, the Company's
investment would have been $12.6 million and the equity in loss of HTE for
the three and six months ended June 30, 2000 would have been $576,000 and
$1.8 million, respectively.
(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. In
May 2001, the Senior Credit Facility was further amended to provide for
total borrowings of up to approximately $12.5 million. 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 further limited to 80% of eligible accounts receivable. At June
30, 2001, the Company had outstanding borrowings of $5.0 million and an
unused available borrowing capacity of $6.3 million under the Senior Credit
Facility. The interest rate at June 30, 2001 was 9.25%. The effective
average interest rates for borrowings during the three and six months ended
June 30, 2001 were 9.7% and 10.5%, respectively, and 9.5% and 9.2% for the
three and six months ended June 30, 2000, 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
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and restricts substantial asset sales, capital expenditures and cash
dividends. At June 30, 2001, the Company is in compliance with its various
covenants under the Senior Credit Facility, as amended.
(10) Comprehensive Income (Loss)
For the three and six months ended June 30, 2001, the Company had
comprehensive income of $5.6 million and $8.9 million, respectively,
including an unrealized gain of $5.2 million and $9.1 million, respectively,
associated with unrealized gain on securities classified as
available-for-sale. For the three and six months ended June 30, 2000, the
Company had comprehensive loss of $14.7 million and $34.0 million,
respectively, including an unrealized loss of $10.7 million and $26.3
million, respectively, associated with investment securities.
(11) New Accounting Pronouncements
In July 2001, the Financial Accounting Standards Board issued SFAS No. 141,
"Business Combinations", and SFAS No. 142, "Goodwill and Other Intangible
Assets", effective for fiscal years beginning after December 15, 2001. Under
the new rules, goodwill and intangible assets deemed to have indefinite
lives will no longer be amortized but will be subject to annual impairment
tests in accordance with the Statements. Other intangible assets will
continue to be amortized over their useful lives. The Company will apply the
new rules on accounting for goodwill and other intangible assets beginning
in the first quarter of 2002. The Company's annual amortization for
acquisition intangibles amounts to approximately $6.9 million. Such
amortization includes, among other items, goodwill and assembled workforce
which will no longer be amortized. The Company is also exploring other
amortizable costs to determine if they qualify for non-amortization. After
consideration of the deferred tax effects for certain of these intangible
assets, application of the non-amortization provisions of the Statement for
the goodwill and assembled workforce is expected to result in an increase in
net income of approximately $2.5 million to $3.0 million per year. During
2002, the Company will perform the first of the required impairment
tests of goodwill and indefinite lived intangible assets as of January 1,
2002. The Company has not yet determined what the effect of these tests will
be on the earnings and financial position of the Company.
(12) Segment and Related Information
SFAS No. 131, "Disclosures About Segments of an Enterprise and Related
Information", establishes standards for reporting information about
operating segments. 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.
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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 to the Condensed
Consolidated Financial Statements for discussion of discontinued
businesses).
ANALYSIS OF RESULTS OF OPERATIONS
REVENUES
Revenues from continuing operations increased 43% to $31.0 million for the
quarter ended June 30, 2001 from $21.7 million for the same period in the
prior year. For the six months ended June 30, 2001, revenues were $58.2
million, a 34% increase from $43.5 million of revenue for the six months
ended June 30, 2000.
Software license revenue increased $783,000, or 21%, for the three months
ended June 30, 2001, from $3.8 million for the three months ended June 30,
2000. The increase was primarily due to sales of a third-party software
program that provides additional functionality to certain of the Company's
proprietary software. The software license revenue increase was offset
somewhat by customers delaying purchases in anticipation of selected
financial and city solution software modules, which are scheduled to be
released later in 2001. Software license revenues for the six months ended
June 30, 2001 were $8.2 million, up slightly from $7.8 million, in the six
months ended June 30, 2000.
Professional services revenues grew 68% to $15.1 million for the three
months ended June 30, 2001, from $9.0 million for the three months ended
June 30, 2000. Professional services revenue increased from $18.0 million
for the six months ended June 30, 2000 to $26.7 million for the six months
ended June 30, 2001. Included in professional services revenues for the
three and six months ended June 30, 2001, was appraisal services revenue of
$9.8 million and $17.4 million, respectively, compared to $4.6 million and
$9.0 million for the same periods in the prior year. The 113% and 93%
increases for the three and six month periods, respectively, in appraisal
services revenue were primarily due to the Company's continued progress on
its contract with Nassau
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County, New York Board of Assessors ("Nassau County"). The 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 approximately $34.0
million. Implementation of the Nassau County contract began in September
2000 and is expected to be completed by late 2002. During the three and six
months ended June 30, 2001, the Company recorded $4.8 million and $7.5
million of professional services revenue related to Nassau County,
respectively.
For the three months ended June 30, 2001, maintenance revenue increased 23%,
or $1.9 million, from $8.0 million for the same period in 2000. Year-to-date
maintenance revenue increased 25% or $4.0 million from $15.7 million for the
six months ended June 30, 2000. 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 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 $1.5 million in the second quarter
of 2001, from $871,000 in the second quarter of 2000. Hardware and other
revenues increased $1.8 million for the six months ended June 30, 2001 from
$1.9 million for the same period of 2000. The increase in hardware and other
revenues was primarily due to the completion of several contracts that had
significant hardware requirements. Hardware revenue is dependent on the
contract size and on varying customer hardware needs.
COST OF REVENUES
For the three months ended June 30, 2001, cost of revenues was $20.8
million, compared to $14.1 million for the three months ended June 30, 2000.
For the six months ended June 30, 2001, cost of revenues was $39.5 million,
compared to $27.8 million for the same period of 2000. The increase in cost
of revenues was primarily due to the increase in revenues.
Overall gross margins were 33% and 32% for the three and six months ended
June 30, 2001, respectively, compared to 35% and 36% for the three and six
months ended June 30, 2000, respectively. Gross margins were lower because
the Company's revenue mix included more lower margin appraisal services
compared to 2000 for both the second quarter and year-to-date periods. In
addition, software license costs increased compared to the three and six
months ended June 30, 2000, due to higher third party software costs and
software development amortization. The Company released several new products
in the second quarter of 2000, at which time amortization of the related
software development costs commenced.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
Selling, general and administrative expenses for the three months and six
months ended June 30, 2001, were $7.8 million and $15.4 million,
respectively, compared to $8.5 million and $17.0 million in the comparable
prior year periods. Selling, general and administrative expenses as a
percentage of revenues were 25% and 26% for the three and six months ended
June 30, 2001, respectively, and 39% for the same periods of 2000. The
selling, general and administrative expenses as a percent of sales
comparisons were positively impacted primarily by higher sales volume. The
decline in selling, general and administrative expense was due to a
reduction in corporate costs following the sale of the information and
property records services segment as well as lower research and development
costs which were expensed.
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 $121,000 and $965,000 for the three months ended June
30, 2001 and 2000, respectively. Interest expense was $282,000 and $1.8
million for the six months ended June 30, 2001 and 2000, respectively.
Interest expense declined mainly due to a significant reduction in bank debt
as the proceeds from the sale of parts of the Company's former information
and property records service segment (see Note 2) were used to pay down
debt. In addition, in connection with certain internally developed software
projects, the Company capitalized $155,000 and $300,000 of interest costs
during the three and six months ended June 30, 2001, respectively, compared
to $89,000 for the three and six months ended June 30, 2000.
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INCOME TAX PROVISION
For the three months ended June 30, 2001, the Company had income from
continuing operations before income taxes of $745,000 and an income tax
provision of $373,000, resulting in an effective tax rate of 50%. For the
six months ending June 30, 2001, the Company had a loss from continuing
operations before income taxes of $112,000 and an income tax provision of
$30,000. The effective income tax rates are estimated based on projected
income for the year and the resulting amount of income taxes. The effective
income tax rates for the three and six months ended June 30, 2001 were
different from the statutory United States Federal income tax rate of 35%
primarily due to non-deductible items such as goodwill amortization as
compared to the relative amount of pretax earnings or loss.
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, consisting of Business Resources Corporation, to an affiliate
of ACS (the "Resources Sale"). The Resources Sale was valued at
approximately $71.0 million. 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) and was recorded during the three months ended
December 31, 2000.
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 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 anticipated operating losses from the measurement
date of December 29, 2000, 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.
On May 16, 2001, the Company sold all of its common stock in one of its
remaining businesses that was previously designated as a discontinued
operation. In connection with the sale, the Company received cash proceeds
of $575,000, approximately 60,000 shares of Company common stock, a
promissory note of $750,000 payable in 58 monthly installments at an
interest rate of 9%, and other contingent consideration. Because the note
receivable is highly dependent upon future operations of the buyer, the
Company will record its value as cash is received. Since the loss on the
sale was estimated as of the measurement date of December 29, 2000 when the
decision to discontinue the business was made, no additional adjustments to
the estimated loss on the disposals of the discontinued businesses are
considered appropriate at this time.
Revenues from the information and property records services segment amounted
to $10.5 million and $21.2 million for the three and six months ended June
30, 2000.
Two of the Company's non-operating subsidiaries are involved in various
claims for work-related injuries and physical conditions relating to a
formerly owned subsidiary that was sold in 1995. For the three and six
months ended June 30, 2001 the Company recorded net losses of $1,000 (net of
taxes of $-0-) and $15,000 (net of taxes of $8,000), respectively, compared
to $68,000 (net of taxes of $37,000) and $487,000 (net of taxes of
$263,000), for the three and six months ended June
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30, 2000, respectively, primarily for trial and related costs (See Note 4
Commitments and Contingencies).
NET INCOME AND OTHER MEASURES
The Company had net income of $371,000 for the three months ended June 30,
2001, and net loss of $157,000 for the six months ended June 30, 2001
compared to net losses of $4.0 million and $7.7 million for the three and
six months ended June 30, 2000, respectively. Income from continuing
operations was $372,000 and net loss from continuing operations was $142,000
for the three and six months ended June 30, 2001, respectively, compared to
net losses of $2.6 million and $5.0 million for the three and six months
ended June 30, 2000, respectively. For the three and six months ended June
30, 2001, diluted earnings (loss) per share from continuing operations was
$0.01 and $(0.00) compared to $(0.06) and $(0.12) for the same periods of
2000.
Earnings before interest, taxes, depreciation and amortization ("EBITDA")
from continuing operations for the three and six months ended June 30, 2001,
was $3.3 million and $5.1 million, respectively, compared to a loss before
interest, taxes, depreciation and amortization of $101,000 and $102,000 for
the comparable prior year periods. EBITDA consists of income or loss from
continuing operations before interest, income taxes, depreciation,
amortization and recovery of acquisition costs previously expensed. 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
six months ended June 30, 2001 and 2000 were $1.6 million and $5.1 million,
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. In May 2001, the
Senior Credit Facility was further amended to provide for total borrowings
up to approximately $12.5 million. 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 June 30, 2001, the Company had
outstanding borrowings of $5.0 million and unused available borrowing
capacity of $6.3 million under the Senior Credit Facility. The interest rate
at June 30, 2001 was 9.25%. The effective average interest rates for
borrowings during the second quarters of 2001 and 2000 were 9.7% and 9.5%,
respectively.
In addition, at June 30, 2001, the Company's continuing operations had
several promissory notes payable, and other installment notes totaling $3.2
million (including current portion of $242,000). Fixed interest rates on the
promissory and installment notes ranged from 6.1% to 10.0%. The Company made
principal payments of $155,000 on these notes during the six months ended
June 30, 2001.
For the six months ended June 30, 2001, the Company made capital
expenditures of $4.8 million for continuing operations. These expenditures
included $3.2 million relating to software development. The remaining
expenditures were primarily for computer equipment and expansions required
to support internal growth. 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 June 30, 2001.
These expenditures were primarily funded by borrowings under the Company's
Senior Credit Facility or with cash on hand from the previously described
dispositions of the property records segment.
On May 16, 2001, the Company sold all of the common stock of one of the
remaining businesses that was previously designated as a discontinued
operation. In connection with the sale, the Company received cash proceeds
of $575,000, a promissory note of $750,000 payable in 58 monthly
installments at an interest rate of 9%, and other contingent consideration.
Because the note receivable is highly dependent upon future operations of
the buyer, the Company will record its value as cash is received, as well as
other consideration.
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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 in 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 provisions for a number of post-closing adjustments. 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 June 30,
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 4. Submission of Matters to a Vote of Security Holders
The Company held its annual meeting of stockholders on June 5, 2001. The
following are the results of certain matters voted upon at the meeting:
With respect to the election of directors, shares were voted as follows:
<Table>
<Caption>
NOMINEE NUMBER OF VOTES FOR NUMBER OF VOTES WITHHELD
------------------- ------------------- ------------------------
Ben T. Morris 35,675,481 102,820
Ulrich Otto 35,675,481 102,820
G. Stuart Reeves 35,675,481 102,820
Glenn A. Smith 35,651,481 126,820
Louis A. Waters 35,222,719 555,582
John D. Woolf 35,651,481 102,820
John M. Yeaman 35,647,281 131,020
</Table>
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
None.
(b) Reports on Form 8-K
None.
Item 3 of Part I and Items 2, 3, and 5 of Part II were not applicable and have
been omitted.
17
18
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: August 9, 2001
18