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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 September 30, 1999
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 identification no.)
incorporation or organization)
2800 WEST MOCKINGBIRD LANE
DALLAS, TEXAS 75235
(Address of principal executive offices)
(Zip code)
(214) 902-5086
(Registrant's telephone number, including area code)
None
(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 November 10, 1999:
42,806,211
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TYLER TECHNOLOGIES, INC. AND SUBSIDIARIES
INDEX
Page No.
--------
Part I - Financial Information (Unaudited)
Item 1. Financial Statements
Condensed Consolidated Balance Sheets ......................................... 3
Condensed Consolidated Statements of Income ................................... 5
Condensed Consolidated Statements of Cash Flows................................ 6
Notes to Condensed Consolidated Financial Statements .......................... 7
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations ......................................................... 17
Part II - Other Information
Item 1. Legal Proceedings ............................................................. 25
Item 6. Exhibits and Reports on Form 8-K............................................... 25
Signatures ...................................................................................... 25
Exhibits ........................................................................................ 26
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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)
September 30, December 31,
1999 1998
------------ ------------
(Unaudited)
ASSETS
Current assets
Cash and cash equivalents $ 1,678 $ 1,558
Accounts receivable (less allowance
for losses of $968 and $531
at 9/30/99 and 12/31/98, respectively) 30,515 14,500
Income taxes receivable -- 1,308
Prepaid expenses and other current assets 3,976 1,374
Current notes receivable 1,377 --
Deferred income taxes 1,434 1,061
Net assets of discontinued operations -- 12,752
------------ ------------
Total current assets 38,980 32,553
Net assets of discontinued operations -- 2,848
Property and equipment, net 17,485 14,147
Other assets
Goodwill and other intangibles, net 145,948 95,996
Investment in affiliate, at equity 13,630 --
Non-current notes receivable 9,808 --
Other receivables 2,844 3,612
Sundry 950 938
------------ ------------
$ 229,645 $ 150,094
============ ============
See accompanying notes.
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TYLER TECHNOLOGIES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS (Continued)
(In thousands, except par value and number of shares)
September 30, December 31,
1999 1998
--------------- ---------------
(Unaudited)
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities
Accounts payable $ 3,562 $ 1,190
Accrued liabilities 9,431 5,152
Current portion of long-term debt 3,551 1,876
Deferred revenue 19,941 10,148
Income taxes payable 1,262 --
--------------- ---------------
Total current liabilities 37,747 18,366
Long-term debt, less current portion 54,381 37,189
Other liabilities 5,392 7,273
Deferred income taxes 11,467 10,920
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; 43,224,693 and 35,913,313
shares issued at 9/30/99 and 12/31/98, respectively) 431 359
Capital surplus 145,403 103,985
Accumulated deficit (19,019) (21,791)
--------------- ---------------
126,815 82,553
Less treasury shares, at cost:
(1,418,482 and 1,423,482 shares at 9/30/99
and 12/31/98, respectively) 6,157 6,207
--------------- ---------------
Total shareholders' equity 120,658 76,346
--------------- ---------------
$ 229,645 $ 150,094
=============== ===============
See accompanying notes.
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TYLER TECHNOLOGIES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(In thousands, except per share amounts)
(Unaudited)
Three months ended Nine months ended
September 30, September 30,
---------------------------- ----------------------------
1999 1998 1999 1998
------------ ------------ ------------ ------------
Net revenues $ 29,502 $ 16,035 $ 78,609 $ 32,836
Cost of revenues 13,614 7,751 36,092 15,931
------------ ------------ ------------ ------------
Gross profit 15,888 8,284 42,517 16,905
Selling, general and administrative 9,824 4,705 24,941 9,433
Amortization of intangibles 2,419 861 5,067 1,983
------------ ------------ ------------ ------------
Operating income 3,645 2,718 12,509 5,489
Interest expense 1,148 592 3,087 1,389
Interest income (192) (10) (473) (146)
------------ ------------ ------------ ------------
Income before equity in loss 2,689 2,136 9,895 4,246
Equity in net loss of affiliate (378) -- (378) --
------------ ------------ ------------ ------------
Income before provision for income taxes 2,311 2,136 9,517 4,246
Provision for income taxes 1,159 1,049 4,798 2,019
------------ ------------ ------------ ------------
Income from continuing operations 1,152 1,087 4,719 2,227
Discontinued operations:
Loss from operations of discontinued
operations, after income taxes (602) (178) (1,382) (247)
Gain (loss) on disposals of discontinued
operations -- -- (565) 375
------------ ------------ ------------ ------------
Net income $ 550 $ 909 $ 2,772 $ 2,355
============ ============ ============ ============
Basic earnings (loss) per common share:
Continuing operations $ 0.03 $ 0.03 $ 0.12 $ 0.07
Discontinued operations (0.02) -- (0.05) --
------------ ------------ ------------ ------------
Net earnings per common share $ 0.01 $ 0.03 $ 0.07 $ 0.07
============ ============ ============ ============
Diluted earnings (loss) per common share:
Continuing operations $ 0.03 $ 0.03 $ 0.12 $ 0.07
Discontinued operations (0.02) -- (0.05) --
------------ ------------ ------------ ------------
Net earnings per common share $ 0.01 $ 0.03 $ 0.07 $ 0.07
------------ ------------ ------------ ------------
Weighted average outstanding common shares:
Basic 40,541 34,413 37,960 31,979
Diluted 42,074 36,226 39,336 33,739
See accompanying notes.
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TYLER TECHNOLOGIES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
Nine Months Ended September 30,
-------------------------------
1999 1998
------------ ------------
Cash flows from operating activities
Net income $ 2,772 $ 2,355
Adjustments to reconcile net income to net cash provided by operating activities:
Equity in net loss of affiliate 378 --
Depreciation and amortization 7,599 3,257
Deferred income taxes (973) (777)
Discontinued operations - non-cash charges and changes in
operating assets and liabilities (1,778) (1,024)
Changes in operating assets and liabilities, net of effects of acquired
companies and discontinued operations (6,748) (1,965)
------------ ------------
Net cash provided by operating activities 1,250 1,846
------------ ------------
Cash flows from investing activities
Additions to property and equipment (2,518) (1,995)
Cost of acquisitions, net of cash acquired (22,491) (34,218)
Investment in database and other software development costs (3,791) --
Investing activities of discontinued operations (534) (1,092)
Net proceeds from disposal of discontinued operations 15,116 2,628
Issuance of notes receivable (1,200) --
Other (189) (869)
------------ ------------
Net cash used by investing activities (15,607) (35,546)
------------ ------------
Cash flows from financing activities
Net borrowings on revolving credit facilities 17,314 30,810
Payments on notes payable (1,892) (4,111)
Sale of treasury shares to employee benefit plan 19 209
Payments of principal on capital lease obligations (864) (235)
Debt issuance costs (100) (313)
------------ ------------
Net cash provided by financing activities 14,477 26,360
------------ ------------
Net increase(decrease) in cash and cash equivalents 120 (7,340)
Cash and cash equivalents at beginning of period 1,558 8,364
------------ ------------
Cash and cash equivalents at end of period $ 1,678 $ 1,024
============ ============
See accompanying notes.
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Tyler Technologies, Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements
(Unaudited)
(Tables in thousands, except per share data)
(1) Basis of Presentation
On May 19, 1999, the shareholders of the Company voted to approve the
change of the Company's name from Tyler Corporation to Tyler
Technologies, Inc.
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 September 30, 1999, and the condensed
consolidated results of operations and statement of cash flows for the
periods presented. Such financial statements have been prepared in
accordance with generally accepted accounting principles for interim
financial information. 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, 1998.
Certain prior year amounts have been reclassified to conform to the
current year presentation.
The Company sold Forest City Auto Parts Company ("Forest City") in
March 1999. Accordingly, the prior year's financial statements have
been restated to reflect Forest City as discontinued operations.
(2) Acquisitions
The Company acquired the entities described below in transactions which
were accounted for by the purchase method of accounting and financed
the cash portion of the consideration utilizing funds available under
its bank credit agreement. Results of operations of the acquired
entities are included in the Company's condensed consolidated financial
statements from their respective dates of acquisition.
On February 19, 1998, the Company completed the purchases of Business
Resources Corporation ("Resources"), The Software Group, Inc. ("TSG")
and Interactive Computer Designs, Inc. ("INCODE"). These acquisitions
represent the implementation of Tyler's previously announced strategy
to build a nationally integrated information management services,
systems, database and outsourcing company initially serving local and
municipal governments. Resources, TSG and INCODE provide information
management solutions to county governments and cities, principally
located in the Southwestern United States. The purchase price for each
acquired company consisted of the following: (i) Resources - 10.0
million shares of Tyler common stock and approximately $28.0 million of
cash and assumed debt; (ii) TSG - 2.0 million shares of Tyler common
stock and approximately $12.0 million of cash; and (iii) INCODE -
225,000 shares of Tyler common stock and approximately $1.3 million of
cash. The purchase price has been allocated to the assets (including
identifiable intangible assets such as title plant, workforce, customer
lists and software) and liabilities of each company based on their
respective fair values. The purchase price exceeded the estimated fair
value of each company's respective net identifiable assets by
approximately $45.9 million, $14.1 million and $2.5 million for
Resources, TSG and INCODE, respectively, and the excess has been
assigned to goodwill. The purchase price for Resources does not include
certain potential additional consideration, as the contingencies
regarding such additional consideration are not presently determinable
beyond reasonable doubt.
On June 5, 1998, the Company acquired a line of document management
software and related customer installations and service contracts from
the Business Imaging Systems division of Eastman Kodak Company for $3.6
million in cash and $1.9 million in assumed liabilities. The excess
purchase price over the estimated fair values of the net identifiable
assets acquired was approximately $5.6 million and has been recorded as
goodwill.
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On July 1, 1998, the Company completed the purchases of CompactData
Solutions, Inc. ("CompactData") and Ram Quest Software, Inc. ("Ram
Quest"). CompactData specializes in building and marketing large-scale
databases comprised of public record information, such as property
appraisals, motor vehicle registrations, drivers licenses and criminal
and civil court case records. Ram Quest is a producer of advanced
software for title companies, which provides automation solutions for
the closing, title plant management and imaging needs of its customers.
Ram Quest has installed software systems with customers throughout
Texas. Ram Quest and CompactData operate as units of the Company's
Resources subsidiary. The purchase price for CompactData and Ram Quest
totaled approximately $2.3 million, comprised of approximately $1.0
million in cash and assumed debt and 145,000 shares of Tyler common
stock. The excess purchase price over the estimated fair values of the
net identifiable assets acquired was $2.1 million and has been recorded
as goodwill.
Effective August 1, 1998, the Company completed the purchase of
Computer Management Services, Inc. ("CMS") for approximately $1.2
million in cash and 228,000 shares of Tyler common stock. CMS provides
integrated information management systems and services to cities and
counties throughout Iowa, Minnesota, Missouri, South Dakota, Illinois,
Wisconsin and other states, primarily in the upper Midwest. The excess
purchase price over the estimated fair value of the net identifiable
assets acquired was approximately $1.1 million and has been recorded as
goodwill.
Effective March 1, 1999, the Company acquired Eagle Computer Systems,
Inc. ("Eagle") for approximately 1.1 million shares of Tyler common
stock and $5.0 million in cash. Eagle is a leading supplier of
networked computing solutions for county governments in 14 states,
primarily in the western United States. In addition, Eagle provides
hardware, data conversion, site planning, training and ongoing support
to its customers. The excess purchase price over the preliminary
estimated fair value of net identifiable assets acquired was
approximately $10.8 million and has been recorded as goodwill.
Effective April 1, 1999, the Company completed its acquisition of Micro
Arizala Systems, Inc. d/b/a FundBalance ("FundBalance") a company which
develops and markets fund accounting software and other applications
for state and local governments, not-for-profit organizations and
cemeteries. The Company acquired all of the outstanding common stock of
FundBalance for approximately 356,000 shares of Tyler common stock. The
excess purchase price over the preliminary estimated fair value of net
identifiable assets acquired was approximately $1.7 million and has
been recorded as goodwill.
On April 19, 1999, the Company acquired Process Incorporated d/b/a
Computer Center Software ("MUNIS") which designs and develops
integrated financial and land management information systems for
counties, cities, schools and not-for-profit organizations. MUNIS
provides software solutions to customers primarily located throughout
the northeast and southeast United States. The purchase price was
approximately $16.3 million in cash and 2.7 million shares of Tyler
common stock. The excess purchase price over the preliminary estimated
fair value of net identifiable assets acquired was $29.2 million and
has been recorded as goodwill.
Effective May 1, 1999, the Company acquired Gemini Systems, Inc.
("Gemini") for a combination of approximately $1.2 million in cash and
promissory notes and 700,000 shares of Tyler common stock. Gemini
develops and markets software products for municipal governments and
utilities which are installed at locations in 34 states, with a
majority of those installations in New England. The excess purchase
price over the preliminary estimated fair value of net identifiable
assets acquired was approximately $5.8 million and has been recorded as
goodwill.
On July 16, 1999, the Company acquired Pacific Data Technologies, Inc.
("Pacific Data") for 175,000 shares of Tyler common stock. Pacific Data
is a developer of software and systems that automate and manage real
estate records for Internet delivery. The excess purchase price over
the preliminary estimated fair value of net identifiable assets
acquired was approximately $1.0 million and has been recorded as
goodwill.
During 1999 and 1998, the Company also made other acquisitions which
are immaterial.
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The following unaudited pro forma information presents the consolidated
results of operations as if all of the Company's acquisitions occurred
on January 1, 1998, after giving effect to certain adjustments,
including amortization of intangibles, 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.
Nine months ended September 30,
-------------------------------
1999 1998
------------ ------------
Revenues ......................................... $ 87,339 $ 62,234
Income from continuing operations ................ 5,039 779
Net income ....................................... 3,092 1,050
Earnings per diluted common share ................ $ .08 $ .03
In connection with the acquisitions of Eagle, FundBalance, MUNIS,
Gemini and Pacific Data, the purchase price has been allocated to the
net assets acquired based primarily on information furnished by
management of the acquired companies. The final allocation of the
respective purchase prices will be determined in a reasonable time and
will be based on a complete evaluation of the assets acquired and
liabilities assumed. Accordingly, the information presented herein may
differ from the final purchase price allocation.
(3) Investment in H.T.E., Inc.
On August 17, 1999, Tyler and two shareholders of H.T.E., Inc. ("HTE")
entered into an agreement in which Tyler would exchange its shares of
common stock for shares of common stock of HTE. The agreement provides
for the exchange of approximately 4.7 million unregistered shares of
HTE for approximately 2.3 million unregistered shares of Tyler. In
addition, the agreement provides both the buyer and the seller with put
options and call options in which either party can require the other
party to exchange an additional 968,952 unregistered shares of HTE for
484,476 unregistered shares of Tyler common stock. On August 19, 1999,
the initial exchange of shares occurred and the investment was recorded
at approximately $14.0 million. This exchange resulted in Tyler owning
approximately 27% of the outstanding common stock of HTE. As of
September 30, 1999 the options for additional shares have not been
exercised by either party. The quoted market price of HTE was $2.06 per
share on September 30, 1999.
Florida state corporation law restricts the voting rights of "control
shares" acquired by a third party in certain types of acquisitions,
which restrictions may be removed by a vote of the shareholders.
Management of Tyler believes it currently has the right to vote all
shares it owns up to at least 20% of the outstanding shares.
The Company accounts for its investment in HTE using the equity method
of accounting. 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 date of acquisition.
The Company's investment in HTE includes unamortized excess of the
Company's investment over its equity in the net assets of HTE. This
excess is being amortized on a straight-line basis over the estimated
economic useful life. In addition, any loss in value of an investment
which is other than a temporary decline would also be charged to
earnings. HTE reported a net loss of approximately $5.5 million for the
three months ended September 30, 1999, which includes approximately
$3.2 million, net of tax, related to write-offs of software development
costs, certain accounts receivables and employee-termination benefits
that were recorded by HTE as a result of a recent
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change in management. These costs were considered pre-acquisition costs
by Tyler in determining its share of HTE's loss from the date of
acquisition. Accordingly, the Company recorded its equity in loss of
affiliate of $378,000, net of income tax effect, since the date of
acquisition of its investment in HTE for the three months ended
September 30, 1999.
(4) Commitments and Contingencies
As discussed in Note 13 of the Notes to the Consolidated Financial
Statements included in the Company's Annual Report on Form 10-K for the
year ended December 31, 1998, the Company, through certain of its
subsidiaries, is involved in various environmental claims and claims
for work-related injuries and physical conditions arising from a
formerly-owned subsidiary that was sold in December 1995.
The New Jersey Department of Environmental Protection and Energy
("NJDEPE") has alleged that a site where a former affiliate of Tyler
Pipe Industries, Inc. (a wholly-owned subsidiary of the Company known
as TPI of Texas, Inc. ("TPI")), Jersey-Tyler Foundry Company
("Jersey-Tyler"), once operated a foundry contains lead and possible
other priority pollutant metals and may need on-site and off-site
remediation. The site was used for foundry operations from the early
part of this century to 1969 when it was acquired by Jersey-Tyler.
Jersey-Tyler operated the foundry from 1969 to 1976, at which time the
foundry was closed. In 1976, Jersey-Tyler sold the property to other
persons who have operated a salvage yard on the site. NJDEPE agreed for
TPI to conduct a feasibility study to assess remediation options and
propose a remedy for the site and the impacted areas. This study was
completed and submitted to the NJDEPE in March 1999. TPI has not agreed
to commit to further action at this time. TPI never held title to the
site and denies liability.
Between 1968 and December 1995, TPI owned and operated a foundry in
Swan, Texas. Since February 1997, more than 300 former employees of TPI
have filed a series of lawsuits against TPI, Swan Transportation
Company ("Swan"), another wholly-owned subsidiary of the Company, and,
in some instances, Tyler as the parent corporation of Swan and/or TPI.
The plaintiffs allege that they were exposed to silica, asbestos and/or
other industrial dusts during their employment at TPI and seek to
recover money damages for personal injuries they allegedly suffered as
a result. Although TPI is a defendant in some of these cases,
applicable workers' compensation laws bar recovery against TPI by
almost all of the plaintiffs. Swan and Tyler have been sued under
various theories to try to avoid these workers compensation bars to
recovery against TPI, including causes of action against Swan and Tyler
based upon "good samaritan" theories, i.e., that they exercised control
over the safety programs of TPI and negligently performed those
responsibilities. The major suppliers of asbestos, sand, and industrial
respirator devices also have been sued as co-defendants in most of
these cases under product liability theories of recovery.
The Company has undertaken vigorous defense of these claims. The
ultimate outcome of this litigation is uncertain and depends primarily
upon a successful defense by Swan and Tyler that neither of them
undertook "good samaritan" responsibility for the safety programs of
TPI and, if "good samaritan" responsibility were undertaken, they were
not negligent in their performance of those responsibilities. In
addition, TPI, Swan and Tyler intend to contest the nature of and
severity of the injuries alleged and the causal relationship with their
employment by TPI. Since little discovery has taken place with respect
to the individual plaintiffs' alleged injuries, the Company lacks
sufficient information upon which judgments can be made as to the
validity and ultimate disposition of the individual claims if the
defenses to the "good samaritan" causes of action against Swan and
Tyler are unsuccessful and the workers' compensation bars to recovery
are not enforced, or the extent to which judgments, if any, in favor of
plaintiffs would be covered by insurance.
The Company initially provides for estimated claim settlement costs
when minimum levels can be reasonably estimated. If the best estimate
of claim costs can only be identified within a range and no specific
amount within that range can be determined more likely than any other
amount within the range, the minimum of the range is accrued. Based on
an assessment of claims and contingent claims that may result in future
litigation involving TPI, a reserve for the minimum amount of $2.0
million for claim settlements was
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recorded in 1996. Legal and related professional services costs to
defend litigation of this nature have been expensed as incurred. During
1999, the Company has paid a total of approximately $2.6 million in
claim settlements and in legal and related defense costs on these
cases, of which a total of approximately $1.6 million was paid during
the three months ended September 30, 1999. The remaining reserve for
settlements was approximately $1.0 million at September 30, 1999. While
the Company plans to defend the above mentioned litigation vigorously,
it is reasonably possible that the amounts recorded as liabilities for
TPI related matters could change in the near term by amounts that would
be material to the consolidated financial statements. The Company
currently estimates that the ultimate liability for these claims,
excluding the legal and other costs incurred to defend against the
claims, may range as low as $1.0 million if it is successful in the
defense of the "good samaritan" causes of action, to as high as $6.0
million if that defense is unsuccessful, in each case net of insurance
recoveries.
Other than ordinary course, routine litigation incidental to the
business of the Company and except as described herein, there are no
other material legal proceedings pending to which the Company or its
subsidiaries are parties or to which any of its properties are subject.
In the opinion of management, the ultimate liability, if any, resulting
from these ordinary course, routine contingencies will not have a
material adverse effect on the Company's consolidated results of
operations or financial condition.
(5) Revenue Recognition
The Company's information software systems and services segment derives
revenue from software licenses, postcontract customer support ("PCS"),
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.
In October 1997, the American Institute of Certified Public Accountants
("AICPA") issued Statement of Position ("SOP") 97-2, Software Revenue
Recognition, which supersedes SOP 91-1. The Company was required to
adopt SOP 97-2 for software transactions entered into beginning January
1, 1998.
The Company recognizes revenue in accordance with SOP 97-2, 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 that 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 and the license fee is
substantially billable.
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.
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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, revenue is recognized using contract accounting.
Revenue from these software arrangements is recognized on a
percentage-of-completion method with progress-to-completion measured
based primarily upon labor hours incurred.
Deferred revenue consists primarily of payments received in advance of
revenue being earned under software licensing, software and hardware
installation, support and maintenance contracts.
Through its information and property records services segment, the
Company provides computerized indexing and imaging of real property
records, records management and micrographic reproduction, as well as
information management outsourcing and professional services required
by county and local government units and agencies and provides title
plant update services to title companies. The Company recognizes
service revenue when services are performed and equipment sales when
the products are shipped.
Title Plants - Sales of copies of title plants are usually made under
long-term installment contracts. The contract with the customer is
generally bundled with a long-term title plant update service
arrangement. The contractual amount ascribed to the sale aspect of the
arrangement is based on vendor specific evidence of fair value. The
revenue resulting from the sale of copies of title plants is recognized
currently by discounting future payments to reflect present values.
Such amounts have been recognized currently because legal ownership has
passed, delivery has occurred, no significant continuing obligations
remain, and collection is considered probable.
The Company also receives royalty revenue relating to the current
activities of two former subsidiaries of Resources. Royalty revenue is
recognized as earned upon receipt of royalty payments.
(6) Discontinued Operations
On March 26, 1999, the Company sold all of the outstanding common stock
of Forest City to HalArt, L.L.C. ("HalArt") for approximately $24.5
million. Proceeds consisted of $12.0 million in cash, $3.8 million in a
short-term secured promissory note, $3.2 million in senior secured
subordinated notes and $5.5 million in preferred stock. The short-term
secured promissory note was fully paid in July 1999. The senior secured
subordinated notes carry interest rates ranging between 6% to 8%,
become due in March 2002, and are secured by a second lien on Forest
City inventory and real estate. The preferred stock will be mandatorily
redeemable March 2006. Both the subordinated notes and the preferred
stock are subject to partial or whole redemption upon the occurrences
of specified events.
In determining the loss on the disposal of the business, the
subordinated notes were valued using present value techniques. As
discussed in Note 11, the $3.2 million in senior secured subordinated
notes were assigned without recourse to Day & Zimmermann L.L.C. on
November 4, 1999 in connection with an acquisition.
Because the redemption of the preferred stock is highly dependent upon
future operations of the buyer and due to its extended repayment terms,
the Company is unable to estimate the degree of recoverability.
Accordingly, the Company will record the value of the preferred stock
as cash is received. The Company estimated the loss on the disposal of
Forest City to be $8.9 million which was recorded in the fourth quarter
of 1998. The estimated loss included anticipated operating losses from
the measurement date of December 1998 to the date of disposal and
associated transaction costs. The Company recorded an additional loss
during the three months ended March 31, 1999 of $565,000 (net of taxes
of $364,000) to reflect adjusted estimated transaction costs and funded
operating losses.
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The purchase agreement provides for an adjustment to the purchase price
depending upon the ultimate balance of net assets transferred to the
buyer and for the settlement in cash for levels of cash and cash
equivalents above or below a prescribed level, as of the closing date.
Subsequent to the closing, the Company submitted its computation of the
purchase price adjustment receivable from HalArt and such amount has
neither been approved nor paid by HalArt. At September 30, 1999, the
estimate of this adjustment has been included in current notes
receivable in the accompanying condensed consolidated balance sheet.
The ultimate amount of the settlement, if any, may vary materially from
the amount reflected in the accompanying condensed consolidated
financial statements.
The net assets of discontinued operations at December 31, 1998
consisted principally of working capital (including accounts
receivable, inventories, accounts payable and accrued liabilities),
property and equipment of Forest City. Net sales of discontinued
operations for the three months and nine months ended September 30,
1998 were $19.7 million and $ 59.5 million, respectively. Results of
discontinued operations include external interest expense on debt
associated with discontinued operations for the three months and nine
months ended September 30, 1998, of $104,000 and $239,000,
respectively.
Income tax benefit of $134,000 and $192,000 has been provided on
discontinued operations in the three and nine months ended September
30, 1998, respectively, based on the income tax resulting from
inclusion of the discontinued segment in the Company's consolidated
federal income tax return.
The Company has estimated a $4.6 million capital loss for tax purposes
on the sale of Forest City. No tax benefit has been recorded for this
capital loss since realization of the capital loss is not assured.
(7) Sale of Copies of Title Plants
During the three and nine months ended September 30, 1999, the Company
entered into a series of title services agreements with certain of its
customers. Each of the contracts included the sale of copies of title
plants in a three county area combined with five and ten year title
plant update service arrangements for the provision of title plant
indices and document retrieval services. Revenue recognized in
connection with the sales of copies of the title plants for the three
and nine months ended September 30, 1999 was $2.1 million and $5.7
million, respectively. Approximately $5.1 million has been classified
in the accompanying condensed consolidated balance sheet at September
30, 1999 as non-current notes receivable at their discounted present
values.
(8) CPS Systems, Inc. Note Receivable
In March 1999, the Company entered into a merger agreement pursuant to
which the Company contemplated the acquisition of all of the
outstanding common stock of CPS Systems, Inc. ("CPS"). In connection
with that agreement, Tyler provided CPS with bridge financing of $1.0
million in the form of a note secured by a second lien on substantially
all of the assets of CPS, including accounts receivable, inventory,
intangibles, equipment and intellectual property. The note bears
interest at 2% over the prime rate and was due on October 30, 1999. In
June 1999, Tyler provided notice to CPS that it was exercising its
right to terminate the merger agreement. Although the original
agreement was terminated, Tyler and CPS announced that negotiations
would continue to find an alternative structure for the transaction. In
August 1999, Tyler provided an additional $200,000 of bridge financing,
due October 31, 1999, on terms similar to the original note. At
September 30, 1999, Tyler had notes of approximately $1.2 million which
had not been paid as of their respective due dates.
Management of Tyler continues to negotiate with management of CPS
regarding certain matters, including the repayment of amounts due under
the note agreements as well as the acquisition of assets of CPS. There
can be no assurance that Tyler will be able to successfully acquire the
assets of CPS and on terms favorable to Tyler, or that the Board of
Directors, creditors, and shareholders of CPS and other regulatory
bodies will agree to any such acquisition and the related terms.
Accordingly, since management of Tyler is continuing its negotiations
to acquire CPS and for the amounts due under the notes to consist of
partial consideration for such acquisition, management believes there
is no impairment
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of the notes but has classified the notes as long-term assets in the
accompanying condensed consolidated balance sheet at September 30,
1999.
(9) Earnings Per Share
Basic earnings per share of common stock is computed by dividing net
income by the weighted-average number of Tyler common shares
outstanding during the period. Diluted earnings per share is calculated
in the same manner as basic earnings per share, except that the
denominator is increased to include the number of additional common
shares that would have been outstanding assuming the exercise of all
employee stock options and a warrant to purchase common stock that
would have had a dilutive effect on earnings per share. Options to
purchase 1,626,797 shares of common stock at exercise prices ranging
from $5.81 to $10.94 in 1999 and options to purchase 100,000 shares of
common stock at exercise prices ranging from $10.19 to $10.94 in 1998
were outstanding but were not included in the computation of diluted
earnings per share because the options' exercise prices were greater
than the average market price of the common shares and, therefore, the
effect would have been antidilutive. The following table reconciles the
numerators and denominators used in the calculation of basic and
diluted earnings per share for each of the periods presented:
Three months ended Nine months ended
September 30, September 30,
--------------------------- ---------------------------
1999 1998 1999 1998
------------ ------------ ------------ ------------
Numerators for basic and diluted earnings per share:
Income from continuing operations ..................... $ 1,152 $ 1,087 $ 4,719 $ 2,227
============ ============ ============ ============
Denominator:
Denominator for basic earnings per share-
Weighted-average outstanding common shares ............ 40,541 34,413 37,960 31,979
Effect of dilutive securities:
Employee stock options ................................ 390 380 282 363
Warrant ............................................... 1,143 1,433 1,094 1,397
------------ ------------ ------------ ------------
Dilutive potential common shares ........................ 1,533 1,813 1,376 1,760
------------ ------------ ------------ ------------
Denominator for diluted earnings per share-
Adjusted weighted-average outstanding
common shares and assumed conversion .................. 42,074 36,226 39,336 33,739
============ ============ ============ ============
Basic earnings per share from continuing
operations ............................................ $ .03 $ .03 $ .12 $ . 07
============ ============ ============ ============
Diluted earnings per share from continuing
operations ............................................ $ .03 $ .03 $ .12 $ .07
============ ============ ============ ============
(10) Comprehensive Income
In June 1997, SFAS No. 130, Reporting Comprehensive Income, was issued
and was adopted by the Company in 1998. SFAS No. 130 establishes
standards for reporting and displaying comprehensive income and its
components in an annual financial statement that is displayed with the
same prominence as other annual financial statements. The statement
also requires the accumulated balance of other comprehensive income to
be displayed separately from retained earnings and additional paid-in
capital in the equity section of the statement of financial position.
Comprehensive income and net income was the same for all periods
presented and there were no additional components of comprehensive
income requiring separate display in the statement of financial
position.
(11) Subsequent events
On November 4, 1999, the Company acquired selected assets and assumed
selected liabilities of Cole Layer Trumble Company, a division of Day &
Zimmermann L.L.C., in an asset purchase agreement with an effective
date of October 29, 1999. The Company paid $3.0 million in cash, issued
1.0 million
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restricted shares of Tyler common stock, assigned without recourse
certain senior subordinated secured promissory notes due March 26, 2002
of Forest City Auto Parts Company with an aggregate face amount of $3.2
million, and issued a price protection on the sale of the Company's
common stock which expires no later than November 4, 2001. The price
protection is equal to the difference between the actual sale proceeds
of the Tyler common stock and $6.50 on a per share basis, but is
limited to $3.0 million and can be reduced under certain circumstances
subject to certain post-closing adjustments. In addition, the Company
is obligated to purchase any billed receivables not collected within 90
days of closing, and the Company can receive or pay certain amounts on
a post-closing basis based upon the balance of billed receivables and
net liabilities assumed at closing.
In October 1999, the Company entered into a three-year revolving credit
agreement with a group of banks ("Senior Credit Facility") in an amount
not to exceed $80 million. Borrowings under the Senior Credit Facility
bear interest at either the bank's prime rate plus a margin of .25% to
1.25% or the London Interbank Offered Rate plus a margin of 2.25% to
3.25%, depending on the Company's ratio of indebtedness to earnings
before interest, taxes, depreciation and amortization. The Senior
Credit Facility replaced the Company's previous $50 million revolving
credit facility ("Prior Facility"). As of October 6, 1999 (the date of
funding), the Company had outstanding borrowings and letters of credit
of $52.0 million and available borrowing capacity of $28.0 million
under the Senior Credit Facility. The effective average interest rate
for the borrowings under the Prior Facility was approximately 7.6% and
7.3% for the three and nine months ended September 30, 1999,
respectively. The Senior Credit Facility is secured by substantially
all of the Company's real and personal property and a pledge of the
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. Under the terms of the
Senior Credit Facility the Company has the ability to increase the
facility to $100 million subject to the participation of additional new
lenders.
(12) Segment and Related Information
As of January 1, 1998, the Company has adopted SFAS No. 131,
Disclosures About Segments of an Enterprise and Related Information,
which requires segment information to be reported using a management
approach. This management approach is based on reporting segment
information the way management organizes segments within the enterprise
for making operating decisions and assessing performance.
The Company has two reportable segments: information and property
records services and information software systems and services. The
largest component of the information and property records services
business is the computerized indexing and imaging of real property
records maintained by county clerks and recorders, in addition to the
provision of other information management outsourcing services, records
management, micrographic reproduction and title plant update services
and sales of copies of title plants to title companies. The information
software systems and services segment provides municipal and county
governments with software systems and related services to meet their
information technology and automation needs. In addition, corporate
activities are included as "Other".
The Company evaluates performance based on several factors, of which
the primary financial measure is business segment operating income. The
Company defines segment operating income as income before noncash
amortization of intangible assets associated with their acquisition by
Tyler, interest expense, non-recurring items and income taxes. The
accounting policies of the reportable segments are the same as those
described in Note 1 of the Notes to Consolidated Financial Statements
included in the Company's Annual Report on Form 10-K for the year ended
December 31, 1998.
There were no intersegment transactions, thus no eliminations are
necessary.
The Company's reportable segments are strategic business units that
offer different products and services. They are separately managed as
each business requires different marketing and distribution strategies.
The Company derives a majority of its revenue from external domestic
customers. The information and property records services segment
conducts minor operations in Germany, which are not significant and are
not subsequently disclosed.
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Summarized financial information concerning the Company's reportable
segments is set forth below based on the nature of the products and
services offered:
1999
----------------------------------------------------------------------------------------------
Information
& Property Information
Records Software Continuing
Services Systems Other Operations
----------------------------------------------------------------------------------------------
Assets as of September 30 ... $ 102,103 $ 102,563 $ 24,979 $ 229,645
Revenues for the periods ended September 30:
Three months .............. $ 10,923 $ 18,579 $ -- $ 29,502
Nine months ............... $ 32,339 $ 46,270 $ -- $ 78,609
Segment profit (loss) for the periods ended September 30:
Three months .............. $ 4,036 $ 3,648 $ (1,620) $ 6,064
Nine months ............... $ 12,452 $ 10,253 $ (5,129) $ 17,576
----------------------------------------------------------------------------------------------
1998
----------------------------------------------------------------------------------------------
Information
& Property Information
Records Software Continuing
Services Systems Other Operations
----------------------------------------------------------------------------------------------
Assets as of September 30 ... $ 90,483 $ 31,757 $ 7,464 $ 129,704
Revenues for the periods ended September 30:
Three months .............. $ 9,115 $ 6,920 $ -- $ 16,035
Nine months ............... $ 18,814 $ 14,022 $ -- $ 32,836
Segment profit (loss) for the periods ended September 30:
Three months .............. $ 2,891 $ 1,444 $ (756) $ 3,579
Nine months ............... $ 6,269 $ 3,343 $ (2,140) $ 7,472
----------------------------------------------------------------------------------------------
For the periods ended September 30
Three months Nine months
----------------------------------------------------------------------------------------------
Reconciliation of reportable segment operating
profit to the Company's consolidated totals 1999 1998 1999 1998
---------------------------------------------- -------- -------- -------- --------
Total segment operating profit for
reportable segments ............................. $ 6,064 $ 3,579 $ 17,576 $ 7,472
Interest expense ................................ (1,148) (592) (3,087) (1,389)
Interest income ................................. 192 10 473 146
Goodwill and intangibles amortization ........... (2,419) (861) (5,067) (1,983)
-------- -------- -------- --------
Income from continuing operations before equity
in affiliate and provision for income tax ....... $ 2,689 $ 2,136 $ 9,895 $ 4,246
======== ======== ======== ========
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(13) New Accounting Standards
In June 1998, SFAS No.133, Accounting for Derivative Instruments and
Hedging Activities, was issued and deferred with the issuance of SFAS
No. 137. SFAS No. 133 establishes accounting and reporting standards
for derivative instruments, including certain derivative instruments
embedded in other contracts, and for hedging activities. The provisions
of SFAS No. 133, as amended by SFAS No. 137, are effective for
financial statements for all fiscal quarters of all fiscal years
beginning after June 15, 2000, although early adoption is allowed. The
Company has not determined if it will adopt the provisions of this SFAS
prior to its effective date. The adoption of SFAS No. 133 is not
expected to have a material impact on the Company's consolidated
financial statements and related disclosures.
On January 1, 1999, the Company adopted the provisions of SOP 98-5,
Reporting on the Costs of Start-up Activities. This SOP provides
guidance on the financial reporting of start-up and organization costs
and requires that these costs be expensed as incurred. Adoption of SOP
98-5 did not have a material impact on the Company's consolidated
financial statements.
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, changes in product
demand, the availability of products, changes in competition, economic
conditions, risks associated with Year 2000 issues, 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" 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
Through March 26, 1999, Tyler operated two distinct businesses, the
integrated information management services, systems and outsourcing
business and the automotive parts and supplies business. In March 1999,
Tyler sold Forest City Auto Parts Company ("Forest City") to HalArt,
L.L.C. As a result of the sale of Forest City, Tyler no longer engages
in the automotive parts and supplies business, and its business is
solely focused on the integrated information management services,
systems, and outsourcing business. Therefore, historical financial
information attributable to the automotive parts and supply business
has been reported as discontinued operations and all prior year
financial information included herein has been restated to reflect this
disposition. Continuing operations are comprised of the results of
operations of its newly acquired information management businesses from
their respective dates of acquisition.
RECENT DEVELOPMENTS
Effective October 29, 1999, Tyler acquired selected assets and assumed
selected liabilities of Cole Layer Trumble Company, ("CLT") a division
of Day & Zimmermann L.L.C., in an asset purchase agreement. The Company
paid $3.0 million in cash, issued 1.0 million restricted shares of
Tyler common stock, assigned without recourse certain senior
subordinated secured promissory notes due March 26, 2002 of Forest City
Auto Parts Company with an aggregate face amount of $3.2 million, and
issued a price
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protection on the sale of the Company's common stock which expires no
later than November 4, 2001. The price protection is equal to the
difference between the actual sale proceeds of the Tyler common stock
and $6.50 on a per share basis, but is limited to $3.0 million and can
be reduced under certain circumstances subject to certain post-closing
adjustments. In addition, the Company is obligated to purchase any
billed receivables not collected within 90 days of closing, and the
Company can receive or pay certain amounts on a post-closing basis
based upon the balance of billed receivables and net liabilities
assumed at closing.
ANALYSIS OF RESULTS OF OPERATIONS
REVENUES
Total revenues of $29.5 million for the three months ended September
30, 1999, increased 84% in comparison to $16.0 million from continuing
operations in the prior year period. For the nine months ended
September 30, 1999, revenues of $78.6 million increased 139% compared
to revenues from continuing operations for the nine months ended
September 30, 1998 of $32.8 million.
On a pro forma basis, revenues from continuing operations increased
$5.2 million or 22% for the three months ended September 30, 1999 from
$24.3 million in the prior year period. For the nine months ended
September 30, 1999, pro forma revenues from continuing operations
increased $25.1 million or 40% from $62.2 million in the comparable
prior year period. Information software systems and services provided
for approximately 60% of the sales growth for both the three and nine
months ended September 30, 1999. In 1998, an operating company was
awarded significant contracts with the counties of El Paso and Gregg,
both located in Texas, and Multnomah County (Portland) in Oregon for
combined expected revenues of approximately $8.0 million. Installations
of these contracts began in the fall of 1998 and were substantially
complete as of June 30, 1999. Revenues relating to these three
contracts included in the three and nine months ended September 30,
1999 were approximately $400,000 and $4.8 million, respectively. In
addition, sales from financial and land management information
applications for local governments and school districts contributed
revenue increases of approximately $800,000 and $5.4 million for the
three and nine months ended September 30, 1999, respectively. This
increase is due to expanded sales territory and add-on sales of
additional products to existing customers. Several of the operating
units are benefiting from prior year expansions into new territories,
installations resulting from customers' Year 2000 issues and a slight
increase in average contract size.
Additional sources of pro forma revenue increases were provided by
sales of copies of title plants and certain contracts for document
management services, which were acquired in June of 1998. For the three
and nine months ended September 30, 1999, the document management
services contracts contributed to revenue approximately $300,000 and
$4.5 million, respectively. In the three and nine months ended
September 30, 1999, the Company recognized $2.1 million and $5.7
million, respectively, in connection with the sale of copies of title
plants to several different title companies, compared to none in the
prior year periods. Under the terms of these contracts, Tyler will
deliver database information covering three Texas counties and provide
data update and document image retrieval services over the five or
ten-year terms of these contracts. Tyler will also provide these
customers with its fully integrated on-line data indexing and imaging
system. The total estimated value of these title plant contracts over
the five and ten-year periods is $31.9 million.
COST OF REVENUES
Total cost of revenues from continuing operations of $13.6 million for
the three months ended September 30, 1999, increased 76% in comparison
to $7.8 million in the prior year period. For the nine months ended
September 30, 1999, cost of revenues from continuing operations of
$36.1 million increased 127% compared to cost of revenues for the nine
months ended September 30, 1998 of $15.9 million.
On a pro forma basis, cost of revenues increased $1.7 million, or 15%.
for the three months ended September 30, 1999 from $11.9 million from
continuing operations in the prior year period. For the nine
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months ended September 30, 1999, pro forma cost of revenues from
continuing operations increased $8.4 million, or 27%, from $31.0
million in the comparable prior year period.
For the three months ended September 30, 1999, pro forma gross margin
was 53.9% compared to 51.0% in the comparable prior year period. Pro
forma gross margin for the nine months ended September 30, 1999 was
54.9% compared to 50.3% in the prior year period. The gross margin
improved primarily due to increased sales volume, changes in product
mix and somewhat higher fees for maintenance and support services. For
the three months and nine months ended September 1999, sales of copies
of title plants, which have a significantly higher gross margin than
other products and services, increased as a percent of total revenue
compared to the same periods in the prior year on a pro forma basis.
The gross margin improvement was offset somewhat by increased salaries
and other costs associated with retaining quality employees.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
For the three months ended September 30, 1999, Tyler had selling,
general and administrative expenses of $9.8 million compared to $4.7
million from continuing operations in the comparable prior year period.
Selling, general and administrative expenses for the nine months ended
September 30, 1999 were $24.9 million compared to $9.4 million for the
nine months ended September 30, 1998. The increase in selling, general
and administrative expenses is mainly the result of a series of
acquisitions since early 1998. Pro forma selling, general and
administrative expenses as a percent of revenues for the three months
and nine months ended September 30, 1999 were approximately 33%
compared to 32% and 34% for the three months and nine months ended
September 30, 1998, respectively. Although sales volume has increased
significantly compared to the prior year periods, selling, general and
administrative expenses as a percent of revenues has remained
relatively flat due to increased costs associated with hiring
management and support personnel to accommodate present and planned
future growth.
AMORTIZATION OF INTANGIBLES
The Company accounted for all 1998 and 1999 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
acquisitions are amortized using the straight-line method of
amortization over their respective useful lives.
NET INTEREST EXPENSE
Net interest expense for the three months and nine months ended
September 30, 1999 has increased substantially from the comparable
prior year periods mainly due to acquisition activity beginning in
February 1998 which has been primarily financed with debt. Prior to
February 1998, the Company had no debt. The average interest rate for
the three months and nine months ended September 30, 1999 was
approximately 7.6% and 7.3%, respectively.
INCOME TAX PROVISION
The effective tax rate for the nine months ended September 30, 1999 has
increased to 48.5% from 47.6% in the comparable prior year period
primarily due to the non-deductibility of certain goodwill amortization
relating to acquisitions which occurred in 1999.
DISCONTINUED OPERATIONS
The Company recorded net losses from discontinued operations of
$602,000 and $1.9 million for the three and nine months ended September
30, 1999, respectively. Discontinued operations consist of Forest City,
which was disposed of in March 1999, Swan Transportation Company
("Swan") whose operations were discontinued in 1995, and TPI of Texas,
Inc. ("TPI"), which sold substantially all of its assets and
liabilities in 1995. For the three and nine months ended September 30,
1999, TPI and Swan together recorded net charges of $602,000 and $1.4
million, respectively, primarily for legal and professional fees
related to a series of personal injury lawsuits filed by former
employees.
The Company sold all of the outstanding common stock of its non-core
automotive parts and supplies business, Forest City, on March 26, 1999,
for approximately $24.5 million. The Company estimated the loss on the
disposal of Forest City to be $8.9 million, which was recorded in the
fourth quarter of 1998.
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The estimated loss included anticipated operating losses from the
measurement date of December 1998 to the date of disposal and
associated transaction costs. The Company recorded an additional loss
during the three months ended March 31, 1999 of $565,000 (net of taxes
of $364,000) to reflect adjusted estimated transaction costs and funded
operating losses.
The purchase agreement provides for an adjustment to the purchase price
depending upon the ultimate balance of net assets transferred to the
buyer and for the settlement in cash for levels of cash and cash
equivalents above or below a prescribed level, as of the closing date.
Subsequent to the closing, the Company submitted its computation of the
purchase price adjustment receivable from HalArt and such amount has
neither been approved nor paid by HalArt. At September 30, 1999, the
estimate of this adjustment has been included in current notes
receivable in the accompanying condensed consolidated balance sheet.
The ultimate amount of the settlement, if any, may vary materially from
the amount reflected in the accompanying condensed consolidated
financial statements.
NET INCOME AND OTHER MEASURES
Net income for the three and nine months ended September 30, 1999 was
$550,000 and $2.8 million, respectively, compared to $909,000 and $2.4
million for the three and nine months ended September 30, 1998,
respectively. Income from continuing operations for the three and nine
months ended September 30, 1999 was $1.2 million and $4.7 million,
respectively, compared to $1.1 million and $2.2 million for the three
and nine months ended September 30, 1998, respectively. Diluted
earnings per share from continuing operations for the three and nine
months ended September 30, 1999 was $.03 and $.12, respectively,
compared to $.03 and $.07 for the three and nine months ended September
30, 1998, respectively. For the three months ended September 30, 1999,
income from continuing operations included a loss from investment in an
affiliate of $378,000, net of tax effect. Excluding the loss from
investment in affiliate (HTE), earnings per share from continuing
operations for the three months and nine months ended September 30,
1999 was $.04 and $.13, respectively.
Earnings before interest, taxes, depreciation and amortization
("EBITDA") from continuing operations for the three months ended
September 30, 1999 was $6.9 million, compared to $4.2 million for the
comparable prior year period. EBITDA from continuing operations for the
nine months ended September 30, 1999 was $20.1 million, compared to
$8.7 million for the comparable prior year period. EBITDA consists of
income from continuing operations before interest, income taxes, equity
in loss from affiliate, depreciation and amortization. Although EBITDA
is not a calculation in accordance with generally accepted accounting
principles, 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 generally accepted accounting principles.
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.
FINANCIAL CONDITION AND LIQUIDITY
In October 1999, the Company entered into a three-year revolving credit
agreement with a group of banks ("Senior Credit Facility") in an amount
not to exceed $80 million. Borrowings under the Senior Credit Facility
bear interest at either the bank's prime rate plus a margin of .25% to
1.25% or the London Interbank Offered Rate plus a margin of 2.25% to
3.25% depending on the Company's ratio of indebtedness to earnings
before interest, taxes, depreciation and amortization. The Senior
Credit Facility replaced the Company's previous $50 million revolving
credit facility ("Prior Facility"). As of October 6, 1999 (the date of
funding), the Company had outstanding borrowings and letters of credit
of $52.0 million and available borrowing capacity of $28.0 million
under the Senior Credit Facility. The effective average interest rate
for the borrowings under the Prior Facility was approximately 7.6% and
7.3% for the three and nine months ended September 30, 1999,
respectively. The Senior Credit Facility is secured by substantially
all of the Company's real and personal property and a pledge of the
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
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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. Under the terms of the
Senior Credit Facility the Company has the ability to increase the
facility to $100 million, subject to the participation of additional
new lenders.
The Company's capitalization at September 30, 1999 consisted of $57.9
million in long-term debt and capital lease obligations (including
current portion) and $120.7 million in stockholders' equity. The total
debt-to-capital ratio was approximately 32% at September 30, 1999.
For the nine months ended September 30, 1999, the Company made capital
expenditures of $2.5 million. These expenditures include costs of
computer equipment and software required for internal growth and some
modest building expansion.
During the nine months ended September 30, 1999, the Company received
net proceeds of $15.1 million in connection with the sale of Forest
City including the collection of a $3.8 million short-term secured
promissory note.
The Company incurred software development costs of approximately $3.8
million in the first nine months of 1999, of which approximately $2.8
million relates to the construction of a national data repository
("Database"). Such costs include certain payroll related programming
costs as well as the costs to purchase data from external sources to
initially populate the Database. Upon completion, the Database will
include, among other items, a wide range of public information such as
real property tax and assessment data; chain of title property records
and images. Additionally, further expenditures will be necessary
subsequent to 1999 to update and expand the Database.
During 1999, the Company paid approximately $2.6 million in claim
settlements and in legal and related defense costs, of which a total of
approximately $1.6 million was paid during the three months ended
September 30, 1999. These payments relate to a series of lawsuits by
300 former employees of TPI, against TPI, Swan and in some instances,
Tyler, as the parent company of TPI and/or Swan. The remaining reserve
for claim settlements was approximately $1.0 million at September 30,
1999. While the Company plans to defend the above mentioned litigation
vigorously, it is reasonably possible that the amounts recorded as
liabilities for TPI related matters could change in the near term by
amounts that would be material to the consolidated financial
statements. The Company currently estimates that the ultimate liability
for these claims, excluding the legal and other costs incurred to
defend against the claims, may range as low as $1.0 million, to as high
as $6.0 million, in each case net of insurance recoveries.
In March 1999, the Company entered into a merger agreement to acquire
all of the outstanding common stock of CPS Systems, Inc. ("CPS"). In
connection with that agreement, Tyler provided CPS with bridge
financing of $1.0 million in the form of a secured note. In June 1999,
Tyler provided notice to CPS that it was exercising its right to
terminate the merger agreement, although negotiations would continue to
find an alternative structure for the transaction. In August 1999,
Tyler provided an additional $200,000 of bridge financing on terms
similar to the original note. The notes have not been paid as of their
respective due dates. Management of Tyler continues to negotiate with
management of CPS regarding certain matters, including the repayment of
amounts due under the note agreements as well as the acquisition of
assets of the company. There can be no assurance, however, that any
such acquisition will be consummated or that any needed additional
financing will be available when required on terms satisfactory to the
Company.
In July 1999, Tyler acquired Pacific Data Technologies, Inc. ("Pacific
Data"). The Company acquired all of the outstanding stock of Pacific
Data for approximately 175,000 shares of Tyler common stock. Pacific
Data develops software and systems to automate and manage real estate
records for Internet delivery. Pacific Data will be operated as a
division of NationsData.com, a wholly owned subsidiary of Tyler that is
engaged in the development of a national data repository containing
public information such as real property tax and assessment data.
On August 17, 1999, Tyler and two shareholders of H.T.E., Inc. ("HTE")
entered into an agreement in which Tyler would exchange its shares of
common stock for shares of common stock of HTE. The agreement provides
for the exchange of approximately 4.7 million unregistered shares of
HTE for approximately 2.3 million unregistered shares of Tyler. In
addition, the agreement provides both the buyer
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and the seller with put options and call options in which either party
can require the other party to exchange an additional 968,952
unregistered shares of HTE common stock for 484,476 unregistered shares
of Tyler common stock. On August 19, 1999, the initial exchange of
shares occurred and the investment was recorded at approximately $14.0
million. This exchange resulted in Tyler owning approximately 27% of
the outstanding common stock of HTE. As of September 30, 1999 the
option for additional shares have not been exercised by either party.
In the first nine months of 1999, the Company paid in the aggregate,
approximately $21.9 million in cash and issued 5.0 million shares of
Tyler common stock to acquire Eagle, FundBalance, MUNIS, Gemini and
Pacific Data in business combinations accounted for as purchases. Cash
paid for acquisitions does not include cash paid for transaction costs
related to the execution of the acquisitions, such as legal, accounting
and consulting fees, or acquired cash balances.
The Company from time to time engages in discussions with respect to
selected acquisitions and expects to continue to assess these and other
acquisition opportunities as they arise. The Company may also require
additional financing if it decides to make additional acquisitions.
There can be no assurance, however, that any such opportunities will
arise, any such acquisitions will be consummated or that any needed
additional financing will be available when required on terms
satisfactory to the Company. Absent any acquisitions, the Company
anticipates that cash flows from operations, working capital and unused
borrowing capacity under its existing bank credit agreement will
provide sufficient funds to meet its needs for at least next year.
YEAR 2000 COMPLIANCE
Status of Progress
The Company has established a Program Office to centralize and
coordinate its efforts and to further define, evaluate and conduct
audits of the Company and its progress toward Year 2000 ("Y2K")
compliance. The Program Office is chaired by the Chief Financial
Officer and reports periodically to the Executive Committee of the
Board of Directors. The Program Office has established a Y2K Task
Force, comprised of representatives from each of the Company's
principal operating units, which is charged with evaluating and
implementing the Company's Y2K effort and reporting the results thereof
to the Program Office. The Company's Y2K Task Force mission is to
identify and resolve Y2K issues associated with the Company's internal
information technology (IT) systems, internal non-IT systems, material
third party relationships, and includes: corporate awareness, adoption
of Y2K standards, inventory, assessment, remediation, validation
testing, and contingency planning. The Executive Committee of the Board
of Directors is charged with evaluating the progress reported by the
Program Office and addressing any issues as they arise.
At the request of the Program Office, each of the Company's operating
units has independently developed a Y2K plan. Pursuant to these plans,
each operating unit has conducted an inventory and assessment of its
internal and external technology, its computer-based systems, imbedded
microchips and other processing capabilities to identify the computer
systems that could be affected by the Y2K issue.
The Company's core products have completed remediation. The Company has
been and is still communicating with its customers the status of the
Company's products relating to year 2000. The Company continues to make
the updates available to customers.
A majority of the Company's customers had compliant versions of our
products installed as of September 30, 1999. The remaining few will
have them by December 1999. Some of the Company's customers are using
product versions that the Company will not support for Y2K issues; the
Company is encouraging these customers to migrate to current product
versions that are Y2K ready. Also, in certain client outsourcing and
services contracts, the Company is evaluating Y2K issues for its
clients' computing environments and implementing Y2K related
remediations. Most of the client remediation efforts were completed as
of September 30, 1999. All remaining remediation efforts will be
completed by December 31, 1999.
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Each operating unit is nearing completion of their Y2K plan. Overall,
however, as of September 30, 1999, the Company was approximately 90%
complete.
The Company primarily uses third party software for its internal
computer systems. A majority of the installed systems are purported to
be Y2K compliant. The Company has purchased, and is now installing at
one of its principal operating units, an enhanced accounting
application from Platinum Technologies that is Y2K compliant to replace
the current system. The installation to date has been on plan and is
expected to be completed by December 1, 1999.
The Company cooperates with many third party vendors and suppliers to
provide products and services to its customers and to the Company
itself. The Company has circulated requests for and has received
written confirmations regarding their Y2K compliance from a selected
number of such parties and is expecting responses from the remainder.
All responses to date have indicated that the Company will not
experience disruptions from third parties. Future responses will be
evaluated to determine if additional action is required.
Costs to Address
Given the nature of ongoing system development activities throughout
the businesses, it is difficult to quantify, with specificity, all of
the costs being incurred to address this issue. A significant portion
of these costs will represent the redeployment of existing information
technology resources. The Company's employees have conducted the
majority of the work performed thus far in executing the implementation
plans.
The costs incurred to date are estimated to be approximately $3.8
million, and the estimated costs to complete will comprise an
additional $.6 million. A significant amount of the estimated costs to
complete will be capitalized because such costs represent hardware and
software packages. Some of the prior costs were incurred by the
Company's operating units before they were acquired by the Company. The
new accounting application was purchased primarily to accommodate
expansion and anticipated future acquisitions and secondarily to obtain
Y2K compliance. However, the total cost for the accounting application
is included in the aforementioned amount. The total cost estimate of
the implementation plan may be revised because the plan is constantly
evaluated and revised as a result of many factors. These factors
include, but are not limited to, the results of any phase of the
implementation plan, customer requirements, acquisitions, or
recommendations by business partners. The Company does not expect that
the opportunity costs of executing the implementation plan will have a
material effect on the financial condition of the Company or its
results of operations.
Risks
The Y2K issue creates risk for the Company from unforeseen problems in
its own computer, telephone and security systems and from third parties
upon which the Company relies. Accordingly, the Company is requesting
assurances from certain software vendors from which it has acquired
software, or from which it may acquire software, that the software will
correctly process all date information at all times. The Company exerts
no control over such third party's efforts to become Y2K compliant. The
services provided by these parties are critical to the operations of
the Company and the Company is heavily reliant upon these parties to
successfully address the Y2K issue. Therefore, if any of these parties
fail to provide the Company with services, the Company's ability to
conduct business could be materially impacted. The result of such
impact may have a material adverse effect on the financial condition
and results of operations of the Company.
In addition, the Company is in the process of confirming with certain
of its customers and suppliers their progress in identifying and
addressing problems that their computer systems will face in correctly
processing date information as the year 2000 approaches and is reached.
Failure to appropriately address the Y2K issue by a major customer or
supplier or a material percentage of the smaller customers could have a
material adverse effect on the financial condition and results of
operations of the Company.
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The Company does not expect any material product development activities
to be delayed due to the Y2K compliance efforts; however, if certain
initiatives are delayed, the result could have an adverse effect to the
Company.
Contingency
The Company's Y2K compliance activities are being monitored and
evaluated by the Program Office and ultimately by the Executive
Committee. The Company has significantly developed contingency plans to
deal with issues which may arise in 1999 and 2000. The focus of this
effort is to identify the potential risks associated with mission
critical functions and then to develop appropriate contingency plans.
Such planning is complicated by the risk of multiple year 2000 problems
and the fact that many of the Company's risks reside with outside
parties who may not successfully address their own risks. The areas of
planning include: expected increases in customer upgrade and support
activities, problems caused by customer delays in implementing Company
or third-party upgrades, possible disruptions in the Company's external
support systems and internal systems, employee matters, identification
of manual "work-arounds" for software and hardware failures,
substitution of hardware and software systems, and test exercises of
contingency planning elements. The Company has completed its year 2000
contingency plans. Additional steps are being taken to further minimize
the risks associated with the Y2K issue. For example, all of the
Company's operating units are developing plans to allow for additional
customer support after January 1, 2000 in anticipation of questions
they may receive from their customers, even if the questions do not
relate directly to their products or services.
Summary
There can be no assurance that the Company will identify all
date-handling problems in its business systems or those of its
customers and suppliers in advance of their occurrence or that the
Company will be able to successfully remedy all Y2K compliance issues
that are discovered; however, the Company is working to identify all
issues. The Company believes that necessary modifications to its
products will be made on a timely basis. However, there can be no
guarantee that one or more of the Company's current products do not
contain year 2000 date issues that may result in material costs to the
Company. Additionally, where the Company is evaluating year 2000 issues
for client outsourcing and services contracts, there can be no
assurances that all year 2000 issues will be identified and remediated
and it is possible that the Company may experience increased expenses
in addressing these issues. The most reasonably likely worst case
scenarios would include: issues originating from clients who do not
migrate to current product releases or who experience other year 2000
related problems, corruption of data contained in the Company's
internal IT systems, and failure of infrastructure services provided by
government agencies and other third parties (electricity, banking
services, phone services, water systems, internet services, etc.). It
is possible that any such issue could have a material adverse impact on
the Company's operations and financial results. Some commentators have
stated that a significant amount of litigation will arise out of year
2000 compliance issues. Because of the unprecedented nature of such
litigation, it is uncertain whether or to what extent the Company may
be affected by it.
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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 10 of this document.
Item 6. Exhibits and Reports on Form 8-K
None
(a) Exhibits
Exhibit
Number Exhibit
------- -------
4.3 Credit agreement among Tyler Technologies,
Inc., Bank of America, N.A., Chase Bank of
Texas, N.A., Bank One, Texas, N.A. and Banc
of America Securities LLC
27 Financial Data Schedule (for SEC information
only)
(b) There were no reports filed on Form 8-K during the third
quarter of 1999.
Item 3 of Part I and Items 2, 3, 4 and 5 of Part II were not applicable
and have been omitted.
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: November 12, 1999
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INDEX TO EXHIBITS
EXHIBIT
NUMBER DESCRIPTION
- ------- -----------
4.3 Credit agreement among Tyler Technologies, Inc., Bank of
America, N.A., Chase Bank of Texas, N.A., Bank One,
Texas, N.A. and Banc of America Securities LLC
27 Financial Data Schedule (for SEC information only)
26