-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, V2CVHLSJNgEw3N5ac05QG2b1Ked6LRFcHEpWkzGfyaZXqOtyqvPN2mccPdqzRejD pgo6U0ChUrh+bS/uYbzJ4A== 0000950134-01-501404.txt : 20010511 0000950134-01-501404.hdr.sgml : 20010511 ACCESSION NUMBER: 0000950134-01-501404 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 1 CONFORMED PERIOD OF REPORT: 20010331 FILED AS OF DATE: 20010510 FILER: COMPANY DATA: COMPANY CONFORMED NAME: TYLER TECHNOLOGIES INC CENTRAL INDEX KEY: 0000860731 STANDARD INDUSTRIAL CLASSIFICATION: SERVICES-COMPUTER INTEGRATED SYSTEMS DESIGN [7373] IRS NUMBER: 752303920 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 001-10485 FILM NUMBER: 1627981 BUSINESS ADDRESS: STREET 1: 2800 W MOCKINGBIRD LANE STREET 2: STE 3200 SAN JACINTO TOWER CITY: DALLAS STATE: TX ZIP: 75235 BUSINESS PHONE: 2147547800 MAIL ADDRESS: STREET 1: 2121 SAN JACINTO STREET STREET 2: SUITE 3200 CITY: DALLAS STATE: TX ZIP: 75201 FORMER COMPANY: FORMER CONFORMED NAME: TYLER CORP /NEW/ DATE OF NAME CHANGE: 19930328 FORMER COMPANY: FORMER CONFORMED NAME: TYLER THREE INC DATE OF NAME CHANGE: 19600201 10-Q 1 d86965e10-q.txt FORM 10-Q FOR QUARTER ENDED MARCH 31, 2001 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 March 31, 2001 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934. Commission File Number 1-10485 TYLER TECHNOLOGIES, INC. (Exact name of registrant as specified in its charter) DELAWARE 75-2303920 (State or other jurisdiction of (I.R.S. employer incorporation or organization) identification no.) 2800 WEST MOCKINGBIRD LANE DALLAS, TEXAS 75235 (Address of principal executive offices) (Zip code) (214) 902-5086 (Registrant's telephone number, including area code) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [ ] Number of shares of common stock of registrant outstanding at May 7, 2001: 47,179,371 2 TYLER TECHNOLOGIES, INC. INDEX
PAGE NO. Part I - Financial Information (Unaudited) Item 1. Financial Statements Condensed Consolidated Balance Sheets......................... 3 Condensed Consolidated Statements of Operations............... 4 Condensed Consolidated Statements of Cash Flows............... 5 Notes to Condensed Consolidated Financial Statements.......... 6 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations.................................... 11 Part II - Other Information Item 1. Legal Proceedings............................................ 15 Item 6. Exhibits and Reports on Form 8-K............................. 15 Signatures.......................................................................... 16
2 3 PART I. FINANCIAL INFORMATION Item 1. Financial Statements TYLER TECHNOLOGIES, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEETS (In thousands, except share amounts)
(Unaudited) March 31, December 31, 2001 2000 ----------- ------------ ASSETS Current assets: Cash and cash equivalents $ 517 $ 8,930 Accounts receivable (less allowance for losses of $1,320 in 2001 and $1,505 in 2000) 31,917 36,599 Income tax receivable 501 323 Prepaid expenses and other current assets 2,507 2,465 Deferred income taxes 1,503 1,503 --------- --------- Total current assets 36,945 49,820 Net assets of discontinued operations 8,049 6,339 Property and equipment, net 6,285 6,175 Other assets: Investment securities available-for-sale 8,956 5,092 Goodwill and other intangibles, net 84,476 84,700 Sundry 502 580 --------- --------- $ 145,213 $ 152,706 ========= ========= LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities: Accounts payable $ 3,141 $ 4,906 Accrued liabilities 10,664 11,880 Current portion of long-term obligations 307 353 Net current liabilities of discontinued operations 3,899 5,132 Deferred revenue 19,049 21,066 --------- --------- Total current liabilities 37,060 43,337 Long-term obligations, less current portion 3,366 7,747 Deferred income taxes 3,364 3,543 Other liabilities 1,965 1,957 Commitments and contingencies Shareholders' equity: Preferred stock, $10.00 par value; 1,000,000 shares authorized, none issued -- -- Common stock, $.01 par value; 100,000,000 shares authorized; 48,042,969 shares issued in 2001 and 2000 480 480 Additional paid-in capital 158,776 158,776 Accumulated deficit (49,740) (49,212) Accumulated other comprehensive income - unrealized loss on securities available-for-sale (6,827) (10,691) Treasury stock, at cost; 863,598 and 863,522 shares in 2001 and 2000, respectively (3,231) (3,231) --------- --------- Total shareholders' equity 99,458 96,122 --------- --------- $ 145,213 $ 152,706 ========= =========
See accompanying notes. 3 4 TYLER TECHNOLOGIES, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (In thousands, except per share data) (Unaudited)
For the three months ended March 31, ------------------------------------- 2001 2000 -------- -------- Revenues: Software licenses $ 3,601 $ 3,984 Professional services 11,586 9,028 Maintenance 9,860 7,735 Hardware and other 2,225 1,050 -------- -------- Total revenues 27,272 21,797 Cost of revenues: Software licenses 621 457 Professional services and maintenance 16,190 12,429 Hardware and other 1,840 881 -------- -------- Total cost of revenues 18,651 13,767 -------- -------- Gross profit 8,621 8,030 Selling, general and administrative expenses 7,580 8,507 Amortization of acquisition intangibles 1,737 1,919 -------- -------- Operating loss (696) (2,396) Interest expense 161 883 -------- -------- Loss from continuing operations before income tax benefit (857) (3,279) Income tax benefit (343) (942) -------- -------- Loss from continuing operations (514) (2,337) Loss from operations of discontinued operations, net of income taxes (14) (1,382) -------- -------- Net loss $ (528) $ (3,719) ======== ======== Basic and diluted loss per common share: Continuing operations $ (0.01) $ (0.06) Discontinued operations (0.00) (0.03) -------- -------- Net loss per common share $ (0.01) $ (0.09) ======== ======== Weighted average common shares outstanding: Basic and diluted 47,179 43,291
See accompanying notes. 4 5 TYLER TECHNOLOGIES, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (In thousands) (Unaudited)
Three months ended March 31, ---------------------------- 2001 2000 ------- -------- Cash flows from operating activities: Net loss $ (528) $(3,719) Adjustments to reconcile net loss from operations to net cash used by operations: Depreciation and amortization 2,516 2,395 Deferred income taxes (179) (472) Discontinued operations - noncash charges and changes in operating assets and liabilities (1,409) 1,180 Changes in operating assets and liabilities, exclusive of effects of acquired companies and discontinued operations (471) (305) ------- ------- Net cash used by operating activities (71) (921) ------- ------- Cash flows from investing activities: Additions to property and equipment (672) (596) Software development costs (1,743) (1,746) Cost of acquisitions subsequently discontinued -- (3,073) Assets acquired for discontinued operations (1,342) (1,839) Other 34 (169) ------- ------- Net cash used by investing activities (3,723) (7,423) ------- ------- Cash flows from financing activities: Net borrowings (payments) on revolving credit facility (4,350) 9,150 Payments on notes payable and capital lease obligations (77) (69) Payments on debt of discontinued operations (192) (2,285) ------- ------- Net cash provided (used) by financing activities (4,619) 6,796 ------- ------- Net decrease in cash and cash equivalents (8,413) (1,548) Cash and cash equivalents at beginning of period 8,930 1,987 ------- ------- Cash and cash equivalents at end of period $ 517 $ 439 ======= =======
See accompanying notes. 5 6 Tyler Technologies, Inc. Notes to Condensed Consolidated Financial Statements (Unaudited) (1) Basis of Presentation The accompanying unaudited information for Tyler Technologies, Inc. ("Tyler" or the "Company") includes all adjustments which are, in the opinion of the Company's management, of a normal or recurring nature and necessary for a fair summarized presentation of the condensed consolidated balance sheet at March 31, 2001, and the condensed consolidated results of operations and cash flows for the periods presented. Such financial statements have been prepared in accordance with accounting principles generally accepted in the United States for interim financial information. Accordingly, the financial statements do not include all of the information and footnotes required by accounting principles generally accepted in the United States for complete financial statements. The consolidated results of operations for interim periods may not necessarily be indicative of the results of operations for any other interim period or for the full year and should be read in conjunction with the Company's Annual Report on Form 10-K for the year ended December 31, 2000. The balance sheet at December 31, 2000 has been derived from the audited financial statements at that date but does not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. (2) Discontinued Operations On September 29, 2000, the Company sold for cash certain net assets of Kofile, Inc. ("Kofile") and another subsidiary, the Company's interest in a certain intangible work product, and a building and related building improvements (the "Kofile Sale"). The gain on the Kofile Sale, after transaction costs, amounted to $403,000 (net of an income tax benefit of $200,000) and was recorded during the three month period ended September 30, 2000. Effective December 29, 2000, the Company sold for cash its land records business unit, Business Resources Corporation ("Resources"), including among others, Resources' wholly-owned subsidiaries, Government Records Services, Inc. and Title Records Corporation, to an affiliate of Affiliated Computer Services, Inc. ("ACS") (the "Resources Sale"). The Resources Sale was valued at approximately $71.0 million, consisting of $70.0 million in cash and the assumption by ACS of $1.0 million of capital lease obligations. Concurrent with the Resources Sale, management of the Company with the Board of Director's approval adopted a formal plan of disposal for the remaining businesses and assets of the information and property records services segment. This restructuring program was designed to focus the Company's resources on its software systems and services segment and to reduce debt. The business and assets divested or identified for divesture have been classified as discontinued operations in the accompanying consolidated financial statements with prior periods' financial statements restated to report separately their operations in compliance with Accounting Principle Board ("APB") Opinion No. 30. The gain on the Resources Sale, after transaction costs, amounted to $1.1 million (net of an income tax benefit of $2.2 million) was recorded during the three months ended December 31, 2000. Transaction costs and certain costs directly related to the Resources Sale were estimated to be $4.1 million, including investment banking fees, professional fees, cash payments to departing employees, and approximately $844,000 in connection with the issuance of 500,000 shares of restricted common stock to departing employees. The Company's formal plan of disposal provides for the remaining businesses and assets of the information and property records services segment to be disposed of by December 29, 2001. One of the remaining assets consists of a start-up company which has been engaged in constructing a Web-enabled national repository of public records data. Another remaining business is Capitol Commerce Reporter, Inc. ("CCR"), which was purchased in January 2000 and provides public records research, principally UCCs in Texas. The interdependency of these operations with those of Resources resulted in the Company's decision to discontinue the development of the database and other related products and exit the land records business following the Resources Sale. During the three months ended December 31, 2000, the Company charged discontinued operations for the estimated loss on the disposal on the remaining businesses. The estimated loss on the disposal of these remaining businesses and assets amounted to $13.6 million (after an income tax benefit of $3.8 million), consisting of an estimated loss on disposal of the businesses of $11.5 million (net of an income tax benefit of $2.7 million) and a provision of $2.1 million (after an income tax benefit of $1.1 million) for anticipated operating losses from the measurement date of December 29, 2000 to the estimated disposal dates. The anticipated operating losses to the disposal dates include the effects of the settlement of certain employment contracts, losses on real property leases, severance costs and similar closing related costs. The amounts the Company will ultimately realize could differ materially from the amounts assumed in arriving at the loss on disposal of the discontinued operations. Revenues from the information and property records services segment amounted to $10.7 million for the three months ended March 31, 2000. 6 7 Two of the Company's non-operating subsidiaries are involved in various claims for work-related injuries and physical conditions and for environmental claims relating to a formerly-owned subsidiary that was sold in 1995. For the three months ended March 31, 2001 and 2000, the Company expensed and included in discontinued operations $22,000 (net of taxes of $8,000) and $419,000 (net of taxes of $226,000), respectively, for trial and related costs (See Note 4 - Commitments and Contingencies). (3) Acquisitions, Dispositions and Related Matters On January 3, 2000, the Company acquired CCR. CCR was included in the information and property records services segment, which was discontinued in December 2000. (See Note 2 - Discontinued Operations.) The following unaudited pro forma information (in thousands, except per share data) presents the consolidated results of operations as if the Company's disposition of the information and property records services segment occurred on January 1, 2000, after giving effect to certain adjustments, interest and income tax effects. The pro forma information does not purport to represent what the Company's results of operations actually would have been had such transactions or events occurred on the dates specified, or to project the Company's results of operations for any future period.
THREE MONTHS ENDED MARCH 31, ------------------------------- 2001 2000 -------- -------- Revenues .............................................. $ 27,272 $ 21,797 Loss from continuing operations ....................... $ (514) $ (1,708) Loss from continuing operations per diluted share ..... $ (0.01) $ (0.04)
(4) Commitments and Contingencies Two of the Company's non-operating subsidiaries, Swan Transportation Company ("Swan") and TPI of Texas, Inc. ("TPI"), have been and/or are currently involved in various claims raised by approximately 550 former TPI employees for work related injuries and physical conditions resulting from alleged exposure to silica, asbestos, and/or related industrial dusts during their employment by TPI. Swan was the parent company of TPI, which owned and operated a foundry in Tyler, Texas for approximately 28 years. As non-operating subsidiaries of the Company, the assets of Swan and TPI consist primarily of various insurance policies issued to each company during the relevant time periods. In accordance with a standstill agreement entered into in March 2000, Swan and TPI have tendered the defense and indemnity obligations arising from these claims to their insurance carriers. To date, Swan's insurance carriers have entered into settlement agreements with over 250 of the plaintiffs, each of which agreed to release Swan, TPI, the Company, and its subsidiaries and affiliates from all such claims in exchange for payments made by the insurance carriers. Because of the inherent uncertainties discussed above, it is reasonably possible that the amounts recorded as liabilities for TPI and Swan related matters could change in the near term by amounts that would be material to the consolidated financial statements. (5) Revenue Recognition The Company derives revenue from software licenses, postcontract customer support ("PCS" or "maintenance"), and services. PCS includes telephone support, bug fixes, and rights to upgrade on a when-and-if available basis. Services range from installation, training, and basic consulting to software modification and customization to meet specific customer needs. In software arrangements that include rights to multiple software products, specified upgrades, PCS, and/or other services, the Company allocates the total arrangement fee among each deliverable based on the relative fair value of each of the deliverables as determined based on vendor specific objective evidence. The Company recognizes revenue from software transactions in accordance with Statement of Position 97-2, "Software Revenue Recognition", as amended as follows: 7 8 Software Licenses - The Company recognizes the revenue allocable to software licenses and specified upgrades upon delivery and installation of the software product or upgrade to the end user, unless the fee is not fixed or determinable or collectibility is not probable. If the fee is not fixed or determinable, revenue is recognized as payments become due from the customer. If collectibility is not considered probable, revenue is recognized when the fee is collected. Arrangements that include software services, such as training or installation, are evaluated to determine whether those services are essential to the functionality of other elements of the arrangement. A majority of the Company's software arrangements involve "off-the-shelf" software, and the other elements are not considered essential to the functionality of the software. For those software arrangements in which services are not considered essential, the software license fee is recognized as revenue after delivery and installation have occurred, customer acceptance is reasonably assured, the fee represents an enforceable claim and probable of collection and the remaining services such as training are considered nominal. Software Services - When software services are considered essential, revenue under the entire arrangement is recognized as the services are performed using the percentage-of-completion contract accounting method. When software services are not considered essential, the fee allocable to the service element is recognized as revenue as the services are performed. Computer Hardware Equipment - Revenue allocable to equipment based on vendor specific evidence of fair value is recognized when the equipment is delivered and collection is probable. Postcontract Customer Support - PCS agreements are generally entered into in connection with initial license sales and subsequent renewals. Revenue allocated to PCS is recognized on a straight-line basis over the period the PCS is provided. All significant costs and expenses associated with PCS are expensed as incurred. Contract Accounting - For arrangements that include customization or modification of the software, or where software services are otherwise considered essential, or for real estate mass appraisal projects, revenue is recognized using contract accounting. Revenue from these arrangements is recognized on a percentage-of-completion method with progress-to-completion measured based primarily upon labor hours incurred or units completed. Deferred revenue consists primarily of payments received in advance of revenue being earned under software licensing, software and hardware installation, support and maintenance contracts. (6) Earnings Per Share In accordance with Statement of Financial Accounting Standards ("SFAS") No. 128 "Earnings per Share", the Company has presented basic income (loss) per share, computed on the basis of the weighted average number of common shares outstanding during the period, and diluted income (loss) per share, computed on the basis of the weighted average number of common shares and all dilutive potential common shares outstanding during the period. The Company incurred a loss from continuing operations for the three-month periods ended March 31, 2001 and 2000. As a result, the denominator was not adjusted for dilutive securities in these periods, as the effect would have been antidilutive. (7) Income Tax Provision For the three months ended March 31, 2001, the Company had a loss from continuing operations before income taxes of $857,000, and an income tax benefit of $343,000. The resulting effective tax rate for the three-month period was 40%. For the three months ended March 31, 2000, the Company had a loss from continuing operations before income taxes of $3.3 million, and an income tax benefit of $942,000. The effective tax rate for this three month period was 29%. The effective tax rates are estimated based on projected operating income for the year and the resulting amount of income taxes, and the effective rates for the three month period ended March 31, 2001 and 2000 were different from the statutory United States federal income tax rate of 35% due to non-deductible items such as goodwill amortization as compared to the relative amount of pretax earnings or loss. (8) Investment Securities Available-for-Sale Pursuant to an agreement with two major shareholders of H.T.E., Inc. ("HTE"), the Company acquired approximately 32% of HTE's common stock in two separate transactions in 1999. On August 17, 1999, the Company exchanged 2.3 million shares of its common stock for 4.7 million shares of HTE common stock. This initial investment was recorded at $14.0 million. The second transaction occurred on December 21, 1999, in which the Company exchanged 484,000 shares of its common stock for 969,000 8 9 shares of HTE common stock. The additional investment was recorded at $1.8 million. The investment in HTE common stock is classified as a non-current asset since it was made for a continuing business purpose. Florida state corporation law restricts the voting rights of "control shares", as defined, acquired by a third party in certain types of acquisitions, which restrictions may be removed by a vote of the shareholders. The courts have not interpreted the Florida "control share" statute. HTE has taken the position that, under the Florida statute, all of the shares acquired by the Company constitute "control shares" and therefore do not have voting rights until such time as shareholders of HTE, other than the Company, restore voting rights to those shares. Management of the Company believes that only the shares acquired in excess of 20% of the outstanding shares of HTE constitute "control shares" and therefore believes it currently has the right to vote all HTE shares it owns up to at least 20% of the outstanding shares of HTE. On November 16, 2000, the shareholders of HTE, other than Tyler, voted to deny the Company its right to vote the "control shares" of HTE. Accordingly, the Company accounts for its investment in HTE pursuant to the provisions of SFAS No. 115, "Accounting for Certain Investments in Debt and Equity Securities". These securities are classified as available-for-sale and are recorded at fair value as determined by quoted market prices. Unrealized holding gains and losses, net of the related tax effect, on available-for-sale securities are excluded from earnings and are reported as a separate component of shareholders' equity until realized. Realized gains and losses from the sale of available-for-sale securities are determined on a specific identification basis. The cost, fair value and gross unrealized holding losses of the investment securities available-for-sale amounted to the following, based on the quoted market price for HTE common stock:
Gross Unrealized Per Share Cost Fair Value Holding Gains (Losses) --------- ------- ---------- ---------------------- March 31, 2001 $ 1.59 $ 15.8 $ 9.0 $ (6.8) December 31, 2000 0.91 15.8 5.1 (10.7) March 31, 2000 3.22 15.8 18.1 2.3 May 7, 2001 1.90 15.8 10.7 (5.1)
A decline in the market value of any available for sale security below cost that is deemed to be other than temporary results in a reduction in the carrying amount to fair value. The impairment is charged to earnings and a new cost basis for the security is established. At this time, management of the Company does not believe the decline in the market value is other than temporary. In making this determination, management concluded it has both the intent and the ability to hold the investment for a period of time sufficient to allow for the anticipated recovery in fair value. Other conditions considered, among others, included the conditions in the local government software industry, the financial condition of the issuer, and recent favorable public statements by the issuer concerning its future prospects. If the uncertainty regarding the voting shares is resolved in the Company's favor, the Company will retroactively adopt the equity method of accounting for this investment. Therefore, the Company's results of operations and retained earnings for periods beginning with the 1999 acquisition will be retroactively restated to reflect the Company's investment in HTE for all periods in which it held an investment in the voting stock of HTE. Under the equity method, the original investment is recorded at cost and is adjusted periodically to recognize the investor's share of earnings or losses after the respective dates of acquisition. The Company's investment in HTE would include the unamortized excess of the Company's investment over its equity in the net assets of HTE. This excess would be amortized on a straight-line basis over the estimated economic useful life of ten years. Had the Company's investment in HTE been accounted for under the equity method, the Company's investment at March 31, 2001 would have been $11.5 million and the equity in loss of HTE for the three months ended March 31, 2001 would have been $513,000. At March 31, 2000, the Company's investment would have been $13.2 million and the equity in loss of HTE for the three months ended March 31, 2000 would have been $1.3 million. 9 10 (9) Long-term Obligations In December 2000, the Company amended its revolving credit agreement with a group of banks (the "Senior Credit Facility") to provide for total borrowings of up to $15.0 million and a maturity date of July 1, 2002. Borrowings under the Senior Credit Facility, as amended, initially bear interest at the lead bank's prime rate plus a margin of 2.00%, which margin increases by 0.50% quarterly through January 1, 2002. Borrowings under the Senior Credit Facility are limited to 80% of eligible accounts receivable. At March 31, 2001, the Company had outstanding borrowings of $400,000 and an unused available borrowing capacity of $12.3 million under the Senior Credit Facility. The interest rate at March 31, 2001 was 10.0%. The effective average interest rates for borrowings during the three months ended March 31, 2001 and 2000 were 11.0% and 8.9%, respectively. The Senior Credit Facility is secured by substantially all of the Company's real and personal property and by a pledge of its common stock of present and future significant operating subsidiaries. The Senior Credit Facility is also guaranteed by such subsidiaries. Under the terms of the Senior Credit Facility, the Company is required to maintain certain financial ratios and other financial conditions. The Senior Credit Facility also prohibits the Company from making certain investments, advances or loans and restricts substantial asset sales, capital expenditures and cash dividends. At March 31, 2001, the Company is in compliance with its various covenants under the Senior Credit Facility, as amended. (10) Comprehensive Income (Loss) For the three months ended March 31, 2001, the Company had a total comprehensive income of $3.3 million, consisting of a net loss of $528,000 and an unrealized gain of $3.9 million, associated with the decrease in the unrealized loss on securities classified as available-for-sale. Total comprehensive loss for the three months ended March 31, 2000 was $19.3 million, including an unrealized loss of $15.6 million associated with securities classified as available-for-sale. (11) Adoption of Accounting Pronouncements In June 1999, SFAS No. 137 "Accounting for Derivative Instruments and Hedging Activities-Deferral of Effective Date of FASB Statement No. 133" was issued by the Financial Accounting Standards Board ("FASB"). The Statement deferred for one year the effective date of FASB Statement No. 133, "Accounting for Derivative Instruments and Hedging Activities". The rule now applies to all fiscal years beginning after June 15, 2000. FASB Statement No. 133 requires the Company to recognize all derivatives on the balance sheet at fair value. Derivatives that are not hedges must be adjusted to fair value through income. If the derivative is a hedge, depending on the nature of the hedge, changes in the fair value of derivatives are offset against the change in fair value of the hedged assets, liabilities, or firm commitments through earnings or recognized in other comprehensive income until the hedged item is recognized in earnings. The adoption of SFAS No. 133 as of January 1, 2000, did not have a material impact on the Company's consolidated financial statements and related disclosures. (12) Segment and Related Information The Company has adopted SFAS No. 131, "Disclosures About Segments of an Enterprise and Related Information", which establishes standards for reporting information about operating segments. As this statement pertains to disclosure and informational requirements, it has no impact on the Company's operating results or financial position. Although the Company has a number of operating subsidiaries, separate segment data has not been presented as they meet the criteria set forth in SFAS No. 131 for aggregation. (13) Reclassifications As a result of the implementation of a new management information system, the Company has been able to more accurately allocate certain costs between cost of revenues and selling, general and administrative expense. Accordingly, certain amounts for previous years have been reclassified to conform to the 2001 presentation. 10 11 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS FORWARD-LOOKING STATEMENTS This Quarterly Report on Form 10-Q contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. All statements other than historical or current facts, including, without limitation, statements about the business, financial condition, business strategy, plans and objectives of management, and prospects of the Company are forward-looking statements. Although the Company believes that the expectations reflected in such forward-looking statements are reasonable, such forward-looking statements are subject to risks and uncertainties that could cause actual results to differ materially from these expectations. Such risks and uncertainties include, without limitation, the ability of the Company to successfully integrate the operations of acquired companies, technological risks associated with the development of new products and the enhancement of existing products, changes in the budgets and regulating environments of the Company's government customers, the ability to attract and retain qualified personnel, changes in product demand, the availability of products, changes in competition, economic conditions, changes in tax risks and other risks indicated in the Company's filings with the Securities and Exchange Commission. These risks and uncertainties are beyond the ability of the Company to control, and in many cases, the Company cannot predict the risks and uncertainties that could cause its actual results to differ materially from those indicated by the forward-looking statements. When used in this Quarterly Report, the words "believes," "plans," "estimates," "expects," "anticipates," "intends," "continue," "may," "will," "should", "projects", "forecast", "might", "could" or the negative of such terms and similar expressions as they relate to the Company or its management are intended to identify forward-looking statements. GENERAL The Company provides county, local and municipal governments with software systems and services to serve their information technology and automation needs. The Company's software products are integrated with computer equipment from hardware vendors, third-party database management applications and office automation software. In addition, the Company also assists local and county governments with all aspects of software and hardware selection, network design and management, installation and training and on-going support and related services. The Company also provides mass property appraisal services to taxing jurisdictions, including physical inspection of all properties in the assessing jurisdiction, data collection and processing, computer analysis for property valuation and preparation of tax rolls. The Company discontinued the operations of its information and property records services segment in December 2000 (See Note 2 for discussion of discontinued businesses). ANALYSIS OF RESULTS OF OPERATIONS REVENUES Revenues from continuing operations were $27.3 million for the three months ended March 31, 2001, an increase of 25% over the $21.8 million reported for the three months ended March 31, 2000. Revenues from software licenses declined $383,000 for the three months ended March 31, 2001, from $3.9 million for the three months ended March 31, 2000. The decrease was due in part to customers delaying purchases in anticipation of selected financial and city solution software modules which are scheduled to be released later this year. Revenues from professional services grew 28% from $9.0 million for the three months ended March 31, 2000, to $11.6 million for the three months ended March 31, 2001. Professional services for the three month period ended March 31, 2001, included approximately $2.5 million of appraisal services relating to the Company's contract with Nassau County, New York Board of Assessors ("Nassau County"). The Nassau County contract to reassess all residential and commercial properties in Nassau County and provide assessment administration software and training to help maintain equity and manage the property tax process is valued at $34.0 million. Implementation of the Nassau County contract began in September 2000 and is expected to be completed late 2002. Maintenance revenue was $9.9 million for the three months ended March 31, 2001, an increase of 27% over the $7.7 million for the comparable prior year period. The increase was due to an increase in the Company's base of installed software and systems products and maintenance rate increases for several product lines. Maintenance 11 12 and support services are provided for the Company's software products, including property appraisal products, and third party software and hardware. Hardware and other revenues increased to $2.2 million in the first quarter of 2001, from $1.1 million in the first quarter of 2000. The increase in hardware and other revenues was primarily due to $850,000 of hardware included in the Nassau County and State of Hawaii contracts. COST OF REVENUES For the three months ended March 31, 2001, cost of revenues was $18.7 million, compared to $13.8 million for the three months ended March 31, 2000, respectively. The increase in cost of revenues was primarily due to the increase in revenues. Overall gross margin was 32% for the three months ended March 31, 2001, compared to 37% for the three months ended March 31, 2000. During the first quarter of 2001, cost of revenues included amortization of post acquisition software development costs for which there were no comparable amortization costs in the first quarter of 2000. Software development costs, which consist primarily of personnel costs, are not amortized until the general release of the related software licenses occur. In addition, gross margin was negatively impacted because the product mix in the first quarter of 2001 included more lower margin appraisal service and hardware revenues as compared to the first quarter of 2000. The change in product mix is due mainly to the Company's larger contracts, specifically its contract with Nassau County. SELLING, GENERAL AND ADMINISTRATIVE EXPENSES Selling, general and administrative expenses for the three months ended March 31, 2001, were $7.6 million, compared to $8.5 million in the comparable prior year period. Selling, general and administrative expenses as a percentage of revenues was 28% and 39% for the three months ended March 31, 2001 and 2000, respectively. The selling, general and administrative expense comparisons were positively impacted primarily by the higher sales volume. The decline in selling, general and administrative expense was due to lower research and development costs which were expensed as well as a reduction in corporate costs following the sale of the information and property records services segment. AMORTIZATION OF ACQUISITION INTANGIBLES The Company has accounted for all acquisitions using the purchase method of accounting for business combinations. Unallocated purchase price over the fair value of net identifiable assets of the acquired companies ("goodwill") and intangibles associated with acquisition is amortized using the straight-line method of amortization over their respective useful lives beginning when a company is first acquired. INTEREST EXPENSE Interest expense was $161,000 and $883,000 for the three months ended March 31, 2001 and 2000, respectively. Interest expense declined mainly due to a significant reduction in debt volume as the proceeds from the sale of Business Resources Corporation ("Resources") to Affiliated Computer Services ("ACS") (see Note 2) were used to pay down debt. In addition, in connection with certain internally developed software projects, the Company capitalized $145,000 of interest costs in the three months ended March 31, 2001, while no interest costs for continuing operations were capitalized in the comparable prior year period. INCOME TAX PROVISION For the three months ended March 31, 2001, the Company had a loss from continuing operations before income taxes of $857,000, and an income tax benefit of $343,000. The resulting effective tax rate for the three-month period was 40%. For the three months ended March 31, 2000, the Company had a loss from continuing operations before income taxes of $3.3 million, and an income tax benefit of $942,000. The effective tax rate for this three month period ended March 31, 2000 was 29%. The effective tax rates are estimated based on projected operating income for the year and the resulting amount of income taxes, and the effective rates for the three months ended March 31, 2001 and 2000 were different from the statutory United States Federal income tax rate of 35% due to non-deductible items such as goodwill amortization as compared to the relative amount of pretax earnings or loss. 12 13 DISCONTINUED OPERATIONS On September 29, 2000, the Company sold for cash certain net assets of Kofile, Inc. ("Kofile") and another subsidiary, the Company's interest in a certain intangible work product, and a building and related building improvements (the "Kofile sale"). The gain on the Kofile Sale after transaction costs, amounted to $403,000 (net of an income tax benefit of $200,000) and was recorded during the three month period ended September 30, 2000. Effective December 29, 2000, the Company sold for cash its land records business unit, Resources, including among others, Resources' wholly-owned subsidiaries Government Records Services, Inc. and Title Records Corporation, to an affiliate of ACS (the "Resources Sale"). The Resources Sale was valued at approximately $71.0 million, consisting of $70.0 million in cash and the assumption by ACS of $1.0 million of capital lease obligations. Concurrent with the Resources Sale, management of the Company with the Board of Director's approval adopted a formal plan of disposal for the remaining businesses and assets of the information and property records services segment. This restructuring program was designed to focus the Company's resources on its software systems and services segment and to reduce debt. The business and assets divested or identified for divesture have been classified as discontinued operations in the accompanying consolidated financial statements with prior periods' financial statements restated to report separately their operations in compliance with Accounting Principle Board ("APB") Opinion No. 30. The gain on the Resources Sale, after transaction costs, amounted to $1.1 million (net of an income tax benefit of $2.2 million) was recorded during the three months ended December 31, 2000. Transaction costs and certain costs directly related to the Resources Sale were estimated to be $4.1 million and included investment banking fees, professional fees, cash payments to departing employees, and approximately $844,000 in connection with the issuance of 500,000 shares of restricted common stock to departing employees. The Company's formal plan of disposal provides for the remaining businesses and assets of the information and property records services segment to be disposed of by December 29, 2001. One of the remaining assets consists of a start-up company which has been engaged in constructing a Web-enabled national repository of public records data. Another remaining business is Capitol Commerce Reporter, Inc. ("CCR"), which was purchased in January 2000 and provides public records research, principally UCCs in Texas. The interdependency of these operations with those of Resources resulted in the Company's decision to discontinue the development of the database and other related products and exit the land records business following the Resources Sale. During the three months ended December 31, 2000, the Company charged discontinued operations for the estimated loss on the disposal on the remaining businesses. The estimated loss on the disposal of these remaining businesses and assets amounted to $13.6 million (after an income tax benefit of $3.8 million), consisting of an estimated loss on disposal of the businesses of $11.5 million (net of an income tax benefit of $2.7 million) and a provision of $2.1 million (after an income tax benefit of $1.1 million) for anticipated operating losses from the measurement date of December 29, 2000 to the estimated disposal dates. The anticipated operating losses to the disposal dates include the effects of the settlement of certain employment contracts, losses on real property leases, severance costs and similar closing related costs. The amounts the Company will ultimately realize could differ materially from the amounts assumed in arriving at the loss on disposal of the discontinued operations. Revenues from the information and property records services segment amounted to $10.7 million for the three months ended March 31, 2000. Two of the Company's non-operating subsidiaries are involved in various claims for work-related injuries and physical conditions and for environmental claims relating to a formerly owned subsidiary that was sold in 1995. For the three months ended March 31, 2001 and 2000, the Company expensed $22,000 (net of taxes of $8,000) and $419,000 (net of taxes of $226,000), respectively, for trial and related costs (See Note 4 Commitments and Contingencies). NET LOSS AND OTHER MEASURES Net loss was $528,000 for the three months ended March 31, 2001, compared to net loss of $3.7 million for the three months ended March 31, 2000. Net loss from continuing operations was $514,000 for the three months ended March 31, 2001 compared to $2.3 million for the three months ended March 31, 2000. For the three months ended March 31, 2001, diluted loss per share from continuing operations was $0.01, compared to $0.06 for the three months ended March 31, 2000. Earnings before interest, taxes, depreciation and amortization ("EBITDA") from continuing operations for the three months ended March 31, 2001, was $1.8 million compared to a loss before interest, taxes, depreciation and amortization of $1,000 for the 13 14 comparable prior year periods. EBITDA consists of income or loss from continuing operations before interest, income taxes, depreciation and amortization. Although EBITDA is not calculated in accordance with accounting principles generally accepted in the United States, the Company believes that EBITDA is widely used as a measure of operating performance. Nevertheless, the measure should not be considered in isolation or as a substitute for operating income, cash flows from operating activities, or any other measure for determining the Company's operating performance or liquidity that is calculated in accordance with accounting principles generally accepted in the United States. EBITDA is not necessarily indicative of amounts that may be available for reinvestment in the Company's business or other discretionary uses. In addition, since all companies do not calculate EBITDA in the same manner, this measure may not be comparable to similarly titled measures reported by other companies. Cash flows used by operating activities for the three months ended March 31, 2001 and 2000 were $71,000 and $921,000, respectively. FINANCIAL CONDITION AND LIQUIDITY In December 2000, the Company amended its revolving credit agreement with a group of banks ("Senior Credit Facility") to provide for total borrowings of up to $15.0 million and a maturity date of July 1, 2002. Borrowings under the Senior Credit Facility, as amended, initially bear interest at the lead bank's prime rate plus a margin of 2.00%, which margin increases by 0.50% quarterly through January 1, 2002. Borrowings under the Senior Credit Facility are limited to 80% of eligible accounts receivable. At March 31, 2001, the Company had outstanding borrowings of $400,000 and unused available borrowing capacity of $12.3 million under the Senior Credit Facility. The interest rate at March 31, 2001 was 10.0%. The effective average interest rates for borrowings during the first quarters of 2001 and 2000 were 11.0% and 8.9%, respectively. In addition, at March 31, 2001, the Company had several promissory notes payable, and other installment notes totaling $3.3 million (including current portion of $307,000). Fixed interest rates on the promissory and installment notes ranged from 6.1% to 10.0%. The Company made principal payments of $77,000 on these notes during the first quarter of 2001. For the three months ended March 31, 2001, the Company made capital expenditures of $2.4 million for continuing operations. These expenditures included $1.7 million relating to software development. The remaining expenditures were primarily for computer equipment and expansions required for internal growth. In connection with the software development, the Company capitalized interest costs of $145,000 for the three months ended March 31, 2001. The Company capitalized no similar interest costs for continuing operations during the three months ended March 31, 2000. The Company also purchased a formerly leased building for $1.3 million in connection with an existing obligation of the discontinued information and property records service segment. The building, which is held for sale, is included in net assets of discontinued operations on the condensed consolidated balance sheet at March 31, 2001. These expenditures were primarily funded by borrowings under the Company's Senior Credit Facility. On November 4, 1999, the Company purchased Cole Layer Trumble Company ("CLT") from a privately held company ("Seller"). A portion of the consideration consisted of restricted shares of Tyler common stock and included a price protection on the future sale of the Company's common stock by the Seller, which expires late 2001. The price protection is equal to the difference between the actual sale proceeds of the Tyler common stock and $6.25 on a per share basis, but is limited to $2.8 million. The purchase agreement contained a number of post-closing adjustments and, in addition, certain CLT customers inadvertently submitted post-closing cash receipts to the Seller. As a result of this activity, the Company has recorded a receivable from the Seller amounting to $1.3 million at March 31, 2001. 14 15 Part II. OTHER INFORMATION Item 1. Legal Proceedings For a discussion of legal proceedings see Part I, Item 1. "Financial Statements - Notes to Condensed Consolidated Financial Statements - Commitments and Contingencies" on page 7 of this document. Item 6. Exhibits and Reports on Form 8-K (a) Exhibit None. (b) Reports on Form 8-K Form 8-K Item Reported Date Reported Exhibits Filed 1/16/01 2 Stock Purchase Agreement dated December 29, 2000 among Affiliated Computer Services, Inc., ACS Enterprise Solutions, Inc., Tyler Technologies, Inc. and Business Resources Corporation. 5 Authorization of disposition by the Board of Directors of Tyler Technologies, Inc., of the remaining operations of the information and property records services segment. 7(b) Pro forma condensed consolidated financial statements as of September 30, 2000 and for the year ended December 31, 1999 and the nine months ended September 30, 2000. Item 3 of Part I and Items 2, 3, 4, and 5 of Part II were not applicable and have been omitted. 15 16 Pursuant to the requirements of the Securities Exchange Act of 1934, the Company has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. TYLER TECHNOLOGIES, INC. By: /s/ Theodore L. Bathurst ----------------------------------------------- Theodore L. Bathurst Vice President and Chief Financial Officer (principal financial officer and an authorized signatory) By: /s/ Terri L. Alford ----------------------------------------------- Terri L. Alford Controller (principal accounting officer and an authorized signatory) Date: May 10, 2001 16 -----END PRIVACY-ENHANCED MESSAGE-----