-----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, J8hJ6DGObse1A0HOq7kE6L0K1CTwIRQWxZmuZ22qNt4fg6eU2xdDO2JMXeCnJ1Ed nQHfAE3xSWbZXk7FIfFXbw== 0000950134-03-003229.txt : 20030228 0000950134-03-003229.hdr.sgml : 20030228 20030228145636 ACCESSION NUMBER: 0000950134-03-003229 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 7 CONFORMED PERIOD OF REPORT: 20021231 FILED AS OF DATE: 20030228 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-K SEC ACT: 1934 Act SEC FILE NUMBER: 001-10485 FILM NUMBER: 03586321 BUSINESS ADDRESS: STREET 1: 2800 W MOCKINGBIRD LANE 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 THREE INC DATE OF NAME CHANGE: 19600201 FORMER COMPANY: FORMER CONFORMED NAME: TYLER CORP /NEW/ DATE OF NAME CHANGE: 19930328 10-K 1 d03636e10vk.txt FORM 10-K ================================================================================ SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 --------------- FORM 10-K [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES AND EXCHANGE ACT OF 1934 For the Fiscal Year Ended December 31, 2002 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 (I.R.S. employer of incorporation or identification no.) organization) 5949 SHERRY LANE, SUITE 1400 75225 DALLAS, TEXAS (Zip code) (Address of principal executive offices) Registrant's telephone number, including area code: (972) 713-3700 --------------- Securities registered pursuant to Section 12(b) of the Act: NAME OF EACH EXCHANGE TITLE OF EACH CLASS ON WHICH REGISTERED - -------------------------------- ------------------------- COMMON STOCK, $0.01 PAR VALUE NEW YORK STOCK EXCHANGE Securities registered pursuant to Section 12(g) of the Act: NONE --------------- 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 [ ] INDICATE BY CHECK MARK IF DISCLOSURE OF DELINQUENT FILERS PURSUANT TO ITEM 405 OF REGULATION S-K IS NOT CONTAINED HEREIN, AND WILL NOT BE CONTAINED, TO THE BEST OF REGISTRANT'S KNOWLEDGE, IN DEFINITIVE PROXY OR INFORMATION STATEMENTS INCORPORATED BY REFERENCE IN PART III OF THE FORM 10-K OR ANY AMENDMENT TO THIS FORM 10-K. YES [X] NO [ ] THE AGGREGATE MARKET VALUE OF THE VOTING STOCK HELD BY NON-AFFILIATES OF THE REGISTRANT ON FEBRUARY 25, 2003 WAS $166,250,000. THE NUMBER OF SHARES OF COMMON STOCK OF THE REGISTRANT OUTSTANDING ON FEBRUARY 25, 2003 WAS 42,737,736. DOCUMENTS INCORPORATED BY REFERENCE CERTAIN INFORMATION REQUIRED BY PART III OF THIS ANNUAL REPORT IS INCORPORATED BY REFERENCE FROM THE REGISTRANT'S DEFINITIVE PROXY STATEMENT FOR ITS ANNUAL MEETING OF STOCKHOLDERS TO BE HELD ON May 1, 2003. ================================================================================ TYLER TECHNOLOGIES, INC. FORM 10-K TABLE OF CONTENTS
PAGE ---- PART I Item 1. Business............................................................................ 3 Item 2. Properties.......................................................................... 9 Item 3. Legal Proceedings................................................................... 9 Item 4. Submission of Matters to a Vote of Security Holders................................. 11 PART II Item 5. Market for Registrant's Common Equity and Related Stockholder Matters............... 11 Item 6. Selected Financial Data............................................................. 12 Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations....................................................................... 14 Item 7A. Quantitative and Qualitative Disclosures About Market Risk.......................... 30 Item 8. Financial Statements and Supplementary Data......................................... 30 Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.......................................................................... 30 PART III Item 10. Directors and Executive Officers of the Registrant.................................. 31 Item 11. Executive Compensation.............................................................. 31 Item 12. Security Ownership of Certain Beneficial Owners and Management...................... 31 Item 13. Certain Relationships and Related Transactions...................................... 31 PART IV Item 14. Controls and Procedures............................................................. 31 Item 15. Exhibits, Financial Statement Schedule and Reports on Form 8-K...................... 32 Signatures...................................................................................... 35
2 PART I ITEM 1. BUSINESS. DESCRIPTION OF BUSINESS Tyler Technologies, Inc. ("Tyler") is a leading provider of integrated information management solutions and services for local governments. We partner with clients to make local government more accessible to the public, more responsive to the needs of citizens and more efficient in its operations. We have a broad line of software products and services to address the information technology ("IT") needs of virtually every major area of operation for cities, counties, schools and other local government entities. Most of our customers have our software installed in-house. For customers who prefer not to physically acquire the software and hardware, we provide outsourced hosting for some of our applications at one of our data centers through an applications service provider ("ASP") arrangement. We provide professional IT services to our customers, including software and hardware installation, data conversion, training and, at times, product modifications. In addition, we are the nation's largest provider of outsourced property appraisal services for taxing jurisdictions. We also provide continuing customer support services to ensure proper product performance and reliability, which provides us with long-term customer relationships and a significant base of recurring maintenance revenue. Tyler was founded in 1966. Prior to early 1998, we operated as a diversified industrial conglomerate, with diversified operations in various industrial, retail and distribution businesses, all of which have been sold. In 1997, we embarked on a multi-phase growth plan focused on serving the specialized information management needs of local governments nationwide. In 1998 and 1999, we made a series of strategic acquisitions of leading companies in the local government IT market. In addition to our continuing operations in the software and services business described above, we also operated from 1998 through 2000 a business segment focused on providing outsourced property records management for local governments and reselling related data. In late 2000, we decided to dispose of the information and property records services segment in order to strengthen our balance sheet and allow us to focus our resources on the segment of business that we believe offers the greatest growth and profit opportunities. We expect to continue to capitalize on these opportunities by leveraging our large national client base, our long-term relationships with local government customers, and our deep domain expertise in local government operations through the development of state-of-the-art technologies and new nationally branded applications solutions. We began in 2000 and are continuing to develop a new generation of some of our software products based on n-tier architecture, SQL-compliant databases, browser compatibility and component-based technology. Our historical revenues from continuing operations have grown from $23.4 million in 1998 to $133.9 million in 2002. In addition to growth through acquisitions, our business units have experienced significant internal growth during this period. On a pro forma basis, revenues from continuing operations have grown from $83.7 million in 1998 to $133.9 million in 2002. MARKET OVERVIEW The state, local and municipal government market is one of the largest and most decentralized IT markets in the country, consisting of all 50 states, approximately 3,200 counties, and over 40,000 municipalities and other agencies. This market is also comprised of hundreds of various government agencies, each with specialized delegated responsibilities and unique information management requirements. Traditionally, local government bodies and agencies performed state-mandated duties, including property assessment, record keeping, road maintenance, law enforcement, administration of election and judicial functions, and the provision of welfare assistance. Today, a host of emerging and urgent issues are confronting local governments, each of which demands a service response. These areas include criminal justice and corrections, administration and finance, public safety, health and human services, and public works. Transfers of responsibility from the federal and state governments to county and municipal governments and agencies in these and other areas also place additional service and financial requirements on these local government units. In addition, constituents of local governments are increasingly demanding improved service and better access to information from public entities. As a result, local governments recognize the increasing value of information management systems and services to, among other things, improve revenue collection, provide increased access to information, and streamline delivery of services to their constituents. Local government bodies are now recognizing that "e-government" is an additional responsibility for community development. From integrated tax systems to integrated civil and criminal justice information systems, many counties and cities have benefited significantly from the implementation of jurisdiction-wide systems that allow different agencies or government offices to share data 3 and provide a more comprehensive approach to information management. Many city and county governmental agencies also have unique individual information management requirements, which must be tailored to the specific functions of each particular office. Many local governments also have difficulties attracting and retaining the staff necessary to support their IT functions. As a result, they seek to establish long-term relationships with reliable providers of high quality IT products and services such as Tyler. Although local governments generally face budgetary constraints in their operations, the primary revenue source of local government is property tax, which tends to be a relatively stable source of revenue. In addition, the acquisition of technology typically enables local government to operate more efficiently, and often provides a measurable return on investment that justifies the purchase of software and related services. Gartner Dataquest currently estimates that state and local government spending for information technology products and services will grow from $44 billion in 2002 to $56 billion in 2005. The external services and software segments of the market, in which we are primarily focused, are expected to be the most rapidly growing areas of the local government IT market. PRODUCTS AND SERVICES We provide a comprehensive and flexible suite of products and services that address the information technology needs of cities, counties, schools and other local government entities. We derive our revenues from four primary sources: - software licensing; - software services; - appraisal services; and - maintenance and support. We design, develop and market a broad range of software products to serve mission-critical "back-office" functions of local governments. Our software applications are designed primarily for use on hardware supporting UNIX/NT operating systems. Many of our software applications include Internet-accessible solutions that allow for real-time public access to a variety of information or that allow the public to transact business with local governments via the Internet. Our products and services are generally grouped in four major areas: - Financial and City Solutions; - Justice and Courts; - Property Appraisal and Tax; and - Recording. Each of our core software systems consists of several fully integrated application modules. For customers who acquire the software for use in-house, we generally license our systems under standard license agreements which provide the customer with a fully-paid, nonexclusive, nontransferable right to use the software. In some of the product areas, such as financials and property tax, we offer multiple solutions designed to meet the needs of different sized governments. We also offer certain software products on an outsourced basis for customers who do not wish to maintain, update and operate these systems or to make large up-front capital expenditures to implement these advanced technologies. For these customers, we either host the applications and data at one of our data centers, or maintain the hardware and software at the client's site. Customers typically pay monthly fees under multi-year contracts for these services. Historically we have had a higher concentration of sales in the second half of our fiscal year due to governmental budget and spending tendencies. 4 Financial and City Solutions Our Financial and City Solutions products include modular fund accounting systems that can be tailored to meet the needs of virtually any government agency or not-for-profit entity. Our financial systems include modules for general ledger, budget preparation, fixed assets, purchasing, accounts payable, investment management, payroll and human resources. All of our financial systems conform to government auditing and financial reporting requirements and generally accepted accounting principles. We sell utility billing systems that support the billing and collection of metered and non-metered services, along with multiple billing cycles. Our Web-enabled utility billing solutions allow customers to access information online such as average consumption and transaction history. In addition, our systems can accept secured Internet payments via credit cards and checks. We also offer specialized products that automate numerous city functions, including equipment and project costing, inventory, business licenses, permits and inspections, citizen complaint tracking, ambulance billing, fleet maintenance, and cemetery records management. Justice and Courts We offer a complete integrated suite of products designed to automate, track and manage the law enforcement and judicial process, from the initiation of incidents in computer-aided dispatch/emergency 911 systems through the process of arrest, court appearances and final disposition to probation. These applications may be installed on a stand-alone basis or integrated with our other products to eliminate duplicate entries and improve efficiency. Our Web-enabled court systems are designed to automate the tracking and management of information involved in criminal and civil court cases, including municipal, family and probate courts. These applications track the status of criminal and civil cases, process fines and fees and generate the specialized judgment and sentencing documents, citations, notices and forms required in court proceedings. Additional judicial applications automate the management of court calendars, coordinate judge's schedules, generate court dockets, manage justice of the peace processes and automate district attorney and prosecutor functions. Related products include jury selection, "hot" check processing, and adult and juvenile probation management applications. Our courtroom technologies allow judges to review cases, calendars, and to scan documents and mug shots using a Web browser. Additionally, document-imaging options include the ability to scan, store, retrieve and archive a variety of criminal and civil case-related documents. Our law enforcement systems automate police and sheriff functions from dispatch and records management through booking and jail management. Searching, reporting and tracking features are integrated, allowing reliable, up-to-date access to current arrest and incarceration data. The systems also provide warrant checks for visitors or book-ins, inmate classification and risk assessment, commissary, property and medical processing, and automation of statistics and state and federal reporting. Our computer-aided dispatch/emergency E-911 system tracks calls and the availability of emergency response vehicles, interfaces with local and state searches, and generally assists dispatchers in processing emergency situations. The law enforcement and jail management systems are fully integrated with the suite of court products that manage the judicial process. Our court and law enforcement systems allow the public to access via the Internet a variety of information, including criminal and civil court records, jail booking and release information, bond and bondsmen information, and court calendars and dockets. In addition, our systems allow cities and counties to accept payments for traffic and parking tickets over the Internet, with a seamless and automatic interface to back-office justice and financial systems. We recently introduced Odyssey, an all-new unified court case management system which is slated for general release in mid-2003. Odyssey uses enhanced Web-browser concepts to render a unique user interface. It incorporates the latest technology - XML, n-tier architecture, component-based design, and an ultra-thin client footprint - to maximize the value of a court's investment in new software. We believe that some of Odyssey's design concepts, including embedded imaging functionality, COM+ objects to enable local customization, and an architecture that enables multiple deployment options, are first in the court automation marketplace. Odyssey is the first of our new generation of n-tier, browser-based products and our initial marketing efforts for the new court case management system have been focused on states, large cities and counties. Property Appraisal and Tax We provide systems that automate the appraisal and assessment of real and personal property, including record keeping, mass appraisal, inquiry and protest tracking, appraisal and tax roll generation, tax statement processing, and electronic state-level reporting. 5 These systems are image- and video-enabled to facilitate the storage of and access to the many property-related documents and for the online storage of digital photographs of properties for use in defending values in protest situations. Other related tax applications are available for agencies that bill and collect taxes, including cities, counties, school tax offices, and special taxing and collection agencies. These systems support billing, collections, lock box operations, mortgage company electronic payments, and various reporting requirements. We are currently developing a new appraisal system, Orion, based on the same technology platform that we used for Odyssey. We expect to introduce Orion, which will replace several legacy products, during early 2003. Recording We offer a number of specialized applications designed to help county governments enhance and automate courthouse operations. These systems record and index information for the many documents maintained at the courthouse, such as deeds, mortgages, liens, UCC financing statements and vital records (birth, death and marriage certificates). We also offer applications to automate such functions as child support tracking, motor vehicle registration, voter registration and election result tabulation. Software Services We provide a variety of professional IT services to customers who utilize our software products. Virtually all of our customers contract with us for installation, training, and data conversion services in connection with their purchase of software products. The complete implementation process for a typical system includes planning, design, data conversion, set-up and testing. At the culmination of the implementation process, an installation team travels to the customer's facility to ensure the smooth transfer of data to the new system. Installation fees are charged separately to customers on either a fixed-fee or hourly charge basis, depending on the contract, with full pass-through to customers of travel and other out-of-pocket expenses. Both in connection with the installation of new systems and on an ongoing basis, we provide extensive training services and programs related to our products and services. Training can be provided in our training centers, onsite at customers' locations, or at meetings and conferences, and can be customized to meet customers' requirements. The vast majority of our customers contract with us for training services, both to improve their employees' proficiency and productivity and to fully utilize the functionality of our systems. Training services are generally billed on an hourly basis, along with travel and other expenses. Appraisal Services We are the nation's largest provider of real property appraisal outsourcing services for local government taxing authorities. These services include: - the physical inspection of all commercial and residential properties; - data collection and processing; - sophisticated computer analyses for property valuation; - preparation of tax rolls; - community education regarding the assessment process; and - arbitration between taxpayers and the assessing jurisdiction. Local government taxing entities normally reappraise real properties from time to time to update values for tax assessment purposes and to maintain equity in the taxing process. In some jurisdictions, reassessment cycles are mandated by law; in others, they are discretionary. While some taxing jurisdictions perform reappraisals in-house, many local governments outsource this function because of its cyclical nature and because of the specialized knowledge and expertise requirements associated with it. Our business unit that provides appraisal outsourcing services to local governments has been in this business since 1938. In some instances, we also sell property tax and/or appraisal software products in connection with appraisal outsourcing contracts, while other customers may only engage us to provide appraisal services. Appraisal outsourcing services are somewhat seasonal in nature to the extent that winter weather conditions reduce the productivity of data collection activities in connection with those projects. 6 Maintenance and Support Following the implementation of our software systems, we provide ongoing software support services to assist our customers in operating the systems and to periodically update the software. Support is provided over the phone to customers through help desks staffed by our customer support representatives. For more complicated issues, our staff, with the customer's permission, can log on to customers' systems remotely. We maintain our customers' software largely through releases that contain improvements and incremental additions, along with updates necessary because of legislative or regulatory changes. Virtually all of our software customers contract for maintenance and support from us, which provides a significant source of recurring revenue. We generally provide maintenance and support under annual contracts, with a typical fee based on the software product's license fee. These fees can be increased annually and may also increase as new license fees increase. Maintenance and support fees are generally paid in advance for the entire maintenance contract period. Most maintenance contracts automatically renew unless we or the customer gives notice of termination prior to expiration. Similar support is provided to our ASP customers, and is included in their monthly overall fees. STRATEGY Our objective is to grow our revenue and earnings internally, supplemented by focused strategic acquisitions. The key components of our business strategy are to: - Provide high quality, value-added products and services to our clients. We compete on the basis of, among other things, delivering to customers our deep domain expertise in local government operations through the highest value products and services in the market. We believe we have achieved a reputation as a premium product and service provider to the local government market. - Continue to expand our product and service offerings. While we already have what we believe to be the broadest line of software products for local governments, we continually upgrade our core software applications and expand our complementary product and service offerings to respond to technological advancements and the changing needs of our clients. For example, we offer solutions that allow the public to access data and conduct transactions with local governments, such as paying traffic tickets, property taxes and utility bills, via the Internet. We believe that the addition of such features enhances the market appeal of our core products. In 2001, we also began offering certain of our software products in an ASP environment, a delivery model that we believe will have increasing appeal to local governments and that will be expanded to include more applications. We have also increased our offerings of consulting and business process reengineering services. - Leverage a core technology framework across multiple product development efforts. We have developed a core technology framework upon which we intend to develop a new generation of a number of products. By leveraging the core framework, which is based on an n-tier, browser-based architecture, for the development of multiple products, we believe we can develop new-generation products more efficiently, and at a lower total cost. In addition, utilizing a core framework is also expected to help us bring new products to market more rapidly. By having more products built on a common technology framework, we expect to enhance our cross-selling opportunities and be able to provide maintenance and other services more efficiently. - Expand our customer base. We seek to establish long-term relationships with new customers primarily through our sales and marketing efforts. While we currently have customers in 49 states, Canada and Puerto Rico, not all of our product lines have nationwide geographic penetration. We intend to expand into new geographic markets by adding sales staff and targeting marketing efforts by product in those areas. We also intend to continue to expand our customer base to include larger governments. While our traditional market focus has primarily been on small and mid-sized governments, our increased size and market presence, together with the technological advances and improved scalability of certain of our products, are allowing us to achieve success in selling to larger customers. - Expand our existing customer relationships. Our existing customer base of nearly 6,000 local government offices offers significant opportunities for additional sales of IT products and services that we currently offer, but that existing customers do not fully utilize. Add-on sales to existing customers typically involve lower sales and marketing expenses than sales to new customers. 7 - Grow recurring revenue. We have a large recurring revenue base from maintenance and support, with an annual run rate in excess of $40 million. We have historically experienced very low customer turnover (less than 1% annually for our major software business units) and recurring revenues continue to grow as the installed customer base increases. In addition, since the beginning of 2001, we have established a growing recurring revenue stream from ASP hosting and other similar services. - Maximize economies of scale and take advantage of financial leverage in our business. We seek to develop and maintain a large client base to create economies of scale, enabling us to provide value-added products and services to our customers while expanding our operating margins. Because we sell primarily "off-the-shelf" software, increased sales of the same products result in incrementally higher gross margins. In addition, we believe that we have a marketing and administrative infrastructure in place that we can leverage to accommodate significant growth without proportionately increasing selling, general and administrative expenses. - Attract and retain highly qualified employees. We believe that the depth and quality of our operating management and staff is one of our significant strengths, and that the ability to retain such employees is crucial to our continued growth and success. We believe that our stable management team, financial strength and growth opportunities, as well as our leadership position in the local government market, enhance our attractiveness as an employer for highly skilled employees. - Pursue selected strategic acquisitions. While we expect to grow primarily internally, we may from time to time selectively pursue strategic acquisitions that provide us with one or more of the following: - products and services to complement our existing offerings; - entry into new markets related to local governments; and - new customers and/or geographic expansion. When considering acquisition opportunities, we generally focus on companies with strong management teams and employee bases and excellent customer relationships. Our most recent acquisition included in our continuing operations was completed in November 1999. SALES, MARKETING, AND CUSTOMERS We market our products and services through direct sales and marketing personnel located throughout the United States. Other in-house marketing staff focus on add-on sales, professional services and support. Sales of new systems are typically generated from referrals from other governmental offices or departments within a county or municipality, referrals from other local governments, relationships established between sales representatives and county or local officials, contacts at trade shows, direct mailings, and direct contact from prospects already familiar with us. We are active in numerous state, county, and local government associations, and participate in annual meetings, trade shows, and educational events. Customers consist primarily of county and municipal agencies, school districts and other local government offices. In counties, customers include the auditor, treasurer, tax assessor/collector, county clerk, district clerk, county and district court judges, probation officers, sheriff, and county appraiser. At municipal government sites, customers include directors from various departments, including administration, finance, utilities, public works, code enforcement, personnel, purchasing, taxation, municipal court, and police. In 2002, one customer accounted for approximately 10% of our total revenues. Contracts for software products and services are generally implemented over periods of three months to one year, with annually renewing service and software update agreements thereafter. Although these agreements can be terminated by either us or the customer, historically almost all support and maintenance agreements are automatically renewed annually. Contracts for appraisal outsourcing services are generally one to three years in duration. During 2002, approximately 30% of the Company's revenue was attributable to ongoing support and maintenance agreements. COMPETITION We compete with numerous local, regional, and national firms that provide or offer some or many of the products and services provided by us. Most of these competitors are smaller companies that may be able to offer less expensive solutions than ours. We also compete with national firms, some of which have greater financial and technical resources than us, including PeopleSoft, Inc., J. D. Edwards & Company, Lawson Software, Inc., Maximus, Inc., Affiliated Computer Services, Inc., Tier Technologies, Inc., 8 SunGard Data Systems, Inc. and Manatron, Inc. We also occasionally compete with central internal information service departments of county or local governments, which require us to persuade the end-user department to discontinue service by its own personnel and outsource the service to us. We compete on a variety of factors, including price, service, name recognition, reputation, technological capabilities, and the ability to modify existing products and services to accommodate the individual requirements of the customer. Our ability to offer an integrated system of applications for several offices or departments is often a competitive strength. County and local governmental units often are required to seek competitive proposals. SUPPLIERS All computers, peripherals, printers, scanners, operating system software, office automation software, and other equipment necessary for the implementation and provision of our software systems and services are presently available from several third-party sources. Hardware is purchased on original equipment manufacturer or distributor terms at discounts from retail. We have not experienced any significant supply problems. BACKLOG At December 31, 2002, we estimated our sales backlog was approximately $89.1 million, compared to $96.3 million at December 31, 2001. The backlog represents contracts that have been signed but not delivered or performed as of year-end. Approximately $79.0 million of the backlog is expected to be installed or services are expected to be performed during 2003. INTELLECTUAL PROPERTY, PROPRIETARY RIGHTS, AND LICENSES We regard certain features of our internal operations, software, and documentation as confidential and proprietary and rely on a combination of contractual restrictions, trade secret laws and other measures to protect our proprietary intellectual property. We generally do not rely on patents. We believe that, due to the rapid rate of technological change in the computer software industry, trade secrets and copyright protection are less significant than factors such as knowledge, ability and experience of our employees, frequent product enhancements, and timeliness and quality of support services. We typically license our software products under exclusive license agreements which are generally non-transferable and have a perpetual term. EMPLOYEES At December 31, 2002, we had approximately 1,230 employees. Appraisal outsourcing projects are periodic in nature and can be widely dispersed geographically. We often hire temporary employees to assist in these projects whose term of employment generally ends with the project's completion. None of our employees are represented by a labor union or are subject to collective bargaining agreements. We consider our relations with our employees to be positive. INTERNET WEBSITE AND AVAILABILITY OF PUBLIC FILINGS Our Internet address is www.tylertechnologies.com. We make available free of charge on our Internet website, our annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934 as soon as reasonably practicable after we electronically file such material with, or furnish such material to, the SEC. ITEM 2. PROPERTIES. We occupy approximately 300,000 square feet of office and warehouse space, 27,000 of which we own. We lease our principal executive office located in Dallas, Texas, as well as other offices, facilities and project offices for our operating companies in California, Colorado, Connecticut, Florida, Georgia, Idaho, Indiana, Iowa, Maine, Massachusetts, Michigan, New Hampshire, New York, North Carolina, Ohio, Pennsylvania, Rhode Island, Texas, and Wisconsin. ITEM 3. LEGAL PROCEEDINGS. On October 29, 2001, H.T.E., Inc. ("HTE") notified us that, pursuant to the Florida "control share" statute, it had redeemed all 5.6 million shares of HTE common stock owned by us for a cash price of $1.30 per share. The 5.6 million shares represent a current ownership interest of approximately 35% of HTE, a company whose common stock is traded on the NASDAQ National Market System. On October 29, 2001, we notified HTE that its purported redemption of our HTE shares was invalid and contrary to Florida 9 law, and in any event, the calculation by HTE of fair value for such shares was incorrect. On October 30, 2001, HTE filed a complaint in a civil court in Seminole County, Florida requesting the court to enter a declaratory judgment declaring HTE's purported redemption of all of our HTE shares at a redemption price of $1.30 per share was lawful and to effect the redemption and cancel our HTE shares. We removed the case to the United States District Court, Middle District of Florida, Orlando Division, and requested a declaratory judgment from the court declaring, among other things, that HTE's purported redemption of any or all of our shares was illegal under Florida law and that we had the ability to vote up to 20% of the issued and outstanding shares of HTE common stock owned by us. On September 18, 2002, the court issued an order declaring that HTE's purported redemption was invalid. Accordingly, we continue to own 5.6 million shares of HTE common stock. On September 24, 2002, we entered into a settlement agreement with HTE in which HTE agreed that it would not attempt any other redemption of our shares. In addition, HTE agreed to dismiss and release us from the tort claims it alleged against us as disclosed in previous filings. On December 11, 2002, the court issued a further order declaring that all of our HTE shares are "control shares" and therefore none of our shares have voting rights. The court further ruled that voting rights would be restored to our HTE shares if we were to sell or otherwise transfer our HTE shares to an unaffiliated third party in a transaction that did not constitute a "control share acquisition." One of our non-operating subsidiaries, Swan Transportation Company ("Swan"), has been and is currently involved in various claims raised by hundreds of former employees of a foundry that was once owned by an affiliate of Swan and Tyler. These claims are for alleged work related injuries and physical conditions resulting from alleged exposure to silica, asbestos, and/or related industrial dusts during the plaintiffs' employment at the foundry. We sold the operating assets of the foundry on December 1, 1995. As a non-operating subsidiary of Tyler, the assets of Swan consist primarily of various insurance policies issued to Swan during the relevant time periods and restricted cash of $1.3 million at December 31, 2002. Swan tendered the defense and indemnity obligations arising from these claims to its insurance carriers, who, prior to December 20, 2001, entered into settlement agreements with approximately 275 of the plaintiffs, each of whom agreed to release Swan, Tyler, and its subsidiaries and affiliates from all such claims in exchange for payments made by the insurance carriers. On December 20, 2001, Swan filed a petition under Chapter 11 of the U.S. Bankruptcy Code in the United States Bankruptcy Court for the District of Delaware. The bankruptcy filing by Swan was the result of extensive negotiations between Tyler, Swan, their respective insurance carriers, and an ad hoc committee of plaintiff attorneys representing substantially all of the then known plaintiffs. Swan filed its plan of reorganization in February 2002. The principal features of the plan of reorganization include: (a) the creation of a trust, which is to be funded principally by fifteen insurance carriers pursuant to certain settlement agreements executed pre-petition between Swan, Tyler, and such carriers; (b) the implementation of a claims resolution procedure pursuant to which all present and future claimants may assert claims against such trust for alleged injuries; (c) the issuance of certain injunctions under the federal bankruptcy laws requiring any such claims to be asserted against the trust and barring such claims from being asserted, either now or in the future, against Swan, Tyler, all of Tyler's affected affiliates, and the insurers participating in the funding of the trust; and (d) the full and final release of each of Swan, Tyler, all of Tyler's affected affiliates, and the insurers participating in the funding of the trust from any and all claims associated with the once-owned foundry by all claimants that assert a claim against, and receive compensation from, the trust. The confirmation hearings on Swan's plan of reorganization were held on December 9, 2002. The plan of reorganization received the affirmative vote of approximately 99% of the total votes cast. All objections to the plan were resolved prior to the confirmation hearing, and the final confirmation order will therefore not be subject to appeal. The confirmation order discharges, releases, and extinguishes all of the foundry-related obligations and liabilities of Tyler, Swan, their affected affiliates, and the insurers participating in the funding of the trust. Further, the confirmation order includes the issuance of injunctions that channel all present and future foundry-related claims into the trust and forever bar any such claims from being asserted, either now or in the future, against Swan, Tyler, their affected affiliates, and the participating insurers. In order to receive the benefits described above, we have agreed, among other things, to transfer all of the capital stock of Swan to the trust so that the trust can directly pursue claims against insurers who have not participated in the funding of the trust. In addition, we have agreed to contribute $1.5 million in cash to the trust, which is due as follows: $750,000 within ten days of the confirmation order becoming a final order; $500,000 on the first anniversary of the date the confirmation order becomes a final order; and $250,000 on the second anniversary of the date the confirmation order becomes a final order. The confirmation order will become a final order thirty days after execution by both the bankruptcy and district court judges, which is expected to occur by the end of the first quarter of 2003. Other than ordinary course, routine litigation incidental to our business and except as described in this Annual Report, there are no material legal proceedings pending to which we or our subsidiaries are parties or to which any of our properties are subject. 10 ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS. Not applicable. PART II ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS. Our common stock is traded on the New York Stock Exchange under the symbol "TYL." At December 31, 2002, we had approximately 2,600 stockholders of record. A number of our stockholders hold their shares in street name; therefore, there are substantially more than 2,600 beneficial owners of our common stock. The following table sets forth for the calendar periods indicated the high and low sales price per share of our common stock as reported on the New York Stock Exchange.
HIGH LOW ---- --- 2001: First Quarter................................ $ 2.25 $ 1.00 Second Quarter............................... 3.04 1.35 Third Quarter................................ 3.81 1.99 Fourth Quarter............................... 4.60 2.73 2002: First Quarter ............................... $ 5.95 $ 3.75 Second Quarter............................... 6.01 3.85 Third Quarter................................ 5.25 3.05 Fourth Quarter............................... 4.85 3.80 2002: First Quarter (through February 25, 2003).. $ 4.40 $ 3.50
We did not pay any cash dividends in 2002 or 2001. Our bank credit agreement contains restrictions on the payment of cash dividends. Also, we intend to retain earnings for use in the operation and expansion of our business, and, therefore, we do not anticipate declaring a cash dividend in the foreseeable future. 11 ITEM 6. SELECTED FINANCIAL DATA. (In thousands, except per share data)
FOR THE YEARS ENDED DECEMBER 31, ---------------------------------------------------------------------------------- 2002 2001 2000 1999 1998 ------------ ------------ ------------ ------------ ---------- STATEMENT OF OPERATIONS DATA: (1) Revenues (2)............................ $ 133,897 $ 118,816 $ 93,933 $ 71,416 $ 23,440 Costs and expenses: Cost of revenues (2)................. 85,915 78,797 59,658 37,027 13,143 Selling, general and administrative expenses............ 33,914 30,830 32,805 29,404 11,680 Amortization of acquisition intangibles (3).................... 3,329 6,898 6,903 4,966 1,499 --------- ---------- --------- --------- --------- Operating income (loss) ............. 10,739 2,291 (5,433) 19 (2,882) Legal fees associated with affiliated investment.............. 704 -- -- -- -- Interest (income) expense, net....... (6) 479 4,884 1,797 234 --------- ---------- --------- --------- --------- Income (loss) from continuing operations before income taxes.................. 10,041 1,812 (10,317) (1,778) (3,116) Income tax provision (benefit).......... 3,869 1,540 (2,810) 188 (652) --------- ---------- --------- --------- --------- Income (loss) from continuing operations $ 6,172 $ 272 $ (7,507) $(1,966) $ (2,464) ========= ========== ========= ========= ========== Income (loss) from continuing operations per diluted share.................... $ 0.12 $ 0.01 $ (0.17) $ (0.05) $ (0.08) ========= ========== ========= ========= ========== Weighted average diluted shares......... 49,493 47,984 45,380 39,105 32,612 OTHER DATA: EBITDA (4)......................... $ 18,557 $ 13,203 $ 4,253 $ 6,130 $ (890) STATEMENT OF CASH FLOWS DATA: Cash flows from operating activities.... $ 19,845 $ 12,744 $ (7,126) $ 715 $ 1,758 Cash flows from investing activities.... (7,974) (9,706) 65,401 (24,743) (36,787) Cash flows from financing activities.... (3,398) (5,984) (52,022) 24,955 27,893
AS OF DECEMBER 31, --------------------------------------------------------------- 2002 2001 2000 1999 1998 --------- --------- --------- ---------- ---------- BALANCE SHEET DATA: (1) Total assets......................... $ 169,845 $ 146,975 $ 150,712 $ 243,260 $ 124,328 Long-term obligations, less current portion................... 2,550 2,910 7,747 61,530 37,189 Shareholders' equity................. 118,656 100,884 96,122 138,904 76,346
12 (1) For the years 1998 through 2002, results of operations include the results of the continuing companies that were formerly the software systems and services segment, from the respective dates we acquired the companies, and exclude the results of operations of the discontinued information and property records services segment and automotive parts segment. Prior years' selected financial data has been restated to reflect discontinuation of the information and property records services segment in 2000 and the automotive parts segment in 1998. See Note 3 in Notes to Consolidated Financial Statements. (2) Pursuant to Financial Accounting Standards Board Emerging Issues Task Force ("EITF") Issue No. 01-14, "Income Statement Characterization of Reimbursements Received for 'Out-of-Pocket' Expenses Incurred," customer reimbursements for out-of-pocket expenses are to be included in net revenues and the related costs in cost of revenues. Because these additional net revenues are offset by the associated reimbursable expenses included in cost of revenues, the adoption of EITF No. 01-14 in 2002 did not impact income (loss) from continuing operations for all periods presented. Net revenues and cost of revenues for 2001 and 2000 were recast to reclassify certain reimbursable expenses to conform to the current year presentation in accordance with EITF No. 01-14. Periods prior to 2000 were not recast because reimbursable expenses were immaterial. See Note 17 in Notes to Consolidated Financial Statements. (3) Effective January 1, 2002, we adopted the provisions of Statement of Financial Accounting Standards No. 142 "Goodwill and other Intangible Assets". Under the new standard, goodwill and intangible assets with indefinite useful lives are no longer amortized but instead tested for impairment at least annually. In accordance with the new standard, results of operations for years prior to 2002 are reported under the previous accounting standards for goodwill and intangible assets. Amortization expense net of income taxes, related to goodwill (including assembled workforce subsumed into goodwill) no longer expensed under the new standard was $2,960 in 2001, $2,934 in 2000, $2,199 in 1999 and $836 in 1998. (4) EBITDA consists of income from continuing operations before interest, income taxes, depreciation and amortization. EBITDA is not calculated in accordance with accounting principles generally accepted in the United States, but we believe that it is widely used as a measure of operating performance. EBITDA should only be considered together with other measures of operating performance such as operating income, cash flows from operating activities, or any other measure for determining operating performance or liquidity that is calculated in accordance with accounting principles generally accepted in the United States. EBITDA is not necessarily an indication of amounts that may be available for us to reinvest or for any other discretionary uses and does not take into account our debt service requirements and other commitments. In addition, since all companies do not calculate EBITDA the same way, it may not be comparable to other companies' similarly titled measures. The following reconciles to EBITDA from income (loss) from continuing operations before income taxes for the periods presented:
FOR THE YEARS ENDED DECEMBER 31, ------------------------------------------------------------------------ 2002 2001 2000 1999 1998 ---------- --------- --------- --------- --------- Income (loss) from continuing operations before income taxes............................... $ 10,041 $ 1,812 $ (10,317) $ (1,778) $ (3,116) Amortization of acquisition intangibles... 3,329 6,898 6,903 4,966 1,499 Depreciation and amortization included in cost of revenues and selling, general and administrative expenses.... 5,193 4,014 2,783 1,145 493 Interest (income) expense, net ........... (6) 479 4,884 1,797 234 --------- --------- --------- --------- --------- EBITDA $ 18,557 $ 13,203 $ 4,253 $ 6,130 $ (890) ========= ========= ========= ========= =========
13 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS. FORWARD - LOOKING STATEMENTS In addition to historical information, this Annual Report on Form 10-K contains forward-looking statements. The forward-looking statements are made in reliance upon safe harbor provisions of the Private Securities Litigation Reform Act of 1995. The forward-looking statements are subject to certain risks and uncertainties that could cause actual results to differ materially from those reflected in the forward-looking statements. Factors that might cause such a difference include, but are not limited to, those discussed in the section entitled Management's Discussion and Analysis of Financial Condition and Results of Operations - "Factors That May Affect Our Future Results and Market Price of Our Stock." Readers are cautioned not to place undue reliance on these forward-looking statements, which reflect management's opinions only as of the date hereof. We undertake no obligation to revise or publicly release the results of any revision to these forward-looking statements. Readers should carefully review the risk factors described in this Annual Report and other documents we file from time to time with the SEC. When used in this Annual Report, the words "believes," "plans," "estimates," "expects," "anticipates," "intends," "continue," "may," "will," "should," "projects," "forecasts," "might," "could" or the negative of such terms and similar expressions are intended to identify forward-looking statements. GENERAL We provide integrated information management solutions and services for local governments. We have a broad line of software products and services to address the information technology ("IT") needs of virtually every area of operation for cities, counties, schools and other local government entities. Most of our customers have our software installed in-house. For customers who prefer not to physically acquire the software and hardware, we provide outsourced hosting for some of our applications at one of our data centers through an applications service provider ("ASP") arrangement. We provide professional IT services to our customers, including software and hardware installation, data conversion, training and, at times, product modifications. In addition, we provide outsourced property appraisal services for taxing jurisdictions. We also provide continuing customer support services to ensure proper product performance and reliability. CRITICAL ACCOUNTING POLICIES AND ESTIMATES Our discussion and analysis of financial condition and results of operations is based upon our consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States ("GAAP"). The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of assets and liabilities at the date of the financial statements, the reported amounts of revenues and expenses during the reporting period, and related disclosure of contingent assets and liabilities. The Notes to the Consolidated Financial Statements contained herein describe our significant accounting policies used in the preparation of the consolidated financial statements. On an on going basis, we evaluate our estimates, including, but not limited to, those related to intangible assets, bad debts and our long-term service contracts. We base our estimates on historical experience and on various other assumptions that we believe to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions. We believe the following critical accounting policies affect significant judgments and estimates used in the preparation of our consolidated financial statements: Revenue Recognition. We recognize revenues in accordance with the provisions of the American Institute of Certified Public Accountants Statement of Position ("SOP") 97-2, "Software Revenue Recognition," as amended by SOP 98-4 and SOP 98-9, as well as Technical Practice Aids issued from time to time by the American Institute of Certified Public Accountants, and in accordance with the SEC Staff Accounting Bulletin No. 101 "Revenue Recognition in Financial Statements." Our revenues are derived from software licenses, hardware, postcontract customer support/maintenance and services that typically range from installation, training and basic consulting to software modification and customization to meet specific customer needs. For multiple element software arrangements, which do not entail the performance of services that are considered essential to the functionality of the software, we generally record revenue when the delivered products or performed services result in a legally enforceable claim. We maintain allowances for doubtful accounts, sales adjustments and estimated cost of product warranties, which are provided at the time the revenue is recognized. Since most of our customers are governmental entities, we rarely incur a loss resulting from the inability of a customer to make required 14 payments. Occasionally, customers may become dissatisfied with the functionality of the software products and/or the quality of the services and request a reduction of the total contract price or similar concession. While we engage in extensive product and service quality assurance programs and processes, our allowances for these contract price reductions may need to be revised in the future. In connection with our customer contracts and the adequacy of related allowances and measures of progress towards contract completion, our project managers are charged with the responsibility to continually review the status of each customer on a specific contract basis. Also, management at our corporate offices as well as at our operating companies review on at least a quarterly basis significant past due accounts receivable and the adequacy of related reserves. Events or changes in circumstances that indicate that the carrying amount for the allowances for doubtful accounts, sales adjustments and estimated cost of product warranties may require revision, include, but are not limited to, deterioration of a customer's financial condition, failure to manage our customer's expectations regarding the scope of the services to be delivered, and defects or errors in new versions or enhancements of our software products. For those minimal number of software arrangements that include customization of the software, which is considered essential to its functionality, and for substantially all of our real estate appraisal outsourcing projects, we recognize revenue and profit as the work progresses using the percentage-of-completion method. This method relies on estimates of total expected contract revenue, billings and collections and expected contract costs. We follow this method since reasonably dependable estimates of revenue and costs applicable to various stages of a contract can be made. At times, we perform additional and/or non-contractual services for little to no incremental fee, to satisfy customer expectations. If changes occur in delivery, productivity or other factors used in developing our estimates of expected costs or revenues, we revise our cost and revenue estimates, and any revisions are charged to income in the period in which the facts that give rise to that revision first become known. Intangible Assets and Goodwill. Our business acquisitions typically result in the creation of goodwill and other intangible asset balances, and these balances affect the amount and timing of future period amortization expense, as well as expense we could possibly incur as a result of an impairment charge. The cost of acquired companies is allocated to identifiable tangible and intangible assets based on estimated fair value, with the excess allocated to goodwill. Accordingly, we have a significant balance of acquisition date intangible assets, including software, customer base and goodwill. In addition, we capitalize software development costs incurred subsequent to the establishment of technological feasibility on a specific software project. Certain of these intangible assets are amortized over their estimated useful lives. All intangible assets with definite and indefinite lives are reviewed for impairment annually or whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability of goodwill is generally measured by a comparison of the carrying amount of an asset to its fair value generally determined by estimated future net cash flows expected to be generated by the asset. Recoverability of other intangible assets is generally measured by comparison of the carrying amount to estimated undiscounted future cash flows. The assessment of recoverability or of the estimated useful life for amortization purposes will be affected if the timing or the amount of estimated future operating cash flows is not achieved. Events or changes in circumstances that indicate the carrying amount may not be recoverable include, but are not limited to, a significant decrease in the market value of the business or asset acquired, a significant adverse change in the extent or manner in which the business or asset acquired is used or a significant adverse change in the business climate. In addition, products, capabilities, or technologies developed by others may render our software products obsolete or non-competitive. 15 ANALYSIS OF RESULTS OF OPERATIONS AND OTHER 2002 Compared to 2001 The following table includes items from our audited consolidated financial statements and the relevant percentage change in the amounts between the periods presented. The amounts shown in the table are in thousands, except the per share data:
Years Ended December 31, ---------------------------------------------- 2002 2001 % Change -------- -------- --------- Revenues: Software licenses $ 24,278 $ 19,491 25% Software services 25,703 21,538 19 Maintenance 40,667 36,587 11 Appraisal services 37,319 34,727 7 Hardware and other 5,930 6,473 (8) -------- -------- Total revenues 133,897 118,816 13 Cost of revenues: Software licenses 5,482 4,130 33 Software services and maintenance 50,175 46,024 9 Appraisal services 25,512 23,894 7 Hardware and other 4,746 4,749 (0) -------- -------- Total cost of revenues 85,915 78,797 9 % of revenues 64.2% 66.3% Gross profit 47,982 40,019 20 % of revenues 35.8% 33.7% Selling, general and administrative expenses 33,914 30,830 10 % of revenues 25.3% 25.9% Amortization of acquisition intangibles 3,329 6,898 (52) ------- ------ Operating income 10,739 2,291 369 Legal fees associated with affiliated investment 704 - Interest (income) expense (6) 479 -------- -------- Income before income taxes 10,041 1,812 Income tax provision 3,869 1,540 -------- -------- Effective income tax rate 38.5% 85.0% Income from continuing operations $ 6,172 $ 272 ======== ======== Diluted earnings per share from continuing operations $ 0.12 $ 0.01 ======== ======== Cash flows provided by operating activities $ 19,845 $ 12,744 Cash balance at December 31 13,744 5,271 Capital expenditures: Sofware development costs 7,210 6,225 Property and equipment 2,508 3,101
16 REVENUES The following table compares the components of revenue as a percentage of total revenues for the periods presented:
Years ended December 31, ----------------------------- 2002 2001 -------- -------- Software licenses 18.1 % 16.4 % Software services 19.2 18.1 Maintenance 30.4 30.8 Appraisal services 27.9 29.2 Hardware and other 4.4 5.5 ----- ----- 100.0 % 100.0 %
Software license revenues. Software license revenues increased $4.8 million, or 25%, for the year ended December 31, 2002, compared to 2001. During 2002, we recognized approximately $2.4 million in license revenues from four customers for real estate appraisal software, while we recorded minimal license revenues from appraisal software in 2001. The remainder of the increase in software license revenues was related to expansion of our financial and city solutions software products into the midwest and the western United States, and was aided by the release of several new financial and city solutions products and enhancements. Our financial and city solutions software products automate accounting systems for cities, counties, school districts, public utilities and not-for-profit organizations. Software services revenues. For the year ended December 31, 2002, software services revenues increased $4.2 million, or 19%, compared to 2001. The increase in software services is primarily related to higher software license sales. Typically, contracts for software licenses include services such as installation of the software, conversion of customer data to be compatible with the new software and training customer personnel to use the software. In addition, software services revenues for 2002 included approximately $1.9 million for services performed under an $11.0 million contract signed with the State of Minnesota in July 2002 to install our new Odyssey court case management system. The Minnesota contract includes both software license and software services but no license revenues were recognized under the contract in 2002. Approximately 70% of the installation is expected to be performed by late 2003. The remainder of the installation is expected to be performed from 2004 through 2006. Maintenance revenues. For the year ended December 31, 2002, maintenance revenue increased $4.1 million, or 11%, from $36.6 million for 2001. We provide maintenance and support services for our software products, third party software and hardware. The maintenance revenue increase was due to growth in our installed customer base and slightly higher rates. During 2001, we received and recorded as revenue a one-time settlement of approximately $650,000 from a third party provider of maintenance services relating to past services. Excluding this settlement, maintenance revenue increased approximately 13% for the year ended December 31, 2002 compared to the prior year. Appraisal services revenues. Appraisal services revenues increased $2.6 million, or 7%, for the year ended December 31, 2002, compared to 2001. The increase was primarily related to our contract with Lake County, Indiana, which was first awarded in December 2001. The contract to provide professional services and technology to reassess real property in Lake County is valued at $15.9 million, of which $14.4 million relates to appraisal services, and is expected to be completed by late 2003. During 2002, appraisal services revenue also included $12.1 million of appraisal revenue related to our contract with the Nassau County, New York Board of Assessors ("Nassau County"), which was comparable to the amount recognized in 2001. Substantially all of the work related to Nassau County contract had been completed as of December 31, 2002. COST OF REVENUES Cost of software license revenues. For the year ended December 31, 2002, cost of software license revenues increased $1.4 million, or 33%, compared to the prior year, primarily due to higher amortization expense of software development costs. In 2001, we had several products in the development stage, which were released beginning in the third quarter of 2001. Once a product is available for general release, we begin to expense the costs associated with the development generally over the estimated useful life of the product. 17 Development costs mainly consist of personnel costs, such as salary and benefits paid to our software developers, rent for related office space and capitalized interest costs. Cost of software service and maintenance revenues. For the year ended December 31, 2002, cost of software services and maintenance revenues increased $4.2 million, or 9%, compared to 2001. This increase is consistent with the higher software services and maintenance revenues for the same period, although software services and maintenance revenues grew at a higher rate than the cost of those revenues, which is reflective of more efficient utilization of our support and maintenance staff and economies of scale. As a percentage of related revenues, cost of software services and maintenance was 76% in 2002 compared to 79% in 2001. Cost of appraisal services revenues. For the year ended December 31, 2002, cost of appraisal service revenue increased approximately $1.6 million, or 7%, compared to the year ended December 31, 2001. This increase is consistent with the increase in appraisal services revenue, which also rose 7% compared to the prior year. Cost of appraisal services revenues as a percentage of appraisal services revenue was 68% for 2002 compared to 69% for 2001. GROSS PROFIT For the years ended December 31, 2002 and 2001, our overall gross margin was 36% and 34%, respectively. The 2002 gross margin benefited from a product mix that included more software license revenues and higher maintenance revenues than the prior year. Software license revenues have lower associated costs than other revenues such as software and appraisal services, third party software and hardware. In addition, utilization of our personnel that provide services and support has improved, which has increased our overall gross profit. The increase in our gross profit was offset slightly by higher software development amortization during 2002. SELLING, GENERAL AND ADMINISTRATIVE EXPENSES Selling, general and administrative expenses, or SG&A, increased $3.1 million, or 10%, for the year ended December 31, 2002 compared to the prior year. As a percentage of revenues, SG&A was 25% in 2002 compared to 26% in 2001. The $3.1 million increase in SG&A was related primarily to higher costs with respect to sales commissions, and increases in health and other insurance expenses. AMORTIZATION OF ACQUISITION INTANGIBLES Our amortization of acquisition intangibles for the year ended December 31, 2001 amounted to $6.9 million, including $3.6 million for amortization of goodwill and workforce costs. Effective January 1, 2002, we adopted Statement of Financial Accounting Standards ("SFAS") No. 142, "Goodwill and Other Intangible Assets." As a result of adopting SFAS No. 142, we ceased amortizing goodwill and workforce after December 31, 2001. The remaining amortization consisted of those costs allocated to our customer base and acquisition date software. See further discussion of the effect of adopting SFAS No. 142 in Note 7 in Notes to the Consolidated Financial Statements. INTEREST (INCOME) EXPENSE Our cash balances have increased significantly during 2002 due to cash generated from operations, the receipt of proceeds from the sale of certain discontinued businesses and the exercise of stock options. In 2002 we invested excess cash in money market investments. Offsetting interest income from these money market investments was $255,000 of interest expense for an outstanding $2.5 million note payable. As a result, we had net interest income of $6,000 for the year ended December 31, 2002 compared to net interest expense of $479,000 for 2001. In addition, during the years ended December 31, 2002 and 2001, we capitalized $269,000 and $578,000, respectively, of interest costs related to capitalized software development costs. INCOME TAX PROVISION We had an effective income tax rate of 39% for the year ended December 31, 2002. For the year ended December 31, 2001, we had an effective income tax rate of 85%. Our effective income tax rate in both years exceeded the federal statutory rate of 35% due primarily to the net effect of state income taxes and items that are non-deductible for federal income tax purposes, including certain non tax-deductible goodwill amortization in periods prior to 2002. 18 DISCONTINUED OPERATIONS Discontinued operations consists of the operating results of the information and property records services segment which we discontinued in December 2000, two non-operating subsidiaries relating to a formerly owned subsidiary that we sold in December 1995 and an automotive parts distributor that we sold in March 1999. On September 29, 2000, we sold certain net assets of Kofile, Inc. and another subsidiary, our interest in a certain intangible work product, and a building and related building improvements (the "Kofile Sale") for a cash sale price of $14.4 million. Effective December 29, 2000, we sold for cash our land records business unit, consisting of Business Resources Corporation ("Resources"), to an affiliate of Affiliated Computer Services, Inc. ("ACS") (the "Resources Sale".) The Resources Sale was valued at approximately $71.0 million. Concurrent with the Resources Sale, our management, with our Board of Directors' approval, adopted a formal plan of disposal for the remaining businesses and assets of the information and property records services segment. This restructuring program was designed to focus our resources on our software systems and services segment and to reduce debt. The businesses and assets divested or identified for divesture were classified as discontinued operations in the accompanying consolidated financial statements in 2000 and the prior periods' financial statements were restated to report separately their operations in compliance with APB Opinion No. 30. The net gain on the Kofile Sale and the Resources Sale amounted to approximately $1.5 million (net of an income tax benefit of $2.4 million). Our formal plan of disposal provided for the remaining businesses and assets of the information and property records services segment to be disposed of by December 29, 2001. The estimated loss on the disposal of these remaining businesses and assets at December 29, 2000 amounted to $13.6 million (after an income tax benefit of $3.8 million). This loss consisted of an estimated loss on disposal of the businesses of $11.5 million (net of an income tax benefit of $2.7 million) and a provision of $2.1 million (after an income tax benefit of $1.1 million) for anticipated operating losses from the measurement date of December 29, 2000 to the estimated disposal dates. On May 16, 2001, we sold all of the common stock of one of the remaining businesses in the discontinued information and property records services segment. In connection with the sale, we received cash proceeds of $575,000, approximately 60,000 shares of Tyler common stock, a promissory note of $750,000 payable in 58 monthly installments at an interest rate of 9%, and other contingent consideration. On September 21, 2001, we sold all of the common stock of Capital Commerce Reporter, Inc. for $3.1 million in cash. We renegotiated certain aspects of the May 16, 2001 sale transaction and as a result of this renegotiation in March 2002, we received additional cash of approximately $800,000 and a subordinated note receivable for $200,000, to fully settle the promissory note and other contingent consideration received in connection with this sale. The subordinated note is payable in 16 equal quarterly principal payments with interest at a rate of 6%. Because the subordinated note receivable is highly dependent upon future operations of the buyer, we are recording its value when the cash is received which is our historical practice. During 2002, we received receipts of $46,000 on the subordinated note. During the year ended December 31, 2002, the IRS issued temporary regulations, which in effect allowed us to deduct for tax purposes losses attributable to the March 1999 sale of our automotive parts subsidiary that were previously not allowed. The tax benefit of allowing the deduction of this loss amounted to approximately $970,000. In addition, we renegotiated a note receivable and certain contingent consideration in connection with a subsidiary sold in 2001 and received proceeds of approximately $846,000 in 2002. We initially assigned no value for accounting purposes to the note receivable and contingent consideration when the loss on the disposal of the discontinued operations was first established in 2000 and when the note was first received in 2001. In addition, we settled in the fourth quarter of 2002 our asbestos litigation for an amount that was approximately $200,000 less than the liability initially established for this matter (See Note 16 in Notes to Consolidated Financial Statements). The aggregate effects of these events, net of the related tax effects, and other minor adjustments to the reserve for discontinued operations, resulted in a credit to discontinued operations of $1.8 million in 2002. In our opinion and based on information available at this time, we believe the net liabilities related to discontinued operations are adequate. The income tax expense or benefit associated with the gains or losses on the respective sales of the businesses in the information and property records services segment differs from the statutory income tax rate of 35% due to the elimination of deferred taxes related to the basis difference between amounts reported for income taxes and financial reporting purposes and the utilization of available capital loss carryforwards which were fully reserved in the valuation account prior to the respective sales. 19 One of our non-operating subsidiaries is involved in various claims for work-related injuries and physical conditions relating to a formerly-owned subsidiary that we sold in 1995. For the years ended December 31, 2001 and 2000, we expensed and included in discontinued operations, net of related tax effect, $3,000 and $748,000, respectively, for trial and related costs (See Note 16 in the Notes to the Consolidated Financial Statements). INVESTMENT SECURITY AVAILABLE-FOR-SALE Pursuant to an agreement with two major shareholders of H.T.E., Inc. ("HTE"), we acquired approximately 5.6 million shares of HTE's common stock in exchange for approximately 2.8 million shares of our common stock. The exchange occurred in two transactions, one in August 1999 and the other in December 1999. The 5.6 million shares represent a current ownership interest of approximately 35% of HTE. The cost of the investment was recorded at $15.8 million and is classified as a non-current asset. Florida state corporation law restricts the voting rights of "control shares," as defined, acquired by a third party in certain types of acquisitions. These restrictions may be removed by a vote of the shareholders of HTE. On November 16, 2000, the shareholders of HTE, other than Tyler, voted to deny Tyler its right to vote the "control shares" of HTE. When we acquired the HTE shares, HTE took the position that all of our shares were "control shares" and therefore did not have voting rights. We disputed this contention and asserted that the "control shares" were only those shares in excess of 20% of the outstanding shares of HTE, and it was only those shares that lacked voting rights. At the time of our acquisition, no court had interpreted the Florida "control share" statute. On October 29, 2001, HTE notified us that, pursuant to the Florida "control share" statute, it had redeemed all 5.6 million shares of HTE common stock owned by us for a cash price of $1.30 per share. On October 29, 2001, we notified HTE that its purported redemption of our HTE shares was invalid and contrary to Florida law, and in any event, the calculation by HTE of fair value for our shares was incorrect. On October 30, 2001, HTE filed a complaint in a civil court in Seminole County, Florida requesting the court to enter a declaratory judgment declaring HTE's purported redemption of all of our HTE shares at a redemption price of $1.30 per share was lawful and to effect the redemption and cancel our HTE shares. We removed the case to the United States District Court, Middle District of Florida, Orlando Division, and requested a declaratory judgment from the court declaring, among other things, that HTE's purported redemption of any or all of our shares was illegal under Florida law and that we had the ability to vote up to 20% of the issued and outstanding shares of HTE common stock owned by us. On September 18, 2002, the court issued an order declaring that HTE's purported redemption was invalid. On September 24, 2002, we entered into a settlement agreement with HTE in which HTE agreed that it would not attempt any other redemption of our shares. In addition, HTE agreed to dismiss and release us from the tort claims it alleged against us as disclosed in previous filings. On December 11, 2002, the court issued a further order declaring that all of our HTE shares are "control shares" and therefore none of our shares have voting rights. The court further ruled that voting rights would be restored to our HTE shares if we were to sell or otherwise transfer our HTE shares to an unaffiliated third party in a transaction that did not constitute a "control share acquisition." During 2002, approximately $704,000 of legal and other related costs associated with these matters were charged to non-operating expenses. Under GAAP, a 20% investment in the voting stock of another company creates the presumption that the investor has significant influence over the operating and financial policies of that company, unless there is evidence to the contrary. Our management has concluded that we do not have such influence. Accordingly, we account for our investment in HTE pursuant to the provisions of SFAS No. 115, "Accounting for Certain Investments in Debt and Equity Securities." These securities are classified as available-for-sale and are recorded at fair value as determined by quoted market prices for HTE common stock. On February 4, 2003, we entered into an agreement with SunGard Data Systems, Inc. ("SDS") in which we agreed to tender all of our HTE shares in a tender offer to be commenced by SDS for the acquisition of HTE. On February 5, 2003, SDS and HTE announced a definitive agreement for the acquisition of all of the shares of HTE for $7.00 per share in cash. SDS and HTE also announced that the consummation of the transaction is subject to customary conditions, including the tender of at least a majority of the outstanding shares of HTE in the tender offer and the expiration of the waiting period under the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended. SDS and HTE further announced that certain shareholders owning approximately 49.6% of the total outstanding shares of HTE had agreed to tender their shares. According to the press release issued by SDS and HTE, the acquisition is expected to close in the first quarter of 2003. Assuming the acquisition is consummated, we will receive approximately $39.3 million in gross cash proceeds from the sale of our HTE shares. There can be no assurance that the acquisition of HTE by SDS will be consummated on the terms as disclosed, if at all. If SDS does not acquire HTE, we will continue to classify our investment as an available-for-sale security in accordance with SFAS No. 115 and as a non-current asset since the investment was initially made for a continuing business purpose. 20 NET INCOME Net income was $8.0 million in 2002 compared to $269,000 in 2001. For 2002 and 2001, diluted earnings per share was $0.16 and $0.01, respectively. Net income for 2002 included a gain on disposal of discontinued operations, net of taxes, of $1.8 million, or $0.04 per diluted share, and net income for 2001 included a loss on discontinued operations, net of taxes, of $3,000, or $0.00 per diluted share. 2001 COMPARED TO 2000 REVENUES Revenues were $118.8 million for the year ended December 31, 2001, a 26% increase from revenues of $93.9 million for the prior year. Software license revenues. Software license revenues increased each quarter during 2001 from $4.0 million in the first quarter to $5.8 million in the fourth quarter. For the year ended December 31, 2001, software license revenue was $19.5 million, compared to $19.3 million for the year ended December 31, 2000. The increase was due mainly to sales of third-party software that provided additional functionality to certain modules of our proprietary software, sales of proprietary software to new customers and in new geographic areas, primarily the midwestern United States, and sales of upgraded financial and utility software modules to existing customers. The increase was somewhat offset by lower tax and appraisal software sales. Software services revenues. Software services revenues grew 11% to $21.5 million for the year ended December 31, 2001, from $19.4 million for the year ended December 31, 2000. The increase was due to higher proprietary software sales, as we offer services, such as installation of the software, conversion of the customers' data to be compatible with the software and training of the customer personnel to use the software. In addition, during 2001, we entered into more service-intensive contracts, particularly related to our tax products. Maintenance revenues. For the year ended December 31, 2001, maintenance revenue increased 26%, to $36.6 million, from $29.1 million for 2000. Higher maintenance revenues were due to an increase in our base of installed software and systems products and maintenance rate increases for several product lines. Maintenance and support services are provided for our software and related products. Appraisal services revenues. For the year ended December 31, 2001, appraisal services revenues were $34.7 million, compared to $20.9 million in the prior year. The 66% increase for the year in appraisal services revenues was primarily due to our continued progress on our contract with Nassau County. The contract to provide outsourced assessment services for Nassau County, together with tax assessment administration software and training, is valued at approximately $34.0 million. Implementation of the Nassau County contract began in September 2000. For the year ended December 31, 2001, we recorded $14.4 million of professional services revenue related to Nassau County. Hardware and other revenues. Hardware and other revenues increased $1.3 million for the year ended December 31, 2001 from $5.2 million for the same period of 2000. Approximately $700,000 of the increase related to the Nassau County contract. Other increases were due to timing of installations of equipment on customer contracts and are dependent on the contract size and on varying customer hardware needs. COST OF REVENUES For the year ended December 31, 2001, cost of revenues was $78.8 million compared to $59.7 million for the year ended December 31, 2000. The increase in cost of revenues was primarily due to the increase in revenues. Gross margin was 34% for the year ended December 31, 2001, compared to 36% for the year ended December 31, 2000. Overall gross margin was lower because our 2001 revenue mix included more appraisal services compared to 2000. Historically, gross profit is higher for software licenses than for software and appraisal services due to personnel costs associated with services. In addition, software license costs increased during 2001 compared to 2000, due to increased amortization of software development costs. We released several new products during the second and third quarters of 2001, at which time we began to amortize the related software development costs. 21 SELLING, GENERAL AND ADMINISTRATIVE EXPENSES Selling, general and administrative expenses for the year ended December 31, 2001 was $30.8 million compared to $32.8 million in the prior year. Selling, general and administrative expenses as a percentage of revenues declined to 26% in 2001 from 35% in 2000 because such expenses are primarily fixed and therefore did not increase in proportion to our revenue growth. The decline in selling, general and administrative expenses was due to a reduction in corporate costs following the sale of the information and property records services segment, lower acquisition-related costs such as legal and travel expenses and lower research and development costs which are expensed. AMORTIZATION OF ACQUISITION INTANGIBLES We accounted for all of our past acquisitions using the purchase method of accounting for business combinations. Prior to the adoption of SFAS No. 142, the excess of the purchase price over the fair value of the net identifiable assets of the acquired companies ("goodwill") was amortized using the straight-line method of amortization over their respective estimated useful lives. Amortization expense of acquisition intangibles was $6.9 million in 2001 and 2000. NET INTEREST EXPENSE Net interest expense was $479,000 for the year ended December 31, 2001, compared to $4.9 million for the year ended December 31, 2000. Interest expense declined due to a significant reduction in bank debt with the proceeds from the disposal of our former information and property records services segment. In addition, during 2001 we capitalized $578,000 of interest costs related to internally developed software products, compared to $586,000 for 2000. INCOME TAX PROVISION For the year ended December 31, 2001, we had income from continuing operations before income taxes of $1.8 million and an income tax provision of $1.5 million, resulting in an effective tax rate of 85%. The high effective income tax rate is primarily attributable to non tax-deductible goodwill amortization. For 2000, we incurred a loss from continuing operations before income tax benefit of $10.3 million and an income tax benefit of $2.8 million, resulting in an effective benefit rate of 27%. NET INCOME Net income was $269,000 in 2001 compared to a net loss of $24.6 million in 2000. For 2001, diluted earnings per share was $0.01 and, for 2000, diluted loss per share was $0.54. Income from continuing operations was $272,000, or $0.01 per diluted share in 2001, compared to a loss from continuing operations of $7.5 million, or $0.17 per diluted share in 2000. ACCOUNTING PRONOUNCEMENTS NOT YET ADOPTED In June 2001, the Financial Accounting Standards Board ("FASB") issued SFAS No. 143, "Accounting for Asset Retirement Obligations." SFAS No. 143 requires us to record the fair value of an asset retirement obligation as a liability in the period in which it incurs a legal obligation associated with the retirement of tangible long-lived assets that result from the acquisition, construction, development, and/or normal use of the assets. A corresponding asset is also recorded and depreciated over the life of the asset. After the initial measurement of the asset retirement obligation, the obligation will be adjusted at the end of each period to reflect the passage of time and changes in the estimated future cash flows relating to the obligation. We are required to adopt SFAS No. 143 on January 1, 2003. The adoption of SFAS No. 143 is not expected to have a material effect on our financial statements. In April 2002, the FASB issued SFAS No. 145, "Rescission of FASB Statements No. 4, 44 and 64, Amendment of FASB Statement No. 13, and Technical Corrections". SFAS No. 145 amends existing guidance on reporting gains and losses on the extinguishment of debt to prohibit the classification of the gain or loss as extraordinary, as the use of such extinguishments have become part of the risk management strategy of many companies. SFAS No. 145 also amends SFAS No. 13 to require sale-leaseback accounting for certain lease modifications that have economic effects similar to sale-leaseback transactions. The provisions of SFAS No. 145 related to the rescission of Statement No. 4, are applied in fiscal years beginning after May 15, 2002. Earlier application of these provisions is encouraged. The provisions of SFAS No. 145 related to Statement No. 13 were also effective for transactions occurring after May 15, 2002, with early application encouraged. The adoption of SFAS No. 145 is not expected to have a material effect on our financial statements. 22 In June 2002, the FASB issued SFAS No. 146, "Accounting for Costs Associated with Exit or Disposal Activities." SFAS No. 146 addresses financial accounting and reporting for costs associated with exit or disposal activities and nullifies Emerging Issues Task Force ("EITF") Issue 94-3, "Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit an Activity." The provisions of this Statement are effective for exit or disposal activities that are initiated after December 31, 2002, with early application encouraged. The adoption of SFAS No. 146 is not expected to have a material effect on our financial statements. In November 2002, the FASB issued Interpretation No. 45, "Guarantor's Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness to Others," an interpretation of FASB Statements No. 5, 57 and 107 and a rescission of FASB Interpretation No. 34. This Interpretation elaborates on the disclosures to be made by a guarantor in its interim and annual financial statements about its obligations under guarantees issued. The Interpretation also clarifies that a guarantor is required to recognize, at inception of a guarantee, a liability for the fair value of the obligation undertaken. The initial recognition and measurement provisions of the Interpretation are applicable to guarantees issued or modified after December 31, 2002 and are not expected to have a material effect on our financial statements. The disclosure requirements are effective for financial statements of interim and annual periods ending after December 31, 2002. In January 2003, the FASB issued Interpretation No. 46, "Consolidation of Variable Interest Entities, an interpretation of Accounting Research Bulletin ("ARB") No. 51." This Interpretation addresses the consolidation by business enterprises of variable interest entities as defined in the Interpretation. The Interpretation applies immediately to variable interests in variable interest entities created after January 31, 2003, and to variable interests in variable interest entities obtained after January 31, 2003. The application of this Interpretation is not expected to have a material effect on our financial statements. FINANCIAL CONDITION AND LIQUIDITY On March 5, 2002, we entered into a new $10.0 million revolving bank credit agreement which matures January 1, 2005. Our borrowings are limited to 80% of eligible accounts receivable and bear interest at either the prime rate or at the London Interbank Offered Rate plus a margin of 3%. The credit agreement is secured by our personal property and the common stock of our operating subsidiaries. The credit agreement is also guaranteed by our operating subsidiaries. In addition, we must maintain certain financial ratios and other financial conditions and cannot make certain investments, advances, cash dividends or loans. As of December 31, 2002, our bank has issued under our credit agreement letters of credit totaling $3.7 million to secure performance bonds required by some of our customer contracts. Our borrowing base under the credit agreement is limited by the amount of eligible receivables and was reduced by the letters of credit at December 31, 2002. At December 31, 2002, we had no outstanding bank borrowings under the credit agreement and had an available borrowing base of $6.3 million. As of December 31, 2002, our cash balance was $13.7 million, compared to $5.3 million at December 31, 2001. Cash increased primarily due to cash received from disposition of certain discontinued businesses and assets of discontinued business, cash generated from operations, exercise of stock options and improved cash collections. At December 31, 2002, our days sales outstanding ("DSO's") (accounts receivable divided by the quotient of annualized quarterly revenues divided by 360 days) were 85 compared to DSO's of 103 at December 31, 2001. In March 2002, we received cash of approximately $800,000 and a $200,000 subordinated note receivable to fully settle an existing promissory note and other contingent consideration in connection with the sale in May 2001 of a business unit previously included in the information and property records services segment, which had been discontinued. In June 2002, we sold the building of a business unit previously included in the discontinued information and property records service segment. Net proceeds from the sale were approximately $961,000. During the year ended December 31, 2002, we received $1.6 million from the issuance of 491,000 treasury shares upon the exercise of stock options under our employee stock option plan. During 2002, we made capital expenditures of $9.7 million, including $7.2 million for software development costs. The other expenditures related to computer equipment and expansions related to internal growth. Capital expenditures were funded principally from cash generated from operations. 23 Excluding acquisitions, we anticipate that 2003 capital spending will be approximately $12.0 million, approximately $9.0 million of which will be related to software development. Capital spending in 2003 is expected to be funded from existing cash balances and cash flows from operations. On August 15, 2002, we consummated an agreement to repurchase 1.1 million of our common shares from William D. Oates, a former director of Tyler, for a cash purchase price of $4.0 million. We lease certain offices, transportation, computer and other equipment used in our continuing operations under noncancelable operating lease agreements expiring at various dates through 2012. Most leases contain renewal options and some contain purchase options. Following are the future obligations under noncancelable leases and maturities of long-term obligations at December 31, 2002 (in millions):
2003 2004 2005 2006 2007 Thereafter Total ---- ---- ---- ---- ---- ---------- ----- Future rental payments under operating leases............................... $ 3.5 $ 3.2 $ 3.0 $ 2.7 $ 2.5 $ 9.5 $ 24.4 Notes payable and other................. .5 0.0 2.5 -- -- -- 3.0 ------- ------- ------- ------- ------- -------- ---------- $ 4.0 $ 3.2 $ 5.5 $ 2.7 $ 2.5 $ 9.5 $ 27.4 ======= ======= ======= ======= ======= ======== ==========
In August 2002, our Board of Directors approved a plan to repurchase up to 1.0 million shares of our common stock. Subsequent to December 31, 2002 and through February 21, 2003, we have repurchased 339,000 shares for an aggregate purchase price of $1.4 million. On February 4, 2003, we entered into an agreement with SunGard Data Systems Inc. ("SDS") in which we agreed to tender all of our HTE shares in the tender offer to be commenced by SDS for the acquisition of HTE. On February 5, 2003, SDS and HTE announced a definitive agreement for the acquisition of all of the shares of HTE for $7.00 per share in cash. Assuming the acquisition is consummated, we will receive approximately $39.3 million in gross cash proceeds from the sale of our HTE shares. As part of the plan of reorganization of Swan Transportation Company, one of our non-operating subsidiaries, we have agreed to contribute approximately $1.5 million over the next three years to a trust that was set up as part of the reorganization. See Note 16 in the Notes to the Consolidated Financial Statements. From time to time, we have discussions relating to acquisitions and we expect to continue to assess these and other strategic acquisition opportunities as they arise. We may also require additional financing if we decide to make additional acquisitions. There can be no assurance, however, that any such opportunities will arise, that any such acquisitions will be consummated or that any needed additional financing will be available when required on terms satisfactory to us. Absent any acquisitions, we anticipate that existing cash balances, cash flows from operations, working capital and available borrowing capacity under our revolving credit facility will provide sufficient funds to meet our needs for at least the next year. CAPITALIZATION At December 31, 2002, our capitalization consisted of $3.0 million of long-term obligations (including the current portion of those obligations) and $118.7 million of shareholders' equity. Our total debt-to-capital ratio (total debt divided by the sum of total shareholders' equity and total long-term obligations) was 2% at December 31, 2002. FACTORS THAT MAY AFFECT FUTURE RESULTS AND MARKET PRICE OF OUR STOCK An investment in our common stock involves a high degree of risk. Investors evaluating our company should carefully consider the factors described below and all other information contained in this Annual Report. Any of the following factors could materially harm our business, operating results, and financial condition. Additional factors and uncertainties not currently known to us or that we currently consider immaterial could also harm our business, operating results, and financial condition. This section should be read in conjunction with the Consolidated Financial Statements and related Notes and Management's Discussion and Analysis of Financial Condition and Results of Operations included in this Annual Report. We may make forward-looking statements from time to time, both written and oral. We undertake no obligation to revise or publicly release the results of any revisions to these forward-looking statements. Our actual results may differ materially from those projected in any such forward-looking statements due to a number of factors, including those set forth below and elsewhere in this Annual Report. 24 A decline in information technology spending may result in a decrease in our revenues or lower our growth rate. A decline in the demand for information technology among our current and prospective customers may result in decreased revenues or a lower growth rate for us because our sales depend, in part, on our customers' level of funding for new or additional information technology systems and services. Moreover, demand for our solutions may be reduced by a decline in overall demand for computer software and services. The current technology recession and decline in overall technology spending, terrorist activity, and threats of hostilities in the Middle East and Asia may cause our customers to reduce or eliminate information technology spending and cause price erosion for our solutions, which would substantially reduce the number of new software licenses we sell and the average sales price for these licenses. Because of these market and economic conditions, we believe there will continue to be uncertainty in the level of demand for our products and services. Accordingly, we cannot assure you that we will be able to increase or maintain our revenues. We may experience fluctuations in quarterly revenue that could adversely impact our stock price and our operating results. Our actual revenues in a quarter could fall below expectations, which could lead to a decline in our stock price. Our revenues and operating results are difficult to predict and may fluctuate substantially from quarter to quarter. Revenues from license fees in any quarter depend substantially upon our contracting activity and our ability to recognize revenues in that quarter in accordance with our revenue recognition policies. Our quarterly revenue may fluctuate and may be difficult to forecast for a variety of reasons, including the following: - a significant number of our prospective customers' decisions regarding whether to enter into license agreements with us are made within the last few weeks of each quarter; - we have historically had a higher concentration of revenues in the second half of our fiscal year due to governmental budget and spending tendencies; - the size of license transactions can vary significantly; - customers may unexpectedly postpone or cancel orders due to changes in their strategic priorities, project objectives, budget or personnel; - customer purchasing processes vary significantly and a customer's internal approval and expenditure authorization process can be difficult and time consuming to complete, even after selection of a vendor; - the number, timing, and significance of software product enhancements and new software product announcements by us and our competitors may affect purchase decisions; and - we may have to defer revenues under our revenue recognition policies. Fluctuation in our quarterly revenues may adversely affect our operating results. In each fiscal quarter our expense levels, operating costs, and hiring plans are based on projections of future revenues and are relatively fixed. If our actual revenues fall below expectations, we could experience a reduction in operating results. As with other software vendors, we may be required to delay revenue recognition into future periods, which could adversely impact our operating results. We have in the past had to, and in the future may have to, defer revenue recognition for license fees due to several factors, including whether: - license agreements include applications that are under development or other undelivered elements; - we must deliver services, including significant modifications, customization, or complex interfaces, which could delay product delivery or acceptance; - the transaction involves acceptance criteria; - the transaction involves contingent payment terms or fees; - we are required to accept a fixed-fee services contract; or - we are required to accept extended payment terms. Because of the factors listed above and other specific requirements under generally accepted accounting principles in the United States for software revenue recognition, we must have very precise terms in our license agreements in order to recognize revenue when we initially deliver and install software or perform services. Negotiation of mutually acceptable terms and conditions can extend the sales 25 cycle, and sometimes we do not obtain terms and conditions that permit revenue recognition at the time of delivery or even as work on the project is completed. Increases in service revenue as a percentage of total revenues could decrease overall margins and adversely affect our operating results. We realize lower margins on software and appraisal service revenues than on license revenue. The majority of our contracts involve both the license of software and the provision of professional services. Therefore, an increase in the percentage of software service and appraisal service revenue compared to license revenue could have a detrimental impact on our overall gross margins and could adversely affect operating results. Selling products and services into the public sector poses unique challenges. We derive substantially all of our revenues from sales of software and services to state, county and city governments, other municipal agencies, and other public entities. We expect that sales to public sector customers will continue to account for substantially all of our revenues in the future. We face many risks and challenges associated with contracting with governmental entities, including: - the sales cycle of governmental agencies may be complex and lengthy; - payments under some public sector contracts are subject to achieving implementation milestones, and we have had, and may in the future have, differences with customers as to whether milestones have been achieved; - political resistance to the concept of government agencies contracting with third parties to provide information technology solutions; - changes in legislation authorizing government's contracting with third parties; - the internal review process by governmental agencies for bid acceptance; - changes to the bidding procedures by governmental agencies; - changes in governmental administrations and personnel; - limitations on governmental resources placed by budgetary restraints, which in some circumstances, may provide for a termination of executed contracts because of a lack of future funding; and - the general effect of economic downturns and other changes on local governments' ability to spend public funds on outsourcing arrangements. Each of these risks is outside our control. If we fail to adequately adapt to these risks and uncertainties, our financial performance could be adversely affected. The open bidding process for governmental contracts creates uncertainty in predicting future contract awards. Many governmental agencies purchase products and services through an open bidding process. Generally, a governmental entity will publish an established list of requirements requesting potential vendors to propose solutions for the established requirements. To respond successfully to these requests for proposals, we must accurately estimate our cost structure for servicing a proposed contract, the time required to establish operations for the proposed client, and the likely terms of any other third party proposals submitted. We cannot guarantee that we will win any bids in the future through the request for proposal process, or that any winning bids will ultimately result in contracts on favorable terms. Our failure to secure contracts through the open bidding process, or to secure such contracts on favorable terms, may adversely affect our business, financial condition, and results of operations. Fixed price contracts may affect our profits. Some of our present contracts are on a fixed-priced basis, which can lead to various risks, including: - the failure to accurately estimate the resources and time required for an engagement; - the failure to effectively manage governmental agencies' and other customers' expectations regarding the scope of services to be delivered for an estimated price; and - the failure to timely complete fixed-price engagements within budget to the customers' satisfaction. If we do not adequately assess these and other risks, we may be subject to cost overruns and penalties, which may harm our business, financial condition, or results of operations. 26 We face significant competition from other vendors and potential new entrants into our markets. We believe we are a leading provider of integrated solutions for the public sector. However, we face competition from a variety of software vendors that offer products and services similar to those offered by us, as well as from companies offering to develop custom software. We compete on the basis of a number of factors, including: - the attractiveness of the business strategy and services we offer; - the breadth of products and services we offer; - price; - quality of products and service; - technological innovation; - name recognition; and - our ability to modify existing products and services to accommodate the particular needs of our customers. We believe the market is highly fragmented with a large number of competitors that vary in size, primary computer platforms, and overall product scope. Our competitors include the consulting divisions of national and regional accounting firms, publicly held companies that focus on selected segments of the public sector market, and a significant number of smaller, privately held companies. Certain competitors have greater technical, marketing, and financial resources than us. We cannot assure you that such competitors will not develop products or offer services that are superior to our products or services or that achieve greater market acceptance. We also compete with internal, centralized information service departments of governmental entities, which require us to persuade the end-user to stop the internal service and outsource to us. In addition, our customers may elect in the future to provide information management services internally through new or existing departments, which will reduce the market for our services. We could face additional competition as other established and emerging companies enter the public sector software application market and new products and technologies are introduced. Increased competition could result in price reductions, fewer customer orders, reduced gross margins, and loss of market share. In addition, current and potential competitors may make strategic acquisitions or establish cooperative relationships among themselves or with third-parties, thereby increasing the ability of their products to address the needs of our prospective customers. It is possible that new competitors or alliances among current and new competitors may emerge and rapidly gain significant market share. Further, competitive pressures could require us to reduce the price of our software licenses and related services. We cannot assure you that we will be able to compete successfully against current and future competitors, and the failure to do so would have material adverse effect upon our business, operating results, and financial condition. We must respond to rapid technological changes to be competitive. The market for our products is characterized by rapid technological change, evolving industry standards in computer hardware and software technology, changes in customer requirements, and frequent new product introductions and enhancements. The introduction of products embodying new technologies and the emergence of new industry standards can render existing products obsolete and unmarketable. As a result, our future success will depend, in part, upon our ability to continue to enhance existing products and develop and introduce in a timely manner or acquire new products that keep pace with technological developments, satisfy increasingly sophisticated customer requirements, and achieve market acceptance. We cannot assure you that we will successfully identify new product opportunities and develop and bring new products to market in a timely and cost-effective manner. Further, we cannot assure you that the products, capabilities, or technologies developed by others will not render our products or technologies obsolete or noncompetitive. If we are unable to develop or acquire on a timely and cost-effective basis new software products or enhancements to existing products, or if such new products or enhancements do not achieve market acceptance, our business, operating results, and financial condition may be materially adversely affected. Our failure to properly manage growth could adversely affect our business. We have expanded our operations rapidly since February 1998, when we entered the business of providing software solutions and services to the public sector. We intend to continue expansion in the foreseeable future to pursue existing and potential market opportunities. This rapid growth places a significant demand on management and operational resources. In order to manage growth effectively, we must implement and improve our operational systems, procedures, and controls on a timely basis. We must also identify, hire, train, and manage key managerial and technical personnel. If we fail to implement these systems or employ and retain such qualified personnel, our business, financial condition, and results of operations may be materially and adversely affected. 27 In addition, a significant portion of our growth has resulted from strategic acquisitions in new product and geographic markets. Although our future focus will be on internal growth, we will continue to identify and pursue strategic acquisitions and alliances with suitable candidates. Our future success will depend, in part, on our ability to successfully integrate past and future acquisitions and other strategic alliances into our operations. Acquisitions may involve a number of special risks, including diversion of management's attention, failure to retain key acquired personnel, unanticipated events or circumstances, legal liabilities, and amortization of certain acquired intangible assets. Some or all of these risks could have a material adverse effect on our business, financial condition, and results of operations. Although we conduct due diligence reviews of potential acquisition candidates, we may not identify all material liabilities or risks related to acquisition candidates. There can be no assurance that any such strategic acquisitions or alliances will be accomplished on favorable terms or will result in profitable operations. We may be unable to hire, integrate, and retain qualified personnel. Our continued success will depend upon the availability and performance of our key management, sales, marketing, customer support, and product development personnel. The loss of key management or technical personnel could adversely affect us. We believe that our continued success will depend in large part upon our ability to attract, integrate, and retain such personnel. We have at times experienced and continue to experience difficulty in recruiting qualified personnel. Competition for qualified software development, sales, and other personnel is intense, and we cannot assure you that we will be successful in attracting and retaining such personnel. We may be unable to protect our proprietary rights. Many of our product and service offerings incorporate proprietary information, trade secrets, know-how, and other intellectual property rights. We rely on a combination of contracts, copyrights, and trade secret laws to establish and protect our proprietary rights in our technology. We cannot be certain that we have taken all appropriate steps to deter misappropriation of our intellectual property. In addition, there has been significant litigation in the United States in recent years involving intellectual property rights. We are not currently involved in any material intellectual property litigation. We may, however, be a party to intellectual property litigation in the future to protect our proprietary information, trade secrets, know-how, and other intellectual property rights. Further, we cannot assure you that third parties will not assert infringement or misappropriation claims against us in the future with respect to current or future products. Any claims or litigation, with or without merit, could be time-consuming and result in costly litigation and diversion of management's attention. Further, any claims and litigation could cause product shipment delays or require us to enter into royalty or licensing arrangements. Such royalty or licensing arrangements, if required, may not be available on terms acceptable to us, if at all. Thus, litigation to defend and enforce our intellectual property rights could have a material adverse effect on our business, financial condition, and results of operations, regardless of the final outcome of such litigation. Our products are complex and, as such, we run the risk of errors or defects with new product introductions or enhancements. Software products as complex as those developed by us may contain errors or defects, especially when first introduced or when new versions or enhancements are released. Although we have not experienced material adverse effects resulting from any such defects or errors to date, we cannot assure you that material defects and errors will not be found after commencement of product shipments. Any such defects could result in loss of revenues or delay market acceptance. Our license agreements with our customers typically contain provisions designed to limit our exposure to potential liability claims. It is possible, however, that the limitation of liability provisions contained in our license agreements may not be effective as a result of existing or future federal, state or local laws or ordinances or judicial decisions. Although we maintain errors and omissions and general liability insurance, and we try to structure our contracts to include limitations on liability, we cannot assure you that a successful claim would not have a material adverse effect on our business, financial condition, and results of operations. Our Application Service Provider strategy has yet to gain widespread acceptance. Some businesses choose to access enterprise software applications through application service providers, or ASPs, which are businesses that host applications and provide access to software on a subscription basis. The public sector market for ASP solutions is new and unproven. Acceptance of our ASP model depends upon the ability and willingness of different governmental entities to accept and implement ASP solutions. Our clients have expressed security and privacy concerns with the ASP model, including a concern regarding the confidential nature of the information and transactions available from and conducted with governments and concerns regarding off-site storage of such information. We have limited experience selling our solutions through ASPs and may not be successful in generating revenue from this distribution channel. 28 Changes in the insurance markets may affect our ability to win some contract awards and may lead to increased expenses. Some of our customers, primarily those for our property appraisal services, require that we secure performance bonds before they will select us as their vendor. The number of qualified, high-rated insurance companies that offer performance bonds has decreased in recent years, while the costs associated with securing these bonds has increased dramatically. In addition, we are generally required to issue a letter of credit as security for the issuance of a performance bond. Each letter of credit we issue reduces our borrowing capacity under our senior secured credit agreement. We cannot guarantee that we will be able to secure such performance bonds in the future on terms that are favorable to us, if at all. Our inability to obtain performance bonds on favorable terms or at all could impact our future ability to win some contract awards, particularly large property appraisal services contracts, which could have a material adverse effect on our business, financial condition, and results of operations. Recent volatility in the stock markets, increasing shareholder litigation, the adoption of expansive legislation that redefines corporate controls (in particular, legislation adopted to prevent future corporate and accounting scandals), as well as other factors have recently led to significant increases in premiums for directors' and officers' liability insurance. The number of insurers offering directors and officers insurance at competitive rates has also decreased in recent years. We cannot predict when the insurance market for such coverage will stabilize, if at all. The continued volatility of the insurance market may result in future increases in our general and administrative expenses, which may adversely affect future operating results. Compliance with changing regulation of corporate governance and public disclosure may result in additional expenses. Changing laws, regulations, and standards relating to corporate governance and public disclosure, including the Sarbanes-Oxley Act of 2002, new Securities and Exchange Commission regulations and New York Stock Exchange rules, are creating uncertainty for companies such as ours. To maintain high standards of corporate governance and public disclosure, we intend to invest all reasonably necessary resources to comply with evolving standards. This investment may result in increased general and administrative expenses and a diversion of management time and attention from revenue-generating activities. Our stock price may be volatile. The market price of our common stock may be volatile and may be significantly affected by many different factors. Some examples of factors that can have a significant impact on our stock price include: - actual or anticipated fluctuations in our operating results; - announcements of technological innovations, new products, or new contracts by us or our competitors; - developments with respect to patents, copyrights, or other proprietary rights; - conditions and trends in the software and other technology industries; - adoption of new accounting standards affecting the software industry; - changes in financial estimates by securities analysts; and - general market conditions and other factors. In addition, the stock market has from time to time experienced significant price and volume fluctuations that have particularly affected the market prices for the common stock of technology companies. These broad market fluctuations may adversely affect the market price of our common stock. In the past, following periods of volatility in the market price of a particular company's securities, securities class action litigation has often been brought against that company. We cannot assure you that similar litigation will not occur in the future with respect to us. Such litigation could result in substantial costs and a diversion of management's attention and resources, which could have a material adverse effect upon our business, operating results, and financial condition. Historically, we have not paid dividends on our common stock. We have not declared or paid a cash dividend since we entered the business of providing software solutions and services to the public sector in February 1998. Our credit agreement restricts our ability to pay cash dividends. We intend to retain earnings for use in the operation and expansion of our business. We do not anticipate paying any cash dividends on our common stock in the foreseeable future. 29 Provisions in our certificate of incorporation, bylaws, and Delaware law could deter takeover attempts. Our Board of Directors may issue up to 1,000,000 shares of Preferred Stock and may determine the price, rights, preferences, privileges, and restrictions, including voting and conversion rights, of these shares of Preferred Stock. These determinations may be made without any further vote or action by our stockholders. The rights of the holders of our common stock will be subject to, and may be adversely affected by, the rights of the holders of any Preferred Stock that may be issued in the future. The issuance of Preferred Stock may make it more difficult for a third party to acquire a majority of our outstanding voting stock. In addition, some provisions of our Certificate of Incorporation, Bylaws, and of the Delaware General Corporation Law could also delay, prevent, or make more difficult a merger, tender offer, or proxy contest involving us. Financial Outlook. From time to time in press releases and otherwise, we may publish forecasts or other forward-looking statements regarding our results, including estimated revenues or net earnings. Any forecast of our future performance reflects various assumptions. These assumptions are subject to significant uncertainties, and as a matter of course, any number of them may prove to be incorrect. Further, the achievement of any forecast depends on numerous risks and other factors (including those described in this discussion), many of which are beyond our control. As a result, we cannot be certain that our performance will be consistent with any management forecasts or that the variation from such forecasts will not be material and adverse. Current and potential stockholders are cautioned not to base their entire analysis of our business and prospects upon isolated predictions, but instead are encouraged to utilize our entire publicly available mix of historical and forward-looking information, as well as other available information regarding us, our products and services, and the software industry when evaluating our prospective results of operations. ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK. We are not materially exposed to market risk from changes in interest rates, equity prices or foreign currency exchange rates. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA. Information required by this item is incorporated by reference from the Independent Auditors' Report on page 39 of our 2002 Annual Report to Shareholders ("2002 Annual Report") and from the consolidated financial statements, related notes and supplementary data on pages 40 through 61 of our 2002 Annual Report. ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE. None. 30 PART III See the information under the following captions in Tyler's definitive Proxy Statement, which is incorporated herein by reference. Only those sections of the Proxy Statement that specifically address the items set forth herein are incorporated by reference. Such incorporation by reference does not include the Compensation Committee Report, the Audit Committee Report or the Stock Performance Graphs, included in the Proxy Statement.
Headings in Proxy Statement ---------------------------------------------- ITEM 10. Directors and Executive Officers of the Registrant. "Directors, Nominees for Director and Executive Officers" ITEM 11. Executive Compensation. "Executive Compensation" ITEM 12. Security Ownership of Certain Beneficial Owners and "Security Ownership of Directors, Nominees for Management Director, Executive Officers and Principal Shareholders" ITEM 13. Certain Relationships and Related Transactions. "Employment Contracts"
PART IV ITEM 14. CONTROLS AND PROCEDURES (a) Evaluation of disclosure controls and procedures. Our chief executive officer and our chief financial officer, after evaluating the effectiveness of the Company's "disclosure controls and procedures" (as defined in the Securities Exchange Act of 1934 Rules 13a-14(c) and 15-d-14(c)) as of a date (the "Evaluation Date") within 90 days before the filing date of this annual report, have concluded that as of the Evaluation Date, our disclosure controls and procedures were adequate and designed to ensure that material information relating to us and our consolidated subsidiaries would be made known to them by others within those entities. (b) Changes in internal controls. There were no significant changes in our internal controls or to our knowledge, in other factors that could significantly affect our disclosure controls and procedures subsequent to the Evaluation Date. 31 ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULE AND REPORTS ON FORM 8-K. The following documents from our 2002 Annual Report are incorporated by reference into Item 8 of Part II of this Annual Report: (a) (1) The consolidated financial statements are filed as part of this Annual Report. PAGE Report of Independent Auditors.................. 39 Consolidated Statements of Operations for the years ended December 31, 2002, 2001 and 2000........................ 40 Consolidated Balance Sheets as of December 31, 2002 and 2001.......................... 41 Consolidated Statements of Shareholders' Equity for the years ended December 31, 2002 2001 and 2000.............................. 42 Consolidated Statements of Cash Flows for the years ended December 31, 2002, 2001 and 2000................................... 43 Notes to Consolidated Financial Statements...... 44 (2) The following financial statement schedule is filed as part of this report. Schedule II--Valuation and Qualifying Accounts for the years ended December 31, 2002, 2001 and 2000................................... 61 All other schedules for which provision is made in the applicable accounting regulation of the Securities and Exchange Commission are not required under the related instructions or are inapplicable and, therefore, have been omitted. (3) Exhibits Certain of the exhibits to this Annual Report are hereby incorporated by reference, as specified:
EXHIBIT NUMBER DESCRIPTION - ---------------------------------------------------------- 3.1 Restated Certificate of Incorporation of Tyler Three, as amended through May 14, 1990, and Certificate of Designation of Series A Junior Participating Preferred Stock (filed as Exhibit 3.1 to our Form 10-Q for the quarter ended June 30, 1990, and incorporated herein). 3.2 Certificate of Amendment to the Restated Certificate of Incorporation (filed as Exhibit 3.1 to our Form 8-K, dated February 19, 1998, and incorporated herein). 3.3 Amended and Restated By-Laws of Tyler Corporation, dated November 4, 1997 (filed as Exhibit 3.3 to our Form 10-K for the year ended December 31, 1997, and incorporated herein). 3.4 Certificate of Amendment dated May 19, 1999 to the Restated Certificate of Incorporation (filed as Exhibit 3.4 to our Form 10-K for the year ended December 31, 2000, and incorporated herein).
32 4.1 Specimen of Common Stock Certificate (filed as Exhibit 4.1 to our registration statement no. 33-33505 and incorporated herein). 4.2 Warrant to purchase common stock of Tyler Technologies, Inc. (filed as Exhibit 4.5 to our Form 10-Q for the quarter ended June 30, 2000, and incorporated herein). 4.3 Credit Agreement dated as of February 27, 2002, by and between Tyler Technologies, Inc. and Bank of Texas, N.A. (filed as Exhibit 4.6 to our Form 10-K for the year ended December 31, 2001 and incorporated herein). 4.4 First Amendment to Credit Agreement by and between Tyler Technologies, Inc. and Bank of Texas, N.A. dated March 5, 2002, (filed as Exhibit 4.7 to our Form 10-K for the year ended December 31, 2001 and incorporated herein). *4.5 Second Amendment to Credit Agreement, First Amendment to Pledge and Security Agreement, and Lenders Consent and Waiver by and Among Tyler Technologies, Inc. and Bank of Texas N.A. *10.1 Form of Indemnification Agreement for directors and officers. 10.2 Stock Option Plan amended and restated as of May 12, 2000 (filed as Exhibit 4.1 to our registration statement no. 333-98929 and incorporated herein and amended by Exhibit 4.2). 10.3 Acquisition Agreement dated as of November 20, 1995, by and among the Registrants, Tyler Pipe Industries, Inc. and Ransom Industries, Inc., formerly known as Union Acquisition Corporation (filed as Exhibit 2.1 to our Form 8-K, dated December 14, 1995, and incorporated herein). 10.4 Purchase Agreement between Tyler Corporation, Richmond Partners, Ltd. and Louis A. Waters, dated August 20, 1997 (filed as Exhibit 10.24 to our Form 8-K, dated September 2, 1997, and incorporated herein). 10.5 Employment agreement between Tyler Technologies, Inc. and Theodore L. Bathurst, dated October 7, 1998, (filed as Exhibit 10.18 to our Form 10-Q for the quarter ended September 30, 1998, and incorporated herein). *21 Subsidiaries of Tyler *23 Consent of Ernst & Young LLP *99.1 Certifications pursuant to Section 1350 of Chapter 63 of Title 18 of the United States Code. 33 *99.2 Certifications pursuant to Section 1350 of Chapter 63 of Title 18 of the United States Code. We will furnish copies of these exhibits to shareholders upon written request and payment for copying charges of $0.15 per page. * Filed herewith. (b) Reports on Form 8-K Form 8-K Item Reported Date Reported Exhibits Filed ------------- --------- ------------------------------ November 1, 2002 5 News release issued by Tyler Technologies, Inc. dated October 31, 2002 34 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. TYLER TECHNOLOGIES, INC. Date: February 25, 2003 By: /s/ John M. Yeaman ----------------------------------- John M. Yeaman Chief Executive Officer and President (principal executive officer) Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated. Date: February 25, 2003 By: /s/ G. Stuart Reeves ---------------------------- G. Stuart Reeves Chairman of the Board Date: February 25, 2003 By: /s/ John M. Yeaman ---------------------------- John M. Yeaman Chief Executive Officer and President Director (principal executive officer) Date: February 25, 2003 By: /s/ Theodore L. Bathurst ---------------------------- Theodore L. Bathurst Vice President and Chief Financial Officer (principal financial officer) Date: February 25, 2003 By: /s/ Brian K. Miller ---------------------------- Brian K. Miller Vice President - Finance and Treasurer Date: February 25, 2003 By: /s/ Terri L. Alford ---------------------------- Terri L. Alford Controller (principal accounting officer) 35 Date: February 25, 2003 By: /s/ Ben T. Morris ---------------------------- Ben T. Morris Director Date: February 25, 2003 By: /s/ John S. Marr ---------------------------- John S. Marr Director Date: February 25, 2003 By: /s/ Michael D. Richards ---------------------------- Michael D. Richards Director Date: February 25, 2003 By: /s/ Glenn A. Smith ---------------------------- Glenn A. Smith Director 36 CERTIFICATIONS I, John M. Yeaman, certify that: 1. I have reviewed this annual report on Form 10-K of Tyler Technologies, Inc.; 2. Based on my knowledge, this annual report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this annual report; 3. Based on my knowledge, the financial statements, and other financial information included in this annual report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this annual report; 4. The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have: a) designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this annual report is being prepared; b) evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this annual report (the "Evaluation Date"); and c) presented in this annual report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date; 5. The registrant's other certifying officer and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent function): a) all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and 6. The registrant's other certifying officer and I have indicated in this annual report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. Dated: February 25, 2003 By: /s/ John M. Yeaman ------------------ John M. Yeaman President and Chief Executive Officer 37 I, Theodore L. Bathurst, certify that: 1. I have reviewed this annual report on Form 10-K of Tyler Technologies, Inc.; 2. Based on my knowledge, this annual report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this annual report; 3. Based on my knowledge, the financial statements, and other financial information included in this annual report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this annual report; 4. The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have: a) designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this annual report is being prepared; b) evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this annual report (the "Evaluation Date"); and c) presented in this annual report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date; 5. The registrant's other certifying officer and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent function): a) all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and 6. The registrant's other certifying officer and I have indicated in this annual report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. Dated: February 25, 2003 By: /s/ Theodore L. Bathurst ------------------------ Theodore L. Bathurst Vice President and Chief Financial Officer 38 REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS The Board of Directors and Shareholders Tyler Technologies, Inc. We have audited the accompanying consolidated balance sheets of Tyler Technologies, Inc. as of December 31, 2002 and 2001, and the related consolidated statements of operations, shareholders' equity, and cash flows for each of the three years in the period ended December 31, 2002. Our audits also included the financial statement schedule listed in the Index at Item 15(a). These financial statements and schedule are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements and schedule based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of Tyler Technologies, Inc. at December 31, 2002 and 2001, and the consolidated results of their operations and their cash flows for each of the three years in the period ended December 31, 2002, in conformity with accounting principles generally accepted in the United States. Also, in our opinion, the related financial statement schedule, when considered in relation to the basic financial statements taken as a whole, presents fairly in all material respects the information set forth therein. As discussed in Note 7 in the Notes to the Consolidated Financial Statements, the Company changed its method of accounting for goodwill. ERNST & YOUNG LLP Dallas, Texas February 21, 2003 39 Tyler Technologies, Inc. Consolidated Statements of Operations For the years ended December 31 In thousands, except per share amounts
2002 2001 2000 --------- --------- -------- Revenues: Software licenses $ 24,278 $ 19,491 $ 19,312 Software services 25,703 21,538 19,425 Maintenance 40,667 36,587 29,108 Appraisal services 37,319 34,727 20,909 Hardware and other 5,930 6,473 5,179 -------- -------- -------- Total revenues 133,897 118,816 93,933 Cost of revenues: Software licenses 5,482 4,130 2,605 Software services and maintenance 50,175 46,024 38,355 Appraisal services 25,512 23,894 14,681 Hardware and other 4,746 4,749 4,017 -------- -------- -------- Total cost of revenues 85,915 78,797 59,658 -------- -------- -------- Gross profit 47,982 40,019 34,275 Selling, general and administrative expenses 33,914 30,830 32,805 Amortization of acquisition intangibles 3,329 6,898 6,903 -------- -------- -------- Operating income (loss) 10,739 2,291 (5,433) Legal fees associated with affiliated investment 704 -- -- Interest expense 187 630 4,914 Interest income (193) (151) (30) -------- -------- -------- Income (loss) from continuing operations before income taxes 10,041 1,812 (10,317) Income tax provision (benefit) 3,869 1,540 (2,810) -------- -------- -------- Income (loss) from continuing operations 6,172 272 (7,507) Discontinued operations: Loss from operations, after income taxes -- -- (4,251) Gain (loss) on disposal, after income taxes 1,817 (3) (12,839) -------- -------- -------- Gain (loss) from discontinued operations 1,817 (3) (17,090) -------- -------- -------- Net income (loss) $ 7,989 $ 269 $(24,597) ======== ======== ======== Basic income (loss) per common share: Continuing operations $ 0.13 $ 0.01 $ (0.17) Discontinued operations 0.04 (0.00) (0.37) -------- -------- -------- Net income (loss) per common share $ 0.17 $ 0.01 $ (0.54) ======== ======== ======== Diluted income (loss) per common share: Continuing operations $ 0.12 $ 0.01 $ (0.17) Discontinued operations 0.04 (0.00) (0.37) -------- -------- -------- Net income (loss) per common share $ 0.16 $ 0.01 $ (0.54) ======== ======== ======== Basic weighted average common shares outstanding 47,136 47,181 45,380 Diluted weighted average common shares outstanding 49,493 47,984 45,380
See accompanying notes 40 Tyler Technologies, Inc. Consolidated Balance Sheets December 31 In thousands, except share and per share amounts
2002 2001 ---------- ---------- ASSETS Current assets: Cash and cash equivalents $ 13,744 $ 5,271 Accounts receivable (less allowance for losses of $690 in 2002 and $1,275 in 2001) 33,510 35,256 Income taxes receivable -- 151 Prepaid expenses and other current assets 4,009 3,318 Deferred income taxes 1,197 1,329 --------- --------- Total current assets 52,460 45,325 Net assets of discontinued operations -- 1,000 Property and equipment, net 6,819 6,967 Other assets: Investment security available - for - sale 27,196 11,238 Goodwill 46,298 43,292 Customer base, net 14,645 15,518 Software, net 21,933 19,982 Other acquisition intangibles 10 3,419 Sundry 484 234 --------- --------- $ 169,845 $ 146,975 ========= ========= LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities: Accounts payable $ 2,390 $ 2,036 Accrued liabilities 11,186 9,774 Net current liabilities of discontinued operations 442 581 Deferred revenue 26,208 27,215 --------- --------- Total current liabilities 40,226 39,606 Long-term obligations, less current portion 2,550 2,910 Deferred income taxes 8,413 3,575 Commitments and contingencies Shareholders' equity: Preferred stock, $10.00 par value; 1,000,000 shares authorized none issued -- -- Common stock, $0.01 par value; 100,000,000 shares authorized; 48,147,969 shares issued in 2002 and 2001 481 481 Additional paid-in capital 156,898 157,242 Accumulated deficit (40,954) (48,943) Accumulated other comprehensive income (loss), net of tax 7,418 (4,545) Treasury stock, at cost; 1,928,636 and 920,205 shares in 2002 and 2001, respectively (5,187) (3,351) --------- --------- Total shareholders' equity 118,656 100,884 --------- --------- $ 169,845 $ 146,975 ========= =========
See accompanying notes. 41 Tyler Technologies, Inc. Consolidated Statements of Shareholders' Equity For the years ended December 31, 2002, 2001 and 2000 In thousands
ACCUMULATED COMMON STOCK ADDITIONAL OTHER TREASURY STOCK TOTAL -------------- PAID-IN COMPREHENSIVE ACCUMULATED ----------------- SHAREHOLDERS' SHARES AMOUNT CAPITAL INCOME (LOSS) DEFICIT SHARES AMOUNT EQUITY ------ ------ ----------- ------------- ----------- ------ ------- ------ Balance at December 31, 1999 44,709 $ 447 $151,298 $ 17,931 $(24,615) (1,418) $ (6,157) $ 138,904 Comprehensive loss: Net loss -- -- -- -- (24,597) -- -- (24,597) Unrealized loss on investment security -- -- -- (28,622) -- -- -- (28,622) --------- Total comprehensive loss (53,219) --------- Issuance of shares pursuant to stock compensation plans -- -- (1,759) -- -- 555 2,926 1,167 Shares issued for private investment 3,334 33 9,237 -- -- -- -- 9,270 ------ ------ -------- --------- -------- ------ --------- --------- Balance at December 31, 2000 48,043 480 158,776 (10,691) (49,212) (863) (3,231) 96,122 Comprehensive income: Net income -- -- -- -- 269 -- -- 269 Unrealized gain on investment security -- -- -- 6,146 -- -- -- 6,146 --------- Total comprehensive income 6,415 --------- Issuance of shares pursuant to stock compensation plans 105 1 221 -- -- 3 8 230 Federal income tax benefit related to exercise of stock options -- -- 33 -- -- -- -- 33 Shares received from sale of discontinued business -- -- -- -- -- (60) (128) (128) Adjustment in connection with previous acquisition -- -- (1,788) -- -- -- -- (1,788) ------ ------ -------- --------- -------- ------ --------- --------- Balance at December 31, 2001 48,148 481 157,242 (4,545) (48,943) (920) (3,351) 100,884 Comprehensive income: Net income -- -- -- -- 7,989 -- -- 7,989 Unrealized gain on investment security, net of tax -- -- -- 11,963 -- -- -- 11,963 --------- Total comprehensive income 19,952 --------- Issuance of shares pursuant to stock compensation plans -- -- (542) -- -- 491 2,164 1,622 Treasury stock purchases -- -- -- -- -- (1,500) (4,000) (4,000) Federal income tax benefit related to exercise of stock options -- -- 198 -- -- -- -- 198 ------ ------ -------- --------- -------- ------ --------- --------- Balance at December 31, 2002 48,148 $ 481 $156,898 $ 7,418 $(40,954) (1,929) $(5,187) $ 118,656 ====== ====== ======== ========= ======== ====== ========= =========
See accompanying notes. 42 Tyler Technologies, Inc. Consolidated Statements of Cash Flows For the years ended December 31 In thousands
2002 2001 2000 --------- --------- --------- Cash flows from operating activities: Net income (loss) $ 7,989 $ 269 $(24,597) Adjustments to reconcile net income (loss) to net cash provided (used) by operations: Depreciation and amortization 8,522 10,910 9,686 Non-cash interest and other charges 348 361 2,069 Provision for losses -- accounts receivable 727 1,681 1,438 Deferred income tax provision (benefit) 3,384 1,258 (2,890) Discontinued operations - noncash charges and changes in operating assets and liabilities (2,458) (2,590) 8,215 Changes in operating assets and liabilities, exclusive of effects of acquired companies and discontinued operations: Accounts receivable 1,019 (258) (7,052) Income tax receivable 151 172 2,571 Prepaid expenses and other current assets (279) (853) 48 Other receivables -- -- 85 Accounts payable 354 (2,263) 697 Accrued liabilities 1,095 (2,092) 1,370 Deferred revenue (1,007) 6,149 1,234 -------- -------- -------- Net cash provided (used) by operating activities 19,845 12,744 (7,126) -------- -------- -------- Cash flows from investing activities: Additions to property and equipment (2,508) (3,101) (2,645) Software development costs (7,210) (6,225) (6,714) Cost of acquisitions, net of cash acquired -- (2,750) -- Cost of acquisitions subsequently discontinued -- -- (3,073) Capital expenditures of discontinued operations -- (1,353) (2,201) Proceeds from disposal of discontinued operations and related assets 1,807 3,675 79,821 Other (63) 48 213 -------- -------- -------- Net cash (used) provided by investing activities (7,974) (9,706) 65,401 -------- -------- -------- Cash flows from financing activities: Net payments on revolving credit facility -- (4,750) (56,250) Payments on notes payable (456) (354) (836) Payment of debt of discontinued operations (324) (992) (2,925) Issuance of common stock -- -- 9,270 Repurchase of common stock (4,000) -- -- Proceeds from exercise of stock options 1,622 230 19 Debt issuance costs (240) (118) (1,300) -------- -------- -------- Net cash used by financing activities (3,398) (5,984) (52,022) -------- -------- -------- Net increase (decrease) in cash and cash equivalents 8,473 (2,946) 6,253 Cash and cash equivalents at beginning of year 5,271 8,217 1,964 -------- -------- -------- Cash and cash equivalents at end of year $ 13,744 $ 5,271 $ 8,217 ======== ======== ========
See accompanying notes. 43 Tyler Technologies, Inc. Notes to Consolidated Financial Statements (Tables in thousands, except per share data) December 31, 2002 and 2001 (1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES DESCRIPTION OF BUSINESS We provide integrated software systems and related services for local governments. We develop and market a broad line of software products and services to address the information technology ("IT") needs of cities, counties, schools and other local government entities. In addition we provide professional IT services to our customers, including software and hardware installation, data conversion, training and product modifications, along with continuing maintenance and support for customers using our systems. We also provide property appraisal outsourcing services for taxing jurisdictions. We discontinued the operations of our information and property records services segment in 2000. See Note 3 - Discontinued Operations. PRINCIPLES OF CONSOLIDATION The consolidated financial statements include our parent company and our subsidiaries, all of which are wholly-owned. All significant intercompany balances and transactions have been eliminated in consolidation. CASH AND CASH EQUIVALENTS Cash equivalents include items almost as liquid as cash, such as money market investments with maturity periods of three months or less when purchased. For purposes of the statements of cash flows, we consider all investments with original maturities of three months or less to be cash equivalents. REVENUE RECOGNITION We earn revenue from software licenses, postcontract customer support ("PCS" or "maintenance"), hardware, software related services and appraisal services. PCS includes telephone support, bug fixes, and rights to upgrades on a when-and-if available basis. We provide services that range from installation, training, and basic consulting to software modification and customization to meet specific customer needs. In software arrangements that include rights to multiple software products, specified upgrades, PCS, and/or other services, we allocate the total arrangement fee among each deliverable based on the relative fair value of each. Fair values are estimated using vendor specific objective evidence. We recognize revenue from software transactions in accordance with Statement of Position ("SOP") 97-2, "Software Revenue Recognition," as amended by SOP 98-4 and SOP 98-9 as follows: Software Licenses and Appraisal Services: We recognize the revenue allocable to software licenses and specified upgrades upon delivery of the software product or upgrade to the customer, unless the fee is not fixed or determinable or collectibility is not probable. If the fee is not fixed or determinable including payment terms three months or more from shipment, 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 product's functionality. A majority of our software arrangements involve "off-the-shelf" software. We consider software to be off-the-shelf software if it can be added to an arrangement with minor changes in the underlying code and it can be used by the customer for the customer's purpose upon installation. For off-the-shelf software arrangements, we recognize the software license fee as revenue after delivery has occurred, customer acceptance is reasonably assured, that portion of the fee represents an enforceable claim and is probable of collection and the remaining services such as training are not considered essential to the product's functionality. 44 For arrangements that include customization or modification of the software, or where software services are otherwise considered essential, we recognize revenue using contract accounting. We use the percentage-of-completion method to recognize revenue from these arrangements. We measure progress-to-completion primarily using labor hours incurred, or value added. The percentage of completion methodology generally results in the recognition of reasonably consistent profit margins over the life of a contract since we have the ability to produce reasonably dependable estimates of contract billings and contract costs. We generally use the level of profit margins that are most likely to occur on a contract. If the most likely profit margins cannot be precisely determined, the lowest probable level of profit in the range of estimates is used for the contract until the results can be estimated more precisely. These arrangements are often implemented over an extended time period and occasionally require us to revise total cost estimates. Amounts recognized in revenue are calculated using the progress-to-completion measurement after giving effect to any changes in our cost estimates. Changes to total estimated contract costs, if any, are recorded in the period they are determined. Estimated losses on uncompleted contracts are recorded in the period in which we first determine that a loss is apparent. Software Services: Some of our software arrangements include services considered essential for the customer to use the software for the customer's purposes. For these software arrangements, both the software license revenue and the services revenue are recognized as the services are performed using the percentage-of-completion contract accounting method. When software services are not considered essential, the fee allocable to the service element is recognized as revenue as we perform the services. Appraisal Services: For our real estate appraisal projects, we recognize revenue using contract accounting. We measure progress-to-completion primarily using units completed and these arrangements are often implemented over a one to three year time period. Computer Hardware Equipment: Revenue allocable to equipment based on vendor specific objective evidence of fair value is recognized when we deliver the equipment and collection is probable. Postcontract Customer Support: Our customers generally enter into PCS agreements when they purchase the software license. Our PCS agreements are generally renewable every year. 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. Deferred revenue consists primarily of payments received in advance of revenue being earned under software licensing, software services and hardware installation, support and maintenance contracts. Unbilled revenue is not billable at the balance sheet dates but is recoverable over the remaining life of the contract through billings made in accordance with contractual agreements. USE OF ESTIMATES The preparation of our consolidated financial statements in conformity with accounting principles generally accepted in the United States ("GAAP") requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Significant items subject to such estimates and assumptions include the application of the percentage of completion method, the carrying amount of intangible assets and valuation allowances for receivables and deferred income tax assets. Actual results could differ from those estimates. PROPERTY AND EQUIPMENT Property, equipment and purchased software are recorded at original cost and increased by the cost of any significant improvements after purchase. We record maintenance and repairs as expense when incurred. Depreciation and amortization is calculated using the straight-line method over the shorter of the asset's estimated useful life or the term of the lease in the case of leasehold improvements. For income tax purposes, we use accelerated depreciation methods as allowed by tax laws. INTEREST COST We capitalize interest cost as a component of capitalized software development costs. We capitalized interest costs of $269,000 during 2002, $578,000 during 2001 and $586,000 during 2000. 45 RESEARCH AND DEVELOPMENT COSTS We record all research and development costs as expense when incurred. We expensed research and development costs of $611,000 during 2002, $412,000 during 2001 and $973,000 during 2000. INCOME TAXES Income taxes are accounted for under the asset and liability method. Deferred taxes arise because of different treatment between financial statement accounting and tax accounting, known as "temporary differences." We record the tax effect of these temporary differences as "deferred tax assets" (generally items that can be used as a tax deduction or credit in the future periods) and "deferred tax liabilities" (generally items that we received a tax deduction for, which have not yet been recorded in the income statement). The deferred tax assets and liabilities are measured using enacted tax rules and laws that are expected to be in effect when the temporary differences are expected to be recovered or settled. A valuation allowance would be established to reduce deferred tax assets if it is likely that a deferred tax asset will not be realized. STOCK COMPENSATION In accordance with Statement of Financial Accounting Standards ("SFAS") No. 123, "Accounting for Stock-Based Compensation," we elected to account for our stock-based compensation under Accounting Principles Board ("APB") Opinion No. 25, "Accounting for Stock Issued to Employees," as amended and related interpretations including FASB Interpretation No. 44, "Accounting for Certain Transactions involving Stock Compensation," an interpretation of APB Opinion No. 25, issued in March 2000. Under APB No. 25's intrinsic value method, compensation expense is determined on the measurement date; that is, the first date on which both the number of shares the option holder is entitled to receive, and the exercise price, if any, are known. Compensation expense, if any, is measured based on the award's intrinsic value - the excess of the market price of the stock over the exercise price on the measurement date. The exercise price of all of our stock options granted equals the market price on the measurement date. Therefore we have not recorded any compensation expense related to grants of stock options. The weighted-average fair value per stock option granted was $3.61 for 2002, $1.28 for 2001 and $2.02 for 2000. We estimated the fair values using the Black-Scholes option pricing model and the following assumptions for the periods presented:
YEARS ENDED DECEMBER 31, ---------------------------------- 2002 2001 2000 --------- --------- --------- Expected dividend yield..................... 0% 0% 0% Risk-free interest rate..................... 4.9% 5.1% 6.1% Expected stock price volatility............. 77.0% 78.0% 73.0% Expected term until exercise (years) ....... 7 7 7
Pro forma information regarding net income (loss) and earnings (loss) per share is required by SFAS No. 123 for awards granted after December 31, 1994, as if we had accounted for our stock-based awards to employees under the fair value method of SFAS No. 123, and is as follows:
YEARS ENDED DECEMBER 31, -------------------------------------- 2002 2001 2000 ---------- ---------- ---------- Net income (loss)................................................. $ 7,989 $ 269 $ (24,597) Add stock-based employee compensation cost included in net income (loss), net of related tax benefit................................ -- -- -- Deduct total stock-based employee compensation expense determined under fair-value-based method for all rewards, net of related tax benefit.................................................... (1,394) (1,188) (1,399) --------- -------- --------- Pro forma net income (loss)....................................... $ 6,595 $ (919) $ (25,996) ========= ======== ========= Pro forma net income (loss) per basic share....................... $ 0.14 $ (0.02) $ (0.57) ========= ======== ========= Pro forma net income (loss) per diluted share..................... $ 0.13 $ (0.02) $ (0.57) ========= ======== =========
46 COMPREHENSIVE INCOME (LOSS) Changes in accumulated other comprehensive income (loss) follows:
YEARS ENDED DECEMBER 31, ------------------------------------------ 2002 2001 2000 ---------- ---------- ---------- Net income (loss)................................................. $ 7,989 $ 269 $ (24,597) Other comprehensive income (loss): Change in fair value of securities available-for-sale (net of deferred tax expense of $3,995 for 2002)...................... 11,963 6,146 (28,622) ---------- ---------- --------- Total comprehensive income (loss)................................. $ 19,952 $ 6,415 $ (53,219) ========== ========== =========
We did not record a tax benefit in connection with the change in the unrealized gain (loss) for 2001 or 2000 since we could not conclude it was more likely than not that the tax benefit would be realized on the cumulative unrealized holding loss. SEGMENT AND RELATED INFORMATION Although we have a number of operating subsidiaries, separate segment data has not been presented as they meet the criteria for aggregation as permitted by SFAS No. 131, "Disclosures About Segments of an Enterprise and Related Information." GOODWILL AND OTHER INTANGIBLE ASSETS Our business acquisitions result in the allocation of the purchase price to goodwill and other intangible assets. We allocate the cost of acquired companies first to identifiable assets based on estimated fair values. The excess of the purchase price over the fair value of identifiable assets acquired, net of liabilities assumed, is recorded as goodwill. On January 1, 2002 we adopted the provisions of SFAS No. 141, "Business Combinations," and SFAS No. 142, "Goodwill and Other Intangible Assets." SFAS No. 141 eliminates the pooling of interest method of accounting for business combinations initiated after June 30, 2001. The adoption of SFAS No. 141 did not impact our results of operations or financial position. With the adoption of SFAS No. 142 goodwill and intangible assets not subject to amortization are tested annually for impairment, and are tested for impairment more frequently if events and circumstances indicate that the asset might be impaired. An impairment loss is recognized to the extent that the carrying amount exceeds the asset's fair value. Prior to the adoption of SFAS No. 142, goodwill was amortized on a straight-line basis over the expected periods to be benefited and assessed for recoverability by determining whether the amortization of the goodwill balance over its remaining life could be recovered through undiscounted future operating cash flows of the acquired operation. All other intangible assets were amortized on a straight-line basis. The amount of goodwill and other intangible asset impairment, if any, was measured by the amount by which the carrying amount of the assets exceeded the fair value of the assets. Fair value was determined based on projected discounted future operating cash flows using a discount rate reflecting our average cost of funds. 47 IMPAIRMENT OF LONG-LIVED ASSETS SFAS No. 144 provides a single accounting model for long-lived assets to be disposed of. SFAS No. 144 also changes the criteria for classifying an asset as held for sale; and broadens the scope of businesses to be disposed of that qualify for reporting as discontinued operations and changes the timing of recognizing losses on discontinued operations. We adopted SFAS No. 144 on January 1, 2002. The adoption of SFAS No. 144 did not affect our results of operations or financial position. In accordance with SFAS No. 144, long-lived assets, such as property, plant, and equipment, and purchased intangibles subject to amortization, are reviewed for impairment whenever events or changes in circumstances indicate that the amount we have recorded for an asset may not be recoverable. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of an asset to estimated undiscounted future cash flows expected to be generated by the asset. If the carrying amount of an asset exceeds its estimated future cash flows, an impairment charge is recognized by the amount by which the carrying amount of the asset exceeds the fair value of the asset. Assets to be disposed of would be separately presented in the balance sheet and reported at the lower of the carrying amount or fair value less costs to sell, and are no longer depreciated. The assets and liabilities of a disposed group classified as held for sale would be presented separately in the appropriate asset and liability sections of the balance sheet. Prior to the adoption of SFAS No. 144, we accounted for long-lived assets in accordance with SFAS No. 121, "Accounting for Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of." COSTS OF COMPUTER SOFTWARE Software development costs have been accounted for in accordance with SFAS No. 86, "Accounting for the Costs of Computer Software to be Sold, Leased, or Otherwise Marketed." Under SFAS No. 86, capitalization of software development costs begins upon the establishment of technological feasibility and prior to the availability of the product for general release to customers. We capitalized software development costs of approximately $7.2 million during 2002, $6.2 million during 2001 and $6.7 million during 2000. Software development costs primarily consist of personnel costs, rent for related office space and capitalized interest cost. We begin to amortize capitalized costs when a product is available for general release to customers. Amortization expense is determined on a product-by-product basis at a rate not less than straight-line basis over the product's remaining estimated economic life. Amortization of software development costs was approximately $2.8 million during 2002, $1.7 million during 2001 and $622,000 during 2000. FAIR VALUE OF FINANCIAL INSTRUMENTS We used the following methods and assumptions to estimate the fair value of each class of financial instruments at the balance sheet date: - Cash and cash equivalents, accounts receivables, trade accounts payables, deferred revenues and certain other assets: Costs approximate fair value because of the short maturity of these instruments. Our available-for-sale investments are recorded at fair value based on quoted market prices. - Long-term obligations: Cost/carrying values approximates fair value either due to the variable nature of their stated interest rates or the stated interest rates approximate market rates. These estimated fair value amounts have been determined using available market information or other appropriate valuation methodologies. - We do not have any derivative financial instruments, including those for speculative or trading purposes. CONCENTRATIONS OF CREDIT RISK AND UNBILLED RECEIVABLES Concentrations of credit risk with respect to receivables are limited due to the wide variety of customers and markets into which our products and services are provided, as well as their dispersion across many different geographic areas. Historically our credit losses have not been significant. As a result, as of December 31, 2002, we do not believe we have any significant concentrations of credit risk. 48 Our property appraisal outsourcing service contracts can range up to three years in duration. In connection with these percentage of completion contracts and for certain software service contracts, we may perform the work prior to when the services are billable and/or payable pursuant to the contract. We have recorded retentions and unbilled receivables (costs and estimated profit in excess of billings) of approximately $6.2 million and $7.5 million at December 31, 2002 and 2001, respectively, in connection with such contracts. Retentions are included in trade accounts receivable and amounted to $2.6 million at December 31, 2002, of which $168,000 is expected to be collected in excess of one year. One customer accounted for approximately 10% during 2002 and 13% during 2001, of our total consolidated revenues. No single customer accounted for greater than 10% of total consolidated revenues during 2000. RECLASSIFICATIONS Pursuant to Financial Accounting Standards Board Emerging Issues Task Force ("EITF") Issue No. 01-14, "Income Statement Characterization of Reimbursements Received for 'Out-of-Pocket' Expenses Incurred," customer reimbursements for out-of-pocket expenses are to be included in net revenues and the related costs in cost of revenues. Because these additional net revenues are offset by the associated reimbursable expenses included in cost of revenues, the adoption of EITF No. 01-14 in 2002 did not impact income (loss) from continuing operations or net income (loss) for all periods presented. Net revenues and cost of revenues for 2001 and 2000 were recast to reclassify certain reimbursable expenses to conform to the current year presentation in accordance with EITF No. 01-14. See Note 17 - Quarterly Financial Information. In addition, certain other amounts for previous years have been reclassified to conform to the current year presentation. (2) ACQUISITIONS On November 4, 1999, we acquired selected assets and assumed selected liabilities of Cole Layer Trumble Company ("CLT") from a privately held company ("Seller"). Part of the purchase price consisted of the issuance of 1.0 million restricted shares of Tyler common stock and included a price protection on the sale of the stock. The price protection, which expired November 4, 2001, was equal to the difference between the actual sale proceeds of the Tyler common stock and $6.25 on a per share basis. The price protection was limited to $2.75 million. During the year ended December 31, 2001, we received a claim from the Seller under the price protection provision, which qualified for the maximum amount of the price protection. Contingent consideration of this nature does not change the recorded costs of the acquisition and the claim is first recorded when submitted. Accordingly, the claim submitted in 2001 of $2.75 million, net of the deferred tax benefit of $963,000, was charged to paid-in capital during 2001. The purchase agreement contained a number of post-closing adjustments which resulted in a receivable of approximately $1.4 million due to us from the Seller. During the year ended December 31, 2001 and concurrent with the settlement of the price protection provision, we paid the Seller $1.35 million in cash on a net basis and eliminated the $1.4 million receivable due to us. We entered into a mutual release agreement with the Seller to fully settle the price protection and related purchase agreement provisions. In January 2000 we paid $3.0 million in cash (among other consideration) for Capital Commerce Reporter, Inc. ("CCR") which was included in our information and property records services segment that was discontinued in December 2000. We have used the purchase method of accounting for all of our business combinations. Results of operations of acquired entities are included in our consolidated financial statements from the respective dates of acquisition. (3) DISCONTINUED OPERATIONS Discontinued operations includes the operating results of the information and property records services segment which we discontinued in December 2002, two non-operating subsidiaries relating to a formerly owned subsidiary that we sold in December 1995 and an automotive parts distributor that we sold in March 1999. On September 29, 2000, we sold certain net assets of Kofile, Inc. and another subsidiary, our interest in a certain intangible work product, and a building and related building improvements ("Kofile Sale") for a cash sale price of $14.4 million. Effective December 29, 2000, we sold for cash our land records business unit, consisting of Business Resources Corporation ("Resources"), to an affiliate of Affiliated Computer Services, Inc. (the "Resources Sale"). The Resources Sale was valued at approximately $71.0 million. Concurrent with the Resources Sale, our management with our Board of Directors' approval adopted a formal plan of disposal for the remaining businesses and assets of the information and property records services segment. This restructuring program was designed 49 to focus our resources on our software systems and services segment and to reduce debt. The businesses and assets divested or identified for divesture were classified as discontinued operations in the accompanying consolidated financial statements in 2000 and the prior periods' financial statements were restated to report separately their operations in compliance with APB Opinion No. 30. The net gain on the Kofile Sale and the Resources Sale amounted to approximately $1.5 million (net of an income tax benefit of $2.4 million). Our formal plan of disposal provided for the remaining businesses and assets of the information and property records services segment to be disposed of by December 29, 2001. The estimated loss on the disposal of these remaining businesses and assets at December 29, 2000 amounted to $13.6 million (after an income tax benefit of $3.8 million). This loss consisted of an estimated loss on disposal of the businesses of $11.5 million (net of an income tax benefit of $2.7 million) and a provision of $2.1 million (after an income tax benefit of $1.1 million) for anticipated operating losses from the measurement date of December 29, 2000 to the estimated disposal dates. On May 16, 2001, we sold all of the common stock of one of the businesses in the discontinued information and property records services segment. In connection with the sale, we received cash proceeds of $575,000, approximately 60,000 shares of Tyler common stock, a promissory note of $750,000 payable in 58 monthly installments at an interest rate of 9%, and other contingent consideration. On September 21, 2001, we sold all of the common stock of CCR for $3.1 million in cash. We renegotiated certain aspects of the May 16, 2001 sale transaction and as a result of this renegotiation in March 2002, we received additional cash of approximately $800,000 and a subordinated note receivable amounting to $200,000, to fully settle the promissory note and other contingent consideration received in connection with this previous sale. The subordinated note is payable in 16 equal quarterly principal payments with interest at a rate of 6%. Because the subordinated note receivable is highly dependent upon future operations of the buyer, we are recording its value when the cash is received which is our historical practice. During 2002, we received payments of $46,000 on the subordinated note. During the year ended December 31, 2002, the IRS issued temporary regulations that in effect allowed us to deduct for tax purposes losses attributable to the March 1999 sale of our automotive parts subsidiary that were previously not allowed. The tax benefit of allowing the deduction of this loss amounted to approximately $970,000. In addition, we renegotiated a note receivable and certain contingent consideration in connection with a subsidiary sold in 2001 and received proceeds of approximately $846,000 in 2002. We initially assigned no value for accounting purposes to the note receivable and contingent consideration when the loss on the disposal of the discontinued operation was first established in 2000 and when the note was first received in 2001. In addition, we settled in the fourth quarter of 2002 our asbestos litigation for an amount that was approximately $200,000 less than the liability initially established for this matter. See Note 16 - Commitments and Contingencies. The aggregate effects of these events, net of the related tax effects, and other minor adjustments to the reserve for discontinued operations resulted in a credit to discontinued operations of $1.8 million in 2002. In our opinion and based on information available at this time, we believe that our net liabilities related to discontinued operations are adequate. The income tax expense or benefit associated with the gains or losses on the respective sales of the businesses in the information and property records services segment differs from the statutory income tax rate of 35% due to the elimination of deferred taxes related to the basis difference between amounts reported for income taxes and financial reporting purposes and the utilization of available capital loss carryforwards which were fully reserved in the valuation account prior to the respective sales. Net assets of discontinued operations of the information and property records services segment and two of our non-operating subsidiaries included in the consolidated balance sheets as of December 31, 2002 and 2001 includes the following:
2002 2001 --------- -------- Restricted asbestosis settlement cash with offsetting amount in current liabilities........ $ 1,325 $ 2,310 Accounts receivable................................ -- 100 Deferred taxes..................................... 1,705 2,192 Other current liabilities primarily consisting of asbestosis settlement obligations (see Note 16)........................................ (3,472) (5,183) -------- -------- Net current liabilities.......................... (442) (581) -------- -------- Property and equipment held for sale .............. -- 1,000 -------- -------- Net (liability) assets........................... $ (442) $ 419 ======== ========
50 The condensed statements of operations relating to the information and property records services segment for the year ended December 31, 2000 is presented below:
2000 -------- Revenues...................................... $ 39,680 Costs and expenses............................ 44,635 -------- Loss before income tax benefit................ (4,955) Income tax benefit............................ (704) -------- Net loss...................................... $ (4,251) ========
Other One of our non-operating subsidiaries is involved in various claims for work-related injuries and physical conditions relating to a formerly owned subsidiary that was sold in 1995. We recorded net losses, net of related tax effect, of $3,000 during 2001 and $748,000 in 2000 for trial and related costs. See Note 16 - Commitments and Contingencies. (4) RELATED PARTY TRANSACTIONS On September 29, 2000, we sold for cash of $14.4 million certain net assets of Kofile and another subsidiary, our interest in a certain intangible work product, and a building and related building improvements to investment entities beneficially owned by a principal shareholder of Tyler, who was also a director at the time. From time to time, we charter aircraft from businesses in which a member of management is an owner. We recorded rental expense related to such arrangements with a non-corporate officer management member of $69,000 during 2002, $83,000 during 2001 and $81,000 during 2000. During 2000, we chartered an aircraft from a former director. The rental expense related to these charters was $325,000. As disclosed in Note 11 - Shareholders' Equity, we purchased 1.5 million shares of our common stock from a former director in 2002. We have three office building lease agreements with various shareholders and non-corporate officer management members. Total rental expense related to such leases was $1.2 million during 2002, $1.1 million during 2001 and $679,000 during 2000. Total future minimum rental under noncancelable related party operating leases as of December 31, 2002, are as follows: 2003........ $ 1,204 2004........ 1,198 2005........ 1,136 2006........ 1,149 2007........ 1,179 Thereafter.. 2,778
(5) PROPERTY AND EQUIPMENT Property and equipment consists of the following at December 31:
USEFUL LIVES (YEARS) 2002 2001 ------- ------- -------- Land........................................ -- $ 115 $ 115 Transportation equipment.................... 5 385 390 Computer equipment and purchased software... 3-7 8,909 7,542 Furniture and fixtures...................... 3-7 3,797 3,515 Building and leasehold improvements......... 3-35 1,751 1,338 ------- -------- 14,957 12,900 Accumulated depreciation and amortization... (8,138) (5,933) ------- -------- Property and equipment, net.............. $ 6,819 $ 6,967 ======= ========
Depreciation expense was $2.4 million during 2002, $2.3 million during 2001 and $2.0 million during 2000. 51 (6) INVESTMENT SECURITY AVAILABLE-FOR-SALE Pursuant to an agreement with two major shareholders of H.T.E., Inc. ("HTE"), we acquired approximately 5.6 million shares of HTE's common stock in exchange for approximately 2.8 million shares of our common stock. The exchange occurred in two transactions, one in August 1999 and the other in December 1999. The 5.6 million shares represent a current ownership interest of approximately 35% of HTE. The cost of the investment was recorded at $15.8 million and is classified as a non-current asset. Florida state corporation law restricts the voting rights of "control shares," as defined, acquired by a third party in certain types of acquisitions. These restrictions may be removed by a vote of the shareholders of HTE. On November 16, 2000, the shareholders of HTE, other than Tyler, voted to deny Tyler its right to vote the "control shares" of HTE. When we acquired the HTE shares, HTE took the position that all of our shares were "control shares" and therefore did not have voting rights. We disputed this contention and asserted that the "control shares" were only those shares in excess of 20% of the outstanding shares of HTE, and it was only those shares that lacked voting rights. At the time of our acquisition, no court had interpreted the Florida "control share" statute. On October 29, 2001, HTE notified us that, pursuant to the Florida "control share" statute, it had redeemed all 5.6 million shares of HTE common stock owned by us for a cash price of $1.30 per share. On October 29, 2001, we notified HTE that its purported redemption of our HTE shares was invalid and contrary to Florida law, and in any event, the calculation by HTE of fair value for our shares was incorrect. On October 30, 2001, HTE filed a complaint in a civil court in Seminole County, Florida requesting the court to enter a declaratory judgment declaring HTE's purported redemption of all of our HTE shares at a redemption price of $1.30 per share was lawful and to effect the redemption and cancel our HTE shares. We removed the case to the United States District Court, Middle District of Florida, Orlando Division, and requested a declaratory judgment from the court declaring, among other things, that HTE's purported redemption of any or all of our shares was illegal under Florida law and that we had the ability to vote up to 20% of the issued and outstanding shares of HTE common stock owned by us. On September 18, 2002, the court issued an order declaring that HTE's purported redemption was invalid. On September 24, 2002, we entered into a settlement agreement with HTE in which HTE agreed that it would not attempt any other redemption of our shares. In addition, HTE agreed to dismiss and release us from the tort claims it alleged against us as disclosed in previous filings. On December 11, 2002, the court issued a further order declaring that all of our HTE shares are "control shares" and therefore none of our shares have voting rights. The court further ruled that voting rights would be restored to our HTE shares if we were to sell or otherwise transfer our HTE shares to an unaffiliated third party in a transaction that did not constitute a "control share acquisition." During 2002 we incurred approximately $704,000 of legal and other related costs associated with these matters which are classified as non-operating expenses. Under GAAP, a 20% investment in the voting stock of another company creates the presumption that the investor has significant influence over the operating and financial policies of that company, unless there is evidence to the contrary. Our management has concluded that we do not have such influence. Accordingly, we account for our investment in HTE pursuant to the provisions of SFAS No. 115, "Accounting for Certain Investments in Debt and Equity Securities." These securities are classified as available-for-sale and are recorded at fair value as determined by quoted market prices for HTE common stock. Unrealized holding gains and losses, net of the related tax effect, are excluded from earnings and are reported as a separate component of shareholders' equity until the securities are sold. Realized gains and losses from the sale of available-for-sale securities are determined on a specific identification basis. A decline in the market value of any available-for-sale security below cost that we consider to be other than temporary results in a reduction in the cost basis to fair value. The impairment is charged to earnings and a new cost basis for the security is established. The cost, fair value and gross unrealized holding gains (losses) of the investment securities available-for-sale, based on the quoted market price for HTE common stock (amounts in millions, except per share amounts) are presented below. In accordance with SFAS No. 115, we used quoted market price per share in calculating fair value to be used for financial reporting purposes.
QUOTED MARKET GROSS UNREALIZED PER SHARE COST FAIR VALUE HOLDING GAINS (LOSSES) ------------- ------ ---------- ---------------------- December 31, 2002 $4.84 $15.8 $27.2 $11.4 December 31, 2001 2.00 15.8 11.2 (4.6) February 25, 2003 6.94 15.8 38.9 23.1
On February 4, 2003, we entered into an agreement with SunGard Data Systems, Inc. ("SDS") in which we agreed to tender all of our HTE shares in the tender offer to be commenced by SDS for the acquisition of HTE. On February 5, 2003, SDS and HTE announced 52 a definitive agreement for the acquisition of all of the shares of HTE for $7.00 per share in cash. SDS and HTE also announced that the consummation of the transaction is subject to customary conditions, including the tender of at least a majority of the outstanding shares of HTE in the tender offer and the expiration of the waiting period under the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended. SDS and HTE further announced that certain shareholders owning approximately 49.6% of the total outstanding shares of HTE had agreed to tender their shares. According to the press release issued by SDS and HTE, the acquisition is expected to close in the first quarter of 2003. Assuming the acquisition is consummated, we will receive approximately $39.3 million in gross cash proceeds from the sale of our HTE shares. There can be no assurance that the acquisition of HTE by SDS will be consummated on the terms as disclosed, if at all. If SDS does not acquire HTE, we will continue to classify our investment as an available-for-sale security in accordance with SFAS No. 115 and as a non-current asset since the investment was initially made for a continuing business purpose. (7) GOODWILL AND OTHER INTANGIBLE ASSETS Goodwill, other intangible assets and related accumulated amortization consists of the following at December 31:
2002 2001 --------- --------- Gross carrying amount of acquisition intangibles: Goodwill........................................ $ 46,298 $ 51,063 Customer base................................... 17,997 17,997 Software acquired............................... 12,158 12,158 Workforce....................................... -- 6,191 Non-compete agreements.......................... 163 163 --------- --------- 76,616 87,572 Accumulated amortization........................... (13,066) (20,314) --------- --------- Acquisition intangibles, net.................... $ 63,550 $ 67,258 ========= ========= Post acquisition software development costs........ $ 24,560 $ 17,369 Accumulated amortization........................... (5,224) (2,416) --------- --------- Post acquisition software costs, net............ $ 19,336 $ 14,953 ========= =========
Total amortization expense was $6.1 million during 2002, $8.6 million during 2001 and $7.5 million during 2000. As discussed in Note 1 - Summary of Significant Accounting Policies, on January 1, 2002, we adopted the provisions of SFAS No. 141, "Business Combinations" and SFAS No. 142, "Goodwill and Other Intangible Assets." Under SFAS No. 142, assembled workforce, net of related deferred taxes, is subsumed into goodwill upon the adoption of the Statement as of January 1, 2002. If we had accounted for goodwill (including workforce) under the non-amortization approach of SFAS No. 142, our net income (loss) and related per share amounts would have been as follows for the years ended December 31, 2001 and 2000:
2001 2000 ---------- ---------- Reported net income (loss).................................. $ 269 $ (24,597) Add back goodwill amortization, net of income taxes......... 2,960 2,934 --------- --------- Adjusted net income (loss)........................... $ 3,229 $ (21,663) ========= ========= Basic and diluted net income (loss) per share............... $ 0.01 $ (0.54) Goodwill amortization, net of income taxes, per share....... 0.06 0.06 --------- --------- Basic and diluted net income (loss) per share........ $ 0.07 $ (0.48) ========= =========
SFAS No. 142's transitional goodwill impairment evaluation required us to perform an assessment of whether there was an indication that goodwill was impaired as of the date of adoption. To accomplish this, we identified our reporting units and determined the carrying value of each reporting unit by assigning the assets and liabilities, including the existing goodwill and intangible assets, to those reporting units as of January 1, 2002. We determined the fair value of each reporting unit and compared it to the carrying amount of the reporting unit and concluded there was no impairment. In addition to the transitional goodwill impairment test, we are required to perform, at least annually, a goodwill impairment test and designate a consistent date for such annual testing. We determined the fair value of each reporting unit and compared it to the carrying amount of the reporting unit at March 31, 2002 and concluded there was no impairment. 53 The allocation of acquisition intangible assets following our adoption of SFAS No. 142 is summarized in the following table:
December 31, 2002 -------------------------------------------- Weighted Gross Average Carrying Amortization Accumulated Amount Period Amortization ---------- ------------ -------------- Intangibles no longer amortized: Goodwill........................... $ 46,298 -- $ -- Amortizable intangibles: Customer base...................... 17,997 21 years 3,352 Software acquired.................. 12,158 5 years 9,561 Non-compete agreements............. 163 4 years 153
The changes in the carrying amount of goodwill for the year ended December 31, 2002 are as follows: Balance as of December 31, 2001 (cost of $51,063 and accumulated amortization of $7,771) .................. $43,292 Goodwill adjustments during 2002 relating to workforce (cost of $6,191 and accumulated amortization of $2,808 at January 1, 2002), net of deferred taxes of $377, being subsumed into goodwill upon the adoption of SFAS No. 142 on January 1, 2002.................................................................... 3,006 ------- Balance as of December 31, 2002................................................. $46,298 =======
Estimated annual amortization expense relating to acquisition intangibles is as follows: YEAR ENDING DECEMBER 31, 2003............. $ 2,800 2004............. 1,500 2005............. 900 2006............. 900 2007............. 900
(8) ACCRUED LIABILITIES Accrued liabilities consists of the following at December 31:
2002 2001 ------- -------- Accrued wages and commissions................... $ 7,667 $ 7,071 Other accrued liabilities....................... 3,079 2,580 Current portion of long-term obligations........ 440 123 ------- -------- $11,186 $ 9,774 ======= ========
(9) LONG-TERM OBLIGATIONS Long-term obligations consists of the following at December 31:
2002 2001 ------- -------- 10% promissory notes payable due January 2005... $ 2,520 $ 2,800 Other........................................... 470 233 ------- -------- Total obligations........................... 2,990 3,033 Less current portion............................ 440 123 ------- -------- Total long-term obligations................. $ 2,550 $ 2,910 ======= ========
Long-term debt outstanding at December 31, 2002 matures as follows: 2003 - $440,000; 2004 - $30,000; and the remainder in 2005. We paid interest of $377,000 in 2002, $814,000 in 2001 and $8.8 million in 2000. On March 5, 2002, we entered into a revolving bank credit agreement. Our credit agreement matures January 1, 2005 and provides for total availability of up to $10.0 million. Borrowings bear interest at either prime rate or at the London Interbank Offered Rate plus a margin of 3% and are limited to 80% of eligible accounts receivable. The credit agreement is secured by substantially all of our 54 personal property, by a pledge of the common stock of our operating subsidiaries, and is also guaranteed by our operating subsidiaries. The credit agreement requires us to maintain certain financial ratios and other financial conditions and prohibits us from making certain investments, advances, cash dividends or loans. At December 31, 2002, our bank has issued outstanding letters of credit totaling $3.7 million under our credit agreement to secure performance bonds required by some of our customer contracts. Our borrowing base under the credit agreement is limited by the amount of eligible receivables and was reduced by the letters of credit at December 31, 2002. At December 31, 2002, we had no outstanding bank borrowings under the credit agreement and had an available borrowing base of $6.3 million. (10) INCOME TAX The income tax provision (benefit) on income (loss) from continuing operations consisted of the following:
YEARS ENDED DECEMBER 31, --------------------------------- 2002 2001 2000 --------- --------- --------- Current: Federal.... $ -- $ -- $ -- State...... 485 282 80 --------- --------- --------- 485 282 80 Deferred...... 3,384 1,258 (2,890) --------- --------- --------- $ 3,869 $ 1,540 $ (2,810) ========= ========= =========
Reconciliation of the U.S. statutory income tax rate to our effective income tax expense (benefit) rate for continuing operations follows:
YEARS ENDED DECEMBER 31, ---------------------------------- 2002 2001 2000 --------- --------- --------- Income tax expense (benefit) at statutory rate... $ 3,514 $ 634 $ (3,611) State income tax, net of federal income tax benefit....................................... 315 183 52 Non-deductible amortization...................... -- 635 640 Non-deductible business expenses................. 40 83 110 Other, net....................................... -- 5 (1) -------- -------- -------- $ 3,869 $ 1,540 $ (2,810) ======== ======== ========
The tax effects of the major items recorded as deferred tax assets and liabilities as of December 31 are:
2002 2001 -------- -------- Deferred income tax assets: Net operating loss carryforward........................ $ 3,734 $ 3,667 Capital loss carryfoward............................... 1,114 -- Basis difference on investment security................ -- 1,591 Operating expenses not currently deductible............ 865 967 Employee benefit plans................................. 345 299 Minimum tax credits.................................... 268 268 Research tax credits................................... 78 78 Other.................................................. -- 100 -------- -------- Net deferred income tax assets before valuation allowance........................................ 6,404 6,970 Less valuation allowance............................... (1,114) (1,690) -------- -------- Net deferred income tax assets...................... 5,290 5,280 Deferred income tax liabilities: Basis difference on investment security................ (3,995) -- Property and equipment................................. (1,148) (1,069) Intangible assets...................................... (7,363) (6,442) Other.................................................. -- (15) -------- -------- Total deferred income tax liabilities............... (12,506) (7,526) -------- -------- Net deferred income tax liabilities....................... $ (7,216) $ (2,246) ======== ========
At December 31, 2002, we had available approximately $10.7 million of net tax operating loss carryforwards for federal income tax purposes. These carryforwards, which may provide future tax benefits, expire from 2011 through 2022. During the year ended December 31, 2002, we claimed a deduction for the write off of preferred stock which was deemed worthless for tax purposes. The preferred stock had an initial tax value of $3 million and was received in connection with the sale of our discontinued automotive parts 55 subsidiary which was sold in March 1999. At December 31, 2002, we had available approximately $3.2 million of capital loss carryforwards for federal income tax purposes which expire December 31, 2006. Although realization is not assured, we believe it is more likely than not that all the deferred tax assets, except for the asset relating to the capital loss carryforward will be realized. Accordingly, we believe no valuation allowance is required for the remaining deferred tax assets. However, the amount of the deferred tax asset considered realizable could be adjusted in the future if estimates of reversing taxable temporary differences are revised. We paid income taxes, net of refunds received, of $455,000 in 2002 and $273,000 in 2001. In 2000 we received a refund of prior years' income taxes of $2.7 million. (11) SHAREHOLDERS' EQUITY In May 2000, we sold 3.3 million shares of common stock and 333,380 warrants in a private placement for approximately $10.0 million in gross cash proceeds, before deducting commissions and offering expenses of approximately $730,000. Each warrant is convertible into one share of common stock at an exercise price of $3.60 per share. The warrants expire in May 2005. As of December 31, 2002, we have an additional warrant outstanding to purchase 2.0 million shares of our common stock at $2.50 per share. This warrant expires in September 2007. In August 2002, we consummated an agreement to purchase 1.1 million of our common shares from William D. Oates, a former director of Tyler, for a cash purchase price of $4.0 million. In October 2002, we repurchased an additional 400,000 of our shares as part of the initial agreement by assigning our rights and obligations under a Data License and Update Agreement associated with our discontinued information property records service business to eiStream. eiStream is an affiliate of William D. Oates. The repurchase of all 1.5 million shares was charged to treasury stock to the extent cash was paid. In August 2002, our Board of Directors approved a plan to repurchase up to 1.0 million shares of our common stock. Subsequent to December 31, 2002 and through February 21, 2003, we have repurchased 339,000 shares for an aggregate purchase price of $1.4 million. (12) STOCK OPTION PLAN We have a stock option plan that provides for granting stock options to key employees and directors. Options become fully exercisable after three to eight years of continuous employment and expire ten years after the grant date. Once exercisable, the employee can purchase shares of our common stock at the market price on the date we granted the option. As of December 31, 2002 there were 1.2 million shares available for future grants under the plan from the original 6.5 million shares approved by the stockholders. 56 The following table summarizes our stock option plan's transactions for the three-year period ended December 31, 2002:
NUMBER OF WEIGHTED-AVERAGE SHARES EXERCISE PRICES ----------- ---------------- Options outstanding at December 31, 1999.... 3,418 $5.55 Granted................................ 498 2.76 Forfeited.............................. (417) 6.16 Exercised.............................. (5) 3.88 ----- Options outstanding at December 31, 2000.... 3,494 5.08 Granted................................ 2,185 1.70 Forfeited.............................. (933) 5.18 Exercised.............................. (108) 2.13 ----- Options outstanding at December 31, 2001.... 4,638 3.54 Granted................................ 280 4.86 Forfeited.............................. (322) 5.65 Exercised.............................. (491) 3.29 ----- Options outstanding at December 31, 2002.... 4,105 $3.49 Exercisable options: December 31, 2000...................... 1,385 $5.04 December 31, 2001...................... 1,504 5.20 December 31, 2002...................... 1,910 4.26
The following table summarizes information concerning outstanding and exercisable options at December 31, 2002:
WEIGHTED WEIGHTED AVERAGE NUMBER OF AVERAGE PRICE NUMBER OF WEIGHTED AVERAGE RANGE OF EXERCISE REMAINING OUTSTANDING OF OUTSTANDING EXERCISABLE PRICE OF EXERCISABLE PRICES CONTRACTUAL LIFE OPTIONS OPTIONS OPTIONS OPTIONS - ----------------- ---------------- ----------- -------------- ----------- -------------------- $ 0.00 - $ 2.19 8.3 years 2,018 $ 1.64 634 $ 1.63 2.19 - 3.28 8.4 140 2.62 38 2.63 3.28 - 4.38 7.1 527 4.02 283 3.99 4.38 - 5.47 6.5 720 5.24 432 5.26 5.47 - 6.56 6.0 448 6.18 321 6.22 6.56 - 7.66 5.1 216 7.63 173 7.63 7.66 - 8.75 5.8 6 7.75 5 7.75 9.84 - 10.19 5.3 30 10.19 24 10.19
We previously granted an employee 50,000 shares of restricted common stock with a fair value of $303,000 at the grant date. We recorded annual compensation expense of $151,500 for the year ended December 31, 2000, based on the service period provided for in the agreement and the vesting period over which the restrictions lapse. (13) EARNINGS (LOSS) PER SHARE Basic earnings and diluted earnings (loss) per common share data was computed as follows:
YEARS ENDED DECEMBER 31, ------------------------------------------- 2002 2001 2000 --------- --------- --------- Numerator: Income (loss) from continuing operations for basic and diluted earnings per share .............................................................. $ 6,172 $ 272 $ (7,507) Denominator: Denominator for basic earnings per share - Weighted-average shares................................................. 47,136 47,181 45,380 Effect of dilutive securities: Employee stock options.................................................. 1,386 593 -- Warrants................................................................ 971 210 -- --------- --------- --------- Potentially dilutive common shares........................................ 2,357 803 -- --------- --------- --------- Denominator for diluted earnings per share - Adjusted weighted-average shares................................................. 49,493 47,984 45,380 --------- --------- --------- Basic earnings (loss) per common share from continuing operations............ $ 0.13 $ 0.01 $ (0.17) ========= ========= ========= Diluted earnings (loss) per common share from continuing operations.......... $ 0.12 $ 0.01 $ (0.17) ========= ========= =========
57 Stock options issuable under the stock option plan representing common stock equivalents of 1.3 million during 2002, 2.3 million during 2001 and 3.5 million during 2000 had exercise prices greater than the average quoted market price of our common stock. These common stock equivalents were outstanding during 2002, 2001 and 2000 but were not included in the computation of diluted earnings per share because their inclusion would have had an antidilutive effect. Additionally, warrants to purchase 333,380, and 2.3 million shares of our common stock for 2001 and 2000, respectively, were not included in the computation of diluted earnings per share because the effect would have been antidilutive. (14) LEASES We lease offices, transportation, computer and other equipment for use in our operations. Most of these leases are noncancelable operating lease agreements and expire at various dates through 2012. In addition to rent, the leases generally require us to pay taxes, maintenance, insurance and certain other operating expenses. Rent expense was approximately $3.4 million in 2002, $2.8 million in 2001 and $2.1 million in 2000. Future minimum lease payments under all noncancelable leases at December 31, 2002 are:
OPERATING FISCAL YEAR LEASES - ------------------------------------------- --------- 2003....................................... $ 3,504 2004....................................... 3,171 2005....................................... 2,972 2006....................................... 2,682 2007....................................... 2,572 Thereafter................................. 9,538 -------- Total future minimum lease payments........ $ 24,439 ========
(15) EMPLOYEE BENEFIT PLANS We provide a defined contribution plan for the majority of our employees meeting minimum service requirements. The employees can contribute up to 15% of their current compensation to the plan subject to certain statutory limitations. We contribute up to a maximum of 2% of an employee's compensation to the plan. We made contributions to the plan and charged continuing operations $881,000 during 2002, $868,000 during 2001, and $761,000 during 2000. (16) COMMITMENTS AND CONTINGENCIES One of our non-operating subsidiaries, Swan Transportation Company ("Swan"), has been and is currently involved in various claims raised by hundreds of former employees of a foundry that was once owned by an affiliate of Swan and Tyler. These claims are for alleged work related injuries and physical conditions resulting from alleged exposure to silica, asbestos, and/or related industrial dusts during the plaintiff's employment at the foundry. We sold the operating assets of the foundry on December 1, 1995. As a non-operating subsidiary of Tyler, the assets of Swan consist primarily of various insurance policies issued to Swan during the relevant time periods and restricted cash of $1.3 million at December 31, 2002. Swan tendered the defense and indemnity obligations arising from these claims to its insurance carriers, who, prior to December 20, 2001, entered into settlement agreements with approximately 275 of the plaintiffs, each of whom agreed to release Swan, Tyler, and its subsidiaries and affiliates from all such claims in exchange for payments made by the insurance carriers. 58 On December 20, 2001, Swan filed a petition under Chapter 11 of the U.S. Bankruptcy Code in the United States Bankruptcy Court for the District of Delaware. The bankruptcy filing by Swan was the result of extensive negotiations between Tyler, Swan, their respective insurance carriers, and an ad hoc committee of plaintiff attorneys representing substantially all of the then known plaintiffs. Swan filed its plan of reorganization in February 2002. The principal features of the plan of reorganization include: (a) the creation of a trust, which is to be funded principally by fifteen insurance carriers pursuant to certain settlement agreements executed pre-petition between Swan, Tyler, and such carriers; (b) the implementation of a claims resolution procedure pursuant to which all present and future claimants may assert claims against such trust for alleged injuries; (c) the issuance of certain injunctions under the federal bankruptcy laws requiring any such claims to be asserted against the trust and barring such claims from being asserted, either now or in the future, against Swan, Tyler, all of Tyler's affected affiliates, and the insurers participating in the funding of the trust; and (d) the full and final release of each of Swan, Tyler, all of Tyler's affected affiliates, and the insurers participating in the funding of the trust from any and all claims associated with the once-owned foundry by all claimants that assert a claim against, and receive compensation from, the trust. The confirmation hearings on Swan's plan of reorganization were held on December 9, 2002. The plan of reorganization received the affirmative vote of approximately 99% of the total votes cast. All objections to the plan were resolved prior to the confirmation hearing, and the final confirmation order will therefore not be subject to appeal. The confirmation order will discharge, release, and extinguish all of the foundry-related obligations and liabilities of Tyler, Swan, their affected affiliates, and the insurers participating in the funding of the trust. Further, the confirmation order will include the issuance of injunctions that channel all present and future foundry-related claims into the trust and forever bar any such claims from being asserted, either now or in the future, against Swan, Tyler, their affected affiliates, and the participating insurers. In order to receive the benefits described above, we have agreed, among other things, to transfer all of the capital stock of Swan to the trust (net assets of Swan at December 31, 2002 were $309,000) so that the trust can directly pursue claims against insurers who have not participated in the funding of the trust. In addition, we have agreed to contribute $1.5 million in cash to the trust, which is due as follows: $750,000 within ten days of the confirmation order becoming a final order; $500,000 on the first anniversary of the date the confirmation order becomes a final order; and $250,000 on the second anniversary of the date the confirmation order becomes a final order. The confirmation order will become a final order thirty days after execution by both the bankruptcy and district court judges, which is expected to occur by the end of the first quarter of 2003. Our ultimate settlement obligation under the plan of reorganization of $1.5 million is approximately $200,000 less than the remaining carrying amount of the liability initially recorded for this matter. Accordingly, $200,000 ($130,000 net of tax) was included in the $1.8 million credit recorded for discontinued operations in 2002. See Note 3 - Discontinued Operations. We initially provided for estimated claim settlement costs when minimum levels can be reasonably estimated. If the best estimate of claim costs could only be identified within a range and no specific amount within that range could be determined more likely than any other amount within the range, the minimum of the range was accrued. Based on an initial assessment of claims and contingent claims that may result in future litigation, a reserve for the minimum amount of $2.0 million for claim settlements was initially recorded in 1996. Legal and related professional services costs to defend litigation of this nature have been expensed as incurred. Other than ordinary course, routine litigation incidental to our business and except as described herein, there are no material legal proceedings pending to which we or our subsidiaries are parties or to which any of our properties are subject. See Note 6 - Investment Securities Available-for-Sale, for discussion of litigation in connection with HTE's attempted cash redemption of all shares of HTE common stock currently owned by Tyler. 59 (17) QUARTERLY FINANCIAL INFORMATION (UNAUDITED) The following tables contain selected financial information from unaudited consolidated statements of operations for each quarter of 2002 and 2001.
QUARTER ENDED ------------------------------------------------------------------------------------- 2002 2001 ------------------------------------------ ----------------------------------------- Dec. 31 Sept. 30 June 30 Mar. 31 Dec. 31 Sept. 30 June 30 Mar. 31 --------- --------- --------- --------- --------- --------- --------- -------- Revenues(1)................................. $ 36,396 $ 34,974 $ 33,605 $ 28,922 $ 31,463 $ 28,658 $ 31,237 $ 27,458 Gross profit................................ 14,228 12,312 11,708 9,734 11,346 9,920 10,132 8,621 Income (loss) from continuing operations before income taxes....................... 4,086 2,922 2,116 917 1,310 614 745 (857) Income (loss) from continuing operations.... 2,581 1,739 1,290 562 163 251 372 (514) Income (loss) from discontinued operations.. 1,817 -- -- -- 35 (23) (1) (14) --------- --------- --------- --------- --------- --------- --------- -------- Net income (loss)........................... $ 4,398 $ 1,739 $ 1,290 $ 562 $ 198 $ 228 $ 371 $ (528) ========= ========= ========= ========= ========= ========= ========= ======== Diluted earnings (loss) from continuing operations................................ $ 0.05 $ 0.04 $ 0.03 $ 0.01 $ 0.00 $ 0.01 $ 0.01 $ (0.01) Diluted earnings (loss) from discontinued operations................................ 0.04 -- -- -- 0.00 (0.01) (0.00) (0.00) --------- --------- --------- --------- --------- --------- --------- -------- Net earnings (loss) per diluted share....... $ 0.09 $ 0.04 $ 0.03 $ 0.01 $ 0.00 $ 0.00 $ 0.01 $ (0.01) ========= ========= ========= ========= ========= ========= ========= ======== Shares used in computing diluted earnings (loss) per share.......................... 48,482 49,372 50,405 49,725 48,915 48,396 47,425 47,179
(1) Previously reported amounts for revenues and cost of revenues for quarterly periods prior to October 1, 2002 have been reclassified to report certain reimbursable customer expenses as revenues and as cost of revenue in accordance with EITF 01-14 as discussed in Note 1 - Summary of Significant Accounting Policies. We increased quarterly revenues and the related cost of revenues from the previously reported amounts for the following three month periods ended: March 31, 2001................. $ 186 June 30, 2001.................. 260 September 30, 2001............. 223 December 31, 2001.............. 259 March 31, 2002................. 266 June 30, 2002.................. 289 September 30, 2002............. 281
60 TYLER TECHNOLOGIES, INC. SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS (IN THOUSANDS) Years ended December 31, 2002, 2001 and 2000
YEARS ENDED DECEMBER 31, -------------------------------- 2002 2001 2000 --------- --------- --------- ALLOWANCE FOR LOSSES - ACCOUNTS RECEIVABLE - ------------------------------------------ Balance at beginning of year....................... $ 1,275 $ 1,505 $ 826 Additions charged to costs and expenses............ 727 1,681 1,438 Deductions for accounts charged off or credits issued............................................. (1,312) (1,911) (759) ---------- ---------- --------- Balance at end of year.................... $ 690 $ 1,275 $ 1,505 ========= ========= =========
VALUATION ALLOWANCE - DEFERRED TAX ASSETS YEARS ENDED DECEMBER 31, - ----------------------------------------- -------------------------------- 2002 2001 2000 --------- --------- --------- Balance at beginning of year....................... $ 1,690 $ 3,657 $ 10,863 Utilization of capital loss carryforward........... (99) -- (16,138) Adjustment to actual capital loss carryforwards arising from a previous sale....................... 1,114 -- (901) Change in basis difference on investment security.. (1,591) (1,967) 9,833 --------- --------- --------- Balance at end of year.................... $ 1,114 $ 1,690 $ 3,657 ========= ========= =========
61 EXHIBIT INDEX
EXHIBIT NUMBER DESCRIPTION - ------- ---------------------------------------------------------------- 3.1 Restated Certificate of Incorporation of Tyler Three, as amended through May 14, 1990, and Certificate of Designation of Series A Junior Participating Preferred Stock (filed as Exhibit 3.1 to our Form 10-Q for the quarter ended June 30, 1990, and incorporated herein). 3.2 Certificate of Amendment to the Restated Certificate of Incorporation (filed as Exhibit 3.1 to our Form 8-K, dated February 19, 1998, and incorporated herein). 3.3 Amended and Restated By-Laws of Tyler Corporation, dated November 4, 1997 (filed as Exhibit 3.3 to our Form 10-K for the year ended December 31, 1997, and incorporated herein). 3.4 Certificate of Amendment dated May 19, 1999 to the Restated Certificate of Incorporation (filed as Exhibit 3.4 to our Form 10-K for the year ended December 31, 2000, and incorporated herein). 4.1 Specimen of Common Stock Certificate (filed as Exhibit 4.1 to our registration statement no. 33-33505 and incorporated herein). 4.2 Warrant to purchase common stock of Tyler Technologies, Inc. (filed as Exhibit 4.5 to our Form 10-Q for the quarter ended June 30, 2000, and incorporated herein). 4.3 Credit Agreement dated as of February 27, 2002, by and between Tyler Technologies, Inc. and Bank of Texas, N.A. (filed as Exhibit 4.6 to our Form 10-K for the year ended December 31, 2001 and incorporated herein). 4.4 First Amendment to Credit Agreement by and between Tyler Technologies, Inc. and Bank of Texas, N.A. dated March 5, 2002. (filed as Exhibit 4.7 to our Form 10-K for the year ended December 31, 2001 and incorporated herein). *4.5 Second Amendment to Credit Agreement, First Amendment to Pledge and Security Agreement, and Lenders Consent and Waiver by and Among Tyler Technologies, Inc. and Bank of Texas N.A.
*10.1 Form of Indemnification Agreement for directors and officers. 10.2 Stock Option Plan amended and restated as of May 12, 2000 (filed as Exhibit 4.1 to our registration statement no. 333-98929 and incorporated herein and amended by Exhibit 4.2). 10.3 Acquisition Agreement dated as of November 20, 1995, by and among the Registrants, Tyler Pipe Industries, Inc. and Ransom Industries, Inc., formerly known as Union Acquisition Corporation (filed as Exhibit 2.1 to our Form 8-K, dated December 14, 1995, and incorporated herein). 10.4 Purchase Agreement between Tyler Corporation, Richmond Partners, Ltd. and Louis A. Waters, dated August 20, 1997 (filed as Exhibit 10.24 to our Form 8-K, dated September 2, 1997, and incorporated herein). 10.5 Employment agreement between Tyler Technologies, Inc. and Theodore L. Bathurst, dated October 7, 1998, (filed as Exhibit 10.18 to our Form 10-Q for the quarter ended September 30, 1998, and incorporated herein). *21 Subsidiaries of Tyler *23 Consent of Ernst & Young LLP *99.1 Certifications pursuant to Section 1350 of Chapter 63 of Title 18 of the United States Code. *99.2 Certifications pursuant to Section 1350 of Chapter 63 of Title 18 of the United States Code. We will furnish copies of these exhibits to shareholders upon written request and payment for copying charges of $0.15 per page.
* Filed herewith. EX-4.5 3 d03636exv4w5.txt SECOND AMENDMENT TO CREDIT AGREEMENT Exhibit 4.5 SECOND AMENDMENT TO CREDIT AGREEMENT, FIRST AMENDMENT TO PLEDGE AND SECURITY AGREEMENT, AND LENDER'S CONSENT AND WAIVER THIS SECOND AMENDMENT TO CREDIT AGREEMENT, FIRST AMENDMENT TO PLEDGE AND SECURITY AGREEMENT, AND LENDER'S CONSENT (this "Amendment") is dated effective September 30, 2002, by and among TYLER TECHNOLOGIES, INC., a Delaware corporation ("Borrower") and BANK OF TEXAS, N.A., a national banking association ("Lender"). W I T N E S S E T H: WHEREAS, Borrower and Lender entered into that certain Credit Agreement, dated February 27, 2002, pursuant to which Lender agreed to make the Loan (as therein defined) available to Borrower (as heretofore or hereafter amended, the "Credit Agreement")(each capitalized term used herein, but not otherwise defined shall have the same meaning given to it in the Credit Agreement); and WHEREAS, the Credit Agreement has been amended by that certain First Amendment to Credit Agreement dated March 5, 2002 whereby Lender and Borrower agreed to (i) increase the principal amount of the Loan from $8,000,000 to $10,000,000, and (ii) delete the $5,000,000 limit on the aggregate amount of Letter of Credit Exposure; and WHEREAS, to secure the Loan, Borrower and Lender entered into that certain Pledge and Security Agreement dated February 27, 2002 (the "Pledge Agreement") whereby Borrower pledged as security, among other things, all of its shares of stock in H.T.E., Inc. ("HTE"); and WHEREAS, Borrower has requested that Lender: (i) allow Borrower to repurchase up to 1,500,000 shares of outstanding Borrower stock; (ii) return stock certificate number 2391, representing 4,650,000 shares of HTE stock, and stock certificate number 2416, representing 968,952 shares of HTE stock (collectively referred to herein as the "HTE Stock Certificates"), for the purpose of allowing HTE to reissue the shares in smaller denominations; and (iii) amend the Credit Agreement to: (a) allow Borrower to sell up to $1,000,000 of HTE stock per fiscal year, and (b) reduce the Minimum Tangible Net Worth Covenant for the quarter ending September 30, 2002; and WHEREAS, subject to the terms and conditions herein contained, Lender is willing to agree to such requests. NOW, THEREFORE, in consideration of the covenants, conditions and agreements hereinafter set forth, and for other good and valuable consideration, the receipt and adequacy of which are all hereby acknowledged, Borrower and Lender hereby covenant and agree as follows: ARTICLE I - AMENDMENT TO CREDIT AGREEMENT SECTION 1.1 SALE OF HTE STOCK. The Credit Agreement is hereby amended to include after Section 9.12 the following: SECTION 9.13 SALE OF CERTAIN COLLATERAL. Sell, transfer or convey shares of HTE, Inc. owned by Borrower; provided, however, that Borrower shall be permitted to sell, transfer or convey, without Lender's consent, any such shares of HTE, Inc. (and, concurrently therewith, Lender shall SECOND AMENDMENT TO CREDIT AGREEMENT, FIRST AMENDMENT TO PLEDGE AND SECURITY AGREEMENT AND LENDER'S CONSENT (TYLER) 1 release such shares as are sold, transferred or conveyed in compliance with this Section 9.13 from the Liens of the Loan Documents) so long as: (i) the proceeds from such sale, transfer or conveyance do not exceed, in the aggregate, $1,000,000 during any fiscal year, (ii) at the time of any such sale, no Default or Event of Default has occurred and is continuing under the Credit Agreement and (iii) Borrower gives Lender five (5) Business Day's prior written notice of any such sale and reimburses Lender for any costs incurred by Lender in connection with the return of the stock certificates evidencing the shares so sold, transferred or conveyed. SECTION 1.2 MINIMUM TANGIBLE NET WORTH COVENANT. Section 9.9(a) of the Credit Agreement is hereby deleted and restated as follows: (a) Tangible Net Worth on the last day of any fiscal quarter to be less than the sum of (i) the amount equal to eighty nine and eight tenths percent (89.8%) of Borrower's consolidated Tangible Net Worth computed as of September 30, 2002, plus (ii) as of the end of each fiscal quarter commencing with December 31, 2002, the product of (A) ninety percent (90%) times (b) the consolidated net income of Borrower for the immediately preceding fiscal quarter, provided, that in no case shall such sum be less than the minimum Tangible Net Worth calculated hereunder for the previous quarter. ARTICLE II - CONSENT AND WAIVER SECTION 2.1 REPURCHASE OF OUTSTANDING STOCK. The Credit Agreement provides, among other things, that, without the prior written consent of Lender, Borrower shall declare no Distribution nor make any Investment, prior to payment in full of the Obligations owed to Lender, and the termination of Lender's Commitment, under the Credit Agreement. Borrower has requested Lender's consent to Borrower's repurchase of up to 1,500,000 shares of outstanding stock in Borrower during the period from August 15, 2002 to November 30, 2002 (the "Targeted Repurchase"). Lender hereby consents to the Targeted Repurchase and waives any Default or Event of Default that may have occurred as a result of any portion of the Targeted Repurchase occurring prior to the effective date of this Amendment; provided that such waiver shall be limited to the Targeted Repurchase and shall not constitute a waiver of any other Default or Event of Default. SECTION 2.2 HTE STOCK CERTIFICATES. Borrower has also requested that Lender return to Borrower the HTE Stock Certificates so that HTE may reissue the shares in smaller denominations (the "Reissued Shares"). Lender hereby consents to such request. Upon receipt of the Reissued Shares, Borrower is hereby required to forward such Reissued Shares to Lender, together with appropriate stock powers. This consent and the temporary return of the HTE Stock Certificates do not constitute a release of lien against the shares evidenced by the HTE Stock Certificates. SECTION 2.3 LIMITATION ON CONSENT. The consents granted in this Amendment are limited to the foregoing actions and neither consent constitutes a waiver of any required consent with respect to any other action. ARTICLE III - AMENDMENT TO PLEDGE AND SECURITY AGREEMENT SECTION 3.1 EXHIBIT "E". Borrower and Lender hereby agree that Exhibit "E" of the Pledge Agreement shall be amended upon Lender's receipt of the Reissued Shares to Lender. Lender shall record the certificate number and number of shares represented by each of the Reissued Shares on Exhibit "E" and shall forward a revised Exhibit "E" to Borrower. ARTICLE IV - MISCELLANEOUS SECTION 4.1 CONDITION TO CLOSING; FURTHER ASSURANCES. As a condition to the closing of this Amendment, Borrower shall execute and deliver this Amendment and such other documents as may be necessary or as may be required, in the opinion of counsel to Lender, to effect the transactions contemplated hereby and continue the liens and/or security interests of all other collateral instruments, as modified by this Amendment. Borrower also agrees to provide to Lenders such other documents and instruments as Lenders reasonably may request in connection with the modification of the Loans effected hereby. SECTION 4.2 CONTINUING EFFECT. Except as modified and amended hereby, the Credit Agreement and other Loan Documents are and shall remain in full force and effect in accordance with their terms. SECTION 4.3 PAYMENT OF EXPENSES. Borrower agrees to pay to Lender the reasonable attorneys' fees and expenses of Lender's counsel and other expenses incurred by Lender in connection with this Amendment. SECTION 4.4 BINDING AGREEMENT. This Amendment shall be binding upon, and shall inure to the benefit of, the parties' respective representatives, successors and assigns. SECTION 4.5 NO DEFENSES. Borrower by its execution of this Amendment, hereby declares that it has no set-offs, counterclaims, defenses or other causes of action against Lender arising out of the Loan, this Amendment or otherwise; and, to the extent any such setoffs, counterclaims, defenses or other causes of action may exist, whether known or unknown, such items are hereby waived by Borrower. SECTION 4.6 USURY SAVINGS CLAUSE. Notwithstanding anything to the contrary in this Amendment, the Note or any other Loan Document, or in any other agreement entered into in connection with the Note or securing the indebtedness evidenced by the Note, whether now existing or hereafter arising and whether written or oral, it is agreed that the aggregate of all interest and other charges constituting interest, or adjudicated as constituting interest, and contracted for, chargeable or receivable under the Note or otherwise in connection with the Note shall under no circumstances exceed the maximum rate of interest permitted by applicable law. In the event the maturity of the Note is accelerated by reason of an election by the holder thereof resulting from a default thereunder or under any other document executed as security therefor or in connection therewith, or by voluntary prepayment by the maker, or otherwise, then earned interest may never include more than the maximum rate of interest permitted by applicable law. If from any circumstance any holder of any of the Note shall ever receive interest or any other charges constituting interest, or adjudicated as constituting interest, the amount, if any, which would exceed the maximum rate of interest permitted by applicable law shall be applied to the reduction of the principal amount owing on such Note or on account of any other principal indebtedness of the maker to the holders of such Note, and not to the payment of interest, or if such excessive interest exceeds the unpaid balance of principal thereof and such other indebtedness, the amount of such excessive interest that exceeds the unpaid balance of principal thereof and such other indebtedness shall be refunded to the maker. All sums paid or agreed to be paid to the holder of the Note for the use, forbearance or detention of the indebtedness of the maker to the holder of such Note shall be amortized, prorated, allocated and spread throughout the full term of such indebtedness until payment in full for the purpose of determining the actual rate on such indebtedness is uniform throughout the term thereof. The terms "maximum amount" or "maximum rate" as used in this Amendment or the Note, or in any other agreement entered into in connection with the Note or securing the indebtedness evidenced by the Note, whether now existing or hereafter arising and whether written or oral, include, as to Chapter 303 of the Texas Finance Code (and as same may be incorporated by reference in other statutes of the State of Texas), but otherwise without limitation, that rate based upon the "weekly ceiling"; provided, however, that this designation shall not preclude the rate of interest contracted for, charged or received in connection with the Loan from being governed by, or construed in accordance with, any other state or federal law. SECTION 4.7 COUNTERPARTS. This Amendment may be executed in several counterparts, all of which are identical, each of which shall be deemed an original, and all of which counterparts together shall constitute one and the same instrument, it being understood and agreed that the signature pages may be detached from one or more of such counterparts and combined with the signature pages from any other counterpart in order that one or more fully executed originals may be assembled. SECTION 4.8 CHOICE OF LAW. THIS AMENDMENT SHALL BE GOVERNED BY, AND CONSTRUED IN ACCORDANCE WITH, THE LAWS OF THE STATE OF TEXAS, EXCEPT TO THE EXTENT FEDERAL LAWS PREEMPT THE LAWS OF THE STATE OF TEXAS. SECTION 4.9 ENTIRE AGREEMENT. This Amendment, together with the other Loan Documents, contain the entire agreements between the parties relating to the subject matter hereof and thereof. This Amendment and the other Loan Documents may be amended, revised, waived, discharged, released or terminated only by a written instrument or instruments, executed by the party against which enforcement of the amendment, revision, waiver, discharge, release or termination is asserted. Any alleged amendment, revision, waiver, discharge, release or termination which is not so documented shall not be effective as to any party. THIS AMENDMENT AND THE OTHER LOAN DOCUMENTS REPRESENT THE FINAL AGREEMENT BETWEEN THE PARTIES RELATED TO THE SUBJECT MATTER HEREIN CONTAINED AND MAY NOT BE CONTRADICTED BY EVIDENCE OF PRIOR, CONTEMPORANEOUS OR SUBSEQUENT ORAL AGREEMENTS OF THE PARTIES. THERE ARE NO UNWRITTEN ORAL AGREEMENTS BETWEEN THE PARTIES. [REMAINDER OF PAGE INTENTIONALLY LEFT BLANK] IN WITNESS WHEREOF, this Amendment is executed effective as of the date first written above. LENDER: BANK OF TEXAS, N.A., a national banking association By: __________________________________ Mark Wade Senior Vice President BORROWER: TYLER TECHNOLOGIES, Inc. a Delaware corporation By: ___________________________________ Brian K. Miller, Vice President-Finance SECOND AMENDMENT TO CREDIT AGREEMENT, FIRST AMENDMENT TO PLEDGE AND SECURITY AGREEMENT AND LENDER'S CONSENT (TYLER) 5 CONSENT OF GUARANTORS Each of the undersigned Guarantors hereby acknowledges and consents to the foregoing amendment and expressly acknowledges and agrees that (a) its Guaranty shall guaranty, and the Security Agreement executed by it shall secure, the Loan as amended hereby, and (b) except as may be modified to incorporate the terms of this Amendment, the Guaranty of the other Loan Documents to which it is a part, are and shall continue in full force and effect. IN WITNESS WHEREOF, each of the Guarantors has caused this Consent to be duly executed by its authorized officer. GUARANTORS: APPRAISAL RECORDS SERVICES, INC., a Texas corporation By: _______________________________ Brian K. Miller, Vice President-Finance Address: c/o Tyler Technologies, Inc. 5949 Sherry Lane, Suite 1400 Dallas, Texas 75225 Attention: Treasurer Fax: (214) 547-4041 AUTOMATED RECORDS SERVICES, INC., a Texas corporation By: _______________________________ Brian K. Miller, Vice President-Finance Address: c/o Tyler Technologies, Inc. 5949 Sherry Lane, Suite 1400 Dallas, Texas 75225 Attention: Treasurer Fax: (214) 547-4041 SECOND AMENDMENT TO CREDIT AGREEMENT, FIRST AMENDMENT TO PLEDGE AND SECURITY AGREEMENT AND LENDER'S CONSENT (TYLER) 6 COLE LAYER TRUMBLE COMPANY, a Delaware corporation By: ______________________________ Brian K. Miller, Vice President-Finance Address: c/o Tyler Technologies, Inc. 5949 Sherry Lane, Suite 1400 Dallas, Texas 75225 Attention: Treasurer Fax: (214) 547-4041 EAGLE COMPUTER SYSTEMS, INC., a Delaware corporation By: _______________________________ Brian K. Miller, Vice President-Finance Address: c/o Tyler Technologies, Inc. 5949 Sherry Lane, Suite 1400 Dallas, Texas 75225 Attention: Treasurer Fax: (214) 547-4041 FUNDBALANCE, INC., a Delaware corporation By: _______________________________ Brian K. Miller, Vice President-Finance Address: c/o Tyler Technologies, Inc. 5949 Sherry Lane, Suite 1400 Dallas, Texas 75225 Attention: Treasurer Fax: (214) 547-4041 SECOND AMENDMENT TO CREDIT AGREEMENT, FIRST AMENDMENT TO PLEDGE AND SECURITY AGREEMENT AND LENDER'S CONSENT (TYLER) 7 INTERACTIVE COMPUTER DESIGNS, a Texas corporation By: _______________________________ Brian K. Miller, Vice President-Finance Address: c/o Tyler Technologies, Inc. 5949 Sherry Lane, Suite 1400 Dallas, Texas 75225 Attention: Treasurer Fax: (214) 547-4041 MUNIS, INC., a Maine corporation By: _______________________________ Brian K. Miller, Vice President-Finance Address: c/o Tyler Technologies, Inc. 5949 Sherry Lane, Suite 1400 Dallas, Texas 75225 Attention: Treasurer Fax: (214) 547-4041 NATIONSDATA.COM, INC., a Delaware corporation By: _______________________________ Brian K. Miller, Vice President-Finance Address: c/o Tyler Technologies, Inc. 5949 Sherry Lane, Suite 1400 Dallas, Texas 75225 Attention: Treasurer Fax: (214) 547-4041 SECOND AMENDMENT TO CREDIT AGREEMENT, FIRST AMENDMENT TO PLEDGE AND SECURITY AGREEMENT AND LENDER'S CONSENT (TYLER) 8 THE SOFTWARE GROUP, INC., a Texas corporation By: _______________________________ Brian K. Miller, Vice President-Finance Address: c/o Tyler Technologies, Inc. 5949 Sherry Lane, Suite 1400 Dallas, Texas 75225 Attention: Treasurer Fax: (214) 547-4041 TYLER LEASING, INC., a Delaware corporation By: _______________________________ Brian K. Miller, Vice President-Finance Address: c/o Tyler Technologies, Inc. 5949 Sherry Lane, Suite 1400 Dallas, Texas 75225 Attention: Treasurer Fax: (214) 547-4041 EX-10.1 4 d03636exv10w1.txt FORM OF INDEMNIFICATION AGREEMENT EXHIBIT 10.1 INDEMNITY AGREEMENT This Indemnity Agreement (this "Agreement"), dated to be effective as of this ___ day of __________, 20__ by and between TYLER TECHNOLOGIES, INC., a Delaware corporation (the "Company"), and ________________ ("Indemnitee"). ARTICLE V - RECITALS WHEREAS, highly competent persons have become more reluctant to serve publicly-held corporations as directors or in other capacities unless they are provided with adequate protection through insurance or adequate indemnification against inordinate risks of claims and actions against them arising out of their service to, and activities on behalf of, the corporation. WHEREAS, the Board of Directors of the Company (the "Board") has determined that, in order to attract and retain qualified individuals, the Company will attempt to maintain on an ongoing basis, at its sole expense, liability insurance to protect persons serving the Company and its subsidiaries from certain liabilities. Although the furnishing of such insurance has been a customary and widespread practice among United States-based corporations and other business enterprises, the Company believes that, given current market conditions and trends, such insurance may be available to it in the future only at higher premiums and with more exclusions. At the same time, directors, officers, and other persons in service to corporations or business enterprises are being increasingly subjected to expensive and time-consuming litigation relating to, among other things, matters that traditionally would have been brought only against the Company or business enterprise itself. The Bylaws of the Company require indemnification of the officers and directors of the Company. Indemnitee may also be entitled to indemnification pursuant to the Delaware General Corporation Law ("DGCL"). The Bylaws and the DGCL expressly provide that the indemnification provisions set forth therein are not exclusive, and thereby contemplate that contracts may be entered into between the Company and members of the board of directors, officers and other persons with respect to indemnification. WHEREAS, the uncertainties relating to such insurance and to indemnification have increased the difficulty of attracting and retaining such persons. WHEREAS, the Board has determined that the increased difficulty in attracting and retaining such persons is detrimental to the best interests of the Company's stockholders and that the Company should act to assure such persons that there will be increased certainty of such protection in the future. WHEREAS, it is reasonable, prudent and necessary for the Company contractually to obligate itself to indemnify, and to advance expenses on behalf of, such persons to the fullest extent permitted by applicable law so that they will serve or 1 continue to serve the Company free from undue concern that they will not be so indemnified. WHEREAS, this Agreement is a supplement to and in furtherance of the Bylaws of the Company and any resolutions adopted pursuant thereto, and shall not be deemed a substitute therefor, nor to diminish or abrogate any rights of Indemnitee thereunder. WHEREAS, Indemnitee does not regard the protection available under the Company's Bylaws and insurance as adequate in the present circumstances, and may not be willing to serve as an officer or director without adequate protection, and the Company desires Indemnitee to serve in such capacity. Indemnitee is willing to serve, continue to serve and to take on additional service for or on behalf of the Company on the condition that he be so indemnified; NOW, THEREFORE, in consideration of the premises and the covenants contained herein, the Company and Indemnitee do hereby covenant and agree as follows: 1. SERVICES TO THE COMPANY. Indemnitee will serve or continue to serve, at the will of the Company, as an officer, director or key employee of the Company for so long as Indemnitee is duly elected or appointed or until Indemnitee tenders his or her resignation. 2. DEFINITIONS. As used in this Agreement: (a) A "Change in Control" shall be deemed to occur upon the earliest to occur after the date of this Agreement of any of the following events: (i) Acquisition of Stock by Third Party. Any Person (as defined below) is or becomes the Beneficial Owner (as defined below), directly or indirectly, of securities of the Company representing fifteen percent (15%) or more of the combined voting power of the Company's then outstanding securities; (ii) Change in Board of Directors. During any period of two (2) consecutive years (not including any period prior to the execution of this Agreement), individuals who at the beginning of such period constitute the Board, and any new director (other than a director designated by a person who has entered into an agreement with the Company to effect a transaction described in Sections 2(a)(i), 2(a)(iii) or 2(a)(iv)) whose election by the Board or nomination for election by the Company's stockholders was approved by a vote of at least two-thirds of the directors then still in office who either were directors at the beginning of the period or whose election or nomination for election was previously so approved, cease for any reason to constitute at least a majority of the members of the Board; (iii) Corporate Transactions. The effective date of a merger or consolidation of the Company with any other entity, other than a merger or consolidation which would result in the voting securities of the Company outstanding immediately prior to such merger or consolidation continuing to represent (either by remaining outstanding or by being converted into voting securities of the surviving entity) more than 51% of the combined voting power of the voting securities of the surviving entity outstanding immediately after such merger or consolidation and with the power to elect at least a majority of the board of directors or other governing body of such surviving entity; 2 (iv) Liquidation. The approval by the stockholders of the Company of a complete liquidation of the Company or an agreement for the sale or disposition by the Company of all or substantially all of the Company's assets; and (v) Other Events. There occurs any other event of a nature that would be required to be reported in response to Item 6(e) of Schedule 14A of Regulation 14A (or a response to any similar item on any similar schedule or form) promulgated under the Exchange Act (as defined below), whether or not the Company is then subject to such reporting requirement. (vi) Certain Definitions. For purposes of this Section 2(a), the following terms shall have the following meanings: (A) "Exchange Act" shall mean the Securities Exchange Act of 1934, as amended. (B) "Person" shall have the meaning as set forth in Sections 13(d) and 14(d) of the Exchange Act; provided, however, that Person shall exclude (i) the Company, (ii) any trustee or other fiduciary holding securities under an employee benefit plan of the Company, and (iii) any corporation owned, directly or indirectly, by the stockholders of the Company in substantially the same proportions as their ownership of stock of the Company. (C) "Beneficial Owner" shall have the meaning given to such term in Rule 13d-3 under the Exchange Act; provided, however, that Beneficial Owner shall exclude any Person otherwise becoming a Beneficial Owner by reason of the stockholders of the Company approving a merger of the Company with another entity. (b) "Corporate Status" describes the status of a person who is or was a director, officer, employee or agent of the Company or of any other corporation, partnership or joint venture, trust, employee benefit plan or other enterprise which such person is or was serving at the request of the Company. (c) "Disinterested Director" means a director of the Company who is not and was not a party to the Proceeding in respect of which indemnification is sought by Indemnitee. (d) "Enterprise" shall mean the Company and any other corporation, partnership, joint venture, trust, employee benefit plan or other enterprise of which Indemnitee is or was serving at the request of the Company as a director, officer, employee, agent or fiduciary. (e) "Expenses" shall include all reasonable attorneys' fees, retainers, court costs, transcript costs, fees of experts, witness fees, travel expenses, duplicating costs, printing and binding costs, telephone charges, postage, delivery service fees, and all other disbursements or expenses of the types customarily incurred in connection with prosecuting, defending, preparing to prosecute or defend, investigating, being or preparing to be a witness in, or otherwise participating in a Proceeding. Expenses also shall include Expenses incurred in connection with any appeal resulting from any Proceeding, including, without limitation, the premium, security for, and other costs relating to any cost bond, supersede as bond, or other appeal bond or its 3 equivalent. Expenses, however, shall not include amounts paid in settlement by Indemnitee or the amount of judgments or fines against Indemnitee. (f) Reference to "other enterprise" shall include employee benefit plans; references to "fines" shall include any excise tax assessed with respect to any employee benefit plan; references to "serving at the request of the Company" shall include any service as a director, officer, employee or agent of the Company which imposes duties on, or involves services by, such director, officer, employee or agent with respect to an employee benefit plan, its participants or beneficiaries; and a person who acted in good faith and in a manner he reasonably believed to be in the best interests of the participants and beneficiaries of an employee benefit plan shall be deemed to have acted in a manner "not opposed to the best interests of the Company" as referred to in this Agreement. (g) The term "Proceeding" shall include any threatened, pending or completed action, suit, arbitration, alternate dispute resolution mechanism, investigation, inquiry, administrative hearing or any other actual, threatened or completed proceeding, whether brought in the right of the Company or otherwise and whether of a civil, criminal, administrative or investigative nature, in which Indemnitee was, is or will be involved as a party or otherwise by reason of the fact that Indemnitee is or was a director or officer of the Company, by reason of any action taken by him or of any action on his part while acting as director or officer of the Company, or by reason of the fact that he is or was serving at the request of the Company as a director, officer, employee or agent of another corporation, partnership, joint venture, trust or other enterprise, in each case whether or not serving in such capacity at the time any liability or expense is incurred for which indemnification, reimbursement, or advancement of expenses can be provided under this Agreement. (h) "Independent Counsel" means a law firm, or a member of a law firm, that is experienced in matters of corporation law and neither presently is, nor in the past five years has been, retained to represent: (i) the Company or Indemnitee in any matter material to either such party (other than with respect to matters concerning the Indemnitee under this Agreement, or of other indemnities under similar indemnification agreements), or (ii) any other party to the Proceeding giving rise to a claim for indemnification hereunder. Notwithstanding the foregoing, the term "Independent Counsel" shall not include any person who, under the applicable standards of professional conduct then prevailing, would have a conflict of interest in representing either the Company or Indemnitee in an action to determine Indemnitee's rights under this Agreement. The Company agrees to pay the reasonable fees and expenses of the Independent Counsel referred to above and to fully indemnify such counsel against any and all Expenses, claims, liabilities and damages arising out of or relating to this Agreement or its engagement pursuant hereto. 3. INDEMNITY IN THIRD-PARTY PROCEEDINGS. The Company shall indemnify Indemnitee in accordance with the provisions of this Section 3 if Indemnitee is, or is threatened to be made, a party to or a participant in any Proceeding, other than a Proceeding by or in the right of the Company to procure a judgment in its favor. Pursuant to this Section 3, Indemnitee shall be indemnified against all Expenses, judgments, fines and amounts paid in settlement actually and reasonably incurred by Indemnitee or on his behalf in connection with such Proceeding or any claim, issue or matter therein, if Indemnitee acted in good faith and in a manner he reasonably believed to be in or not opposed to the best interests of the Company and, in the case of a criminal proceeding, had no reasonable cause to believe that his conduct was unlawful. 4 4. INDEMNITY IN PROCEEDINGS BY OR IN THE RIGHT OF THE COMPANY. The Company shall indemnify Indemnitee in accordance with the provisions of this Section 4 if Indemnitee is, or is threatened to be made, a party to or a participant in any Proceeding by or in the right of the Company to procure a judgment in its favor. Pursuant to this Section 4, Indemnitee shall be indemnified against all Expenses actually and reasonably incurred by him or on his behalf in connection with such Proceeding or any claim, issue or matter therein, if Indemnitee acted in good faith and in a manner he reasonably believed to be in or not opposed to the best interests of the Company. No indemnification for Expenses shall be made under this Section 4 in respect of any claim, issue or matter as to which Indemnitee shall have been finally adjudged by a court to be liable to the Company, unless and only to the extent that any court in which the Proceeding was brought shall determine upon application that, despite the adjudication of liability but in view of all the circumstances of the case, Indemnitee is fairly and reasonably entitled to indemnification. 5. INDEMNIFICATION FOR EXPENSES OF A PARTY WHO IS WHOLLY OR PARTLY SUCCESSFUL. Notwithstanding any other provisions of this Agreement, to the extent that Indemnitee is a party to (or a participant in) and is successful, on the merits or otherwise, in any Proceeding or in defense of any claim, issue or matter therein, in whole or in part, the Company shall indemnify Indemnitee against all Expenses actually and reasonably incurred by him in connection therewith. If Indemnitee is not wholly successful in such Proceeding but is successful, on the merits or otherwise, as to one or more but less than all claims, issues or matters in such Proceeding, the Company shall indemnify Indemnitee against all Expenses actually and reasonably incurred by him or on his behalf in connection with each successfully resolved claim, issue or matter. If the Indemnitee is not wholly successful in such Proceeding, the Company also shall indemnify Indemnitee against all Expenses reasonably incurred in connection with a claim, issue or matter related to any claim, issue, or matter or which the Indemnitee was successful. For purposes of this Section 5 and without limitation, the termination of any claim, issue or matter in such a Proceeding by dismissal, with our without prejudice, shall be deemed to be a successful result as to such claim, issue or matter. 6. INDEMNIFICATION FOR EXPENSES OF A WITNESS. Notwithstanding any other provision of this Agreement, to the extent that Indemnitee is, by reason of his Corporate Status, a witness in any Proceeding to which Indemnitee is not a party, he shall be indemnified against all Expenses actually and reasonably incurred by him or on his behalf in connection therewith. 7. ADDITIONAL INDEMNIFICATION. (a) Notwithstanding any limitation in Sections 3, 4, or 5, the Company shall indemnify Indemnitee to the fullest extent permitted by law if Indemnitee is a party to or threatened to be made a party to any Proceeding (including a Proceeding by or in the right of the Company to procure a judgment in its favor) against all Expenses, judgments, fines and amounts paid in settlement actually and reasonably incurred by Indemnitee in connection with the Proceeding. No indemnity shall be made under this Section 7(a) on account of Indemnitee's conduct which constitutes a breach of Indemnitee's duty of loyalty to the Company or its stockholders or is an act or omission not in good faith or which involves intentional misconduct or a knowing violation of the law. (b) Notwithstanding any limitation in Sections 3, 4, 5 or 7(a), the Company shall indemnify Indemnitee to the fullest extent permitted by law if Indemnitee is a party to or threatened to be made a party to any Proceeding (including a Proceeding by or in the right of the Company to procure a judgment in its favor) against all Expenses, judgments, fines and amounts 5 paid in settlement actually and reasonably incurred by Indemnitee in connection with the Proceeding. (c) For purposes of Sections 7(a) and 7(b), the meaning of the phrase "to the fullest extent permitted by law" shall include, but not be limited to: (i) to the fullest extent permitted by the provision of the DGCL that authorizes or contemplates additional indemnification by agreement, or the corresponding provision of any amendment to or replacement of the DGCL, and (ii) to the fullest extent authorized or permitted by any amendments to or replacements of the DGCL adopted after the date of this Agreement that increase the extent to which a corporation may indemnify its officers and directors. 8. EXCLUSIONS. Notwithstanding any provision in this Agreement, the Company shall not be obligated under this Agreement to make any indemnity in connection with any claim made against Indemnitee: (a) for which payment has actually been made to or on behalf of Indemnitee under any insurance policy or other indemnity provision, except with respect to any excess beyond the amount paid under any insurance policy or other indemnity provision; or (b) for an accounting of profits made from the purchase and sale (or sale and purchase) by Indemnitee of securities of the Company within the meaning of Section 16(b) of the Securities Exchange Act of 1934, as amended, or similar provisions of state statutory law or common law; or (c) in connection with any Proceeding (or any part of any Proceeding) initiated by Indemnitee, including any Proceeding (or any part of any Proceeding) initiated by Indemnitee against the Company or its directors, officers, employees or other indemnities, unless (i) the Board of Directors of the Company authorized the Proceeding (or any part of any Proceeding) prior to its initiation or (ii) the Company provides the indemnification, in its sole discretion pursuant to the powers vested in the Company under applicable law. 9. ADVANCES OF EXPENSES. Notwithstanding any provision of this Agreement to the contrary, the Company shall advance the expenses incurred by Indemnitee in connection with any Proceeding within 30 days after the receipt by the Company of a statement or statements requesting such advances from time to time, whether prior to or after final disposition of any Proceeding. Advances shall be unsecured and interest free. Advances shall be made without regard to Indemnitee's ability to repay the expenses and without regard to Indemnitee's ultimate entitlement to indemnification under the other provisions of this Agreement. Advances shall include any and all reasonable Expenses incurred pursuing an action to enforce this right of advancement, including Expenses incurred preparing and forward statements to the Company to support the advances claimed. The Indemnitee shall qualify for advances solely upon the execution and delivery to the Company of an undertaking providing that the Indemnitee undertakes to repay the advance to the extent that it is ultimately determined that Indemnitee is not entitled to be indemnified by the Company. This Section 9 shall not apply to any claim made by Indemnitee for which indemnity is excluded pursuant to Section 8. 10. PROCEDURE FOR NOTIFICATION AND DEFENSE OF CLAIM. 6 (a) To obtain indemnification under this Agreement, Indemnitee shall submit to the Company a written request, including therein or therewith such documentation and information as is reasonably available to Indemnitee and is reasonably necessary to determine whether and to what extent Indemnitee is entitled to indemnification, not later than thirty (30) days after receipt by Indemnitee of notice of the commencement of any Proceeding. The omission to notify the Company will not relieve the Company from any liability which it may have to Indemnitee otherwise than under this Agreement. The Secretary of the Company shall, promptly upon receipt of such a request for indemnification, advise the Board in writing that Indemnitee has requested indemnification. (b) The Company will be entitled to participate in the Proceeding at its own expense. 11. PROCEDURE UPON APPLICATION FOR INDEMNIFICATION. (a) Upon written request by Indemnitee for indemnification pursuant to the first sentence of Section 10(a), a determination, if required by applicable law, with respect to Indemnitee's entitlement thereto shall be made in the specific case: (i) if a Change in Control shall have occurred, by Independent Counsel in a written opinion to the Board, a copy of which shall be delivered to Indemnitee; or (ii) if a Change in Control shall not have occurred, (A) by a majority vote of the Disinterested Directors, even though less than a quorum of the Board, or (B) if there are no such Disinterested Directors or, if such Disinterested Directors so direct, by Independent Counsel in a written opinion to the Board, a copy of which shall be delivered to Indemnitee, or (C) if so directed by the Board, by the stockholders of the Company; and, if it is so determined that Indemnitee is entitled to indemnification, payment to Indemnitee shall be made within ten (10) days after such determination. Indemnitee shall cooperate with the person, persons or entity making such determination with respect to Indemnitee's entitlement to indemnification, including providing to such person, persons or entity upon reasonable advance request any documentation or information which is not privileged or otherwise protected from disclosure and which is reasonably available to Indemnitee and reasonably necessary to such determination. Any costs or expenses (including attorneys' fees and disbursements) incurred by Indemnitee in so cooperating with the person, persons or entity making such determination shall be borne by the Company (irrespective of the determination as to Indemnitee's entitlement to indemnification) and the Company hereby indemnifies and agrees to hold Indemnitee harmless therefrom. 7 (b) In the event the determination of entitlement to indemnification is to be made by Independent Counsel pursuant to Section 11(a) hereof, the Independent Counsel shall be selected as provided in this Section 11(b). If a Change in Control shall not have occurred, the Independent Counsel shall be selected by the Board, and the Company shall give written notice to Indemnitee advising him of the identity of the Independent Counsel so selected. If a Change in Control shall have occurred, the Independent Counsel shall be selected by Indemnitee (unless Indemnitee shall request that such selection be made by the Board, in which event the preceding sentence shall apply), and Indemnitee shall give written notice to the Company advising it of the identity of the Independent Counsel so selected. In either event, Indemnitee or the Company, as the case may be, may, within 10 days after such written notice of selection shall have been given, deliver to the Company or to Indemnitee, as the case may be, a written objection to such selection; provided, however, that such objection may be asserted only on the ground that the Independent Counsel so selected does not meet the requirements of "Independent Counsel" as defined in Section 2 of this Agreement, and the objection shall set forth with particularity the factual basis of such assertion. Absent a proper and timely objection, the person so selected shall act as Independent Counsel. If such written objection is so made and substantiated, the Independent Counsel so selected may not serve as Independent Counsel unless and until such objection is withdrawn or a court has determined that such objection is without merit. If, within 20 days after submission by Indemnitee of a written request for indemnification pursuant to Section 10(a) hereof, no Independent Counsel shall have been selected and not objected to, either the Company or Indemnitee may petition a court of competent jurisdiction for resolution of any objection which shall have been made by the Company or Indemnitee to the other's selection of Independent Counsel and/or for the appointment as Independent Counsel of a person selected by the court or by such other person as the court shall designate, and the person with respect to whom all objections are so resolved or the person so appointed shall act as Independent Counsel under Section 11(a) hereof. Upon the due commencement of any judicial proceeding or arbitration pursuant to Section 13(a) of this Agreement, Independent Counsel shall be discharged and relieved of any further responsibility in such capacity (subject to the applicable standards of professional conduct then prevailing). 12. PRESUMPTIONS AND EFFECT OF CERTAIN PROCEEDINGS. (a) In making a determination with respect to entitlement to indemnification hereunder, the person or persons or entity making such determination shall presume that Indemnitee is entitled to indemnification under this Agreement if Indemnitee has submitted a request for indemnification in accordance with Section 10(a) of this Agreement, and the Company shall have the burden of proof to overcome that presumption in connection with the making by any person, persons or entity of any determination contrary to that presumption in connection with the making by any person, persons or entity of any determination contrary to that presumption. Neither the failure of the Company (including by the Board or independent legal counsel) to have made a determination prior to the commencement of any action pursuant to this Agreement that indemnification is proper in the circumstances because Indemnitee has met the applicable standard of conduct, nor an actual determination by the Company (including by the Board or independent legal counsel) that Indemnitee has not met such applicable standard of conduct, shall be a defense to the action or create a presumption that Indemnitee has not met the applicable standard of conduct. (b) If the person, persons or entity empowered or selected under Section 11 of this Agreement to determine whether Indemnitee is entitled to indemnification shall not have made a determination within sixty (60) days after receipt by the Company of the request therefor, the requisite determination of entitlement to indemnification shall be deemed to have been made 8 and Indemnitee shall be entitled to such indemnification, absent (i) a misstatement by Indemnitee of a material fact, or an omission of a material fact necessary to make Indemnitee's statement not materially misleading, in connection with the request for indemnification, or (ii) a prohibition of such indemnification under applicable law; provided, however, that such sixty (60) day period may be extended for a reasonable time, not to exceed an additional thirty (30) days, if the person, persons or entity making the determination with respect to entitlement to indemnification in good faith requires such additional time for the obtaining or evaluating of documentation and/or information relating thereto; and provided, further, that the foregoing provisions of this Section 12(b) shall not apply (i) if the determination of entitlement to indemnification is to be made by the stockholders pursuant to Section 11(a) of this Agreement and if (A) within fifteen (15) days after receipt by the Company of the request for such determination the Board has resolved to submit such determination to the stockholders for their consideration at an annual meeting thereof to be held within seventy-five (75) days after such receipt and such determination is made thereat, or (B) a special meeting of stockholders is called within fifteen (15) days after such receipt for the purpose of making such determination, such meeting is held for such purpose within sixty (60) days after having been so called and such determination is made thereat, or (ii) if the determination of entitlement to indemnification is to be made by Independent Counsel pursuant to Section 11(a) of this Agreement. (c) The termination of any Proceeding or of any claim, issue or matter therein, by judgment, order, settlement or conviction, or upon a plea of nolo contendere or its equivalent, shall not (except as otherwise expressly provided in this Agreement) of itself adversely affect the right of Indemnitee to indemnification or create a presumption that Indemnitee did not act in good faith and in a manner which he reasonably believed to be in or not opposed to the best interests of the Company or, with respect to any criminal Proceeding, that Indemnitee had reasonable cause to believe that his conduct was unlawful. (d) Reliance as Safe Harbor. For purposes of any determination of good faith, Indemnitee shall be deemed to have acted in good faith if Indemnitee's action is based on the records or books of account of the Enterprise, including financial statements, or on information supplied to Indemnitee by the officers of the Enterprise in the course of their duties, or on the advice of legal counsel for the Enterprise or on information or records given or reports made to the Enterprise by an independent certified public accountant or by an appraiser or other expert selected with the reasonable care by the Enterprise. The provisions of this Section 12(d) shall not be deemed to be exclusive or to limit in any way the other circumstances in which the Indemnitee may be deemed to have met the applicable standard of conduct set forth in this Agreement. (e) Actions of Others. The knowledge and/or actions, or failure to act, of any director, officer, agent or employee of the Enterprise shall not be imputed to Indemnitee for purposes of determining the right to indemnification under this Agreement. 13. REMEDIES OF INDEMNITEE. (a) In the event that (i) a determination is made pursuant to Section 11 of this Agreement that Indemnitee is not entitled to indemnification under this Agreement, (ii) advancement of Expenses is not timely made pursuant to Section 9 of this Agreement, (iii) no determination of entitlement to indemnification shall have been made pursuant to Section 11(a) of this Agreement within 45 days after receipt by the Company of the request for indemnification, (iv) payment of indemnification is not made pursuant to Section 5, 6, 7 or the last sentence of Section 11(a) of this Agreement within ten (10) days after receipt by the Company of a written 9 request therefore, or (v) payment of indemnification pursuant to Section 3 or 4 of this Agreement is not made within ten (10) days after a determination has been made that Indemnitee is entitled to indemnification, Indemnitee shall be entitled to an adjudication by a court of his entitlement to such indemnification or advancement of Expenses. Alternatively, Indemnitee, at his option, may seek an award in arbitration to be conducted by a single arbitrator pursuant to the Commercial Arbitration Rules of the American Arbitration Association. The Company shall not oppose Indemnitee's right to seek any such adjudication or award in arbitration. (b) In the event that a determination shall have been made pursuant to Section 11(a) of this Agreement that Indemnitee is not entitled to indemnification, any judicial proceeding or arbitration commenced pursuant to this Section 13 shall be conducted in all respects as a de novo trial, or arbitration, on the merits and Indemnitee shall not be prejudiced by reason of that adverse determination. In any judicial proceeding or arbitration commenced pursuant to this Section 13 the Company shall have the burden of proving Indemnitee is not entitled to indemnification or advancement of Expenses, as the case may be. (c) If a determination shall have been made pursuant to Section 11(a) of this Agreement that Indemnitee is entitled to indemnification, the Company shall be bound by such determination in any judicial proceeding or arbitration commenced pursuant to this Section 13, absent (i) a misstatement by Indemnitee of a material fact, or an omission of a material fact necessary to make Indemnitee's statement not materially misleading, in connection with the request for indemnification, or (ii) a prohibition of such indemnification under applicable law. (d) In the event that Indemnitee, pursuant to this Section 13, seeks a judicial adjudication of or an award in arbitration to enforce his rights under, or to recover damages for breach of, this Agreement, Indemnitee shall be entitled to recover from the Company, and shall be indemnified by the Company against, any and all Expenses actually and reasonably incurred by him in such judicial adjudication or arbitration. If it shall be determined in said judicial adjudication or arbitration that Indemnitee is entitled to receive part but not all of the indemnification or advancement of Expenses sought, the Indemnitee shall be entitled to recover from the Company, and shall be indemnified by the Company against, any and all Expenses reasonably incurred by Indemnitee in connection with such judicial adjudication or arbitration. (e) The Company shall be precluded from asserting in any judicial proceeding or arbitration commenced pursuant to this Section 13 that the procedures and presumptions of this Agreement are not valid, binding and enforceable and shall stipulate in any such court or before any such arbitrator that the Company is bound by all the provisions of this Agreement. The Company shall indemnify Indemnitee against any and all Expenses and, if requested by Indemnitee, shall (within ten (10) days after receipt by the Company of a written request therefore) advance such expenses to Indemnitee, which are incurred by Indemnitee in connection with any action brought by Indemnitee for indemnification or advance of Expenses from the Company under this Agreement or under any directors' and officers' liability insurance policies maintained by the Company, regardless of whether Indemnitee ultimately is determined to be entitled to such indemnification, advancement of Expenses or insurance recovery, as the case may be. 14. NON-EXCLUSIVITY; SURVIVAL OF RIGHTS; INSURANCE; SUBROGATION. (a) The rights of indemnification and to receive advancement of Expenses as provided by this Agreement shall not be deemed exclusive of any other rights to which Indemnitee may at any time be entitled under applicable law, the Company's Articles of 10 Incorporation, the Company's Bylaws, any agreement, a vote of stockholders or a resolution of directors, or otherwise. No amendment, alteration or repeal of this Agreement or of any provision hereof shall limit or restrict any right of Indemnitee under this Agreement in respect of any action taken or omitted by such Indemnitee in his Corporate Status prior to such amendment, alteration or repeal. To the extent that a change in Delaware law, whether by statute or judicial decision, permits greater indemnification or advancement of Expenses than would be afforded currently under the Company's Bylaws and this Agreement, it is the intent of the parties hereto that Indemnitee shall enjoy by this Agreement the greater benefits so afforded by such change. No right or remedy herein conferred is intended to be exclusive of any other right or remedy, and every other right and remedy shall be cumulative and in addition to every other right and remedy given hereunder or now or hereafter existing at law or in equity or otherwise. The assertion or employment of any right or remedy hereunder, or otherwise, shall not prevent the concurrent assertion or employment of any other right or remedy. (b) To the extent that the Company maintains an insurance policy or policies providing liability insurance for directors, officers, employees, or agents of the Company or of any other corporation, partnership, joint venture, trust, employee benefit plan or other enterprise which such person serves at the request of the Company, Indemnitee shall be covered by such policy or policies in accordance with its or their terms to the maximum extent of the coverage available for any such director, officer, employee or agent under such policy or policies. If, at the time of the receipt of a notice of a claim pursuant to this Agreement, the Company has director and officer liability insurance in effect, the Company shall give prompt notice of the commencement of such proceeding to the insurers in accordance with the procedures set forth in the respective policies. The Company shall thereafter take all necessary or desirable action to cause such insurers to pay, on behalf of the Indemnitee, all amounts payable as a result of such proceeding in accordance with the terms of such policies. (c) In the event of any payment under this Agreement, the Company shall be subrogated to the extent of such payment to all of the rights of recovery of Indemnitee, who shall execute all papers required and take all action necessary to secure such rights, including execution of such documents as are necessary to enable the Company to bring suit to enforce such rights. (d) The Company shall not be liable under this Agreement to make any payment of amounts otherwise indemnifiable (or for which advancement is provided hereunder) hereunder if and to the extent that Indemnitee has otherwise actually received such payment under any insurance policy, contract, agreement or otherwise. (e) The Company's obligation to indemnify or advance Expenses hereunder to Indemnitee who is or was serving at the request of the Company as a director, officer, employee or agent of any other corporation, partnership, joint venture, trust, employee benefit plan or other enterprise shall be reduced by any amount Indemnitee has actually received as indemnification or advancement of expenses from such other corporation, partnership, joint venture, trust, employee benefit plan or other enterprise. 15. DURATION OF AGREEMENT. This Agreement shall continue until and terminate upon the later of: (a) 10 years after the date that Indemnitee shall have ceased to serve as a director or officer of the Company or as a director, officer, employee or agent of any other corporation, partnership, joint venture, trust, employee benefit plan or other enterprise which Indemnitee served at the request of the Company; or (b) 1 year after the final termination of any 11 Proceeding then pending in respect of which Indemnitee is granted rights of indemnification or advancement of Expenses hereunder and of any proceeding commenced by Indemnitee pursuant to Section 13 of this Agreement relating thereto. This Agreement shall be binding upon the Company and its successors and assigns and shall inure to the benefit of Indemnitee and his heirs, executors and administrators. 16. SEVERABILITY. If any provision or provisions of this Agreement shall be held to be invalid, illegal or unenforceable for any reason whatever: (a) the validity, legality and enforceability of the remaining provisions of this Agreement (including without limitation, each portion of any Section of this Agreement containing any such provision held to be invalid, illegal or unenforceable, that is not itself invalid, illegal or unenforceable) shall not in any way be affected or impaired thereby and shall remain enforceable to the fullest extent permitted by law; (b) such provision or provisions shall be deemed reformed to the extent necessary to conform to applicable law and to give the maximum effect to the intent of the parties hereto; and (c) to the fullest extent possible, the provisions of this Agreement (including, without limitation, each portion of any Section of this Agreement containing any such provision held to be invalid, illegal or unenforceable, that is not itself invalid, illegal or unenforceable) shall be construed so as to give effect to the intent manifested thereby. 17. ENFORCEMENT. (a) The Company expressly confirms and agrees that it has entered into this Agreement and assumed the obligations imposed on it hereby in order to induce Indemnitee to serve as a director or officer of the Company, and the Company acknowledges that Indemnitee is relying upon this Agreement in serving as a director or officer of the Company. (b) This Agreement constitutes the entire agreement between the parties hereto with respect to the subject matter hereof and supersedes all prior agreements and understandings, oral, written and implied, between the parties hereto with respect to the subject matter hereof. 18. MODIFICATION AND WAIVER. No supplement, modification or amendment of this Agreement shall be binding unless executed in writing by the parties thereto. No waiver of any of the provisions of this Agreement shall be deemed or shall constitute a waiver of any other provisions of this Agreement nor shall any waiver constitute a continuing waiver. 19. NOTICE BY INDEMNITEE. Indemnitee agrees promptly to notify the Company in writing upon being served with any summons, citation, subpoena, complaint, indictment, information or other document relating to any Proceeding or matter which may be subject to indemnification or advancement of Expenses covered hereunder. The failure of Indemnitee to so notify the Company shall not relieve the Company of any obligation which it may have to the Indemnitee under this Agreement or otherwise. 20. NOTICES. All notices, requests, demands and other communications under this Agreement shall be in writing and shall be deemed to have been duly given (a) if delivered by hand, when received by the party to whom said notice or other communication shall have been directed, or (b) if mailed by certified or registered mail with postage prepaid, on the third business day after the date on which it is so mailed: (a) If to Indemnitee, at the address indicated on the Company's records or such other address as Indemnitee shall provide to the Company. 12 (b) If to the Company to: Tyler Technologies, Inc. 2800 W. Mockingbird Lane Dallas, Texas 75235 Attention: General Counsel or to any other address as may have been furnished to Indemnitee by the Company. 21. CONTRIBUTION. To the fullest extent permissible under applicable law, if the indemnification provided for in this Agreement is unavailable to Indemnitee for any reason whatsoever, the Company, in lieu of indemnifying Indemnitee, shall contribute to the amount incurred by Indemnitee, whether for judgments, fines, penalties, excise taxes, amounts paid or to be paid in settlement and/or for Expenses, in connection with any claim relating to an indemnifiable event under this Agreement, in such proportion as is deemed fair and reasonable in light of all of the circumstances of such Proceeding in order to reflect (i) the relative benefits received by the Company and Indemnitee as a result of the event(s) and/or transaction(s) giving cause to such Proceeding; and/or (ii) the relative fault of the Company (and its directors, officers, employees and agents) and Indemnitee in connection with such events(s) and/or transaction(s). 22. APPLICABLE LAW AND CONSENT TO JURISDICTION. This Agreement and the legal relations among the parties shall be governed by, and construed and enforced in accordance with, the laws of the State of Delaware, without regard to its conflict of laws rules. Except with respect to any arbitration commenced by Indemnitee pursuant to this Agreement, the Company and Indemnitee hereby irrevocably and unconditionally (i) agree that any action or proceeding arising out of or in connection with this Agreement shall be brought only in the Chancery Court of the State of Delaware (the "Delaware Court"), and not in any other state or federal court in the United States of America or any court in any other country, (ii) consent to submit to the exclusive jurisdiction of the Delaware Court for purposes of any action or proceeding arising out of or in connection with this Agreement, (iii) appoint, to the extent such party is not a resident of the State of Delaware, irrevocably RL&F Service Corp., One Rodney Square, 10th Floor, 10th and King Streets, Wilmington, Delaware 19801 as its agent in the State of Delaware as such party's agent for acceptance of legal process in connection with any such action or proceeding against such party with the same legal force and validity as if served upon such party personally within the State of Delaware, (iv) waive any objection to the laying of venue of any such action or proceeding in the Delaware Court, and (v) waive, and agree not to plead or to make, any claim that any such action or proceeding brought in the Delaware Court has been brought in an improper or inconvenient forum. 23. IDENTICAL COUNTERPARTS. This Agreement may be executed in one or more counterparts, each of which shall for all purposes be deemed to be an original but all of which together shall constitute one and the same Agreement. Only one such counterpart signed by the party against whom enforceability is sought needs to be produced to evidence the existence of this Agreement. 24. MISCELLANEOUS. Use of the masculine pronoun shall be deemed to include usage of the feminine pronoun where appropriate. The headings of the paragraphs of this Agreement are inserted for convenience only and shall not be deemed to constitute part of this Agreement or to affect the construction thereof. 13 IN WITNESS WHEREOF, the parties have caused this Agreement to be signed as of the day and year first above written. TYLER TECHNOLOGIES, INC. INDEMNITEE By: __________________________ _________________________________ Name: _______________________ Name: ___________________________ Title: _______________________ 14 EX-21 5 d03636exv21.txt SUBSIDIARIES OF TYLER EXHIBIT 21 SUBSIDIARIES OF TYLER TECHNOLOGIES, INC.
Name Place of Incorporation - ---- ---------------------- The Software Group, Inc. Texas Interactive Computer Designs, Inc. Texas Eagle Computer Systems, Inc. Delaware FundBalance, Inc. Delaware Munis, Inc. Maine Cole Layer Trumble Company Delaware Appraisal Records Services, Inc. Texas Automated Records Services, Inc. Texas
EX-23 6 d03636exv23.txt CONSENT OF ERNST & YOUNG LLP EXHIBIT 23 Consent of Ernst & Young LLP, Independent Auditors We consent to the incorporation by reference in the Registration Statement (Form S-8 No. 333-98929) pertaining to the Tyler Technologies, Inc. Stock Option Plan of our report dated February 21, 2003, with respect to the consolidated financial statements and schedule of Tyler Technologies, Inc. and subsidiaries included in the Annual Report (Form 10-K) for the year ended December 31, 2002. ERNST & YOUNG LLP Dallas, Texas February 24, 2003 EX-99.1 7 d03636exv99w1.txt CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350 Exhibit 99.1 Certification Pursuant to Section 1350 of Chapter 63 of Title 18 of the United States Code I, John M. Yeaman, the chief executive officer of Tyler Technologies, Inc., certify that (i) the Annual Report on Form 10-K fully complies with the requirements of Section 13(a) or 14(d) of the Securities Exchange Act of 1934 and (ii) the information contained in the Annual Report on Form 10-K fairly presents, in all material respects, the financial condition and results of operations of Tyler Technologies, Inc. By: /s/ John M. Yeaman ------------------- John M. Yeaman President and Chief Executive Officer EX-99.2 8 d03636exv99w2.txt CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350 Exhibit 99.2 Certification Pursuant to Section 1350 of Chapter 63 of Title 18 of the United States Code I, Theodore L. Bathurst, the chief financial officer of Tyler Technologies, Inc., certify that (i) the Annual Report on Form 10-K fully complies with the requirements of Section 13(a) or 14(d) of the Securities Exchange Act of 1934 and (ii) the information contained in the Annual Report on Form 10-K fairly presents, in all material respects, the financial condition and results of operations of Tyler Technologies, Inc. By: /s/ Theodore L. Bathurst ------------------------ Theodore L. Bathurst Vice President and Chief Financial Officer -----END PRIVACY-ENHANCED MESSAGE-----