<PAGE> 1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(x) QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934.
For the quarterly period ended June 30, 1998
OR
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934.
Commission File Number 1-10485
TYLER CORPORATION
(Exact name of registrant as specified in its charter)
DELAWARE 75-2303920
(State or other jurisdiction of (I.R.S. employer
incorporation or organization) identification no.)
2121 SAN JACINTO STREET
SUITE 3200, DALLAS, TEXAS 75201
(Address of principal executive offices)
(Zip code)
(214) 754-7800
(Registrant's telephone number, including area code)
NONE
(Former name, former address and former fiscal year,
if changed since last report.)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes x No
---- ----
Number of shares of common stock of registrant outstanding at
August 7, 1998: 34,267,399
Page 1 of 17
<PAGE> 2
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
TYLER CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
June 30, December 31,
1998 1997
------------ ------------
(Unaudited)
<S> <C> <C>
ASSETS
Current assets
Cash and cash equivalents $ 2,629,000 $ 8,877,000
Accounts receivable (less allowance
for losses of $503,000 and $42,000
at 6/30/98 and 12/31/97, respectively) 5,654,000 201,000
Note receivable from I.F.S. Acquisition Corp. -- 2,628,000
Merchandise inventories 23,854,000 22,901,000
Income tax receivable 478,000 516,000
Other current assets 2,443,000 394,000
Deferred income taxes 762,000 762,000
------------ ------------
Total current assets 35,820,000 36,279,000
Property, plant and equipment, net 17,498,000 5,580,000
Other assets
Goodwill 67,058,000 --
Other intangibles 22,196,000 --
Sundry 2,295,000 2,881,000
Other receivables 4,485,000 4,455,000
Note receivable from Business Resources Corporation -- 5,700,000
------------ ------------
96,034,000 13,036,000
------------ ------------
$149,352,000 $ 54,895,000
============ ============
</TABLE>
See accompanying notes.
Page 2 of 17
<PAGE> 3
TYLER CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS (Continued)
<TABLE>
<CAPTION>
June 30, December 31,
1998 1997
------------- -------------
(Unaudited)
<S> <C> <C>
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities
Accounts payable $ 5,663,000 $ 5,615,000
Accrued liabilities 6,294,000 6,172,000
Current portion of long-term debt 1,827,000 --
Deferred revenue 5,714,000 --
------------- -------------
Total current liabilities 19,498,000 11,787,000
Long-term debt 29,753,000 --
Other liabilities 7,882,000 8,537,000
Deferred income taxes 9,791,000 3,168,000
Commitments and contingencies
Shareholders' equity
Common Stock ($.01 par value, 100,000,000 and
50,000,000 shares authorized at 6/30/98 and
12/31/97, respectively; 35,534,274 and 23,309,277
shares issued at 6/30/98 and 12/31/97, respectively) 355,000 233,000
Capital surplus 100,205,000 51,216,000
Retained deficit (11,985,000) (13,431,000)
------------- -------------
88,575,000 38,018,000
Less treasury shares, at cost:
(1,417,482 and 1,552,965 shares at 6/30/98
and 12/31/97, respectively) 6,147,000 6,615,000
------------- -------------
Total shareholders' equity 82,428,000 31,403,000
------------- -------------
$ 149,352,000 $ 54,895,000
============= =============
</TABLE>
See accompanying notes.
Page 3 of 17
<PAGE> 4
TYLER CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
<TABLE>
<CAPTION>
For the three months ended June 30,
-----------------------------------
1998 1997
------------ ------------
<S> <C> <C>
Revenues
Auto parts $ 21,186,000 $ 20,555,000
Information management 11,993,000 --
------------ ------------
Total revenues 33,179,000 20,555,000
Cost of revenues
Auto parts 12,394,000 11,777,000
Information management 5,672,000 --
------------ ------------
Total cost of revenues 18,066,000 11,777,000
------------ ------------
Gross profit 15,113,000 8,778,000
Selling, general and administrative 12,067,000 8,621,000
Store closing costs 705,000 --
------------ ------------
Operating income 2,341,000 157,000
Interest expense (income), net 625,000 (226,000)
------------ ------------
Income from continuing operations,
before income taxes 1,716,000 383,000
Income tax expense 800,000 139,000
------------ ------------
Income from continuing operations 916,000 244,000
Income (loss) from discontinued operations,
after income taxes 375,000 (1,342,000)
------------ ------------
Net income (loss) $ 1,291,000 $ (1,098,000)
============ ============
Basic earnings (loss) per common share:
Continuing operations $ .03 $ .01
Discontinued operations .01 (.07)
------------ ------------
Net earnings (loss) per common share $ .04 $ (.06)
============ ============
Diluted earnings (loss) per common share:
Continuing operations $ .03 $ .01
Discontinued operations .01 (.07)
------------ ------------
Net earnings (loss) per common share $ .04 $ (.06)
============ ============
Weighted average shares:
Basic 34,117,000 19,945,000
Diluted 36,089,000 20,080,000
</TABLE>
See accompanying notes.
Page 4 of 17
<PAGE> 5
TYLER CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
<TABLE>
<CAPTION>
For the six months ended June 30,
---------------------------------
1998 1997
------------ ------------
<S> <C> <C>
Revenues
Auto parts $ 39,752,000 $ 37,968,000
Information management 16,801,000 --
------------ ------------
Total revenues 56,553,000 37,968,000
Cost of revenues
Auto parts 23,255,000 21,528,000
Information management 8,180,000 --
------------ ------------
Total cost of revenues 31,435,000 21,528,000
------------ ------------
Gross profit 25,118,000 16,440,000
Selling, general and administrative 21,636,000 15,987,000
Store closing costs 705,000 --
------------ ------------
Operating income 2,777,000 453,000
Interest expense (income), net 794,000 (384,000)
------------ ------------
Income from continuing operations,
before income taxes 1,983,000 837,000
Income tax expense 912,000 303,000
------------ ------------
Income from continuing operations 1,071,000 534,000
Income (loss) from discontinued operations,
after income taxes 375,000 (1,493,000)
------------ ------------
Net income (loss) $ 1,446,000 $ (959,000)
============ ============
Basic earnings (loss) per common share:
Continuing operations $ .04 $ .02
Discontinued operations .01 (.07)
------------ ------------
Net earnings (loss) per common share $ .05 $ (.05)
============ ============
Diluted earnings (loss) per common share
Continuing operations $ .03 $ .02
Discontinued operations .01 (.07)
------------ ------------
Net earnings (loss) per common share $ .04 $ (.05)
============ ============
Weighted average shares:
Basic 30,741,000 19,918,000
Diluted 32,475,000 20,024,000
</TABLE>
See accompanying notes.
Page 5 of 17
<PAGE> 6
TYLER CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
<TABLE>
<CAPTION>
For the three months ended June 30,
-----------------------------------
1998 1997
------------ ------------
<S> <C> <C>
Cash flows from operating activities
Net income (loss) $ 1,291,000 $ (1,098,000)
Adjustments to reconcile net income
to net cash provided by operations:
Depreciation and amortization 1,762,000 514,000
Deferred income tax benefit 234,000 (215,000)
Decrease (increase) in accounts receivable 508,000 (83,000)
Decrease in inventories 256,000 607,000
Decrease in income tax receivable 469,000 912,000
(Increase) decrease in other current assets (709,000) 97,000
Decrease in other receivables 1,000 139,000
Increase in accounts payable 113,000 45,000
Increase in accrued liabilities 79,000 282,000
Increase in deferred revenue 566,000 --
Decrease in other liabilities (262,000) (219,000)
Discontinued operations-noncash
charges and working capital changes -- 1,548,000
------------ ------------
Net cash provided by operations 4,308,000 2,529,000
------------ ------------
Cash flows from investing activities
Additions to property, plant and equipment (1,471,000) (108,000)
Cost of acquisitions, net of cash acquired (4,155,000) --
Proceeds from disposal of property,
plant and equipment 149,000 18,000
Other (153,000) (129,000)
------------ ------------
Net cash used by investing activities (5,630,000) (219,000)
------------ ------------
Cash flows from financing activities
Long-term borrowings 822,000 --
Sale of treasury shares to employee benefit plan 7,000 --
Payments on capital lease obligations (18,000) --
Debt issuance costs (313,000) --
------------ ------------
Net cash provided by financing activities 498,000 --
------------ ------------
Net (decrease) increase in cash and cash equivalents (824,000) 2,310,000
Cash and cash equivalents at beginning of period 3,453,000 18,932,000
------------ ------------
Cash and cash equivalents at end of period $ 2,629,000 $ 21,242,000
============ ============
Supplemental disclosures
Interest paid (received) $ 667,000 $ (21,000)
Income tax payment (refunds) $ 188,000 $ (68,000)
</TABLE>
Page 6 of 17
<PAGE> 7
TYLER CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
<TABLE>
<CAPTION>
For the six months ended June 30,
---------------------------------
1998 1997
------------ ------------
<S> <C> <C>
Cash flows from operating activities
Net income (loss) $ 1,446,000 $ (959,000)
Adjustments to reconcile net income
to net cash provided by operations:
Depreciation and amortization 2,850,000 984,000
Deferred income tax benefit 25,000 (429,000)
Increase in accounts receivable (396,000) (32,000)
(Increase) decrease in inventories (868,000) 58,000
Decrease in income tax receivable 963,000 912,000
(Increase) decrease in other current assets (750,000) 93,000
Decrease in other receivables 604,000 139,000
(Decrease) increase in accounts payable (1,451,000) 1,365,000
Decrease in accrued liabilities (1,619,000) (1,960,000)
Increase in deferred revenue 2,124,000 --
Decrease in other liabilities (833,000) (231,000)
Discontinued operations-noncash
charges and working capital changes -- 6,525,000
------------ ------------
Net cash provided by operations 2,095,000 6,465,000
------------ ------------
Cash flows from investing activities
Additions to property, plant and equipment (2,227,000) (421,000)
Cost of acquisitions, net of cash acquired (31,638,000) --
Proceeds from disposal of property,
plant and equipment 171,000 20,000
Other (208,000) (243,000)
Net proceeds from sale of products for fund-raising
programs segment 2,628,000 --
------------ ------------
Net cash used by investing activities (31,274,000) (644,000)
------------ ------------
Cash flows from financing activities
Long-term borrowings 23,248,000 --
Sale of treasury shares to employee benefit plan 209,000 2,000
Payments on capital lease obligations (213,000) --
Debt issuance costs (313,000) --
------------ ------------
Net cash provided by financing activities 22,931,000 2,000
------------ ------------
Net (decrease) increase in cash and cash equivalents (6,248,000) 5,823,000
Cash and cash equivalents at beginning of period 8,877,000 15,419,000
------------ ------------
Cash and cash equivalents at end of period $ 2,629,000 $ 21,242,000
============ ============
Supplemental disclosures
Interest paid (received) $ 764,000 $ (17,000)
Income tax payment (refunds) $ 188,000 $ (64,000)
</TABLE>
Page 7 of 17
<PAGE> 8
Tyler Corporation
Notes to Condensed Consolidated Financial Statements
(Unaudited)
(1) Basis of Presentation
The unaudited information for Tyler Corporation ("Tyler" or the
"Company") includes all adjustments which are, in the opinion of the
Company's management, of a normal or recurring nature and necessary
for a fair summarized presentation of the condensed consolidated
balance sheet at June 30, 1998, and the condensed consolidated
results of operations and cash flows for the periods presented. The
consolidated results of operations for the six months ended June 30,
1998, are not necessarily indicative of the results of operations for
the full year and should be read in conjunction with the Company's
Annual Report on Form 10-K for the year ended December 31, 1997.
This Quarterly Report on Form 10-Q contains forward-looking
statements within the meaning of Section 27A of the Securities Act of
1933, as amended and Section 21E of the Securities Exchange Act of
1934, as amended. All statements other than historical or current
facts, including, without limitation, statements about the business,
financial condition, business strategy, plans and objectives of
management, and prospects of the Company are forward-looking
statements. Although the Company believes that the expectations
reflected in such forward-looking statements are reasonable, such
forward-looking statements are subject to risks and uncertainties
that could cause actual results to differ materially from these
expectations. Such risks and uncertainties include, without
limitation, changes in product demand, the availability of products,
changes in competition, economic conditions, various inventory risks
due to changes in market conditions, changes in tax and other risks
indicated in the Company's filings with the Securities and Exchange
Commission. These risks and uncertainties are beyond the ability of
the Company to control, and in many cases, the Company cannot predict
the risks and uncertainties that could cause its actual results to
differ materially from those indicated by the forward-looking
statements. When used in this Quarterly Report, the words "believes,"
"plans," "estimates," "expects," "anticipates," "intends," and
similar expressions as they relate to the Company or its management
are intended to identify forward-looking statements.
(2) Acquisitions
On February 19, 1998, the Company completed the purchases of Business
Resources Corporation ("Resources"), The Software Group, Inc. ("TSG")
and Interactive Computer Designs, Inc. ("INCODE"). These acquisitions
represent the implementation of Tyler's previously announced strategy
to build an integrated information management services, system and
outsourcing company servicing local governments. Resources, TSG and
INCODE provide information management solutions to approximately 200
county governments and 225 cities, principally located in the
Southwestern United States.
The purchase price for each acquired company consisted of the
following: (i) Resources - 10.0 million shares of Tyler common stock
and approximately $27.4 million of cash and assumed debt (ii) TSG -
2.0 million shares of Tyler common stock and approximately $12.0
million of cash and (iii) INCODE - 225,000 shares of Tyler common
stock and approximately $1.3 million of cash. The Company financed
the acquisitions utilizing funds available under its bank credit
agreement.
Page 8 of 17
<PAGE> 9
These acquisitions have been accounted for using the purchase method
of accounting and the results of operations are included in the
Company's condensed consolidated financial statements since the date
of acquisition. The purchase price has been preliminary allocated to
the assets (including identifiable intangible assets such as title
plant, workforce, customer lists and software) and liabilities of
each company based on their estimated respective fair values. The
purchase price exceeded fair value of each company's respective net
assets by approximately $45.9 million, $14.1 million and $2.6 million
for Resources, TSG and INCODE, respectively, which excess has been
assigned to goodwill. Goodwill will be amortized over 40 years for
Resources and 20 years for TSG and INCODE. The purchase price for
Resources does not include certain potential additional
consideration, as the contingencies regarding such additional
consideration are not presently determinable beyond reasonable doubt.
The following unaudited pro forma information presents the
consolidated results of operations of the Company, Resources and TSG
as if the acquisitions occurred on January 1, 1997. The pro forma
information is not necessarily indicative of the results of
operations, which would have actually occurred during such periods.
<TABLE>
<CAPTION>
(Dollars in thousands, except per shares data)
----------------------------------------------
Earnings per
Net sales Net income diluted share
--------- ----------- --------------
<S> <C> <C> <C>
Three months ended
June 30, 1997 $ 29,002 $ (567) $ (.02)
Six months ended
June 30, 1997 55,036 241 .01
Six months ended
June 30, 1998 $ 60,367 $ 1,246 $ .04
</TABLE>
On June 5, 1998, the Company acquired a line of document management
software and related customer installations and service contracts from
the Business Imaging Systems division of Eastman Kodak Company for
$3.6 million in cash and $1.9 million in assumed liabilities. Kofile,
Inc. ("Kofile"), a newly formed subsidiary in the Company's Resources
unit, will be based in Rochester, New York for development, support
and marketing of the document management software and related customer
installations and service contracts. The results of Kofile's
operations are included in the Company's condensed consolidated
financial statements from June 5, 1998. Kofile is expected to
have annual revenues of approximately $4.0 million in 1998.
(3) Commitments and Contingencies
As discussed in Note 13 of the Notes to the Consolidated Financial
Statements included in the Company's Annual Report on Form 10-K for
the year ended December 31, 1997, the Company, through some of its
subsidiaries, is involved in various environmental claims and claims
for work-related injuries and physical conditions arising from a
formerly-owned subsidiary which was sold in December 1995.
At December 31, 1997, approximately fifty former employees of a
subsidiary of the Company, which prior to December 1995, engaged in
pipe, fittings and other activities had filed several suits against
TPI of Texas, Inc. and/or Swan Transportation Company and/or Tyler
Sand Company, all subsidiaries or former subsidiaries of the Company,
seeking to recover damages for alleged exposure to asbestos and/or
silica. As of June 30, 1998, more than 100 additional former employees
have filed suits of a similar nature. While the Company plans to
defend this litigation vigorously, the ultimate outcome of the
litigation is uncertain.
Page 9 of 17
<PAGE> 10
Other than ordinary course, routine litigation incidental to the
business of the Company and except as described herein, and in the
Company's Annual Report on Form 10-K for the year ended December 31,
1997, there are no other material legal proceedings pending to which
the Company or its subsidiaries are parties or to which any of its
properties are subject.
(4) Revenue Recognition
Information Management:
The Company sells off-the-shelf software packages and in some cases
software packages designed to the customers specification. In a
variety of instances, the Company also provides computer equipment
and related peripherals, installation and training. The Company
recognizes revenue, including those arrangements which entail a
customer-specific installation solution, when all of the elements
have been delivered, training completed, all significant contractual
obligations satisfied and collection of the related receivable for
the entire arrangement is probable. The Company also provides
support, maintenance and enhancements, which is deferred based on
vendor specific evidence of fair value, and recognized ratably over
the service period. Incremental training is billable on a time and
material basis and is recognized as a revenue when the related
services are performed.
To the extent computer hardware and related peripherals are
drop-shipped to a customer before the end of an accounting period,
the Company records contracts in progress for the corresponding cost
of such equipment.
The Company also provides computerized indexing and imaging of real
property records, records management and micrographic reproduction,
as well as information management and outsourcing and professional
services required by county and local government units and agencies
and provides title plant update services to title companies. The
Company recognizes service revenue when services are performed and
equipment sales when the products are shipped.
The Company also receives royalty revenue relating to the current
activities of two former subsidiaries of Resources. Royalty revenue
is recognized as earned upon receipt of royalty payments.
For certain long-term contracts entered into by the Company, revenue
is recognized using the percentage-of-completion method based on the
costs incurred to fulfill the Company's commitments to complete the
obligations specified in the agreements.
Deferred revenue consists primarily of payments received in advance of
revenue being earned under software licensing, software and hardware
installation, support and maintenance contracts.
Auto Parts:
Substantially all revenue is recognized when products are delivered
to customers.
(5) Discontinued Operations
Effective October 15, 1997, the Company sold all of the capital stock
of its subsidiary which provided products for fund-raising programs,
Institutional Financing Services, Inc. (IFS), to I.F.S. Acquisition
Corporation for approximately $8,400,000 resulting in a loss on
disposal of approximately $2,500,000. This estimated loss on disposal
included estimates regarding the value of certain assets that were
subject to change. In the second quarter of 1998, the Company adjusted
the estimated value of an asset, which resulted in a reduction of the
estimated loss on disposal of $375,000, net of income taxes.
Management expects final resolution of all estimates by the fourth
quarter of 1998 and that any subsequent adjustments will not have a
significant impact on the estimated loss on disposal. Proceeds
consisted of approximately $5,800,000 in cash received at closing and
approximately $2,600,000 received in January 1998.
Page 10 of 17
<PAGE> 11
(6) Earnings Per Share
The following table reconciles the numerators and denominators used
in the calculation of basic and diluted earnings per share for each
of the periods presented:
<TABLE>
<CAPTION>
Three months ended Six months ended
June 30, June 30,
--------------------------- ---------------------------
1998 1997 1998 1997
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Numerators for basic and diluted
earnings per share:
Net income (loss) $ 1,291,000 $ (1,098,000) $ 1,446,000 $ (959,000)
============ ============ ============ ============
Denominator:
Denominator for basic earnings per
weighted average share 34,117,000 19,945,000 30,741,000 19,918,000
Effect of dilutive securities:
Employee stock options 470,000 135,000 355,000 106,000
Warrant 1,502,000 -- 1,379,000 --
------------ ------------ ------------ ------------
Dilutive potential common shares 1,972,000 135,000 1,734,000 106,000
------------ ------------ ------------ ------------
Denominator for diluted earnings per
share-adjusted weighted-average shares
for assumed conversion 36,089,000 20,080,000 32,475,000 20,024,000
============ ============ ============ ============
Basic earnings (loss) per share $ 0.04 $ (0.06) $ 0.05 $ (0.05)
============ ============ ============ ============
Diluted earnings (loss) per share $ 0.04 $ (0.06) $ 0.04 $ (0.05)
============ ============ ============ ============
</TABLE>
(7) Subsequent Events
Effective July 1, 1998, the Company completed the purchases of
CompactData Solutions, Inc. ("CompactData") and Ram Quest Software,
Inc. ("Ram Quest"). CompactData specializes in building and marketing
large-scale databases comprised of public record information, such as
property appraisals, motor vehicle registrations, drivers licenses
and criminal and civil court case records. This enhanced information
is then made available to customers through CompactData's proprietary
user-friendly selection, sorting, viewing and printing software.
CompactData delivers the data to its customers on CD-ROM, tapes and
via the Internet.
Ram Quest is a producer of advanced software for title companies,
which provides automation solutions for the closing, title plant
management and imaging needs of its customers. Ram Quest currently
has installed software systems with over 75 customers throughout
Texas.
CompactData and Ram Quest are expected to have combined annual
revenues of approximately $3,000,000 in 1998. The purchase price for
the two companies totaled about $2,600,000, comprised of
approximately $1,000,000 in cash and assumed debt and 150,000 shares
of Tyler stock.
The purchase method of accounting will be used to account for these
acquisitions and the purchase price will be allocated to the
companies' assets and liabilities based on their estimated respective
fair values. The results of the companies' operations for the quarter
were not included in the Company's condensed financial statements.
Page 11 of 17
<PAGE> 12
On August 7, 1998, the Company signed a definitive agreement to
purchase Computer Management Services, Inc. ("CMS"). CMS provides
integrated information management systems and services to over 500
cities and 100 counties throughout Iowa, Minnesota, Missouri, South
Dakota, Illinois and other states, primarily in the upper Midwest.
The CMS acquisition is expected to close by August 15, 1998. CMS is
expected to have annual revenues of approximately $6,000,000 in 1998.
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
General
As of June 30, 1998, Tyler provides products and services through
four operating subsidiaries. Resources, TSG and INCODE, which were
acquired February 19, 1998, provide information management solutions
to approximately 200 county governments and 225 cities, principally
in the Southwestern United States. These three entities comprise the
Company's information management group.
The Company believes that the information management industry today
is fragmented and that the county government and related markets are
primarily served by small, private companies. Given these industry
characteristics and the ability to identify suitable acquisition
candidates and complete acquisitions, the Company intends to pursue a
consolidation strategy that, if successful, could lead to significant
revenue growth for the Company. The acquisitions of Resources, TSG,
and INCODE have positioned the Company to grow rapidly through
consolidating acquisitions and give it the opportunity to obtain a
larger share of the county and city information management market.
The Company intends to pursue aggressively this consolidation
strategy through an acquisition program focused on entry into new
geographic markets, expansion within existing geographic markets and
development of related services and systems.
The Company also continues to operate through Forest City Auto Parts
Company ("Forest City"), a retailer of automotive parts and supplies.
Forest City specializes in selling mechanical and electrical
hardparts, such as brake parts, rack-and-pinion steering and fuel
injectors, to do-it-yourself customers.
Analysis of Results of Operations
Tyler's consolidated results include the operations of its newly
acquired information management companies - Resources, TSG and
INCODE - from February 19, 1998, the date of their acquisition by
Tyler. Resources' results of operations include the results of its
newly formed subsidiary, Kofile, from June 5, 1998. The results of
continuing operations for 1997 consist of operations of Forest City
and exclude the results of operations from the newly acquired
information management group and the results of operations of IFS.
REVENUES
Total revenues of $33.2 million for the three months ended June 30,
1998, increased 61% in comparison to $20.6 million reported for the
three months ended June 30, 1997. For the six months ended June 30,
1998, revenues of $56.6 million increased 49% from revenues of $38.0
million reported for the six months ended June 30, 1997.
Approximately 3% and 5% of the overall revenue increase for the three
months and six months ended June 30, 1998, respectively, relates to
Forest City. The remaining increases are due to the acquisitions of
the information management companies on February 19, 1998.
Page 12 of 17
<PAGE> 13
Information Management Group
On a pro forma basis the information management group posted revenue
increases over the prior year. Resources' revenues on a pro forma
basis increased approximately 29% and 9% for the three and six months
ended June 30, 1998, respectively, compared to the same periods last
year. Revenue in the second quarter of 1998 was positively impacted
by recognition of a portion of the revenue from a contract with the
Cook County Recorder of Deeds in Chicago, Illinois, to design and
install an electronic document management and imaging system.
Resources' revenues also include the results of operations for the
month of June from its newly formed subsidiary, Kofile. Kofile
acquired a line of document management software and related customer
installations and service contracts from Eastman Kodak Company on
June 5, 1998. Other sources of revenue increases for Resources were
title plant update services and royalty income. Royalties income is
derived from the sale of property tax information for real estate
transactions. These increases were offset somewhat by lower
re-creation revenue compared to the prior year. Re-creation services
provide image-enhanced, archival-quality reprints of old and
deteriorating records, including photostatic prints, with microfilm
backup copies for improved security in case of loss by fire, theft,
water damage, or other catastrophe. Re-creation revenue is generally
dependent on available county funds, which may result in uneven
revenue streams from year to year.
For the three months and six months ended June 30, 1998, TSG's
revenues increased 35% and 28%, respectively, compared to the same
periods last year, on a pro forma basis. Approximately one-third of
the increase was due to the continued need of TSG's municipal
customers to solve their Year 2000 issues ("Y2K"), with the remaining
increase resulting from more systems and services being sold to an
expanding customer base and additional services being provided to
existing customers. The Y2K issue is the result of computer programs
being written using two digits rather than four to define the
applicable year. Thus, a date using "00" is recognized as the year
1900 rather than 2000. This could result in a system failure or
miscalculations causing disruptions of operations, including, among
other things, a temporary inability to process transactions, send
invoices or engage in similar normal business activities. As with all
new contracts, TSG expects Y2K related sales to increase its customer
base, which will provide opportunities to increase future service and
maintenance revenues. The increase in new contract awards at TSG also
includes increases in contracts for its integrated justice system
software. The rise in court activity over that last five years has
led to more pressure on county governments to automate their judicial
systems.
Also, during the second quarter of 1998, TSG signed a $4.4 million
contract with the County of El Paso, Texas, and a $1.6 million
contract with Multnomah County in Portland, Oregon. The El Paso
contract provides that TSG will install its proprietary Integrated
Justice Management system, while the Multnomah contract calls for TSG
to install it proprietary Integrated Property Appraisal and Tax
Collection system. As mentioned above, TSG has benefited
significantly from its customers' needs to resolve their Y2K
problems, and approximately 50% of the El Paso contract is Y2K
related. While TSG did not recognize any revenue from these contracts
during the second quarter of 1998, management anticipates the
installation process for both contracts to commence by the fourth
quarter of 1998.
Auto Parts
The overall revenue increase at Forest City was attributable to the
acquisition of ten stores in October 1997 as comparable store sales
were down 3% and 2% for the three months and six months ended June 30,
1998, respectively. Stores located in the Cleveland, Ohio area
continue to suffer as competitors add new stores in this area.
However, these declines were offset somewhat by modest same store
increases in the Chicago area. The auto parts retailing industry is
quickly consolidating and redesigning distribution channels to improve
efficiencies. Forest City is currently consolidating inventory
distribution channels and replacing or remodeling outdated facilities.
Forest City also established a new store design as the prototype for
the future and opened its first new built-to-specifications store in
February 1998, which replaced an outdated facility. In June, another
outdated facility was replaced with the new prototype model and in
July a similar new store was opened in the Cleveland area. In the
second quarter of 1998, Forest City closed eight underperforming
stores.
Page 13 of 17
<PAGE> 14
COST OF REVENUES
For the three months ended June 30, 1998, total cost of revenues
increased $6.3 million, or 53%, to $18.1 million from $11.8 million
for the three months ended June 30, 1997. Cost of revenues of $31.4
million for the six months ended June 30, 1998, increased 46% in
comparison to $21.5 million reported for the six months ended June
30, 1997. Approximately 5% and 8% of the overall cost of revenue
increase for the three months and six months ended June 30, 1998,
respectively, relates to Forest City, while the remaining increase is
attributable to the acquisition of the information management
companies on February 19, 1998.
Information Management Group
Cost of revenues for the information management group were $5.7
million and $8.2 million for the three months and six months ended
June 30, 1998, respectively. These costs resulted in a gross margin
of approximately 53% and 51% for the three and six months ended June
30, 1998, respectively.
Although Resources' overall revenues increased from the prior year
periods for both the three and six months ended June 30, 1998, the
gross margin was somewhat lower mainly due to changes in the product
mix. Recreation revenue, which has a higher gross margin than other
services, was unusually high in the first six months of the prior
year.
TSG's gross margin was down slightly for the three months and six
months ended June 30, 1998, compared to the comparable prior year
periods. Due to sales growth and a strong competitive market for
computer professionals, the company experienced increased salaries
and other costs associated with attracting and retaining quality
employees.
Auto Parts
Cost of revenues increased 5%, or $.6 million to $12.4 million for
the three months ended June 30, 1998, from $11.8 million for the same
period in the prior year. For the six months ended June 30, 1998,
cost of revenues increased $1.7 million, or 8%, to $23.3 million,
from $21.5 million for the same period in the prior period. This
increase was mainly due to the acquisition of ten new stores in
October 1997, offset somewhat by the closing of eight unprofitable
stores late in the second quarter.
Gross margins for the three months and six months ended June 30,
1998, were 41.5% compared to 42.7% and 43.3% for the three months and
six months ended June 30, 1997, respectively. The decline in gross
margin for both periods was primarily the result of continued
competitive pressures.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
Selling, general and administrative expenses include goodwill
amortization associated with the acquisitions of the information
management companies on February 19, 1998, for the three months and
six months ended June 30, 1998, of $.8 million and $1.1 million,
respectively. Excluding goodwill amortization, selling, general and
administrative expenses for the three months ended June 30, 1998,
were $11.3 million, an increase of 31% from $8.6 million in the
comparable prior year period. For the six months ended June 30, 1998,
selling, general and administrative expenses, excluding goodwill
amortization, was $20.5 million, an increase of 28% from $16.0
million in the comparable prior year period. Approximately 7% and 10%
of the overall selling, general and administrative expense increase
for the three months and six months ended June 30, 1998,
respectively, relates to Forest City. The remaining increases are due
to the acquisition of the information management companies on
February 19, 1998.
Information Management Group
Selling, general and administrative expenses as a percent of sales
for the information management group was approximately 20% for both
the three and six months ended June 30, 1998, which are somewhat
lower than the prior year due to increased sales volume.
Page 14 of 17
<PAGE> 15
Auto Parts
Forest City's selling, general and administrative expenses as a
percent of sales increased approximately 1% and 2% for the three
months and six months ended June 30, 1998, respectively, compared to
the same periods last year. These increases are primarily due to the
fixed expenses associated with ten stores acquired in October 1997.
Although sales volume at the new locations has been increasing over
the last six months it remains lower than the average store. However,
sales volume at the new stores has been steadily increasing in 1998
and average sales for the new stores in the second quarter of 1998,
were approximately 20% higher than their average sales for the first
quarter of 1998.
STORE CLOSING COSTS
In the second quarter, Forest City closed eight underperforming
stores which resulted in a pretax charge to earnings of $705,000.
Costs include future lease and real estate obligations and other
miscellaneous costs to be incurred in connection with these store
closures. Forest City will continue to review performance of existing
of stores, which may result in the relocation or closure of
additional unprofitable stores.
INTEREST EXPENSE
As a result of the debt incurred to finance the February 1998
acquisitions and the Kofile acquisition in June 1998, the Company
recorded interest expense for the three months and six months ended
June 30, 1998 of $.6 million and $.8 million, respectively.
INCOME TAX PROVISION
The effective tax rate increased to 46% from 36% in the prior year
primarily due to the non-deductibility of goodwill and intangibles
amortization relating to the 1998 acquisitions.
IMPACT OF YEAR 2000
Many currently installed computer systems and software products are
coded to accept only two digit entries in the date code field.
Beginning in the year 2000, these date code fields will need to
accept four digit entries in order to distinguish 21st century dates
from 20th century dates. As a result, in less than two years,
computer systems and/or software used by many companies will need to
be upgraded to comply with Y2K requirements. Significant uncertainty
exists in the software industry concerning the potential effects
associated with such compliance issues. Although the Company believes
that its products are Y2K compliant, there can be no assurance that
Y2K errors or defects will not be discovered in the Company's current
and future products.
The Company has conducted a preliminary review of its internal
computer systems to identify the systems that could be affected by
the Y2K issue. Based on this preliminary review, the Company
currently has no reason to believe that its internal software systems
or externally marketed software products are not Y2K compliant.
Although the ability of third parties with whom the Company transacts
business to address adequately their Y2K issue is outside the
Company's control, the Company is discussing with its vendors and
customers the possibility of any interface difficulties that may
affect the Company.
There can be no assurance that Y2K errors or defects will not be
discovered in the Company's internal computer systems and externally
marketed software products and, if such errors or defects are
discovered, there can be no assurance that the costs of making such
systems Y2K compliant will not have materially adverse effect on the
Company's business, operating results and financial condition.
Page 15 of 17
<PAGE> 16
Financial Condition and Liquidity
In February 1998, the Company entered into a three-year bank credit
agreement in an amount not to exceed $50 million, including a $5
million sublimit for the issuance of standby and commercial letters
of credit. At June 30, 1998, the Company had outstanding borrowings
of $24.0 million under the bank credit agreement. The effective
interest rate for borrowings under the bank credit agreement for the
three and six months ended June 30, 1998, was approximately 7%.
For the six months ended June 30, 1998, the Company incurred capital
expenditures of $2.2 million. The expenditures included cost for
building expansion and computer equipment required for internal
growth. In addition, Forest City incurred cost associated with
relocating two stores and opening one new store in their new
prototype design.
The Company is from time to time engaged in discussions with respect
to selected acquisitions and expects to continue to assess these and
other acquisition opportunities as they arise. The Company may also
require additional financing if it decides to make additional
acquisitions. There can be no assurance, however, that any such
opportunities will arise, any such acquisitions will be consummated
or that any needed additional financing will be available when
required on terms satisfactory to the Company.
Part II. OTHER INFORMATION
Item 1. Legal Proceedings
For a discussion of legal proceedings see Part I, Item 1. "Financial
Statements - Notes to Condensed Consolidated Financial Statements -
Commitments and Contingencies" on page 9 of this document.
Item 4. Submission of Matters to a Vote of Security Holders
The Company held its annual meeting of stockholders on April 28,
1998. The following are the results of certain matters voted upon at
the meeting:
(a) With respect to the election of new directors and directors
whose terms expired on April 28, 1998, shares were voted as
follows:
<TABLE>
<CAPTION>
Number of
Number of Votes
Nominee Votes for Withheld
------- ---------- ----------
<S> <C> <C>
Ernest H. Lorch 30,948,029 107,746
Frederick R. Meyer 31,002,526 53,249
William D. Oates 31,012,984 42,791
C. A. Rundell, Jr. 31,005,971 49,804
James E. Russell 30,998,129 57,646
Louis A. Waters 31,013,176 42,599
</TABLE>
(b) With respect to the amendments to the Company's Stock Option Plan
("the Plan") to increase the number of shares of the Company's
Common Stock which may be issued under the Plan from 1,800,000
shares to 3,300,000 shares and to provide that any eligible
employee may be granted options up to the number of shares
authorized under the Plan, the number of votes cast for,
against and the number of abstentions were 30,084,719,
604,632 and 366,424, respectively.
Page 16 of 17
<PAGE> 17
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
Exhibit
Number Exhibit
------- -------
27 Financial Data Schedule
(b) There were no reports filed on Form 8-K during the second
quarter of 1998.
Item 3 of Part I and Items 2, 3 and 5 of Part II were not applicable and have
been omitted.
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Company has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
TYLER CORPORATION
By: /s/ Brian K. Miller
----------------------------------------
Brian K. Miller
Vice President, Chief Accounting Officer
and Treasurer (principal accounting
officer and principal financial officer
and an authorized signatory)
Date: August 12, 1998
Page 17 of 17
<PAGE> 18
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NUMBER EXHIBIT
- ------ -------
<S> <C>
27 Financial Data Schedule
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> JUN-30-1998
<CASH> 2,629,000
<SECURITIES> 0
<RECEIVABLES> 6,157,000
<ALLOWANCES> 503,000
<INVENTORY> 23,854,000
<CURRENT-ASSETS> 35,820,000
<PP&E> 22,564,000
<DEPRECIATION> 5,066,000
<TOTAL-ASSETS> 149,352,000
<CURRENT-LIABILITIES> 19,498,000
<BONDS> 0
0
0
<COMMON> 355,000
<OTHER-SE> 82,073,000
<TOTAL-LIABILITY-AND-EQUITY> 149,352,000
<SALES> 56,553,000
<TOTAL-REVENUES> 0
<CGS> 31,435,000
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 932,000
<INCOME-PRETAX> 1,983,000
<INCOME-TAX> 912,000
<INCOME-CONTINUING> 1,071,000
<DISCONTINUED> 375,000
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,446,000
<EPS-PRIMARY> .05
<EPS-DILUTED> .04
</TABLE>
