<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, 1999
OR
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934.
Commission File Number 1-10485
TYLER TECHNOLOGIES, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 75-2303920
(State or other jurisdiction of ( I.R.S. employer
incorporation or organization) identification no.)
2800 WEST MOCKINGBIRD LANE
DALLAS, TEXAS 75235
(Address of principal executive offices)
(Zip code)
(214) 902-5086
(Registrant's telephone number, including area code)
TYLER CORPORATION
(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 10,
1999: 39,481,211
<PAGE> 2
TYLER TECHNOLOGIES, INC. AND SUBSIDIARIES
INDEX
<TABLE>
<CAPTION>
Page No.
--------
<S> <C>
Part I - Financial Information (Unaudited)
Item 1. Financial Statements
Condensed Consolidated Balance Sheets ......................................... 3
Condensed Consolidated Statements of Income ................................... 5
Condensed Consolidated Statements of Cash Flows................................ 6
Notes to Condensed Consolidated Financial Statements .......................... 7
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations ......................................................... 16
Part II - Other Information
Item 1. Legal Proceedings ............................................................. 23
Item 4. Submission of Matters to a Vote of Security Holders............................ 23
Item 6. Exhibits and Reports on Form 8-K............................................... 24
Signatures ...................................................................................... 24
Exhibit 27 Financial Data Schedule (for SEC information only)
</TABLE>
2
<PAGE> 3
PART I FINANCIAL INFORMATION
Item 1 Financial Statements
TYLER TECHNOLOGIES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands, except par value and number of shares)
<TABLE>
<CAPTION>
June 30, December 31,
1999 1998
-------------- --------------
(Unaudited)
<S> <C> <C>
ASSETS
Current Assets
Cash and cash equivalents $ 885 $ 1,558
Accounts receivable (less allowance
for losses of $836 and $531
at 6/30/99 and 12/31/98, respectively) 26,664 14,500
Income taxes receivable -- 1,308
Prepaid expenses and other current assets 3,530 1,374
Current notes receivable 6,004 --
Deferred income taxes 1,195 1,061
Net assets of discontinued operations -- 12,752
-------------- --------------
Total current assets 38,278 32,553
Net assets of discontinued operations -- 2,848
Property and equipment, net 16,166 14,147
Other assets
Goodwill and other intangibles, net 143,801 95,996
Non-current notes receivable 6,744 --
Other receivables 2,969 3,612
Sundry 1,076 938
-------------- --------------
$ 209,034 $ 150,094
============== ==============
</TABLE>
See accompanying notes.
3
<PAGE> 4
TYLER TECHNOLOGIES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS (Continued)
(In thousands, except par value and number of shares)
<TABLE>
<CAPTION>
June 30, December 31,
1999 1998
------------ ------------
(Unaudited)
<S> <C> <C>
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities
Accounts payable $ 3,457 $ 1,190
Accrued liabilities 9,207 5,152
Current portion of long-term debt 4,017 1,876
Deferred revenue 17,153 10,148
Income taxes payable 854 --
------------ ------------
Total current liabilities 34,688 18,366
Long-term debt, less current portion 52,562 37,189
Other liabilities 6,593 7,273
Deferred income taxes 10,125 10,920
Commitments and contingencies
Shareholders' equity
Preferred stock, $10.00 par value, 1,000,000
shares authorized, none issued -- --
Common stock ($.01 par value, 100,000,000
shares authorized; 40,724,693 and 35,913,313
shares issued at 6/30/99 and 12/31/98, respectively) 406 359
Capital surplus 130,386 103,985
Accumulated deficit (19,569) (21,791)
------------ ------------
111,223 82,553
Less treasury shares, at cost:
(1,418,482 and 1,423,482 shares at 6/30/99
and 12/31/98, respectively) 6,157 6,207
------------ ------------
Total shareholders' equity 105,066 76,346
------------ ------------
$ 209,034 $ 150,094
============ ============
</TABLE>
See accompanying notes.
4
<PAGE> 5
TYLER TECHNOLOGIES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(In thousands, except per share amounts)
(Unaudited)
<TABLE>
<CAPTION>
Three months ended Six months ended
June 30, June 30,
-------------------------- --------------------------
1999 1998 1999 1998
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Net revenues $ 28,674 $ 11,993 $ 49,107 $ 16,801
Cost of revenues 12,651 5,672 22,478 8,180
---------- ---------- ---------- ----------
Gross profit 16,023 6,321 26,629 8,621
Selling, general and administrative 9,649 3,174 15,117 4,728
Amortization of intangibles 1,552 772 2,648 1,122
---------- ---------- ---------- ----------
Operating income 4,822 2,375 8,864 2,771
Interest expense 1,113 545 1,939 797
Interest income (272) (12) (281) (136)
---------- ---------- ---------- ----------
Income before provision for income taxes 3,981 1,842 7,206 2,110
Provision for income taxes 2,088 845 3,639 970
---------- ---------- ---------- ----------
Income from continuing operations 1,893 997 3,567 1,140
Discontinued operations:
Loss from operations of discontinued
operations, after income taxes (780) (81) (780) (69)
Gain (loss) on disposals of discontinued
operations -- 375 (565) 375
---------- ---------- ---------- ----------
Net income $ 1,113 $ 1,291 $ 2,222 $ 1,446
========== ========== ========== ==========
Basic earnings (loss) per common share:
Continuing operations $ 0.05 $ 0.03 $ 0.10 $ 0.04
Discontinued operations (0.02) 0.01 (0.04) 0.01
---------- ---------- ---------- ----------
Net earnings per common share $ 0.03 $ 0.04 $ 0.06 $ 0.05
========== ========== ========== ==========
Diluted earnings (loss) per common share:
Continuing operations $ 0.05 $ 0.03 $ 0.09 $ 0.04
Discontinued operations (0.02) 0.01 (0.04) 0.00
---------- ---------- ---------- ----------
Net earnings per common share $ 0.03 $ 0.04 $ 0.05 $ 0.04
========== ========== ========== ==========
Weighted average outstanding common shares:
Basic 38,539 34,117 36,648 30,741
Diluted 39,944 36,089 37,946 32,475
</TABLE>
See accompanying notes.
5
<PAGE> 6
TYLER TECHNOLOGIES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
<TABLE>
<CAPTION>
Six Months Ended June 30,
--------------------------
1999 1998
---------- ----------
<S> <C> <C>
Cash flows from operating activities
Net income $ 2,222 $ 1,446
Adjustments to reconcile net income to net cash provided by operations:
Depreciation and amortization 4,298 1,822
Deferred income taxes (455) 25
Discontinued operations - non-cash charges and changes in
operating assets and liabilities (665) (814)
Changes in operating assets and liabilities, net of effects of acquired
companies and discontinued operations (4,915) (1,231)
---------- ----------
Net cash provided by operations 485 1,248
---------- ----------
Cash flows from investing activities
Additions to property, plant and equipment (2,123) (1,250)
Cost of acquisitions, net of cash acquired (22,412) (31,638)
Investment in database and other assets (1,997) --
Investing activities of discontinued operations (534) (806)
Net proceeds from disposal of discontinued operations 11,291 2,628
Issuance of notes receivable (1,000) --
Other (94) (58)
---------- ----------
Net cash used by investing activities (16,869) (31,124)
---------- ----------
Cash flows from financing activities
Net borrowings on revolving credit facilities 16,703 23,248
Payments on notes payable (1,354) --
Proceeds from notes receivable 643 --
Sale of treasury shares to employee benefit plan 20 209
Payments of principal on capital lease obligations (201) (213)
Debt issuance cost (100) (313)
---------- ----------
Net cash provided by financing activities 15,711 22,931
---------- ----------
Net decrease in cash and cash equivalents (673) (6,945)
Cash and cash equivalents at beginning of period 1,558 8,364
---------- ----------
Cash and cash equivalents at end of period $ 885 $ 1,419
========== ==========
</TABLE>
See accompanying notes.
6
<PAGE> 7
Tyler Technologies, Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements
(Unaudited)
(Tables in thousands, except per share data)
(1) Basis of Presentation
On May 19, 1999, the shareholders of the Company voted to approve the
change of the Company's name from Tyler Corporation to Tyler
Technologies, Inc.
The accompanying unaudited information for Tyler Technologies, Inc.
("Tyler" or the "Company") includes all adjustments which are, in the
opinion of the Company's management, of a normal or recurring nature
and necessary for a fair summarized presentation of the condensed
consolidated balance sheet at June 30, 1999, and the condensed
consolidated results of operations and cash flows for the periods
presented. Such financial statements have been prepared in accordance
with generally accepted accounting principles for interim financial
information. The consolidated results of operations for interim periods
may not necessarily be indicative of the results of operations for any
other interim period or for the full year and should be read in
conjunction with the Company's Annual Report on Form 10-K for the year
ended December 31, 1998.
Certain prior year amounts have been reclassified to conform to the
current year presentation.
The Company discontinued the operations of Forest City Auto Parts
Company ("Forest City") in 1998. Accordingly, the prior year's
financial statements have been restated to reflect the disposition of
Forest City.
(2) Acquisitions
The Company acquired the entities described below in transactions which
were accounted for by the purchase method of accounting and financed
the cash portion of the consideration utilizing funds available under
its bank credit agreement. Results of operations of the acquired
entities are included in the Company's condensed consolidated financial
statements from their respective dates of acquisition.
On February 19, 1998, the Company completed the purchases of Business
Resources Corporation ("Resources"), The Software Group, Inc. ("TSG")
and Interactive Computer Designs, Inc. ("INCODE"). These acquisitions
represent the implementation of Tyler's previously announced strategy
to build a nationally integrated information management services,
system, database and outsourcing company initially serving local and
municipal governments. Resources, TSG and INCODE provide information
management solutions to county governments and cities, principally
located in the Southwestern United States. The purchase price for each
acquired company consisted of the following: (i) Resources - 10.0
million shares of Tyler common stock and approximately $28.0 million of
cash and assumed debt; (ii) TSG - 2.0 million shares of Tyler common
stock and approximately $12.0 million of cash; and (iii) INCODE -
225,000 shares of Tyler common stock and approximately $1.3 million of
cash. The purchase price has been allocated to the assets (including
identifiable intangible assets such as title plant, workforce, customer
lists and software) and liabilities of each company based on their
respective fair values. The purchase price exceeded the estimated fair
value of each company's respective net identifiable assets by
approximately $45.9 million, $14.1 million and $2.5 million for
Resources, TSG and INCODE, respectively, and the excess has been
assigned to goodwill. The purchase price for Resources does not include
certain potential additional consideration, as the contingencies
regarding such additional consideration are not presently determinable
beyond reasonable doubt.
On June 5, 1998, the Company acquired a line of document management
software and related customer installations and service contracts from
the Business Imaging Systems division of Eastman Kodak Company for $3.6
million in cash and $1.9 million in assumed liabilities. The excess
purchase price over the estimated fair values of the net identifiable
assets acquired was approximately $5.6 million and has been recorded as
goodwill.
7
<PAGE> 8
On July 1, 1998, the Company completed the purchases of CompactData
Solutions, Inc. ("CompactData") and Ram Quest Software, Inc. ("Ram
Quest"). CompactData specializes in building and marketing large-scale
databases comprised of public record information, such as property
appraisals, motor vehicle registrations, drivers licenses and criminal
and civil court case records. Ram Quest is a producer of advanced
software for title companies, which provides automation solutions for
the closing, title plant management and imaging needs of its customers.
Ram Quest has installed software systems with customers throughout
Texas. Ram Quest and CompactData operate as units of the Company's
Resources subsidiary. The purchase price for CompactData and Ram Quest
totaled approximately $2.3 million, comprised of approximately $1.0
million in cash and assumed debt and 145,000 shares of Tyler common
stock. The excess purchase price over the estimated fair values of the
net identifiable assets acquired was $2.1 million and has been recorded
as goodwill.
Effective August 1, 1998, the Company completed the purchase of
Computer Management Services, Inc. ("CMS") for approximately $1.2
million in cash and 228,000 shares of Tyler common stock. CMS provides
integrated information management systems and services to cities and
counties throughout Iowa, Minnesota, Missouri, South Dakota, Illinois,
Wisconsin and other states, primarily in the upper Midwest. The excess
purchase price over the estimated fair value of the net identifiable
assets acquired was approximately $1.1 million and has been recorded as
goodwill.
Effective March 1, 1999, the Company acquired Eagle Computer Systems,
Inc. ("Eagle"), for approximately 1.1 million shares of Tyler common
stock and $5.0 million in cash. The excess purchase price over the
preliminary estimated fair value of net identifiable assets acquired
was approximately $10.8 million and has been recorded as goodwill.
Eagle is a leading supplier of networked computing solutions for county
governments in 14 states, primarily in the western United States. In
addition, Eagle provides hardware, data conversion, site planning,
training and ongoing support to its customers.
Effective April 1, 1999, the Company completed its acquisition of Micro
Arizala Systems, Inc. d/b/a FundBalance ("FundBalance") a company which
develops and markets fund accounting software and other applications
for state and local governments, not-for-profit organizations and
cemeteries. The Company acquired all of the outstanding capital stock
of FundBalance for approximately 356,000 shares of Tyler common stock.
The excess purchase price over the preliminary estimated fair value of
net identifiable assets acquired was approximately $1.7 million and has
been recorded as goodwill.
On April 19, 1999, the Company acquired Process Incorporated d/b/a
Computer Center Software ("MUNIS"), which designs and develops
integrated financial and land management information systems for
counties, cities, schools and not-for-profit organizations. MUNIS
provides software solutions to customers primarily located throughout
the northeast and southeast United States. The purchase price was
approximately $16.3 million in cash and 2.7 million shares of Tyler
common stock. The excess purchase price over the preliminary estimated
fair value of net identifiable assets acquired was $29.2 million and
has been recorded as goodwill.
Effective May 1, 1999, the Company acquired Gemini Systems, Inc.
("Gemini"), for a combination of approximately $1.2 million in cash and
promissory notes and 700,000 shares of Tyler common stock. The excess
purchase price over the preliminary estimated fair value of net
identifiable assets acquired was approximately $5.8 million and has
been recorded as goodwill. Gemini develops and markets software
products for municipal governments and utilities which are installed at
locations in 34 states, with a majority of those installations in New
England.
During 1999 and 1998, the Company also made other acquisitions which
are immaterial.
8
<PAGE> 9
The following unaudited pro forma information presents the consolidated
results of operations as if all of the Company's acquisitions occurred
on January 1, 1998, after giving effect to certain adjustments,
including amortization of intangibles, interest and income tax effects.
The pro forma information does not purport to represent what the
Company's results of operations actually would have been had such
transactions or events occurred on the dates specified, or to project
the Company's results of operations for any future period.
<TABLE>
<CAPTION>
(Dollars in thousands, except per share data)
Six months ended June 30,
1999 1998
---------- ----------
<S> <C> <C>
Revenues .................................. $ 57,837 $ 37,975
Income (loss) from continuing operations .. 3,221 (482)
Net income (loss) ......................... 1,876 (63)
Earnings per diluted common share ......... $ .05 $ --
</TABLE>
In connection with the acquisitions of Eagle, FundBalance, MUNIS and
Gemini, the purchase price has been allocated to the net assets
acquired based primarily on information furnished by management of the
acquired companies. The final allocation of the respective purchase
prices will be determined in a reasonable time and will be based on a
complete evaluation of the assets acquired and liabilities assumed.
Accordingly, the information presented herein may differ from the final
purchase price allocation.
(3) Commitments and Contingencies
As discussed in Note 13 of the Notes to the Consolidated Financial
Statements included in the Company's Annual Report on Form 10-K for the
year ended December 31, 1998, the Company, through certain of its
subsidiaries, is involved in various environmental claims and claims
for work-related injuries and physical conditions arising from a
formerly-owned subsidiary that was sold in December 1995.
The New Jersey Department of Environmental Protection and Energy
("NJDEPE") has alleged that a site where a former affiliate of Tyler
Pipe Industries, Inc. (a wholly-owned subsidiary of the Company known
as TPI of Texas, Inc. ("TPI")), Jersey-Tyler Foundry Company
("Jersey-Tyler"), once operated a foundry contains lead and possible
other priority pollutant metals and may need on-site and off-site
remediation. The site was used for foundry operations from the early
part of this century to 1969 when it was acquired by Jersey-Tyler.
Jersey-Tyler operated the foundry from 1969 to 1976, at which time the
foundry was closed. In 1976, Jersey-Tyler sold the property to other
persons who have operated a salvage yard on the site. NJDEPE agreed for
TPI to conduct a feasibility study to assess remediation options and
propose a remedy for the site and the impacted areas. This study was
completed and submitted to the NJDEPE in March 1999. TPI has not agreed
to commit to further action at this time. TPI never held title to the
site and denies liability.
Between 1968 and December 1995, TPI owned and operated foundries. TPI
is, and expects to continue to be, involved in different types of
litigation related to such ownership and operation. Since February
1997, approximately three hundred former employees of TPI have filed a
series of separate personal injury lawsuits which allege that they were
exposed to silica, asbestos and/or other industrial dusts during their
employment at TPI. Named as defendants with TPI are Swan Transportation
Company ("Swan"), another wholly-owned subsidiary of the Company, as
well as major suppliers of asbestos, sand, and industrial respirator
devices. These co-defendants have been sued under product liability
theories of recovery and various theories to try to avoid workers
compensation bars to recovery. The plaintiffs seek to recover money
damages for the personal injuries they allegedly suffered as a result
of their occupational exposure to silica, asbestos, and other
industrial dusts. Because of the unique factors inherent in each case
and the fact that most are in the
9
<PAGE> 10
preliminary stages and little discovery has taken place, the Company
lacks sufficient information upon which judgments can be made as to
their validity and ultimate disposition.
The Company plans to defend this litigation vigorously, but the
ultimate outcome is uncertain. The Company initially provides for the
estimated claim settlement costs when minimum levels can be reasonably
estimated. If the best estimate of claim costs can only be identified
within a range and no specific amount within that range can be
determined more likely than any other amount within the range, the
minimum of the range is accrued. In light of the current litigation,
and based on a preliminary assessment of claims and contingent claims
that may result in future litigation involving TPI, a liability for the
minimum amount of $2.0 million for claim settlements was recorded in
1996. In addition, legal and related professional services costs to
defend litigation of this nature are expensed as incurred. During the
three months ended June 30, 1999, the Company charged discontinued
operations for approximately $.8 million (net of income tax benefit of
approximately $ .4 million) primarily for legal and related
professional services costs incurred in connection with preparing its
defense for anticipated trials.
While the Company plans to defend the above mentioned litigation
vigorously, it is reasonably possible that the amounts recorded as
liabilities for TPI related matters could change in the near term by
amounts that would be material to the consolidated financial
statements.
(4) Revenue Recognition
The Company's information software systems and services segment derives
revenue from software licenses, postcontract customer support ("PCS"),
and services. PCS includes telephone support, bug fixes, and rights to
upgrade on a when-and-if available basis. Services range from
installation, training, and basic consulting to software modification
and customization to meet specific customer needs. In software
arrangements that include rights to multiple software products,
specified upgrades, PCS, and/or other services, the Company allocates
the total arrangement fee among each deliverable based on the relative
fair value of each of the deliverables as determined based on
vendor-specific objective evidence.
In October 1997, the American Institute of Certified Public Accountants
("AICPA") issued Statement of Position ("SOP") 97-2, Software Revenue
Recognition, which supersedes SOP 91-1. The Company was required to
adopt SOP 97-2 for software transactions entered into beginning January
1, 1998.
The Company recognizes revenue in accordance with SOP 97-2 as follows:
Software Licenses - The Company recognizes the revenue allocable to
software licenses and specified upgrades upon delivery and installation
of the software product or upgrade to the end user, unless the fee is
not fixed or determinable or collectibility is not probable. If the fee
is not fixed or determinable, revenue is recognized as payments become
due from the customer. If collectibility is not considered probable,
revenue is recognized when the fee is collected. Arrangements that
include software services, such as training or installation, are
evaluated to determine whether those services are essential to the
functionality of other elements of the arrangement.
A majority of the Company's software arrangements involve off-the-shelf
software and the other elements that are not considered essential to
the functionality of the software. For those software arrangements in
which services are not considered essential, the software license fee
is recognized as revenue after delivery and installation have occurred,
training has commenced, customer acceptance is reasonably assured, the
license fee is substantially billable and remaining services are
considered nominal.
Software Services - When software services are considered essential,
revenue under the entire arrangement is recognized as the services are
performed using the percentage-of-completion contract accounting
method. When software services are not considered essential, the fee
allocable to the service element is recognized as revenue as the
services are performed.
10
<PAGE> 11
Computer Hardware Equipment - Revenue allocable to equipment based on
vendor specific evidence of fair value is recognized when the equipment
is delivered and collection is probable.
Postcontract Customer Support - PCS agreements are generally entered
into in connection with initial license sales and subsequent renewals.
Revenue allocated to PCS is recognized on a straight-line basis over
the period the PCS is provided. All significant costs and expenses
associated with PCS are expensed as incurred.
Contract Accounting - For arrangements that include customization or
modification of the software, or where software services are otherwise
considered essential, revenue is recognized using contract accounting.
Revenue from these software arrangements is recognized on a
percentage-of-completion method with progress-to-completion measured
based primarily upon labor hours incurred.
Deferred revenue consists primarily of payments received in advance of
revenue being earned under software licensing, software and hardware
installation, support and maintenance contracts.
Through its information and property records services segment, the
Company provides computerized indexing and imaging of real property
records, records management and micrographic reproduction, as well as
information management outsourcing and professional services required
by county and local government units and agencies and provides title
plant update services to title companies. The Company recognizes
service revenue when services are performed and equipment sales when
the products are shipped.
Title Plants - Sales of copies of title plants are usually made under
long-term installment contracts. The contract with the customer is
generally bundled with a long-term title plant update service
arrangement. The contractual amount ascribed to the sale aspect of the
arrangement is based on vendor specific evidence of fair value. The
revenue resulting from the sale of copies of title plants is recognized
currently by discounting future payments to reflect present values.
Such amounts have been recognized currently because legal ownership has
passed, delivery has occurred, no significant continuing obligations
remain, and collection is considered probable.
The Company also receives royalty revenue relating to the current
activities of two former subsidiaries of Resources. Royalty revenue is
recognized as earned upon receipt of royalty payments.
(5) Discontinued Operations
On March 26, 1999, the Company sold all of the outstanding common stock
of Forest City to HalArt, L.L.C. ("HalArt") for approximately $24.5
million. Proceeds consisted of $12.0 million in cash, $3.8 million in a
short-term secured promissory note, $3.2 million in senior secured
subordinated notes and $5.5 million in preferred stock. The short-term
secured promissory note was fully paid in July 1999. The senior secured
subordinated notes carry interest rates ranging between 6% to 8%,
become due in March 2002, and are secured by a second lien on Forest
City inventory and real estate. The preferred stock will be mandatorily
redeemable March 2006. Both the subordinated notes and the preferred
stock are subject to partial or whole redemption upon the occurrences
of specified events.
In determining the loss on the disposal of the business, the
subordinated notes were valued using present value techniques. Also,
because the redemption of the preferred stock is highly dependent upon
future operations of the buyer and due to its extended repayment terms,
the Company is unable to estimate the degree of recoverability.
Accordingly, the Company will record the value of the preferred stock
as cash is received. The Company estimated the loss on the disposal of
Forest City to be $8.9 million which was recorded in the fourth quarter
of 1998. The estimated loss included anticipated operating losses from
the measurement date of December 1998 to the date of disposal and
associated transaction costs. The Company recorded an additional loss
during the three months ended March 31, 1999 of $565,000 (net of taxes
of $364,000) to reflect adjusted estimated transaction costs and funded
operating losses.
11
<PAGE> 12
The purchase agreement provides for an adjustment to the purchase price
depending upon the ultimate balance of net assets transferred to the
buyer and for the settlement in cash for levels of cash and cash
equivalents above or below a prescribed level, as of the closing date.
Subsequent to the closing, the Company submitted its computation of the
purchase price adjustment receivable from HalArt and such amount has
neither been approved nor paid by HalArt. At June 30, 1999, the
estimate of this adjustment has been included in current notes
receivable in the accompanying condensed consolidated balance sheet.
The ultimate amount of the settlement, if any, may vary materially from
the amount reflected in the accompanying condensed consolidated
financial statements.
The net assets of discontinued operations at December 31, 1998
consisted principally of working capital (including accounts
receivable, inventories, accounts payable and accrued liabilities),
property and equipment of Forest City. Net sales of discontinued
operations for the three months and six months ended June 30, 1998 were
$ 21.2 million and $ 39.8 million, respectively. Results of
discontinued operations include external interest expense on debt
associated with discontinued operations for the three months and six
months ended June 30, 1998, of $92,000 and $135,000, respectively.
Income tax benefit of $45,000 and $58,000 has been provided on
discontinued operations in the three and six months ended June 30,
1998, respectively, based on the income tax resulting from inclusion of
the discontinued segment in the Company's consolidated federal income
tax return.
The Company has estimated a $4.6 million capital loss for tax purposes
on the sale of Forest City. No tax benefit has been recorded for this
capital loss since realization of the capital loss is not assured.
(6) Sale of Copies of Title Plants
During the three and six months ended June 30, 1999, the Company has
entered into a series of title services agreements with certain of its
customers. Each of the contracts included the sale of copies of title
plants in a three county area combined with five and ten year title
plant update service arrangements for the provision of title plant
indices and document retrieval services. Revenue recognized in
connection with the sales of copies of the title plants for the three
and six months ended June 30, 1999 was $1.9 million and $3.6 million,
respectively. Approximately $3.4 million has been classified in the
accompanying condensed consolidated balance sheet at June 30, 1999 as
non-current notes receivable at their discounted present values.
(7) CPS Systems, Inc. Note Receivable
In March 1999, the Company entered into a merger agreement pursuant to
which the Company contemplated that it would acquire all of the
outstanding common stock of CPS Systems, Inc. ("CPS"). In connection
with that agreement, Tyler provided CPS with bridge financing of $1.0
million in the form of a note secured by a second lien on substantially
all of the assets of CPS, including accounts receivable, inventory,
intangibles, equipment and intellectual property. The note bears
interest at 2% over the prime rate and is due in October 1999. In June
1999, Tyler provided notice to CPS that it was exercising its right to
terminate the merger agreement. Although the original agreement has
been terminated, Tyler and CPS have continued negotiations to find an
alternative structure for the transaction and such negotiations are
continuing. At June 30, 1999, the note receivable of $1.0 million has
been classified as current notes receivable in the accompanying
condensed consolidated balance sheet.
(8) Earnings Per Share
Basic earnings per share of common stock is computed by dividing net
income by the weighted-average number of Tyler common shares
outstanding during the period. Diluted earnings per share is calculated
in the same manner as basic earnings per share, except that the
denominator is increased to include the number of additional common
shares that would have been outstanding assuming the exercise of all
employee stock options and a warrant that would have had a dilutive
effect on earnings per share. Options to purchase 1,273,297 shares of
common stock at exercise prices ranging from $5.81 to $10.94 in 1999
and options to purchase 90,000 shares of common stock at exercise
prices ranging from $10.19 to
12
<PAGE> 13
$10.94 in 1998 were outstanding but were not included in the
computation of diluted earnings per share because the options exercise
prices were greater than the average market price of the common shares
and, therefore, the effect would have been antidilutive. The following
table reconciles the numerators and denominators used in the
calculation of basic and diluted earnings per share for each of the
periods presented:
<TABLE>
<CAPTION>
Three months ended Six months ended
June 30, June 30
----------------------- -----------------------
1999 1998 1999 1998
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Numerators for basic and diluted earnings per share:
Income from continuing operations ................... $ 1,893 $ 997 $ 3,567 $ 1,140
========= ========= ========= =========
Denominator:
Denominator for basic earnings per share-
Weighted-average outstanding common shares .......... 38,539 34,117 36,648 30,741
Effect of dilutive securities:
Employee stock options ............................. 313 470 228 355
Warrant ............................................ 1,092 1,502 1,070 1,379
--------- --------- --------- ---------
Dilutive potential common shares .................... 1,405 1,972 1,298 1,734
--------- --------- --------- ---------
Denominator for diluted earnings per share-
Adjusted weighted-average outstanding
common shares and assumed conversion ............. 39,944 36,089 37,946 32,475
========= ========= ========= =========
Basic earnings per share from continuing
operations ......................................... $ .05 $ .03 $ .10 $ . 04
========= ========= ========= =========
Diluted earnings per share from continuing
operations ......................................... $ .05 $ .03 $ .09 $ .04
========= ========= ========= =========
</TABLE>
(9) Comprehensive Income
In June 1997, SFAS No. 130, Reporting Comprehensive Income, was issued
and was adopted by the Company in 1998. SFAS No. 130 establishes
standards for reporting and displaying comprehensive income and its
components in an annual financial statement that is displayed with the
same prominence as other annual financial statements. The statement
also requires the accumulated balance of other comprehensive income to
be displayed separately from retained earnings and additional paid-in
capital in the equity section of the statement of financial position.
Comprehensive income and net income was the same for all periods
presented.
(10) Segment and Related Information
As of January 1, 1998, the Company has adopted SFAS No. 131,
Disclosures About Segments of an Enterprise and Related Information,
which requires segment information to be reported using a management
approach. This management approach is based on reporting segment
information the way management organizes segments within the enterprise
for making operating decisions and assessing performance.
The Company has two reportable segments: information and property
records services and information software systems and services. The
largest component of the information and property records services
business is the computerized indexing and imaging of real property
records maintained by county clerks and recorders, in addition to the
provision of other information management outsourcing services, records
management, micrographic reproduction and title plant update services
and sales of copies of title plants to title companies. The information
software systems and services segment provides municipal and county
governments with software systems and related services to meet their
information technology and automation needs. In addition, corporate
activities are included as "Other".
13
<PAGE> 14
The Company evaluates performance based on several factors, of which
the primary financial measure is business segment operating income. The
Company defines segment operating income as income before noncash
amortization of intangible assets associated with their acquisition by
Tyler, interest expense, non-recurring items and income taxes. The
accounting policies of the reportable segments are the same as those
described in Note 1 of the Notes to Consolidated Financial Statements
included in the Company's Annual Report on Form 10-K for the year ended
December 31, 1998.
There were no intersegment transactions, thus no eliminations are
necessary.
The Company's reportable segments are strategic business units that
offer different products and services. They are separately managed as
each business requires different marketing and distribution strategies.
The Company derives a majority of its revenue from external domestic
customers. The information and property records services segment
conducts minor operations in Germany, which are not significant and are
not subsequently disclosed.
14
<PAGE> 15
Summarized financial information concerning the Company's reportable segments is
set forth below based on the nature of the products and services offered:
<TABLE>
<CAPTION>
1999
- -------------------------------------------------------------------------------------------
Information
& Property Information
Records Software Continuing
Services Systems Other Operations
- -------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Assets as of June 30 ......... $ 97,024 $ 97,449 $ 14,561 $ 209,034
Revenues for the periods ended June 30:
Three months ............... $ 11,274 $ 17,400 $ -- $ 28,674
Six months ................. $ 21,416 $ 27,691 $ -- $ 49,107
Segment profit (loss) for the periods ended June 30:
Three months ............... $ 4,294 $ 4,108 $ (2,028) $ 6,374
Six months ................. $ 8,416 $ 6,605 $ (3,509) $ 11,512
- -------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
1998
- -------------------------------------------------------------------------------------------
Information
& Property Information
Records Software Continuing
Services Systems Other Operations
- -------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Assets as of June 30 ...... $ 83,393 $ 27,585 $ 5,891 $ 116,869
Revenues for the periods ended June 30:
Three months ............ $ 7,300 $ 4,693 $ -- $ 11,993
Six months .............. $ 9,699 $ 7,102 $ -- $ 16,801
Segment profit (loss) for the periods ended June 30:
Three months ............ $ 2,711 $ 1,158 $ (722) $ 3,147
Six months .............. $ 3,378 $ 1,899 $ (1,384) $ 3,893
- -------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
For the periods ended June 30
Three months Six months
---------------------------------------------
Reconciliation of reportable segment operating
profit to the Company's consolidated totals ......... 1999 1998 1999 1998
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Total segment operating profit for
reportable segments .................................. $ 6,374 $ 3,147 $ 11,512 $ 3,893
Interest expense ..................................... (1,113) (545) (1,939) (797)
Interest income ...................................... 272 12 281 136
Goodwill and intangibles amortization ................ (1,552) (772) (2,648) (1,122)
-------- -------- -------- --------
Income from continuing operations before income tax .. $ 3,981 $ 1,842 $ 7,206 $ 2,110
======== ======== ======== ========
</TABLE>
15
<PAGE> 16
(11) New Accounting Standards
In June 1998, SFAS No.133, Accounting for Derivative Instruments and
Hedging Activities, was issued and deferred with the issuance of SFAS
No. 137. SFAS No. 133 establishes accounting and reporting standards
for derivative instruments, including certain derivative instruments
embedded in other contracts, and for hedging activities. The provisions
of SFAS No. 133, as amended by SFAS No. 137, are effective for
financial statements for all fiscal quarters of all fiscal years
beginning after June 5, 2000, although early adoption is allowed. The
Company has not determined if it will adopt the provisions of this SFAS
prior to its effective date. The adoption of SFAS No. 133 is not
expected to have a material impact on the Company's consolidated
financial statements and related disclosures.
On January 1, 1999, the Company adopted the provisions of SOP 98-5,
Reporting on the Costs of Start-up Activities. This SOP provides
guidance on the financial reporting of start-up and organization costs
and requires that these costs be expensed as incurred. Adoption of SOP
98-5 did not have a material impact on the Company's consolidated
financial statements.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
FORWARD - LOOKING STATEMENTS
This Quarterly Report on Form 10-Q contains forward-looking statements
within the meaning of Section 27A of the Securities Act of 1933, as
amended, and Section 21E of the Securities Exchange Act of 1934, as
amended. All statements other than historical or current facts,
including, without limitation, statements about the business, financial
condition, business strategy, plans and objectives of management, and
prospects of the Company are forward-looking statements. Although the
Company believes that the expectations reflected in such
forward-looking statements are reasonable, such forward-looking
statements are subject to risks and uncertainties that could cause
actual results to differ materially from these expectations. Such risks
and uncertainties include, without limitation, changes in product
demand, the availability of products, changes in competition, economic
conditions, risks associated with Year 2000 issues, changes in tax
risks, and other risks indicated in the Company's filings with the
Securities and Exchange Commission. These risks and uncertainties are
beyond the ability of the Company to control, and in many cases, the
Company cannot predict the risks and uncertainties that could cause its
actual results to differ materially from those indicated by the
forward-looking statements. When used in this Quarterly Report, the
words "believes," "plans," "estimates," "expects," "anticipates,"
"intends," "continue," "may," "will," "should" or the negative of such
terms and similar expressions as they relate to the Company or its
management are intended to identify forward-looking statements.
GENERAL
Through March 26, 1999, Tyler operated two distinct businesses, the
integrated information management services, systems and outsourcing
business and the automotive parts and supplies business. In March 1999,
Tyler sold Forest City Auto Parts Company ("Forest City") to HalArt,
L.L.C. As a result of the sale of Forest City, Tyler no longer engages
in the automotive parts and supplies business, and its business is
solely focused on the integrated information management services,
systems, and outsourcing business. Therefore, historical financial
information attributable to the automotive parts and supply business
has been reported as discontinued operations and all prior year
financial information included herein has been restated to reflect this
disposition. Continuing operations are comprised of the results of
operations of its newly acquired information management businesses from
their respective dates of acquisition.
RECENT DEVELOPMENTS
In July 1999, Tyler acquired Pacific Data Technologies, Inc. ("Pacific
Data") of Aliso Viejo, California. Pacific Data develops software and
systems to automate and manage real estate records for Internet
delivery. Pacific Data will be operated as a division of
NationsData.com, a wholly owned subsidiary of
16
<PAGE> 17
Tyler that is engaged in the development of a national data repository
containing public information such as real property tax and assessment
data.
ANALYSIS OF RESULTS OF OPERATIONS
REVENUES
Total revenues of $28.7 million for the three months ended June 30,
1999, increased 139% in comparison to $12.0 million from continuing
operations in the prior year period. For the six months ended June 30,
1999, revenues of $49.1 million increased 192% compared to revenues
from continuing operations for the six months ended June 30, 1998 of
$16.8 million.
On a pro forma basis, revenues from continuing operations increased
$9.3 million or 44% for the three months ended June 30, 1999 from $20.9
million in the prior year period. For the six months ended June 30,
1999, pro forma revenues from continuing operations increased $19.9
million or 52% from $38.0 in the comparable prior year period.
Information software systems and services provided for approximately
60% of the sales growth for the three and six months ended June 30,
1999. In 1998 The Software Group was awarded significant contracts with
the counties of El Paso and Gregg, both located in Texas, and Multnomah
County (Portland) in Oregon for combined expected revenues of
approximately $8.0 million. Installations of these contracts began in
the fall of 1998 and are substantially complete as of June 30, 1999.
Revenues relating to these three contracts included in the three and
six months ended June 30, 1999 were approximately $2.1 million and $4.4
million, respectively. In addition, sales from financial and land
management information applications for local governments and school
districts contributed revenue increases of approximately $2.1 million
and $4.7 million for the three and six months ended June 30, 1999,
respectively. This increase is due to expanded sales territory and
add-on sales of additional products to existing customers. Several of
the operating units are benefiting from prior year expansions into new
territories, installations resulting from customers Year 2000 issues
and a slight increase in average contract size.
Additional sources of pro forma revenue increases were provided by
sales of copies of title plants and certain contracts which were
acquired in June of 1998 for document management services. In the three
and six months ended June 30, 1999, the Company recognized $1.9 million
and $3.6 million, respectively in connection with the sale of copies
of title plants to several different title companies, compared to none
in the prior year periods. Under the terms of these contracts, Tyler
will deliver database information covering three Texas counties and
provide data update and document image retrieval services over the five
or ten-year terms of these contracts. Tyler will also provide these
customers with its fully integrated on-line data indexing and imaging
system. The total estimated value of these contracts over the five and
ten-year periods is $27.7 million.
COST OF REVENUES
Total cost of revenues from continuing operations of $12.7 million for
the three months ended June 30, 1999, increased 123% in comparison to
$5.7 million in the prior year period. For the six months ended June
30, 1999, cost of revenues from continuing operations of $22.5 million
increased 175% compared to cost of revenues for the six months ended
June 30, 1998 of $8.2 million.
On a pro forma basis, cost of revenues increased $3.5 million or 36%
for the three months ended June 30, 1999 from $9.7 million from
continuing operations in the prior year period. For the six months
ended June 30, 1999, pro forma cost of revenues increased $6.8 million
or 36% from $19.1 from continuing operations in the comparable prior
year period. The increase in cost of revenue is mainly attributable to
increased sales volume. For the three months ended June 30, 1999 pro
forma gross margin was 56% compared to 54% in the comparable prior year
period. Pro forma gross margin for the six months ended June 30, 1999
was 55% compared to 50% in the prior year period. The gross margin
improved primarily due to increased sales volume and somewhat higher
fees for maintenance and support services. The gross margin improvement
was offset somewhat by increased salaries and other costs associated
with retaining quality employees.
17
<PAGE> 18
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
For the three months ended June 30, 1999, Tyler had selling, general
and administrative expenses of $9.6 million compared to $3.2 million
from continuing operations in the comparable prior year period.
Selling, general and administrative expenses for the six months ended
June 30, 1999 were $15.1 million compared to $4.7 million for the six
months ended June 30, 1998. The increase in selling, general and
administrative expenses is mainly the result of a series of
acquisitions since June 1998. Pro forma selling, general and
administrative expenses as a percent of revenues for the three months
and six months ended June 30, 1999 were approximately 34% and 33%,
respectively, compared to 35% for both periods in the prior year. The
slight decline of selling, general and administrative expense as a
percent of sales is primarily due to increased sales volume offset
somewhat by costs associated with hiring management and support
personnel to accommodate present and planned future growth.
AMORTIZATION OF INTANGIBLES
The Company accounted for all 1998 and 1999 acquisitions using the
purchase method of accounting for business combinations. Unallocated
purchase price over the fair value of net identifiable assets of the
acquired companies ("goodwill") and intangibles associated with
acquisitions are amortized using the straight-line method of
amortization over their respective useful lives.
NET INTEREST EXPENSE
Net interest expense for the three months and six months ended June 30,
1999 has increased substantially from the comparable prior year periods
mainly due to acquisition activity beginning in February 1998 which has
been primarily financed with debt. Prior to February 1998, the Company
had no debt. The average interest rate for the three months and six
months ended June 30, 1999 was approximately 7%.
INCOME TAX PROVISION
The effective tax rate for the six months ended June 30, 1999 has
increased to 51% from 46% in the comparable prior year period primarily
due to the non-deductibility of goodwill amortization relating to
acquisitions which occurred beginning in the first quarter of 1998.
DISCONTINUED OPERATIONS
The Company recorded net losses from discontinued operations of $.8
million and $1.3 million for the three and six months ended June 30,
1999, respectively. Discontinued operations consist of Forest City,
which was disposed of in March 1999, Swan Transportation Company
("Swan") whose operations were discontinued in 1995, and TPI of Texas,
Inc. ("TPI"), which sold substantially all of its assets and
liabilities in 1995. In the three months ended June 30, 1999, TPI and
Swan together recorded a net charge of $.8 million for legal and
professional fees related to a series of personal injury lawsuits filed
by former employees.
The Company sold all of the outstanding common stock of its non-core
automotive parts and supplies business, Forest City, on March 26, 1999,
for approximately $24.5 million. The Company estimated the loss on the
disposal of Forest City to be $8.9 million, which was recorded in the
fourth quarter of 1998. The estimated loss included anticipated
operating losses from the measurement date of December 1998 to the date
of disposal and associated transaction costs. The Company recorded an
additional loss during the three months ended March 31, 1999 of
$565,000 (net of taxes of $364,000) to reflect adjusted estimated
transaction costs and funded operating losses.
The purchase agreement provides for an adjustment to the purchase price
depending upon the ultimate balance of net assets transferred to the
buyer and for the settlement in cash for levels of cash and cash
equivalents above or below a prescribed level, as of the closing date.
Subsequent to the closing, the Company submitted its computation of the
purchase price adjustment receivable from HalArt and such amount has
neither been approved nor paid by HalArt. At June 30, 1999, the
estimate of this adjustment has been included in current notes
receivable in the accompanying condensed consolidated balance sheet.
The ultimate amount of the settlement, if any, may vary materially from
the amount reflected in the accompanying condensed consolidated
financial statements.
18
<PAGE> 19
NET INCOME AND OTHER MEASURES
Net income for the three and six months ended June 30, 1999 was $1.1
million and $2.2 million, respectively, compared to $1.3 million and
$1.4 million for the three and six months ended June 30, 1998,
respectively. Income from continuing operations for the three and six
months ended June 30, 1999 was $1.9 million and $3.6 million,
respectively compared to $1.0 million and $1.1 million for the three
months ended June 30, 1998, respectively. Diluted earnings per share
from continuing operations for the three and six months ended June 30,
1999 was $.05 and $.09, respectively compared to $.03 and $.04 for the
three months ended June 30, 1998, respectively.
Earnings before interest, taxes, depreciation and amortization
("EBITDA") from continuing operations for the three months ended June
30, 1999 was $7.3 million, compared to $3.6 million for the comparable
prior year period. EBITDA from continuing operations for the six months
ended June 30, 1999 was $13.2 million, compared to $4.6 million for the
comparable prior year period. EBITDA consists of income from continuing
operations before interest, income taxes, depreciation and
amortization. Although EBITDA is not a calculation in accordance with
generally accepted accounting principles, the Company believes that
EBITDA is widely used as a measure of operating performance.
Nevertheless, the measure should not be considered in isolation or as a
substitute for operating income, cash flows from operating activities,
or any other measure for determining the Company's operating
performance or liquidity that is calculated in accordance with
generally accepted accounting principles. EBITDA is not necessarily
indicative of amounts that may be available for reinvestment in the
Company's business or other discretionary uses. In addition, since all
companies do not calculate EBITDA in the same manner, this measure may
not be comparable to similarly titled measures reported by other
companies.
FINANCIAL CONDITION AND LIQUIDITY
In February 1998, the Company entered into a three-year revolving 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 (the "Senior Credit Facility"). At June 30, 1999, the Company
had outstanding borrowings and letters of credit under the Senior
Credit Facility of $46.5 million and available borrowing capacity of
$3.5 million. The effective average interest rate for the borrowings
under the bank credit agreement was approximately 7% for the three and
six months ended June 30, 1999. The Company and its lender under the
Senior Credit Facility have begun the process of increasing the Senior
Credit Facility on a syndicated basis. Although the Company currently
expects to have an expanded revolving line of credit facility in place
by the end of the third quarter of 1999, there can be no assurance that
the credit facility can be increased on terms acceptable to the
Company.
At June 30, 1999 the Company had approximately $1.4 million of current
debt outstanding assumed in the MUNIS and Gemini acquisitions under
various additional credit lines with total available debt capacities of
approximately $1.8 million.
The Company's capitalization at June 30, 1999 consisted of $56.6
million in long-term debt and capital lease obligations (including
current portion) and $105.1 million in stockholders' equity. The total
debt-to-capital ratio was approximately 35% at June 30, 1999.
For the six months ended June 30, 1999, the Company made capital
expenditures of $2.1 million. These expenditures include costs of
computer equipment and software required for internal growth and some
modest building expansion.
The Company incurred software development costs of approximately $2.0
million in the first six months of 1999, primarily relating to the
construction of a national data repository ("Database"). Such costs
include certain payroll related programming costs as well as the costs
to purchase data from external sources to initially populate the
Database. Upon completion, the Database will include, among other
items, a wide range of public information such as real property tax and
assessment data; chain of title property records and images.
Additionally, further expenditures will be necessary subsequent to 1999
to update and expand the Database.
19
<PAGE> 20
In March 1999, the Company entered into a merger agreement pursuant to
which the Company contemplated that it would acquire all of the
outstanding common stock of CPS Systems, Inc. ("CPS"). In connection
with that agreement, Tyler provided CPS with bridge financing of $1.0
million in the form of a note secured by a second lien on substantially
all of the assets of CPS, including accounts receivable, inventory,
intangibles, equipment and intellectual property. The note bears
interest at 2% over the prime rate and is due in October 1999. In June
1999, Tyler served notice to CPS that it was exercising its right to
terminate the merger agreement. Although the original agreement has
been terminated, Tyler and CPS have continued negotiations to find an
alternative structure for the transaction and such negotiations are
continuing. At June 30, 1999, the note receivable of $1.0 million has
been classified as current notes receivable in the accompanying
condensed consolidated balance sheet.
In the first six months of 1999, the Company paid approximately $21.9
million in cash and issued 4.8 million shares of Tyler common stock to
acquire Eagle, FundBalance, MUNIS and Gemini in business combinations
accounted for as purchases. Cash paid for acquisitions does not include
cash paid for transaction costs related to the execution of the
acquisitions, such as legal, accounting and consulting fees, or
acquired cash balances.
The Company from time to time engages in discussions with respect to
selected acquisitions and expects to continue to assess these and other
acquisition opportunities as they arise. The Company may also require
additional financing if it decides to make additional acquisitions.
There can be no assurance, however, that any such opportunities will
arise, any such acquisitions will be consummated or that any needed
additional financing will be available when required on terms
satisfactory to the Company. Absent any acquisitions, the Company
anticipates that cash flows from operations, working capital and unused
borrowing capacity under its existing bank credit agreement will
provide sufficient funds to meet its needs for at least next year.
YEAR 2000 COMPLIANCE
Status of Progress
The Company has established a Program Office to centralize and
coordinate its efforts and to further define, evaluate and conduct
audits of the Company and its progress toward year 2000 ("Y2K")
compliance. The Program Office is chaired by the Chief Financial
Officer and reports periodically to the Executive Committee of the
Board of Directors. The Program Office has established a Y2K Task
Force, comprised of representatives from each of the Company's
principal operating units, which is charged with evaluating and
implementing the Company's Y2K effort and reporting the results thereof
to the Program Office. The Company's Y2K Task Force mission is to
identify and resolve year 2000 issues associated with the Company's
internal information technology ("IT") systems, internal non-IT
systems, material third party relationships, and includes: corporate
awareness, adoption of year 2000 standards, inventory, assessment,
remediation, validation testing, and contingency planning. The
Executive Committee of the Board of Directors is charged with
evaluating the progress reported by the Program Office and addressing
any issues as they arise.
At the request of the Program Office, each of the Company's operating
units has independently developed a Y2K plan. Pursuant to these plans,
each operating unit has conducted an inventory and assessment of its
internal and external technology, all of its computer-based systems,
imbedded microchips and other processing capabilities to identify the
computer systems that could be affected by the Y2K issue.
Most of the Company's core products have completed remediation. A few
secondary products are still being remediated and should be completed
by early in the fourth quarter of 1999. The Company has been and is
still communicating with its customers the status of the Company's
products relating to year 2000. The Company continues to complete the
updates to most of these products, and has made the updates available
to customers as they become available. The Company's Y2K plan calls for
a majority of customers to have compliant versions installed by July
1999 and the remainder no later than December 1999. Some of the
Company's customers are using product versions that the Company will
not support for year 2000 issues; the Company is encouraging these
customers to migrate to current product versions that
20
<PAGE> 21
are year 2000 ready. Also, in certain client outsourcing and services
contracts, the Company is evaluating year 2000 issues for its clients'
computing environments and implementing year 2000 related remediations.
Some of this client remediation effort was completed in 1998 with the
remainder of the client remediation effort planned throughout 1999.
Each operating unit is at a different stage in the implementation of
their Y2K plan. Overall, however, as of June 30, 1999, the Company was
approximately 75% complete.
The Company primarily uses third party software for its internal
computer systems. A majority of the installed systems are believed to
be Y2K compliant. The Company has purchased, and is now installing at
one of its principal operating units, an enhanced accounting
application from Platinum Technologies that is Y2K compliant to replace
the current non-compliant system. Installation is expected to be
completed by the fourth quarter of 1999.
The Company cooperates with many third party vendors and suppliers to
provide products and services to its customers and to the Company
itself. The Company has circulated requests for and has received
written confirmations regarding their Y2K compliance from a selected
number of such parties and is expecting responses from the remainder.
All responses will be evaluated to determine if additional action is
required.
Costs to Address
Given the nature of ongoing system development activities throughout
the businesses, it is difficult to quantify, with specificity, all of
the costs being incurred to address this issue. A significant portion
of these costs will represent the redeployment of existing information
technology resources. The Company's employees have conducted the
majority of the work performed thus far in executing the implementation
plans.
The costs incurred to date are estimated to be approximately $2.9
million, and the estimated costs to complete will comprise an
additional $1.1 million. A significant amount of the estimated costs to
complete will be capitalized because such costs represent hardware and
software packages. Some of the prior costs were incurred by the
Company's operating units before they were acquired by the Company. The
new accounting application was purchased primarily to accommodate
expansion and anticipated future acquisitions and secondarily to obtain
Y2K compliance. However, the total cost for the accounting application
is included in the aforementioned amount. The total cost estimate of
the implementation plan may be revised because the plan is constantly
evaluated and revised as a result of many factors. These factors
include, but are not limited to, the results of any phase of the
implementation plan, customer requirements, acquisitions, or
recommendations by business partners. The Company does not expect that
the opportunity costs of executing the implementation plan will have a
material effect on the financial condition of the Company or its
results of operations.
Risks
The Y2K issue creates risk for the Company from unforeseen problems in
its own computer, telephone and security systems and from third parties
upon which the Company relies. Accordingly, the Company is requesting
assurances from certain software vendors from which it has acquired
software, or from which it may acquire software, that the software will
correctly process all date information at all times. The Company exerts
no control over such third parties' efforts to become Y2K compliant.
The services provided by these parties are critical to the operations
of the Company and the Company is heavily reliant upon these parties to
successfully address the Y2K issue. Therefore, if any of these parties
fail to provide the Company with services, the Company's ability to
conduct business could be materially impacted. The result of such
impact may have a material adverse effect on the financial condition
and results of operations of the Company.
In addition, the Company is in the process of confirming with certain
of its customers and suppliers their progress in identifying and
addressing problems that their computer systems will face in correctly
processing date information as the year 2000 approaches and is reached.
Failure to appropriately address
21
<PAGE> 22
the Y2K issue by a major customer or supplier or a material percentage
of the smaller customers could have a material adverse effect on the
financial condition and results of operations of the Company.
The Company does not expect any material product development activities
to be delayed due to the Y2K compliance efforts; however, if certain
initiatives are delayed, the result could have an adverse effect to the
Company.
Contingency
The Company's Y2K compliance activities are being monitored and
evaluated by the Program Office and ultimately by the Executive
Committee. The Company is currently in the process of developing
contingency plans to deal with issues which may arise in 1999 and 2000.
The focus of this effort is to identify the potential risks associated
with mission critical functions and then to develop appropriate
contingency plans. Such planning is complicated by the risk of multiple
year 2000 problems and the fact that many of the Company's risks reside
with outside parties who may not successfully address their own risks.
The areas of planning include: expected increases in customer upgrade
and support activities, problems caused by customer delays in
implementing Company or third-party upgrades, possible disruptions in
the Company's external support systems and internal systems, employee
matters, identification of manual "work-arounds" for software and
hardware failures, substitution of hardware and software systems, and
test exercises of contingency planning elements. The Company expects to
complete its year 2000 contingency plans by September 1999. Additional
steps are being taken to further minimize the risks associated with the
Y2K issue. For example, all of the Company's operating units are
developing plans to allow for additional customer support after January
1, 2000 in anticipation of questions they may receive from their
customers, even if the questions do not relate directly to their
products or services.
Summary
There can be no assurance that the Company will identify all
date-handling problems in its business systems or those of its
customers and suppliers in advance of their occurrence or that the
Company will be able to successfully remedy all Y2K compliance issues
that are discovered; however, the Company is working to identify all
issues. The Company believes that necessary modifications to its
products will be made on a timely basis. However, there can be no
guarantee that one or more of the Company's current products do not
contain year 2000 date issues that may result in material costs to the
Company. Additionally, where the Company is evaluating year 2000 issues
for client outsourcing and services contracts, there can be no
assurances that all year 2000 issues will be identified and remediated
and it is possible that the Company may experience increased expenses
in addressing these issues. The most reasonably likely worst case
scenarios would include: issues originating from clients who do not
migrate to current product releases or who experience other year 2000
related problems, corruption of data contained in the Company's
internal IT systems, and failure of infrastructure services provided by
government agencies and other third parties (electricity, banking
services, phone services, water systems, internet services, etc.). It
is possible that any such issue could have a material adverse impact on
the Company's operations and financial results. Some commentators have
stated that a significant amount of litigation will arise out of year
2000 compliance issues. Because of the unprecedented nature of such
litigation, it is uncertain whether or to what extent the Company may
be affected by it.
22
<PAGE> 23
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 May 19, 1999.
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 May 19,1999 shares were voted as follows:
<TABLE>
<CAPTION>
Number of Number of
Nominee Votes for Votes Withheld
------- --------- --------------
<S> <C> <C>
Ernest H. Lorch 30,013,018 850,469
Frederick R. Meyer 30,009,706 853,781
William D. Oates 30,017,721 845,766
C. A. Rundell, Jr. 29,962,121 901,366
Louis A. Waters 30,017,721 845,766
John M. Yeaman 30,017,721 845,766
</TABLE>
(b) With respect to the amendment to the Company's Restated
Certificate of Incorporation to change the name of the Company to
"Tyler Technologies, Inc," the number of votes cast for, against,
and the number of abstentions were 30,795,027, 45,242 and 23,218,
respectively.
(c) With respect to the amendments to the Company's Stock Option Plan
("the Plan") to increase the number of shares of the Company's
Stock which may be issued under the Plan from 3,300,00 shares to
4,300,000 shares. The number of votes cast for, against and the
number of abstentions were 27,042,443, 3,366,975, and 454,069,
respectively.
23
<PAGE> 24
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
Exhibit
Number Exhibit
------ -------
27 Financial Data Schedule (for SEC information only)
(b) Reports on Form 8-K
Form 8-K dated April 8, 1999, Item 2. Disposition of Assets relating
to the disposition of Forest City Auto Parts Company which incorporated
by reference the Company's Form 10-K for the year ended December 31,
1998.
Form 8-K dated May 4, 1999, Item 2. Acquisition of Assets relating to
the acquisition of Process, Incorporated d/b/a Computer Center Software
("MUNIS"). The Form 8-K was amended on June 30, 1999 to include the
following financial statements: MUNIS balance sheets at September 30,
1998 and March 31, 1999; statements of operations for the year ended
September 30, 1998 and the six months ended March 31, 1998 and March
31, 1999; statements of stockholders' equity for the year ended
September 30, 1998 and the six months ended March 31, 1999; and
statements of cash flows for the year ended September 30, 1998 and the
six months ended March 31, 1998 and March 31, 1999.
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 TECHNOLOGIES, INC.
By: /s/Theodore L. Bathurst
----------------------------------------------
Theodore L. Bathurst
Vice President and Chief Financial Officer
(principal financial officer and an authorized
signatory)
By: /s/Terri L. Alford
----------------------------------------------
Terri L. Alford
Controller
(principal accounting officer and an authorized
signatory)
Date: August 13, 1999
24
<PAGE> 25
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
Exhibit
Number Exhibit
------ -------
<S> <C>
27 Financial Data Schedule (for SEC information only)
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> JUN-30-1999
<CASH> 885,000
<SECURITIES> 0
<RECEIVABLES> 27,500,000
<ALLOWANCES> (836,000)
<INVENTORY> 1,759,000
<CURRENT-ASSETS> 38,278,000
<PP&E> 20,331,000
<DEPRECIATION> (4,165,000)
<TOTAL-ASSETS> 209,034,000
<CURRENT-LIABILITIES> 34,688,000
<BONDS> 0
0
0
<COMMON> 406,000
<OTHER-SE> 104,660,000
<TOTAL-LIABILITY-AND-EQUITY> 209,034,000
<SALES> 49,107,000
<TOTAL-REVENUES> 0
<CGS> 22,478,000
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 1,939,000
<INCOME-PRETAX> 7,206,000
<INCOME-TAX> 3,639,000
<INCOME-CONTINUING> 3,567,000
<DISCONTINUED> (1,345,000)
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 2,222,000
<EPS-BASIC> .06
<EPS-DILUTED> .05
</TABLE>
