<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 March 31, 2000
OR
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934.
Commission File Number 1-10485
TYLER TECHNOLOGIES, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 75-2303920
(State or other jurisdiction of (I.R.S. employer
incorporation or organization) identification no.)
2800 WEST MOCKINGBIRD LANE
DALLAS, TEXAS 75235
(Address of principal executive offices)
(Zip code)
(214) 902-5086
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
--- ---
Number of shares of common stock of registrant outstanding at May 10, 2000:
43,345,687
Page 1
<PAGE> 2
TYLER TECHNOLOGIES, INC.
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 Operations ................... 4
Condensed Consolidated Statements of Cash Flows ................... 5
Notes to Condensed Consolidated Financial Statements .............. 6
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations ............................................. 15
Part II - Other Information
Item 1. Legal Proceedings ................................................. 20
Item 6. Exhibits and Reports on Form 8-K .................................. 20
Signatures .......................................................................... 20
</TABLE>
Page 2
<PAGE> 3
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
TYLER TECHNOLOGIES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands, except share amounts)
<TABLE>
<CAPTION>
(Unaudited)
March 31, December 31,
2000 1999
------------- -------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 1,800 $ 2,424
Accounts receivable (less allowance for losses of $1,402 in 2000
and $1,257 in 1999) 37,061 39,464
Income tax receivable 2,925 3,392
Prepaid expenses and other current assets 2,821 3,301
Deferred income taxes 2,438 2,438
------------- -------------
Total current assets 47,045 51,019
Property and equipment, net 21,580 21,789
Other assets:
Investment securities available-for-sale 18,086 33,713
Goodwill and other intangibles, net 168,145 160,665
Other receivables 3,287 3,358
Sundry 2,163 1,991
------------- -------------
$ 260,306 $ 272,535
============= =============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 3,981 $ 5,163
Accrued liabilities 14,384 13,786
Current portion of long-term obligations 5,307 3,747
Deferred revenue 21,718 24,303
------------- -------------
Total current liabilities 45,390 46,999
Long-term obligations, less current portion 76,749 67,446
Deferred income taxes 13,491 13,869
Other liabilities 5,118 5,317
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;
44,709,169 shares issued in both periods 447 447
Additional paid-in capital 151,298 151,298
Accumulated deficit (28,334) (24,615)
Accumulated other comprehensive income -
unrealized gain on securities available-for-sale 2,304 17,931
Treasury stock, at cost; 1,418,482 shares in both periods (6,157) (6,157)
------------- -------------
Total shareholders' equity 119,558 138,904
------------- -------------
$ 260,306 $ 272,535
============= =============
</TABLE>
See accompanying notes.
Page 3
<PAGE> 4
TYLER TECHNOLOGIES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share amounts)
(Unaudited)
<TABLE>
<CAPTION>
For the three months ended March 31,
------------------------------------
2000 1999
---------------- ----------------
<S> <C> <C>
Revenues:
Software licenses $ 4,436 $ 3,616
Professional services 17,364 8,007
Maintenance 8,998 4,471
Hardware and other 1,693 2,719
------------- -------------
Total revenues 32,491 18,813
Cost of revenues:
Software licenses 702 630
Professional services and maintenance 17,563 7,297
Hardware and other 1,024 1,900
------------- -------------
Total cost of revenues 19,289 9,827
------------- -------------
Gross profit 13,202 8,986
Selling, general and administrative expenses 12,292 5,468
Litigation defense costs 1,174 --
Amortization of intangibles 2,707 1,096
------------- -------------
Operating income (loss) (2,971) 2,422
Interest expense 1,876 829
------------- -------------
Income (loss) from continuing operations before
income tax provision (benefit) (4,847) 1,593
Income tax provision (benefit) (1,547) 980
------------- -------------
Income (loss) from continuing operations (3,300) 613
Loss from disposal of discontinued operations, net of income taxes (419) (565)
------------- -------------
Net income (loss) $ (3,719) $ 48
============= =============
Basic and diluted earnings (loss) per common share:
Continuing operations $ (0.08) $ 0.02
Discontinued operations (0.01) (0.02)
------------- -------------
Net earnings (loss) per common share $ (0.09) $ 0.00
============= =============
Weighted average common shares outstanding:
Basic 43,291 34,771
Diluted 43,291 35,962
</TABLE>
See accompanying notes.
Page 4
<PAGE> 5
TYLER TECHNOLOGIES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
<TABLE>
<CAPTION>
Three months ended March 31,
------------- -------------
2000 1999
------------- -------------
<S> <C> <C>
Cash flows from operating activities:
Net income (loss) $ (3,719) $ 48
Adjustments to reconcile net income (loss) from operations
to net cash provided (used) by operations:
Depreciation and amortization 4,197 1,812
Deferred income taxes (472) (141)
Discontinued operations - noncash charges and
changes in operating assets and liabilities -- (665)
Changes in operating assets and liabilities, exclusive of
effects of acquired companies and discontinued operations (3) (1,782)
------------- -------------
Net cash provided (used) by operating activities 3 (728)
------------- -------------
Cash flows from investing activities:
Additions to property and equipment (1,152) (850)
Investment in database and other software development costs (3,029) (1,035)
Cost of acquisitions, net of cash acquired (3,073) (5,781)
Capital expenditures of discontinued operations -- (534)
Proceeds from disposal of discontinued operations,
net of transaction costs -- 11,291
Issuance of notes receivable -- (1,000)
Other (169) 88
------------- -------------
Net cash (used) provided by investing activities (7,423) 2,179
------------- -------------
Cash flows from financing activities:
Net borrowings (payments) on revolving credit facility 7,931 (50)
Payments on notes payable (703) (1,041)
Payments of principal on capital lease obligations (432) (97)
------------- -------------
Net cash provided (used) by financing activities 6,796 (1,188)
------------- -------------
Net (decrease) increase in cash and cash equivalents (624) 263
Cash and cash equivalents at beginning of period 2,424 1,558
------------- -------------
Cash and cash equivalents at end of period $ 1,800 $ 1,821
============= =============
</TABLE>
See accompanying notes
Page 5
<PAGE> 6
Tyler Technologies, Inc.
Notes to Condensed Consolidated Financial Statements
(Unaudited)
(Tables in thousands, except per share data)
(1) Basis of Presentation
The accompanying unaudited information for Tyler Technologies, Inc.
("Tyler" or the "Company") includes all adjustments which are, in the
opinion of the Company's management, of a normal or recurring nature and
necessary for a fair summarized presentation of the condensed consolidated
balance sheet at March 31, 2000, 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, 1999.
(2) Acquisitions
On January 3, 2000, the Company acquired all of the outstanding common
stock of Capitol Commerce Reporter, Inc. ("CCR") of Austin, Texas for
approximately $3,000,000 in cash, $1,200,000 in assumed debt and $2,800,000
five-year, 10% subordinated notes and financed the acquisition utilizing
funds available under its bank credit agreement. The Company accounted for
the acquisition of CCR using the purchase method of accounting and its
results of operations are included in the Company's condensed consolidated
financial statements since the date of acquisition. The purchase price has
been preliminarily allocated to the assets and liabilities based on their
estimated respective fair values. The purchase price exceeded the estimated
fair value of CCR's identifiable net assets by approximately $6,800,000.
Goodwill is being amortized over 10 years.
Since January 1, 1999 the Company has also acquired the entities described
below in transactions which were accounted for by the purchase method of
accounting and the cash portion of the consideration was financed 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.
<TABLE>
<CAPTION>
Date
Company Acquired Acquired
---------------- --------
<S> <C>
Eagle Computer Systems, Inc. ("Eagle") March 1, 1999
Micro Arizala Systems, Inc. ("FundBalance") April 1, 1999
Process Incorporated ("MUNIS") April 21, 1999
Gemini Systems, Inc. ("Gemini") May 1, 1999
Pacific Data Technologies, Inc. ("Pacific Data") July 16, 1999
Cole-Layer-Trumble Company ("CLT") November 4, 1999
</TABLE>
The following unaudited pro forma information presents the consolidated
results of operations as if all of the Company's acquisitions occurred on
January 1, 1999, after giving effect to certain adjustments, including
amortization of intangibles, interest and income tax effects. Because CCR
was acquired January 3, 2000, historical results of operations for the
three months ended March 31, 2000 are the same as pro forma results of
operations and are not presented herein. The pro forma information does not
purport to represent what the Company's results of operations actually
would have been had such
Page 6
<PAGE> 7
Tyler Technologies, Inc.
Notes to Condensed Consolidated Financial Statements
(Unaudited)
(Tables in thousands, except per share data)
transactions or events occurred on the dates specified, or to project the
Company's results of operations for any future period.
<TABLE>
<CAPTION>
Three months ended
March 31, 1999
------------------
<S> <C>
Revenues.............................................. $ 36,511
Income from continuing operations..................... $ 1,216
Net income............................................ $ 651
Net income per diluted share.......................... $ 0.02
</TABLE>
(3) Commitments and Contingencies
As discussed in Note 17 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, 1999, 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. See the Company's Annual Report
on Form 10-K for the year ended December 31, 1999, for further information.
Except as summarized herein and detailed in the Company's Annual Report on
Form 10-K for the year ended December 31, 1999, 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
The Company's 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.
The Company recognizes revenue from software transactions in accordance
with Statement of Position 97-2, "Software Revenue Recognition", as amended
as follows:
Software Licenses - The Company recognizes the revenue allocable to
software licenses and specified upgrades upon delivery and installation of
the software product or upgrade to the end user, unless the fee is not
fixed or determinable or collectibility is not probable. If the fee is not
fixed or determinable, revenue is recognized as payments become due from
the customer. If collectibility is not considered probable, revenue is
recognized when the fee is collected. Arrangements that include software
services, such as training or installation, are evaluated to determine
whether those services are essential to the functionality of other elements
of the arrangement.
Page 7
<PAGE> 8
Tyler Technologies, Inc.
Notes to Condensed Consolidated Financial Statements
(Unaudited)
(Tables in thousands, except per share data)
A majority of the Company's software arrangements involve off-the-shelf
software, and the other elements are not considered essential to the
functionality of the software. For those software arrangements in which
services are not considered essential, the software license fee is
recognized as revenue after delivery and installation have occurred,
training has commenced, customer acceptance is reasonably assured, the fee
is billable and the remaining services other than training are considered
nominal.
Software Services - When software services are considered essential,
revenue under the entire arrangement is recognized as the services are
performed using the percentage-of-completion contract accounting method.
When software services are not considered essential, the fee allocable to
the service element is recognized as revenue as the services are performed.
Computer Hardware Equipment - Revenue allocable to equipment based on
vendor specific evidence of fair value is recognized when the equipment is
delivered and collection is probable.
Postcontract Customer Support - PCS agreements are generally entered into
in connection with initial license sales and subsequent renewals. Revenue
allocated to PCS is recognized on a straight-line basis over the period the
PCS is provided. All significant costs and expenses associated with PCS are
expensed as incurred.
Contract Accounting - For arrangements that include customization or
modification of the software, or where software services are otherwise
considered essential, or for real estate mass appraisal projects, revenue
is recognized using contract accounting. Revenue from these arrangements is
recognized on a percentage-of-completion method with progress-to-completion
measured based primarily upon labor hours incurred or units completed.
Deferred revenue consists primarily of payments received in advance of
revenue being earned under software licensing, software and hardware
installation, support and maintenance contracts.
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. The Company provides title plant
update services to title companies and sales of copies of title plants. 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 bundled fees are payable on a monthly basis over the respective
contract period and revenue is recognized on an as-billable basis over the
terms of the arrangement.
The Company also receives royalty revenue relating to the current
activities of two former subsidiaries. Royalty revenue is recognized as
earned upon receipt of royalty payments.
(5) Litigation Defense Costs
In December 1999, a competitor of one of the Company's operating
subsidiaries filed a lawsuit against the subsidiary, an employee of the
subsidiary, and the Company alleging that the employee, who had
Page 8
<PAGE> 9
Tyler Technologies, Inc.
Notes to Condensed Consolidated Financial Statements
(Unaudited)
(Tables in thousands, except per share data)
previously been an employee of the competitor, had taken confidential and
proprietary trade secrets upon leaving the employ of the competitor. The
lawsuit proceeded on an accelerated court schedule and was tried before a
judge in March 2000. After a trial on the merits, the trial court issued a
favorable ruling on behalf of the Company and its subsidiary and awarded no
monetary damages to the competitor. Incremental direct legal costs relating
to the defense of these matters were approximately $1,174,000, which is
included in litigation defense costs in the accompanying consolidated
condensed financial statements for the three months ended March 31, 2000.
(6) Discontinued Operations
Two of the Company's non-operating subsidiaries are involved in various
claims for work related injuries and physical conditions and for
environmental claims relating to a formerly owned subsidiary that was sold
in 1995. During the first quarter of 2000, the Company expensed
approximately $419,000 (net of taxes of $226,000) for trial and related
costs. Also, as discussed in Note 17 to the Company's 1999 Form 10-K, the
Company entered into a Standstill Agreement in March 2000 with the
plaintiffs alleging claims for work related injuries and physical
conditions.
In December 1998, the Company entered into a letter of intent to sell its
non-core automotive parts retailer, Forest City Auto Parts Company ("Forest
City"). Accordingly, this segment has been accounted for as a discontinued
operation. The measurement date for recording the estimated loss on
disposition of the segment was in December 1998.
The Company estimated the loss on the disposal of Forest City to be
$8,939,000, which was reported in its 1998 Form 10-K. The estimated loss
included anticipated operating losses from the measurement date of December
31, 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 higher than expected
transaction costs and operating losses.
(7) Sale of Copies of Title Plants
During the three months ended March 31, 1999, the Company reported and
recognized $1,675,000 of revenue and $12,000 of interest income in
connection with sales of copies of title plants. Each of the contracts
included the sale of copies of title plants combined with five and ten year
title plant update service agreements to provide monthly update services.
The Company previously sold update services separately to these customers.
In December 1999, the Securities and Exchange Commission ("SEC") issued
Staff Accounting Bulleting No. 101 entitled, "Revenue Recognition in
Financial Statements" ("SAB 101"), in which the SEC staff clarified certain
revenue recognition matters. The Company previously unbundled the
incremental value ascribed to the delivery and sale of the ownership
privilege, while SAB 101 requires transactions of this nature to remain
bundled and the associated revenues to be recognized ratably over the
service period. As disclosed in Note 16 to the Consolidated Financial
Statements included in the Company's 1999 Form 10-K, the Company changed
its accounting in the fourth quarter of 1999 effective to the beginning of
the year. The effect of the accounting change was to reduce revenue by
$1,620,000 and to reduce net income by $1,061,000 ($0.03 per diluted share)
from amounts previously reported for the three months ended March 31, 1999.
The accompanying consolidated condensed financial statements as of and for
the three months ended March 31, 1999 have been restated to reflect the
change.
Page 9
<PAGE> 10
Tyler Technologies, Inc.
Notes to Condensed Consolidated Financial Statements
(Unaudited)
(Tables in thousands, except per share data)
(8) Earnings Per Share
Basic earnings (loss) per share of common stock is computed by dividing
net income (loss) by the weighted-average number of Tyler common shares
outstanding during the period. Diluted earnings (loss) per share is
calculated in the same manner as basic earnings (loss) 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 (loss) per share. The Company incurred a loss from
operations for the three months ended March 31, 2000. As a result, the
denominator was not adjusted for dilutive securities in 2000 as the effect
would be antidilutive.
The following table reconciles the numerators and denominators used in the
calculation of basic and diluted earnings (loss) per share for each of the
periods presented:
<TABLE>
<CAPTION>
Three months ended
March 31,
------------------------------
2000 1999
------------- -------------
<S> <C> <C>
Numerators for basic and diluted earnings per share:
Income (loss) from continuing operations .............. $ (3,300) $ 613
============= =============
Denominator:
Denominator for basic earnings per share-
Weighted-average outstanding common shares ............ 43,291 34,771
Effect of dilutive securities:
Employee stock options ................................ -- 142
Warrant ............................................... -- 1,049
------------- -------------
Dilutive potential common shares ........................ -- 1,191
------------- -------------
Denominator for diluted earnings per share-
Adjusted weighted-average outstanding
common shares and assumed conversion ............... 43,291 35,962
============= =============
Basic and diluted earnings (loss) per share from
continuing operations .............................. $ (0.08) $ 0.02
============= =============
</TABLE>
(9) CPS Systems Notes Receivable
In March 1999, the Company entered into a merger agreement pursuant to
which the Company contemplated the acquisition of all of the outstanding
common stock of CPS Systems, Inc. ("CPS"). In connection with that
agreement, the Company provided CPS with bridge financing of $1,000,000 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 provided for interest at 2%
over the prime rate and was initially due on October 30, 1999. In June
1999, Tyler provided notice to CPS that it was exercising its right to
terminate the merger agreement. Although the original agreement was
terminated, the Company and CPS continued to negotiate to find an
alternative structure for the transaction, and the Company continued to
provide bridge financings to CPS on terms similar to the original note.
Page 10
<PAGE> 11
Tyler Technologies, Inc.
Notes to Condensed Consolidated Financial Statements
(Unaudited)
(Tables in thousands, except per share data)
In January 2000, CPS filed a voluntary petition for relief under Chapter 11
of the United States Bankruptcy Code. On March 24, 2000, the bankruptcy
court conducted a public auction of the assets and the Company submitted a
cash only bid of $100,000 for the California Visual Basic/Oracle Tax and
CAMA software assets of CPS. The Company closed on the transaction on March
30, 2000, and anticipates minimal to no recovery of amounts due under its
secured notes. Accordingly, the aggregate amounts of notes receivable from
the bridge financings and related accrued interest receivable and other
costs were expensed in the fourth quarter of 1999.
(10) Investment Securities Available-for-Sale
Pursuant to an agreement in August 1999 with two major shareholders of
H.T.E., Inc. ("HTE"), the Company exchanged its common stock in a series of
transactions which had a fair value of $15,782,000 for 5,618,952 shares of
HTE common stock. This investment is classified as a non-current asset
since it was made for a continuing business purpose.
Although the Company owns 32% of HTE's outstanding common stock, HTE
management has taken the position that, under Florida law, all of the
shares acquired by the Company constitute "control shares" and therefore do
not have voting rights until such time as a majority of the shareholders of
HTE, other than the Company, restore voting rights to those shares.
Management of the Company believes that only the shares acquired in excess
of 20% of the outstanding shares of HTE constitute "control shares" and
therefore believes it currently has the right to vote all HTE shares it
owns up to at least 20% of the outstanding shares of HTE.
The Company accounts for its investment in HTE pursuant to the provisions
of Statement of Financial Accounting Standards ("SFAS") No. 115,
"Accounting for Certain Investments in Debt and Equity Securities". These
securities are classified as available-for-sale and are recorded at fair
value as determined by quoted market prices. Unrealized holding gains and
losses, net of the related tax effect, on securities available-for-sale are
excluded from earnings and are reported as a separate component of
shareholders' equity until realized.
At March 31, 2000, the cost, fair value and gross unrealized holding gain
amounted to $15,782,000, $18,086,000, and $2,304,000, respectively, based
on a quoted market price of $3.22 per share. Because of the Company's
existing capital loss carryforwards, the unrealized holding gain has not
been tax effected. At May 9, 2000, the fair value of the investment
securities available-for-sale was $8,428,000 based on a quoted market price
of $1.50 per share.
If the uncertainty regarding the voting shares is resolved in the Company's
favor, the Company will retroactively adopt the equity method of accounting
for this investment. Therefore, the Company's results of operations and
retained earnings for periods beginning with the first 1999 acquisition
will be retroactively restated to reflect the Company's investment in HTE
for all periods in which it held an investment in the voting stock of HTE.
Had the Company's investment in HTE been accounted for under the equity
method, the Company's investment at March 31, 2000 would have been
$13,170,000 and the equity in loss of HTE for the three months ended March
31, 2000 would have been $1,261,000.
(11) Comprehensive Income (Loss)
SFAS No. 130, "Reporting Comprehensive Income", establishes standards for
reporting and displaying comprehensive income and its components in an
annual financial statement that is displayed with the same
Page 11
<PAGE> 12
Tyler Technologies, Inc.
Notes to Condensed Consolidated Financial Statements
(Unaudited)
(Tables in thousands, except per share data)
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 condensed consolidated balance sheet. For the
three months ended March 31, 2000, the Company had comprehensive loss of
$19,346,000 including other comprehensive loss of $15,627,000 (no tax
effect due to the change in the valuation allowance related to the existing
capital loss carryforwards) associated with unrealized loss on securities
classified as available-for-sale.
(12) Segment and Related Information
The Company has two reportable segments: software systems and services and
information and property records services. The software systems and
services segment provides municipal and county governments with software
systems and related services to meet their information technology and
automation needs including real estate appraisal 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 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, 1999.
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 domestic customers. The
information and property records services segment conducts minor operations
in Germany, which are not significant and are not separately disclosed.
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>
For the three months ended March 31, 2000
-----------------------------------------
Information
Software & Property
Systems Records Continuing
& Services Services Other Operations
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
Revenues ............................... $ 21,373 $ 11,118 $ -- $ 32,491
Segment operating
profit (loss) ....................... 1,106 1,767 (1,963) 910
</TABLE>
Page 12
<PAGE> 13
Tyler Technologies, Inc.
Notes to Condensed Consolidated Financial Statements
(Unaudited)
(Tables in thousands, except per share data)
<TABLE>
<CAPTION>
For the three months ended March 31, 1999
-----------------------------------------
Information
Software & Property
Systems Records Continuing
& Services Services Other Operations
------------- ------------- ----------- -------------
<S> <C> <C> <C> <C>
Revenues ............. $ 10,291 $ 8,522 $ -- $ 18,813
Segment operating
profit (loss) ..... 2,497 2,502 (1,481) 3,518
</TABLE>
<TABLE>
<CAPTION>
Three months ended March 31,
------------------------------
Reconciliation of reportable segment operating
profit to the Company's consolidated totals 2000 1999
------------- -------------
<S> <C> <C>
Total segment operating profit for
reportable segments ................................ $ 910 $ 3,518
Interest expense ...................................... (1,876) (829)
Litigation defense costs .............................. (1,174) --
Goodwill and intangibles amortization ................. (2,707) (1,096)
------------- -------------
Income (loss) from continuing operations
before income tax .................................. $ (4,847) $ 1,593
============= =============
</TABLE>
(13) Subsequent Event
On April 6, 2000, the Company announced that it executed a Letter of Intent
with a national provider of title insurance and diversified real estate
related services to form a national data and information company known as
NationsData.com. The new company would be a national transaction-based
business to business Internet portal offering proprietary real property
data, information and services.
The transaction is subject to, among other things, certain regulatory
approvals and consents from both companies' banking syndicates,
satisfactory completion of due diligence by both parties and the execution
of definitive agreements.
(14) New Accounting Pronouncements Not Yet Adopted
In June 1999, SFAS No. 137, "Accounting for Derivative Instruments and
Hedging Activities-Deferral of Effective Date of FASB Statement No. 133"
was issued by the Financial Accounting Standards Board ("FASB"). The
Statement defers for one year the effective date of FASB Statement No. 133,
"Accounting for Derivative Instruments and Hedging Activities". The rule
now will apply to all fiscal years beginning after June 15, 2000. FASB
Statement No. 133 will require the Company to recognize all derivatives on
the balance sheet at fair value. Derivatives that are not hedges must be
adjusted to fair value through income. If the derivative is a hedge,
depending on the nature of the hedge, changes in the fair value of
derivatives
Page 13
<PAGE> 14
Tyler Technologies, Inc.
Notes to Condensed Consolidated Financial Statements
(Unaudited)
(Tables in thousands, except per share data)
will either be offset against the change in fair value of the hedged
assets, liabilities, or firm commitments through earnings or recognized in
other comprehensive income until the hedged item is recognized in earnings.
The ineffective portion of a derivative's change in fair value will be
immediately recognized in earnings. The adoption of SFAS No. 133 is not
expected to have a material impact on the Company's consolidated financial
statements and related disclosures.
Page 14
<PAGE> 15
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
FORWARD - LOOKING STATEMENTS
This Quarterly Report on Form 10-Q contains forward-looking statements
within the meaning of Section 27A of the Securities Act of 1933, as
amended, and Section 21E of the Securities Exchange Act of 1934, as
amended. All statements other than historical or current facts, including,
without limitation, statements about the business, financial condition,
business strategy, plans and objectives of management, and prospects of the
Company are forward-looking statements. Although the Company believes that
the expectations reflected in such forward-looking statements are
reasonable, such forward-looking statements are subject to risks and
uncertainties that could cause actual results to differ materially from
these expectations. Such risks and uncertainties include, without
limitation, the ability of the Company to successfully integrate the
operations of acquired companies, technological risks associated with the
development of new products and the enhancement of existing products,
changes in the budgets and regulating environments of the Company's
government customers, the ability to attract and retain qualified
personnel, changes in product demand, the availability of products, changes
in competition, economic conditions, changes in tax risks, availability of
capital, and other risks indicated in the Company's filings with the
Securities and Exchange Commission. These risks and uncertainties are
beyond the ability of the Company to control, and in many cases, the
Company cannot predict the risks and uncertainties that could cause its
actual results to differ materially from those indicated by the
forward-looking statements.
When used in this Quarterly Report, the words "believes," "plans,"
"estimates," "expects," "anticipates," "intends," "continue," "may,"
"will," "should", "projects", "forecast", "might", "could" or the negative
of such terms and similar expressions as they relate to the Company or its
management are intended to identify forward-looking statements.
GENERAL
The Company is a provider of technology, software, data warehousing, web
hosting services, electronic document management systems, information
management outsourcing services, title plant and property record database
information, and real estate appraisal services for local governments.
In mid 1997, the Company embarked on a multi-phase strategy and growth plan
focused on the specialized information management needs of local
government. Since that time, the Company has experienced growth both
internally and as a result of a number of acquisitions.
By the close of 1999, the Company considered itself an important
provider of information management solutions in the local government
marketplace, providing a selection of products for city and county
government operations from law enforcements, to courts, financial systems,
appraisal and taxation, records management, and utility billing.
From 1998 and through 2000, the Company has made a significant number of
acquisitions. All of the Company's acquisitions have been accounted for
using the purchase method of accounting for business combinations, and the
results of operations of the acquired entities are included in the
Company's historical consolidated financial statements from their
respective dates of acquisition. Because of the significance of these
acquisitions in the following analysis of results of operations, the
Company has provided pro forma amounts as if all of the Company's
acquisitions had occurred as of the beginning of 1999.
Page 15
<PAGE> 16
ANALYSIS OF RESULTS OF OPERATIONS
REVENUES
For the three months ended March 31, 2000, Tyler had revenues from
continuing operations of $32,491,000, compared to $18,813,000 for the same
period in 1999. On a pro forma basis, total revenues for the three months
ended March 31, 1999 were $36,511,000, compared to $32,491,000 for the
three months ended March 31, 2000. The decline in revenues on a pro forma
basis was primarily because of Year 2000 ("Y2K") related factors. Many
customers and potential customers instituted Y2K "lockdowns" and did not
install new systems in the first quarter. Additionally, the 1999 pro forma
revenues were aided somewhat by accelerated Y2K compliance related sales.
Pro forma software license revenue for the three months ended March 31,
2000 declined $2,282,000 from $6,718,000 in the prior year period. Pro
forma software license revenue comparisons were negatively impacted by the
Y2K factors described above. January and February sales volume in 2000 was
unusually low compared to the prior year periods, while March sales
rebounded to more normal levels. Revenue declines were offset slightly by
delivery of new accounting application products for certain cities in
Texas.
Professional services revenue on a pro forma basis declined approximately
$1,063,000, compared to $18,427,000 in the first quarter of 1999 primarily
due to lower real estate appraisal services of approximately $1,800,000.
Revenue from real estate appraisal services varies from period to period
based on the customer's re-appraisal cycles. Offsetting the real estate
services decline was approximately $1,300,000 of revenue recognized in the
first quarter of 2000 relating to a $4,500,000 contract with the Cook
County, Recorder of Deeds in Chicago to convert documents recorded and
stored on microfilm from 1985 to 1997 to digitized images. This contract
was awarded in July 1999 and approximately $3,300,000 of revenue has been
recognized as of March 31, 2000 and the remainder of the contract is
expected to be completed by the third quarter of 2000. The remaining
decline in professional services on a pro forma basis was due to the Y2K
related factors described above.
Pro forma maintenance revenue increased 10% compared to $8,211,000 in 1999
due to an increase in the Company's customer base of installed software and
services products. Maintenance services are provided for the Company's
software products, including real estate appraisal products, and third
party hardware. The renewal rate for real estate appraisal maintenance
agreements is not as high as other software and hardware maintenance
agreements and will vary somewhat from period to period. On a pro forma
basis, real estate appraisal maintenance revenue declined approximately
$587,000 in the three months ended March 31, 2000 compared to the three
months ended March 31, 1999. Total pro forma maintenance revenue, including
real estate appraisal maintenance agreements, increased approximately
$787,000 for the first three months of 2000 compared to the prior year
period. As a percent of revenue, total maintenance revenue on a pro forma
basis was approximately 28% for the first three months ended March 31, 2000
compared to approximately 22% in the prior year period.
For the three months ended March 31, 2000, pro forma hardware and other
revenues declined approximately $1,462,000 compared to $3,155,000 in the
first quarter of 1999 mainly due to the Y2K related factors described
above.
For the remainder of 2000, the Company anticipates slower revenue growth
compared to 1999 as the Company pursues long-term development of its
e-commerce growth strategy. In 2000 the Company plans to emphasize its
long-term growth opportunities in e-commerce by developing Internet
accessible solutions for its current installed basis, as well as the
broader local government market.
COST OF REVENUES
For the three months ended March 31, 2000, cost of revenues from continuing
operations were $19,289,000, compared to $9,827,000 for the same period in
1999. On a pro forma basis, total cost of
Page 16
<PAGE> 17
revenues for the three months ended March 31, 1999 were $20,131,000
compared to $19,289,000 for the three months ended March 31, 2000.
The cost of revenues decline is primarily due to lower revenues. In
addition, personnel costs, which is somewhat fixed in nature, is the
largest component of cost of revenues, and contributed to a lower gross
margin in the first quarter of 2000. The gross margin was also negatively
impacted from a product mix that included less software license revenue in
the first quarter of 2000 compared to the prior year period. On a pro forma
basis, the overall gross margin was 41% for the three months ended March
31, 2000 compared to 45% for the three months ended March 31, 1999.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
Selling, general and administrative expenses for the three months ended
March 31, 2000 were $12,292,000 compared to $5,468,000 in the comparable
prior year period. On a pro forma basis, selling, general and
administrative expenses as a percent of revenues was 38% and 28% for the
three months ended March 31, 2000 and 1999, respectively. Lower sales
volume combined with higher additional personnel negatively impacted
selling, general and administrative expense comparisons. Selling, general
and administrative expenses in 2000 included approximately $1,300,000
additional expenses associated with the Company's national data repository
("Database") activities and its preliminary sales efforts.
LITIGATION DEFENSE COSTS
In December 1999, a competitor of one of the Company's operating
subsidiaries filed a lawsuit against the subsidiary, an employee of the
subsidiary, and the Company alleging that the employee, who had previously
been an employee of the competitor, had taken confidential and proprietary
trade secrets upon leaving the employ of the competitor. The lawsuit
proceeded on an accelerated court schedule and was tried before a judge in
March 2000. After a trial on the merits, the trial court issued a favorable
ruling on behalf of the Company and its subsidiary and awarded no monetary
damages to the competitor. Incremental direct legal costs relating to the
defense of these matters was approximately $1,174,000, which is included in
defense litigation costs in the accompanying consolidated condensed
financial statements for the three months ended March 31, 2000. In
addition, the Company devoted significant internal resources to the
litigation defense, the costs of which are included in selling, general and
administrative expenses.
AMORTIZATION OF INTANGIBLES
The Company has accounted for all acquisitions using the purchase method of
accounting for business combinations. Unallocated purchase price over the
fair value of net identifiable assets of the acquired companies
("goodwill") and intangibles associated with acquisition are amortized
using the straight-line method of amortization over their respective useful
lives beginning when a company is first acquired. Amortization expense has
increased for the three months ended March 31, 2000 compared to the same
period of 1999 due to inclusion of goodwill amortization for companies
acquired after March 31, 1999.
INTEREST EXPENSE
Interest expense has increased substantially for the three months ended
March 31, 2000 compared to the same period of 1999. The Company incurred
debt to finance acquisitions and their related transaction costs and
construction of the Database. In connection with construction of the
Database, the Company capitalized $100,000 of interest cost in the first
quarter of 2000. In addition to higher debt levels, the average effective
interest rate for the three months ended March 31, 2000 was 8.9% compared
to 7.1% for the same period in 1999.
INCOME TAX PROVISION
In the first quarter of 2000, the Company had a loss from continuing
operations before income taxes of $4,847,000 and an income tax benefit of
$1,547,000, resulting in an effective tax rate of 32%. The
Page 17
<PAGE> 18
comparable 1999 rate was 62%. These effective income tax rates are due to
non-deductible items such as goodwill amortization as compared to the
relative amount of pretax earnings or loss.
DISCONTINUED OPERATIONS
The Company recorded a net loss from disposal of discontinued operations of
$419,000 and $565,000 for the three months ended March 31, 2000 and 1999,
respectively. Discontinued operations in 2000 consist of Swan
Transportation ("Swan") whose operations were discontinued in 1995 and TPI
of Texas, Inc. ("TPI"), which sold substantially all of its assets and
liabilities in 1995. The 1999 loss from discontinued operations includes
Forest City, which was disposed of in March 1999.
In the three months ended March 31, 2000, TPI and Swan together recorded a
charge of $419,000 for trial and related costs, net of taxes of $226,000.
The Company estimated the loss on the disposal of Forest City to be
$8,939,000, which was reported in its 1998 Form 10-K. The estimated loss
included anticipated operating losses from the measurement date of December
31, 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 higher than expected
transaction costs and operating losses.
NET INCOME (LOSS) AND OTHER MEASURES
Net loss was $3,719,000 for the three months ended March 31, 2000 compared
to net income of $48,000 in the first quarter of 1999. Net loss from
continuing operations was $3,300,000 for the three months ended March 31,
2000 compared to net income of $613,000 for the three months ended March
31, 1999. For the three months ended March 31, 2000, diluted loss per share
from continuing operations was $0.08 compared to diluted earnings per share
from continuing operations of $0.02 for the three months ended March 31,
1999.
Earnings before interest, taxes, depreciation and amortization ("EBITDA")
from continuing operations for the three months ended March 31, 2000 was
$2,400,000 compared to $4,234,000 for the comparable prior year period.
EBITDA consists of income from continuing operations before interest,
litigation defense costs, income taxes, depreciation and amortization.
Although EBITDA is not calculated 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.
Cash flows provided by operating activities for the three months ended
March 31, 2000 were $3,000 compared to cash used by operating activities of
$728,000 for the three months ended March 31, 1999.
FINANCIAL CONDITION AND LIQUIDITY
In October 1999, the Company entered into a three-year $80 million
revolving credit agreement ("Senior Credit Facility") with a group of
banks. Borrowings under the Senior Credit Facility, as amended, bear
interest at either the lead bank's prime rate plus a margin of .25% to
1.50% or the London Interbank Offered Rate plus a margin of 2.25% to 3.50%,
depending on the Company's ratio of indebtedness to EBITDA. At March 31,
2000, the Company had outstanding borrowings and letters of credit of
$70,150,000 and available borrowing capacity of $9,850,000 under the Senior
Credit Facility. For the three months ended March 31, 2000 and 1999, the
effective average interest rate for the borrowings was approximately 8.9%
and 7.1%, respectively. The Senior Credit Facility is secured by
substantially all of the Company's real and personal property and a pledge
of the common stock of present and future
Page 18
<PAGE> 19
significant operating subsidiaries. The Senior Credit Facility is also
guaranteed by such subsidiaries. Under the terms of the Senior Credit
Facility, the Company is required to maintain certain financial ratios and
other financial conditions. The Senior Credit Facility also prohibits the
Company from making certain investments, advances or loans and restricts
substantial asset sales, capital expenditures and cash dividends. Under the
terms of the Senior Credit Facility the Company has the right to increase
the facility to $100,000,000 subject to the participation of additional new
lenders.
For the three months ended March 31, 2000, the Company incurred capital
expenditures of $4,081,000. These expenditures included $3,029,000 relating
to the construction of the Database and other software development. The
remaining expenditures were primarily for computer equipment and building
expansions required for internal growth. In connection with the
construction of the Database and other software development the Company
capitalized interest costs of approximately $100,000.
In January 2000, the Company acquired all of the outstanding common stock
of Capitol Commerce Reporter, Inc. ("CCR") for approximately $3,000,000 in
cash, $1,200,000 in assumed debt and $2,800,000 in five-year, 10%
subordinated notes in a business combination accounted for as a purchase.
CCR is based in Austin, Texas and provides public records research,
documents retrieval, filing and information services.
These expenditures were primarily funded by borrowings of approximately
$7,900,000 from the Company's revolving credit facility.
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.
Page 19
<PAGE> 20
Part II. OTHER INFORMATION
Item 1. Legal Proceedings
For a discussion of legal proceedings see Part I, Item 1. "Financial
Statements - Notes to Condensed Consolidated Financial Statements -
Commitments and Contingencies" on page 7 of this document.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibit
Number Exhibit
------- -------
27 Financial Data Schedule
(b) Form 8-K/A dated January 18, 2000, which amended Form 8-K, Asset
Purchase Agreement dated November 3, 1999, among Tyler
Technologies, Inc., Cole-Layer-Trumble Company ("CLT"), and Day &
Zimmerman, L.L.C., relating to the acquisition of certain assets
and liabilities of CLT, filed November 18, 1999. The Form 8-K/A
included pro forma condensed consolidated financial statements
for the year ended December 31, 1998 and the nine months ended
September 30, 1999. The Form 8-K/A also included audited
financial statements of CLT as of December 26, 1997, December 27,
1998 and October 1, 1999 and for the respective years or periods
then ended.
Item 3 of Part I and Items 2, 3, 4 and 5 of Part II were not applicable and have
been omitted.
Pursuant to the requirements of the Securities Exchange Act of 1934, the Company
has duly caused this report to be signed on its behalf by the undersigned
thereunto duly authorized.
TYLER TECHNOLOGIES, INC.
By: /s/ Theodore L. Bathurst
-------------------------------------------
Theodore L. Bathurst
Vice President and Chief Financial Officer
(principal financial officer and an
authorized signatory)
By: /s/ Terri L. Alford
-------------------------------------------
Terri L. Alford
Controller
(principal accounting officer and an
authorized signatory)
Date: May 15, 2000
Page 20
<PAGE> 21
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
Exhibit
Number Description
- ------- -----------
<S> <C>
27 Financial Data Schedule
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-2000
<PERIOD-END> MAR-31-2000
<CASH> 1,800,000
<SECURITIES> 0
<RECEIVABLES> 38,463,000
<ALLOWANCES> 1,402,000
<INVENTORY> 0
<CURRENT-ASSETS> 47,045,000
<PP&E> 29,011,000
<DEPRECIATION> 7,431,000
<TOTAL-ASSETS> 260,306,000
<CURRENT-LIABILITIES> 45,390,000
<BONDS> 0
0
0
<COMMON> 447,000
<OTHER-SE> 119,111,000
<TOTAL-LIABILITY-AND-EQUITY> 260,306,000
<SALES> 32,491,000
<TOTAL-REVENUES> 0
<CGS> 19,289,000
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 1,876,000
<INCOME-PRETAX> (4,847,000)
<INCOME-TAX> (1,547,000)
<INCOME-CONTINUING> (3,300,000)
<DISCONTINUED> (419,000)
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (3,719,000)
<EPS-BASIC> (.09)
<EPS-DILUTED> (.09)
</TABLE>
