<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 September 30, 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 November 7, 2000:
46,679,447
<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..................... 14
Part II - Other Information
Item 1. Legal Proceedings....................................... 20
Item 6. Exhibits and Reports on Form 8-K........................ 20
Signatures..................................................................... 20
</TABLE>
<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>
(Unaudited)
September 30, December 31,
2000 1999
-------------- --------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 555 $ 2,424
Accounts receivable (less allowance for losses of $1,350 in 2000
and $1,257 in 1999) 41,571 39,464
Income taxes receivable 1,912 3,392
Prepaid expenses and other current assets 2,806 3,301
Deferred income taxes 2,402 2,438
-------------- --------------
Total current assets 49,246 51,019
Property and equipment, net 13,250 21,789
Other assets:
Investment securities available-for-sale 7,375 33,713
Goodwill and other intangibles, net 160,352 160,665
Other receivables 3,960 3,358
Sundry 1,647 1,991
-------------- --------------
$ 235,830 $ 272,535
============== ==============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 3,998 $ 5,163
Accrued liabilities 10,486 13,786
Current portion of long-term obligations 22,615 3,747
Deferred revenue 21,808 24,303
-------------- --------------
Total current liabilities 58,907 46,999
Long-term obligations, less current portion 47,313 67,446
Deferred income taxes 12,734 13,869
Other liabilities 4,974 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;
48,042,969 and 44,709,169 shares issued at 9/30/00 and 12/31/99, respectively 481 447
Additional paid-in capital 160,595 151,298
Accumulated deficit (34,871) (24,615)
Accumulated other comprehensive income -
unrealized (loss) gain on securities available-for-sale (8,408) 17,931
Treasury stock, at cost: 1,363,522 and 1,418,482 shares
at 9/30/00 and 12/31/99, respectively (5,895) (6,157)
-------------- --------------
Total shareholders' equity 111,902 138,904
-------------- --------------
$ 235,830 $ 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>
Three months ended Nine months ended
September 30, September 30,
-------------------- --------------------
2000 1999 2000 1999
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Revenues:
Software licenses $ 5,676 $ 6,418 $ 14,246 $ 16,366
Professional services 17,002 11,144 51,733 30,476
Maintenance 9,467 6,638 27,785 17,072
Hardware and other 2,231 3,338 5,244 9,706
-------- -------- -------- --------
Total revenues 34,376 27,538 99,008 73,620
Cost of revenues:
Software licenses 597 977 2,031 2,419
Professional services and maintenance 17,952 11,497 54,166 29,846
Hardware and other 1,668 1,915 3,710 6,138
-------- -------- -------- --------
Total cost of revenues 20,217 14,389 59,907 38,403
-------- -------- -------- --------
Gross profit 14,159 13,149 39,101 35,217
Selling, general and administrative expenses 11,295 9,054 34,944 22,977
Litigation defense costs -- -- 1,264 --
Amortization of intangibles 2,205 2,419 7,550 5,067
-------- -------- -------- --------
Operating income (loss) 659 1,676 (4,657) 7,173
Other income 251 -- 251 --
Interest expense 3,546 1,038 7,442 2,794
-------- -------- -------- --------
Income (loss) from continuing operations before
income tax provision (benefit) (2,636) 638 (11,848) 4,379
Income tax provision (benefit) (160) 441 (2,161) 2,867
-------- -------- -------- --------
Income (loss) from continuing operations (2,476) 197 (9,687) 1,512
Loss from disposal of discontinued operations, net of income taxes (82) (602) (569) (1,947)
-------- -------- -------- --------
Net loss $ (2,558) $ (405) $(10,256) $ (435)
======== ======== ======== ========
Basic and diluted earnings (loss) per common share:
Continuing operations $ (0.05) $ 0.00 $ (0.22) $ 0.04
Discontinued operations (0.00) (0.01) (0.01) (0.05)
-------- -------- -------- --------
Net loss per common share $ (0.05) $ (0.01) $ (0.23) $ (0.01)
======== ======== ======== ========
Weighted average common shares outstanding:
Basic 46,654 40,541 44,953 37,960
Diluted 46,654 42,074 44,953 39,336
</TABLE>
See accompanying notes.
Page 4
<PAGE> 5
TYLER TECHNOLOGIES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
<TABLE>
<CAPTION>
Nine months ended September 30,
-------------------------------
2000 1999
-------------- -------------
<S> <C> <C>
Cash flows from operating activities:
Net loss $ (10,256) $ (435)
Adjustments to reconcile net loss from operations
to net cash (used) provided by operations:
Depreciation and amortization 12,514 7,599
Deferred income taxes (1,192) (973)
Gain on sale (251) --
Amortization of issue costs due to debt modifications 1,161 --
Discontinued operations - noncash charges and
changes in operating assets and liabilities -- (1,778)
Changes in operating assets and liabilities, exclusive of
effects of acquired and disposed companies
and discontinued operations (6,227) (3,163)
------------ ------------
Net cash (used) provided by operating activities (4,251) 1,250
------------ ------------
Cash flows from investing activities:
Additions to property and equipment (2,787) (2,518)
Investment in database and other software development costs (7,400) (3,791)
Cost of acquisitions, net of cash acquired (3,073) (22,491)
Capital expenditures of discontinued operations -- (534)
Proceeds from disposal of assets, net of transaction costs 14,019 15,116
Issuance of notes receivable -- (1,200)
Other (1,043) (189)
------------ ------------
Net cash used by investing activities (284) (15,607)
------------ ------------
Cash flows from financing activities:
Net (payments) borrowings on revolving credit facility (1,958) 17,314
Payments on notes payable (2,412) (1,892)
Payments of principal on capital lease obligations (953) (864)
Proceeds from sale of common stock, net of issuance costs 9,270 --
Sale of treasury shares to employee benefit plan 19 19
Debt issuance cost (1,300) (100)
------------ ------------
Net cash provided by financing activities 2,666 14,477
------------ ------------
Net (decrease) increase in cash and cash equivalents (1,869) 120
Cash and cash equivalents at beginning of period 2,424 1,558
------------ ------------
Cash and cash equivalents at end of period $ 555 $ 1,678
============ ============
</TABLE>
See accompanying notes
Page 5
<PAGE> 6
Tyler Technologies, Inc.
Notes to Condensed Consolidated Financial Statements
(Unaudited)
(1) Basis of Presentation
The accompanying unaudited information for Tyler Technologies, Inc.
("Tyler" or the "Company") includes all adjustments which are, in the
opinion of the Company's management, of a normal or recurring nature and
necessary for a fair summarized presentation of the condensed consolidated
balance sheet at September 30, 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. As a result of the
implementation of a new management information system, the Company has been
able to more accurately allocate certain costs between costs of revenue and
selling, general and administrative expenses. Accordingly, certain amounts
in prior financial statements have been reclassified to conform to current
period presentation.
(2) Sale of Assets
On September 29, 2000, the Company sold for cash certain non-core assets
for an aggregate sale price of $14.4 million. The assets sold consisted of
certain net assets of two operating subsidiaries, the Company's interest in
a certain intangible work product, and the sale and leaseback of a building
and related building improvements. The building that was sold is the
headquarters for the Company's corporate employees and those of an
operating company, and it has been leased back by the Company for a period
of ten years at an annual rental amount of $720,000. The net proceeds of
the sale were used to repay an existing obligation of one of the companies
sold and to reduce the Company's borrowings under its senior credit
facility.
The assets were sold to investment entities beneficially owned by Mr.
William D. Oates, a principal shareholder, Director and Chairman of the
Executive Committee of the Company. The sale is subject to certain post
closing adjustments dependent upon the changes in net assets sold as
compared to an earlier period. Certain transaction costs, estimated by the
Company to be approximately $400,000, were incurred to effect the
transactions. In connection with the sale, the Company recorded an
aggregate gain of $251,000, after estimating the effects of the post
closing adjustments and estimated transaction costs. Because of the
Company's existing capital loss carryforwards, the related income tax
effects of these transactions are estimated to be insignificant.
(3) 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 $3.0 million in cash, $1.2 million in assumed debt and $2.8
million in five-year, 10% subordinated notes and financed the cash portion
of 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 $6.8 million. Goodwill is being amortized over ten
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. April 1, 1999
("FundBalance")
Process Incorporated ("MUNIS") April 21, 1999
Gemini Systems, Inc. ("Gemini") May 1, 1999
Pacific Data Technologies, Inc. July 16, 1999
("Pacific Data")
Cole-Layer-Trumble Company ("CLT") November 4, 1999
</TABLE>
Page 6
<PAGE> 7
The following unaudited pro forma information (in thousands, except per
share data) presents the consolidated results of operations as if all of
the Company's acquisitions and dispositions of certain non-core assets and
real estate occurred on January 1, 1999, 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>
NINE MONTHS ENDED SEPTEMBER 30,
--------------------------------
2000 1999
-------------- --------------
<S> <C> <C>
Revenues $ 92,240 $ 101,392
Income (loss) from continuing
operations $ (9,182) $ 1,734
Net loss $ (9,669) $ (213)
Net loss per diluted share $ (0.22) $ (0.00)
</TABLE>
(4) Commitments and Contingencies
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.
Between 1968 and 1995, TPI of Texas, Inc. ("TPI") owned and operated a
foundry in Swan, Texas. Since 1997, more than 300 former employees of TPI
have filed a series of lawsuits against TPI, Swan Transportation Company,
the parent corporation of TPI until 1992 ("Swan"), and in some instances,
the Company, alleging various personal injuries resulting from exposure to
silica, asbestos, and/or other related industrial dusts during their
employment with TPI. As non-operating subsidiaries, Swan and TPI's assets
consist primarily of various insurance policies issued during the relevant
time periods. In December 1999, the Company, Swan, and TPI initiated
litigation against Swan and TPI's former insurance carriers in Harris
County, Texas, demanding that such carriers undertake the defense of these
claims, fulfill all indemnity obligations with respect to these claims, and
reimburse the Company for settlement and defense costs previously paid by
the Company.
In March 2000, the Company entered into a Standstill Agreement with all
known plaintiffs asserting injuries described above, including all known
plaintiffs who have alleged injury but have not yet filed suit against Swan
and/or TPI (collectively, the "Plaintiffs"). Under the Standstill
Agreement, the Plaintiffs agreed to dismiss all pending claims against the
Company and agreed to not sue the Company until two years after the date
that the first jury verdict is rendered against Swan. Under the Standstill
Agreement, the Company agreed to withdraw its outside counsel of record in
the pending lawsuits, re-tender the defense and indemnity obligations
related to these claims to the insurance carriers of Swan and TPI, and
continue to prosecute its insurance coverage suit in Harris County, Texas,
in which the Plaintiffs, if and when they receive a judgment, may intervene
in such litigation and prosecute their claims directly against the
insurance carriers. Further, the Standstill Agreement provides that any
Plaintiff that settles or receives a judgment on any of its claims, and
such settlement or judgment is fully paid or compromised, then such
Plaintiff will execute a release in favor of the Company, its subsidiaries
and affiliates from such claims. In March 2000, Swan's insurance carriers
agreed to assume the ongoing and future defense of these claims, subject to
a reservation of rights.
During the quarter ended September 30, 2000, Swan's insurance carriers
entered into settlement agreements with over 200 Plaintiffs, each of which
agreed to release Swan, the Company, and its subsidiaries and affiliates in
exchange for payments to be made by the insurance carriers.
The New Jersey Department of Environmental Protection and Energy (the
"NJDEPE") has alleged that a site where Jersey-Tyler Company
("Jersey-Tyler"), a former affiliate of TPI, once operated a foundry
contains lead and possible other priority pollutant metals and may need
on-site and off-site remediation. In January 1995, TPI agreed with the
NJDEPE to undertake certain investigatory actions relating to the alleged
contamination in and around the site, which investigation will be completed
sometime in the fourth quarter of 2000. Notwithstanding the foregoing, TPI
has in the past denied, and continues to deny, any liability for alleged
environmental contamination at the site. The NJDEPE has not asserted that
the Company is a potentially responsible party for the site.
On October 31, 2000, TPI executed an agreement with a third party
contractor for a complete transfer of environmental liabilities and
obligations relating to the site. Under the agreement, the third party
contractor will execute an enforceable agreement with the
Page 7
<PAGE> 8
NJDEPE whereby such contractor will assume all liability related to the
site and will be identified as the responsible party for all clean up
activities of the site as required by the NJDEPE. The remedial activities
conducted by the third party contractor will be funded by a trust and will
be secured by clean-up cost containment insurance and environmental
response, compensation, and liability insurance, of which the Company and
TPI will be a named insured. The funds placed in the trust will be governed
by a trust agreement that will only permit distribution for remediation of
the site. The trust will be funded from various sources, including other
alleged potentially responsible parties, TPI's insurance carriers, and TPI.
The transaction is expected to close in the fourth quarter of 2000, and the
net effects of these anticipated settlements and reimbursements are not
expected to exceed the amount accrued in the Company's financial statements
for this liability.
Because of the inherent uncertainties discussed above, it is reasonably
possible that the amounts recorded as liabilities for TPI and Swan related
matters could change in the near term by amounts that would be material to
the consolidated financial statements.
(5) Revenue Recognition
The Company'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.
A majority of the Company's software arrangements involve "off-the-shelf"
software, and the other elements are not considered essential to the
functionality of the software. For those software arrangements in which
services are not considered essential, the software license fee is
recognized as revenue after delivery and installation have occurred,
customer acceptance is reasonably assured, the fee represents an
enforceable claim and 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.
Page 8
<PAGE> 9
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.
(6) 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 employment 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 $1.3 million, which are included in
litigation defense costs in the accompanying consolidated condensed
financial statements for the nine months ended September 30, 2000.
(7) 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. For the three and nine months ended September 30, 2000, the
Company expensed $82,000 (net of taxes of $44,000) and $569,000 (net of
taxes of $307,000), respectively, for trial and related costs. For the
three and nine months ended September 30, 1999, the Company expensed
$602,000 (net of taxes of $303,000) and $1.4 million (net of taxes of
$744,000), respectively, for trial and related costs. (See Note (5)
Commitments and Contingencies.)
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 $8.9
million, which was reported in its 1998 financial statements. 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.
(8) Sale of Copies of Title Plants
During the three months ended September 30, 1999, the Company reported and
recognized $2.1 million of revenue and $82,000 of interest income in
connection with sales of copies of title plants. For the nine months ended
September 30, 1999, the Company reported and recognized $5.7 million of
revenue and $180,000 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 Bulletin
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 $2.0 million and to reduce net income by $1.3
million ($0.03 per diluted share) from amounts previously reported for the
three months ended September 30, 1999. For the nine months ended September
30, 1999, the effect of the
Page 9
<PAGE> 10
accounting change on amounts previously reported was to reduce revenue by
$5.3 million and to reduce net income by $3.6 million ($0.09 per diluted
share). The accompanying consolidated condensed financial statements as of
and for the three and nine months ended September 30, 1999 have been
restated to reflect the change.
(9) Earnings Per Share
Basic earnings (loss) per share of common stock is computed by dividing net
income (loss) by the weighted-average number of 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 warrants that would have had a dilutive effect on earnings (loss) per
share. The Company incurred losses from continuing operations for the three
months and nine months ended September 30, 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 (in thousands, except per share data):
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------------ ------------------------
2000 1999 2000 1999
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Numerators for basic and diluted earnings per share:
Income (loss) from continuing operations .......... $ (2,476) $ 197 $ (9,687) $ 1,512
========== ========== ========== ==========
Denominator:
Denominator for basic earnings per share-
Weighted-average common shares outstanding ........ 46,654 40,541 44,953 37,960
Effect of dilutive securities:
Employee stock options ............................ -- 390 -- 282
Warrants .......................................... -- 1,143 -- 1,094
---------- ---------- ---------- ----------
Dilutive potential common shares ...................... -- 1,533 -- 1,376
---------- ---------- ---------- ----------
Denominator for diluted earnings per share-
Adjusted weighted-average
shares and assumed conversion .................... 46,654 42,074 44,953 39,336
========== ========== ========== ==========
Basic and diluted earnings (loss) per share from
continuing operations ............................. $ (0.05) $ 0.00 $ (0.22) $ 0.04
========== ========== ========== ==========
</TABLE>
(10) Income Tax Provision
For the three and nine months ended September 30, 2000, the Company had a
loss from continuing operations before income taxes of $2.6 million and
$11.8 million, respectively, and an income tax benefit of $160,000 and $2.2
million, respectively. The resulting effective tax rates for the three and
nine-month periods were 6% and 18%, respectively. For the three and nine
months ended September 30, 1999, the Company had income from continuing
operations before income taxes of $638,000 and $4.4 million, respectively,
and an income tax provision of $441,000 and $2.9 million, respectively.
The effective tax rates for the three and nine months were 69% and 65%,
respectively. The effective tax rates are due to non-deductible items such
as goodwill amortization as compared to the relative amount of pretax
earnings or loss.
(11) 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 $15.8 million for 5.6 million
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 approximately 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.
Page 10
<PAGE> 11
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 September 30, 2000, the cost, fair value and gross unrealized holding
loss amounted to $15.8 million, $7.4 million and $8.4 million respectively,
based on a quoted market price of $1.31 per share. At November 7, 2000, the
fair value of the investment securities available-for-sale was $7.6 million
based on a quoted market price of $1.34 per share. A decline in the market
value of any available-for-sale security below cost that is deemed to be
other than temporary results in a reduction in the carrying amount to fair
value. The impairment is charged to earnings and a new cost basis for the
security is established. At this time, management of the Company does not
believe the decline in the market value is other than temporary.
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 September 30, 2000 would have been
$12.2 million and the equity in loss of HTE for the three and nine months
ended September 30, 2000 would have been $392,000 and $2.2 million,
respectively. Also, during the three months ended September 30, 1999, the
Company previously used the equity method and recorded an equity in loss of
HTE of $378,000 ($0.01 per diluted share). This charge has been
retroactively restated and eliminated in the accompanying condensed
consolidated financial statements for the three and nine months ended
September 30, 1999 to reflect the aforementioned factors.
(12) Long-term Obligations
The Company has a credit facility with a syndicated group of banks which
had an original maturity date of October 1, 2002 and an original credit
line of $80 million. The credit facility contains covenants that limit,
among other items, the level of the Company's funded debt and require
certain earnings before interest, taxes, depreciation and amortization and
debt ratio levels. At September 30, 2000, the Company was fully in
compliance with the covenants under the amended credit facility. As of
September 30, 2000, the available credit under the Company's credit
facility was $64.0 million, of which $60.3 million was outstanding.
In connection with an amendment to the credit facility dated August 14,
2000, the Company paid additional bank fees of $300,000 in August 2000, and
will pay $300,000 on January 1, 2001 and $400,000 on July 1, 2001. The
amended credit facility provides for interest at the lead bank's prime rate
plus a margin of 2% as of August 1, 2000, increasing to 3% as of January 1,
2001, 3 1/2% as of April 1, 2001 and 4% as of July 1, 2001. As a result of
the August amendment to the credit facility, the repayment of borrowings
were accelerated. Accordingly, a $1.2 million charge was recorded in the
third quarter of 2000 pursuant to Emerging Issues Task Force ("EITF")
98-14 "Accounting for Changes in Line-of-Credit or Revolving-Debt
Arrangements" to accelerate the amortization of previously capitalized
loan costs.
Subsequent to September 30, 2000, the terms of the credit facility were
further amended to revise the timing of certain scheduled reductions to the
available credit line. The available credit will be reduced to $62.5
million on December 31, 2000 and to $53.5 million on January 15, 2001. The
available credit will be reduced by $1.5 million on the last day of each
month thereafter, until the entire credit facility matures on October 2,
2001. Accordingly, the Company classified $18.3 million of the outstanding
debt as a current liability in the accompanying condensed consolidated
balance sheet at September 30, 2000.
In consideration of the Company's current projected earnings and cash flow,
management believes the Company will meet or exceed the requirements under
the bank covenants for the one-year period as of and subsequent to
September 30, 2000. Management plans to reduce the outstanding balance of
the debt through a combination of cash generated from operations and from
sales of non-core assets. On September 29, 2000, the Company completed the
sale of certain non-core assets, including the sale and leaseback of a
building and related building improvements. Management of the Company has
identified for sale certain other non-core operating assets that are not
strategic to its future operations and has had a number of conversations
with potentially interested buyers. In addition, the Company is exploring
opportunities to raise additional capital through the sale of senior
subordinated notes with warrants. Although management believes it will be
successful in repaying the amounts due under the revised credit facility as
they become due, there can be no assurance that the Company will be
successful in its efforts to consummate any of the aforementioned strategic
alternatives.
Page 11
<PAGE> 12
(13) Comprehensive Income (Loss)
Statement of Financial Accounting Standards ("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 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 and nine months ended September
30, 2000, the Company had comprehensive loss of $2.6 million and $36.6
million, respectively, including a change in the unrealized loss of $26.3
million for the nine months ended September 30, 2000, associated with
unrealized loss on securities classified as available-for-sale. For the
three months ended September 30, 2000, there was no change in market value
from June 30, 2000 to September 30, 2000, therefore there was no change in
the unrealized loss on securities classified as available-for-sale. Total
comprehensive loss for the three months ended September 30, 1999 was $4.8
million, including an unrealized loss of $4.4 million associated with
securities classified as available-for-sale. Total comprehensive loss for
the nine months ended September 30, 1999 was $4.9 million, including an
unrealized loss of $4.4 million associated with securities classified as
available-for-sale.
(14) 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 profit (loss). The
Company defines segment operating profit (loss) 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.
Prior to the sale of assets as discussed in Note 2, the information and
property records services segment conducted 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 (in thousands):
<TABLE>
<CAPTION>
INFORMATION
SOFTWARE & PROPERTY
SYSTEMS RECORDS CONTINUING
2000 & SERVICES SERVICES OTHER OPERATIONS
--------------------------------------------- ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Revenues for the periods ended September 30:
Three months ...................................... $ 23,253 $ 11,123 $ -- $ 34,376
Nine months ....................................... $ 65,863 $ 33,145 $ -- $ 99,008
Segment operating profit (loss) for the periods ended
September 30:
Three months ...................................... $ 3,342 $ 1,494 $ (1,972) $ 2,864
Nine months ....................................... $ 5,503 $ 4,886 $ (6,232) $ 4,157
</TABLE>
Page 12
<PAGE> 13
<TABLE>
<CAPTION>
INFORMATION
SOFTWARE & PROPERTY
SYSTEMS RECORDS CONTINUING
1999 & SERVICES SERVICES OTHER OPERATIONS
-------------------------------------------- ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Revenues for the periods ended September 30:
Three months ...................................... $ 18,584 $ 8,954 $ -- $ 27,538
Nine months ....................................... $ 46,617 $ 27,003 $ -- $ 73,620
Segment operating profit (loss) for the periods ended
September 30:
Three months ...................................... $ 3,648 $ 2,067 $ (1,620) $ 4,095
Nine months ....................................... $ 10,253 $ 7,116 $ (5,129) $ 12,240
</TABLE>
<TABLE>
<CAPTION>
FOR THE PERIODS ENDED SEPTEMBER 30
THREE MONTHS NINE MONTHS
---------------------------- ----------------------------
RECONCILIATION OF REPORTABLE SEGMENT OPERATING
PROFIT TO THE COMPANY'S CONSOLIDATED TOTALS 2000 1999 2000 1999
---------------------------------------------- ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Total segment operating profit for
reportable segments ......................... $ 2,864 $ 4,095 $ 4,157 $ 12,240
Other income ..................................... 251 -- 251 --
Interest expense ................................. (3,546) (1,038) (7,442) (2,794)
Litigation defense costs ......................... -- -- (1,264) --
Goodwill and intangibles amortization ............ (2,205) (2,419) (7,550) (5,067)
------------ ------------ ------------ ------------
(Loss) income from continuing operations before
income tax (benefit) provision .............. $ (2,636) $ 638 $ (11,848) $ 4,379
============ ============ ============ ============
</TABLE>
(15) Equity Private Placement
In May 2000, the Company sold 3.3 million shares of common stock and
333,380 warrants pursuant to a private placement agreement with Sanders
Morris Harris Inc. for approximately $10.0 million in gross cash proceeds,
before deducting commissions and offering expenses of approximately
$730,000. Each warrant is convertible into one share of common stock at an
exercise price of $3.60 per share. The warrants expire in May 2005. The
common stock sold in this transaction is not registered and may only be
sold pursuant to Rule 144 of the Securities Act of 1933, generally after
being held for at least one year. The Company used the proceeds from the
offering for the development of its previously announced e-government
initiatives and for the development of its national data repository and
Internet portal for public information, NationsData.com.
(16) 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 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 13
<PAGE> 14
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 the Company's ability to reduce its debt through a combination
of cash generated from operations and sales of non-core assets, 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.
RECENT DEVELOPMENTS
On September 29, 2000, the Company sold for cash certain non-core assets
for an aggregate sale price of $14.4 million. The assets sold consisted of
certain net assets of two operating subsidiaries, the Company's interest in
a certain intangible work product, and the sale and leaseback of a building
and related building improvements. The building that was sold is the
headquarters for the Company's corporate employees and those of an
operating company, and it has been leased back by the Company for a period
of ten years at an annual rental amount of $720,000.
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 broad array of products for city and county government
operations from law enforcement, to courts, financial systems, appraisal
and taxation, records management, and utility billing.
From 1998 through January 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 and the disposition of certain non-core assets referred to in
"Recent Developments", the Company has also provided pro forma amounts in
the following analysis of results of operations as if all of the Company's
acquisitions and the disposition of certain non-core assets had occurred as
of the beginning of 1999.
Page 14
<PAGE> 15
ANALYSIS OF RESULTS OF OPERATIONS
REVENUES
For the three and nine months ended September 30, 2000, the Company had
revenues from continuing operations of $34.4 million and $99.0 million,
respectively, compared to $27.5 million and $73.6 million for the three and
nine months ended September 30, 1999, respectively. On a pro forma basis,
total revenues for the three and nine months ended September 30, 1999 were
$33.4 million, and $101.4 million, respectively, compared to $32.1 million
and $92.2 million for the three and nine months ended September 30, 2000.
Management believes the decline in revenues on a pro forma basis was
primarily because of Year 2000 ("Y2K") related factors. Local governments
appear to have reduced spending for software applications and systems for a
variety of reasons, including anticipation of Y2K problems and delaying new
systems projects while they recover from their intensive efforts to become
Y2K compliant in the prior year. Many customers and potential customers
appeared to have instituted Y2K "lockdowns" and did not install new systems
in the first half of 2000. Additionally, the 1999 pro forma revenues
benefited somewhat from accelerated Y2K compliance related sales. Sales
volume for the three months ended September 30, 2000 appears to be
rebounding somewhat although not back to 1999's record levels.
Pro forma software license revenue for the three months ended September 30,
2000 declined $1.3 million from $6.7 million in the prior year period. For
the nine months ended September 30, 2000, pro forma revenues from software
licenses decreased $6.1 million from $19.4 million in the comparable prior
year. Pro forma software license revenue comparisons were negatively
impacted by the Y2K factors described above.
For the three months ended September 30, 2000, professional service revenue
on a pro forma basis was $16.1 million compared to $16.4 million in the
prior year period. Pro forma professional services revenue for the nine
months ended September 30, 2000 declined $1.9 million from $51.3 compared
to the prior year period. Professional services are often sold in tandem
with software license products and are therefore negatively impacted by
declining software license sales volume.
Professional service revenue for the nine months ended September 30, 2000
includes approximately $5.9 million relating to the following three large
contracts: (1) Cook County, Recorder of Deeds in Chicago ("Cook County"),
(2) the Department of the Illinois Secretary of State's office ("State of
Illinois") and (3) Nassau County, New York Board of Assessors ("Nassau
County"). Professional service revenue included in the three months ended
September 30, 2000 relating to these three contracts was approximately $2.8
million. The Cook County contract, which was valued at approximately $4.5
million, was substantially complete as of June 2000. The State of Illinois
contract to install and manage a new digital imaging system and perform
related services, including technology updates, back records conversion,
digital microfilm productions and process workflow implementation, for all
divisions of the Business Services Department, is valued at approximately
$5.3 million. Installation of the State of Illinois contract began in May
2000 and the majority of this revenue is expected to be earned by early
2001. The Nassau County contract to reassess all residential and commercial
properties in Nassau County and provide assessment administration software
and training to help maintain equity and manage the property tax process is
valued at $34 million. Implementation of the Nassau County contract began
in September 2000 and is expected to be completed late 2002.
For the three months ended September 30, 2000, pro forma maintenance
revenue increased 18%, or $1.3 million, compared to $7.1 million for the
same period in 1999. Year-to-date pro forma maintenance revenue has
increased 17%, or $3.5 million, compared to $20.9 million for the nine
months ended September 30, 1999. Maintenance revenue increases are due to a
larger 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 software and
hardware. The renewal rates for real estate appraisal system maintenance
agreements is not as high as other software and hardware maintenance
agreements and will vary somewhat from period to period. Excluding real
estate maintenance agreements, pro forma maintenance revenue increased
approximately 20% and 28% for the three and nine months ended September 30,
2000, respectively, compared to the comparable prior year periods. As a
percent of revenue, total maintenance revenue on a pro forma basis was
approximately 26% for the three and nine months ended September 30, 2000,
compared to approximately 21% for both the three and nine months ended
September 30, 1999.
For the three and nine months ended September 30, 2000, pro forma hardware
and other revenues declined $1.0 million and $4.7 million, respectively,
from $3.2 million and $9.8 million for the three and nine months ended
September 30, 1999, respectively. Pro forma hardware revenue is down from
prior year periods mainly due to the Y2K related factors described above
and Company efforts to focus sales on higher margin products and services.
Page 15
<PAGE> 16
For the remainder of 2000, the Company anticipates slower revenue growth
compared to 1999 as a result of the Y2K-related slowdown in new orders and
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 customer base, as well as the broader local
government market.
COST OF REVENUES
For the three and nine months ended September 30, 2000, cost of revenues
from continuing operations were $20.2 million and $59.9 million,
respectively, compared to $14.4 million and $38.4 million for the three and
nine months ended September 30, 1999, respectively. On a pro forma basis,
total cost of revenues for the three months ended September 30, 1999 was
$18.9 million compared to $19.1 million for the three months ended
September 30, 2000. For the nine months ended September 30, 1999, pro forma
cost of revenues was $58.8 million compared to $56.5 million for the nine
months ended September 30, 2000.
The cost of revenues decline is primarily due to lower revenues. Cost of
revenues in 2000 includes subcontracting expenses for the Cook County
contract, higher head count as a result of prior year sales volume
increases and salary adjustments. Personnel cost, which in the short term
is somewhat fixed in nature, is the largest component of cost of revenues,
and contributed to a lower gross margin for the three and nine months ended
September 30, 2000. A product mix that included less software license
revenue in 2000 compared to 1999 was another negative factor impacting the
gross margin. The gross margin decline was offset slightly by more
capitalized labor costs in 2000 for internally developed software projects.
On a pro forma basis, the overall gross margin was 41% and 39% for the
three and nine months ended September 30, 2000, compared to 43% and 42% for
the three and nine months ended September 30, 1999, respectively.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
Selling, general and administrative expenses for the three and nine months
ended September 30, 2000, were $11.3 million and $34.9 million,
respectively, compared to $9.1 million and $23.0 million in the comparable
prior year periods. On a pro forma basis, selling, general and
administrative expenses as a percent of revenues was 33% and 30% for the
three months ended September 30, 2000 and 1999, respectively. For the nine
months ended September 30, 2000, pro forma selling, general and
administrative expense as a percent of revenue was 36% compared to 30% for
the nine months ended September 30, 1999. Lower sales volume combined with
increased travel expense, costs associated with consolidating certain
finance and administrative functions and higher personnel costs negatively
impacted selling, general and administrative expense comparisons. For the
three and nine months ended September 30, 2000, selling, general and
administrative expenses included approximately $1.7 million and $4.4
million, respectively, of 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 employment 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 $1.3 million for the nine
months ended September 30, 2000, respectively, which is included in
litigation defense costs in the accompanying consolidated condensed
financial statements. 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 is amortized using
the straight-line method of amortization over their respective useful lives
beginning when a company is first acquired. Amortization expense increased
for the three and nine months ended September 30, 2000 compared to the same
periods of 1999 due to inclusion of goodwill and other intangible
amortization for companies acquired after September 30, 1999. Amortization
expense periodically includes adjustments resulting from finalization of
preliminary purchase price allocations relating to such acquisitions.
Page 16
<PAGE> 17
INTEREST EXPENSE
Interest expense increased substantially for the three and nine months ended
September 30, 2000 compared to the same periods in 1999. The senior credit
facility was amended in August 2000 and included accelerating repayment of
borrowings under the facility. Accordingly, a $1.2 million charge was recorded
in the third quarter of 2000 pursuant to EITF 98-14 "Accounting for Changes in
Line-of-Credit or Revolving-Debt Arrangements" to accelerate the amortization of
previously capitalized loan costs. Higher debt levels to finance acquisitions
and their related transaction costs and capital expenditures including
construction of the Database have also resulted in higher interest expense. In
connection with construction of the Database and certain internally developed
software projects, the Company capitalized $190,000 and $518,000 of interest
costs in the three and nine months ended September 30, 2000. In addition to
higher debt levels, the average effective interest rate for the three and nine
months ended September 30, 2000, was 10.8% and 9.8%, respectively, compared to
7.6% and 7.3% for the same periods in 1999.
INCOME TAX PROVISION
In the three months ended September 30, 2000, the Company had a loss from
continuing operations before income taxes of $2.6 million and an income tax
benefit of $160,000 resulting in an effective tax rate of 6%. For the nine
months ending September 30, 2000, the Company had a loss from continuing
operations before income taxes of $11.8 million and an income tax benefit
of $2.2 million, resulting in an effective tax rate of 18%. These effective
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
$82,000 and $569,000 for the three and nine months ended September 30,
2000, respectively compared to net losses of $602,000 and $1.9 million for
the three and nine months ended September 30, 1999. 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 September 30, 2000, TPI and Swan together
recorded a charge of $82,000 for trial and related costs, net of taxes of
$44,000. For the nine months ended September 30, 2000, these charges
totaled $569,000, net of taxes of $307,000.
The Company estimated the loss on the disposal of Forest City to be $8.9
million, 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 $2.6 million and $10.3 million for the three and nine months
ended September 30, 2000, respectively, compared to net loss of $405,000
and $435,000 for the three and nine months ended September 30, 1999. Net
loss from continuing operations was $2.5 million and $9.7 million for the
three and nine months ended September 30, 2000 compared to net income of
$197,000 and $1.5 million for the three and nine months ended September 30,
1999, respectively. For the three and nine months ended September 30, 2000,
diluted loss per share from continuing operations was $0.05 and $0.22,
respectively, compared to diluted earnings per share from continuing
operations of $0.00 and $0.04 for the three and nine months ended September
30, 1999, respectively.
Earnings before interest, taxes, depreciation and amortization ("EBITDA")
from continuing operations for the three and nine months ended September
30, 2000, respectively, was $4.7 million and $9.4 million compared to $5.0
million and $14.8 million for the comparable prior year periods. 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
Page 17
<PAGE> 18
manner, this measure may not be comparable to similarly titled measures
reported by other companies. Cash flows used by operating activities for
the nine months ended September 30, 2000 were $4.3 million, compared to
cash flows provided by operating activities of $1.3 million for the nine
months ended September 30, 1999.
FINANCIAL CONDITION AND LIQUIDITY
The Company has a credit facility with a syndicated group of banks which
had an original maturity date of October 1, 2002 and an original credit
line of $80 million. The credit facility contains covenants that limit,
among other items, the level of the Company's funded debt and require
certain earnings before interest, taxes, depreciation and amortization and
debt ratio levels. At September 30, 2000, the Company was fully in
compliance with the covenants under the amended credit facility. As of
September 30, 2000, the available credit under the Company's credit
facility was $64.0 million, of which $60.3 million was outstanding.
In connection with an amendment to the credit facility dated August 14,
2000, the Company paid additional bank fees of $300,000 in August 2000, and
will pay $300,000 on January 1, 2001 and $400,000 on July 1, 2001. The
amended credit facility provides for interest at the lead bank's prime rate
plus a margin of 2% as of August 1, 2000, increasing to 3% as of January 1,
2001, 3 1/2% as of April 1, 2001 and 4% as of July 1, 2001.
Subsequent to September 30, 2000, the terms of the credit facility were
further amended to revise the timing of certain scheduled reductions to the
available credit line. The available credit will be reduced to $62.5
million on December 31, 2000 and to $53.5 million on January 15, 2001. The
available credit will be reduced by $1.5 million on the last day of each
month thereafter, until the entire credit facility matures on October 2,
2001. Accordingly, the Company classified $18.3 million of the outstanding
debt as a current liability in the accompanying condensed consolidated
balance sheet at September 30, 2000.
For the three and nine months ended September 30, 2000, the effective
average interest rate for the borrowings was approximately 10.8% and 9.8%,
respectively. The credit facility is secured by substantially all of the
Company's real and personal property and by a pledge of the common stock of
present and future significant operating subsidiaries. The credit facility
is also guaranteed by such subsidiaries.
In consideration of the Company's current projected earnings and cash flow,
management believes the Company will meet or exceed the restrictive
covenants for the one-year period as of and subsequent to September 30,
2000. Management plans to reduce the outstanding balance of the debt
through a combination of cash generated from operations and sales of
non-core assets. Management of the Company has identified certain non-core
operating assets, which are not strategic to its future operations for sale
and have had a number of conversations with potentially interested buyers.
In addition, the Company is exploring opportunities to raise additional
capital through the sale of subordinated senior notes with warrants.
Although management believes it will be successful in repaying the amounts
payable under the revised credit facility when those amounts come due,
there can be no assurance that the Company will be successful in its
attempt to consummate any of the aforementioned strategic alternatives.
On September 29, 2000, the Company sold for cash certain non-core assets
for an aggregate sale price of $14.4 million. The assets sold consisted of
certain net assets of two operating subsidiaries, the Company's interest in
a certain intangible work product, and the sale and leaseback of a building
and related building improvements. The building that was sold is the
headquarters for the Company's corporate employees and those of an
operating company, and it has been leased back by the Company for a period
of ten years at an annual rental amount of $720,000. The net proceeds of
the sale were used to repay an existing obligation of one of the companies
sold and to reduce the Company's borrowings under its senior credit
facility.
For the nine months ended September 30, 2000, the Company made capital
expenditures of $10.3 million. These expenditures included $7.6 million
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 $190,000 and
$518,000 for the three and nine months ended September 30, 2000.
In January 2000, the Company acquired all of the outstanding common stock
of Capitol Commerce Reporter, Inc. ("CCR") for approximately $3.0 million
cash, $1.2 million in assumed debt and $2.8 million 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.
Page 18
<PAGE> 19
These expenditures were primarily funded by borrowings under the Company's
revolving credit facility.
In May 2000, the Company sold 3.3 million shares of common stock and
333,380 warrants pursuant to a private placement agreement with Sanders
Morris Harris Inc. for approximately $10.0 million in gross cash proceeds
before deducting commissions and offering expenses of approximately
$730,000. Each warrant is convertible into one share of common stock at an
exercise price of $3.60 per share. The warrants expire in May 2005. The
common stock sold in this transaction is not registered and may only be
sold pursuant to Rule 144 of the Securities Act of 1933, generally after
being held for at least one year. Tyler used the proceeds from the offering
for new product development, including the development of its previously
announced e-government initiatives and for the development of its national
data repository and Internet portal for public information,
NationsData.com.
On November 4, 1999 the Company acquired selected assets and assumed
selected liabilities of Cole-Layer-Trumble Company, a division of a
privately held company. A portion of the consideration consisted of
restricted shares of Tyler common stock and included a price protection on
the sale of the Company's common stock, which expires no later than
November 4, 2001. The price protection is equal to the difference between
the actual sale proceeds of the Tyler common stock and $6.25 on a per share
basis, but is limited to $2.8 million. The subsequent payment, if any, of
the contingent consideration will not change the recorded cost of the
acquisition.
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
4.7 Asset Purchase Agreement dated September 29,
2000, by and among Tyler Technologies, Inc.,
Kofile, Inc., Spectrum Data, Inc.,
eiSolutions, Inc., Kofile Acquisition
Corporation and Spectrum Data Acquisition
Corporation
4.8 Real Estate Purchase and Sale Agreement
dated September 29, 2000, by and among
Business Resources Corporation, Spectrum
Data, Inc. and William D. and Marilyn Oates
4.9 Lease Agreement between William D. Oates and
Marilyn Oates as Landlord and Government
Record Services, Inc. as Tenant
27 Financial Data Schedule
(b) There were no reports filed on Form 8-K during the third quarter of
2000.
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: November 14, 2000
Page 20
<PAGE> 21
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------ -----------
<S> <C>
4.7 Asset Purchase Agreement dated September 29, 2000, by
and among Tyler Technologies, Inc., Kofile, Inc.,
Spectrum Data, Inc., eiSolutions, Inc., Kofile
Acquisition Corporation and Spectrum Data Acquisition
Corporation
4.8 Real Estate Purchase and Sale Agreement dated
September 29, 2000, by and among Business Resources
Corporation, Spectrum Data, Inc. and William D. and
Marilyn Oates
4.9 Lease Agreement between William D. Oates and Marilyn
Oates as Landlord and Government Record Services,
Inc. as Tenant
27 Financial Data Schedule
</TABLE>
