TYLER TECHNOLOGIES INC - 10-Q Quarterly Report

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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-Q

(x) QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934.

For the quarterly period ended June 30, 2002

OR

( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934.

Commission File Number 1-10485

TYLER TECHNOLOGIES, INC.
(Exact name of registrant as specified in its charter)

DELAWARE 75-2303920
(State or other jurisdiction of (I.R.S. employer
incorporation or organization) identification no.)

5949 SHERRY LANE, SUITE 1400
DALLAS, TEXAS
75225
(Address of principal executive offices)
(Zip code)

(214) 547-4000
(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 August 2, 2002:
47,706,733

TYLER TECHNOLOGIES, INC.

INDEX

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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)

See accompanying notes.

3

TYLER TECHNOLOGIES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share amounts)
(Unaudited)

See accompanying notes.

4

TYLER TECHNOLOGIES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)

See accompanying notes.

5

Tyler Technologies, Inc.
Notes to Condensed Consolidated Financial Statements
(Unaudited)
(Tables in thousands, except per share data)

(1) Basis of Presentation

We prepared the accompanying condensed consolidated financial statements
following the requirements of the Securities and Exchange Commission and
GAAP (accounting principles generally accepted in the United States) for
interim reporting. As permitted under those rules, certain footnotes or
other financial information that are normally required by GAAP can be
condensed or omitted for interim periods. Balance sheet amounts are as of
June 30, 2002 and December 31, 2001 and operating result amounts are for the
three and six months ended June 30, 2002 and 2001 and include all normal and
recurring adjustments that we considered necessary for the fair summarized
presentation of our financial position and operating results. As these are
condensed financial statements, one should also read the financial
statements and notes included in our latest Form 10-K for the year ended
December 31, 2001. Revenues, expenses, assets and liabilities can vary
during each quarter of the year. Therefore, the results and trends in these
interim financial statements may not be the same as those for the full year.

Although we have a number of operating subsidiaries, separate segment data
has not been presented as they meet the criteria set forth in SFAS
(Statement of Financial Accounting Standards) No. 131, "Disclosures About
Segments of an Enterprise and Related Information" to be presented as one
segment.

(2) Discontinued Operations

Discontinued operations include the operating results of the information and
property records services segment in which our Board of Directors approved a
formal plan of disposal in December 2000. Discontinued operations also
include the results of two non-operating subsidiaries relating to a formerly
owned subsidiary that we sold in December 1995. The business units within
the information and property records services segment were sold in 2000 and
2001. One of the business units previously included in the information and
property records services segment was sold in May 2001 for $575,000 cash,
approximately 60,000 shares of Tyler stock, a promissory note of $750,000 at
9% interest and other contingent consideration. In 2002, the buyer of this
business unit requested to renegotiate the $750,000 promissory note and the
contingent consideration. As a result of this renegotiation in March 2002,
we received additional cash of approximately $800,000 and a subordinated
note receivable amounting to $200,000, to fully settle the promissory note
and other contingent consideration in connection with this previous sale.
The subordinated note is payable in 16 equal quarterly principal payments
with interest at a rate of 6%. Because the subordinated note receivable is
highly dependent upon future operations of the buyer, we are recording its
value when the cash is received which is our historical practice. During the
three months ended June 30, 2002, we received payments of $15,000 on the
note. Since the original $750,000 promissory note was not credited to income
when the note was initially received, the cash proceeds from the accelerated
promissory note repayment resulted in a gain on the disposal of discontinued
operations, net of income taxes. However, this net gain was offset in the
first quarter of 2002 due to a similar increase in the loss reserve. This
increase can be attributed to the inherent uncertainties associated with the
value of the remaining assets of our discontinued businesses and the
ultimate settlement obligations of the outstanding liabilities including
facility lease obligations and the bankruptcy filing of Swan Transportation
Company (See Note 3 - Commitments and Contingencies). In our opinion and
based upon information available at this time, no material adverse
adjustment is anticipated to this loss reserve and we believe the loss
reserve remains adequate.

Two of our non-operating subsidiaries are involved in various claims for
work-related injuries and physical conditions relating to a formerly-owned
subsidiary that we sold in 1995. For the three and six months ended June 30,
2001, we expensed and included in discontinued operations $1,000 (net of
taxes of $-0-) and $15,000 (net of taxes of $8,000), respectively, for trial
and related costs (See Note 3 - Commitments and Contingencies).

(3) Commitments and Contingencies

One of our non-operating subsidiaries, Swan Transportation Company (Swan),
has been and is currently involved in various claims raised by hundreds of
former employees of a foundry that was once owned by an affiliate of Swan
and Tyler. These claims are for alleged work related injuries and physical
conditions resulting from alleged exposure to silica, asbestos, and/or
related industrial dusts during their employment at the foundry. We sold the
operating assets of the foundry on December 1, 1995. As a non-operating
subsidiary of Tyler, the assets of Swan consist primarily of various
insurance policies issued to Swan during the relevant time periods and
restricted cash of $2.2 million at June 30, 2002. Swan has tendered the
defense and indemnity

6

obligations arising from these claims to its insurance carriers, who have
entered into settlement agreements with approximately 275 of the plaintiffs,
each of whom agreed to release Swan, Tyler, and its subsidiaries and
affiliates from all such claims in exchange for payments made by the
insurance carriers.

On December 20, 2001, Swan filed a petition under Chapter 11 of the U.S.
Bankruptcy Code in the United States Bankruptcy Court for the District of
Delaware. The bankruptcy filing by Swan was the result of extensive
negotiations between Tyler, Swan, their respective insurance carriers, and
an ad hoc committee of plaintiff attorneys representing substantially all of
the then known plaintiffs. Swan filed its plan of reorganization in February
2002. The principal features of the plan of reorganization include: (a) the
creation of a trust, which is to be funded principally by fifteen insurance
carriers pursuant to certain settlement agreements executed pre-petition
between Swan, Tyler, and such carriers; (b) the implementation of a claims
resolution procedure pursuant to which all present and future claimants may
assert claims against such trust for alleged injuries; (c) the issuance of
certain injunctions under the federal bankruptcy laws requiring any such
claims to be asserted against the trust and barring such claims from being
asserted, either now or in the future, against Swan, Tyler, all of Tyler's
affected affiliates, and the insurers participating in the funding of the
trust; and (d) the full and final release of each of Swan, Tyler, all of
Tyler's affected affiliates, and the insurers participating in the funding
of the trust from any and all claims associated with the once-owned foundry
by all claimants that assert a claim against, and receive compensation from,
the trust. In order to receive the foregoing benefits, we have agreed, among
other things, to make certain cash contributions to the trust, the amount of
which is not expected to be in excess of the settlement liability previously
recorded by Tyler in its condensed consolidated financial statements.

We anticipate the creditors of Swan will vote on Swan's plan of
reorganization during the fourth quarter of 2002. Tyler anticipates the
plan, as currently contemplated will be approved by Swan's creditors because
the material terms of the plan of reorganization have been pre-negotiated
between the various affected parties. After the creditors approve the plan
it will be presented to the bankruptcy court for final approval. If the plan
of reorganization as currently contemplated is approved, we anticipate that
all of the liabilities associated with the foundry formerly owned by our
affiliates will be eliminated at an amount no greater than the liability
reflected in the condensed consolidated financial statements. There can be
no assurance that the creditors of Swan will approve the plan of
reorganization as currently contemplated, and if approved by such creditors,
will be approved in such form by the bankruptcy court, if at all. Because of
the inherent uncertainties, it is reasonably possible that the amounts
recorded as liabilities for Swan related matters could change in the near
term by amounts that would be material to the condensed consolidated
financial statements.

See Note 6 - Investment Securities Available for Sale, for discussion of
litigation in connection with HTE's attempted cash redemption of all shares
of HTE common stock currently owned by Tyler.

(4) Earnings Per Share

The following table details the computation of basic and diluted earnings
(loss) per share:

7

Due to our loss from continuing operations for the six months ended June 30,
2001, we did not adjust the denominator for potentially dilutive securities
because they would have been antidilutive, or made the loss per share
smaller.

(5) Income Tax Provision

We had an effective income tax rate of 39% for the three and six months
ended June 30, 2002. For the three months ended June 30, 2001, we had an
effective income tax rate of 50%. For the six months ended June 30, 2001, we
had a loss from continuing operations before income taxes of $112,000 and an
income tax provision of $30,000. The effective income tax rates are
estimated based on projected pre-tax income for the entire fiscal year and
the resulting amount of income taxes. The effective income tax rates for the
periods presented were different from the statutory United States Federal
income tax rate of 35% primarily due to state income taxes, non-deductible
meals and entertainment costs, and in periods prior to January 1, 2002,
non-deductible goodwill amortization expensed for financial reporting
purposes.

(6) Investment Securities Available-for-Sale

Pursuant to an agreement with two major shareholders of H.T.E., Inc. (HTE),
we acquired approximately 32% of HTE's common stock in two separate
transactions in 1999. On August 17, 1999, we exchanged 2.3 million shares of
our common stock for 4.7 million shares of HTE common stock. This initial
investment in HTE common stock was recorded at $14.0 million. The second
transaction occurred on December 21, 1999, in which we exchanged 484,000
shares of our common stock for 969,000 shares of HTE common stock. The
additional investment was recorded at $1.8 million. The investment in HTE
common stock is classified as a non-current asset because we made the
investment for a continuing business purpose.

Florida state corporation law restricts the voting rights of "control
shares", as defined, acquired by a third party in certain types of
acquisitions. These restrictions may be removed by a vote of the
shareholders of HTE. The courts have not interpreted the Florida "control
share" statute. HTE has taken the position that, under the Florida statute,
all of the shares acquired by us constitute "control shares" and therefore
do not have voting rights until such time as shareholders of HTE, other than
Tyler, restore voting rights to those shares. We believe only the shares
acquired in excess of 20% of the outstanding shares of HTE constitute
"control shares". Therefore, we believe we currently have the right to vote
all HTE shares we own up to at least 20% of the outstanding shares of HTE.
On November 16, 2000, the shareholders of HTE, other than Tyler, voted to
deny Tyler its right to vote the "control shares" of HTE.

On October 29, 2001, HTE notified us that it had attempted a cash redemption
of all 5.6 million shares of HTE common stock currently owned by us at price
of $1.30 per share. We believe that the attempted redemption of our HTE
shares was invalid and we take exception to the manner in which fair value
was calculated. Management of HTE contends that its ability to redeem the
HTE shares of common stock owned by us and the manner of calculation of fair
value by HTE is in accordance with Florida state statutes for "control
shares." On October 29, 2001, we notified HTE that its purported redemption
of our HTE shares was invalid and contrary to Florida law, and in any event,
the calculation by HTE of fair value for such shares was incorrect. On
October 30, 2001, HTE filed a complaint in a civil court in Seminole County,
Florida requesting the court to enter a declaratory judgment declaring HTE's
purported redemption of all of our HTE shares at a redemption price of $1.30
per share was lawful and to effect the redemption and cancel our HTE shares.
We removed the case to the United States District Court, Middle District of
Florida, Orlando Division, and requested a declaratory judgment from the
court declaring, among other things, (a) that HTE's purported redemption of
any or all of our shares was illegal under Florida law, (b) in the
alternative, that HTE's right of redemption, if any, under Florida law only
applies to the "control shares" owned by us (i.e., those shares in excess of
20% of the issued and outstanding shares of common stock of HTE as of the
date that we acquired such shares), (c) in the alternative, that HTE's
calculation of fair value for the redemption of any or all of our HTE shares
was grossly understated, and (d) that we maintain the ability to vote up to
20% of the issued and outstanding shares of HTE common stock owned by us.
Although we believe that the attempted stock redemption by HTE is invalid,
there can be no assurance that the court will rule in our favor. HTE
subsequently amended its complaint alleging that we tortiously interfered
with the severance agreements of the major shareholders of HTE and
tortiously interfered with the advantageous business relationship between
such shareholders and HTE. HTE has alleged that our ownership of 5.6 million
shares "damaged" HTE. Based on the advice of legal counsel, we believe this
claim has no merit.

We account for our investment in HTE pursuant to the provisions of SFAS No.
115, "Accounting for Certain Investments in Debt and Equity Securities".
These securities are classified as available-for-sale and are recorded at
fair value as determined by quoted market prices for HTE common stock.
Unrealized holding gains and losses, net of the related tax effect, are
excluded from earnings and are reported as a separate component of
shareholders' equity until the securities are sold. Realized gains and
losses

8

from the sale of available-for-sale securities are determined on a specific
identification basis. A decline in the market value of any
available-for-sale security below cost that we consider to be other than
temporary results in a reduction in the cost basis to fair value. The
impairment is charged to earnings and a new cost basis for the security is
established.

The cost, fair value and gross unrealized holding gains (losses) of the
investment securities available-for-sale, based on the quoted market price
for HTE common stock (amounts in millions, except per share amounts) are
presented below. In accordance with SFAS No. 115, we used quoted market
price per share in calculating fair value to be used for financial reporting
purposes. SFAS No. 115 does not permit the adjustment of quoted market
prices in the determination of fair value and, accordingly, the ultimate
value we could realize because of our significant investment could vary
materially from the amount presented.

If the uncertainty regarding the "control shares" is resolved in our favor,
we will retroactively adopt the equity method of accounting for this
investment. Therefore, our results of operations and retained earnings for
periods beginning with the 1999 acquisition will be retroactively restated
to reflect our investment in HTE for all periods in which we held an
investment in the common stock of HTE. Under the equity method, the original
investment is recorded at cost and is adjusted periodically to recognize our
share of HTE's earnings or losses after the respective dates of acquisition.
Our investment in HTE would include the unamortized excess of our investment
over our equity in the net assets of HTE through December 31, 2001.
Effective January 1, 2002, under the newly adopted provisions of SFAS No.
142, the excess investment over our equity in the net assets would no longer
be amortized if it consisted of goodwill. Had our investment in HTE been
accounted for under the equity method, our investment at June 30, 2002 would
have been $12.6 million and the equity in income of HTE for the three and
six months ended June 30, 2002 would have been $509,000 and $1.1 million,
respectively. At June 30, 2001, our investment would have been $11.5 million
and our equity in loss of HTE for the three and six months ended June 30,
2001 would have been $3,000 and $516,000, respectively.

(7) Comprehensive Income

The components of comprehensive income are as follows:

(8) Goodwill and Intangible Assets

In July 2001, the Financial Accounting Standards Board (FASB) issued SFAS
No. 141, "Business Combinations", and SFAS No. 142, "Goodwill and Other
Intangible Assets". SFAS No. 141 requires that all business combinations be
accounted for under the purchase method only and that certain acquired
intangible assets in a business combination be recognized as assets apart
from goodwill. SFAS No. 142 requires that ratable amortization of goodwill
be discontinued and replaced with periodic tests of the goodwill's
impairment and that intangible assets other than goodwill be amortized over
their useful lives. The intangible asset impairment test which compares the
fair values of our reporting units to their respective carrying values, was
completed during the three months ended June 30, 2002. No impairments were
recognized as a result of this test. SFAS No. 141 is effective for all
business combinations initiated after June 30, 2001 and for all business
combinations accounted for by the purchase method for which the date of
acquisition is after June 30, 2001. We have adopted the provisions of SFAS
No. 141.

9

Under SFAS No. 142, assembled workforce, net of related deferred taxes, is
subsumed into goodwill upon the adoption of the Statement as of January 1,
2002. In periods prior to January 1, 2002, our effective income tax rate for
determining the quarterly income tax provision varied significantly because
of the significant amount of non-deductible goodwill in relation to the
estimated annual pre-tax income or loss. The adoption of SFAS No. 142, in
which goodwill is no longer amortized for financial reporting purposes, has
resulted in our ability to more accurately estimate our effective income tax
rate on an annual and on a quarterly basis. In determining the pro forma
operating results on a quarterly basis, as shown below, we used our pro
forma annual effective income tax rate as applied to our quarterly pro forma
pretax income or loss in computing our adjusted net income. If we had
accounted for goodwill (including workforce) under the non-amortization
approach of SFAS No. 142, our net income (loss) and related per share
amounts would have been as follows for the periods ended June 30, 2001:

The allocation of assets following our adoption of SFAS No. 142 is
summarized in the following table:

The changes in the carrying amount of goodwill for the six months ended June
30, 2002 are as follows:

Balance as of December 31, 2001 ........................................... $ 43,292

Goodwill adjustments during the first quarter
relating to workforce, net of deferred taxes of
$377, being subsumed into goodwill upon the adoption
of SFAS No. 142 on January 1, 2002 ..................................... 3,006
------------

Balance as of June 30, 2002 ............................................... $ 46,298
============

Estimated annual amortization expense relating to acquisition intangibles is
as follows:

10

(9) New Accounting Standards

In June 2001, the FASB issued SFAS No. 143, "Accounting for Asset Retirement
Obligations". SFAS No. 143 requires that the fair value of the liability for
an asset retirement obligation be recognized in the period in which it is
incurred if a reasonable estimate of fair value can be made. The associated
asset retirement costs are capitalized as part of the carrying amount of the
long-lived asset. SFAS No. 143 is effective for fiscal years beginning after
June 15, 2002. We are currently evaluating the requirements and impact of
the Statement, but its adoption is not expected to have a material impact on
our results of operations and financial position.

In August 2001, the FASB issued SFAS No. 144, "Accounting for the Impairment
or Disposal of Long-Lived Assets." SFAS No. 144 addresses financial
accounting and reporting for the impairment of long-lived assets and for
long-lived assets to be disposed of. Under SFAS No. 144, an impairment loss
is recognized only if the carrying amount of a long-lived asset to be held
and used is not recoverable from its undiscounted cash flows and the loss is
measured as the difference between the carrying amount and the fair value of
the asset. Long-lived assets to be disposed of by sale are to be measured at
the lower of their carrying amount or fair value, less cost to sell, and
depreciation related to such long-lived assets is required to be
discontinued.

In addition, SFAS No. 144 retains the basic provisions of APB Opinion No. 30
for the presentation of discontinued operations in the income statement but
broadens that presentation to include a component of an entity rather than a
segment of a business. The provisions of this Statement are effective for
financial statements issued for fiscal years beginning after December 15,
2001, and interim periods within those fiscal years, with early application
encouraged. The provisions of this Statement generally are to be applied
prospectively. To the extent applicable, we adopted the provisions of this
Statement and it did not have a material effect on the determination of
carrying amounts for long-lived assets.

In April 2002, the FASB issued SFAS No. 145, "Rescission of FASB Statements
No. 4, 44 and 64, Amendment of FASB Statement No. 13, and Technical
Corrections". Among other items, this Statement no longer classifies in the
income statement the early extinguishment of debt as an extraordinary item.
We do not anticipate that this Statement will have a material impact on our
results of operations and financial position.

11

ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS

FORWARD-LOOKING STATEMENTS

The statements in this discussion that are not historical statements are
"forward-looking statements" within the meaning of the Private Securities
Litigation Reform Act of 1995. These forward-looking statements include
statements about our business, financial condition, business strategy, plans and
the objectives of our management, and future prospects. In addition, we have
made in the past and may make in the future other written or oral
forward-looking statements, including statements regarding future operating
performance, short- and long-term revenue and earnings growth, the timing of the
revenue and earnings impact for new contracts, backlog, the value of new
contract signings, business pipeline, and in industry growth rates and our
performance relative thereto. Any forward-looking statements may rely on a
number of assumptions concerning future events and be subject to a number of
uncertainties and other factors, many of which are outside our control that
could cause actual results to differ materially from such statements. These
include, but are not limited to: our ability to improve productivity and achieve
synergies from acquired businesses; technological risks associated with the
development of new products and the enhancement of existing products; changes in
the budgets and regulating environments of our government customers; competition
in the industry in which we conduct business and the impact of competition on
pricing, revenues and margins; with respect to customer contracts accounted for
under percentage-of-completion method of accounting, the performance of such
contracts in accordance with our cost and revenue estimates; our ability to
maintain health and other insurance coverage and capacity due to changes in the
insurance market and the impact of increasing insurance costs on the results of
operations; the costs to attract and retain qualified personnel, changes in
product demand, the availability of products, economic conditions, changes in
tax risks and other risks indicated in our filings with the Securities and
Exchange Commission. Except to the extent required by law, we are not obligated
to update or revise any forward-looking statements whether as a result of new
information, future events or otherwise. 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 Tyler or
our management are intended to identify forward-looking statements.

GENERAL

Tyler provides integrated software systems and related services for local
governments. We develop and market a broad line of software products and
services to address the information technology (IT) needs of cities, counties,
schools and other local government entities. We provide professional IT services
to our customers, including software and hardware installation, data conversion,
training and product modifications, along with continuing maintenance and
support for customers using our systems. We also provide property appraisal
outsourcing services for taxing jurisdictions.

CRITICAL ACCOUNTING POLICIES AND ESTIMATES

The discussion and analysis of our financial condition and results of operations
are based upon our condensed consolidated financial statements. These condensed
consolidated financial statements have been prepared following the requirements
of accounting principles generally accepted in the United States for interim
periods and require us to make estimates and judgments that affect the reported
amounts of assets, liabilities, revenues and expenses, and related disclosure of
contingent assets and liabilities. On an on-going basis, we evaluate our
estimates, including those related to investments, intangible assets, bad debts
and long-term service contracts, deferred income tax assets, reserve for
discontinued operations and contingencies and litigation. As these are condensed
financial statements one should also read our Form 10-K for the year ended
December 31, 2001, regarding expanded information about our critical accounting
policies and estimates.

12

ANALYSIS OF RESULTS OF OPERATIONS

The following table sets forth items from our unaudited condensed consolidated
statements of operations and the percentage change in the amounts between the
periods presented. The amounts shown in the table are in thousands, except the
per share data. Revenues and expenses can vary during each quarter of the year.
Therefore, the results and trends in these interim financial statements may not
be the same as those for the full year.

# Not meaningful

*EBITDA consists of income or loss from continuing operations
before interest, income taxes, depreciation, amortization and
recovery of acquisition costs previously expensed. EBITDA is not
calculated in accordance with GAAP, but we believe that it is
widely used as a measure of operating performance. EBITDA should
only be considered together with other measures of operating
performance such as operating income, cash flows from operating
activities, or any other measure for determining operating
performance or liquidity that is calculated in accordance with
GAAP. EBITDA is not necessarily an indication of amounts that may
be available for us to reinvest or for any other discretionary
uses.

13

REVENUES

The following table compares the components of revenue as a percent of total
revenues for the periods presented:

Software license revenues. Software license revenues increased $538,000, or 12%,
and $2.1 million, or 26%, for the three and six months ended June 30, 2002,
respectively, compared to the same periods last year. Sales of our financial and
city solutions products and real estate appraisal software provided the majority
of the increase. The financial and city solutions division provides software
products that automate accounting systems for cities, counties, school
districts, public utilities and not-for-profit organizations. The following
factors contributed to the software revenue increase:

* A portion of the software license revenue increase resulted from
geographical expansion, particularly in the Midwest United States. Over
the last year, we have added to the sales staff serving the Midwest and
increased our efforts to add new business in this region.

* In the last half of 2001, we released several upgraded/new financial
software products and such releases are ongoing.

Professional services revenues. For the three and six months ended June 30,
2002, professional services revenues increased $658,000 and $1.1 million, or 4%,
respectively, compared to the same periods last year, as a result of increased
software license activities and increased appraisal services revenue. Typically,
contracts for software include services such as installation of the software,
converting the customers' data to be compatible with the software and training
customer personnel to use the software. Also, during the second quarter of 2002,
we accelerated work on our appraisal contract for Lake County, Indiana, which
was first awarded in December 2001. We have contracted to provide professional
services and technology to reassess most of the real property in Lake County,
which is the second largest county in the state of Indiana with a population of
approximately 485,000. The total contract is worth approximately $15.9 million
and is expected to be completed by late 2003. Also included in professional
services revenue for the three and six months ended June 30, 2002, was $3.5
million and $6.0 million, respectively, of appraisal revenue related to our
contract with Nassau County, New York Board of Assessors. The contract with
Nassau County is expected to be complete by early 2003.

Maintenance revenues. Maintenance revenues for the quarter ended June 30, 2002,
increased $1.3 million, or 14%, compared to the prior year quarter. Maintenance
revenues for the six months ended June 30, 2002, increased $1.7 million, or 8%,
compared to the six months ended June 30, 2001. We provide maintenance and
support services for our software products, third party software and hardware.
The maintenance revenue increase was due to growth in our installed customer
base and slightly higher rates. During the first three months of 2001, we
received a one-time settlement of approximately $650,000 from a third party
provider of maintenance services relating to past services. Excluding this
settlement, maintenance revenue increased approximately 12% for the six months
ended June 30, 2002, compared to the same period last year.

Hardware and other revenues. For the three and six months ended June 30, 2002,
hardware revenues decreased $204,000 and $1.1 million, respectively, compared to
the same prior year periods. The change in hardware revenue is a result of the
timing of installations of equipment on customer contracts and is dependent on
the contract size and on varying customer hardware needs. We have de-emphasized
this aspect of our business in recent periods due to pressures on margins for
hardware. The six-month period in the prior year included revenue of
approximately $850,000, which related to hardware sold in connection with
sizable contracts with Nassau County and counties in the State of Hawaii.

14

COST OF REVENUES

Cost of software license revenues. For the three and six months ended June
30, 2002, cost of software license revenues increased $368,000, or 37%, and
$811,000, or 50%, respectively, compared to the prior year periods, due to
higher amortization expense of software development costs. In 2001, we had
several products in the development stage, which were released beginning in
the third quarter of 2001. Once a product is released, we begin to expense
the costs associated with the development over the estimated useful life of
the product. Development costs mainly consist of personnel costs, such as
salary and benefits paid to our developers.

Cost of professional service and maintenance revenues. Costs of professional
services and maintenance increased 2% and 3% for the three and six-month
periods, respectively, which is consistent with professional services and
maintenance revenue increases.

Cost of hardware and other revenues. Costs of hardware and other revenues
decreased $71,000 and $899,000, respectively, for the three and six month
periods, which is consistent with hardware and other revenue decreases.

GROSS MARGIN

For the three and six months ended June 30, 2002, our overall gross margin
increased to 35% from 33% and 32% for the same periods of 2001,
respectively. This increase is mainly due to higher software license sales
and maintenance revenues. Software license revenue has lower costs
associated with it than other revenues such as professional services and
hardware. In addition, utilization of our personnel that provide services
and support has improved, which has increased our overall gross margin.

SELLING, GENERAL AND ADMINISTRATIVE EXPENSES

Selling, general and administrative expenses, or SG&A, increased $974,000,
or 13%, and $1.4 million, or 9%, for the three and six months ended June 30,
2002, respectively. For the second quarter of 2002, SG&A as a percent of
revenue increased to 26% from 25% for the same prior year period. For the
six months ended June 30, 2002, SG&A as a percent of revenue increased to
27% from 26% for the same period of 2001. The increase in SG&A is related
primarily to higher costs related to sales commissions, costs related to
marketing our new Odyssey Case Management software system, such as additions
of marketing personnel and travel expenses, increases in health and other
insurance expenses, and HTE matters.

AMORTIZATION OF ACQUISITION INTANGIBLES

Prior year amortization expense included amortization of goodwill and
workforce. Effective January 1, 2002, we adopted SFAS No. 142, Goodwill and
Other Intangible Assets. As a result of adopting SFAS No. 142, we ceased
amortizing goodwill and workforce after December 31, 2001. Amortization
expense for goodwill and workforce charged to the statement of operations
for the three and six months ended June 30, 2001 was $894,000 and $1.8
million, respectively. The remaining amortization consists of those costs
allocated to our customer base and acquisition date software. See further
discussion of the effect of adopting SFAS No. 142 in Note 8 to our condensed
consolidated financial statements.

RECOVERY OF CERTAIN ACQUISITION COSTS PREVIOUSLY EXPENSED

In March 1999, we entered into a merger agreement in which we considered
acquiring all of the outstanding common stock of CPS Systems, Inc., or CPS.
Under the agreement, we provided CPS with bridge financing in the form of
notes secured by a second lien on substantially all of the assets of CPS. In
January 2000, CPS filed a voluntary petition for relief under Chapter 11 of
the United States Bankruptcy Code. In March 2000, the bankruptcy court
conducted a public auction of the assets of CPS. The aggregate bridge
financings and related accrued interest receivable and other costs amounting
to $1.9 million were expensed in the 1999 consolidated financial statements.
In 2001 we received cash of approximately $235,000 through CPS bankruptcy
proceedings in connection with the notes.

INTEREST EXPENSE (INCOME)

Our cash balances have increased significantly compared to the three and six
months ended June 30, 2001 due to cash generated from operations and the
proceeds from the sale of certain discontinued businesses. As a result, we
had net interest expense of $5,000 for the second quarter of 2002 compared
to $121,000 for the same period in 2001. For the six months ended June 30,
2002, we had interest income of $32,000, compared to interest expense of
$282,000 for the same prior year period. In addition, in the three and six
months ended June 30, 2002, we capitalized $71,000 and $140,000,
respectively, of interest costs related to capitalized software development
costs.

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INCOME TAX PROVISION

We had an effective income tax rate of 39% for the three and six months
ended June 30, 2002. For the three months ended June 30, 2001, we had an
effective income tax rate of 50%. For the six months ended June 30, 2001, we
had a loss from continuing operations before income taxes of $112,000 and an
income tax provision of $30,000. Our effective income tax rate exceeded the
federal statutory rate of 35% due primarily to the net effect of state
income taxes and items that are non-deductible for federal income tax
purposes.

DISCONTINUED OPERATIONS

Discontinued operations include the operating results of the information and
property records services segment in which our Board of Directors approved a
formal plan of disposal in December 2000. Discontinued operations also
include the results of two non-operating subsidiaries relating to a formerly
owned subsidiary that we sold in December 1995. The business units within
the information and property records services segment were sold in 2000 and
2001. One of the business units previously included in the information and
property records services segment was sold in May 2001 for $575,000 cash,
approximately 60,000 shares of Tyler stock, a promissory note of $750,000 at
9% interest and other contingent consideration. In 2002, the buyer of this
business unit requested to renegotiate the $750,000 promissory note and the
contingent consideration. As a result of this renegotiation in March 2002,
we received additional cash of approximately $800,000 and a subordinated
note receivable amounting to $200,000, to fully settle the promissory note
and other contingent consideration in connection with this previous sale.
The subordinated note is payable in 16 equal quarterly principal payments
with interest at a rate of 6%. Because the subordinated note receivable is
highly dependent upon future operations of the buyer, we are recording its
value when the cash is received which is our historical practice. During the
three months ended June 30, 2002, we received payments of $15,000 on the
note. Since the original $750,000 promissory note was not credited to income
when the note was initially received, the cash proceeds from the accelerated
promissory note repayment resulted in a gain on the disposal of discontinued
operations, net of income taxes. However, this net gain was offset in the
first quarter of 2002 due to a similar increase in the loss reserve. This
increase can be attributed to the inherent uncertainties associated with the
value of the remaining assets of our discontinued businesses and the
ultimate settlement obligations of the outstanding liabilities including
facility lease obligations and the bankruptcy filing of Swan Transportation
Company (See Note 3 - Commitments and Contingencies). In our opinion and
based upon information available at this time, no material adverse
adjustment is anticipated to this loss reserve and we believe the loss
reserve remains adequate.

Two of our non-operating subsidiaries are involved in various claims for
work-related injuries and physical conditions relating to a formerly-owned
subsidiary that we sold in 1995. For the three and six months ended June 30,
2001, we expensed and included in discontinued operations $1,000 (net of
taxes of $-0-) and $15,000 (net of taxes of $8,000), respectively, for trial
and related costs (See Note 3 - Commitments and Contingencies).

LIQUIDITY AND CAPITAL RESOURCES

On March 5, 2002, we entered into a new $10.0 million revolving credit
agreement with a bank, which matures January 1, 2005. Our borrowings are
limited to 80% of eligible accounts receivable and interest is charged at
either the prime rate or at the London Interbank Offered Rate plus a margin
of 3%. The credit agreement is secured by our personal property and the
common stock of our operating subsidiaries. The credit agreement is also
guaranteed by our operating subsidiaries. In addition, we must maintain
certain financial ratios and other financial conditions and cannot make
certain investments, advances, cash dividends or loans.

During the first six months of 2002, our bank issued letters of credit
totaling $3.3 million under our credit agreement to secure performance bonds
required by some of our customer contracts. Our borrowing base under the
credit agreement is limited by the amount of eligible receivables and was
reduced by the letters of credit at June 30, 2002. At June 30, 2002, we had
no outstanding bank borrowings under the credit agreement and had an
available borrowing base of $5.2 million.

At June 30, 2002, our capitalization consisted of $3.0 million of long-term
obligations (including the current portion of that debt) and $116.0 million
of shareholders' equity. Our total debt-to-capital ratio (total debt divided
by the sum of total shareholders' equity and total debt) was 3% at June 30,
2002.

During the first six months of 2002, we made capital expenditures of $5.0
million, including $3.6 million for software development costs. The other
expenditures related to computer equipment and expansions related to
internal growth. Capital expenditures were funded from cash generated from
operations.

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In March 2002, we received cash of approximately $800,000 and a $200,000
subordinated note receivable to fully settle an existing promissory note and
other contingent consideration in connection with the sale in May of 2001 of
a business unit previously included in the information and property records
services segment.

In June 2002, we sold the building of a business unit previously included in
the information and property records service segment. Net proceeds from the
sale totaled approximately $961,000.

During the six months ended June 30, 2002, we received $1.6 million from the
purchase of 478,000 treasury shares upon the exercise of stock options under
our employee stock option plan.

Absent acquisitions, we believe our current cash balances and expected
future cash flows from operations will be sufficient to meet our anticipated
cash needs for working capital, capital expenditures and other activities
through the next twelve months. If operating cash flows are not sufficient
to meet our needs, we may borrow under our credit agreement.

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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 6, of this document.

Item 4. Submission of Matters to a Vote of Security Holders

We held our annual meeting of stockholders on May 9, 2002. The results of
the matters voted on at the meeting are as follows:

(a) With respect to the election of directors, our shares were voted as
follows:

(b) With respect to amendments to our stock option plan to increase the
number of shares of our stock that may be issued under the stock
option plan from 5,500,000 shares to 6,500,000 shares. The votes
were as follows:

Item 6. Exhibits and Reports on Form 8-K

(a) Exhibits

None.

(b) Reports on Form 8-K

Item 3 of Part I and Items 2, 3, and 5 of Part II were not applicable and have
been omitted.

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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.

TYLER TECHNOLOGIES, INC.

Dated: August 5, 2002 By: /s/ Theodore L. Bathurst
-----------------------------------------
Theodore L. Bathurst Vice President and
Chief Financial Officer (principal financial
officer and an authorized signatory)

Dated: August 5, 2002 By: /s/ Terri L. Alford
-----------------------------------------
Terri L. Alford
Controller
(principal accounting officer and
an authorized signatory)

CERTIFICATION PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

In connection with the Quarterly Report of Tyler Technologies, Inc. (the
"Company") on Form 10-Q for the quarterly period ended June 30, 2002, as filed
with the Securities and Exchange Commission on the date hereof (the "Report"),
the undersigned, in the capacities and dates indicated below, hereby certify
pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002, that: (1) The Report fully complies with the
requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934;
and (2) The information contained in the Report fairly presents, in all
material respects, the financial condition and results of operations of the
Company.

Dated: August 5, 2002 By: /s/ JOHN M. YEAMAN
-----------------------------------------
John M. Yeaman
Chief Executive Officer

Dated: August 5, 2002 By: /s/ THEODORE L. BATHURST
-----------------------------------------
Theodore L. Bathurst
Vice President and Chief Financial Officer

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