Back to GetFilings.com
================================================================================
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
---------------
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES AND EXCHANGE ACT OF 1934
For the Fiscal Year Ended December 31, 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 (I.R.S. employer
of incorporation or identification no.)
organization)
5949 SHERRY LANE, SUITE 1400 75225
DALLAS, TEXAS (Zip code)
(Address of principal
executive offices)
Registrant's telephone number, including area code: (972) 713-3700
---------------
Securities registered pursuant to Section 12(b) of the Act:
NAME OF EACH EXCHANGE
TITLE OF EACH CLASS ON WHICH REGISTERED
- -------------------------------- -------------------------
COMMON STOCK, $0.01 PAR VALUE NEW YORK STOCK EXCHANGE
Securities registered pursuant to Section 12(g) of the Act:
NONE
---------------
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 [ ]
INDICATE BY CHECK MARK IF DISCLOSURE OF DELINQUENT FILERS PURSUANT TO ITEM
405 OF REGULATION S-K IS NOT CONTAINED HEREIN, AND WILL NOT BE CONTAINED, TO THE
BEST OF REGISTRANT'S KNOWLEDGE, IN DEFINITIVE PROXY OR INFORMATION STATEMENTS
INCORPORATED BY REFERENCE IN PART III OF THE FORM 10-K OR ANY AMENDMENT TO THIS
FORM 10-K. YES [X] NO [ ]
THE AGGREGATE MARKET VALUE OF THE VOTING STOCK HELD BY NON-AFFILIATES OF THE
REGISTRANT ON FEBRUARY 25, 2003 WAS $166,250,000.
THE NUMBER OF SHARES OF COMMON STOCK OF THE REGISTRANT OUTSTANDING ON
FEBRUARY 25, 2003 WAS 42,737,736.
DOCUMENTS INCORPORATED BY REFERENCE
CERTAIN INFORMATION REQUIRED BY PART III OF THIS ANNUAL REPORT IS
INCORPORATED BY REFERENCE FROM THE REGISTRANT'S DEFINITIVE PROXY STATEMENT FOR
ITS ANNUAL MEETING OF STOCKHOLDERS TO BE HELD ON May 1, 2003.
================================================================================
TYLER TECHNOLOGIES, INC.
FORM 10-K
TABLE OF CONTENTS
PAGE
----
PART I
Item 1. Business............................................................................ 3
Item 2. Properties.......................................................................... 9
Item 3. Legal Proceedings................................................................... 9
Item 4. Submission of Matters to a Vote of Security Holders................................. 11
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters............... 11
Item 6. Selected Financial Data............................................................. 12
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations....................................................................... 14
Item 7A. Quantitative and Qualitative Disclosures About Market Risk.......................... 30
Item 8. Financial Statements and Supplementary Data......................................... 30
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial
Disclosure.......................................................................... 30
PART III
Item 10. Directors and Executive Officers of the Registrant.................................. 31
Item 11. Executive Compensation.............................................................. 31
Item 12. Security Ownership of Certain Beneficial Owners and Management...................... 31
Item 13. Certain Relationships and Related Transactions...................................... 31
PART IV
Item 14. Controls and Procedures............................................................. 31
Item 15. Exhibits, Financial Statement Schedule and Reports on Form 8-K...................... 32
Signatures...................................................................................... 35
2
PART I
ITEM 1. BUSINESS.
DESCRIPTION OF BUSINESS
Tyler Technologies, Inc. ("Tyler") is a leading provider of integrated
information management solutions and services for local governments. We partner
with clients to make local government more accessible to the public, more
responsive to the needs of citizens and more efficient in its operations. We
have a broad line of software products and services to address the information
technology ("IT") needs of virtually every major area of operation for cities,
counties, schools and other local government entities. Most of our customers
have our software installed in-house. For customers who prefer not to physically
acquire the software and hardware, we provide outsourced hosting for some of our
applications at one of our data centers through an applications service provider
("ASP") arrangement. We provide professional IT services to our customers,
including software and hardware installation, data conversion, training and, at
times, product modifications. In addition, we are the nation's largest provider
of outsourced property appraisal services for taxing jurisdictions. We also
provide continuing customer support services to ensure proper product
performance and reliability, which provides us with long-term customer
relationships and a significant base of recurring maintenance revenue.
Tyler was founded in 1966. Prior to early 1998, we operated as a diversified
industrial conglomerate, with diversified operations in various industrial,
retail and distribution businesses, all of which have been sold. In 1997, we
embarked on a multi-phase growth plan focused on serving the specialized
information management needs of local governments nationwide. In 1998 and 1999,
we made a series of strategic acquisitions of leading companies in the local
government IT market.
In addition to our continuing operations in the software and services business
described above, we also operated from 1998 through 2000 a business segment
focused on providing outsourced property records management for local
governments and reselling related data. In late 2000, we decided to dispose of
the information and property records services segment in order to strengthen our
balance sheet and allow us to focus our resources on the segment of business
that we believe offers the greatest growth and profit opportunities. We expect
to continue to capitalize on these opportunities by leveraging our large
national client base, our long-term relationships with local government
customers, and our deep domain expertise in local government operations through
the development of state-of-the-art technologies and new nationally branded
applications solutions. We began in 2000 and are continuing to develop a new
generation of some of our software products based on n-tier architecture,
SQL-compliant databases, browser compatibility and component-based technology.
Our historical revenues from continuing operations have grown from $23.4 million
in 1998 to $133.9 million in 2002. In addition to growth through acquisitions,
our business units have experienced significant internal growth during this
period. On a pro forma basis, revenues from continuing operations have grown
from $83.7 million in 1998 to $133.9 million in 2002.
MARKET OVERVIEW
The state, local and municipal government market is one of the largest and most
decentralized IT markets in the country, consisting of all 50 states,
approximately 3,200 counties, and over 40,000 municipalities and other agencies.
This market is also comprised of hundreds of various government agencies, each
with specialized delegated responsibilities and unique information management
requirements.
Traditionally, local government bodies and agencies performed state-mandated
duties, including property assessment, record keeping, road maintenance, law
enforcement, administration of election and judicial functions, and the
provision of welfare assistance. Today, a host of emerging and urgent issues are
confronting local governments, each of which demands a service response. These
areas include criminal justice and corrections, administration and finance,
public safety, health and human services, and public works. Transfers of
responsibility from the federal and state governments to county and municipal
governments and agencies in these and other areas also place additional service
and financial requirements on these local government units. In addition,
constituents of local governments are increasingly demanding improved service
and better access to information from public entities. As a result, local
governments recognize the increasing value of information management systems and
services to, among other things, improve revenue collection, provide increased
access to information, and streamline delivery of services to their
constituents. Local government bodies are now recognizing that "e-government" is
an additional responsibility for community development. From integrated tax
systems to integrated civil and criminal justice information systems, many
counties and cities have benefited significantly from the implementation of
jurisdiction-wide systems that allow different agencies or government offices to
share data
3
and provide a more comprehensive approach to information management. Many city
and county governmental agencies also have unique individual information
management requirements, which must be tailored to the specific functions of
each particular office.
Many local governments also have difficulties attracting and retaining the staff
necessary to support their IT functions. As a result, they seek to establish
long-term relationships with reliable providers of high quality IT products and
services such as Tyler.
Although local governments generally face budgetary constraints in their
operations, the primary revenue source of local government is property tax,
which tends to be a relatively stable source of revenue. In addition, the
acquisition of technology typically enables local government to operate more
efficiently, and often provides a measurable return on investment that justifies
the purchase of software and related services.
Gartner Dataquest currently estimates that state and local government spending
for information technology products and services will grow from $44 billion in
2002 to $56 billion in 2005. The external services and software segments of the
market, in which we are primarily focused, are expected to be the most rapidly
growing areas of the local government IT market.
PRODUCTS AND SERVICES
We provide a comprehensive and flexible suite of products and services that
address the information technology needs of cities, counties, schools and other
local government entities. We derive our revenues from four primary sources:
- software licensing;
- software services;
- appraisal services; and
- maintenance and support.
We design, develop and market a broad range of software products to serve
mission-critical "back-office" functions of local governments. Our software
applications are designed primarily for use on hardware supporting UNIX/NT
operating systems. Many of our software applications include Internet-accessible
solutions that allow for real-time public access to a variety of information or
that allow the public to transact business with local governments via the
Internet. Our products and services are generally grouped in four major areas:
- Financial and City Solutions;
- Justice and Courts;
- Property Appraisal and Tax; and
- Recording.
Each of our core software systems consists of several fully integrated
application modules. For customers who acquire the software for use in-house, we
generally license our systems under standard license agreements which provide
the customer with a fully-paid, nonexclusive, nontransferable right to use the
software. In some of the product areas, such as financials and property tax, we
offer multiple solutions designed to meet the needs of different sized
governments.
We also offer certain software products on an outsourced basis for customers who
do not wish to maintain, update and operate these systems or to make large
up-front capital expenditures to implement these advanced technologies. For
these customers, we either host the applications and data at one of our data
centers, or maintain the hardware and software at the client's site. Customers
typically pay monthly fees under multi-year contracts for these services.
Historically we have had a higher concentration of sales in the second half of
our fiscal year due to governmental budget and spending tendencies.
4
Financial and City Solutions
Our Financial and City Solutions products include modular fund accounting
systems that can be tailored to meet the needs of virtually any government
agency or not-for-profit entity. Our financial systems include modules for
general ledger, budget preparation, fixed assets, purchasing, accounts payable,
investment management, payroll and human resources. All of our financial systems
conform to government auditing and financial reporting requirements and
generally accepted accounting principles.
We sell utility billing systems that support the billing and collection of
metered and non-metered services, along with multiple billing cycles. Our
Web-enabled utility billing solutions allow customers to access information
online such as average consumption and transaction history. In addition, our
systems can accept secured Internet payments via credit cards and checks.
We also offer specialized products that automate numerous city functions,
including equipment and project costing, inventory, business licenses, permits
and inspections, citizen complaint tracking, ambulance billing, fleet
maintenance, and cemetery records management.
Justice and Courts
We offer a complete integrated suite of products designed to automate, track and
manage the law enforcement and judicial process, from the initiation of
incidents in computer-aided dispatch/emergency 911 systems through the process
of arrest, court appearances and final disposition to probation. These
applications may be installed on a stand-alone basis or integrated with our
other products to eliminate duplicate entries and improve efficiency.
Our Web-enabled court systems are designed to automate the tracking and
management of information involved in criminal and civil court cases, including
municipal, family and probate courts. These applications track the status of
criminal and civil cases, process fines and fees and generate the specialized
judgment and sentencing documents, citations, notices and forms required in
court proceedings. Additional judicial applications automate the management of
court calendars, coordinate judge's schedules, generate court dockets, manage
justice of the peace processes and automate district attorney and prosecutor
functions. Related products include jury selection, "hot" check processing, and
adult and juvenile probation management applications. Our courtroom technologies
allow judges to review cases, calendars, and to scan documents and mug shots
using a Web browser. Additionally, document-imaging options include the ability
to scan, store, retrieve and archive a variety of criminal and civil
case-related documents.
Our law enforcement systems automate police and sheriff functions from dispatch
and records management through booking and jail management. Searching, reporting
and tracking features are integrated, allowing reliable, up-to-date access to
current arrest and incarceration data. The systems also provide warrant checks
for visitors or book-ins, inmate classification and risk assessment, commissary,
property and medical processing, and automation of statistics and state and
federal reporting. Our computer-aided dispatch/emergency E-911 system tracks
calls and the availability of emergency response vehicles, interfaces with local
and state searches, and generally assists dispatchers in processing emergency
situations. The law enforcement and jail management systems are fully integrated
with the suite of court products that manage the judicial process.
Our court and law enforcement systems allow the public to access via the
Internet a variety of information, including criminal and civil court records,
jail booking and release information, bond and bondsmen information, and court
calendars and dockets. In addition, our systems allow cities and counties to
accept payments for traffic and parking tickets over the Internet, with a
seamless and automatic interface to back-office justice and financial systems.
We recently introduced Odyssey, an all-new unified court case management system
which is slated for general release in mid-2003. Odyssey uses enhanced
Web-browser concepts to render a unique user interface. It incorporates the
latest technology - XML, n-tier architecture, component-based design, and an
ultra-thin client footprint - to maximize the value of a court's investment in
new software. We believe that some of Odyssey's design concepts, including
embedded imaging functionality, COM+ objects to enable local customization, and
an architecture that enables multiple deployment options, are first in the court
automation marketplace. Odyssey is the first of our new generation of n-tier,
browser-based products and our initial marketing efforts for the new court case
management system have been focused on states, large cities and counties.
Property Appraisal and Tax
We provide systems that automate the appraisal and assessment of real and
personal property, including record keeping, mass appraisal, inquiry and protest
tracking, appraisal and tax roll generation, tax statement processing, and
electronic state-level reporting.
5
These systems are image- and video-enabled to facilitate the storage of and
access to the many property-related documents and for the online storage of
digital photographs of properties for use in defending values in protest
situations. Other related tax applications are available for agencies that bill
and collect taxes, including cities, counties, school tax offices, and special
taxing and collection agencies. These systems support billing, collections, lock
box operations, mortgage company electronic payments, and various reporting
requirements.
We are currently developing a new appraisal system, Orion, based on the same
technology platform that we used for Odyssey. We expect to introduce Orion,
which will replace several legacy products, during early 2003.
Recording
We offer a number of specialized applications designed to help county
governments enhance and automate courthouse operations. These systems record and
index information for the many documents maintained at the courthouse, such as
deeds, mortgages, liens, UCC financing statements and vital records (birth,
death and marriage certificates). We also offer applications to automate such
functions as child support tracking, motor vehicle registration, voter
registration and election result tabulation.
Software Services
We provide a variety of professional IT services to customers who utilize our
software products. Virtually all of our customers contract with us for
installation, training, and data conversion services in connection with their
purchase of software products. The complete implementation process for a typical
system includes planning, design, data conversion, set-up and testing. At the
culmination of the implementation process, an installation team travels to the
customer's facility to ensure the smooth transfer of data to the new system.
Installation fees are charged separately to customers on either a fixed-fee or
hourly charge basis, depending on the contract, with full pass-through to
customers of travel and other out-of-pocket expenses.
Both in connection with the installation of new systems and on an ongoing basis,
we provide extensive training services and programs related to our products and
services. Training can be provided in our training centers, onsite at customers'
locations, or at meetings and conferences, and can be customized to meet
customers' requirements. The vast majority of our customers contract with us for
training services, both to improve their employees' proficiency and productivity
and to fully utilize the functionality of our systems. Training services are
generally billed on an hourly basis, along with travel and other expenses.
Appraisal Services
We are the nation's largest provider of real property appraisal outsourcing
services for local government taxing authorities. These services include:
- the physical inspection of all commercial and residential
properties;
- data collection and processing;
- sophisticated computer analyses for property valuation;
- preparation of tax rolls;
- community education regarding the assessment process; and
- arbitration between taxpayers and the assessing jurisdiction.
Local government taxing entities normally reappraise real properties from time
to time to update values for tax assessment purposes and to maintain equity in
the taxing process. In some jurisdictions, reassessment cycles are mandated by
law; in others, they are discretionary. While some taxing jurisdictions perform
reappraisals in-house, many local governments outsource this function because of
its cyclical nature and because of the specialized knowledge and expertise
requirements associated with it. Our business unit that provides appraisal
outsourcing services to local governments has been in this business since 1938.
In some instances, we also sell property tax and/or appraisal software products
in connection with appraisal outsourcing contracts, while other customers may
only engage us to provide appraisal services. Appraisal outsourcing services are
somewhat seasonal in nature to the extent that winter weather conditions reduce
the productivity of data collection activities in connection with those
projects.
6
Maintenance and Support
Following the implementation of our software systems, we provide ongoing
software support services to assist our customers in operating the systems and
to periodically update the software. Support is provided over the phone to
customers through help desks staffed by our customer support representatives.
For more complicated issues, our staff, with the customer's permission, can log
on to customers' systems remotely. We maintain our customers' software largely
through releases that contain improvements and incremental additions, along with
updates necessary because of legislative or regulatory changes.
Virtually all of our software customers contract for maintenance and support
from us, which provides a significant source of recurring revenue. We generally
provide maintenance and support under annual contracts, with a typical fee based
on the software product's license fee. These fees can be increased annually and
may also increase as new license fees increase. Maintenance and support fees are
generally paid in advance for the entire maintenance contract period. Most
maintenance contracts automatically renew unless we or the customer gives notice
of termination prior to expiration. Similar support is provided to our ASP
customers, and is included in their monthly overall fees.
STRATEGY
Our objective is to grow our revenue and earnings internally, supplemented by
focused strategic acquisitions. The key components of our business strategy are
to:
- Provide high quality, value-added products and services to our
clients. We compete on the basis of, among other things,
delivering to customers our deep domain expertise in local
government operations through the highest value products and
services in the market. We believe we have achieved a
reputation as a premium product and service provider to the
local government market.
- Continue to expand our product and service offerings. While we
already have what we believe to be the broadest line of
software products for local governments, we continually
upgrade our core software applications and expand our
complementary product and service offerings to respond to
technological advancements and the changing needs of our
clients. For example, we offer solutions that allow the public
to access data and conduct transactions with local
governments, such as paying traffic tickets, property taxes
and utility bills, via the Internet. We believe that the
addition of such features enhances the market appeal of our
core products. In 2001, we also began offering certain of our
software products in an ASP environment, a delivery model that
we believe will have increasing appeal to local governments
and that will be expanded to include more applications. We
have also increased our offerings of consulting and business
process reengineering services.
- Leverage a core technology framework across multiple product
development efforts. We have developed a core technology
framework upon which we intend to develop a new generation of
a number of products. By leveraging the core framework, which
is based on an n-tier, browser-based architecture, for the
development of multiple products, we believe we can develop
new-generation products more efficiently, and at a lower total
cost. In addition, utilizing a core framework is also expected
to help us bring new products to market more rapidly. By
having more products built on a common technology framework,
we expect to enhance our cross-selling opportunities and be
able to provide maintenance and other services more
efficiently.
- Expand our customer base. We seek to establish long-term
relationships with new customers primarily through our sales
and marketing efforts. While we currently have customers in 49
states, Canada and Puerto Rico, not all of our product lines
have nationwide geographic penetration. We intend to expand
into new geographic markets by adding sales staff and
targeting marketing efforts by product in those areas. We also
intend to continue to expand our customer base to include
larger governments. While our traditional market focus has
primarily been on small and mid-sized governments, our
increased size and market presence, together with the
technological advances and improved scalability of certain of
our products, are allowing us to achieve success in selling to
larger customers.
- Expand our existing customer relationships. Our existing
customer base of nearly 6,000 local government offices offers
significant opportunities for additional sales of IT products
and services that we currently offer, but that existing
customers do not fully utilize. Add-on sales to existing
customers typically involve lower sales and marketing expenses
than sales to new customers.
7
- Grow recurring revenue. We have a large recurring revenue base
from maintenance and support, with an annual run rate in
excess of $40 million. We have historically experienced very
low customer turnover (less than 1% annually for our major
software business units) and recurring revenues continue to
grow as the installed customer base increases. In addition,
since the beginning of 2001, we have established a growing
recurring revenue stream from ASP hosting and other similar
services.
- Maximize economies of scale and take advantage of financial
leverage in our business. We seek to develop and maintain a
large client base to create economies of scale, enabling us to
provide value-added products and services to our customers
while expanding our operating margins. Because we sell
primarily "off-the-shelf" software, increased sales of the
same products result in incrementally higher gross margins. In
addition, we believe that we have a marketing and
administrative infrastructure in place that we can leverage to
accommodate significant growth without proportionately
increasing selling, general and administrative expenses.
- Attract and retain highly qualified employees. We believe that
the depth and quality of our operating management and staff is
one of our significant strengths, and that the ability to
retain such employees is crucial to our continued growth and
success. We believe that our stable management team, financial
strength and growth opportunities, as well as our leadership
position in the local government market, enhance our
attractiveness as an employer for highly skilled employees.
- Pursue selected strategic acquisitions. While we expect to
grow primarily internally, we may from time to time
selectively pursue strategic acquisitions that provide us with
one or more of the following:
- products and services to complement our existing
offerings;
- entry into new markets related to local governments;
and
- new customers and/or geographic expansion.
When considering acquisition opportunities, we generally focus on companies with
strong management teams and employee bases and excellent customer relationships.
Our most recent acquisition included in our continuing operations was completed
in November 1999.
SALES, MARKETING, AND CUSTOMERS
We market our products and services through direct sales and marketing personnel
located throughout the United States. Other in-house marketing staff focus on
add-on sales, professional services and support.
Sales of new systems are typically generated from referrals from other
governmental offices or departments within a county or municipality, referrals
from other local governments, relationships established between sales
representatives and county or local officials, contacts at trade shows, direct
mailings, and direct contact from prospects already familiar with us. We are
active in numerous state, county, and local government associations, and
participate in annual meetings, trade shows, and educational events.
Customers consist primarily of county and municipal agencies, school districts
and other local government offices. In counties, customers include the auditor,
treasurer, tax assessor/collector, county clerk, district clerk, county and
district court judges, probation officers, sheriff, and county appraiser. At
municipal government sites, customers include directors from various
departments, including administration, finance, utilities, public works, code
enforcement, personnel, purchasing, taxation, municipal court, and police. In
2002, one customer accounted for approximately 10% of our total revenues.
Contracts for software products and services are generally implemented over
periods of three months to one year, with annually renewing service and software
update agreements thereafter. Although these agreements can be terminated by
either us or the customer, historically almost all support and maintenance
agreements are automatically renewed annually. Contracts for appraisal
outsourcing services are generally one to three years in duration. During 2002,
approximately 30% of the Company's revenue was attributable to ongoing support
and maintenance agreements.
COMPETITION
We compete with numerous local, regional, and national firms that provide or
offer some or many of the products and services provided by us. Most of these
competitors are smaller companies that may be able to offer less expensive
solutions than ours. We also compete with national firms, some of which have
greater financial and technical resources than us, including PeopleSoft, Inc.,
J. D. Edwards & Company, Lawson Software, Inc., Maximus, Inc., Affiliated
Computer Services, Inc., Tier Technologies, Inc.,
8
SunGard Data Systems, Inc. and Manatron, Inc. We also occasionally compete with
central internal information service departments of county or local governments,
which require us to persuade the end-user department to discontinue service by
its own personnel and outsource the service to us. We compete on a variety of
factors, including price, service, name recognition, reputation, technological
capabilities, and the ability to modify existing products and services to
accommodate the individual requirements of the customer. Our ability to offer an
integrated system of applications for several offices or departments is often a
competitive strength. County and local governmental units often are required to
seek competitive proposals.
SUPPLIERS
All computers, peripherals, printers, scanners, operating system software,
office automation software, and other equipment necessary for the implementation
and provision of our software systems and services are presently available from
several third-party sources. Hardware is purchased on original equipment
manufacturer or distributor terms at discounts from retail. We have not
experienced any significant supply problems.
BACKLOG
At December 31, 2002, we estimated our sales backlog was approximately $89.1
million, compared to $96.3 million at December 31, 2001. The backlog represents
contracts that have been signed but not delivered or performed as of year-end.
Approximately $79.0 million of the backlog is expected to be installed or
services are expected to be performed during 2003.
INTELLECTUAL PROPERTY, PROPRIETARY RIGHTS, AND LICENSES
We regard certain features of our internal operations, software, and
documentation as confidential and proprietary and rely on a combination of
contractual restrictions, trade secret laws and other measures to protect our
proprietary intellectual property. We generally do not rely on patents. We
believe that, due to the rapid rate of technological change in the computer
software industry, trade secrets and copyright protection are less significant
than factors such as knowledge, ability and experience of our employees,
frequent product enhancements, and timeliness and quality of support services.
We typically license our software products under exclusive license agreements
which are generally non-transferable and have a perpetual term.
EMPLOYEES
At December 31, 2002, we had approximately 1,230 employees. Appraisal
outsourcing projects are periodic in nature and can be widely dispersed
geographically. We often hire temporary employees to assist in these projects
whose term of employment generally ends with the project's completion. None of
our employees are represented by a labor union or are subject to collective
bargaining agreements. We consider our relations with our employees to be
positive.
INTERNET WEBSITE AND AVAILABILITY OF PUBLIC FILINGS
Our Internet address is www.tylertechnologies.com. We make available free of
charge on our Internet website, our annual report on Form 10-K, quarterly
reports on Form 10-Q, current reports on Form 8-K, and amendments to those
reports filed or furnished pursuant to Section 13(a) or 15(d) of the Securities
Exchange Act of 1934 as soon as reasonably practicable after we electronically
file such material with, or furnish such material to, the SEC.
ITEM 2. PROPERTIES.
We occupy approximately 300,000 square feet of office and warehouse space,
27,000 of which we own. We lease our principal executive office located in
Dallas, Texas, as well as other offices, facilities and project offices for our
operating companies in California, Colorado, Connecticut, Florida, Georgia,
Idaho, Indiana, Iowa, Maine, Massachusetts, Michigan, New Hampshire, New York,
North Carolina, Ohio, Pennsylvania, Rhode Island, Texas, and Wisconsin.
ITEM 3. LEGAL PROCEEDINGS.
On October 29, 2001, H.T.E., Inc. ("HTE") notified us that, pursuant to the
Florida "control share" statute, it had redeemed all 5.6 million shares of HTE
common stock owned by us for a cash price of $1.30 per share. The 5.6 million
shares represent a current ownership interest of approximately 35% of HTE, a
company whose common stock is traded on the NASDAQ National Market System. On
October 29, 2001, we notified HTE that its purported redemption of our HTE
shares was invalid and contrary to Florida
9
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, that HTE's purported redemption of any
or all of our shares was illegal under Florida law and that we had the ability
to vote up to 20% of the issued and outstanding shares of HTE common stock owned
by us.
On September 18, 2002, the court issued an order declaring that HTE's purported
redemption was invalid. Accordingly, we continue to own 5.6 million shares of
HTE common stock. On September 24, 2002, we entered into a settlement agreement
with HTE in which HTE agreed that it would not attempt any other redemption of
our shares. In addition, HTE agreed to dismiss and release us from the tort
claims it alleged against us as disclosed in previous filings. On December 11,
2002, the court issued a further order declaring that all of our HTE shares are
"control shares" and therefore none of our shares have voting rights. The court
further ruled that voting rights would be restored to our HTE shares if we were
to sell or otherwise transfer our HTE shares to an unaffiliated third party in a
transaction that did not constitute a "control share acquisition."
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 the plaintiffs' 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 $1.3 million at
December 31, 2002. Swan tendered the defense and indemnity obligations arising
from these claims to its insurance carriers, who, prior to December 20, 2001,
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.
The confirmation hearings on Swan's plan of reorganization were held on December
9, 2002. The plan of reorganization received the affirmative vote of
approximately 99% of the total votes cast. All objections to the plan were
resolved prior to the confirmation hearing, and the final confirmation order
will therefore not be subject to appeal. The confirmation order discharges,
releases, and extinguishes all of the foundry-related obligations and
liabilities of Tyler, Swan, their affected affiliates, and the insurers
participating in the funding of the trust. Further, the confirmation order
includes the issuance of injunctions that channel all present and future
foundry-related claims into the trust and forever bar any such claims from being
asserted, either now or in the future, against Swan, Tyler, their affected
affiliates, and the participating insurers. In order to receive the benefits
described above, we have agreed, among other things, to transfer all of the
capital stock of Swan to the trust so that the trust can directly pursue claims
against insurers who have not participated in the funding of the trust. In
addition, we have agreed to contribute $1.5 million in cash to the trust, which
is due as follows: $750,000 within ten days of the confirmation order becoming a
final order; $500,000 on the first anniversary of the date the confirmation
order becomes a final order; and $250,000 on the second anniversary of the date
the confirmation order becomes a final order. The confirmation order will become
a final order thirty days after execution by both the bankruptcy and district
court judges, which is expected to occur by the end of the first quarter of
2003.
Other than ordinary course, routine litigation incidental to our business and
except as described in this Annual Report, there are no material legal
proceedings pending to which we or our subsidiaries are parties or to which any
of our properties are subject.
10
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
Not applicable.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
Our common stock is traded on the New York Stock Exchange under the symbol
"TYL." At December 31, 2002, we had approximately 2,600 stockholders of record.
A number of our stockholders hold their shares in street name; therefore, there
are substantially more than 2,600 beneficial owners of our common stock.
The following table sets forth for the calendar periods indicated the high and
low sales price per share of our common stock as reported on the New York Stock
Exchange.
HIGH LOW
---- ---
2001: First Quarter................................ $ 2.25 $ 1.00
Second Quarter............................... 3.04 1.35
Third Quarter................................ 3.81 1.99
Fourth Quarter............................... 4.60 2.73
2002: First Quarter ............................... $ 5.95 $ 3.75
Second Quarter............................... 6.01 3.85
Third Quarter................................ 5.25 3.05
Fourth Quarter............................... 4.85 3.80
2002: First Quarter (through February 25, 2003).. $ 4.40 $ 3.50
We did not pay any cash dividends in 2002 or 2001. Our bank credit agreement
contains restrictions on the payment of cash dividends. Also, we intend to
retain earnings for use in the operation and expansion of our business, and,
therefore, we do not anticipate declaring a cash dividend in the foreseeable
future.
11
ITEM 6. SELECTED FINANCIAL DATA.
(In thousands, except per share data)
FOR THE YEARS ENDED DECEMBER 31,
----------------------------------------------------------------------------------
2002 2001 2000 1999 1998
------------ ------------ ------------ ------------ ----------
STATEMENT OF OPERATIONS DATA: (1)
Revenues (2)............................ $ 133,897 $ 118,816 $ 93,933 $ 71,416 $ 23,440
Costs and expenses:
Cost of revenues (2)................. 85,915 78,797 59,658 37,027 13,143
Selling, general and
administrative expenses............ 33,914 30,830 32,805 29,404 11,680
Amortization of acquisition
intangibles (3).................... 3,329 6,898 6,903 4,966 1,499
--------- ---------- --------- --------- ---------
Operating income (loss) ............. 10,739 2,291 (5,433) 19 (2,882)
Legal fees associated with
affiliated investment.............. 704 -- -- -- --
Interest (income) expense, net....... (6) 479 4,884 1,797 234
--------- ---------- --------- --------- ---------
Income (loss) from continuing operations
before income taxes.................. 10,041 1,812 (10,317) (1,778) (3,116)
Income tax provision (benefit).......... 3,869 1,540 (2,810) 188 (652)
--------- ---------- --------- --------- ---------
Income (loss) from continuing operations $ 6,172 $ 272 $ (7,507) $(1,966) $ (2,464)
========= ========== ========= ========= ==========
Income (loss) from continuing operations
per diluted share.................... $ 0.12 $ 0.01 $ (0.17) $ (0.05) $ (0.08)
========= ========== ========= ========= ==========
Weighted average diluted shares......... 49,493 47,984 45,380 39,105 32,612
OTHER DATA:
EBITDA (4)......................... $ 18,557 $ 13,203 $ 4,253 $ 6,130 $ (890)
STATEMENT OF CASH FLOWS DATA:
Cash flows from operating activities.... $ 19,845 $ 12,744 $ (7,126) $ 715 $ 1,758
Cash flows from investing activities.... (7,974) (9,706) 65,401 (24,743) (36,787)
Cash flows from financing activities.... (3,398) (5,984) (52,022) 24,955 27,893
AS OF DECEMBER 31,
---------------------------------------------------------------
2002 2001 2000 1999 1998
--------- --------- --------- ---------- ----------
BALANCE SHEET DATA: (1)
Total assets......................... $ 169,845 $ 146,975 $ 150,712 $ 243,260 $ 124,328
Long-term obligations, less
current portion................... 2,550 2,910 7,747 61,530 37,189
Shareholders' equity................. 118,656 100,884 96,122 138,904 76,346
12
(1) For the years 1998 through 2002, results of operations include the results
of the continuing companies that were formerly the software systems and
services segment, from the respective dates we acquired the companies, and
exclude the results of operations of the discontinued information and
property records services segment and automotive parts segment. Prior
years' selected financial data has been restated to reflect discontinuation
of the information and property records services segment in 2000 and the
automotive parts segment in 1998. See Note 3 in Notes to Consolidated
Financial Statements.
(2) Pursuant to Financial Accounting Standards Board Emerging Issues Task Force
("EITF") Issue No. 01-14, "Income Statement Characterization of
Reimbursements Received for 'Out-of-Pocket' Expenses Incurred," customer
reimbursements for out-of-pocket expenses are to be included in net
revenues and the related costs in cost of revenues. Because these
additional net revenues are offset by the associated reimbursable expenses
included in cost of revenues, the adoption of EITF No. 01-14 in 2002 did
not impact income (loss) from continuing operations for all periods
presented. Net revenues and cost of revenues for 2001 and 2000 were recast
to reclassify certain reimbursable expenses to conform to the current year
presentation in accordance with EITF No. 01-14. Periods prior to 2000 were
not recast because reimbursable expenses were immaterial. See Note 17 in
Notes to Consolidated Financial Statements.
(3) Effective January 1, 2002, we adopted the provisions of Statement of
Financial Accounting Standards No. 142 "Goodwill and other Intangible
Assets". Under the new standard, goodwill and intangible assets with
indefinite useful lives are no longer amortized but instead tested for
impairment at least annually. In accordance with the new standard, results
of operations for years prior to 2002 are reported under the previous
accounting standards for goodwill and intangible assets. Amortization
expense net of income taxes, related to goodwill (including assembled
workforce subsumed into goodwill) no longer expensed under the new standard
was $2,960 in 2001, $2,934 in 2000, $2,199 in 1999 and $836 in 1998.
(4) EBITDA consists of income from continuing operations before interest,
income taxes, depreciation and amortization. EBITDA is not calculated in
accordance with accounting principles generally accepted in the United
States, 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 accounting
principles generally accepted in the United States. EBITDA is not
necessarily an indication of amounts that may be available for us to
reinvest or for any other discretionary uses and does not take into account
our debt service requirements and other commitments. In addition, since all
companies do not calculate EBITDA the same way, it may not be comparable to
other companies' similarly titled measures. The following reconciles to
EBITDA from income (loss) from continuing operations before income taxes
for the periods presented:
FOR THE YEARS ENDED DECEMBER 31,
------------------------------------------------------------------------
2002 2001 2000 1999 1998
---------- --------- --------- --------- ---------
Income (loss) from continuing operations before
income taxes............................... $ 10,041 $ 1,812 $ (10,317) $ (1,778) $ (3,116)
Amortization of acquisition intangibles... 3,329 6,898 6,903 4,966 1,499
Depreciation and amortization included
in cost of revenues and selling,
general and administrative expenses.... 5,193 4,014 2,783 1,145 493
Interest (income) expense, net ........... (6) 479 4,884 1,797 234
--------- --------- --------- --------- ---------
EBITDA $ 18,557 $ 13,203 $ 4,253 $ 6,130 $ (890)
========= ========= ========= ========= =========
13
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.
FORWARD - LOOKING STATEMENTS
In addition to historical information, this Annual Report on Form 10-K contains
forward-looking statements. The forward-looking statements are made in reliance
upon safe harbor provisions of the Private Securities Litigation Reform Act of
1995. The forward-looking statements are subject to certain risks and
uncertainties that could cause actual results to differ materially from those
reflected in the forward-looking statements. Factors that might cause such a
difference include, but are not limited to, those discussed in the section
entitled Management's Discussion and Analysis of Financial Condition and Results
of Operations - "Factors That May Affect Our Future Results and Market Price of
Our Stock." Readers are cautioned not to place undue reliance on these
forward-looking statements, which reflect management's opinions only as of the
date hereof. We undertake no obligation to revise or publicly release the
results of any revision to these forward-looking statements. Readers should
carefully review the risk factors described in this Annual Report and other
documents we file from time to time with the SEC.
When used in this Annual Report, the words "believes," "plans," "estimates,"
"expects," "anticipates," "intends," "continue," "may," "will," "should,"
"projects," "forecasts," "might," "could" or the negative of such terms and
similar expressions are intended to identify forward-looking statements.
GENERAL
We provide integrated information management solutions and services for local
governments. We have a broad line of software products and services to address
the information technology ("IT") needs of virtually every area of operation for
cities, counties, schools and other local government entities. Most of our
customers have our software installed in-house. For customers who prefer not to
physically acquire the software and hardware, we provide outsourced hosting for
some of our applications at one of our data centers through an applications
service provider ("ASP") arrangement. We provide professional IT services to our
customers, including software and hardware installation, data conversion,
training and, at times, product modifications. In addition, we provide
outsourced property appraisal services for taxing jurisdictions. We also provide
continuing customer support services to ensure proper product performance and
reliability.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
Our discussion and analysis of financial condition and results of operations is
based upon our consolidated financial statements, which have been prepared in
accordance with accounting principles generally accepted in the United States
("GAAP"). The preparation of these financial statements requires us to make
estimates and judgments that affect the reported amounts of assets and
liabilities at the date of the financial statements, the reported amounts of
revenues and expenses during the reporting period, and related disclosure of
contingent assets and liabilities. The Notes to the Consolidated Financial
Statements contained herein describe our significant accounting policies used in
the preparation of the consolidated financial statements. On an on going basis,
we evaluate our estimates, including, but not limited to, those related to
intangible assets, bad debts and our long-term service contracts. We base our
estimates on historical experience and on various other assumptions that we
believe to be reasonable under the circumstances, the results of which form the
basis for making judgments about the carrying values of assets and liabilities
that are not readily apparent from other sources. Actual results may differ from
these estimates under different assumptions or conditions.
We believe the following critical accounting policies affect significant
judgments and estimates used in the preparation of our consolidated financial
statements:
Revenue Recognition. We recognize revenues in accordance with the provisions of
the American Institute of Certified Public Accountants Statement of Position
("SOP") 97-2, "Software Revenue Recognition," as amended by SOP 98-4 and SOP
98-9, as well as Technical Practice Aids issued from time to time by the
American Institute of Certified Public Accountants, and in accordance with the
SEC Staff Accounting Bulletin No. 101 "Revenue Recognition in Financial
Statements." Our revenues are derived from software licenses, hardware,
postcontract customer support/maintenance and services that typically range from
installation, training and basic consulting to software modification and
customization to meet specific customer needs. For multiple element software
arrangements, which do not entail the performance of services that are
considered essential to the functionality of the software, we generally record
revenue when the delivered products or performed services result in a legally
enforceable claim. We maintain allowances for doubtful accounts, sales
adjustments and estimated cost of product warranties, which are provided at the
time the revenue is recognized. Since most of our customers are governmental
entities, we rarely incur a loss resulting from the inability of a customer to
make required
14
payments. Occasionally, customers may become dissatisfied with the functionality
of the software products and/or the quality of the services and request a
reduction of the total contract price or similar concession. While we engage in
extensive product and service quality assurance programs and processes, our
allowances for these contract price reductions may need to be revised in the
future. In connection with our customer contracts and the adequacy of related
allowances and measures of progress towards contract completion, our project
managers are charged with the responsibility to continually review the status of
each customer on a specific contract basis. Also, management at our corporate
offices as well as at our operating companies review on at least a quarterly
basis significant past due accounts receivable and the adequacy of related
reserves. Events or changes in circumstances that indicate that the carrying
amount for the allowances for doubtful accounts, sales adjustments and estimated
cost of product warranties may require revision, include, but are not limited
to, deterioration of a customer's financial condition, failure to manage our
customer's expectations regarding the scope of the services to be delivered, and
defects or errors in new versions or enhancements of our software products.
For those minimal number of software arrangements that include customization of
the software, which is considered essential to its functionality, and for
substantially all of our real estate appraisal outsourcing projects, we
recognize revenue and profit as the work progresses using the
percentage-of-completion method. This method relies on estimates of total
expected contract revenue, billings and collections and expected contract costs.
We follow this method since reasonably dependable estimates of revenue and costs
applicable to various stages of a contract can be made. At times, we perform
additional and/or non-contractual services for little to no incremental fee, to
satisfy customer expectations. If changes occur in delivery, productivity or
other factors used in developing our estimates of expected costs or revenues, we
revise our cost and revenue estimates, and any revisions are charged to income
in the period in which the facts that give rise to that revision first become
known.
Intangible Assets and Goodwill. Our business acquisitions typically result in
the creation of goodwill and other intangible asset balances, and these balances
affect the amount and timing of future period amortization expense, as well as
expense we could possibly incur as a result of an impairment charge. The cost of
acquired companies is allocated to identifiable tangible and intangible assets
based on estimated fair value, with the excess allocated to goodwill.
Accordingly, we have a significant balance of acquisition date intangible
assets, including software, customer base and goodwill. In addition, we
capitalize software development costs incurred subsequent to the establishment
of technological feasibility on a specific software project. Certain of these
intangible assets are amortized over their estimated useful lives. All
intangible assets with definite and indefinite lives are reviewed for impairment
annually or whenever events or changes in circumstances indicate that the
carrying amount of an asset may not be recoverable. Recoverability of goodwill
is generally measured by a comparison of the carrying amount of an asset to its
fair value generally determined by estimated future net cash flows expected to
be generated by the asset. Recoverability of other intangible assets is
generally measured by comparison of the carrying amount to estimated
undiscounted future cash flows. The assessment of recoverability or of the
estimated useful life for amortization purposes will be affected if the timing
or the amount of estimated future operating cash flows is not achieved. Events
or changes in circumstances that indicate the carrying amount may not be
recoverable include, but are not limited to, a significant decrease in the
market value of the business or asset acquired, a significant adverse change in
the extent or manner in which the business or asset acquired is used or a
significant adverse change in the business climate. In addition, products,
capabilities, or technologies developed by others may render our software
products obsolete or non-competitive.
15
ANALYSIS OF RESULTS OF OPERATIONS AND OTHER
2002 Compared to 2001
The following table includes items from our audited consolidated financial
statements and the relevant percentage change in the amounts between the periods
presented. The amounts shown in the table are in thousands, except the per share
data:
Years Ended December 31,
----------------------------------------------
2002 2001 % Change
-------- -------- ---------
Revenues:
Software licenses $ 24,278 $ 19,491 25%
Software services 25,703 21,538 19
Maintenance 40,667 36,587 11
Appraisal services 37,319 34,727 7
Hardware and other 5,930 6,473 (8)
-------- --------
Total revenues 133,897 118,816 13
Cost of revenues:
Software licenses 5,482 4,130 33
Software services and maintenance 50,175 46,024 9
Appraisal services 25,512 23,894 7
Hardware and other 4,746 4,749 (0)
-------- --------
Total cost of revenues 85,915 78,797 9
% of revenues 64.2% 66.3%
Gross profit 47,982 40,019 20
% of revenues 35.8% 33.7%
Selling, general and administrative expenses 33,914 30,830 10
% of revenues 25.3% 25.9%
Amortization of acquisition intangibles 3,329 6,898 (52)
------- ------
Operating income 10,739 2,291 369
Legal fees associated with affiliated investment 704 -
Interest (income) expense (6) 479
-------- --------
Income before income taxes 10,041 1,812
Income tax provision 3,869 1,540
-------- --------
Effective income tax rate 38.5% 85.0%
Income from continuing operations $ 6,172 $ 272
======== ========
Diluted earnings per share from
continuing operations $ 0.12 $ 0.01
======== ========
Cash flows provided by operating activities $ 19,845 $ 12,744
Cash balance at December 31 13,744 5,271
Capital expenditures:
Sofware development costs 7,210 6,225
Property and equipment 2,508 3,101
16
REVENUES
The following table compares the components of revenue as a percentage of total
revenues for the periods presented:
Years ended
December 31,
-----------------------------
2002 2001
-------- --------
Software licenses 18.1 % 16.4 %
Software services 19.2 18.1
Maintenance 30.4 30.8
Appraisal services 27.9 29.2
Hardware and other 4.4 5.5
----- -----
100.0 % 100.0 %
Software license revenues. Software license revenues increased $4.8 million, or
25%, for the year ended December 31, 2002, compared to 2001. During 2002, we
recognized approximately $2.4 million in license revenues from four customers
for real estate appraisal software, while we recorded minimal license revenues
from appraisal software in 2001. The remainder of the increase in software
license revenues was related to expansion of our financial and city solutions
software products into the midwest and the western United States, and was aided
by the release of several new financial and city solutions products and
enhancements. Our financial and city solutions software products automate
accounting systems for cities, counties, school districts, public utilities and
not-for-profit organizations.
Software services revenues. For the year ended December 31, 2002, software
services revenues increased $4.2 million, or 19%, compared to 2001. The increase
in software services is primarily related to higher software license sales.
Typically, contracts for software licenses include services such as installation
of the software, conversion of customer data to be compatible with the new
software and training customer personnel to use the software. In addition,
software services revenues for 2002 included approximately $1.9 million for
services performed under an $11.0 million contract signed with the State of
Minnesota in July 2002 to install our new Odyssey court case management system.
The Minnesota contract includes both software license and software services but
no license revenues were recognized under the contract in 2002. Approximately
70% of the installation is expected to be performed by late 2003. The remainder
of the installation is expected to be performed from 2004 through 2006.
Maintenance revenues. For the year ended December 31, 2002, maintenance revenue
increased $4.1 million, or 11%, from $36.6 million for 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 2001, we received and
recorded as revenue 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 13% for the year ended
December 31, 2002 compared to the prior year.
Appraisal services revenues. Appraisal services revenues increased $2.6 million,
or 7%, for the year ended December 31, 2002, compared to 2001. The increase was
primarily related to our contract with Lake County, Indiana, which was first
awarded in December 2001. The contract to provide professional services and
technology to reassess real property in Lake County is valued at $15.9 million,
of which $14.4 million relates to appraisal services, and is expected to be
completed by late 2003. During 2002, appraisal services revenue also included
$12.1 million of appraisal revenue related to our contract with the Nassau
County, New York Board of Assessors ("Nassau County"), which was comparable to
the amount recognized in 2001. Substantially all of the work related to Nassau
County contract had been completed as of December 31, 2002.
COST OF REVENUES
Cost of software license revenues. For the year ended December 31, 2002, cost of
software license revenues increased $1.4 million, or 33%, compared to the prior
year, primarily 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 available for
general release, we begin to expense the costs associated with the development
generally over the estimated useful life of the product.
17
Development costs mainly consist of personnel costs, such as salary and benefits
paid to our software developers, rent for related office space and capitalized
interest costs.
Cost of software service and maintenance revenues. For the year ended December
31, 2002, cost of software services and maintenance revenues increased $4.2
million, or 9%, compared to 2001. This increase is consistent with the higher
software services and maintenance revenues for the same period, although
software services and maintenance revenues grew at a higher rate than the cost
of those revenues, which is reflective of more efficient utilization of our
support and maintenance staff and economies of scale. As a percentage of related
revenues, cost of software services and maintenance was 76% in 2002 compared to
79% in 2001.
Cost of appraisal services revenues. For the year ended December 31, 2002, cost
of appraisal service revenue increased approximately $1.6 million, or 7%,
compared to the year ended December 31, 2001. This increase is consistent with
the increase in appraisal services revenue, which also rose 7% compared to the
prior year. Cost of appraisal services revenues as a percentage of appraisal
services revenue was 68% for 2002 compared to 69% for 2001.
GROSS PROFIT
For the years ended December 31, 2002 and 2001, our overall gross margin was 36%
and 34%, respectively. The 2002 gross margin benefited from a product mix that
included more software license revenues and higher maintenance revenues than the
prior year. Software license revenues have lower associated costs than other
revenues such as software and appraisal services, third party software and
hardware. In addition, utilization of our personnel that provide services and
support has improved, which has increased our overall gross profit. The increase
in our gross profit was offset slightly by higher software development
amortization during 2002.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
Selling, general and administrative expenses, or SG&A, increased $3.1 million,
or 10%, for the year ended December 31, 2002 compared to the prior year. As a
percentage of revenues, SG&A was 25% in 2002 compared to 26% in 2001. The $3.1
million increase in SG&A was related primarily to higher costs with respect to
sales commissions, and increases in health and other insurance expenses.
AMORTIZATION OF ACQUISITION INTANGIBLES
Our amortization of acquisition intangibles for the year ended December 31, 2001
amounted to $6.9 million, including $3.6 million for amortization of goodwill
and workforce costs. Effective January 1, 2002, we adopted Statement of
Financial Accounting Standards ("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. The remaining amortization consisted 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 7 in Notes to the
Consolidated Financial Statements.
INTEREST (INCOME) EXPENSE
Our cash balances have increased significantly during 2002 due to cash generated
from operations, the receipt of proceeds from the sale of certain discontinued
businesses and the exercise of stock options. In 2002 we invested excess cash in
money market investments. Offsetting interest income from these money market
investments was $255,000 of interest expense for an outstanding $2.5 million
note payable. As a result, we had net interest income of $6,000 for the year
ended December 31, 2002 compared to net interest expense of $479,000 for 2001.
In addition, during the years ended December 31, 2002 and 2001, we capitalized
$269,000 and $578,000, respectively, of interest costs related to capitalized
software development costs.
INCOME TAX PROVISION
We had an effective income tax rate of 39% for the year ended December 31, 2002.
For the year ended December 31, 2001, we had an effective income tax rate of
85%. Our effective income tax rate in both years 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, including certain non
tax-deductible goodwill amortization in periods prior to 2002.
18
DISCONTINUED OPERATIONS
Discontinued operations consists of the operating results of the information and
property records services segment which we discontinued in December 2000, two
non-operating subsidiaries relating to a formerly owned subsidiary that we sold
in December 1995 and an automotive parts distributor that we sold in March 1999.
On September 29, 2000, we sold certain net assets of Kofile, Inc. and another
subsidiary, our interest in a certain intangible work product, and a building
and related building improvements (the "Kofile Sale") for a cash sale price of
$14.4 million. Effective December 29, 2000, we sold for cash our land records
business unit, consisting of Business Resources Corporation ("Resources"), to an
affiliate of Affiliated Computer Services, Inc. ("ACS") (the "Resources Sale".)
The Resources Sale was valued at approximately $71.0 million. Concurrent with
the Resources Sale, our management, with our Board of Directors' approval,
adopted a formal plan of disposal for the remaining businesses and assets of the
information and property records services segment. This restructuring program
was designed to focus our resources on our software systems and services segment
and to reduce debt. The businesses and assets divested or identified for
divesture were classified as discontinued operations in the accompanying
consolidated financial statements in 2000 and the prior periods' financial
statements were restated to report separately their operations in compliance
with APB Opinion No. 30. The net gain on the Kofile Sale and the Resources Sale
amounted to approximately $1.5 million (net of an income tax benefit of $2.4
million).
Our formal plan of disposal provided for the remaining businesses and assets of
the information and property records services segment to be disposed of by
December 29, 2001. The estimated loss on the disposal of these remaining
businesses and assets at December 29, 2000 amounted to $13.6 million (after an
income tax benefit of $3.8 million). This loss consisted of an estimated loss on
disposal of the businesses of $11.5 million (net of an income tax benefit of
$2.7 million) and a provision of $2.1 million (after an income tax benefit of
$1.1 million) for anticipated operating losses from the measurement date of
December 29, 2000 to the estimated disposal dates.
On May 16, 2001, we sold all of the common stock of one of the remaining
businesses in the discontinued information and property records services
segment. In connection with the sale, we received cash proceeds of $575,000,
approximately 60,000 shares of Tyler common stock, a promissory note of $750,000
payable in 58 monthly installments at an interest rate of 9%, and other
contingent consideration. On September 21, 2001, we sold all of the common stock
of Capital Commerce Reporter, Inc. for $3.1 million in cash.
We renegotiated certain aspects of the May 16, 2001 sale transaction and as a
result of this renegotiation in March 2002, we received additional cash of
approximately $800,000 and a subordinated note receivable for $200,000, to fully
settle the promissory note and other contingent consideration received in
connection with this 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 2002, we received receipts of $46,000 on the
subordinated note.
During the year ended December 31, 2002, the IRS issued temporary regulations,
which in effect allowed us to deduct for tax purposes losses attributable to the
March 1999 sale of our automotive parts subsidiary that were previously not
allowed. The tax benefit of allowing the deduction of this loss amounted to
approximately $970,000. In addition, we renegotiated a note receivable and
certain contingent consideration in connection with a subsidiary sold in 2001
and received proceeds of approximately $846,000 in 2002. We initially assigned
no value for accounting purposes to the note receivable and contingent
consideration when the loss on the disposal of the discontinued operations was
first established in 2000 and when the note was first received in 2001. In
addition, we settled in the fourth quarter of 2002 our asbestos litigation for
an amount that was approximately $200,000 less than the liability initially
established for this matter (See Note 16 in Notes to Consolidated Financial
Statements). The aggregate effects of these events, net of the related tax
effects, and other minor adjustments to the reserve for discontinued operations,
resulted in a credit to discontinued operations of $1.8 million in 2002. In our
opinion and based on information available at this time, we believe the net
liabilities related to discontinued operations are adequate.
The income tax expense or benefit associated with the gains or losses on the
respective sales of the businesses in the information and property records
services segment differs from the statutory income tax rate of 35% due to the
elimination of deferred taxes related to the basis difference between amounts
reported for income taxes and financial reporting purposes and the utilization
of available capital loss carryforwards which were fully reserved in the
valuation account prior to the respective sales.
19
One of our non-operating subsidiaries is involved in various claims for
work-related injuries and physical conditions relating to a formerly-owned
subsidiary that we sold in 1995. For the years ended December 31, 2001 and 2000,
we expensed and included in discontinued operations, net of related tax effect,
$3,000 and $748,000, respectively, for trial and related costs (See Note 16 in
the Notes to the Consolidated Financial Statements).
INVESTMENT SECURITY AVAILABLE-FOR-SALE
Pursuant to an agreement with two major shareholders of H.T.E., Inc. ("HTE"), we
acquired approximately 5.6 million shares of HTE's common stock in exchange for
approximately 2.8 million shares of our common stock. The exchange occurred in
two transactions, one in August 1999 and the other in December 1999. The 5.6
million shares represent a current ownership interest of approximately 35% of
HTE. The cost of the investment was recorded at $15.8 million and is classified
as a non-current asset.
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. On November
16, 2000, the shareholders of HTE, other than Tyler, voted to deny Tyler its
right to vote the "control shares" of HTE. When we acquired the HTE shares, HTE
took the position that all of our shares were "control shares" and therefore did
not have voting rights. We disputed this contention and asserted that the
"control shares" were only those shares in excess of 20% of the outstanding
shares of HTE, and it was only those shares that lacked voting rights. At the
time of our acquisition, no court had interpreted the Florida "control share"
statute.
On October 29, 2001, HTE notified us that, pursuant to the Florida "control
share" statute, it had redeemed all 5.6 million shares of HTE common stock owned
by us for a cash price of $1.30 per share. 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 our
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, that HTE's purported
redemption of any or all of our shares was illegal under Florida law and that we
had the ability to vote up to 20% of the issued and outstanding shares of HTE
common stock owned by us.
On September 18, 2002, the court issued an order declaring that HTE's purported
redemption was invalid. On September 24, 2002, we entered into a settlement
agreement with HTE in which HTE agreed that it would not attempt any other
redemption of our shares. In addition, HTE agreed to dismiss and release us from
the tort claims it alleged against us as disclosed in previous filings. On
December 11, 2002, the court issued a further order declaring that all of our
HTE shares are "control shares" and therefore none of our shares have voting
rights. The court further ruled that voting rights would be restored to our HTE
shares if we were to sell or otherwise transfer our HTE shares to an
unaffiliated third party in a transaction that did not constitute a "control
share acquisition." During 2002, approximately $704,000 of legal and other
related costs associated with these matters were charged to non-operating
expenses.
Under GAAP, a 20% investment in the voting stock of another company creates the
presumption that the investor has significant influence over the operating and
financial policies of that company, unless there is evidence to the contrary.
Our management has concluded that we do not have such influence. Accordingly, 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.
On February 4, 2003, we entered into an agreement with SunGard Data Systems,
Inc. ("SDS") in which we agreed to tender all of our HTE shares in a tender
offer to be commenced by SDS for the acquisition of HTE. On February 5, 2003,
SDS and HTE announced a definitive agreement for the acquisition of all of the
shares of HTE for $7.00 per share in cash. SDS and HTE also announced that the
consummation of the transaction is subject to customary conditions, including
the tender of at least a majority of the outstanding shares of HTE in the tender
offer and the expiration of the waiting period under the Hart-Scott-Rodino
Antitrust Improvements Act of 1976, as amended. SDS and HTE further announced
that certain shareholders owning approximately 49.6% of the total outstanding
shares of HTE had agreed to tender their shares. According to the press release
issued by SDS and HTE, the acquisition is expected to close in the first quarter
of 2003. Assuming the acquisition is consummated, we will receive approximately
$39.3 million in gross cash proceeds from the sale of our HTE shares. There can
be no assurance that the acquisition of HTE by SDS will be consummated on the
terms as disclosed, if at all. If SDS does not acquire HTE, we will continue to
classify our investment as an available-for-sale security in accordance with
SFAS No. 115 and as a non-current asset since the investment was initially made
for a continuing business purpose.
20
NET INCOME
Net income was $8.0 million in 2002 compared to $269,000 in 2001. For 2002 and
2001, diluted earnings per share was $0.16 and $0.01, respectively. Net income
for 2002 included a gain on disposal of discontinued operations, net of taxes,
of $1.8 million, or $0.04 per diluted share, and net income for 2001 included a
loss on discontinued operations, net of taxes, of $3,000, or $0.00 per diluted
share.
2001 COMPARED TO 2000
REVENUES
Revenues were $118.8 million for the year ended December 31, 2001, a 26%
increase from revenues of $93.9 million for the prior year.
Software license revenues. Software license revenues increased each quarter
during 2001 from $4.0 million in the first quarter to $5.8 million in the fourth
quarter. For the year ended December 31, 2001, software license revenue was
$19.5 million, compared to $19.3 million for the year ended December 31, 2000.
The increase was due mainly to sales of third-party software that provided
additional functionality to certain modules of our proprietary software, sales
of proprietary software to new customers and in new geographic areas, primarily
the midwestern United States, and sales of upgraded financial and utility
software modules to existing customers. The increase was somewhat offset by
lower tax and appraisal software sales.
Software services revenues. Software services revenues grew 11% to $21.5 million
for the year ended December 31, 2001, from $19.4 million for the year ended
December 31, 2000. The increase was due to higher proprietary software sales, as
we offer services, such as installation of the software, conversion of the
customers' data to be compatible with the software and training of the customer
personnel to use the software. In addition, during 2001, we entered into more
service-intensive contracts, particularly related to our tax products.
Maintenance revenues. For the year ended December 31, 2001, maintenance revenue
increased 26%, to $36.6 million, from $29.1 million for 2000. Higher maintenance
revenues were due to an increase in our base of installed software and systems
products and maintenance rate increases for several product lines. Maintenance
and support services are provided for our software and related products.
Appraisal services revenues. For the year ended December 31, 2001, appraisal
services revenues were $34.7 million, compared to $20.9 million in the prior
year. The 66% increase for the year in appraisal services revenues was primarily
due to our continued progress on our contract with Nassau County. The contract
to provide outsourced assessment services for Nassau County, together with tax
assessment administration software and training, is valued at approximately
$34.0 million. Implementation of the Nassau County contract began in September
2000. For the year ended December 31, 2001, we recorded $14.4 million of
professional services revenue related to Nassau County.
Hardware and other revenues. Hardware and other revenues increased $1.3 million
for the year ended December 31, 2001 from $5.2 million for the same period of
2000. Approximately $700,000 of the increase related to the Nassau County
contract. Other increases were due to timing of installations of equipment on
customer contracts and are dependent on the contract size and on varying
customer hardware needs.
COST OF REVENUES
For the year ended December 31, 2001, cost of revenues was $78.8 million
compared to $59.7 million for the year ended December 31, 2000. The increase in
cost of revenues was primarily due to the increase in revenues.
Gross margin was 34% for the year ended December 31, 2001, compared to 36% for
the year ended December 31, 2000. Overall gross margin was lower because our
2001 revenue mix included more appraisal services compared to 2000.
Historically, gross profit is higher for software licenses than for software and
appraisal services due to personnel costs associated with services. In addition,
software license costs increased during 2001 compared to 2000, due to increased
amortization of software development costs. We released several new products
during the second and third quarters of 2001, at which time we began to amortize
the related software development costs.
21
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
Selling, general and administrative expenses for the year ended December 31,
2001 was $30.8 million compared to $32.8 million in the prior year. Selling,
general and administrative expenses as a percentage of revenues declined to 26%
in 2001 from 35% in 2000 because such expenses are primarily fixed and therefore
did not increase in proportion to our revenue growth. The decline in selling,
general and administrative expenses was due to a reduction in corporate costs
following the sale of the information and property records services segment,
lower acquisition-related costs such as legal and travel expenses and lower
research and development costs which are expensed.
AMORTIZATION OF ACQUISITION INTANGIBLES
We accounted for all of our past acquisitions using the purchase method of
accounting for business combinations. Prior to the adoption of SFAS No. 142, the
excess of the purchase price over the fair value of the net identifiable assets
of the acquired companies ("goodwill") was amortized using the straight-line
method of amortization over their respective estimated useful lives.
Amortization expense of acquisition intangibles was $6.9 million in 2001 and
2000.
NET INTEREST EXPENSE
Net interest expense was $479,000 for the year ended December 31, 2001, compared
to $4.9 million for the year ended December 31, 2000. Interest expense declined
due to a significant reduction in bank debt with the proceeds from the disposal
of our former information and property records services segment. In addition,
during 2001 we capitalized $578,000 of interest costs related to internally
developed software products, compared to $586,000 for 2000.
INCOME TAX PROVISION
For the year ended December 31, 2001, we had income from continuing operations
before income taxes of $1.8 million and an income tax provision of $1.5 million,
resulting in an effective tax rate of 85%. The high effective income tax rate is
primarily attributable to non tax-deductible goodwill amortization. For 2000, we
incurred a loss from continuing operations before income tax benefit of $10.3
million and an income tax benefit of $2.8 million, resulting in an effective
benefit rate of 27%.
NET INCOME
Net income was $269,000 in 2001 compared to a net loss of $24.6 million in 2000.
For 2001, diluted earnings per share was $0.01 and, for 2000, diluted loss per
share was $0.54. Income from continuing operations was $272,000, or $0.01 per
diluted share in 2001, compared to a loss from continuing operations of $7.5
million, or $0.17 per diluted share in 2000.
ACCOUNTING PRONOUNCEMENTS NOT YET ADOPTED
In June 2001, the Financial Accounting Standards Board ("FASB") issued SFAS No.
143, "Accounting for Asset Retirement Obligations." SFAS No. 143 requires us to
record the fair value of an asset retirement obligation as a liability in the
period in which it incurs a legal obligation associated with the retirement of
tangible long-lived assets that result from the acquisition, construction,
development, and/or normal use of the assets. A corresponding asset is also
recorded and depreciated over the life of the asset. After the initial
measurement of the asset retirement obligation, the obligation will be adjusted
at the end of each period to reflect the passage of time and changes in the
estimated future cash flows relating to the obligation. We are required to adopt
SFAS No. 143 on January 1, 2003. The adoption of SFAS No. 143 is not expected to
have a material effect on our financial statements.
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".
SFAS No. 145 amends existing guidance on reporting gains and losses on the
extinguishment of debt to prohibit the classification of the gain or loss as
extraordinary, as the use of such extinguishments have become part of the risk
management strategy of many companies. SFAS No. 145 also amends SFAS No. 13 to
require sale-leaseback accounting for certain lease modifications that have
economic effects similar to sale-leaseback transactions. The provisions of SFAS
No. 145 related to the rescission of Statement No. 4, are applied in fiscal
years beginning after May 15, 2002. Earlier application of these provisions is
encouraged. The provisions of SFAS No. 145 related to Statement No. 13 were also
effective for transactions occurring after May 15, 2002, with early application
encouraged. The adoption of SFAS No. 145 is not expected to have a material
effect on our financial statements.
22
In June 2002, the FASB issued SFAS No. 146, "Accounting for Costs Associated
with Exit or Disposal Activities." SFAS No. 146 addresses financial accounting
and reporting for costs associated with exit or disposal activities and
nullifies Emerging Issues Task Force ("EITF") Issue 94-3, "Liability Recognition
for Certain Employee Termination Benefits and Other Costs to Exit an Activity."
The provisions of this Statement are effective for exit or disposal activities
that are initiated after December 31, 2002, with early application encouraged.
The adoption of SFAS No. 146 is not expected to have a material effect on our
financial statements.
In November 2002, the FASB issued Interpretation No. 45, "Guarantor's Accounting
and Disclosure Requirements for Guarantees, Including Indirect Guarantees of
Indebtedness to Others," an interpretation of FASB Statements No. 5, 57 and 107
and a rescission of FASB Interpretation No. 34. This Interpretation elaborates
on the disclosures to be made by a guarantor in its interim and annual financial
statements about its obligations under guarantees issued. The Interpretation
also clarifies that a guarantor is required to recognize, at inception of a
guarantee, a liability for the fair value of the obligation undertaken. The
initial recognition and measurement provisions of the Interpretation are
applicable to guarantees issued or modified after December 31, 2002 and are not
expected to have a material effect on our financial statements. The disclosure
requirements are effective for financial statements of interim and annual
periods ending after December 31, 2002.
In January 2003, the FASB issued Interpretation No. 46, "Consolidation of
Variable Interest Entities, an interpretation of Accounting Research Bulletin
("ARB") No. 51." This Interpretation addresses the consolidation by business
enterprises of variable interest entities as defined in the Interpretation. The
Interpretation applies immediately to variable interests in variable interest
entities created after January 31, 2003, and to variable interests in variable
interest entities obtained after January 31, 2003. The application of this
Interpretation is not expected to have a material effect on our financial
statements.
FINANCIAL CONDITION AND LIQUIDITY
On March 5, 2002, we entered into a new $10.0 million revolving bank credit
agreement which matures January 1, 2005. Our borrowings are limited to 80% of
eligible accounts receivable and bear interest 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.
As of December 31, 2002, our bank has issued under our credit agreement letters
of credit totaling $3.7 million 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 December 31, 2002. At December 31, 2002, we had no outstanding bank
borrowings under the credit agreement and had an available borrowing base of
$6.3 million.
As of December 31, 2002, our cash balance was $13.7 million, compared to $5.3
million at December 31, 2001. Cash increased primarily due to cash received from
disposition of certain discontinued businesses and assets of discontinued
business, cash generated from operations, exercise of stock options and improved
cash collections. At December 31, 2002, our days sales outstanding ("DSO's")
(accounts receivable divided by the quotient of annualized quarterly revenues
divided by 360 days) were 85 compared to DSO's of 103 at December 31, 2001.
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 2001 of a
business unit previously included in the information and property records
services segment, which had been discontinued.
In June 2002, we sold the building of a business unit previously included in the
discontinued information and property records service segment. Net proceeds from
the sale were approximately $961,000.
During the year ended December 31, 2002, we received $1.6 million from the
issuance of 491,000 treasury shares upon the exercise of stock options under our
employee stock option plan.
During 2002, we made capital expenditures of $9.7 million, including $7.2
million for software development costs. The other expenditures related to
computer equipment and expansions related to internal growth. Capital
expenditures were funded principally from cash generated from operations.
23
Excluding acquisitions, we anticipate that 2003 capital spending will be
approximately $12.0 million, approximately $9.0 million of which will be related
to software development. Capital spending in 2003 is expected to be funded from
existing cash balances and cash flows from operations.
On August 15, 2002, we consummated an agreement to repurchase 1.1 million of our
common shares from William D. Oates, a former director of Tyler, for a cash
purchase price of $4.0 million.
We lease certain offices, transportation, computer and other equipment used in
our continuing operations under noncancelable operating lease agreements
expiring at various dates through 2012. Most leases contain renewal options and
some contain purchase options. Following are the future obligations under
noncancelable leases and maturities of long-term obligations at December 31,
2002 (in millions):
2003 2004 2005 2006 2007 Thereafter Total
---- ---- ---- ---- ---- ---------- -----
Future rental payments under operating
leases............................... $ 3.5 $ 3.2 $ 3.0 $ 2.7 $ 2.5 $ 9.5 $ 24.4
Notes payable and other................. .5 0.0 2.5 -- -- -- 3.0
------- ------- ------- ------- ------- -------- ----------
$ 4.0 $ 3.2 $ 5.5 $ 2.7 $ 2.5 $ 9.5 $ 27.4
======= ======= ======= ======= ======= ======== ==========
In August 2002, our Board of Directors approved a plan to repurchase up to 1.0
million shares of our common stock. Subsequent to December 31, 2002 and through
February 21, 2003, we have repurchased 339,000 shares for an aggregate purchase
price of $1.4 million.
On February 4, 2003, we entered into an agreement with SunGard Data Systems Inc.
("SDS") in which we agreed to tender all of our HTE shares in the tender offer
to be commenced by SDS for the acquisition of HTE. On February 5, 2003, SDS and
HTE announced a definitive agreement for the acquisition of all of the shares of
HTE for $7.00 per share in cash. Assuming the acquisition is consummated, we
will receive approximately $39.3 million in gross cash proceeds from the sale of
our HTE shares.
As part of the plan of reorganization of Swan Transportation Company, one of our
non-operating subsidiaries, we have agreed to contribute approximately $1.5
million over the next three years to a trust that was set up as part of the
reorganization. See Note 16 in the Notes to the Consolidated Financial
Statements.
From time to time, we have discussions relating to acquisitions and we expect to
continue to assess these and other strategic acquisition opportunities as they
arise. We may also require additional financing if we decide to make additional
acquisitions. There can be no assurance, however, that any such opportunities
will arise, that any such acquisitions will be consummated or that any needed
additional financing will be available when required on terms satisfactory to
us. Absent any acquisitions, we anticipate that existing cash balances, cash
flows from operations, working capital and available borrowing capacity under
our revolving credit facility will provide sufficient funds to meet our needs
for at least the next year.
CAPITALIZATION
At December 31, 2002, our capitalization consisted of $3.0 million of long-term
obligations (including the current portion of those obligations) and $118.7
million of shareholders' equity. Our total debt-to-capital ratio (total debt
divided by the sum of total shareholders' equity and total long-term
obligations) was 2% at December 31, 2002.
FACTORS THAT MAY AFFECT FUTURE RESULTS AND MARKET PRICE OF OUR STOCK
An investment in our common stock involves a high degree of risk. Investors
evaluating our company should carefully consider the factors described below and
all other information contained in this Annual Report. Any of the following
factors could materially harm our business, operating results, and financial
condition. Additional factors and uncertainties not currently known to us or
that we currently consider immaterial could also harm our business, operating
results, and financial condition. This section should be read in conjunction
with the Consolidated Financial Statements and related Notes and Management's
Discussion and Analysis of Financial Condition and Results of Operations
included in this Annual Report. We may make forward-looking statements from time
to time, both written and oral. We undertake no obligation to revise or publicly
release the results of any revisions to these forward-looking statements. Our
actual results may differ materially from those projected in any such
forward-looking statements due to a number of factors, including those set forth
below and elsewhere in this Annual Report.
24
A decline in information technology spending may result in a decrease in our
revenues or lower our growth rate.
A decline in the demand for information technology among our current and
prospective customers may result in decreased revenues or a lower growth rate
for us because our sales depend, in part, on our customers' level of funding for
new or additional information technology systems and services. Moreover, demand
for our solutions may be reduced by a decline in overall demand for computer
software and services. The current technology recession and decline in overall
technology spending, terrorist activity, and threats of hostilities in the
Middle East and Asia may cause our customers to reduce or eliminate information
technology spending and cause price erosion for our solutions, which would
substantially reduce the number of new software licenses we sell and the average
sales price for these licenses. Because of these market and economic conditions,
we believe there will continue to be uncertainty in the level of demand for our
products and services. Accordingly, we cannot assure you that we will be able to
increase or maintain our revenues.
We may experience fluctuations in quarterly revenue that could adversely impact
our stock price and our operating results.
Our actual revenues in a quarter could fall below expectations, which could lead
to a decline in our stock price. Our revenues and operating results are
difficult to predict and may fluctuate substantially from quarter to quarter.
Revenues from license fees in any quarter depend substantially upon our
contracting activity and our ability to recognize revenues in that quarter in
accordance with our revenue recognition policies. Our quarterly revenue may
fluctuate and may be difficult to forecast for a variety of reasons, including
the following:
- a significant number of our prospective customers' decisions
regarding whether to enter into license agreements with us are
made within the last few weeks of each quarter;
- we have historically had a higher concentration of revenues in
the second half of our fiscal year due to governmental budget
and spending tendencies;
- the size of license transactions can vary significantly;
- customers may unexpectedly postpone or cancel orders due to
changes in their strategic priorities, project objectives,
budget or personnel;
- customer purchasing processes vary significantly and a
customer's internal approval and expenditure authorization
process can be difficult and time consuming to complete, even
after selection of a vendor;
- the number, timing, and significance of software product
enhancements and new software product announcements by us and
our competitors may affect purchase decisions; and
- we may have to defer revenues under our revenue recognition
policies.
Fluctuation in our quarterly revenues may adversely affect our operating
results. In each fiscal quarter our expense levels, operating costs, and hiring
plans are based on projections of future revenues and are relatively fixed. If
our actual revenues fall below expectations, we could experience a reduction in
operating results.
As with other software vendors, we may be required to delay revenue recognition
into future periods, which could adversely impact our operating results.
We have in the past had to, and in the future may have to, defer revenue
recognition for license fees due to several factors, including whether:
- license agreements include applications that are under
development or other undelivered elements;
- we must deliver services, including significant modifications,
customization, or complex interfaces, which could delay
product delivery or acceptance;
- the transaction involves acceptance criteria;
- the transaction involves contingent payment terms or fees;
- we are required to accept a fixed-fee services contract; or
- we are required to accept extended payment terms.
Because of the factors listed above and other specific requirements under
generally accepted accounting principles in the United States for software
revenue recognition, we must have very precise terms in our license agreements
in order to recognize revenue when we initially deliver and install software or
perform services. Negotiation of mutually acceptable terms and conditions can
extend the sales
25
cycle, and sometimes we do not obtain terms and conditions that permit revenue
recognition at the time of delivery or even as work on the project is completed.
Increases in service revenue as a percentage of total revenues could decrease
overall margins and adversely affect our operating results.
We realize lower margins on software and appraisal service revenues than on
license revenue. The majority of our contracts involve both the license of
software and the provision of professional services. Therefore, an increase in
the percentage of software service and appraisal service revenue compared to
license revenue could have a detrimental impact on our overall gross margins and
could adversely affect operating results.
Selling products and services into the public sector poses unique challenges.
We derive substantially all of our revenues from sales of software and services
to state, county and city governments, other municipal agencies, and other
public entities. We expect that sales to public sector customers will continue
to account for substantially all of our revenues in the future. We face many
risks and challenges associated with contracting with governmental entities,
including:
- the sales cycle of governmental agencies may be complex and
lengthy;
- payments under some public sector contracts are subject to
achieving implementation milestones, and we have had, and may
in the future have, differences with customers as to whether
milestones have been achieved;
- political resistance to the concept of government agencies
contracting with third parties to provide information
technology solutions;
- changes in legislation authorizing government's contracting
with third parties;
- the internal review process by governmental agencies for bid
acceptance;
- changes to the bidding procedures by governmental agencies;
- changes in governmental administrations and personnel;
- limitations on governmental resources placed by budgetary
restraints, which in some circumstances, may provide for a
termination of executed contracts because of a lack of future
funding; and
- the general effect of economic downturns and other changes on
local governments' ability to spend public funds on
outsourcing arrangements.
Each of these risks is outside our control. If we fail to adequately adapt to
these risks and uncertainties, our financial performance could be adversely
affected.
The open bidding process for governmental contracts creates uncertainty in
predicting future contract awards.
Many governmental agencies purchase products and services through an open
bidding process. Generally, a governmental entity will publish an established
list of requirements requesting potential vendors to propose solutions for the
established requirements. To respond successfully to these requests for
proposals, we must accurately estimate our cost structure for servicing a
proposed contract, the time required to establish operations for the proposed
client, and the likely terms of any other third party proposals submitted. We
cannot guarantee that we will win any bids in the future through the request for
proposal process, or that any winning bids will ultimately result in contracts
on favorable terms. Our failure to secure contracts through the open bidding
process, or to secure such contracts on favorable terms, may adversely affect
our business, financial condition, and results of operations.
Fixed price contracts may affect our profits.
Some of our present contracts are on a fixed-priced basis, which can lead to
various risks, including:
- the failure to accurately estimate the resources and time
required for an engagement;
- the failure to effectively manage governmental agencies' and
other customers' expectations regarding the scope of services
to be delivered for an estimated price; and
- the failure to timely complete fixed-price engagements within
budget to the customers' satisfaction.
If we do not adequately assess these and other risks, we may be subject to cost
overruns and penalties, which may harm our business, financial condition, or
results of operations.
26
We face significant competition from other vendors and potential new entrants
into our markets.
We believe we are a leading provider of integrated solutions for the public
sector. However, we face competition from a variety of software vendors that
offer products and services similar to those offered by us, as well as from
companies offering to develop custom software. We compete on the basis of a
number of factors, including:
- the attractiveness of the business strategy and services we
offer;
- the breadth of products and services we offer;
- price;
- quality of products and service;
- technological innovation;
- name recognition; and
- our ability to modify existing products and services to
accommodate the particular needs of our customers.
We believe the market is highly fragmented with a large number of competitors
that vary in size, primary computer platforms, and overall product scope. Our
competitors include the consulting divisions of national and regional accounting
firms, publicly held companies that focus on selected segments of the public
sector market, and a significant number of smaller, privately held companies.
Certain competitors have greater technical, marketing, and financial resources
than us. We cannot assure you that such competitors will not develop products or
offer services that are superior to our products or services or that achieve
greater market acceptance.
We also compete with internal, centralized information service departments of
governmental entities, which require us to persuade the end-user to stop the
internal service and outsource to us. In addition, our customers may elect in
the future to provide information management services internally through new or
existing departments, which will reduce the market for our services.
We could face additional competition as other established and emerging companies
enter the public sector software application market and new products and
technologies are introduced. Increased competition could result in price
reductions, fewer customer orders, reduced gross margins, and loss of market
share. In addition, current and potential competitors may make strategic
acquisitions or establish cooperative relationships among themselves or with
third-parties, thereby increasing the ability of their products to address the
needs of our prospective customers. It is possible that new competitors or
alliances among current and new competitors may emerge and rapidly gain
significant market share. Further, competitive pressures could require us to
reduce the price of our software licenses and related services. We cannot assure
you that we will be able to compete successfully against current and future
competitors, and the failure to do so would have material adverse effect upon
our business, operating results, and financial condition.
We must respond to rapid technological changes to be competitive.
The market for our products is characterized by rapid technological change,
evolving industry standards in computer hardware and software technology,
changes in customer requirements, and frequent new product introductions and
enhancements. The introduction of products embodying new technologies and the
emergence of new industry standards can render existing products obsolete and
unmarketable. As a result, our future success will depend, in part, upon our
ability to continue to enhance existing products and develop and introduce in a
timely manner or acquire new products that keep pace with technological
developments, satisfy increasingly sophisticated customer requirements, and
achieve market acceptance. We cannot assure you that we will successfully
identify new product opportunities and develop and bring new products to market
in a timely and cost-effective manner. Further, we cannot assure you that the
products, capabilities, or technologies developed by others will not render our
products or technologies obsolete or noncompetitive. If we are unable to develop
or acquire on a timely and cost-effective basis new software products or
enhancements to existing products, or if such new products or enhancements do
not achieve market acceptance, our business, operating results, and financial
condition may be materially adversely affected.
Our failure to properly manage growth could adversely affect our business.
We have expanded our operations rapidly since February 1998, when we entered the
business of providing software solutions and services to the public sector. We
intend to continue expansion in the foreseeable future to pursue existing and
potential market opportunities. This rapid growth places a significant demand on
management and operational resources. In order to manage growth effectively, we
must implement and improve our operational systems, procedures, and controls on
a timely basis. We must also identify, hire, train, and manage key managerial
and technical personnel. If we fail to implement these systems or employ and
retain such qualified personnel, our business, financial condition, and results
of operations may be materially and adversely affected.
27
In addition, a significant portion of our growth has resulted from strategic
acquisitions in new product and geographic markets. Although our future focus
will be on internal growth, we will continue to identify and pursue strategic
acquisitions and alliances with suitable candidates. Our future success will
depend, in part, on our ability to successfully integrate past and future
acquisitions and other strategic alliances into our operations. Acquisitions may
involve a number of special risks, including diversion of management's
attention, failure to retain key acquired personnel, unanticipated events or
circumstances, legal liabilities, and amortization of certain acquired
intangible assets. Some or all of these risks could have a material adverse
effect on our business, financial condition, and results of operations. Although
we conduct due diligence reviews of potential acquisition candidates, we may not
identify all material liabilities or risks related to acquisition candidates.
There can be no assurance that any such strategic acquisitions or alliances will
be accomplished on favorable terms or will result in profitable operations.
We may be unable to hire, integrate, and retain qualified personnel.
Our continued success will depend upon the availability and performance of our
key management, sales, marketing, customer support, and product development
personnel. The loss of key management or technical personnel could adversely
affect us. We believe that our continued success will depend in large part upon
our ability to attract, integrate, and retain such personnel. We have at times
experienced and continue to experience difficulty in recruiting qualified
personnel. Competition for qualified software development, sales, and other
personnel is intense, and we cannot assure you that we will be successful in
attracting and retaining such personnel.
We may be unable to protect our proprietary rights.
Many of our product and service offerings incorporate proprietary information,
trade secrets, know-how, and other intellectual property rights. We rely on a
combination of contracts, copyrights, and trade secret laws to establish and
protect our proprietary rights in our technology. We cannot be certain that we
have taken all appropriate steps to deter misappropriation of our intellectual
property. In addition, there has been significant litigation in the United
States in recent years involving intellectual property rights. We are not
currently involved in any material intellectual property litigation. We may,
however, be a party to intellectual property litigation in the future to protect
our proprietary information, trade secrets, know-how, and other intellectual
property rights. Further, we cannot assure you that third parties will not
assert infringement or misappropriation claims against us in the future with
respect to current or future products. Any claims or litigation, with or without
merit, could be time-consuming and result in costly litigation and diversion of
management's attention. Further, any claims and litigation could cause product
shipment delays or require us to enter into royalty or licensing arrangements.
Such royalty or licensing arrangements, if required, may not be available on
terms acceptable to us, if at all. Thus, litigation to defend and enforce our
intellectual property rights could have a material adverse effect on our
business, financial condition, and results of operations, regardless of the
final outcome of such litigation.
Our products are complex and, as such, we run the risk of errors or defects with
new product introductions or enhancements.
Software products as complex as those developed by us may contain errors or
defects, especially when first introduced or when new versions or enhancements
are released. Although we have not experienced material adverse effects
resulting from any such defects or errors to date, we cannot assure you that
material defects and errors will not be found after commencement of product
shipments. Any such defects could result in loss of revenues or delay market
acceptance.
Our license agreements with our customers typically contain provisions designed
to limit our exposure to potential liability claims. It is possible, however,
that the limitation of liability provisions contained in our license agreements
may not be effective as a result of existing or future federal, state or local
laws or ordinances or judicial decisions. Although we maintain errors and
omissions and general liability insurance, and we try to structure our contracts
to include limitations on liability, we cannot assure you that a successful
claim would not have a material adverse effect on our business, financial
condition, and results of operations.
Our Application Service Provider strategy has yet to gain widespread acceptance.
Some businesses choose to access enterprise software applications through
application service providers, or ASPs, which are businesses that host
applications and provide access to software on a subscription basis. The public
sector market for ASP solutions is new and unproven. Acceptance of our ASP model
depends upon the ability and willingness of different governmental entities to
accept and implement ASP solutions. Our clients have expressed security and
privacy concerns with the ASP model, including a concern regarding the
confidential nature of the information and transactions available from and
conducted with governments and concerns regarding off-site storage of such
information. We have limited experience selling our solutions through ASPs and
may not be successful in generating revenue from this distribution channel.
28
Changes in the insurance markets may affect our ability to win some contract
awards and may lead to increased expenses.
Some of our customers, primarily those for our property appraisal services,
require that we secure performance bonds before they will select us as their
vendor. The number of qualified, high-rated insurance companies that offer
performance bonds has decreased in recent years, while the costs associated with
securing these bonds has increased dramatically. In addition, we are generally
required to issue a letter of credit as security for the issuance of a
performance bond. Each letter of credit we issue reduces our borrowing capacity
under our senior secured credit agreement. We cannot guarantee that we will be
able to secure such performance bonds in the future on terms that are favorable
to us, if at all. Our inability to obtain performance bonds on favorable terms
or at all could impact our future ability to win some contract awards,
particularly large property appraisal services contracts, which could have a
material adverse effect on our business, financial condition, and results of
operations.
Recent volatility in the stock markets, increasing shareholder litigation, the
adoption of expansive legislation that redefines corporate controls (in
particular, legislation adopted to prevent future corporate and accounting
scandals), as well as other factors have recently led to significant increases
in premiums for directors' and officers' liability insurance. The number of
insurers offering directors and officers insurance at competitive rates has also
decreased in recent years. We cannot predict when the insurance market for such
coverage will stabilize, if at all. The continued volatility of the insurance
market may result in future increases in our general and administrative
expenses, which may adversely affect future operating results.
Compliance with changing regulation of corporate governance and public
disclosure may result in additional expenses.
Changing laws, regulations, and standards relating to corporate governance and
public disclosure, including the Sarbanes-Oxley Act of 2002, new Securities and
Exchange Commission regulations and New York Stock Exchange rules, are creating
uncertainty for companies such as ours. To maintain high standards of corporate
governance and public disclosure, we intend to invest all reasonably necessary
resources to comply with evolving standards. This investment may result in
increased general and administrative expenses and a diversion of management time
and attention from revenue-generating activities.
Our stock price may be volatile.
The market price of our common stock may be volatile and may be significantly
affected by many different factors. Some examples of factors that can have a
significant impact on our stock price include:
- actual or anticipated fluctuations in our operating results;
- announcements of technological innovations, new products, or
new contracts by us or our competitors;
- developments with respect to patents, copyrights, or other
proprietary rights;
- conditions and trends in the software and other technology
industries;
- adoption of new accounting standards affecting the software
industry;
- changes in financial estimates by securities analysts; and
- general market conditions and other factors.
In addition, the stock market has from time to time experienced significant
price and volume fluctuations that have particularly affected the market prices
for the common stock of technology companies. These broad market fluctuations
may adversely affect the market price of our common stock. In the past,
following periods of volatility in the market price of a particular company's
securities, securities class action litigation has often been brought against
that company. We cannot assure you that similar litigation will not occur in the
future with respect to us. Such litigation could result in substantial costs and
a diversion of management's attention and resources, which could have a material
adverse effect upon our business, operating results, and financial condition.
Historically, we have not paid dividends on our common stock.
We have not declared or paid a cash dividend since we entered the business of
providing software solutions and services to the public sector in February 1998.
Our credit agreement restricts our ability to pay cash dividends. We intend to
retain earnings for use in the operation and expansion of our business. We do
not anticipate paying any cash dividends on our common stock in the foreseeable
future.
29
Provisions in our certificate of incorporation, bylaws, and Delaware law could
deter takeover attempts.
Our Board of Directors may issue up to 1,000,000 shares of Preferred Stock and
may determine the price, rights, preferences, privileges, and restrictions,
including voting and conversion rights, of these shares of Preferred Stock.
These determinations may be made without any further vote or action by our
stockholders. The rights of the holders of our common stock will be subject to,
and may be adversely affected by, the rights of the holders of any Preferred
Stock that may be issued in the future. The issuance of Preferred Stock may make
it more difficult for a third party to acquire a majority of our outstanding
voting stock. In addition, some provisions of our Certificate of Incorporation,
Bylaws, and of the Delaware General Corporation Law could also delay, prevent,
or make more difficult a merger, tender offer, or proxy contest involving us.
Financial Outlook.
From time to time in press releases and otherwise, we may publish forecasts or
other forward-looking statements regarding our results, including estimated
revenues or net earnings. Any forecast of our future performance reflects
various assumptions. These assumptions are subject to significant uncertainties,
and as a matter of course, any number of them may prove to be incorrect.
Further, the achievement of any forecast depends on numerous risks and other
factors (including those described in this discussion), many of which are beyond
our control. As a result, we cannot be certain that our performance will be
consistent with any management forecasts or that the variation from such
forecasts will not be material and adverse. Current and potential stockholders
are cautioned not to base their entire analysis of our business and prospects
upon isolated predictions, but instead are encouraged to utilize our entire
publicly available mix of historical and forward-looking information, as well as
other available information regarding us, our products and services, and the
software industry when evaluating our prospective results of operations.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
We are not materially exposed to market risk from changes in interest rates,
equity prices or foreign currency exchange rates.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
Information required by this item is incorporated by reference from the
Independent Auditors' Report on page 39 of our 2002 Annual Report to
Shareholders ("2002 Annual Report") and from the consolidated financial
statements, related notes and supplementary data on pages 40 through 61 of our
2002 Annual Report.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
None.
30
PART III
See the information under the following captions in Tyler's definitive Proxy
Statement, which is incorporated herein by reference. Only those sections of the
Proxy Statement that specifically address the items set forth herein are
incorporated by reference. Such incorporation by reference does not include the
Compensation Committee Report, the Audit Committee Report or the Stock
Performance Graphs, included in the Proxy Statement.
Headings in Proxy Statement
----------------------------------------------
ITEM 10. Directors and Executive Officers of the Registrant. "Directors, Nominees for Director and
Executive Officers"
ITEM 11. Executive Compensation. "Executive Compensation"
ITEM 12. Security Ownership of Certain Beneficial Owners and "Security Ownership of Directors, Nominees for
Management Director, Executive
Officers and Principal Shareholders"
ITEM 13. Certain Relationships and Related Transactions. "Employment Contracts"
PART IV
ITEM 14. CONTROLS AND PROCEDURES
(a) Evaluation of disclosure controls and procedures. Our chief executive
officer and our chief financial officer, after evaluating the
effectiveness of the Company's "disclosure controls and procedures"
(as defined in the Securities Exchange Act of 1934 Rules 13a-14(c) and
15-d-14(c)) as of a date (the "Evaluation Date") within 90 days before
the filing date of this annual report, have concluded that as of the
Evaluation Date, our disclosure controls and procedures were adequate
and designed to ensure that material information relating to us and
our consolidated subsidiaries would be made known to them by others
within those entities.
(b) Changes in internal controls. There were no significant changes in our
internal controls or to our knowledge, in other factors that could
significantly affect our disclosure controls and procedures subsequent
to the Evaluation Date.
31
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULE AND REPORTS ON FORM 8-K.
The following documents from our 2002 Annual Report are incorporated by
reference into Item 8 of Part II of this Annual Report:
(a) (1) The consolidated financial statements are
filed as part of this Annual Report.
PAGE
Report of Independent Auditors.................. 39
Consolidated Statements of Operations
for the years ended December 31,
2002, 2001 and 2000........................ 40
Consolidated Balance Sheets as of December
31, 2002 and 2001.......................... 41
Consolidated Statements of Shareholders' Equity
for the years ended December 31, 2002
2001 and 2000.............................. 42
Consolidated Statements of Cash Flows for the
years ended December 31, 2002, 2001
and 2000................................... 43
Notes to Consolidated Financial Statements...... 44
(2) The following financial statement schedule is filed as
part of this report.
Schedule II--Valuation and Qualifying Accounts
for the years ended December 31, 2002, 2001
and 2000................................... 61
All other schedules for which provision is made in the
applicable accounting regulation of the Securities and
Exchange Commission are not required under the related
instructions or are inapplicable and, therefore, have
been omitted.
(3) Exhibits
Certain of the exhibits to this Annual Report are hereby incorporated by
reference, as specified:
EXHIBIT
NUMBER DESCRIPTION
- ----------------------------------------------------------
3.1 Restated Certificate of Incorporation of
Tyler Three, as amended through May 14, 1990,
and Certificate of Designation of Series A
Junior Participating Preferred Stock (filed
as Exhibit 3.1 to our Form 10-Q for the
quarter ended June 30, 1990, and incorporated
herein).
3.2 Certificate of Amendment to the Restated
Certificate of Incorporation (filed as
Exhibit 3.1 to our Form 8-K, dated February
19, 1998, and incorporated herein).
3.3 Amended and Restated By-Laws of Tyler
Corporation, dated November 4, 1997 (filed as
Exhibit 3.3 to our Form 10-K for the year
ended December 31, 1997, and incorporated
herein).
3.4 Certificate of Amendment dated May 19, 1999
to the Restated Certificate of Incorporation
(filed as Exhibit 3.4 to our Form 10-K for
the year ended December 31, 2000, and
incorporated herein).
32
4.1 Specimen of Common Stock Certificate (filed
as Exhibit 4.1 to our registration statement
no. 33-33505 and incorporated herein).
4.2 Warrant to purchase common stock of Tyler
Technologies, Inc. (filed as Exhibit 4.5 to
our Form 10-Q for the quarter ended June 30,
2000, and incorporated herein).
4.3 Credit Agreement dated as of February 27,
2002, by and between Tyler Technologies, Inc.
and Bank of Texas, N.A. (filed as Exhibit 4.6
to our Form 10-K for the year ended December
31, 2001 and incorporated herein).
4.4 First Amendment to Credit Agreement by and
between Tyler Technologies, Inc. and Bank of
Texas, N.A. dated March 5, 2002, (filed as
Exhibit 4.7 to our Form 10-K for the year
ended December 31, 2001 and incorporated
herein).
*4.5 Second Amendment to Credit Agreement, First
Amendment to Pledge and Security Agreement,
and Lenders Consent and Waiver by and Among
Tyler Technologies, Inc. and Bank of Texas
N.A.
*10.1 Form of Indemnification Agreement for
directors and officers.
10.2 Stock Option Plan amended and restated as of
May 12, 2000 (filed as Exhibit 4.1 to our
registration statement no. 333-98929 and
incorporated herein and amended by Exhibit
4.2).
10.3 Acquisition Agreement dated as of November
20, 1995, by and among the Registrants, Tyler
Pipe Industries, Inc. and Ransom Industries,
Inc., formerly known as Union Acquisition
Corporation (filed as Exhibit 2.1 to our Form
8-K, dated December 14, 1995, and
incorporated herein).
10.4 Purchase Agreement between Tyler Corporation,
Richmond Partners, Ltd. and Louis A. Waters,
dated August 20, 1997 (filed as Exhibit 10.24
to our Form 8-K, dated September 2, 1997, and
incorporated herein).
10.5 Employment agreement between Tyler
Technologies, Inc. and Theodore L. Bathurst,
dated October 7, 1998, (filed as Exhibit
10.18 to our Form 10-Q for the quarter ended
September 30, 1998, and incorporated herein).
*21 Subsidiaries of Tyler
*23 Consent of Ernst & Young LLP
*99.1 Certifications pursuant to Section 1350 of
Chapter 63 of Title 18 of the United States
Code.
33
*99.2 Certifications pursuant to Section 1350 of
Chapter 63 of Title 18 of the United States
Code.
We will furnish copies of these exhibits to
shareholders upon written request and payment
for copying charges of $0.15 per page.
* Filed herewith.
(b) Reports on Form 8-K
Form 8-K Item
Reported Date Reported Exhibits Filed
------------- --------- ------------------------------
November 1, 2002 5 News release issued by Tyler
Technologies, Inc. dated October
31, 2002
34
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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.
Date: February 25, 2003 By: /s/ John M. Yeaman
-----------------------------------
John M. Yeaman
Chief Executive Officer and President
(principal executive officer)
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
Date: February 25, 2003 By: /s/ G. Stuart Reeves
----------------------------
G. Stuart Reeves
Chairman of the Board
Date: February 25, 2003 By: /s/ John M. Yeaman
----------------------------
John M. Yeaman
Chief Executive Officer and
President
Director
(principal executive officer)
Date: February 25, 2003 By: /s/ Theodore L. Bathurst
----------------------------
Theodore L. Bathurst
Vice President and Chief
Financial Officer
(principal financial officer)
Date: February 25, 2003 By: /s/ Brian K. Miller
----------------------------
Brian K. Miller
Vice President - Finance and
Treasurer
Date: February 25, 2003 By: /s/ Terri L. Alford
----------------------------
Terri L. Alford
Controller
(principal accounting officer)
35
Date: February 25, 2003 By: /s/ Ben T. Morris
----------------------------
Ben T. Morris
Director
Date: February 25, 2003 By: /s/ John S. Marr
----------------------------
John S. Marr
Director
Date: February 25, 2003 By: /s/ Michael D. Richards
----------------------------
Michael D. Richards
Director
Date: February 25, 2003 By: /s/ Glenn A. Smith
----------------------------
Glenn A. Smith
Director
36
CERTIFICATIONS
I, John M. Yeaman, certify that:
1. I have reviewed this annual report on Form 10-K of Tyler Technologies,
Inc.;
2. Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary
to make the statements made, in light of the circumstances under which
such statements were made, not misleading with respect to the period
covered by this annual report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all
material respects the financial condition, results of operations and
cash flows of the registrant as of, and for, the periods presented in
this annual report;
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and
we have:
a) designed such disclosure controls and procedures to ensure
that material information relating to the registrant,
including its consolidated subsidiaries, is made known to us
by others within those entities, particularly during the
period in which this annual report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to
the filing date of this annual report (the "Evaluation Date");
and
c) presented in this annual report our conclusions about the
effectiveness of the disclosure controls and procedures based
on our evaluation as of the Evaluation Date;
5. The registrant's other certifying officer and I have disclosed, based
on our most recent evaluation, to the registrant's auditors and the
audit committee of registrant's board of directors (or persons
performing the equivalent function):
a) all significant deficiencies in the design or operation of
internal controls which could adversely affect the
registrant's ability to record, process, summarize and report
financial data and have identified for the registrant's
auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management
or other employees who have a significant role in the
registrant's internal controls; and
6. The registrant's other certifying officer and I have indicated in this
annual report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation,
including any corrective actions with regard to significant
deficiencies and material weaknesses.
Dated: February 25, 2003 By: /s/ John M. Yeaman
------------------
John M. Yeaman
President and Chief Executive Officer
37
I, Theodore L. Bathurst, certify that:
1. I have reviewed this annual report on Form 10-K of Tyler Technologies,
Inc.;
2. Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary
to make the statements made, in light of the circumstances under which
such statements were made, not misleading with respect to the period
covered by this annual report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all
material respects the financial condition, results of operations and
cash flows of the registrant as of, and for, the periods presented in
this annual report;
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and
we have:
a) designed such disclosure controls and procedures to ensure
that material information relating to the registrant,
including its consolidated subsidiaries, is made known to us
by others within those entities, particularly during the
period in which this annual report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to
the filing date of this annual report (the "Evaluation Date");
and
c) presented in this annual report our conclusions about the
effectiveness of the disclosure controls and procedures based
on our evaluation as of the Evaluation Date;
5. The registrant's other certifying officer and I have disclosed, based
on our most recent evaluation, to the registrant's auditors and the
audit committee of registrant's board of directors (or persons
performing the equivalent function):
a) all significant deficiencies in the design or operation of
internal controls which could adversely affect the
registrant's ability to record, process, summarize and report
financial data and have identified for the registrant's
auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management
or other employees who have a significant role in the
registrant's internal controls; and
6. The registrant's other certifying officer and I have indicated in this
annual report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation,
including any corrective actions with regard to significant
deficiencies and material weaknesses.
Dated: February 25, 2003 By: /s/ Theodore L. Bathurst
------------------------
Theodore L. Bathurst
Vice President and Chief Financial Officer
38
REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
The Board of Directors and Shareholders
Tyler Technologies, Inc.
We have audited the accompanying consolidated balance sheets of Tyler
Technologies, Inc. as of December 31, 2002 and 2001, and the related
consolidated statements of operations, shareholders' equity, and cash flows for
each of the three years in the period ended December 31, 2002. Our audits also
included the financial statement schedule listed in the Index at Item 15(a).
These financial statements and schedule are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements and schedule based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of Tyler
Technologies, Inc. at December 31, 2002 and 2001, and the consolidated results
of their operations and their cash flows for each of the three years in the
period ended December 31, 2002, in conformity with accounting principles
generally accepted in the United States. Also, in our opinion, the related
financial statement schedule, when considered in relation to the basic financial
statements taken as a whole, presents fairly in all material respects the
information set forth therein.
As discussed in Note 7 in the Notes to the Consolidated Financial Statements,
the Company changed its method of accounting for goodwill.
ERNST & YOUNG LLP
Dallas, Texas
February 21, 2003
39
Tyler Technologies, Inc.
Consolidated Statements of Operations
For the years ended December 31
In thousands, except per share amounts
2002 2001 2000
--------- --------- --------
Revenues:
Software licenses $ 24,278 $ 19,491 $ 19,312
Software services 25,703 21,538 19,425
Maintenance 40,667 36,587 29,108
Appraisal services 37,319 34,727 20,909
Hardware and other 5,930 6,473 5,179
-------- -------- --------
Total revenues 133,897 118,816 93,933
Cost of revenues:
Software licenses 5,482 4,130 2,605
Software services and maintenance 50,175 46,024 38,355
Appraisal services 25,512 23,894 14,681
Hardware and other 4,746 4,749 4,017
-------- -------- --------
Total cost of revenues 85,915 78,797 59,658
-------- -------- --------
Gross profit 47,982 40,019 34,275
Selling, general and administrative expenses 33,914 30,830 32,805
Amortization of acquisition intangibles 3,329 6,898 6,903
-------- -------- --------
Operating income (loss) 10,739 2,291 (5,433)
Legal fees associated with affiliated
investment 704 -- --
Interest expense 187 630 4,914
Interest income (193) (151) (30)
-------- -------- --------
Income (loss) from continuing operations
before income taxes 10,041 1,812 (10,317)
Income tax provision (benefit) 3,869 1,540 (2,810)
-------- -------- --------
Income (loss) from continuing operations 6,172 272 (7,507)
Discontinued operations:
Loss from operations, after income taxes -- -- (4,251)
Gain (loss) on disposal, after income taxes 1,817 (3) (12,839)
-------- -------- --------
Gain (loss) from discontinued operations 1,817 (3) (17,090)
-------- -------- --------
Net income (loss) $ 7,989 $ 269 $(24,597)
======== ======== ========
Basic income (loss) per common share:
Continuing operations $ 0.13 $ 0.01 $ (0.17)
Discontinued operations 0.04 (0.00) (0.37)
-------- -------- --------
Net income (loss) per common share $ 0.17 $ 0.01 $ (0.54)
======== ======== ========
Diluted income (loss) per common share:
Continuing operations $ 0.12 $ 0.01 $ (0.17)
Discontinued operations 0.04 (0.00) (0.37)
-------- -------- --------
Net income (loss) per common share $ 0.16 $ 0.01 $ (0.54)
======== ======== ========
Basic weighted average common shares
outstanding 47,136 47,181 45,380
Diluted weighted average common shares
outstanding 49,493 47,984 45,380
See accompanying notes
40
Tyler Technologies, Inc.
Consolidated Balance Sheets
December 31
In thousands, except share and per share amounts
2002 2001
---------- ----------
ASSETS
Current assets:
Cash and cash equivalents $ 13,744 $ 5,271
Accounts receivable (less allowance for losses of $690
in 2002 and $1,275 in 2001) 33,510 35,256
Income taxes receivable -- 151
Prepaid expenses and other current assets 4,009 3,318
Deferred income taxes 1,197 1,329
--------- ---------
Total current assets 52,460 45,325
Net assets of discontinued operations -- 1,000
Property and equipment, net 6,819 6,967
Other assets:
Investment security available - for - sale 27,196 11,238
Goodwill 46,298 43,292
Customer base, net 14,645 15,518
Software, net 21,933 19,982
Other acquisition intangibles 10 3,419
Sundry 484 234
--------- ---------
$ 169,845 $ 146,975
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 2,390 $ 2,036
Accrued liabilities 11,186 9,774
Net current liabilities of discontinued operations 442 581
Deferred revenue 26,208 27,215
--------- ---------
Total current liabilities 40,226 39,606
Long-term obligations, less current portion 2,550 2,910
Deferred income taxes 8,413 3,575
Commitments and contingencies
Shareholders' equity:
Preferred stock, $10.00 par value; 1,000,000 shares
authorized none issued -- --
Common stock, $0.01 par value; 100,000,000 shares
authorized; 48,147,969 shares issued in 2002 and 2001 481 481
Additional paid-in capital 156,898 157,242
Accumulated deficit (40,954) (48,943)
Accumulated other comprehensive income (loss), net of
tax 7,418 (4,545)
Treasury stock, at cost; 1,928,636 and 920,205 shares
in 2002 and 2001, respectively (5,187) (3,351)
--------- ---------
Total shareholders' equity 118,656 100,884
--------- ---------
$ 169,845 $ 146,975
========= =========
See accompanying notes.
41
Tyler Technologies, Inc.
Consolidated Statements of Shareholders' Equity
For the years ended December 31, 2002, 2001 and 2000
In thousands
ACCUMULATED
COMMON STOCK ADDITIONAL OTHER TREASURY STOCK TOTAL
-------------- PAID-IN COMPREHENSIVE ACCUMULATED ----------------- SHAREHOLDERS'
SHARES AMOUNT CAPITAL INCOME (LOSS) DEFICIT SHARES AMOUNT EQUITY
------ ------ ----------- ------------- ----------- ------ ------- ------
Balance at December 31, 1999 44,709 $ 447 $151,298 $ 17,931 $(24,615) (1,418) $ (6,157) $ 138,904
Comprehensive loss:
Net loss -- -- -- -- (24,597) -- -- (24,597)
Unrealized loss on investment
security -- -- -- (28,622) -- -- -- (28,622)
---------
Total comprehensive loss (53,219)
---------
Issuance of shares pursuant
to stock compensation plans -- -- (1,759) -- -- 555 2,926 1,167
Shares issued for private investment 3,334 33 9,237 -- -- -- -- 9,270
------ ------ -------- --------- -------- ------ --------- ---------
Balance at December 31, 2000 48,043 480 158,776 (10,691) (49,212) (863) (3,231) 96,122
Comprehensive income:
Net income -- -- -- -- 269 -- -- 269
Unrealized gain on investment
security -- -- -- 6,146 -- -- -- 6,146
---------
Total comprehensive income 6,415
---------
Issuance of shares pursuant
to stock compensation plans 105 1 221 -- -- 3 8 230
Federal income tax benefit related
to exercise of stock options -- -- 33 -- -- -- -- 33
Shares received from sale of
discontinued business -- -- -- -- -- (60) (128) (128)
Adjustment in connection with
previous acquisition -- -- (1,788) -- -- -- -- (1,788)
------ ------ -------- --------- -------- ------ --------- ---------
Balance at December 31, 2001 48,148 481 157,242 (4,545) (48,943) (920) (3,351) 100,884
Comprehensive income:
Net income -- -- -- -- 7,989 -- -- 7,989
Unrealized gain on investment
security, net of tax -- -- -- 11,963 -- -- -- 11,963
---------
Total comprehensive income 19,952
---------
Issuance of shares pursuant
to stock compensation plans -- -- (542) -- -- 491 2,164 1,622
Treasury stock purchases -- -- -- -- -- (1,500) (4,000) (4,000)
Federal income tax benefit related
to exercise of stock options -- -- 198 -- -- -- -- 198
------ ------ -------- --------- -------- ------ --------- ---------
Balance at December 31, 2002 48,148 $ 481 $156,898 $ 7,418 $(40,954) (1,929) $(5,187) $ 118,656
====== ====== ======== ========= ======== ====== ========= =========
See accompanying notes.
42
Tyler Technologies, Inc.
Consolidated Statements of Cash Flows
For the years ended December 31
In thousands
2002 2001 2000
--------- --------- ---------
Cash flows from operating activities:
Net income (loss) $ 7,989 $ 269 $(24,597)
Adjustments to reconcile net income (loss)
to net cash provided (used) by operations:
Depreciation and amortization 8,522 10,910 9,686
Non-cash interest and other charges 348 361 2,069
Provision for losses -- accounts receivable 727 1,681 1,438
Deferred income tax provision (benefit) 3,384 1,258 (2,890)
Discontinued operations - noncash charges and
changes in operating assets and liabilities (2,458) (2,590) 8,215
Changes in operating assets and liabilities,
exclusive of effects of acquired companies and
discontinued operations:
Accounts receivable 1,019 (258) (7,052)
Income tax receivable 151 172 2,571
Prepaid expenses and other current assets (279) (853) 48
Other receivables -- -- 85
Accounts payable 354 (2,263) 697
Accrued liabilities 1,095 (2,092) 1,370
Deferred revenue (1,007) 6,149 1,234
-------- -------- --------
Net cash provided (used) by operating
activities 19,845 12,744 (7,126)
-------- -------- --------
Cash flows from investing activities:
Additions to property and equipment (2,508) (3,101) (2,645)
Software development costs (7,210) (6,225) (6,714)
Cost of acquisitions, net of cash acquired -- (2,750) --
Cost of acquisitions subsequently discontinued -- -- (3,073)
Capital expenditures of discontinued operations -- (1,353) (2,201)
Proceeds from disposal of discontinued operations
and related assets 1,807 3,675 79,821
Other (63) 48 213
-------- -------- --------
Net cash (used) provided by investing
activities (7,974) (9,706) 65,401
-------- -------- --------
Cash flows from financing activities:
Net payments on revolving credit facility -- (4,750) (56,250)
Payments on notes payable (456) (354) (836)
Payment of debt of discontinued operations (324) (992) (2,925)
Issuance of common stock -- -- 9,270
Repurchase of common stock (4,000) -- --
Proceeds from exercise of stock options 1,622 230 19
Debt issuance costs (240) (118) (1,300)
-------- -------- --------
Net cash used by financing activities (3,398) (5,984) (52,022)
-------- -------- --------
Net increase (decrease) in cash and cash equivalents 8,473 (2,946) 6,253
Cash and cash equivalents at beginning of year 5,271 8,217 1,964
-------- -------- --------
Cash and cash equivalents at end of year $ 13,744 $ 5,271 $ 8,217
======== ======== ========
See accompanying notes.
43
Tyler Technologies, Inc.
Notes to Consolidated Financial Statements
(Tables in thousands, except per share data)
December 31, 2002 and 2001
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
DESCRIPTION OF BUSINESS
We provide 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. In addition 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.
We discontinued the operations of our information and property records services
segment in 2000. See Note 3 - Discontinued Operations.
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include our parent company and our
subsidiaries, all of which are wholly-owned. All significant intercompany
balances and transactions have been eliminated in consolidation.
CASH AND CASH EQUIVALENTS
Cash equivalents include items almost as liquid as cash, such as money market
investments with maturity periods of three months or less when purchased. For
purposes of the statements of cash flows, we consider all investments with
original maturities of three months or less to be cash equivalents.
REVENUE RECOGNITION
We earn revenue from software licenses, postcontract customer support ("PCS" or
"maintenance"), hardware, software related services and appraisal services. PCS
includes telephone support, bug fixes, and rights to upgrades on a when-and-if
available basis. We provide services that 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, we allocate
the total arrangement fee among each deliverable based on the relative fair
value of each. Fair values are estimated using vendor specific objective
evidence.
We recognize revenue from software transactions in accordance with Statement of
Position ("SOP") 97-2, "Software Revenue Recognition," as amended by SOP 98-4
and SOP 98-9 as follows:
Software Licenses and Appraisal Services:
We recognize the revenue allocable to software licenses and specified upgrades
upon delivery of the software product or upgrade to the customer, unless the fee
is not fixed or determinable or collectibility is not probable. If the fee is
not fixed or determinable including payment terms three months or more from
shipment, 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 product's functionality.
A majority of our software arrangements involve "off-the-shelf" software. We
consider software to be off-the-shelf software if it can be added to an
arrangement with minor changes in the underlying code and it can be used by the
customer for the customer's purpose upon installation. For off-the-shelf
software arrangements, we recognize the software license fee as revenue after
delivery has occurred, customer acceptance is reasonably assured, that portion
of the fee represents an enforceable claim and is probable of collection and the
remaining services such as training are not considered essential to the
product's functionality.
44
For arrangements that include customization or modification of the software, or
where software services are otherwise considered essential, we recognize revenue
using contract accounting. We use the percentage-of-completion method to
recognize revenue from these arrangements. We measure progress-to-completion
primarily using labor hours incurred, or value added. The percentage of
completion methodology generally results in the recognition of reasonably
consistent profit margins over the life of a contract since we have the ability
to produce reasonably dependable estimates of contract billings and contract
costs. We generally use the level of profit margins that are most likely to
occur on a contract. If the most likely profit margins cannot be precisely
determined, the lowest probable level of profit in the range of estimates is
used for the contract until the results can be estimated more precisely. These
arrangements are often implemented over an extended time period and occasionally
require us to revise total cost estimates. Amounts recognized in revenue are
calculated using the progress-to-completion measurement after giving effect to
any changes in our cost estimates. Changes to total estimated contract costs, if
any, are recorded in the period they are determined. Estimated losses on
uncompleted contracts are recorded in the period in which we first determine
that a loss is apparent.
Software Services:
Some of our software arrangements include services considered essential for the
customer to use the software for the customer's purposes. For these software
arrangements, both the software license revenue and the services revenue are
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 we perform
the services.
Appraisal Services:
For our real estate appraisal projects, we recognize revenue using contract
accounting. We measure progress-to-completion primarily using units completed
and these arrangements are often implemented over a one to three year time
period.
Computer Hardware Equipment:
Revenue allocable to equipment based on vendor specific objective evidence of
fair value is recognized when we deliver the equipment and collection is
probable.
Postcontract Customer Support:
Our customers generally enter into PCS agreements when they purchase the
software license. Our PCS agreements are generally renewable every year. 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.
Deferred revenue consists primarily of payments received in advance of revenue
being earned under software licensing, software services and hardware
installation, support and maintenance contracts. Unbilled revenue is not
billable at the balance sheet dates but is recoverable over the remaining life
of the contract through billings made in accordance with contractual agreements.
USE OF ESTIMATES
The preparation of our consolidated financial statements in conformity with
accounting principles generally accepted in the United States ("GAAP") requires
us to make estimates and assumptions that affect the reported amounts of assets
and liabilities and disclosure of contingent assets and liabilities at the date
of the financial statements and the reported amounts of revenues and expenses
during the reporting period. Significant items subject to such estimates and
assumptions include the application of the percentage of completion method, the
carrying amount of intangible assets and valuation allowances for receivables
and deferred income tax assets. Actual results could differ from those
estimates.
PROPERTY AND EQUIPMENT
Property, equipment and purchased software are recorded at original cost and
increased by the cost of any significant improvements after purchase. We record
maintenance and repairs as expense when incurred. Depreciation and amortization
is calculated using the straight-line method over the shorter of the asset's
estimated useful life or the term of the lease in the case of leasehold
improvements. For income tax purposes, we use accelerated depreciation methods
as allowed by tax laws.
INTEREST COST
We capitalize interest cost as a component of capitalized software development
costs. We capitalized interest costs of $269,000 during 2002, $578,000 during
2001 and $586,000 during 2000.
45
RESEARCH AND DEVELOPMENT COSTS
We record all research and development costs as expense when incurred. We
expensed research and development costs of $611,000 during 2002, $412,000 during
2001 and $973,000 during 2000.
INCOME TAXES
Income taxes are accounted for under the asset and liability method. Deferred
taxes arise because of different treatment between financial statement
accounting and tax accounting, known as "temporary differences." We record the
tax effect of these temporary differences as "deferred tax assets" (generally
items that can be used as a tax deduction or credit in the future periods) and
"deferred tax liabilities" (generally items that we received a tax deduction
for, which have not yet been recorded in the income statement). The deferred tax
assets and liabilities are measured using enacted tax rules and laws that are
expected to be in effect when the temporary differences are expected to be
recovered or settled. A valuation allowance would be established to reduce
deferred tax assets if it is likely that a deferred tax asset will not be
realized.
STOCK COMPENSATION
In accordance with Statement of Financial Accounting Standards ("SFAS") No. 123,
"Accounting for Stock-Based Compensation," we elected to account for our
stock-based compensation under Accounting Principles Board ("APB") Opinion No.
25, "Accounting for Stock Issued to Employees," as amended and related
interpretations including FASB Interpretation No. 44, "Accounting for Certain
Transactions involving Stock Compensation," an interpretation of APB Opinion No.
25, issued in March 2000. Under APB No. 25's intrinsic value method,
compensation expense is determined on the measurement date; that is, the first
date on which both the number of shares the option holder is entitled to
receive, and the exercise price, if any, are known. Compensation expense, if
any, is measured based on the award's intrinsic value - the excess of the market
price of the stock over the exercise price on the measurement date. The exercise
price of all of our stock options granted equals the market price on the
measurement date. Therefore we have not recorded any compensation expense
related to grants of stock options.
The weighted-average fair value per stock option granted was $3.61 for 2002,
$1.28 for 2001 and $2.02 for 2000. We estimated the fair values using the
Black-Scholes option pricing model and the following assumptions for the periods
presented:
YEARS ENDED DECEMBER 31,
----------------------------------
2002 2001 2000
--------- --------- ---------
Expected dividend yield..................... 0% 0% 0%
Risk-free interest rate..................... 4.9% 5.1% 6.1%
Expected stock price volatility............. 77.0% 78.0% 73.0%
Expected term until exercise (years) ....... 7 7 7
Pro forma information regarding net income (loss) and earnings (loss) per share
is required by SFAS No. 123 for awards granted after December 31, 1994, as if we
had accounted for our stock-based awards to employees under the fair value
method of SFAS No. 123, and is as follows:
YEARS ENDED DECEMBER 31,
--------------------------------------
2002 2001 2000
---------- ---------- ----------
Net income (loss)................................................. $ 7,989 $ 269 $ (24,597)
Add stock-based employee compensation cost included in net income
(loss), net of related tax benefit................................ -- -- --
Deduct total stock-based employee compensation expense determined
under fair-value-based method for all rewards, net of related
tax benefit.................................................... (1,394) (1,188) (1,399)
--------- -------- ---------
Pro forma net income (loss)....................................... $ 6,595 $ (919) $ (25,996)
========= ======== =========
Pro forma net income (loss) per basic share....................... $ 0.14 $ (0.02) $ (0.57)
========= ======== =========
Pro forma net income (loss) per diluted share..................... $ 0.13 $ (0.02) $ (0.57)
========= ======== =========
46
COMPREHENSIVE INCOME (LOSS)
Changes in accumulated other comprehensive income (loss) follows:
YEARS ENDED DECEMBER 31,
------------------------------------------
2002 2001 2000
---------- ---------- ----------
Net income (loss)................................................. $ 7,989 $ 269 $ (24,597)
Other comprehensive income (loss):
Change in fair value of securities available-for-sale (net of
deferred tax expense of $3,995 for 2002)...................... 11,963 6,146 (28,622)
---------- ---------- ---------
Total comprehensive income (loss)................................. $ 19,952 $ 6,415 $ (53,219)
========== ========== =========
We did not record a tax benefit in connection with the change in the unrealized
gain (loss) for 2001 or 2000 since we could not conclude it was more likely than
not that the tax benefit would be realized on the cumulative unrealized holding
loss.
SEGMENT AND RELATED INFORMATION
Although we have a number of operating subsidiaries, separate segment data has
not been presented as they meet the criteria for aggregation as permitted by
SFAS No. 131, "Disclosures About Segments of an Enterprise and Related
Information."
GOODWILL AND OTHER INTANGIBLE ASSETS
Our business acquisitions result in the allocation of the purchase price to
goodwill and other intangible assets. We allocate the cost of acquired companies
first to identifiable assets based on estimated fair values. The excess of the
purchase price over the fair value of identifiable assets acquired, net of
liabilities assumed, is recorded as goodwill.
On January 1, 2002 we adopted the provisions of SFAS No. 141, "Business
Combinations," and SFAS No. 142, "Goodwill and Other Intangible Assets." SFAS
No. 141 eliminates the pooling of interest method of accounting for business
combinations initiated after June 30, 2001. The adoption of SFAS No. 141 did not
impact our results of operations or financial position.
With the adoption of SFAS No. 142 goodwill and intangible assets not subject to
amortization are tested annually for impairment, and are tested for impairment
more frequently if events and circumstances indicate that the asset might be
impaired. An impairment loss is recognized to the extent that the carrying
amount exceeds the asset's fair value.
Prior to the adoption of SFAS No. 142, goodwill was amortized on a straight-line
basis over the expected periods to be benefited and assessed for recoverability
by determining whether the amortization of the goodwill balance over its
remaining life could be recovered through undiscounted future operating cash
flows of the acquired operation. All other intangible assets were amortized on a
straight-line basis. The amount of goodwill and other intangible asset
impairment, if any, was measured by the amount by which the carrying amount of
the assets exceeded the fair value of the assets. Fair value was determined
based on projected discounted future operating cash flows using a discount rate
reflecting our average cost of funds.
47
IMPAIRMENT OF LONG-LIVED ASSETS
SFAS No. 144 provides a single accounting model for long-lived assets to be
disposed of. SFAS No. 144 also changes the criteria for classifying an asset as
held for sale; and broadens the scope of businesses to be disposed of that
qualify for reporting as discontinued operations and changes the timing of
recognizing losses on discontinued operations. We adopted SFAS No. 144 on
January 1, 2002. The adoption of SFAS No. 144 did not affect our results of
operations or financial position.
In accordance with SFAS No. 144, long-lived assets, such as property, plant, and
equipment, and purchased intangibles subject to amortization, are reviewed for
impairment whenever events or changes in circumstances indicate that the amount
we have recorded for an asset may not be recoverable. Recoverability of assets
to be held and used is measured by a comparison of the carrying amount of an
asset to estimated undiscounted future cash flows expected to be generated by
the asset. If the carrying amount of an asset exceeds its estimated future cash
flows, an impairment charge is recognized by the amount by which the carrying
amount of the asset exceeds the fair value of the asset. Assets to be disposed
of would be separately presented in the balance sheet and reported at the lower
of the carrying amount or fair value less costs to sell, and are no longer
depreciated. The assets and liabilities of a disposed group classified as held
for sale would be presented separately in the appropriate asset and liability
sections of the balance sheet.
Prior to the adoption of SFAS No. 144, we accounted for long-lived assets in
accordance with SFAS No. 121, "Accounting for Impairment of Long-Lived Assets
and for Long-Lived Assets to be Disposed Of."
COSTS OF COMPUTER SOFTWARE
Software development costs have been accounted for in accordance with SFAS No.
86, "Accounting for the Costs of Computer Software to be Sold, Leased, or
Otherwise Marketed." Under SFAS No. 86, capitalization of software development
costs begins upon the establishment of technological feasibility and prior to
the availability of the product for general release to customers. We capitalized
software development costs of approximately $7.2 million during 2002, $6.2
million during 2001 and $6.7 million during 2000. Software development costs
primarily consist of personnel costs, rent for related office space and
capitalized interest cost. We begin to amortize capitalized costs when a product
is available for general release to customers. Amortization expense is
determined on a product-by-product basis at a rate not less than straight-line
basis over the product's remaining estimated economic life. Amortization of
software development costs was approximately $2.8 million during 2002, $1.7
million during 2001 and $622,000 during 2000.
FAIR VALUE OF FINANCIAL INSTRUMENTS
We used the following methods and assumptions to estimate the fair value of each
class of financial instruments at the balance sheet date:
- Cash and cash equivalents, accounts receivables, trade
accounts payables, deferred revenues and certain other assets:
Costs approximate fair value because of the short maturity of
these instruments. Our available-for-sale investments are
recorded at fair value based on quoted market prices.
- Long-term obligations: Cost/carrying values approximates fair
value either due to the variable nature of their stated
interest rates or the stated interest rates approximate market
rates. These estimated fair value amounts have been determined
using available market information or other appropriate
valuation methodologies.
- We do not have any derivative financial instruments, including
those for speculative or trading purposes.
CONCENTRATIONS OF CREDIT RISK AND UNBILLED RECEIVABLES
Concentrations of credit risk with respect to receivables are limited due to the
wide variety of customers and markets into which our products and services are
provided, as well as their dispersion across many different geographic areas.
Historically our credit losses have not been significant. As a result, as of
December 31, 2002, we do not believe we have any significant concentrations of
credit risk.
48
Our property appraisal outsourcing service contracts can range up to three years
in duration. In connection with these percentage of completion contracts and for
certain software service contracts, we may perform the work prior to when the
services are billable and/or payable pursuant to the contract. We have recorded
retentions and unbilled receivables (costs and estimated profit in excess of
billings) of approximately $6.2 million and $7.5 million at December 31, 2002
and 2001, respectively, in connection with such contracts. Retentions are
included in trade accounts receivable and amounted to $2.6 million at December
31, 2002, of which $168,000 is expected to be collected in excess of one year.
One customer accounted for approximately 10% during 2002 and 13% during 2001, of
our total consolidated revenues. No single customer accounted for greater than
10% of total consolidated revenues during 2000.
RECLASSIFICATIONS
Pursuant to Financial Accounting Standards Board Emerging Issues Task Force
("EITF") Issue No. 01-14, "Income Statement Characterization of Reimbursements
Received for 'Out-of-Pocket' Expenses Incurred," customer reimbursements for
out-of-pocket expenses are to be included in net revenues and the related costs
in cost of revenues. Because these additional net revenues are offset by the
associated reimbursable expenses included in cost of revenues, the adoption of
EITF No. 01-14 in 2002 did not impact income (loss) from continuing operations
or net income (loss) for all periods presented. Net revenues and cost of
revenues for 2001 and 2000 were recast to reclassify certain reimbursable
expenses to conform to the current year presentation in accordance with EITF No.
01-14. See Note 17 - Quarterly Financial Information.
In addition, certain other amounts for previous years have been reclassified to
conform to the current year presentation.
(2) ACQUISITIONS
On November 4, 1999, we acquired selected assets and assumed selected
liabilities of Cole Layer Trumble Company ("CLT") from a privately held company
("Seller"). Part of the purchase price consisted of the issuance of 1.0 million
restricted shares of Tyler common stock and included a price protection on the
sale of the stock. The price protection, which expired November 4, 2001, was
equal to the difference between the actual sale proceeds of the Tyler common
stock and $6.25 on a per share basis. The price protection was limited to $2.75
million. During the year ended December 31, 2001, we received a claim from the
Seller under the price protection provision, which qualified for the maximum
amount of the price protection. Contingent consideration of this nature does not
change the recorded costs of the acquisition and the claim is first recorded
when submitted. Accordingly, the claim submitted in 2001 of $2.75 million, net
of the deferred tax benefit of $963,000, was charged to paid-in capital during
2001. The purchase agreement contained a number of post-closing adjustments
which resulted in a receivable of approximately $1.4 million due to us from the
Seller. During the year ended December 31, 2001 and concurrent with the
settlement of the price protection provision, we paid the Seller $1.35 million
in cash on a net basis and eliminated the $1.4 million receivable due to us. We
entered into a mutual release agreement with the Seller to fully settle the
price protection and related purchase agreement provisions.
In January 2000 we paid $3.0 million in cash (among other consideration) for
Capital Commerce Reporter, Inc. ("CCR") which was included in our information
and property records services segment that was discontinued in December 2000.
We have used the purchase method of accounting for all of our business
combinations. Results of operations of acquired entities are included in our
consolidated financial statements from the respective dates of acquisition.
(3) DISCONTINUED OPERATIONS
Discontinued operations includes the operating results of the information and
property records services segment which we discontinued in December 2002, two
non-operating subsidiaries relating to a formerly owned subsidiary that we sold
in December 1995 and an automotive parts distributor that we sold in March 1999.
On September 29, 2000, we sold certain net assets of Kofile, Inc. and another
subsidiary, our interest in a certain intangible work product, and a building
and related building improvements ("Kofile Sale") for a cash sale price of $14.4
million. Effective December 29, 2000, we sold for cash our land records business
unit, consisting of Business Resources Corporation ("Resources"), to an
affiliate of Affiliated Computer Services, Inc. (the "Resources Sale"). The
Resources Sale was valued at approximately $71.0 million. Concurrent with the
Resources Sale, our management with our Board of Directors' approval adopted a
formal plan of disposal for the remaining businesses and assets of the
information and property records services segment. This restructuring program
was designed
49
to focus our resources on our software systems and services segment and to
reduce debt. The businesses and assets divested or identified for divesture were
classified as discontinued operations in the accompanying consolidated financial
statements in 2000 and the prior periods' financial statements were restated to
report separately their operations in compliance with APB Opinion No. 30. The
net gain on the Kofile Sale and the Resources Sale amounted to approximately
$1.5 million (net of an income tax benefit of $2.4 million).
Our formal plan of disposal provided for the remaining businesses and assets of
the information and property records services segment to be disposed of by
December 29, 2001. The estimated loss on the disposal of these remaining
businesses and assets at December 29, 2000 amounted to $13.6 million (after an
income tax benefit of $3.8 million). This loss consisted of an estimated loss on
disposal of the businesses of $11.5 million (net of an income tax benefit of
$2.7 million) and a provision of $2.1 million (after an income tax benefit of
$1.1 million) for anticipated operating losses from the measurement date of
December 29, 2000 to the estimated disposal dates.
On May 16, 2001, we sold all of the common stock of one of the businesses in the
discontinued information and property records services segment. In connection
with the sale, we received cash proceeds of $575,000, approximately 60,000
shares of Tyler common stock, a promissory note of $750,000 payable in 58
monthly installments at an interest rate of 9%, and other contingent
consideration. On September 21, 2001, we sold all of the common stock of CCR for
$3.1 million in cash.
We renegotiated certain aspects of the May 16, 2001 sale transaction and 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 received
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 2002, we received payments of $46,000 on the
subordinated note.
During the year ended December 31, 2002, the IRS issued temporary regulations
that in effect allowed us to deduct for tax purposes losses attributable to the
March 1999 sale of our automotive parts subsidiary that were previously not
allowed. The tax benefit of allowing the deduction of this loss amounted to
approximately $970,000. In addition, we renegotiated a note receivable and
certain contingent consideration in connection with a subsidiary sold in 2001
and received proceeds of approximately $846,000 in 2002. We initially assigned
no value for accounting purposes to the note receivable and contingent
consideration when the loss on the disposal of the discontinued operation was
first established in 2000 and when the note was first received in 2001. In
addition, we settled in the fourth quarter of 2002 our asbestos litigation for
an amount that was approximately $200,000 less than the liability initially
established for this matter. See Note 16 - Commitments and Contingencies. The
aggregate effects of these events, net of the related tax effects, and other
minor adjustments to the reserve for discontinued operations resulted in a
credit to discontinued operations of $1.8 million in 2002. In our opinion and
based on information available at this time, we believe that our net liabilities
related to discontinued operations are adequate.
The income tax expense or benefit associated with the gains or losses on the
respective sales of the businesses in the information and property records
services segment differs from the statutory income tax rate of 35% due to the
elimination of deferred taxes related to the basis difference between amounts
reported for income taxes and financial reporting purposes and the utilization
of available capital loss carryforwards which were fully reserved in the
valuation account prior to the respective sales.
Net assets of discontinued operations of the information and property records
services segment and two of our non-operating subsidiaries included in the
consolidated balance sheets as of December 31, 2002 and 2001 includes the
following:
2002 2001
--------- --------
Restricted asbestosis settlement cash with
offsetting amount in current liabilities........ $ 1,325 $ 2,310
Accounts receivable................................ -- 100
Deferred taxes..................................... 1,705 2,192
Other current liabilities primarily consisting
of asbestosis settlement obligations (see
Note 16)........................................ (3,472) (5,183)
-------- --------
Net current liabilities.......................... (442) (581)
-------- --------
Property and equipment held for sale .............. -- 1,000
-------- --------
Net (liability) assets........................... $ (442) $ 419
======== ========
50
The condensed statements of operations relating to the information and property
records services segment for the year ended December 31, 2000 is presented
below:
2000
--------
Revenues...................................... $ 39,680
Costs and expenses............................ 44,635
--------
Loss before income tax benefit................ (4,955)
Income tax benefit............................ (704)
--------
Net loss...................................... $ (4,251)
========
Other
One of our non-operating subsidiaries is involved in various claims for
work-related injuries and physical conditions relating to a formerly owned
subsidiary that was sold in 1995. We recorded net losses, net of related tax
effect, of $3,000 during 2001 and $748,000 in 2000 for trial and related costs.
See Note 16 - Commitments and Contingencies.
(4) RELATED PARTY TRANSACTIONS
On September 29, 2000, we sold for cash of $14.4 million certain net assets of
Kofile and another subsidiary, our interest in a certain intangible work
product, and a building and related building improvements to investment entities
beneficially owned by a principal shareholder of Tyler, who was also a director
at the time.
From time to time, we charter aircraft from businesses in which a member of
management is an owner. We recorded rental expense related to such arrangements
with a non-corporate officer management member of $69,000 during 2002, $83,000
during 2001 and $81,000 during 2000.
During 2000, we chartered an aircraft from a former director. The rental expense
related to these charters was $325,000.
As disclosed in Note 11 - Shareholders' Equity, we purchased 1.5 million shares
of our common stock from a former director in 2002.
We have three office building lease agreements with various shareholders and
non-corporate officer management members. Total rental expense related to such
leases was $1.2 million during 2002, $1.1 million during 2001 and $679,000
during 2000.
Total future minimum rental under noncancelable related party operating leases
as of December 31, 2002, are as follows:
2003........ $ 1,204
2004........ 1,198
2005........ 1,136
2006........ 1,149
2007........ 1,179
Thereafter.. 2,778
(5) PROPERTY AND EQUIPMENT
Property and equipment consists of the following at December 31:
USEFUL
LIVES
(YEARS) 2002 2001
------- ------- --------
Land........................................ -- $ 115 $ 115
Transportation equipment.................... 5 385 390
Computer equipment and purchased software... 3-7 8,909 7,542
Furniture and fixtures...................... 3-7 3,797 3,515
Building and leasehold improvements......... 3-35 1,751 1,338
------- --------
14,957 12,900
Accumulated depreciation and amortization... (8,138) (5,933)
------- --------
Property and equipment, net.............. $ 6,819 $ 6,967
======= ========
Depreciation expense was $2.4 million during 2002, $2.3 million during 2001 and
$2.0 million during 2000.
51
(6) INVESTMENT SECURITY AVAILABLE-FOR-SALE
Pursuant to an agreement with two major shareholders of H.T.E., Inc. ("HTE"), we
acquired approximately 5.6 million shares of HTE's common stock in exchange for
approximately 2.8 million shares of our common stock. The exchange occurred in
two transactions, one in August 1999 and the other in December 1999. The 5.6
million shares represent a current ownership interest of approximately 35% of
HTE. The cost of the investment was recorded at $15.8 million and is classified
as a non-current asset.
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. On November
16, 2000, the shareholders of HTE, other than Tyler, voted to deny Tyler its
right to vote the "control shares" of HTE. When we acquired the HTE shares, HTE
took the position that all of our shares were "control shares" and therefore did
not have voting rights. We disputed this contention and asserted that the
"control shares" were only those shares in excess of 20% of the outstanding
shares of HTE, and it was only those shares that lacked voting rights. At the
time of our acquisition, no court had interpreted the Florida "control share"
statute.
On October 29, 2001, HTE notified us that, pursuant to the Florida "control
share" statute, it had redeemed all 5.6 million shares of HTE common stock owned
by us for a cash price of $1.30 per share. 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 our
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, that HTE's purported
redemption of any or all of our shares was illegal under Florida law and that we
had the ability to vote up to 20% of the issued and outstanding shares of HTE
common stock owned by us.
On September 18, 2002, the court issued an order declaring that HTE's purported
redemption was invalid. On September 24, 2002, we entered into a settlement
agreement with HTE in which HTE agreed that it would not attempt any other
redemption of our shares. In addition, HTE agreed to dismiss and release us from
the tort claims it alleged against us as disclosed in previous filings. On
December 11, 2002, the court issued a further order declaring that all of our
HTE shares are "control shares" and therefore none of our shares have voting
rights. The court further ruled that voting rights would be restored to our HTE
shares if we were to sell or otherwise transfer our HTE shares to an
unaffiliated third party in a transaction that did not constitute a "control
share acquisition." During 2002 we incurred approximately $704,000 of legal and
other related costs associated with these matters which are classified as
non-operating expenses.
Under GAAP, a 20% investment in the voting stock of another company creates the
presumption that the investor has significant influence over the operating and
financial policies of that company, unless there is evidence to the contrary.
Our management has concluded that we do not have such influence. Accordingly, 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 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.
QUOTED MARKET GROSS UNREALIZED
PER SHARE COST FAIR VALUE HOLDING GAINS (LOSSES)
------------- ------ ---------- ----------------------
December 31, 2002 $4.84 $15.8 $27.2 $11.4
December 31, 2001 2.00 15.8 11.2 (4.6)
February 25, 2003 6.94 15.8 38.9 23.1
On February 4, 2003, we entered into an agreement with SunGard Data Systems,
Inc. ("SDS") in which we agreed to tender all of our HTE shares in the tender
offer to be commenced by SDS for the acquisition of HTE. On February 5, 2003,
SDS and HTE announced
52
a definitive agreement for the acquisition of all of the shares of HTE for $7.00
per share in cash. SDS and HTE also announced that the consummation of the
transaction is subject to customary conditions, including the tender of at least
a majority of the outstanding shares of HTE in the tender offer and the
expiration of the waiting period under the Hart-Scott-Rodino Antitrust
Improvements Act of 1976, as amended. SDS and HTE further announced that certain
shareholders owning approximately 49.6% of the total outstanding shares of HTE
had agreed to tender their shares. According to the press release issued by SDS
and HTE, the acquisition is expected to close in the first quarter of 2003.
Assuming the acquisition is consummated, we will receive approximately $39.3
million in gross cash proceeds from the sale of our HTE shares. There can be no
assurance that the acquisition of HTE by SDS will be consummated on the terms as
disclosed, if at all. If SDS does not acquire HTE, we will continue to classify
our investment as an available-for-sale security in accordance with SFAS No. 115
and as a non-current asset since the investment was initially made for a
continuing business purpose.
(7) GOODWILL AND OTHER INTANGIBLE ASSETS
Goodwill, other intangible assets and related accumulated amortization consists
of the following at December 31:
2002 2001
--------- ---------
Gross carrying amount of acquisition intangibles:
Goodwill........................................ $ 46,298 $ 51,063
Customer base................................... 17,997 17,997
Software acquired............................... 12,158 12,158
Workforce....................................... -- 6,191
Non-compete agreements.......................... 163 163
--------- ---------
76,616 87,572
Accumulated amortization........................... (13,066) (20,314)
--------- ---------
Acquisition intangibles, net.................... $ 63,550 $ 67,258
========= =========
Post acquisition software development costs........ $ 24,560 $ 17,369
Accumulated amortization........................... (5,224) (2,416)
--------- ---------
Post acquisition software costs, net............ $ 19,336 $ 14,953
========= =========
Total amortization expense was $6.1 million during 2002, $8.6 million during
2001 and $7.5 million during 2000.
As discussed in Note 1 - Summary of Significant Accounting Policies, on January
1, 2002, we adopted the provisions of SFAS No. 141, "Business Combinations" and
SFAS No. 142, "Goodwill and Other Intangible Assets."
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.
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 years ended December 31, 2001
and 2000:
2001 2000
---------- ----------
Reported net income (loss).................................. $ 269 $ (24,597)
Add back goodwill amortization, net of income taxes......... 2,960 2,934
--------- ---------
Adjusted net income (loss)........................... $ 3,229 $ (21,663)
========= =========
Basic and diluted net income (loss) per share............... $ 0.01 $ (0.54)
Goodwill amortization, net of income taxes, per share....... 0.06 0.06
--------- ---------
Basic and diluted net income (loss) per share........ $ 0.07 $ (0.48)
========= =========
SFAS No. 142's transitional goodwill impairment evaluation required us to
perform an assessment of whether there was an indication that goodwill was
impaired as of the date of adoption. To accomplish this, we identified our
reporting units and determined the carrying value of each reporting unit by
assigning the assets and liabilities, including the existing goodwill and
intangible assets, to those reporting units as of January 1, 2002. We determined
the fair value of each reporting unit and compared it to the carrying amount of
the reporting unit and concluded there was no impairment. In addition to the
transitional goodwill impairment test, we are required to perform, at least
annually, a goodwill impairment test and designate a consistent date for such
annual testing. We determined the fair value of each reporting unit and compared
it to the carrying amount of the reporting unit at March 31, 2002 and concluded
there was no impairment.
53
The allocation of acquisition intangible assets following our adoption of SFAS
No. 142 is summarized in the following table:
December 31, 2002
--------------------------------------------
Weighted
Gross Average
Carrying Amortization Accumulated
Amount Period Amortization
---------- ------------ --------------
Intangibles no longer amortized:
Goodwill........................... $ 46,298 -- $ --
Amortizable intangibles:
Customer base...................... 17,997 21 years 3,352
Software acquired.................. 12,158 5 years 9,561
Non-compete agreements............. 163 4 years 153
The changes in the carrying amount of goodwill for the year ended December 31,
2002 are as follows:
Balance as of December 31, 2001
(cost of $51,063 and accumulated amortization of $7,771) .................. $43,292
Goodwill adjustments during 2002 relating to workforce (cost of
$6,191 and accumulated amortization of $2,808 at January
1, 2002), 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 December 31, 2002................................................. $46,298
=======
Estimated annual amortization expense relating to acquisition intangibles is as
follows:
YEAR ENDING DECEMBER 31,
2003............. $ 2,800
2004............. 1,500
2005............. 900
2006............. 900
2007............. 900
(8) ACCRUED LIABILITIES
Accrued liabilities consists of the following at December 31:
2002 2001
------- --------
Accrued wages and commissions................... $ 7,667 $ 7,071
Other accrued liabilities....................... 3,079 2,580
Current portion of long-term obligations........ 440 123
------- --------
$11,186 $ 9,774
======= ========
(9) LONG-TERM OBLIGATIONS
Long-term obligations consists of the following at December 31:
2002 2001
------- --------
10% promissory notes payable due January 2005... $ 2,520 $ 2,800
Other........................................... 470 233
------- --------
Total obligations........................... 2,990 3,033
Less current portion............................ 440 123
------- --------
Total long-term obligations................. $ 2,550 $ 2,910
======= ========
Long-term debt outstanding at December 31, 2002 matures as follows:
2003 - $440,000; 2004 - $30,000; and the remainder in 2005.
We paid interest of $377,000 in 2002, $814,000 in 2001 and $8.8 million in 2000.
On March 5, 2002, we entered into a revolving bank credit agreement. Our credit
agreement matures January 1, 2005 and provides for total availability of up to
$10.0 million. Borrowings bear interest at either prime rate or at the London
Interbank Offered Rate plus a margin of 3% and are limited to 80% of eligible
accounts receivable. The credit agreement is secured by substantially all of our
54
personal property, by a pledge of the common stock of our operating
subsidiaries, and is also guaranteed by our operating subsidiaries. The credit
agreement requires us to maintain certain financial ratios and other financial
conditions and prohibits us from making certain investments, advances, cash
dividends or loans.
At December 31, 2002, our bank has issued outstanding letters of credit totaling
$3.7 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 December 31, 2002. At December 31, 2002, we had no outstanding bank
borrowings under the credit agreement and had an available borrowing base of
$6.3 million.
(10) INCOME TAX
The income tax provision (benefit) on income (loss) from continuing operations
consisted of the following:
YEARS ENDED DECEMBER 31,
---------------------------------
2002 2001 2000
--------- --------- ---------
Current:
Federal.... $ -- $ -- $ --
State...... 485 282 80
--------- --------- ---------
485 282 80
Deferred...... 3,384 1,258 (2,890)
--------- --------- ---------
$ 3,869 $ 1,540 $ (2,810)
========= ========= =========
Reconciliation of the U.S. statutory income tax rate to our effective income tax
expense (benefit) rate for continuing operations follows:
YEARS ENDED DECEMBER 31,
----------------------------------
2002 2001 2000
--------- --------- ---------
Income tax expense (benefit) at statutory rate... $ 3,514 $ 634 $ (3,611)
State income tax, net of federal income tax
benefit....................................... 315 183 52
Non-deductible amortization...................... -- 635 640
Non-deductible business expenses................. 40 83 110
Other, net....................................... -- 5 (1)
-------- -------- --------
$ 3,869 $ 1,540 $ (2,810)
======== ======== ========
The tax effects of the major items recorded as deferred tax assets and
liabilities as of December 31 are:
2002 2001
-------- --------
Deferred income tax assets:
Net operating loss carryforward........................ $ 3,734 $ 3,667
Capital loss carryfoward............................... 1,114 --
Basis difference on investment security................ -- 1,591
Operating expenses not currently deductible............ 865 967
Employee benefit plans................................. 345 299
Minimum tax credits.................................... 268 268
Research tax credits................................... 78 78
Other.................................................. -- 100
-------- --------
Net deferred income tax assets before valuation
allowance........................................ 6,404 6,970
Less valuation allowance............................... (1,114) (1,690)
-------- --------
Net deferred income tax assets...................... 5,290 5,280
Deferred income tax liabilities:
Basis difference on investment security................ (3,995) --
Property and equipment................................. (1,148) (1,069)
Intangible assets...................................... (7,363) (6,442)
Other.................................................. -- (15)
-------- --------
Total deferred income tax liabilities............... (12,506) (7,526)
-------- --------
Net deferred income tax liabilities....................... $ (7,216) $ (2,246)
======== ========
At December 31, 2002, we had available approximately $10.7 million of net tax
operating loss carryforwards for federal income tax purposes. These
carryforwards, which may provide future tax benefits, expire from 2011 through
2022. During the year ended December 31, 2002, we claimed a deduction for the
write off of preferred stock which was deemed worthless for tax purposes. The
preferred stock had an initial tax value of $3 million and was received in
connection with the sale of our discontinued automotive parts
55
subsidiary which was sold in March 1999. At December 31, 2002, we had available
approximately $3.2 million of capital loss carryforwards for federal income tax
purposes which expire December 31, 2006.
Although realization is not assured, we believe it is more likely than not that
all the deferred tax assets, except for the asset relating to the capital loss
carryforward will be realized. Accordingly, we believe no valuation allowance is
required for the remaining deferred tax assets. However, the amount of the
deferred tax asset considered realizable could be adjusted in the future if
estimates of reversing taxable temporary differences are revised.
We paid income taxes, net of refunds received, of $455,000 in 2002 and $273,000
in 2001. In 2000 we received a refund of prior years' income taxes of $2.7
million.
(11) SHAREHOLDERS' EQUITY
In May 2000, we sold 3.3 million shares of common stock and 333,380 warrants in
a private placement 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.
As of December 31, 2002, we have an additional warrant outstanding to purchase
2.0 million shares of our common stock at $2.50 per share. This warrant expires
in September 2007.
In August 2002, we consummated an agreement to purchase 1.1 million of our
common shares from William D. Oates, a former director of Tyler, for a cash
purchase price of $4.0 million. In October 2002, we repurchased an additional
400,000 of our shares as part of the initial agreement by assigning our rights
and obligations under a Data License and Update Agreement associated with our
discontinued information property records service business to eiStream. eiStream
is an affiliate of William D. Oates. The repurchase of all 1.5 million shares
was charged to treasury stock to the extent cash was paid.
In August 2002, our Board of Directors approved a plan to repurchase up to 1.0
million shares of our common stock. Subsequent to December 31, 2002 and through
February 21, 2003, we have repurchased 339,000 shares for an aggregate purchase
price of $1.4 million.
(12) STOCK OPTION PLAN
We have a stock option plan that provides for granting stock options to key
employees and directors. Options become fully exercisable after three to eight
years of continuous employment and expire ten years after the grant date. Once
exercisable, the employee can purchase shares of our common stock at the market
price on the date we granted the option. As of December 31, 2002 there were 1.2
million shares available for future grants under the plan from the original 6.5
million shares approved by the stockholders.
56
The following table summarizes our stock option plan's transactions for the
three-year period ended December 31, 2002:
NUMBER OF WEIGHTED-AVERAGE
SHARES EXERCISE PRICES
----------- ----------------
Options outstanding at December 31, 1999.... 3,418 $5.55
Granted................................ 498 2.76
Forfeited.............................. (417) 6.16
Exercised.............................. (5) 3.88
-----
Options outstanding at December 31, 2000.... 3,494 5.08
Granted................................ 2,185 1.70
Forfeited.............................. (933) 5.18
Exercised.............................. (108) 2.13
-----
Options outstanding at December 31, 2001.... 4,638 3.54
Granted................................ 280 4.86
Forfeited.............................. (322) 5.65
Exercised.............................. (491) 3.29
-----
Options outstanding at December 31, 2002.... 4,105 $3.49
Exercisable options:
December 31, 2000...................... 1,385 $5.04
December 31, 2001...................... 1,504 5.20
December 31, 2002...................... 1,910 4.26
The following table summarizes information concerning outstanding and
exercisable options at December 31, 2002:
WEIGHTED
WEIGHTED AVERAGE NUMBER OF AVERAGE PRICE NUMBER OF WEIGHTED AVERAGE
RANGE OF EXERCISE REMAINING OUTSTANDING OF OUTSTANDING EXERCISABLE PRICE OF EXERCISABLE
PRICES CONTRACTUAL LIFE OPTIONS OPTIONS OPTIONS OPTIONS
- ----------------- ---------------- ----------- -------------- ----------- --------------------
$ 0.00 - $ 2.19 8.3 years 2,018 $ 1.64 634 $ 1.63
2.19 - 3.28 8.4 140 2.62 38 2.63
3.28 - 4.38 7.1 527 4.02 283 3.99
4.38 - 5.47 6.5 720 5.24 432 5.26
5.47 - 6.56 6.0 448 6.18 321 6.22
6.56 - 7.66 5.1 216 7.63 173 7.63
7.66 - 8.75 5.8 6 7.75 5 7.75
9.84 - 10.19 5.3 30 10.19 24 10.19
We previously granted an employee 50,000 shares of restricted common stock with
a fair value of $303,000 at the grant date. We recorded annual compensation
expense of $151,500 for the year ended December 31, 2000, based on the service
period provided for in the agreement and the vesting period over which the
restrictions lapse.
(13) EARNINGS (LOSS) PER SHARE
Basic earnings and diluted earnings (loss) per common share data was computed as
follows:
YEARS ENDED DECEMBER 31,
-------------------------------------------
2002 2001 2000
--------- --------- ---------
Numerator:
Income (loss) from continuing operations for basic and diluted earnings
per share .............................................................. $ 6,172 $ 272 $ (7,507)
Denominator:
Denominator for basic earnings per share -
Weighted-average shares................................................. 47,136 47,181 45,380
Effect of dilutive securities:
Employee stock options.................................................. 1,386 593 --
Warrants................................................................ 971 210 --
--------- --------- ---------
Potentially dilutive common shares........................................ 2,357 803 --
--------- --------- ---------
Denominator for diluted earnings per share - Adjusted
weighted-average shares................................................. 49,493 47,984 45,380
--------- --------- ---------
Basic earnings (loss) per common share from continuing operations............ $ 0.13 $ 0.01 $ (0.17)
========= ========= =========
Diluted earnings (loss) per common share from continuing operations.......... $ 0.12 $ 0.01 $ (0.17)
========= ========= =========
57
Stock options issuable under the stock option plan representing common stock
equivalents of 1.3 million during 2002, 2.3 million during 2001 and 3.5 million
during 2000 had exercise prices greater than the average quoted market price of
our common stock. These common stock equivalents were outstanding during 2002,
2001 and 2000 but were not included in the computation of diluted earnings per
share because their inclusion would have had an antidilutive effect.
Additionally, warrants to purchase 333,380, and 2.3 million shares of our common
stock for 2001 and 2000, respectively, were not included in the computation of
diluted earnings per share because the effect would have been antidilutive.
(14) LEASES
We lease offices, transportation, computer and other equipment for use in our
operations. Most of these leases are noncancelable operating lease agreements
and expire at various dates through 2012. In addition to rent, the leases
generally require us to pay taxes, maintenance, insurance and certain other
operating expenses.
Rent expense was approximately $3.4 million in 2002, $2.8 million in 2001 and
$2.1 million in 2000.
Future minimum lease payments under all noncancelable leases at December 31,
2002 are:
OPERATING
FISCAL YEAR LEASES
- ------------------------------------------- ---------
2003....................................... $ 3,504
2004....................................... 3,171
2005....................................... 2,972
2006....................................... 2,682
2007....................................... 2,572
Thereafter................................. 9,538
--------
Total future minimum lease payments........ $ 24,439
========
(15) EMPLOYEE BENEFIT PLANS
We provide a defined contribution plan for the majority of our employees meeting
minimum service requirements. The employees can contribute up to 15% of their
current compensation to the plan subject to certain statutory limitations. We
contribute up to a maximum of 2% of an employee's compensation to the plan. We
made contributions to the plan and charged continuing operations $881,000 during
2002, $868,000 during 2001, and $761,000 during 2000.
(16) 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 the plaintiff's 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 $1.3 million at
December 31, 2002. Swan tendered the defense and indemnity obligations arising
from these claims to its insurance carriers, who, prior to December 20, 2001,
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.
58
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.
The confirmation hearings on Swan's plan of reorganization were held on December
9, 2002. The plan of reorganization received the affirmative vote of
approximately 99% of the total votes cast. All objections to the plan were
resolved prior to the confirmation hearing, and the final confirmation order
will therefore not be subject to appeal. The confirmation order will discharge,
release, and extinguish all of the foundry-related obligations and liabilities
of Tyler, Swan, their affected affiliates, and the insurers participating in the
funding of the trust. Further, the confirmation order will include the issuance
of injunctions that channel all present and future foundry-related claims into
the trust and forever bar any such claims from being asserted, either now or in
the future, against Swan, Tyler, their affected affiliates, and the
participating insurers. In order to receive the benefits described above, we
have agreed, among other things, to transfer all of the capital stock of Swan to
the trust (net assets of Swan at December 31, 2002 were $309,000) so that the
trust can directly pursue claims against insurers who have not participated in
the funding of the trust. In addition, we have agreed to contribute $1.5 million
in cash to the trust, which is due as follows: $750,000 within ten days of the
confirmation order becoming a final order; $500,000 on the first anniversary of
the date the confirmation order becomes a final order; and $250,000 on the
second anniversary of the date the confirmation order becomes a final order. The
confirmation order will become a final order thirty days after execution by both
the bankruptcy and district court judges, which is expected to occur by the end
of the first quarter of 2003. Our ultimate settlement obligation under the plan
of reorganization of $1.5 million is approximately $200,000 less than the
remaining carrying amount of the liability initially recorded for this matter.
Accordingly, $200,000 ($130,000 net of tax) was included in the $1.8 million
credit recorded for discontinued operations in 2002. See Note 3 - Discontinued
Operations.
We initially provided for estimated claim settlement costs when minimum levels
can be reasonably estimated. If the best estimate of claim costs could only be
identified within a range and no specific amount within that range could be
determined more likely than any other amount within the range, the minimum of
the range was accrued. Based on an initial assessment of claims and contingent
claims that may result in future litigation, a reserve for the minimum amount of
$2.0 million for claim settlements was initially recorded in 1996. Legal and
related professional services costs to defend litigation of this nature have
been expensed as incurred.
Other than ordinary course, routine litigation incidental to our business and
except as described herein, there are no material legal proceedings pending to
which we or our subsidiaries are parties or to which any of our properties are
subject.
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.
59
(17) QUARTERLY FINANCIAL INFORMATION (UNAUDITED)
The following tables contain selected financial information from unaudited
consolidated statements of operations for each quarter of 2002 and 2001.
QUARTER ENDED
-------------------------------------------------------------------------------------
2002 2001
------------------------------------------ -----------------------------------------
Dec. 31 Sept. 30 June 30 Mar. 31 Dec. 31 Sept. 30 June 30 Mar. 31
--------- --------- --------- --------- --------- --------- --------- --------
Revenues(1)................................. $ 36,396 $ 34,974 $ 33,605 $ 28,922 $ 31,463 $ 28,658 $ 31,237 $ 27,458
Gross profit................................ 14,228 12,312 11,708 9,734 11,346 9,920 10,132 8,621
Income (loss) from continuing operations
before income taxes....................... 4,086 2,922 2,116 917 1,310 614 745 (857)
Income (loss) from continuing operations.... 2,581 1,739 1,290 562 163 251 372 (514)
Income (loss) from discontinued operations.. 1,817 -- -- -- 35 (23) (1) (14)
--------- --------- --------- --------- --------- --------- --------- --------
Net income (loss)........................... $ 4,398 $ 1,739 $ 1,290 $ 562 $ 198 $ 228 $ 371 $ (528)
========= ========= ========= ========= ========= ========= ========= ========
Diluted earnings (loss) from continuing
operations................................ $ 0.05 $ 0.04 $ 0.03 $ 0.01 $ 0.00 $ 0.01 $ 0.01 $ (0.01)
Diluted earnings (loss) from discontinued
operations................................ 0.04 -- -- -- 0.00 (0.01) (0.00) (0.00)
--------- --------- --------- --------- --------- --------- --------- --------
Net earnings (loss) per diluted share....... $ 0.09 $ 0.04 $ 0.03 $ 0.01 $ 0.00 $ 0.00 $ 0.01 $ (0.01)
========= ========= ========= ========= ========= ========= ========= ========
Shares used in computing diluted earnings
(loss) per share.......................... 48,482 49,372 50,405 49,725 48,915 48,396 47,425 47,179
(1) Previously reported amounts for revenues and cost of revenues for quarterly
periods prior to October 1, 2002 have been reclassified to report certain
reimbursable customer expenses as revenues and as cost of revenue in
accordance with EITF 01-14 as discussed in Note 1 - Summary of Significant
Accounting Policies. We increased quarterly revenues and the related cost of
revenues from the previously reported amounts for the following three month
periods ended:
March 31, 2001................. $ 186
June 30, 2001.................. 260
September 30, 2001............. 223
December 31, 2001.............. 259
March 31, 2002................. 266
June 30, 2002.................. 289
September 30, 2002............. 281
60
TYLER TECHNOLOGIES, INC.
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
(IN THOUSANDS)
Years ended December 31, 2002, 2001 and 2000
YEARS ENDED DECEMBER 31,
--------------------------------
2002 2001 2000
--------- --------- ---------
ALLOWANCE FOR LOSSES - ACCOUNTS RECEIVABLE
- ------------------------------------------
Balance at beginning of year....................... $ 1,275 $ 1,505 $ 826
Additions charged to costs and expenses............ 727 1,681 1,438
Deductions for accounts charged off or credits
issued............................................. (1,312) (1,911) (759)
---------- ---------- ---------
Balance at end of year.................... $ 690 $ 1,275 $ 1,505
========= ========= =========
VALUATION ALLOWANCE - DEFERRED TAX ASSETS YEARS ENDED DECEMBER 31,
- ----------------------------------------- --------------------------------
2002 2001 2000
--------- --------- ---------
Balance at beginning of year....................... $ 1,690 $ 3,657 $ 10,863
Utilization of capital loss carryforward........... (99) -- (16,138)
Adjustment to actual capital loss carryforwards
arising from a previous sale....................... 1,114 -- (901)
Change in basis difference on investment security.. (1,591) (1,967) 9,833
--------- --------- ---------
Balance at end of year.................... $ 1,114 $ 1,690 $ 3,657
========= ========= =========
61
EXHIBIT INDEX
EXHIBIT
NUMBER DESCRIPTION
- ------- ----------------------------------------------------------------
3.1 Restated Certificate of Incorporation of Tyler Three, as amended
through May 14, 1990, and Certificate of Designation of Series A
Junior Participating Preferred Stock (filed as Exhibit 3.1 to our
Form 10-Q for the quarter ended June 30, 1990, and incorporated
herein).
3.2 Certificate of Amendment to the Restated Certificate of
Incorporation (filed as Exhibit 3.1 to our Form 8-K, dated
February 19, 1998, and incorporated herein).
3.3 Amended and Restated By-Laws of Tyler Corporation, dated November
4, 1997 (filed as Exhibit 3.3 to our Form 10-K for the year ended
December 31, 1997, and incorporated herein).
3.4 Certificate of Amendment dated May 19, 1999 to the Restated
Certificate of Incorporation (filed as Exhibit 3.4 to our Form
10-K for the year ended December 31, 2000, and incorporated
herein).
4.1 Specimen of Common Stock Certificate (filed as Exhibit 4.1 to our
registration statement no. 33-33505 and incorporated herein).
4.2 Warrant to purchase common stock of Tyler Technologies, Inc.
(filed as Exhibit 4.5 to our Form 10-Q for the quarter ended June
30, 2000, and incorporated herein).
4.3 Credit Agreement dated as of February 27, 2002, by and between
Tyler Technologies, Inc. and Bank of Texas, N.A. (filed as
Exhibit 4.6 to our Form 10-K for the year ended December 31, 2001
and incorporated herein).
4.4 First Amendment to Credit Agreement by and between Tyler
Technologies, Inc. and Bank of Texas, N.A. dated March 5, 2002.
(filed as Exhibit 4.7 to our Form 10-K for the year ended
December 31, 2001 and incorporated herein).
*4.5 Second Amendment to Credit Agreement, First Amendment to Pledge
and Security Agreement, and Lenders Consent and Waiver by and
Among Tyler Technologies, Inc. and Bank of Texas N.A.
*10.1 Form of Indemnification Agreement for directors and officers.
10.2 Stock Option Plan amended and restated as of May 12, 2000 (filed
as Exhibit 4.1 to our registration statement no. 333-98929 and
incorporated herein and amended by Exhibit 4.2).
10.3 Acquisition Agreement dated as of November 20, 1995, by and among
the Registrants, Tyler Pipe Industries, Inc. and Ransom
Industries, Inc., formerly known as Union Acquisition Corporation
(filed as Exhibit 2.1 to our Form 8-K, dated December 14, 1995,
and incorporated herein).
10.4 Purchase Agreement between Tyler Corporation, Richmond Partners,
Ltd. and Louis A. Waters, dated August 20, 1997 (filed as Exhibit
10.24 to our Form 8-K, dated September 2, 1997, and incorporated
herein).
10.5 Employment agreement between Tyler Technologies, Inc. and
Theodore L. Bathurst, dated October 7, 1998, (filed as Exhibit
10.18 to our Form 10-Q for the quarter ended September 30, 1998,
and incorporated herein).
*21 Subsidiaries of Tyler
*23 Consent of Ernst & Young LLP
*99.1 Certifications pursuant to Section 1350 of Chapter 63 of Title 18
of the United States Code.
*99.2 Certifications pursuant to Section 1350 of Chapter 63 of Title 18
of the United States Code.
We will furnish copies of these exhibits to shareholders upon
written request and payment for copying charges of $0.15 per
page.
* Filed herewith.