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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(x) QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934.
For the quarterly period ended June 30, 2003
OR
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934.
Commission File Number 1-10485
TYLER TECHNOLOGIES, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 75-2303920
(State or other jurisdiction of (I.R.S. employer
incorporation or organization) identification no.)
5949 SHERRY LANE, SUITE 1400
DALLAS, TEXAS
75225
(Address of principal executive offices)
(Zip code)
(972) 713-3700
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes [X] No [ ]
Number of shares of common stock of registrant outstanding at July 29, 2003:
40,399,432
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
TYLER TECHNOLOGIES, INC.
CONDENSED CONSOLIDATED INCOME STATEMENTS
(In thousands, except per share amounts)
(Unaudited)
Three months ended Six months ended
June 30, June 30,
------------------- -------------------
2003 2002 2003 2002
-------- -------- -------- --------
Revenues:
Software licenses $ 6,157 $ 5,264 $ 11,617 $ 10,578
Software services 9,541 5,832 17,247 10,824
Maintenance 11,698 10,269 22,633 19,584
Appraisal services 7,356 10,988 14,107 18,771
Hardware and other 1,383 1,252 2,856 2,770
-------- -------- -------- --------
Total revenues 36,135 33,605 68,460 62,527
Cost of revenues:
Software licenses 1,519 1,394 3,063 2,463
Software services and maintenance 14,565 12,241 27,847 23,751
Appraisal services 5,139 7,257 9,887 12,662
Hardware and other 1,049 1,005 2,156 2,209
-------- -------- -------- --------
Total cost of revenues 22,272 21,897 42,953 41,085
-------- -------- -------- --------
Gross profit 13,863 11,708 25,507 21,442
Selling, general and administrative expenses 10,061 8,596 19,162 16,491
Amortization of acquisition intangibles 725 831 1,510 1,665
-------- -------- -------- --------
Operating income 3,077 2,281 4,835 3,286
Realized gain on sale of investment in H.T.E., Inc. - - 23,233 -
Legal fees associated with investment in H.T.E., Inc. - (160) - (285)
Interest income (expense) 137 (5) 146 32
-------- -------- -------- --------
Income before income tax provision 3,214 2,116 28,214 3,033
Income tax provision 1,233 826 8,937 1,181
-------- -------- -------- --------
Net income $ 1,981 $ 1,290 $ 19,277 $ 1,852
======== ======== ======== ========
Earnings per common share:
Basic $ 0.05 $ 0.03 $ 0.43 $ 0.04
======== ======== ======== ========
Diluted $ 0.04 $ 0.03 $ 0.42 $ 0.04
======== ======== ======== ========
Weighted average common shares outstanding:
Basic 42,881 47,647 44,408 47,517
======== ======== ======== ========
Diluted 44,796 50,405 46,259 50,066
======== ======== ======== ========
See accompanying notes.
1
TYLER TECHNOLOGIES, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands, except par value and share amounts)
June 30,
2003 December 31,
(Unaudited) 2002
----------- ------------
ASSETS
Current assets:
Cash and cash equivalents $ 15,436 $ 13,744
Short-term investments 12,113 -
Accounts receivable (less allowance for losses
of $932 in 2003 and $690 in 2002) 35,593 33,510
Prepaid expenses and other current assets 4,177 4,009
Deferred income taxes 1,197 1,197
----------- ------------
Total current assets 68,516 52,460
Property and equipment, net 6,418 6,819
Other assets:
Investment in H.T.E., Inc. - 27,196
Goodwill 46,298 46,298
Software, net 22,747 21,933
Customer base and other acquisition intangibles, net 14,208 14,655
Sundry 755 484
----------- ------------
$ 158,942 $ 169,845
=========== ============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 2,352 $ 2,390
Accrued liabilities and other current liabilities 11,378 11,186
Net current liabilities of discontinued operations 354 442
Income taxes payable 3,466 -
Deferred revenue 30,015 26,208
----------- ------------
Total current liabilities 47,565 40,226
Long-term obligations, less current portion - 2,550
Deferred income taxes 4,418 8,413
Commitments and contingencies
Shareholders' equity:
Preferred stock, $10.00 par value; 1,000,000
shares authorized, none issued - -
Common stock, $.01 par value; 100,000,000 shares
authorized; 48,147,969 shares issued in 2003 and 2002 481 481
Additional paid-in capital 156,558 156,898
Accumulated deficit (21,677) (40,954)
Accumulated other comprehensive income - unrealized
gain on securities available-for-sale, net of tax - 7,418
Treasury stock, at cost: 7,748,537 and 1,928,636 shares
in 2003 and 2002, respectively (28,403) (5,187)
----------- ------------
Total shareholders' equity 106,959 118,656
----------- ------------
$ 158,942 $ 169,845
=========== ============
See accompanying notes.
2
TYLER TECHNOLOGIES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
Six months ended June 30,
-------------------------
2003 2002
-------- --------
Cash flows from operating activities:
Net income $ 19,277 $ 1,852
Adjustments to reconcile net income to net cash provided
by operations:
Depreciation and amortization 4,281 4,218
Realized gain on sale of investment in H.T.E., Inc. (23,233) -
Non-cash charges - 289
Discontinued operations - non-cash charges and
changes in operating assets and liabilities (88) (47)
Changes in operating assets and liabilities, exclusive of
effects of discontinued operations 5,514 583
-------- --------
Net cash provided by operating activities 5,751 6,895
-------- --------
Cash flows from investing activities:
Proceeds from sale of investment in H.T.E., Inc. 39,333 -
Purchases of short-term investments (15,113) -
Proceeds from sales of short-term investments 3,000 -
Investment in software development costs (3,450) (3,562)
Additions to property and equipment (773) (1,472)
Proceeds from dispositions related to discontinued operations - 1,783
Other (562) (7)
-------- --------
Net cash provided (used) by investing activities 22,435 (3,258)
-------- --------
Cash flows from financing activities:
Purchase of treasury shares (23,868) -
Payments on notes payable (2,891) (53)
Payment of debt of discontinued operations - (179)
Proceeds from exercise of stock options 265 1,598
Debt issuance costs - (185)
-------- --------
Net cash (used) provided by financing activities (26,494) 1,181
-------- --------
Net increase in cash and cash equivalents 1,692 4,818
Cash and cash equivalents at beginning of period 13,744 5,271
-------- --------
Cash and cash equivalents at end of period $ 15,436 $ 10,089
======== ========
See accompanying notes.
3
Tyler Technologies, Inc.
Notes to Condensed Consolidated Financial Statements
(Unaudited)
(Tables in thousands, except per share data)
(1) Basis of Presentation
We prepared the accompanying condensed consolidated financial statements
following the requirements of the Securities and Exchange Commission
("SEC") and accounting principles generally accepted in the United States,
or GAAP, for interim reporting. As permitted under those rules, certain
footnotes or other financial information that are normally required by GAAP
can be condensed or omitted for interim periods. Balance sheet amounts are
as of June 30, 2003 and December 31, 2002 and operating result amounts are
for the three and six months ended June 30, 2003 and 2002, and include all
normal and recurring adjustments that we considered necessary for the fair
summarized presentation of our financial position and operating results. As
these are condensed financial statements, one should also read the
financial statements and notes included in our latest Form 10-K for the
year ended December 31, 2002. Revenues, expenses, assets and liabilities
can vary during each quarter of the year. Therefore, the results and trends
in these interim financial statements may not be the same as those for the
full year.
Although we have a number of operating subsidiaries, separate segment data
has not been presented as they meet the criteria set forth in SFAS
(Statement of Financial Accounting Standards) No. 131, "Disclosures About
Segments of an Enterprise and Related Information" to be presented as one
segment.
In addition, certain other amounts for the previous year have been
reclassified to conform to the current year presentation.
(2) Discontinued Operations
Discontinued operations includes our former information and property
records services segment for which our Board of Directors approved a formal
plan of disposal in December 2000 and two non-operating subsidiaries
related to a formerly owned subsidiary that we sold in December 1995. The
business units within the discontinued information and property records
services segment were sold in 2000 and 2001. In June 2002, we renegotiated
the proceeds from a May 2001 sale transaction and received cash of
approximately $800,000 and a subordinated note receivable amounting to
$200,000 to fully settle a promissory note and other contingent
consideration in connection with the original sale transaction. In June
2002, we also sold the building of a business unit included in the
information and property records service segment. Net proceeds from the
sale totaled $961,000. In our opinion and based upon information available
at this time, we believe that our remaining net liabilities related to
discontinued operations are adequate.
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. See Note 10 - Commitments and
Contingencies.
(3) Cash, Cash Equivalents and Short-term Investments
Cash equivalents include items almost as liquid as cash, such as money
market investments and certificates of deposits with insignificant interest
rate risk and original maturities of three months or less at the time of
purchase. For purposes of the statements of cash flows, we consider all
investments with original maturities of three months or less to be cash
equivalents.
Short-term investments include investments in short-term mutual corporate
and municipal bond funds. In accordance with SFAS No. 115, "Accounting for
Certain Investments in Debt and Equity Securities", we determine the
appropriate classification of debt and equity securities at the time of
purchase and re-evaluate the classification as of each balance sheet date.
At June 30, 2003, we classified these investments in bond funds as
available-for-sale securities pursuant to SFAS No. 115. Investments which
are classified as available-for-sale are recorded at fair value and
unrealized holding gains and losses, net of the related tax effect, if any,
are not reflected in earnings but are reported as a separate component of
other comprehensive income (loss) until realized. We made the initial
mutual fund investments of $15.0 million on March 28, 2003 and there were
minimal unrealized holding gains and losses as of June 30, 2003. Realized
gains and losses are determined on the specific identification method and
are reflected in income. Other than the gain on the sale of our investment
in H.T.E., Inc. (see Note 4 - Investment in H.T.E., Inc.), there were
minimal realized gains or losses relating to short-term investments for the
three or six months ended June 30, 2003.
4
(4) Investment in H.T.E., Inc.
On March 25, 2003, we received cash proceeds of $39.3 million in connection
with a transaction to sell all of our 5.6 million shares of H.T.E., Inc.
("HTE") common stock to SunGard Data Systems Inc. for $7.00 cash per share,
pursuant to a Tender and Voting Agreement dated February 4, 2003. Our
original cost basis in the HTE shares was $15.8 million. After transaction
and other costs, we recorded a realized gross gain of $23.2 million ($16.2
million after income taxes of $7.0 million, including the utilization for
tax purposes and reduction in valuation allowance for accounting purposes
related to a capital loss carryforward amounting to $1.1 million on a tax
effected basis).
Our 5.6 million shares of HTE represented an ownership interest of
approximately 35%. 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. As disclosed in our previous filings,
Tyler's management concluded that no such influence existed. Thus, we
accounted for our investment in HTE pursuant to the provisions of SFAS No.
115. Accordingly, our investment in HTE was previously classified as an
available-for-sale security. As of December 31, 2002, we had an unrealized
holding gain of $11.4 million ($7.4 million after income tax of $4.0
million), which was included as a component of other comprehensive income.
(5) Shareholders' Equity
In April 2003, we commenced a modified "Dutch Auction" tender offer to
purchase up to 4.2 million shares of our common stock at a price not
greater than $4.00 and not less than $3.60 per share. In accordance with
the SEC rules, we had the right to purchase an additional amount of shares
not to exceed 2% of our outstanding shares (approximately 907,000 shares)
without amending or extending our offer. Approximately 6.0 million shares
of common stock were properly tendered and not withdrawn at prices at or
below $4.00 per share. We exercised our right to purchase an additional 2%
of our outstanding shares without amending or extending our offer. As a
result, in May 2003, we purchased 5.1 million shares of our common stock at
a cash purchase price of $4.00 per share and estimated transaction costs of
approximately $150,000, for a total cost of $20.6 million. The final shares
purchased reflect a pro-ration factor equal to 85% of the shares tendered.
During the six months ended June 30, 2003, we also repurchased 875,200
shares for an aggregate purchase price of $3.3 million. As of July 29, 2003
our Board of Directors has authorized us to repurchase up to an additional
2.0 million shares of Tyler common stock.
(6) Income Tax Provision
For the three and six months ended June 30, 2003, we had an income tax
provision of $1.2 million and $8.9 million, respectively. The income tax
provision for the six months ended June 30, 2003, included $7.0 million
(after utilization of a capital loss carryforward amounting to $1.1 million
on a tax effected basis) related to the realized gain from the sale of our
investment in HTE (see Note 4 - Investment in H.T.E., Inc.). We had an
effective income tax rate of 38.4% and 31.7% for the three months and six
months ended June 30, 2003, respectively compared to an effective income
tax rate of 39.0% and 38.9% for the three and six months ended June 30,
2002. The effective income tax rates are estimated based on projected
pre-tax income for the entire fiscal year and the resulting amount of
income taxes. The effective income tax rates for the periods presented were
different from the statutory United States federal income tax rate of 35%
primarily due to the utilization of the capital loss carryforward in 2003,
state income taxes and non-deductible meals and entertainment costs.
5
(7) Earnings Per Share
The following table details the reconciliation of basic earnings per share
to diluted earnings per share:
Three months ended Six months ended
June 30, June 30,
-------------------- -------------------
2003 2002 2003 2002
-------- -------- --------- -------
Numerator for basic and diluted earnings per share:
Net income............................... $ 1,981 $ 1,290 $ 19,277 $ 1,852
======== ======== ========= =======
Denominator:
Weighted-average basic common shares 42,881 47,647 44,408 47,517
outstanding..................................
Assumed conversion of dilutive securities:
Employee stock options................. 1,088 1,587 1,088 1,500
Warrants............................... 827 1,171 763 1,049
-------- -------- --------- -------
Potentially dilutive common shares........... 1,915 2,758 1,851 2,549
-------- -------- --------- -------
Weighted-average common shares outstanding,
assuming full dilution....................... 44,796 50,405 46,259 50,066
======== ======== ========= =======
Basic earnings per share..................... $ 0.05 $ 0.03 $ 0.43 $ 0.04
======== ======== ========= =======
Diluted earnings per share................... $ 0.04 $ 0.03 $ 0.42 $ 0.04
======== ======== ========= =======
(8) Stock Compensation
In accordance with 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, or FIN 44, "Accounting for Certain Transactions
involving Stock Compensation," an interpretation of APB Opinion No. 25,
issued in June 2000. In December 2002, SFAS No. 148, "Accounting for
Stock-Based Compensation - Transition and Disclosure" was issued to amend
SFAS No. 123. This statement amends the disclosure requirements of SFAS No.
123 to require prominent disclosures in both annual and interim financial
statements about the method of accounting for stock-based employee
compensation and the effect of the method used on reported results.
Accordingly, 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.
Pro forma information regarding net income and earnings 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:
Three months ended Six months ended
June 30, June 30,
------------------- -------------------
2003 2002 2003 2002
-------- -------- -------- --------
Net income....................................................... $ 1,981 $ 1,290 $ 19,277 $ 1,852
Add stock-based employee compensation cost included in net income,
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................................................... 477 529 933 988
-------- -------- -------- --------
Pro forma net income............................................. $ 1,504 $ 761 $ 18,344 $ 864
======== ======== ======== ========
Pro forma net income per basic share............................. $ 0.04 $ 0.02 $ 0.41 $ 0.02
======== ======== ======== ========
Pro forma net income per diluted share........................... $ 0.03 $ 0.02 $ 0.40 $ 0.02
======== ======== ======== ========
6
(9) Comprehensive Income
The components of comprehensive income are as follows:
Three months ended Six months ended
June 30, June 30,
--------------------- -------------------
2003 2002 2003 2002
-------- -------- -------- --------
Net income.......................................................... $ 1,981 $ 1,290 $ 19,277 $ 1,852
Other comprehensive income:
Reclassification adjustment for unrealized gain related to
investment in H.T.E., Inc. (net of deferred tax expense of
$3,995)......................................................... -- -- (7,418) --
Change in fair value of investment in H.T.E., Inc. (net of
deferred tax benefit of $40 for the three months ended June 30,
2002 and deferred tax expense of $3,778 for the six months ended
June 30, 2002).................................................. -- (72) -- 11,562
-------- -------- -------- --------
Total comprehensive income $ 1,981 $ 1,218 $ 11,859 $ 13,414
======== ======== ======== ========
(10) 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 $555,000 at June 30, 2003. 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.
7
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 terms and
conditions of the plan (including the issuance of the injunctions) are
therefore not subject to appeal. The confirmation order for the plan of
reorganization was signed by the bankruptcy court and district court judges
and entered by the United States Bankruptcy Court for the District of
Delaware on July 22, 2003. 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 (net assets of Swan at June
30, 2003 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.
Absent an appeal, the confirmation order will become a final order on
August 21, 2003.
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.
(11) Recent Accounting Pronouncements
In January 2003, the Financial Accounting Standards Board ("FASB") issued
FIN 46, "Consolidation of Variable Interest Entities", which requires the
consolidation of variable interest entities. FIN 46 is applicable to
variable interest entities created after January 31, 2003. Variable
interest entities created prior to February 1, 2003 must be consolidated
effective July 1, 2003. We adopted FIN 46 in the quarter ended June 30,
2003, and it did not have a material impact on our financial position or
results of our operations.
In May 2003, the FASB issued SFAS No. 150, "Accounting for Certain
Financial Instruments with Characteristics of both Liabilities and Equity."
SFAS No. 150 requires that certain financial instruments, which under
previous guidance were accounted for as equity, must now be accounted for
as liabilities. The financial instruments affected include mandatory
redeemable stock, certain financial instruments that require or may require
the issuer to buy back some of its shares in exchange for cash or other
assets and certain obligations that can be settled with shares of stock.
SFAS No. 150 is effective for all financial instruments entered into or
modified after May 31, 2003, and otherwise is effective at the beginning of
the first interim period beginning after June 15, 2003. SFAS No. 150 was
adopted in the quarter ended June 30, 2003 and it did not have a material
impact on our financial position or results of our operations.
8
ITEM 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
FORWARD-LOOKING STATEMENTS
The statements in this discussion that are not historical statements are
"forward-looking statements" within the meaning of the Private Securities
Litigation Reform Act of 1995. These forward-looking statements include
statements about our business, financial condition, business strategy,
plans and the objectives of our management, and future prospects. In
addition, we have made in the past and may make in the future other written
or oral forward-looking statements, including statements regarding future
operating performance, short- and long-term revenue and earnings growth,
the timing of the revenue and earnings impact for new contracts, backlog,
the value of new contract signings, business pipeline, and industry growth
rates and our performance relative thereto. Any forward-looking statements
may rely on a number of assumptions concerning future events and be subject
to a number of uncertainties and other factors, many of which are outside
our control, which could cause actual results to differ materially from
such statements. These include, but are not limited to: our ability to
improve productivity and achieve synergies from acquired businesses;
technological risks associated with the development of new products and the
enhancement of existing products; changes in the budgets and regulating
environments of our government customers; competition in the industry in
which we conduct business and the impact of competition on pricing,
revenues and margins; with respect to customer contracts accounted for
under the percentage-of-completion method of accounting, the performance of
such contracts in accordance with our cost and revenue estimates; our
ability to maintain health and other insurance coverage and capacity due to
changes in the insurance market and the impact of increasing insurance
costs on the results of operations; the costs to attract and retain
qualified personnel, changes in product demand, the availability of
products, economic conditions, changes in tax risks and other risks
indicated in our filings with the Securities and Exchange Commission. The
factors described in this paragraph and other factors that may affect
Tyler, its management or future financial results, as and when applicable,
are discussed in Tyler's filings with the Securities and Exchange
Commission, on its Form 10-K for the year ended December 31, 2002. Except
to the extent required by law, we are not obligated to update or revise any
forward-looking statements whether as a result of new information, future
events or otherwise. When used in this Quarterly Report, the words
"believes," "plans," "estimates," "expects," "anticipates," "intends,"
"continue," "may," "will," "should", "projects", "forecast", "might",
"could" or the negative of such terms and similar expressions as they
relate to Tyler or our management are intended to identify forward-looking
statements.
GENERAL
Tyler provides integrated software systems and related services for local
governments. We develop and market a broad line of software products and
services to address the information technology (IT) needs of cities,
counties, schools and other local government entities. We provide
professional IT services to our customers, including software and hardware
installation, data conversion, training and product modifications, along
with continuing maintenance and support for customers using our systems. We
also provide property appraisal outsourcing services for taxing
jurisdictions.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
The discussion and analysis of our financial condition and results of
operations are based upon our condensed consolidated financial statements.
These condensed consolidated financial statements have been prepared
following the requirements of accounting principles generally accepted in
the United States (GAAP) for interim periods and require us to make
estimates and judgments that affect the reported amounts of assets,
liabilities, revenues and expenses, and related disclosure of contingent
assets and liabilities. On an on-going basis, we evaluate our estimates,
including those related to revenue recognition and amortization and
potential impairment of intangible assets and goodwill. As these are
condensed financial statements, one should also read our Form 10-K for the
year ended December 31, 2002 regarding expanded information about our
critical accounting policies and estimates.
9
ANALYSIS OF RESULTS OF OPERATIONS
The following table sets forth items from our unaudited condensed
consolidated financial statements and the percentage change in the amounts
between the periods presented. The amounts shown in the table are in
thousands, except per share data. Revenues and expenses can vary during
each quarter of the year. Therefore, the results and trends in these
interim financial statements may not be the same as those for the full
year.
Three months ended June 30, Six months ended June 30,
----------------------------- -----------------------------
2003 2002 Change 2003 2002 Change
-------- -------- ------ -------- -------- ------
Revenues:
Software licenses $ 6,157 $ 5,264 17% $ 11,617 $ 10,578 10%
Software services 9,541 5,832 64 17,247 10,824 59
Maintenance 11,698 10,269 14 22,633 19,584 16
Appraisal services 7,356 10,988 (33) 14,107 18,771 (25)
Hardware and other 1,383 1,252 10 2,856 2,770 3
-------- -------- -------- --------
Total revenues 36,135 33,605 8 68,460 62,527 9
Cost of revenues:
Software licenses 1,519 1,394 9 3,063 2,463 24
Software services and maintenance 14,565 12,241 19 27,847 23,751 17
Appraisal services 5,139 7,257 (29) 9,887 12,662 (22)
Hardware and other 1,049 1,005 4 2,156 2,209 (2)
-------- -------- -------- --------
Total cost of revenues 22,272 21,897 2 42,953 41,085 5
% of revenues 61.6% 65.2% 62.7% 65.7%
Gross profit 13,863 11,708 18 25,507 21,442 19
% of revenues 38.4% 34.8% 37.3% 34.3%
Selling, general and administrative expenses 10,061 8,596 17 19,162 16,491 16
% of revenues 27.8% 25.6% 28.0% 26.4%
Amortization of acquisition intangibles 725 831 (13) 1,510 1,665 (9)
-------- -------- -------- --------
Operating income 3,077 2,281 35 4,835 3,286 47
Realized gain on sale of investment in
H.T.E., Inc. - - 23,233 -
Legal fees associated with investment
in H.T.E., Inc. - (160) - (285)
Interest income (expense) 137 (5) 146 32
-------- -------- -------- --------
Income before income tax provision 3,214 2,116 28,214 3,033
Income tax provision 1,233 826 8,937 1,181
-------- -------- -------- --------
Effective income tax rate 38.4% 39.0% 31.7% 38.9%
Net income $ 1,981 $ 1,290 $ 19,277 $ 1,852
======== ======== ======== ========
Diluted earnings per share $ 0.04 $ 0.03 $ 0.42 $ 0.04
======== ======== ======== ========
Cash flows provided by operating activities $ 5,646 $ 4,702 $ 5,751 $ 6,895
Cash, cash equivalents and
short-term investments at June 30 27,549 10,089
Capital expenditures:
Software development costs 1,668 2,023 3,450 3,562
Property and equipment 454 807 823 1,472
10
REVENUES
The following table compares the components of revenue as a percent of
total revenues for the periods presented:
Three months ended June 30, Six months ended June 30,
--------------------------- -------------------------
2003 2002 2003 2002
-------- -------- -------- --------
Software licenses 17.0% 15.7% 17.0% 16.9%
Software services 26.4% 17.4% 25.2% 17.3%
Maintenance 32.4% 30.6% 33.1% 31.3%
Appraisal services 20.4% 32.7% 20.6% 30.0%
Hardware and other 3.8% 3.6% 4.1% 4.5%
----- ----- ----- -----
100.0% 100.0% 100.0% 100.0%
===== ===== ===== =====
Software license revenues. Software license revenues increased $893,000, or
17% for the three months ended June 30, 2003, compared to the same period
last year. In addition, the second quarter of 2003 was the seventh
consecutive quarter in which our software license revenues increased
compared to the same period in the prior year. The second quarter increase
included $723,000 for one property appraisal and tax software system and an
increase of approximately $600,000 from sales of our legacy courts and
justice software. Our property appraisal and tax software license volume
varies from period to period depending on the special needs and timing of
our customers. 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. While some of these taxing
jurisdictions contract with our property appraisal and tax division to
perform these reappraisals, it is not always necessary for the customer to
purchase new software in order to process the appraisals. In some cases, a
customer may simply add smaller appraisal software modules to enhance the
functionality of its existing software. Higher courts and justice software
sales were driven primarily by two large contracts. Increases in property
appraisal and tax software and legacy courts and justice software were
offset somewhat by lower recording systems and financial and city solutions
software.
Software license revenues increased $1.0 million, or 10%, for the six
months ended June 30, 2003, compared to the same period last year.
Approximately one-half of this increase relates to sales of our legacy
courts and justice software with the remaining increase coming equally from
property appraisal and tax software and financial and city solutions
software.
Software services revenues. For the three months ended June 30, 2003,
software services revenues increased $3.7 million, or 64%, compared to the
same period in 2002. For the six months ended June 30, 2003, software
services revenues increased $6.4 million, or 59%, compared to the same
period in 2002. The increase in software services revenues was attributable
to the following factors:
- Services related to implementation of Odyssey Case Management system,
our new courts and justice product. We recognized approximately
$800,000 and $1.9 million for services performed in the three and six
months ended June 30, 2003, respectively, under our $11.0 million
contract with the State of Minnesota to implement and install Odyssey
Case Management system. We signed the contract in July 2002 and it
includes both software license and software services. To date, no
software license revenues have been recognized. Under this contract we
have recorded approximately $3.8 million of service revenue from
inception to June 30, 2003. We expect to perform approximately 70% of
the implementation by the end of this calendar year. The remainder of
the implementation is expected to be performed after this year; and
- Software services related to the increase in software contracts signed
in late 2002 and in the first half of 2003. Typically, contracts for
software licenses include services such as installation of the
software, converting the customers' data to be compatible with the
software and training customer personnel to use the software. In
addition we also experienced slight increases in application service
provider contracts and consulting services related to financial and
city solutions software. Services related to financial and city
solutions software and property appraisal and tax software each
contributed approximately one-third of the quarter and year-to-date
increases.
Maintenance revenues. Maintenance revenues for the quarter ended June 30,
2003 increased $1.4 million, or 14%, compared to the prior year quarter.
Maintenance revenues for the six months ended June 30, 2003, increased $3.0
million, or 16%, compared to the six months ended June 30, 2002. 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 on certain product
lines.
11
Appraisal services revenues. For the three and six months ended June 30,
2003, appraisal services revenues decreased $3.6 million, or 33%, and $4.7
million, or 25%, respectively, compared to the same periods of 2002. The
decrease is related to the completion and progression of several major
appraisal contracts. During the six months ended June 30, 2003, we signed a
new six year contract to provide Nassau County, New York Board of Assessors
(Nassau County Extension) with updated property assessments and additional
property appraisal and tax software. The following table contains the
appraisal services revenues recorded on significant contracts for the
periods presented:
Appraisal revenue recorded
-------------------------------------
Three months ended Six months ended
June 30, June 30, Total appraisal Appraisal
------------------ ---------------- revenues revenues Contract
2003 2002 2003 2002 per contract earned to date completion date
------ ------- ------- ------- --------------- -------------- -------------------
Nassau County, New York Board
of Assessors $ - $ 3,500 $ 300 $ 6,000 $ 29,500 $ 29,500 First quarter 2003
Lake County, Indiana 2,100 2,100 4,600 3,000 15,300 13,500 Estimated late 2003
Indiana Revaluations 250 1,700 700 3,100 10,600 10,100 Estimated late 2003
Nassau County Extension 1,600 - 2,000 - 25,300 2,000 Fiscal 2009
COST OF REVENUES
Cost of software license revenues. For the three and six months ended June
30, 2003, cost of software license revenues increased $125,000, or 9%, and
$600,000, or 24%, respectively, compared to the same prior year periods.
During 2002, we had several products in the development stage, which were
released throughout the year. Once a product is released, we begin to
expense the costs associated with the development over the estimated useful
life of the product. Development costs consist mainly of personnel costs,
such as salary and benefits paid to our developers, rent for related office
development space and capitalized interest costs.
Cost of software service and maintenance revenues. For three months and six
months ended June 30, 2003, cost of software services and maintenance
revenues increased $2.3 million, or 19%, and $4.1 million, or 17%,
respectively, compared to the same periods of 2002. These increases are
consistent with the higher professional services and maintenance revenues
for the same periods, although software services and maintenance revenues
grew at a more rapid 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 69% for the second quarter of 2003
compared to 76% for the second quarter of 2002. Cost of software services
and maintenance was 70% of related revenues for the six months ended June
30, 2003, compared to 78% for the same period of 2002.
Cost of appraisal services revenues. Costs of appraisal services revenues
decreased $2.1 million, or 29%, for the three months ended June 30, 2003,
compared to the same prior year period. For the six months ended June 30,
2003, cost of appraisal services revenues decreased $2.8 million, or 22%,
compared to the same period in 2002. The decrease is consistent with the
decrease in appraisal services revenues, which declined 33% and 25% for the
three and six months ended June 30, 2003, respectively. We often hire
temporary employees to assist in appraisal projects whose term of
employment generally ends with the projects' completion. As a percentage of
related revenues, cost of appraisal services was 70% for the three and six
months ended June 30, 2003 compared to 66% and 67% for the same periods of
2002.
GROSS MARGIN
For the three and six months ended June 30, 2003, our overall gross margin
increased to 38% and 37% from 35% and 34% for the same periods of 2002,
respectively. The improvement in our gross margin was mainly due to higher
software services and maintenance revenues without a corresponding increase
in personnel costs reflecting a more efficient utilization of our support
and maintenance staff and economies of scale.
12
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
Selling, general and administrative expenses, or SG&A, increased $1.5
million, or 17%, and $2.7 million, or 16%, for the three and six months
ended June 30, 2003, respectively, compared to the same periods in the
prior year. For the three and six months ended June 30, 2003, SG&A as a
percent of revenue increased to 28% from 26% for the same prior year
periods. The increase in SG&A is related primarily to higher commissions,
which is the result of higher revenues. In addition, annual salary
adjustments, higher performance bonuses, higher health and other insurance
expenses, additional marketing personnel and slightly higher research and
development costs contributed to higher SG&A.
AMORTIZATION OF ACQUISITION INTANGIBLES
For the three and six months ended June 30, 2003, amortization of
acquisition intangibles was approximately $725,000 and $1.5 million,
compared to $831,000 and $1.7 million for the same periods in 2002. The
decrease in amortization from the prior year is related to certain of our
acquisition intangibles becoming fully amortized during the first six
months of 2003. Acquisition intangibles are composed of the excess of the
purchase price over the fair value of net tangible assets acquired that is
allocated to acquired and amortizable software and customer base, with the
remainder allocated to goodwill that is not subject to amortization. The
estimated useful lives of acquired software and customer base are 5 years
and 20 to 25 years, respectively.
REALIZED GAIN ON SALE OF INVESTMENT IN H.T.E., INC.
On March 25, 2003, we received cash proceeds of $39.3 million in connection
with a transaction to sell all of our 5.6 million shares of H.T.E., Inc.
("HTE") common stock to SunGard Data Systems Inc. for $7.00 cash per share.
Our original cost basis in the HTE shares was $15.8 million. After
transaction and other costs, we recorded a gross realized gain of $23.2
million ($16.2 million or $0.35 per diluted share after income taxes of
$7.0 million for the six months ended June 30, 2003). See Note 4 in the
Notes to the Condensed Consolidated Financial Statements.
LEGAL FEES ASSOCIATED WITH INVESTMENT IN H.T.E., INC.
During the three and six months ended June 30, 2002, we incurred
approximately $160,000 and $285,000, respectively, of legal and other costs
associated with legal matters concerning various tort claims HTE alleged
against us and HTE's attempted redemption of our 5.6 million shares for
$1.30 per share. In September 2002, HTE released us from all tort claims
and a court declared HTE's reported redemption of our shares was invalid.
In March 2003, we sold for cash our entire investment in HTE for $7.00 per
share.
INTEREST INCOME (EXPENSE)
For the three months ended June 30, 2003, we had net interest income of
$137,000, compared to interest expense of $5,000 for same period of 2002.
For the six months ended June 30, 2003, we had net interest income of
$146,000, and $32,000 of interest income in the six months ended June 30,
2002. The increase in interest income is related to higher cash levels,
including $39.3 million in cash received upon the sale of our investment in
HTE in late March 2003, which we invested in short-term investments.
INCOME TAX PROVISION
For the three months ended June 30, 2003, we had an income tax provision of
$1.2 million. For the six months ended June 30, 2003, we had an income tax
provision of $8.9 million, which included $7.0 million (after reduction in
valuation allowance related to the utilization of a capital loss
carryforward amounting to $1.1 million on a tax effected basis) relating to
the realized gain from the sale of our investment in HTE. We had an
effective income tax rate of 38.4% for the three months ended June 30, 2003
compared to an effective income tax rate of 39.0% for the three months
ended June 30, 2002. For the six months ended June 30, 2003, we had an
effective income tax rate of 38.5% (excluding the effect of the HTE gain)
compared to an effective rate of 38.9% for the same prior year period. The
effective income tax rates are estimated based on projected pre-tax income
for the entire fiscal year and the resulting amount of income taxes. The
effective income tax rates for the periods presented were different from
the statutory United States federal income tax rate of 35% primarily due to
the utilization of the capital loss carryforward in 2003, state income
taxes and non-deductible meals and entertainment costs.
13
NET INCOME
Net income was $2.0 million in the three months ended June 30, 2003,
compared to $1.3 million for the three months ended June 30, 2002. Net
income was $19.3 million in the six months ended June 30, 2003, including a
$16.2 million realized gain after income taxes relating to the sale of our
investment in HTE. This compares to net income of $1.9 million in the six
months ended June 30, 2002. For the second quarter of 2003, diluted
earnings per share was $0.04 compared to $0.03 for the second quarter of
2002. For the six months ended June 30, 2003 and 2002, diluted earnings per
share was $0.42 and $0.04, respectively. Diluted earnings per share for the
six months ended June 30, 2003 included $0.35 per share related to our net
realized gain on the sale of our investment in HTE after income taxes.
During the three and six months, diluted earnings per share was positively
impacted by the repurchase of our shares of common stock on the open market
and through our modified Dutch Auction tender offer.
FINANCIAL CONDITION AND LIQUIDITY
On March 5, 2002, we entered into a new $10.0 million revolving credit
agreement with a bank, which matures January 1, 2005. Our borrowings are
limited to 80% of eligible accounts receivable and interest is charged at
either the prime rate or at the London Interbank Offered Rate plus a margin
of 3%. The credit agreement is secured by our personal property and the
common stock of our operating subsidiaries. The credit agreement is also
guaranteed by our operating subsidiaries. In addition, the credit agreement
contains covenants that require us to maintain certain financial ratios and
other financial conditions and prohibits us from making certain
investments, advances, cash dividends or loans. As of June 30, 2003, we are
in compliance with those covenants.
As of June 30, 2003, our bank has issued outstanding letters of credit
totaling $7.5 million under our credit agreement to secure performance
bonds required by some of our customer contracts. Our borrowing base under
the credit agreement is limited by the amount of eligible receivables and
was reduced by the letters of credit at June 30, 2003. At June 30, 2003, we
had no outstanding bank borrowings under the credit agreement and had an
available borrowing base of $2.5 million.
As of June 30, 2003, our balance in cash and cash equivalents was $15.4
million and we had short-term investments of $12.1 million, compared to a
cash balance of $13.7 million at December 31, 2002. Cash and short-term
investments increased primarily due to the $39.3 million cash received in
March 2003 as consideration in connection with the transaction to sell our
5.6 million shares of HTE common stock to SunGard Data Systems Inc. At June
30, 2003, our day's sales outstanding ("DSO's") (accounts receivable
divided by the quotient of annualized quarterly revenues divided by 360
days) were 89 compared to DSO's of 94 at June 30, 2002.
In May 2003, we completed a modified "Dutch Auction" tender offer whereby
we purchased 5.1 million shares of our common stock at a cash purchase
price of $4.00 per share and incurred estimated transaction costs of
approximately $150,000, for a total cost of $20.6 million. In addition,
during the six months ended June 30, 2003, we repurchased in the open
market 875,200 shares for an aggregate purchase price of $3.3 million.
As of July 29, 2003 our Board of Directors has authorized us to repurchase
up to an additional 2.0 million shares of our common stock.
During the first quarter of 2003, we purchased $15.0 million of short-term
investments. The investments are principally low-risk funds that consist
primarily of short-term mutual corporate and municipal bond funds. The
interest and capital gains generated from these investments were
re-invested in the funds. For the first three and six months of 2003, the
interest and capital gains were $76,000. During the second quarter of 2003,
we sold $3.0 million of our short-term investments.
On March 28, 2003, we retired an outstanding $2.5 million 10% promissory
note payable. The note was due in January 2005 and paid interest quarterly.
In June 2003, we made an estimated federal income tax payment in the amount
of $5.0 million. The payment was made primarily due to the $23.2 million
realized gain on the sale of our investment in HTE common stock, and also
because of the increase in estimated taxable income for the tax year ending
December 31, 2003.
During the six months ended June 30, 2003, we received $265,000 from the
exercise of options to purchase 162,000 shares of our stock under our
employee stock option plan.
At June 30, 2003, our capitalization consisted entirely of $107.0 million
of shareholders' equity, since we have no long-term debt outstanding at
June 30, 2003.
During the first six months of 2003, we made capital expenditures of $4.2
million, including $3.5 million for software development
14
costs. The other expenditures related to computer equipment and expansions
related to internal growth. Capital expenditures were funded from cash
generated from operations.
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 a part of the reorganization. See Note 10 in the Notes to the
Condensed Consolidated Financial Statements. We expect to pay $750,000 of
the $1.5 million in late August 2003. The remaining amounts will be paid
over the two subsequent years.
Absent acquisitions, we believe our current cash balances and expected
future cash flows from operations will be sufficient to meet our
anticipated cash needs for working capital, capital expenditures and other
activities through the next twelve months. If operating cash flows are not
sufficient to meet our needs, we may borrow under our credit agreement.
Item 4. Evaluation of Disclosure Controls and Procedures
Based on their evaluation as of the end of the period covered by this
quarterly report, our Chief Executive Officer ("CEO") and Chief Financial
Officer ("CFO") believe, based on an evaluation performed under the
supervision and with the participation of management, including our CEO and
CFO, that the design and operation of our disclosure controls and
procedures (as defined in Rules 13a - 14(c) and 15d - 14 under the
Securities Exchange Act of 1934, as amended) are effective to ensure that
material information relating to Tyler Technologies, Inc. is made known to
them by others within our Company during the period in which this Report on
Form 10-Q was being prepared. There have been no material changes in our
internal controls over financial reporting that occurred during the period
covered by the quarterly report which materially affected, or would be
reasonably likely to affect, our internal control over financial reporting.
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
For a discussion of legal proceedings see Part I, Item 1. "Financial
Statements - Notes to Condensed Consolidated Financial Statements -
"Commitments and Contingencies" on page 7 of this document.
Item 4. Submission of Matters to a Vote of Security Holders
We held our annual meeting of stockholders on May 1, 2003. The results of
the matters voted on at the meeting are as follows:
With respect to the election of directors, our shares were voted as
follows:
Number of Votes Number of Votes
Nominee For Withheld
- ------------------- --------------- ---------------
John S. Marr 36,720,326 1,409,916
Ben T. Morris 37,994,641 135,601
G. Stuart Reeves 37,997,341 132,901
Michael D. Richards 37,996,841 133,401
Glenn A. Smith 36,747,979 1,382,263
John M. Yeaman 35,137,325 2,992,917
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibit 10.1 Employment and Non-Competition Agreement between
Tyler Technologies, Inc. and John S. Marr Jr. dated
July 1, 2003
Exhibit 10.2 Employment and Non-Competition Agreement between
Tyler Technologies, Inc. and John M. Yeaman dated
July 1, 2003
15
Exhibit 31.1 Certifications Pursuant to Section 302 of the Sarbanes-Oxley Act
of 2002
Exhibit 32.1 Certifications Pursuant to 18 U.S.C. Section 1350, as adopted
Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
(a) Reports on Form 8-K filed during the three months ended June 30, 2003:
Form 8-K Item
Reported Date Reported Exhibits Filed
- ------------- -------- ----------------------------------------------
5/19/03 5 News release issued by Tyler Technologies,
Inc. dated May 16, 2003 announcing the final
results of our modified "Dutch Auction"
tender offer
Item 3 of Part I and Items 2, 3 and 5 of Part II were not applicable and have
been omitted.
16
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
TYLER TECHNOLOGIES, INC.
By: /s/ Theodore L. Bathurst
------------------------
Theodore L. Bathurst
Vice President and Chief Financial Officer
(principal financial officer
and an authorized signatory)
By: /s/ Terri L. Alford
--------------------
Terri L. Alford
Controller
(principal accounting officer and an
authorized signatory)
Date: July 31, 2003
17
INDEX TO EXHIBITS
(a) Exhibit 10.1 Employment and Non-Competition Agreement between Tyler
Technologies, Inc. and John S. Marr Jr. dated July 1, 2003
Exhibit 10.2 Employment and Non-Competition Agreement between Tyler
Technologies, Inc. and John M. Yeaman dated July 1, 2003
Exhibit 31.1 Certifications Pursuant to Section 302 of the Sarbanes-Oxley
Act of 2002
Exhibit 32.1 Certifications Pursuant to 18 U.S.C. Section 1350, as
adopted Pursuant to Section 906 of the Sarbanes-Oxley Act
of 2002