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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
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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
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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
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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.
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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
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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.
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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.
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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.
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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.
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- 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.,
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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
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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 f