10-Q 1 d00762e10vq.txt FORM 10-Q UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q [x] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934. For the quarterly period ended September 30, 2002 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934. Commission File Number 1-10485 TYLER TECHNOLOGIES, INC. (Exact name of registrant as specified in its charter) DELAWARE 75-2303920 (State or other jurisdiction of (I.R.S. employer incorporation or organization) identification no.) 5949 SHERRY LANE, SUITE 1400 DALLAS, TEXAS 75225 (Address of principal executive offices) (Zip code) (214) 547-4000 (Registrant's telephone number, including area code) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [ ] Number of shares of common stock of registrant outstanding at October 30, 2002: 46,216,733 PART I. FINANCIAL INFORMATION Item 1. Financial Statements TYLER TECHNOLOGIES, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEETS (In thousands, except par value and number of shares)
September 30, 2002 December 31, (Unaudited) 2001 -------------- -------------- ASSETS Current assets: Cash and cash equivalents $ 10,534 $ 5,271 Accounts receivable (less allowance for losses of $767 in 2002 and $1,275 in 2001) 32,543 35,256 Prepaid expenses and other current assets 2,982 3,674 Deferred income taxes 1,329 1,329 -------------- -------------- Total current assets 47,388 45,530 Net non-current assets of discontinued operations -- 1,000 Property and equipment, net 6,934 6,967 Other assets: Investment securities available-for-sale 20,228 11,238 Goodwill and other intangibles, net 82,743 82,211 Sundry 461 234 -------------- -------------- $ 157,754 $ 147,180 ============== ============== LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities: Accounts payable $ 2,328 $ 2,036 Accrued liabilities and other current liabilities 10,127 9,774 Net current liabilities of discontinued operations 981 786 Deferred revenue 27,292 27,215 -------------- -------------- Total current liabilities 40,728 39,811 Long-term obligations, less current portion 2,566 2,910 Deferred income taxes 4,755 3,575 Commitments and contingencies Shareholders' equity: Preferred stock, $10.00 par value; 1,000,000 shares authorized, none issued -- -- Common stock, $.01 par value; 100,000,000 shares authorized; 48,147,969 shares issued 481 481 Additional paid-in capital 156,871 157,242 Accumulated deficit (45,352) (48,943) Accumulated other comprehensive income (loss) - unrealized gain (loss) on securities available-for-sale, net of income taxes 2,890 (4,545) Treasury stock, at cost: 1,531,236 shares in 2002 and 920,205 shares in 2001 (5,185) (3,351) -------------- -------------- Total shareholders' equity 109,705 100,884 -------------- -------------- $ 157,754 $ 147,180 ============== ==============
See accompanying notes. 2 TYLER TECHNOLOGIES, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (In thousands, except per share amounts) (Unaudited)
Three months ended Nine months ended September 30, September 30, ----------------------- ------------------------ 2002 2001 2002 2001 ---------- ---------- ---------- ---------- Revenues: Software licenses $ 6,333 $ 4,940 $ 16,614 $ 13,126 Professional services 15,474 12,413 43,210 39,075 Maintenance 10,961 10,037 32,344 29,746 Hardware and other 1,925 1,045 4,497 4,737 ---------- ---------- ---------- ---------- Total revenues 34,693 28,435 96,665 86,684 Cost of revenues: Software licenses 1,285 1,030 3,721 2,655 Professional services and maintenance 19,585 16,822 55,655 51,770 Hardware and other 1,511 663 3,535 3,586 ---------- ---------- ---------- ---------- Total cost of revenues 22,381 18,515 62,911 58,011 ---------- ---------- ---------- ---------- Gross profit 12,312 9,920 33,754 28,673 Selling, general and administrative expenses 8,546 7,508 25,322 22,635 Amortization of acquisition intangibles 832 1,721 2,497 5,177 ---------- ---------- ---------- ---------- Operating income 2,934 691 5,935 861 Interest expense (income) 12 77 (20) 359 ---------- ---------- ---------- ---------- Income from continuing operations before income taxes 2,922 614 5,955 502 Income tax provision 1,183 363 2,364 393 ---------- ---------- ---------- ---------- Income from continuing operations 1,739 251 3,591 109 Loss from disposal of discontinued operations, net of income taxes -- (23) -- (38) ---------- ---------- ---------- ---------- Net income $ 1,739 $ 228 $ 3,591 $ 71 ========== ========== ========== ========== Basic earnings (loss) per common share: Continuing operations $ 0.04 $ 0.01 $ 0.08 $ 0.00 Discontinued operations -- (0.01) -- (0.00) ---------- ---------- ---------- ---------- Net earnings per common share $ 0.04 $ 0.00 $ 0.08 $ 0.00 ========== ========== ========== ========== Diluted earnings (loss) per common share: Continuing operations $ 0.04 $ 0.01 $ 0.07 $ 0.00 Discontinued operations -- (0.01) -- (0.00) ---------- ---------- ---------- ---------- Net earnings per common share $ 0.04 $ 0.00 $ 0.07 $ 0.00 ========== ========== ========== ========== Weighted average common shares outstanding: Basic 47,173 47,171 47,401 47,167 Diluted 49,372 48,396 49,833 47,667
See accompanying notes. 3 TYLER TECHNOLOGIES, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (In thousands) (Unaudited)
Nine months ended September 30, ------------------------------- 2002 2001 ------------ ------------ Cash flows from operating activities: Net income $ 3,591 $ 71 Adjustments to reconcile net income from operations to net cash provided by operations: Depreciation and amortization 6,355 8,006 Deferred income taxes -- (286) Non-cash charges 311 177 Discontinued operations - non-cash charges and changes in operating assets and liabilities (273) (860) Changes in operating assets and liabilities, exclusive of effects of discontinued operations 4,359 (946) ------------ ------------ Net cash provided by operating activities 14,343 6,162 ------------ ------------ Cash flows from investing activities: Additions to property and equipment (2,017) (2,270) Software development costs (5,493) (4,717) Assets acquired for discontinued operations -- (1,353) Proceeds from sale of discontinued operations 831 3,675 Proceeds from sale of assets of discontinued operations 961 -- Other (15) 55 ------------ ------------ Net cash used by investing activities (5,733) (4,610) ------------ ------------ Cash flows from financing activities: Net payments on revolving credit facility -- (4,750) Payments on notes payable (399) (277) Payment of debt of discontinued operations (324) (842) Purchase of treasury shares (4,000) -- Proceeds from exercise of stock options 1,616 258 Debt issuance costs (240) (116) ------------ ------------ Net cash used by financing activities (3,347) (5,727) ------------ ------------ Net increase (decrease) in cash and cash equivalents 5,263 (4,175) Cash and cash equivalents at beginning of period 5,271 8,217 ------------ ------------ Cash and cash equivalents at end of period $ 10,534 $ 4,042 ============ ============
See accompanying notes 4 Tyler Technologies, Inc. Notes to Condensed Consolidated Financial Statements (Unaudited) (Tables in thousands, except per share data) (1) Basis of Presentation We prepared the accompanying condensed consolidated financial statements following the requirements of the Securities and Exchange Commission and GAAP (accounting principles generally accepted in the United States) for interim reporting. As permitted under those rules, certain footnotes or other financial information that are normally required by GAAP can be condensed or omitted for interim periods. Balance sheet amounts are as of September 30, 2002 and December 31, 2001 and operating result amounts are for the three and nine months ended September 30, 2002 and 2001 and include all normal and recurring adjustments that we considered necessary for the fair summarized presentation of our financial position and operating results. As these are condensed financial statements, one should also read the financial statements and notes included in our latest Form 10-K for the year ended December 31, 2001. Revenues, expenses, assets and liabilities can vary during each quarter of the year. Therefore, the results and trends in these interim financial statements may not be the same as those for the full year. Although we have a number of operating subsidiaries, separate segment data has not been presented as they meet the criteria set forth in SFAS (Statement of Financial Accounting Standards) No. 131, "Disclosures About Segments of an Enterprise and Related Information" to be presented as one segment. (2) Discontinued Operations Discontinued operations include the operating results of the information and property records services segment of which our Board of Directors approved a formal plan of disposal in December 2000. Discontinued operations also include the results of two non-operating subsidiaries relating to a formerly owned subsidiary that we sold in December 1995. The business units within the information and property records services segment were sold in 2000 and 2001. One of the business units previously included in the information and property records services segment was sold in May 2001 for $575,000 cash, approximately 60,000 shares of Tyler stock, a promissory note of $750,000 at 9% interest and other contingent consideration. In 2002, the buyer of this business unit requested to renegotiate the $750,000 promissory note and the contingent consideration. As a result of this renegotiation in March 2002, we received additional cash of approximately $800,000 and a subordinated note receivable amounting to $200,000, to fully settle the promissory note and other contingent consideration in connection with this previous sale. The subordinated note is payable in 16 equal quarterly principal payments with interest at a rate of 6%. Because the subordinated note receivable is highly dependent upon future operations of the buyer, we are recording its value when the cash is received which is our historical practice. During the three and nine months ended September 30, 2002, we received payments of $15,000 and $30,000, respectively, on the note. Since the original $750,000 promissory note was not credited to income when the note was initially received, the cash proceeds from the accelerated promissory note repayment resulted in a gain on the disposal of discontinued operations, net of income taxes. However, this net gain was offset in the first quarter of 2002 due to a similar increase in the loss reserve. This increase can be attributed to the inherent uncertainties associated with the ultimate settlement of the outstanding liabilities associated with discontinued operations, including the settlement of our facility lease obligations and the bankruptcy filing of Swan Transportation Company (See Note 3 - Commitments and Contingencies). In our opinion and based upon information available at this time, no material adverse adjustment is anticipated to this loss reserve and we believe the loss reserve for discontinued operations remains adequate. Two of our non-operating subsidiaries are involved in various claims for work-related injuries and physical conditions relating to a formerly-owned subsidiary that we sold in 1995. For the three and nine months ended September 30, 2001, we expensed and included in discontinued operations, net of related tax effect, $23,000 and $38,000, respectively, for trial and related costs (See Note 3 - Commitments and Contingencies). (3) Commitments and Contingencies One of our non-operating subsidiaries, Swan Transportation Company (Swan), has been and is currently involved in various claims raised by hundreds of former employees of a foundry that was once owned by an affiliate of Swan and Tyler. These claims are for alleged work related injuries and physical conditions resulting from alleged exposure to silica, asbestos, and/or related industrial dusts during their employment at the foundry. We sold the operating assets of the foundry on December 1, 1995. As a 5 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 $1.9 million at September 30, 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. In order to receive the foregoing benefits, we have agreed, among other things, to make certain cash contributions to the trust, the amount of which is not expected to exceed the settlement liability previously recorded by Tyler in its condensed consolidated financial statements. On September 23, 2002, the bankruptcy court approved the disclosure statement and plan of reorganization for distribution to Swan's creditors. The creditors of Swan are required to vote on, or object to, the plan of reorganization by November 15, 2002. Tyler anticipates the plan, as currently contemplated, will be approved by Swan's creditors because the material terms of the plan of reorganization have been pre-negotiated between the various affected parties. If the creditors approve the plan of reorganization, it will be presented to the bankruptcy court for final approval. The bankruptcy court has currently scheduled hearings to confirm the plan of reorganization on December 9 and 10, 2002, at which time the bankruptcy court will hear and determine any objections to the plan of reorganization. If the plan of reorganization as currently contemplated is approved by final order, we anticipate that all of the liabilities associated with the foundry formerly owned by our affiliates will be legally settled at an amount no greater than the liability reflected in the accompanying condensed consolidated financial statements. There can be no assurance that the creditors of Swan will approve the plan of reorganization as currently contemplated, and if approved by such creditors, will be approved in such form by the bankruptcy court, if at all. Because of the inherent uncertainties, it is reasonably possible that the amounts recorded as liabilities for Swan related matters could change in the near term by amounts that would be material to the condensed consolidated financial statements. See Note 6 - Investment Securities Available for Sale, for discussion of litigation in connection with H.T.E., Inc. (HTE) attempted cash redemption of all shares of HTE common stock currently owned by Tyler. 6 (4) Earnings Per Share The following table details the computation of basic and diluted earnings per share:
THREE MONTHS ENDED NINE MONTHS ENDED SEPTEMBER 30, SEPTEMBER 30, ----------------------- ----------------------- 2002 2001 2002 2001 ---------- ---------- ---------- ---------- Numerators for basic and diluted earnings per share: Income from continuing operations ...................... $ 1,739 $ 251 $ 3,591 $ 109 ========== ========== ========== ========== Denominator: Denominator for basic earnings per share- Weighted-average common shares outstanding ............. 47,173 47,171 47,401 47,167 Effect of dilutive securities: Employee stock options ............................... 1,290 949 1,430 408 Warrants ............................................. 909 276 1,002 92 ---------- ---------- ---------- ---------- Dilutive potential common shares ........................... 2,199 1,225 2,432 500 ---------- ---------- ---------- ---------- Denominator for diluted earnings per share- Adjusted weighted-average shares for assumed conversion ......................... 49,372 48,396 49,833 47,667 ========== ========== ========== ========== Basic earnings per share from continuing operations ........ $ 0.04 $ 0.01 $ 0.08 $ 0.00 ========== ========== ========== ========== Diluted earnings per share from continuing operations ...... $ 0.04 $ 0.01 $ 0.07 $ 0.00 ========== ========== ========== ==========
(5) Income Tax Provision We had an effective income tax rate of 40.5% and 39.7% for the three and nine months ended September 30, 2002, respectively. For the three and nine months ended September 30, 2001, we had an effective income tax rate of 59.1% and 78.3%, respectively. The effective income tax rates are estimated based on projected pre-tax income for the entire fiscal year and the resulting amount of income taxes. The effective income tax rates for the periods presented were different from the statutory United States federal income tax rate of 35% primarily due to state income taxes, non-deductible meals and entertainment costs, and in periods prior to January 1, 2002, non-deductible goodwill amortization expensed for financial reporting purposes. (6) Investment Securities Available-for-Sale Pursuant to an agreement with two major shareholders of H.T.E., Inc. (HTE), we acquired approximately 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 34% of HTE. The cost of the investment was recorded at $15.8 million and is classified as a non-current asset because we made the investment for a continuing business purpose. Florida state corporation law restricts the voting rights of "control shares", as defined, acquired by a third party in certain types of acquisitions. These restrictions may be removed by a vote of the shareholders of HTE. The courts have not interpreted the Florida "control share" statute. HTE has taken the position that, under the Florida statute, all of the shares acquired by us constitute "control shares" and therefore do not have voting rights until such time as shareholders of HTE, other than Tyler, restore voting rights to those shares. We believe only the shares acquired in excess of 20% of the outstanding shares of HTE constitute "control shares". Therefore, we believe we currently have the right to vote all HTE shares we own up to at least 20% of the outstanding shares of HTE. On November 16, 2000, the shareholders of HTE, other than Tyler, voted to deny Tyler its right to vote the "control shares" of HTE. On October 29, 2001, HTE notified us that, pursuant to the Florida "control share" statute, it had attempted a cash redemption of all 5.6 million shares of HTE common stock currently owned by us at price of $1.30 per share. 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 7 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 maintain 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 the HTE shares owned by us under the "control share" statute. In addition, HTE agreed to dismiss and release us from the tort claims it alleged against us as disclosed in previous filings. The court has not yet ruled on the voting status of our HTE shares, i.e., our ability to vote up to 20% of the issued and outstanding shares of HTE common stock owned by us. Under GAAP, a 20% investment in the voting stock of another company implies that the investor has significant influence over the operating and financial policies of that company, unless there is evidence to the contrary. Management of Tyler has concluded that we do not have such influence. Accordingly, we account for our investment in HTE pursuant to the provisions of SFAS No. 115, "Accounting for Certain Investments in Debt and Equity Securities". These securities are classified as available-for-sale and are recorded at fair value as determined by quoted market prices for HTE common stock. Unrealized holding gains and losses, net of the related tax effect, are excluded from earnings and are reported as a separate component of shareholders' equity until the securities are sold. Realized gains and losses from the sale of available-for-sale securities are determined on a specific identification basis. A decline in the market value of any available-for-sale security below cost that we consider to be other than temporary results in a reduction in the cost basis to fair value. The impairment is charged to earnings and a new cost basis for the security is established. The cost, fair value and gross unrealized holding gains (losses) of the investment securities available-for-sale, based on the quoted market price for HTE common stock (amounts in millions, except per share amounts) are presented below. In accordance with SFAS No. 115, we used quoted market price per share in calculating fair value to be used for financial reporting purposes. SFAS No. 115 does not permit the adjustment of quoted market prices in the determination of fair value and, accordingly, the ultimate value we could realize because of our significant investment could vary materially from the amount presented.
Quoted Market Gross Unrealized Per Share Cost Fair Value Holding Gains (Losses) ------------- ------ ---------- ---------------------- September 30, 2002 $ 3.60 $ 15.8 $ 20.2 $ 4.4 December 31, 2001 2.00 15.8 11.2 (4.6) September 30, 2001 1.70 15.8 9.6 (6.2)
If the court rules that we are able to vote up to 20% of the issued and outstanding shares of HTE common stock owned by us and, if following such a ruling it is determined that we have the ability to exercise "significant influence" with respect to HTE, we will retroactively adopt the equity method of accounting for this investment. Therefore, our results of operations and retained earnings for periods beginning with the 1999 acquisition will be retroactively restated to reflect our investment in HTE for all periods in which we held an investment in the common stock of HTE. Under the equity method, the original investment is recorded at cost and is adjusted periodically to recognize our share of HTE's earnings or losses after the respective dates of acquisition. Our investment in HTE would include the unamortized excess of our investment over our equity in the net assets of HTE through December 31, 2001. Effective January 1, 2002, under the newly adopted provisions of SFAS No. 142, the excess investment over our equity in the net assets would no longer be amortized if it consisted of goodwill. Had our investment in HTE been accounted for under the equity method, our investment at September 30, 2002 would have been $13.2 million and the equity in income of HTE for the three and nine months ended September 30, 2002 would have been $577,000 and $1.7 million, respectively. At September 30, 2001, our investment would have been $11.1 million and our equity in loss of HTE for the three and nine months ended September 30, 2001 would have been $390,000 and $906,000, respectively. 8 (7) Comprehensive Income The components of comprehensive income (loss) are as follows:
THREE MONTHS ENDED NINE MONTHS ENDED SEPTEMBER 30, SEPTEMBER 30, ------------------------ ----------------------- 2002 2001 2002 2001 ---------- ---------- ---------- ---------- Net income ................................................. $ 1,739 $ 228 $ 3,591 $ 71 Change in fair value of securities available-for-sale (net of deferred tax benefit of $2,222 for the three months ended September 30, 2002 and deferred tax expense of $1,556 for the nine months ended September 30, 2002) ...................................... (4,127) (4,608) 7,435 4,460 ---------- ---------- ---------- ---------- Comprehensive income (loss) .............................. $ (2,388) $ (4,380) $ 11,026 $ 4,531 ========== ========== ========== ==========
(8) Treasury Stock Purchase On August 15, 2002, we consummated an agreement to repurchase 1.1 million of our common shares from William D. Oates, one of our former directors, for a cash purchase price of $4.0 million. Under the terms of the agreement, we also have the sole option to assign to eiStream, LLC, an affiliate of Mr. Oates, our rights and obligations under a Data License and Update Agreement in exchange for an additional 400,000 shares of our common stock. On October 30, 2002, we exercised the option to assign the agreement to Mr. Oates in exchange for 400,000 shares of our common stock. The Data License and Update Agreement grants one of our affiliates included in our discontinued property records business the right to receive updates of certain recorded real property information for an annual fee, subject to certain restrictions on the use of such information. The past operating results of our information and property records business are included in discontinued operations (See Note 2 - Discontinued Operations). (9) Goodwill and Intangible Assets In July 2001, the Financial Accounting Standards Board (FASB) issued SFAS No. 141, "Business Combinations", and SFAS No. 142, "Goodwill and Other Intangible Assets". SFAS No. 141 requires that all business combinations be accounted for under the purchase method only and that certain acquired intangible assets in a business combination be recognized as assets apart from goodwill. SFAS No. 142 requires that ratable amortization of goodwill be discontinued and replaced with periodic tests of the goodwill's impairment and that intangible assets other than goodwill be amortized over their useful lives. The intangible asset impairment test, which compares the fair values of our reporting units to their respective carrying values, was completed during the three months ended June 30, 2002. No impairments were recognized as a result of this test. SFAS No. 141 is effective for all business combinations initiated after June 30, 2001 and for all business combinations accounted for by the purchase method for which the date of acquisition is after June 30, 2001. We have adopted the provisions of SFAS No. 141. Under SFAS No. 142, assembled workforce, net of related deferred taxes, is subsumed into goodwill upon the adoption of the Statement as of January 1, 2002. In periods prior to January 1, 2002, our effective income tax rate for determining the quarterly income tax provision varied significantly because of the significant amount of non-deductible goodwill in relation to the estimated annual pre-tax income or loss. The adoption of SFAS No. 142, in which goodwill is no longer amortized for financial reporting purposes, has resulted in our ability to more accurately estimate our effective income tax rate on an annual and on a quarterly basis. In determining the pro forma operating results on a quarterly basis, as shown below, we used our pro forma annual effective income tax rate as applied to our quarterly pro forma pretax income or loss in computing our adjusted net income. If we had accounted for goodwill (including workforce) under the non-amortization approach of SFAS No. 142, our net income (loss) and related per share amounts would have been as follows for the periods ended September 30, 2001:
Three Nine months months ---------- ---------- Reported net income ................................... $ 228 $ 71 Add back goodwill amortization, net of income taxes ... 651 1,805 ---------- ---------- Adjusted net income ......................... $ 879 $ 1,876 ========== ========== Basic and diluted net income per share ............... $ 0.00 $ 0.00 Goodwill amortization, net of income taxes ............ 0.02 0.04 ---------- ---------- Basic and diluted net income per share ...... $ 0.02 $ 0.04 ========== ==========
9 The allocation of assets following our adoption of SFAS No. 142 is summarized in the following table:
September 30, 2002 December 31, 2001 --------------------------- --------------------------- Gross Gross Carrying Accumulated Carrying Accumulated Amount Amortization Amount Amortization ------------ ------------ ------------ ------------ Intangibles no longer amortized: Goodwill ........................... $ 46,298 $ -- $ 51,063 $ 7,771 Assembled workforce ................ -- -- 6,191 2,808 Amortizable intangibles: Customer base ...................... 17,997 3,135 17,997 2,480 Software acquired .................. 12,158 8,952 12,158 7,128 Non-compete agreements ............. 163 146 163 128
The changes in the carrying amount of goodwill for the nine months ended September 30, 2002 are as follows: Balance as of December 31, 2001 .................................................................... $43,292 Goodwill adjustments during the first quarter relating to workforce, net of deferred taxes of $377, being subsumed into goodwill upon the adoption of SFAS No. 142 on January 1, 2002 ......... 3,006 ------- Balance as of September 30, 2002 ................................................................... $46,298 =======
Estimated annual amortization expense relating to acquisition intangibles is as follows:
Year ending December 31, ------------ 2002 ................... $3,300 2003 ................... 2,800 2004 ................... 1,500 2005 ................... 900 2006 ................... 900
(10) New Accounting Standards In September 2001, the FASB issued SFAS No. 143, "Accounting for Asset Retirement Obligations". SFAS No. 143 requires that the fair value of the liability for an asset retirement obligation be recognized in the period in which it is incurred if a reasonable estimate of fair value can be made. The associated asset retirement costs are capitalized as part of the carrying amount of the long-lived asset. SFAS No. 143 is effective for fiscal years beginning after September 15, 2002. We are currently evaluating the requirements and impact of the Statement, but its adoption is not expected to have a material impact on our results of operations and financial position. In April 2002, the FASB issued SFAS No. 145, "Rescission of FASB Statements No. 4, 44 and 64, Amendment of FASB Statement No. 13, and Technical Corrections". Among other items, this Statement no longer classifies in the income statement the early extinguishment of debt as an extraordinary item. We do not anticipate that this Statement will have a material impact on our results of operations and financial position. In July 2002, the FASB issued SFAS No. 146, "Accounting for Costs Associated with Exit or Disposal Activities". SFAS No. 146 requires the recognition of costs associated with exit or disposal activities when they are incurred rather than at the date of a commitment to an exit or disposal plan. SFAS No. 146 is to be applied prospectively to exit or disposal activities initiated after December 31, 2002. The adoption of this Standard may affect the timing of the recognition of future exit or disposal costs. However, we do not anticipate that this Statement will have a material impact on our results of operations and financial position. 10 ITEM 2. Management's Discussion and Analysis of Financial Condition and Results of Operations FORWARD-LOOKING STATEMENTS The statements in this discussion that are not historical statements are "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995. These forward-looking statements include statements about our business, financial condition, business strategy, plans and the objectives of our management, and future prospects. In addition, we have made in the past and may make in the future other written or oral forward-looking statements, including statements regarding future operating performance, short- and long-term revenue and earnings growth, the timing of the revenue and earnings impact for new contracts, backlog, the value of new contract signings, business pipeline, and in industry growth rates and our performance relative thereto. Any forward-looking statements may rely on a number of assumptions concerning future events and be subject to a number of uncertainties and other factors, many of which are outside our control, which could cause actual results to differ materially from such statements. These include, but are not limited to: our ability to improve productivity and achieve synergies from acquired businesses; technological risks associated with the development of new products and the enhancement of existing products; changes in the budgets and regulating environments of our government customers; competition in the industry in which we conduct business and the impact of competition on pricing, revenues and margins; with respect to customer contracts accounted for under percentage-of-completion method of accounting, the performance of such contracts in accordance with our cost and revenue estimates; our ability to maintain health and other insurance coverage and capacity due to changes in the insurance market and the impact of increasing insurance costs on the results of operations; the costs to attract and retain qualified personnel, changes in product demand, the availability of products, economic conditions, changes in tax risks and other risks indicated in our filings with the Securities and Exchange Commission. Except to the extent required by law, we are not obligated to update or revise any forward-looking statements whether as a result of new information, future events or otherwise. When used in this Quarterly Report, the words "believes," "plans," "estimates," "expects," "anticipates," "intends," "continue," "may," "will," "should", "projects", "forecast", "might", "could" or the negative of such terms and similar expressions as they relate to Tyler or our management are intended to identify forward-looking statements. GENERAL Tyler provides integrated software systems and related services for local governments. We develop and market a broad line of software products and services to address the information technology (IT) needs of cities, counties, schools and other local government entities. We provide professional IT services to our customers, including software and hardware installation, data conversion, training and product modifications, along with continuing maintenance and support for customers using our systems. We also provide property appraisal outsourcing services for taxing jurisdictions. CRITICAL ACCOUNTING POLICIES AND ESTIMATES The discussion and analysis of our financial condition and results of operations are based upon our condensed consolidated financial statements. These condensed consolidated financial statements have been prepared following the requirements of accounting principles generally accepted in the United States (GAAP) for interim periods and require us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities. On an on-going basis, we evaluate our estimates, including those related to investments, intangible assets, bad debts and long-term service contracts, deferred income tax assets, reserve for discontinued operations and contingencies and litigation. As these are condensed financial statements, one should also read our Form 10-K for the year ended December 31, 2001 regarding expanded information about our critical accounting policies and estimates. 11 ANALYSIS OF RESULTS OF OPERATIONS The following table sets forth items from our unaudited condensed consolidated statements of operations and the percentage change in the amounts between the periods presented. The amounts shown in the table are in thousands, except the per share data. Revenues and expenses can vary during each quarter of the year. Therefore, the results and trends in these interim financial statements may not be the same as those for the full year.
Three months ended September 30, Nine months ended September 30, -------------------------------- --------------------------------- % % 2002 2001 Change 2002 2001 Change -------- -------- -------- -------- -------- -------- Revenues: Software licenses $ 6,333 $ 4,940 28% $ 16,614 $ 13,126 27% Professional services 15,474 12,413 25 43,210 39,075 11 Maintenance 10,961 10,037 9 32,344 29,746 9 Hardware and other 1,925 1,045 84 4,497 4,737 (5) -------- -------- -------- -------- Total revenues 34,693 28,435 22 96,665 86,684 12 Cost of revenues: Software licenses 1,285 1,030 25 3,721 2,655 40 Professional services and maintenance 19,585 16,822 16 55,655 51,770 8 Hardware and other 1,511 663 128 3,535 3,586 (1) -------- -------- -------- -------- Total cost of revenues 22,381 18,515 21 62,911 58,011 8 % of revenues 64.5% 65.1% 65.1% 66.9% Gross profit 12,312 9,920 24 33,754 28,673 18 % of revenues 35.5% 34.9% 34.9% 33.1% Selling, general and administrative expenses 8,546 7,508 14 25,322 22,635 12 % of revenues 24.6% 26.4% 26.2% 26.1% Amortization of acquisition intangibles 832 1,721 (52) 2,497 5,177 (52) -------- -------- -------- -------- Operating income 2,934 691 325 5,935 861 # % of revenues 8.5% 2.4% 6.1% 1.0% Interest expense (income) 12 77 (84) (20) 359 # -------- -------- -------- -------- Income before income taxes 2,922 614 376 5,955 502 # % of revenues 8.4% 2.2% 6.2% 0.6% Income tax provision 1,183 363 226 2,364 393 # -------- -------- -------- -------- Effective income tax rate 40.5% 59.1% 39.7% 78.3% Income from continuing operations $ 1,739 $ 251 593 $ 3,591 $ 109 # % of revenues 5.0% 0.9% 3.7% 0.1% Diluted earnings per share from continuing operations $ 0.04 $ 0.01 300 $ 0.07 $ 0.00 # EBITDA* $ 5,071 $ 3,501 45 $ 12,290 $ 8,632 42 Cash flows provided by operating activities $ 7,448 $ 7,785 (4) $ 14,343 $ 6,162 133
# Not meaningful *EBITDA consists of income from continuing operations before interest, income taxes, depreciation, amortization and recovery of acquisition costs previously expensed ($235 in the second quarter of 2001). EBITDA is not calculated in accordance with GAAP, but we believe that it is widely used as a measure of operating performance. EBITDA should only be considered together with other measures of operating performance such as operating income, cash flows from operating activities, or any other measure for determining operating performance or liquidity that is calculated in accordance with GAAP. EBITDA is not necessarily an indication of amounts that may be available for us to reinvest or for any other discretionary uses. 12 ================================================================================ REVENUES The following table compares the components of revenue as a percent of total revenues for the periods presented:
Three months ended Nine months ended September 30, September 30, -------------------- -------------------- 2002 2001 2002 2001 -------- -------- -------- -------- Software licenses 18.3% 17.4% 17.2% 15.1% Professional services 44.6 43.7 44.7 45.1 Maintenance 31.6 35.3 33.5 34.3 Hardware and other 5.5 3.6 4.6 5.5 -------- -------- -------- -------- 100.0 100.0 100.0 100.0
Software license revenues. Software license revenues increased $1.4 million, or 28%, for the three months ended September 30, 2002, compared to the same quarter in the prior year. For the three months ended September 30, 2002, we recognized approximately $1.3 million in license revenue from two customers for real estate appraisal software. Our real estate appraisal software sales cycle is periodic in nature and there were no comparable sales in 2001. For the nine months ended September 2002, software license revenues increased $3.5 million, or 27%, compared to the prior year period. Approximately two-thirds of this increase related to expansion of our financial and city solutions software products into the Midwest and the Western United States. Our financial and city solutions software products automate accounting systems for cities, counties, school districts, public utilities and not-for-profit organizations. Real estate appraisal software revenue made up the remaining one-third of the year-to-date software license revenue increase. Professional services revenues. For the three months ended September 30, 2002, professional services revenues increased $3.1 million, or 25%, compared to the same period last year. For the first nine months of 2002, professional services revenue increased $4.1 million, or 11%, compared to the same period of 2001. Approximately two-thirds of the quarter and year-to-date increase over the prior year periods related to professional services associated with higher software license sales. Typically, contracts for software license include services such as installation of the software, converting the customers' data to be compatible with the software and training customer personnel to use the software. In addition, professional services revenue for the three months ended September 30, 2002 includes approximately $600,000 for services performed under an $11.0 million contract signed with the State of Minnesota in July 2002 to install our Odyssey Case Management system. The Minnesota contract includes both software license and services. Approximately 70% of the installation is expected to be performed by late 2003. The remainder of the installation is expected to be performed during 2004 through 2006. The remaining one-third of the quarter and year-to-date professional services revenues increase over the prior year periods was due to higher appraisal services. Approximately $2.2 million was recognized in the third quarter of 2002 for services performed under our appraisal contract with Lake County, Indiana, which was first awarded in December 2001. The Lake County contract to provide professional services and technology to reassess real property in Lake County is valued at approximately $15.9 million and is expected to be completed by late 2003. Also included in professional services revenue for the three and nine months ended September 30, 2002 was $3.6 million and $10.1 million, respectively, of appraisal revenue related to our contract with the Nassau County, New York Board of Assessors which was comparable to the prior year periods. Implementation of the Nassau County contract began in September 2000 and is expected to be completed by early 2003. Maintenance revenues. Maintenance revenues for the three and nine months ended September 30, 2002 increased $924,000 and $2.6 million, or 9%, respectively, compared to the same prior year periods. We provide maintenance and support services for our software products, third party software and hardware. The maintenance revenue increase was due to growth in our installed customer base and slightly higher rates. During the first three months of 2001, we received a one-time settlement of approximately $650,000 from a third party provider of maintenance services relating to past services. Excluding this settlement, maintenance revenue increased approximately 11% for the nine months ended September 30, 2002 compared to the same period last year. 13 Hardware and other revenues. For the three months ended September 30, 2002, hardware revenues increased $880,000 compared to the same period of 2001. For the nine months ended September 30, 2002, hardware revenues decreased $240,000 compared to the nine months ended September 30, 2001. The change in hardware revenue is a result of the timing of installations of equipment on customer contracts and is dependent on the contract size and on varying customer hardware needs. We have de-emphasized this aspect of our business in recent periods due to pressures on margins for hardware. COST OF REVENUES Cost of software license revenues. For the three and nine months ended September 30, 2002, cost of software license revenues increased $255,000, or 25%, and $1.1 million, or 40%, respectively, compared to the prior year periods, 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 released, we begin to expense the costs associated with the development over the estimated useful life of the product. Development costs mainly consist of personnel costs, such as salary and benefits paid to our developers. Cost of professional service and maintenance revenues. For the three and nine months ended September 30, 2002, cost of professional services and maintenance revenues increased $2.8 million, or 16%, and $3.9 million, or 8%, respectively, compared to the same periods of 2001. These increases are consistent with the higher professional services and maintenance revenues for the same periods. The following table compares cost of professional service and maintenance revenues as a percentage of professional service and maintenance revenues for the periods presented:
Three months ended Nine months ended September 30, September 30, -------------------- -------------------- 2002 2001 2002 2001 -------- -------- -------- -------- Professional services and maintenance revenues $ 26,435 $ 22,450 $ 75,554 $ 68,821 Cost of professional services and maintenance revenues 19,585 16,822 55,655 51,770 % of professional services and maintenance revenues 74% 75% 74% 75%
Cost of hardware and other revenues. Costs of hardware and other revenues increased $848,000 for the three months ended September 30, 2002 compared to the same prior year period. For the nine months ended September 30, 2002, costs of hardware and other revenues were flat compared to the same prior year period. These changes are consistent with the changes in hardware and other revenue for the same periods. GROSS MARGIN For the three months ended September 30, 2002 and 2001, our overall gross margin was 36% and 35%, respectively. For the nine months ended September 30, 2002, our overall gross margin was 35% compared to 33% for the same period of 2001. This increase is mainly due to higher software license sales and maintenance revenues. Software license revenue has lower costs associated with it than other revenues such as professional services and hardware. In addition, utilization of our personnel that provide services and support has improved, which has increased our overall gross margin. SELLING, GENERAL AND ADMINISTRATIVE EXPENSES Selling, general and administrative expenses, or SG&A, increased $1.0 million, or 14%, and $2.7 million, or 12%, for the three and nine months ended September 30, 2002, respectively. For the third quarter of 2002, SG&A as a percent of revenue decreased to 25% from 26% for the same prior year period. For the nine months ended September 30, 2002 and the same period in the prior year, SG&A as a percent of revenue was 26%. The increase in SG&A is related primarily to higher costs related to sales commissions, increases in sales and administrative personnel, increases in health and other insurance expenses, and HTE matters. During the three and nine months ended September 30, 2002, we incurred approximately $365,000 and $650,000 of legal and other 14 related costs associated with HTE matters, respectively. See Note 6 to our condensed consolidated financial statements for discussion of litigation in connection with HTE's attempted cash redemption of all shares of HTE common stock currently owned by Tyler. AMORTIZATION OF ACQUISITION INTANGIBLES Prior year amortization expense included amortization of goodwill and workforce. Effective January 1, 2002, we adopted SFAS No. 142, Goodwill and Other Intangible Assets. As a result of adopting SFAS No. 142, we ceased amortizing goodwill and workforce after December 31, 2001. Amortization expense for goodwill and workforce charged to the statement of operations for the three and nine months ended September 30, 2001 was $895,000 and $2.7 million, respectively. The remaining amortization consists of those costs allocated to our customer base and acquisition date software. See further discussion of the effect of adopting SFAS No. 142 in Note 9 to our condensed consolidated financial statements. INTEREST EXPENSE (INCOME) Our cash balances have increased significantly compared to September 30, 2001 due to cash generated from operations and the proceeds from the sale of certain discontinued businesses. As a result, we had net interest expense of $12,000 for the third quarter of 2002 compared to $77,000 for the same period in 2001. For the nine months ended September 30, 2002, we had interest income of $20,000, compared to interest expense of $359,000 for the same prior year period. In addition, in the three and nine months ended September 30, 2002, we capitalized $64,000 and $204,000, respectively, of interest costs related to capitalized software development costs. INCOME TAX PROVISION We had an effective income tax rate of 40.5% and 39.7% for the three and nine months ended September 30, 2002, respectively. For the three and nine months ended September 30, 2001, we had an effective income tax rate of 59.1% and 78.3%, respectively. Our effective income tax rate exceeded the federal statutory rate of 35% due primarily to the net effect of state income taxes and items that are non-deductible for federal income tax purposes. DISCONTINUED OPERATIONS Discontinued operations include the operating results of the information and property records services segment of which our Board of Directors approved a formal plan of disposal in December 2000. Discontinued operations also include the results of two non-operating subsidiaries relating to a formerly owned subsidiary that we sold in December 1995. The business units within the information and property records services segment were sold in 2000 and 2001. One of the business units previously included in the information and property records services segment was sold in May 2001 for $575,000 cash, approximately 60,000 shares of Tyler stock, a promissory note of $750,000 at 9% interest and other contingent consideration. In 2002, the buyer of this business unit requested to renegotiate the $750,000 promissory note and the contingent consideration. As a result of this renegotiation in March 2002, we received additional cash of approximately $800,000 and a subordinated note receivable amounting to $200,000, to fully settle the promissory note and other contingent consideration in connection with this previous sale. The subordinated note is payable in 16 equal quarterly principal payments with interest at a rate of 6%. Because the subordinated note receivable is highly dependent upon future operations of the buyer, we are recording its value when the cash is received which is our historical practice. During the three and nine months ended September 30, 2002, we received payments of $15,000 and $30,000, respectively, on the note. Since the original $750,000 promissory note was not credited to income when the note was initially received, the cash proceeds from the accelerated promissory note repayment resulted in a gain on the disposal of discontinued operations, net of income taxes. However, this net gain was offset in the first quarter of 2002 due to a similar increase in the loss reserve. This increase can be attributed to the inherent uncertainties associated with the ultimate settlement of the outstanding liabilities associated with discontinued operations including the settlement of our facility lease obligations and the bankruptcy filing of Swan Transportation Company (See Note 3 to our condensed consolidated financial statements). In our opinion and based upon information available at this time, no material adverse adjustment is anticipated to this loss reserve and we believe the loss reserve remains adequate. Two of our non-operating subsidiaries are involved in various claims for work-related injuries and physical conditions relating to a formerly-owned subsidiary that we sold in 1995. For the three and nine months ended September 30, 2001, we expensed and included in discontinued operations, net of related tax effect, $23,000 and $38,000, respectively, for trial and related costs (See Note 3 to our condensed consolidated financial statements). 15 LIQUIDITY AND CAPITAL RESOURCES On March 5, 2002, we entered into a new $10.0 million revolving credit agreement with a bank, which matures January 1, 2005. Our borrowings are limited to 80% of eligible accounts receivable and interest is charged at either the prime rate or at the London Interbank Offered Rate plus a margin of 3%. The credit agreement is secured by our personal property and the common stock of our operating subsidiaries. The credit agreement is also guaranteed by our operating subsidiaries. In addition, we must maintain certain financial ratios and other financial conditions and cannot make certain investments, advances, cash dividends or loans. As of September 30, 2002, our bank has issued outstanding letters of credit totaling $3.7 million under our credit agreement to secure performance bonds required by some of our customer contracts. Our borrowing base under the credit agreement is limited by the amount of eligible receivables and was reduced by the letters of credit at September 30, 2002. At September 30, 2002, we had no outstanding bank borrowings under the credit agreement and had an available borrowing base of $5.3 million. At September 30, 2002, our capitalization consisted of $2.6 million of long-term obligations (including the current portion of that debt) and $109.7 million of shareholders' equity. Our total debt-to-capital ratio (total debt divided by the sum of total shareholders' equity and total debt) was 2% at September 30, 2002. During the first nine months of 2002, we made capital expenditures of $7.5 million, including $5.5 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. In March 2002, we received cash of approximately $800,000 and a $200,000 subordinated note receivable to fully settle an existing promissory note and other contingent consideration in connection with the sale in May of 2001 of a business unit previously included in the information and property records services segment, which had been discontinued. In June 2002, we sold the building of a business unit previously included in the information and property records service segment which had been discontinued. Net proceeds from the sale totaled approximately $961,000. On August 15, 2002, we consummated an agreement to repurchase 1.1 million of our common shares from William D. Oates, one of our former directors, for a cash purchase price of $4.0 million. During the nine months ended September 30, 2002, we received $1.6 million from the purchase of 490,000 treasury shares upon the exercise of stock options under our employee stock option plan. Absent acquisitions, we believe our current cash balances and expected future cash flows from operations will be sufficient to meet our anticipated cash needs for working capital, capital expenditures and other activities through the next twelve months. If operating cash flows are not sufficient to meet our needs, we may borrow under our credit agreement. Item 4. Evaluation of Disclosure Controls and Procedures (a) Evaluation of disclosure controls and procedures. Our chief executive officer and our chief financial officer, after evaluating the effectiveness of the Company's "disclosure controls and procedures" (as defined in the Securities Exchange Act of 1934 Rules 13a-14(c) and 15-d-14(c)) as of a date (the "Evaluation Date") within 90 days before the filing date of this quarterly report, have concluded that as of the Evaluation Date, our disclosure controls and procedures were adequate and designed to ensure that material information relating to us and our consolidated subsidiaries would be made known to them by others within those entities. (b) Changes in internal controls. There were no significant changes in our internal controls or to our knowledge, in other factors that could significantly affect our disclosure controls and procedures subsequent to the Evaluation Date. 16 PART II. OTHER INFORMATION Item 1. Legal Proceedings For a discussion of legal proceedings see Part I, Item 1. "Financial Statements - Notes to Condensed Consolidated Financial Statements - "Commitments and Contingencies" on page 5 of this document. Item 6. Exhibits and Reports on Form 8-K (a) Exhibit 4.8 Second Amendment to Credit Agreement, First Amendment to Pledge and Security Agreement, and Lender's Consent and Waiver, by and between Tyler Technologies, Inc. and Bank of Texas, N.A., dated effective September 30, 2002. (b) Exhibit 99 Certifications Pursuant to Section 1350 of Chapter 63 of Title 18 of the United States Code (c) Reports on Form 8-K
Form 8-K Item Reported Date Reported Exhibits Filed ------------- -------- -------------- 8/19/02 5 News release issued by Tyler Technologies, Inc. dated August 19, 2002 announcing the repurchase of 1.1 million shares of its common stock from William D. Oates, a former director.
Item 3 of Part I and Items 2, 3, 4 and 5 of Part II were not applicable and have been omitted. 17 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. TYLER TECHNOLOGIES, INC. By: /s/ Theodore L. Bathurst ------------------------- Theodore L. Bathurst Vice President and Chief Financial Officer (principal financial officer and an authorized signatory) By: /s/ Terri L. Alford ------------------------- Terri L. Alford Controller (principal accounting officer and an authorized signatory) Date: October 31, 2002 18 CERTIFICATIONS I, John M. Yeaman, certify that: 1. I have reviewed this quarterly report on Form 10-Q of Tyler Technologies, Inc.; 2. Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report; 3. Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report; 4. The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have: a) designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared; b) evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the "Evaluation Date"); and c) presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date; 5. The registrant's other certifying officer and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent function): a) all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and 6. The registrant's other certifying officer and I have indicated in this quarterly report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. Dated: October 31, 2002 By: /s/ John M. Yeaman ------------------ John M. Yeaman President and Chief Executive Officer 19 I, Theodore L. Bathurst, certify that: 1. I have reviewed this quarterly report on Form 10-Q of Tyler Technologies, Inc.; 2. Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report; 3. Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report; 4. The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have: a) designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared; b) evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the "Evaluation Date"); and c) presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date; 5. The registrant's other certifying officer and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent function): a) all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and 6. The registrant's other certifying officer and I have indicated in this quarterly report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. Dated: October 31, 2002 By: /s/ Theodore L. Bathurst ------------------------ Theodore L. Bathurst Vice President and Chief Financial Officer 20 EXHIBIT INDEX
EXHIBIT NO. DESCRIPTION ----------- ----------- 4.8 Second Amendment to Credit Agreement, First Amendment to Pledge and Security Agreement, and Lender's Consent and Waiver, by and between Tyler Technologies, Inc. and Bank of Texas, N.A., dated effective September 30, 2002. 99.1 Certification pursuant to Section 1350 of Chapter 63 of Title 18 of the United States Code - Chief Executive Officer. 99.2 Certification Pursuant to Section 1350 of Chapter 63 of Title 18 of the United States Code - Chief Financial Officer.