Tyler Technologies Annual Report 2002

Plain-text annual report

T Y L E R T E C H N O L O G I E S 2 0 0 2 A N N U A L R E P O R T Each day, governments in 1,899 cities and towns, 620 counties and 49 states rely on software, services and support from Tyler Technologies’ divisions : Courts and Justice, Financial and City Solutions, Property Appraisal and Tax, and Recording Systems. Why? Because Tyler Works. These are tough times, make no mis- In a difﬁcult environment we have take about it. not backed off our strategic initia- tives. To the contrary, we’ve An uncertain economy, corporate strengthened our competitive posi- governance breakdowns, and tion – expanding geographically, conﬂicts around the world. An adding sales resources, and improv- apparent reluctance in 2002 to invest ing the competitiveness of our prod- in new productivity tools produced ucts. Built on the critical mass we gloomy results for the overall soft- achieved in 2001, our record results ware industry -- of less than 3% in 2002 are a testament to the ﬁnan- growth, according to International cial and operational leverage inher- Data Corporation. ent in our business model. Revenues grew by 13% and we met or exceeded Against that backdrop we’re extreme- our key earnings targets. The out- ly proud of the results achieved by look for the year 2003 and beyond is the Tyler team. for sustained growth in revenues 2 and proﬁts. Why? Because Tyler’s ing year. As a result, we expect to see business model works. a somewhat lower overall growth rate Tyler works: Continued demand for our products and services. Despite concerns over state and local government budgets, our results in the past year with a more strategic revenue mix. Tyler works: New business signed at a good pace. During 2002, we success- fully penetrated new geographic give us reason to continue to be opti- markets and signed contracts with mistic about the market for our local larger cities, counties and a state. government software and services. Our broad product line now opens Our position in the market continued more opportunities for cross-selling to strengthen, and our revenue mix and additional business with exist- shifted to a greater proportion of ing customers. Signiﬁcant new con- higher margin software-related rev- tracts in 2002 include: enues. Our software license revenues were exceptionally strong in 2002, That we’re in tough times is not exactly breaking news. So we’re extremely proud of the Tyler team whose efforts resulted in 13% revenue growth. with 25% growth over 2001. We also posted solid growth in software serv- ices and maintenance revenues. Our appraisal services revenues have nearly doubled in the last two years, growing from $20.9 million in 2000 to $37.3 million in 2002. While we have strengthened our position as the nation’s leading provider of these services with our highly successful project in Nassau County, NY, we . The State of Minnesota . Allegheny County (Pittsburgh), Pennsylvania . Lee County, Florida . Fairfax County, Virginia . City and County of Denver, Colorado . Wayne County (Detroit), Michigan, Airport Authority . Lake County (Gary), Indiana don’t expect that our appraisal serv- ices revenues will continue to grow at the same rate. We believe that soft- Tyler works: Innovative product develop- ment. In 2002 we signed our ﬁrst two contracts for Tyler’s Odyssey court ware – related revenues will be the case management system. This new primary driver of growth in the com- Web-based courts system is being installed statewide in Minnesota as well approximately $39.3 million, against as in Lee County, FL. In addition to a cost basis of about $16 million. We our new-generation courts and justice expect the transaction to close in products, Tyler is devoting signiﬁcant the ﬁrst quarter of 2003. The cash development resources to Orion, our proceeds from this investment pro- new Web-based appraisal system, vide additional ﬂexibility to take and to the enhancement of our ﬁnan- advantage of opportunities to build cial and recording suites of products. value for our shareholders, includ- Tyler works: Our core strengths remain key to our success and to our customers. An exceptionally customer-oriented staff and a deep and experienced manage- ment team played a large role in Tyler’s 2002 success. A wider array of products and services that work well ing further stock repurchases. Tyler works: By the numbers –  ﬁnancial highlights: . Revenues grew 13% to $133.9 million. . Software license revenues grew We are the only company in our industry that does it all. positive impacts on the communities we serve and reinforce our reputation for—and anticipates—our customers’ 25%. 2002’s fourth quarter was our needs. This translates into an ever- best quarter ever for software growing, broad base of loyal cus- license revenues at $7.2 million. tomers. In a market that requires the right technology and a mandate to . Software services revenues were up operate more efﬁciently – from the 19% to $25.7 million. courthouse to the statehouse. Tyler works: Building shareholder value. Our balance sheet is solid. During 2002, we used free cash ﬂow to . Gross margin improved more than two percentage points to 35.8%. . SG&A expense declined to 25.3% of repurchase 1.5 million shares of our revenues from 25.9% in 2001 stock and authorized the repurchase of up to one million additional shares. We agreed at year-end to sell our 35% stake in HTE, Inc., for . EBITDA grew 41% to $18.6 million. . Pretax income from continuing 4 operations grew to $10.0 million services offer greater efﬁciencies for from $1.8 million in 2001. almost every aspect of the day to day . Income from continuing operations management of local government. Coast to coast. We continue to reinforce rose to $6.2 million, or 12 cents per our reputation for getting the job share, up from $272,000, or one cent done right regardless of the complexity. per share, last year. . After income from discontinued We are the only company in our indus- try that does it all. We will continue operations of $1.8 million, we had to bring new products to the market net income of $8.0 million, or 16 that create positive impacts on the cents per share. communities we serve. These products . We ended the year with nearly $14 will increase opportunities to grow revenues and proﬁts. Our team is million in cash and no bank debt. committed; their customer focus is For the year 2002 free cash ﬂow intense. Tyler works. We will continue to bring new products to the market that create for getting the job done right. (cash generated from operations minus capital expenditures) was over $10 million. . Our year-end backlog of signed contracts remained solid at $89.1 million. We anticipate another very success- ful year in 2003, notwithstanding the uncertainties ahead. Having all the right components in place for proﬁt- able growth should increase value for all stakeholders. Local govern- ments’ mandate to be more efﬁcient continues. Tyler’s products and Stuart Reeves, Chairman John Yeaman, President & CEO C O U R T S A N D J U S T I C E 10,000 lakes, one software platform. The state of Minnesota was search- states and courts around the world. ing for a solution; one that would “Courts as far away as Australia will have a direct impact on justice and be watching,” says Glenn Smith of public safety, according to Dale Tyler Technologies. “We have all the Good, Chief Information Ofﬁcer for pieces now – domain expertise, talent the Judicial Branch of Minnesota’s and ﬁnancial resources.” state government. This was an $11 million opportunity that played di- Odyssey consolidates the judiciary’s rectly to Tyler’s strengths. And after case processing and tracking func- a rigorous selection process Tyler tions, and behaves like applications was chosen. already familiar to users. That makes training easier and users pro- Tyler’s Odyssey court case manage- ductive even faster. As a Web-based ment system will be installed in all system, Odyssey has the added 87 counties in Minnesota. The new beneﬁt of centralized – and therefore court system will link each county’s easier and more efﬁcient – support court records and set, Tyler believes, because it takes the software applica- a new standard for the other 49 tion off individual desktops. 6 For the citizens of Minnesota, Dale Good of the Minnesota Supreme Odyssey will improve the vigilance Court’s IT division says their initial and tracking of predators and skepticism about the ability of an criminals, county to county, off-the-shelf software product to statewide. Information about their meet their requirements, versus criminal records and whereabouts developing one from scratch, has now becomes a statewide resource been satisﬁed. “Odyssey is linked to numerous databanks. conﬁgurable and extendable, which Odyssey also keeps better track of makes it ﬂexible enough to satisfy juveniles; who they are, and where our needs,” according to Mr. Good. they are. Odyssey transforms He adds that Tyler’s in-depth courts into information–enabled knowledge and understanding of the enterprises. Judges will have more way courts operate also contributed pertinent information, more quick- to being awarded the contract. ly to make sounder decisions. which makes it flexible enough to satisfy our needs. Odyssey is configurable and extendable, More vigilance. Swifter justice. Safer The $11 million contract for Odyssey children. These are expected out- is just the beginning; Tyler is already comes from the use of Odyssey. discussing related opportunities. As more courts recognize the need for When Minnesota ﬁrst issued its data to be shared quickly and accu- request for proposal (RFP), Tyler rately between courts and across was in the process of developing jurisdictions, Tyler is prepared to its new-generation system based meet their needs with a state-of-the- on the National Center for State art solution. Courts’ latest standards. Tyler rec- ognized the value and potential of the Minnesota opportunity but was not far enough along in Odyssey’s development to respond to the RFP. However, when the system devel- oped by Minnesota’s previous soft- ware vendor failed a scalability test, Tyler was ready with Odyssey. Dale Good, Chief Information Ofﬁcer Judicial Branch, State of Minnesota P R O P E R T Y A P P R A I S A L A N D T A X In 1997, homeowners in New York’s Nassau County, upset at valuations of their properties, ﬁled a lawsuit against the county that resulted in a court-ordered reassessment of resi- dential property taxes. For Charles O’Shea, then campaigning for Chair- man of the Board of Assessors, it would mean a monumental task of enormous political sensitivity; no Chairman had been required to under- take a reassessment in over 60 years. “It would have had dire political con- sequences had it not gone well,” recalls Mr. O’Shea. “Remember, we’re talking about over 415,000 parcels of property, including 360,000 A monumental task. 8 residential properties belonging to a 2003 through 2009. “No fair-minded very vocal, very educated population person can look at the work that was that can be very critical under the done here in Nassau County, involv- best of circumstances.” The property ing 415,000 parcels, under the dead- tax division of Tyler Technologies, lines imposed, and not conclude that Cole Layer Trumble (CLT), was up to the result was something the county the challenge. could be proud of,” he says. Bruce Nagel, head of CLT, believes CLT, from a ﬁeld of 12, was the they were chosen for such a highly unanimous choice in 2000 of the visible project because of their track Nassau County proposal committee. record. He pointed out that CLT was The $34 million contract utilized No fair-minded person can look at the work that was done involving 415,000 parcels, under the deadlines imposed, and not be pleased. CLT’s Integrated Assessment System (IAS), a computer assisted not the lowest bidder. Mr. O’Shea mass appraisal software system. 150 believes that the strength and size of local inspectors were hired in one Tyler Technologies prepared CLT to month for the two-year project. undertake such a complex commit- Because of the project’s high proﬁle ment. He said, “CLT had the best nature CLT took all the necessary proposal, experience and ability to steps to keep the electorate fully handle a big job under tough time informed and up to date; CLT had constraints. Their professionalism was fulltime public information people very evident. They could take the heat.” on the job and created a Web site to Results show the right decision was the progress. Timely information made. Mr. O’Shea has said that sta- was crucial in building and sustain- tistical tests used to measure the ing the conﬁdence of the citizens of keep citizens constantly apprised of accuracy and uniformity of the prop- Nassau County. erty values indicate that this reassess- ment is the best job ever performed in According to Mr. O’Shea, Tyler’s CLT a large assessing jurisdiction. A strong professionals performed, “the best foundation has now been built for the reassessment of a large assessing required annual updates for the years jurisdiction in the history of the U.S.” Charles O’Shea, Chairman Nassau County Board of Assessors R E C O R D I N G S Y S T E M S Chester County, for the record. When Terence Farrell ran for Chester County (Pennsylvania) Recorder of Deeds in 1999, he prom- ised citizens that he would modern- ize the land records computer sys- tem. Mr. Farrell kept his campaign promise – and more. With the help of Tyler Technologies, Mr. Farrell and his team developed a land records systems that did what it was sup- posed to do – and saved taxpayers $200,000 per year and won national recognition for Chester County. “Going into the job I knew that the decision I made for a new system would be the most important deci- sion in my term as Recorder,” Mr. 10 Farrell says. When he began his cam- dreds of thousands of dollars com- paign the old system, less than two pared to the old system, even as our years old, was broken. “You name it,” document volume increased.” Mr. Farrell says, “the system had the problem. There was a clear need to Today the land records database is move into the 21st century.” integrated with other county records, allowing access to other departments Meeting with vendors at trade shows, that need the data. The system elim- traveling and evaluating for months inates redundancy and makes the efforts of what 15 other counties searching for records easier and in three states were doing, Mr. more efﬁcient for the 15 county agen- Farrell and his staff studied every cies it serves on a daily basis. The possible option. Other counties in the Urban and Regional Information same purchasing board cooperative as Chester County, and already Literally tons of paperwork have been eliminated, which not only speeds up processing, but saves tax dollars by being more efficient. clients of Tyler’s records software Systems Association honored the division (Eagle), gave positive refer- performance of Chester County’s ences. “We evaluated all the respons- system at its annual conference in es from their RFP process and were 2002. “Eagle’s software is the heart satisﬁed that Eagle was the logical of the system,” says Mr. Farrell. Terence Farrell, Recorder of Deeds Chester County Pennsylvania choice,” says Mr. Farrell. The ﬁnal step involved evaluations from Chester County’s Department of Computer and Information Services; they were satisﬁed. From three ﬁnalists, Eagle was awarded the contract because of a combination of functionality, tech- nology, dependability and price. “Eagle was not the least expensive,” Mr. Farrell said, “but their pricing structure allowed us to save hun- F I N A N C I A L A N D C I T Y S O L U T I O N S In 1999, the City of South Portland, Maine decided to decentralize the functions of payroll, human resources, general ledger, accounts payable and receivable, purchase orders, tax billing and parking tick- ets. The city would change the way they had always conducted business, from manual entries to, for many, using computers for the ﬁrst time. First, a consulting ﬁrm was hired to conduct a complete analysis of each city department’s needs. Their con- clusion was that the 10-year-old sys- MUNIS elected.. 12 tem’s life cycle had ended and the have been nightmares. This went as hardware was barely hanging on. well as it possibly could considering what they were undertaking in a Notices were sent to over 100 very tight timeframe. I would have to software vendors that a request say no one could do a better job in for proposal (RFP) was being pre- their business.” pared; 40 requested the RFP, and 11 then responded to the RFP. The full suite of Tyler ﬁnancial soft- Mr. Coombs decided to try some- ware products, created by Tyler’s thing different in the selection MUNIS division, has made employees process. Instead of the ﬁnance of the City of South Portland much department management, he let more efﬁcient, productive and organized, the users make the decision. says Mr. Coombs. Employees have After four full days of demos been freed to perform other important from the ﬁnalists, the committee tasks and headcount has stabilized. of 20 departmental users made a unanimous decision in Tyler’s favor. Implementation went as well as it could considering what they were undertaking in a very tight timeframe. I would have to say no one could do a better job in their business. Robert Coombs, Finance Director City of South Portland, Maine “Intuitive, easy to use, and has all the functionality,” is how Robert Coombs, Finance Director for the City of South Portland, describes Tyler’s MUNIS software. “A successful implementation would mean buy-in from the people who would be using it. 50-50 would have worked, but the vote for Tyler was unanimous, even though technically it did not have the most bells and whistles,” he says. “Implementation went amazingly well,” according to Mr. Coombs. “Implementations for other systems F I N A N C I A L A N D C I T Y S O L U T I O N S It’s all about reputation. Choosing Tyler Technologies’ InVision municipal software was an easy deci- sion for Goose Creek, according to Ron Faretra, Finance Director for the City of Goose Creek, South Carolina. “I wanted their entire customer list and they gave it to me. That was important. Not every vendor would do it.” From the initial list of 15 possible vendors, the ﬁnal step in the process was checking references. Mr. Faretra’s staff checked 25 of Tyler’s customers. 14 “It was amazing,” he says. “We high percentage are MBAs and CPAs. wanted to know what they thought They really know what they’re talk- of the software. But 23 of the 25 ing about. I don’t have to tell them talked about [Tyler’s] customer sup- the software needs to do this or that. port and we didn’t even ask. It was They tell me.” all very positive.” That’s no surprise to Tyler’s InVision municipal soft- Goose Creek, 50 square miles and the ware sales team; they send the entire home of 30,000 people, has recently customer list to all prospects, built a new state-of-the-art adminis- conﬁdent that every day virtually all tration facility, managed by the most of their customers are pleased. Not only are they good people, but they really know what they’re talking about. I don’t have to tell them what the software needs to do. They tell me. “Our reputation is our most signiﬁcant senior city administrator in all of asset,” says Dustin Womble, presi- South Carolina, 25-year veteran dent of Tyler’s municipal software Dennis C. Harmon. “We are well- division, known as INCODE. “Local known and a lot of other cities governments are inherently risk- [administrators] come to tour,” says adverse. These decision makers place Mr. Faretra. “People ask about soft- a tremendous value on the experi- ware more than I ever thought, and ences of their peers. In the last 20 I am happy to tell them about years of business, over 99% of clients InVision. It keeps accurate and timely that purchased INCODE software billing for utilities and provides bet- products and services remain INCODE ter ﬁnancial records for the commu- clients. This fact carries more weight nity. We can budget and plan better.” with potential clients than any mar- keting point or software feature.” “Besides being light years ahead of most of their competition in function- ality and technology,” Mr. Faretra says, “the experience of their cus- tomer support people is invaluable. Not only are they good people, but a Ron Faretra, Finance Director City of Goose Creek, South Carolina We ended the year with nearly $14 million in cash and no bank debt, and we’re profitable. Our growth continues to be driven by a strong local government software and services market and products that do well for our customers. Our business model works. Now for the numbers: R E P O R T O F E R N S T & Y O U N G L L P , I N D E P E N D E N T A U D I T O R S T H E B O A R D O F D I R E C T O R S A N D S H A R E H O L D E R S T Y L E R T E C H N O L O G I E S , I N C . We have audited the accompanying consolidated balance sheets of Tyler Technologies, Inc. as of December 31, 2002 and 2001, and the related consolidated statements of operations, shareholders' equity, and cash ﬂows for each of the three years in the period ended December 31, 2002. These ﬁnancial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these ﬁnancial statements based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the ﬁnancial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the ﬁnancial statements. An audit also includes assessing the accounting princi- ples used and signiﬁcant estimates made by management, as well as evaluating the overall ﬁnancial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the ﬁnancial statements referred to above present fairly, in all material respects, the consolidated ﬁnancial position of Tyler Technologies, Inc. at December 31, 2002 and 2001, and the consolidated results of their operations and their cash ﬂows for each of the three years in the period ended December 31, 2002, in con- formity with accounting principles generally accepted in the United States. As discussed in Note 7 in the Notes to the Consolidated Financial Statements, the Company changed its method of accounting for goodwill. Dallas, Texas February 21, 2003 18 C O N S O L I D A T E D S T A T E M E N T S O F O P E R A T I O N S For the years ended December  IN THOUSANDS, EXCEPT PER SHARE AMOUNTS Revenues: Software licenses Software services Maintenance Appraisal services Hardware and other Total revenues Cost of revenues: Software licenses Software services and maintenance Appraisal services Hardware and other Total cost of revenues 2 0 0 2 2 0 0 1 2 0 0 0 $ 24,278 25,703 40,667 37,319 5,930 133,897 5,482 50,175 25,512 4,746 85,915 $ 19,491 21,538 36,587 34,727 6,473 118,816 4,130 46,024 23,894 4,749 78,797 $ 19,312 19,425 29,108 20,909 5,179 93,933 2,605 38,355 14,681 4,017 59,658 Gross proﬁt 47,982 40,019 34,275 Selling, general and administrative expenses Amortization of acquisition intangibles 33,914 3,329 30,830 6,898 32,805 6,903 Operating income (loss) 10,739 2,291 (5,433) Legal fees associated with afﬁliated investment Interest expense Interest income Income (loss) from continuing operations before income taxes Income tax provision (beneﬁt) Income (loss) from continuing operations Discontinued operations: Loss from operations, after income taxes Gain (loss) on disposal, after income taxes Gain (loss) from discontinued operations Net income (loss) Basic income (loss) per common share: Continuing operations Discontinued operations Net income (loss) per common share Diluted income (loss) per common share: Continuing operations Discontinued operations Net income (loss) per common share Basic weighted average common shares outstanding Diluted weighted average common shares outstanding See accompanying notes 704 187 (193) 10,041 3,869 6,172 -- 1,817 1,817 $ 7,989 $ $ $ $ 0.13 0.04 0.17 0.12 0.04 0.16 47,136 49,493 -- 630 (151) 1,812 1,540 272 -- (3) (3) -- 4,914 (30) (10,317) (2,810) (7,507) (4,251) (12,839) (17,090) $ $ $ $ $ 269 $(24,597) 0.01 (0.00) 0.01 0.01 (0.00) 0.01 47,181 47,984 $ (0.17) (0.37) $ (0.54) $ (0.17) (0.37) $ (0.54) 45,380 45,380 C O N S O L I D A T E D B A L A N C E S H E E T S December  IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS A S S E T S Current assets: Cash and cash equivalents Accounts receivable (less allowance for losses of $690 in 2002 and $1,275 in 2001) Income taxes receivable Prepaid expenses and other current assets Deferred income taxes Total current assets Net assets of discontinued operations Property and equipment, net Other assets: Investment security available - for - sale Goodwill Customer base, net Software, net Other acquisition intangibles Sundry L I A B I L I T I E S A N D S H A R E H O L D E R S ’ E Q U I T Y Current liabilities: Accounts payable Accrued liabilities Net current liabilities of discontinued operations Deferred revenue Total current liabilities Long-term obligations, less current portion Deferred income taxes Commitments and contingencies Shareholders' equity: Preferred stock, $10.00 par value; 1,000,000 shares authorized, none issued Common stock, $0.01 par value; 100,000,000 shares authorized; 48,147,969 shares issued in 2002 and 2001 Additional paid-in capital Accumulated deﬁcit Accumulated other comprehensive income (loss), net of tax Treasury stock, at cost; 1,928,636 and 920,205 shares in 2002 and 2001, respectively Total shareholders' equity See accompanying notes 20 2 0 0 2 2 0 0 1 $ 13,744 $ 5,271 33,510 -- 4,009 1,197 52,460 35,256 151 3,318 1,329 45,325 -- 1,000 6,819 6,967 27,196 46,298 14,645 21,933 10 484 11,238 43,292 15,518 19,982 3,419 234 $ 169,845 $ 146,975 $ 2,390 11,186 442 26,208 40,226 2,550 8,413 $ 2,036 9,774 581 27,215 39,606 2,910 3,575 -- -- 481 156,898 (40,954) 7,418 481 157,242 (48,943) (4,545) (5,187) (3,351) 118,656 100,884 $ 169,845 $ 146,975 C O N S O L I D A T E D S T A T E M E N T S O F S H A R E H O L D E R S ' E Q U I T Y For the years ended December , ,  and  IN THOUSANDS C O M M O N S T O C K S H A R E S A M O U N T A D D I T I O N A L P A I D - I N C A P I T A L A C C U M U L A T E D O T H E R C O M P R E H E N S I V E I N C O M E ( L O S S ) A C C U M U L A T E D D E F I C I T T R E A S U R Y S T O C K S H A R E S A M O U N T T O T A L S H A R E H O L D E R S ’ E Q U I T Y Balance at December 31, 1999 44,709 $ 447 $151,298 $ 17,931 $ (24,615) (1,418) $ (6,157) $ 138,904 Comprehensive loss: Net loss Unrealized loss on investment security -- -- Total comprehensive loss Issuance of shares pursuant to stock compensation plans Shares issued for private investment Balance at December 31, 2000 -- 3,334 48,043 Comprehensive income: Net income Unrealized gain on investment security Total comprehensive income Issuance of shares pursuant to stock compensation plans Federal income tax beneﬁt related to exercise of stock options Shares received from sale of discontinued business Adjustment in connection with previous acquisition -- -- 105 -- -- -- -- -- -- 33 -- (24,597) -- -- (28,622) -- -- -- -- (24,597) (28,622) (53,219) 555 -- 2,926 -- 1,167 9,270 -- -- -- (1,759) 9,237 -- -- 480 158,776 (10,691) (49,212) (863) (3,231) 96,122 -- -- 1 -- -- -- -- -- 221 33 -- (1,788) -- 269 6,146 -- -- -- -- -- -- -- -- -- -- -- 3 -- -- -- 8 -- 269 6,146 6,415 230 33 (60) (128) (128) -- -- (1,788) Balance at December 31, 2001 48,148 481 157,242 (4,545) (48,943) (920) (3,351) 100,884 Comprehensive income: Net income Unrealized gain on investment security, net of tax Total comprehensive income Issuance of shares pursuant to stock compensation plans Treasury stock purchases Federal income tax beneﬁt related to exercise of stock options -- -- -- -- -- -- -- -- -- -- -- -- (542) -- 198 -- 7,989 11,963 -- -- -- -- -- -- -- -- -- -- -- 7,989 11,963 19,952 491 (1,500) 2,164 (4,000) 1,622 (4,000) -- -- 198 Balance at December 31, 2002 48,148 $ 481 $156,898 $ 7,418 $ (40,954) (1,929) $ (5,187) $ 118,656 See accompanying notes C O N S O L I D A T E D S T A T E M E N T S O F C A S H F L O W S For the years ended December  IN THOUSANDS Cash ﬂows from operating activities: Net income (loss) Adjustments to reconcile net income (loss) to net cash provided (used) by operations: Depreciation and amortization Non-cash interest and other charges Provision for losses – accounts receivable Deferred income tax provision (beneﬁt) Discontinued operations – noncash charges and changes in operating assets and liabilities 2 0 0 2 2 0 0 1 2 0 0 0 $ 7,989 $ 269 $ (24,597) 8,522 348 727 3,384 10,910 361 1,681 1,258 9,686 2,069 1,438 (2,890) (2,458) (2,590) 8,215 Changes in operating assets and liabilities, exclusive of effects of acquired companies and discontinued operations: Accounts receivable Income tax receivable Prepaid expenses and other current assets Other receivables Accounts payable Accrued liabilities Deferred revenue 1,019 151 (279) -- 354 1,095 (1,007) (258) 172 (853) -- (2,263) (2,092) 6,149 Net cash provided (used) by operating activities 19,845 12,744 Cash ﬂows from investing activities: Additions to property and equipment Software development costs Cost of acquisitions, net of cash acquired Cost of acquisitions subsequently discontinued Capital expenditures of discontinued operations Proceeds from disposal of discontinued operations and related assets Other Net cash (used) provided by investing activities Cash ﬂows from ﬁnancing activities: Net payments on revolving credit facility Payments on notes payable Payment of debt of discontinued operations Issuance of common stock Repurchase of common stock Proceeds from exercise of stock options Debt issuance costs Net cash used by ﬁnancing activities Net increase (decrease) in cash and cash equivalents Cash and cash equivalents at beginning of year (2,508) (7,210) -- -- -- 1,807 (63) (7,974) -- (456) (324) -- (4,000) 1,622 (240) (3,398) 8,473 5,271 (3,101) (6,225) (2,750) -- (1,353) 3,675 48 (9,706) (4,750) (354) (992) -- -- 230 (118) (5,984) (2,946) 8,217 (7,052) 2,571 48 85 697 1,370 1,234 (7,126) (2,645) (6,714) -- (3,073) (2,201) 79,821 213 65,401 (56,250) (836) (2,925) 9,270 -- 19 (1,300) (52,022) 6,253 1,964 Cash and cash equivalents at end of year $ 13,744 $ 5,271 $ 8,217 See accompanying notes 22 N O T E S T O C O N S O L I D A T E D F I N A N C I A L S T A T E M E N T S December ,  and  TABLE IN THOUSANDS, EXCEPT PER SHARE DATA ( 1 ) S U M M A R Y O F S I G N I F I C A N T A C C O U N T I N G P O L I C I E S D E S C R I P T I O N O F B U S I N E S S We provide integrated software systems and related services for local governments. We develop and mar- ket a broad line of software products and services to address the information technology (“IT”) needs of cities, counties, schools and other local government entities. In addition we provide professional IT serv- ices to our customers, including software and hard- ware installation, data conversion, training and product modiﬁcations, along with continuing main- tenance and support for customers using our sys- tems. We also provide property appraisal outsourc- ing services for taxing jurisdictions. We discontinued the operations of our information and property records services segment in 2000. See Note 3 - Discontinued Operations. P R I N C I P L E S O F C O N S O L I D A T I O N The consolidated ﬁnancial statements include our par- ent company and our subsidiaries, all of which are wholly-owned. All signiﬁcant intercompany balances and transactions have been eliminated in consolidation. C A S H A N D C A S H E Q U I V A L E N T S Cash equivalents include items almost as liquid as cash, such as money market investments with matu- rity periods of three months or less when purchased. For purposes of the statements of cash ﬂows, we consider all investments with original maturities of three months or less to be cash equivalents. R E V E N U E R E C O G N I T I O N We earn revenue from software licenses, postcontract customer support (“PCS” or “maintenance”), hard- ware, software related services and appraisal services. PCS includes telephone support, bug ﬁxes, and rights to upgrades on a when-and-if available basis. We pro- vide services that range from installation, training, and basic consulting to software modiﬁcation and customization to meet speciﬁc customer needs. In software arrangements that include rights to multi- ple software products, speciﬁed upgrades, PCS, and/or other services, we allocate the total arrange- ment fee among each deliverable based on the rela- tive fair value of each. Fair values are estimated using vendor speciﬁc objective evidence. We recognize revenue from software transactions in accordance with Statement of Position (“SOP”) 97-2, “Software Revenue Recognition,” as amended by SOP 98-4 and SOP 98-9 as follows: Software Licenses. We recognize the revenue allocable to software licenses and speciﬁed upgrades upon delivery of the software product or upgrade to the customer, unless the fee is not ﬁxed or determinable or collectibility is not probable. If the fee is not ﬁxed or determinable including payment terms three months or more from shipment, revenue is recog- nized as payments become due from the customer. If collectibility is not considered probable, revenue is recognized when the fee is collected. Arrangements that include software services, such as training or installation, are evaluated to determine whether those services are essential to the product's functionality. A majority of our software arrangements involve “off-the-shelf” software. We consider software to be off-the-shelf software if it can be added to an arrangement with minor changes in the underlying code and it can be used by the customer for the cus- tomer’s purpose upon installation. For off-the-shelf software arrangements, we recognize the software license fee as revenue after delivery has occurred, customer acceptance is reasonably assured, that por- tion of the fee represents an enforceable claim and is probable of collection and the remaining services such as training are not considered essential to the product's functionality. For arrangements that include customization or modiﬁcation of the software, or where software serv- ices are otherwise considered essential, we recognize revenue using contract accounting. We use the per- centage-of-completion method to recognize revenue from these arrangements. We measure progress-to- completion primarily using labor hours incurred, or value added. The percentage of completion methodol- ogy generally results in the recognition of reasonably consistent proﬁt margins over the life of a contract since we have the ability to produce reasonably dependable estimates of contract billings and con- tract costs. We generally use the level of proﬁt mar- N O T E S T O C O N S O L I D A T E D F I N A N C I A L S T A T E M E N T S ( C O N T I N U E D ) gins that are most likely to occur on a contract. If the most likely proﬁt margins cannot be precisely determined, the lowest probable level of proﬁt in the range of estimates is used for the contract until the results can be estimated more precisely. These arrangements are often implemented over an extend- ed time period and occasionally require us to revise total cost estimates. Amounts recognized in revenue are calculated using the progress-to-completion measurement after giving effect to any changes in our cost estimates. Changes to total estimated con- tract costs, if any, are recorded in the period they are determined. Estimated losses on incompleted con- tracts are recorded in the period in which we ﬁrst determine that a loss is apparent. Software Services. Some of our software arrangements include services considered essential for the customer to use the software for the customer’s purposes. For these software arrangements, both the software license revenue and the services revenue are recog- nized as the services are performed using the per- centage-of-completion contract accounting method. When software services are not considered essential, the fee allocable to the service element is recognized as revenue as we perform the services. Appraisal Services. For our real estate appraisal projects, we recognize revenue using contract accounting. We measure progress-to-completion primarily using units completed and these arrange- ments are often implemented over a one to three year time period. Computer Hardware Equipment. Revenue allocable to equipment based on vendor speciﬁc objective evi- dence of fair value is recognized when we deliver the equipment and collection is probable. Postcontract Customer Support. Our customers gener- ally enter into PCS agreements when they purchase the software license. Our PCS agreements are gener- ally renewable every year. Revenue allocated to PCS is recognized on a straight-line basis over the period the PCS is provided. All signiﬁcant costs and expenses associated with PCS are expensed as incurred. Deferred revenue consists primarily of payments received in advance of revenue being earned under software licensing, software services and hardware installation, support and maintenance contracts. Unbilled revenue is not billable at the balance sheet 24 dates but is recoverable over the remaining life of the contract through billings made in accordance with contractual agreements. U S E O F E S T I M A T E S The preparation of our consolidated ﬁnancial state- ments in conformity with accounting principles gen- erally accepted in the United States (“GAAP”) requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the ﬁnancial statements and the reported amounts of revenues and expenses during the report- ing period. Signiﬁcant items subject to such esti- mates and assumptions include the application of the percentage of completion method, the carrying amount of intangible assets and valuation allowances for receivables and deferred income tax assets. Actual results could differ from those estimates. P R O P E R T Y A N D E Q U I P M E N T Property, equipment and purchased software are recorded at original cost and increased by the cost of any signiﬁcant improvements after purchase. We record maintenance and repairs as expense when incurred. Depreciation and amortization is calculated using the straight-line method over the shorter of the asset’s estimated useful life or the term of the lease in the case of leasehold improvements. For income tax purposes, we use accelerated depreciation methods as allowed by tax laws. I N T E R E S T C O S T We capitalize interest cost as a component of capital- ized software development costs. We capitalized interest costs of $269,000 during 2002, $578,000 dur- ing 2001 and $586,000 during 2000. R E S E A R C H A N D D E V E L O P M E N T C O S T S We record all research and development costs as expense when incurred. We expensed research and development costs of $611,000 during 2002, $412,000 during 2001 and $973,000 during 2000. I N C O M E T A X E S Income taxes are accounted for under the asset and liability method. Deferred taxes arise because of dif- ferent treatment between ﬁnancial statement accounting and tax accounting, known as “temporary differences.” We record the tax effect of these tempo- rary differences as “deferred tax assets” (generally items that can be used as a tax deduction or credit in the future periods) and “deferred tax liabilities” (generally items that we received a tax deduction for, which have not yet been recorded in the income statement). The deferred tax assets and liabilities are measured using enacted tax rules and laws that are expected to be in effect when the temporary differ- ences are expected to be recovered or settled. A valu- ation allowance would be established to reduce deferred tax assets if it is likely that a deferred tax asset will not be realized. S T O C K C O M P E N S A T I O N In accordance with Statement of Financial Accounting Standards (“SFAS”) No. 123, “Accounting for Stock- Based Compensation,” we elected to account for our stock-based compensation under Accounting Principles Board (“APB”) Opinion No. 25, “Accounting for Stock Issued to Employees,” as amended and related interpretations including FASB Interpretation No. 44, “Accounting for Certain Transactions involving Stock Compen- sation,” an interpretation of APB Opinion No. 25, issued in March 2000. Under APB No. 25’s intrin- sic value method, compensation expense is deter- mined on the measurement date; that is, the ﬁrst date on which both the number of shares the option holder is entitled to receive, and the exer- cise price, if any, are known. Compensation expense, if any, is measured based on the award’s intrinsic value – the excess of the market price of the stock over the exercise price on the measure- ment date. The exercise price of all of our stock options granted equals the market price on the measurement date. Therefore we have not recorded any compensation expense related to grants of stock options. The weighted-average fair value per stock option granted was $3.61 for 2002, $1.28 for 2001 and $2.02 for 2000. We estimated the fair values using the Black-Scholes option pricing model and the following assumptions for the periods presented: YEARS ENDED DECEMBER 31, 2 0 0 2 2 0 0 1 2 0 0 0 Expected dividend yield Risk-free interest rate Expected stock price volatility Expected term until exercise (years) 7 7 7 0% 5.1% 78.0% 0% 4.9% 77.0% 0% 6.1% 73.0% Pro forma information regarding net income (loss) and earnings (loss) per share is required by SFAS No. 123 for awards granted after December 31, 1994, as if we had accounted for our stock-based awards to employees under the fair value method of SFAS No. 123, and is as follows: YEARS ENDED DECEMBER 31, Net income (loss) Add stock-based employee compensation cost included in net income (loss), net of related tax beneﬁt Deduct total stock-based employee compensation expense determined 2 0 0 2 2 0 0 1 2 0 0 0 $ 7,989 $ 269 $ (24,597) -- -- -- under fair-value-based method for all rewards, net of related tax beneﬁt (1,394) (1,188) (1,399) Pro forma net income (loss) $ 6,595 $ (919) $ (25,996) Pro forma net income (loss) per basic share Pro forma net income (loss) per diluted share $ $ 0.14 0.13 $ (0.02) $ (0.02) $ $ (0.57) (0.57) N O T E S T O C O N S O L I D A T E D F I N A N C I A L S T A T E M E N T S ( C O N T I N U E D ) C O M P R E H E N S I V E I N C O M E ( L O S S ) Changes in accumulated other comprehensive income (loss) follows: Net income (loss) Other comprehensive income (loss): Change in fair value of securities available-for-sale (net of deferred tax expense of $3,995 for 2002) Total comprehensive income (loss) YEARS ENDED DECEMBER 31, 2 0 0 2 $ 7,989 $ 2 0 0 1 269 2 0 0 0 $ (24,597) 11,963 6,146 (28,622) $ 19,952 $ 6,415 $ (53,219) We did not record a tax beneﬁt in connection with the change in the unrealized gain (loss) for 2001 or 2000 since we could not conclude it was more likely than not that the tax beneﬁt would be realized on the cumula- tive unrealized holding loss. S E G M E N T A N D R E L A T E D I N F O R M A T I O N Although we have a number of operating subsidiaries, separate segment data has not been presented as they meet the criteria for aggregation as permitted by SFAS No. 131, “Disclosures About Segments of an Enterprise and Related Information.” G O O D W I L L A N D O T H E R I N T A N G I B L E A S S E T S Our business acquisitions result in the allocation of the purchase price to goodwill and other intangible assets. We allocate the cost of acquired companies ﬁrst to identiﬁable assets based on estimated fair values. The excess of the purchase price over the fair value of identiﬁable assets acquired, net of liabilities assumed, is recorded as goodwill. On January 1, 2002 we adopted the provisions of SFAS No. 141, “Business Combinations,” and SFAS No. 142, “Goodwill and Other Intangible Assets.” SFAS No. 141 eliminates the pooling of interest method of accounting for business combinations initiated after June 30, 2001. The adoption of SFAS No. 141 did not impact our results of operations or ﬁnancial position. With the adoption of SFAS No. 142 goodwill and intangible assets not subject to amortization are test- ed annually for impairment, and are tested for impairment more frequently if events and circum- stances indicate that the asset might be impaired. An impairment loss is recognized to the extent that the carrying amount exceeds the asset’s fair value. Prior to the adoption of SFAS No. 142, goodwill was amortized on a straight-line basis over the expected periods to be beneﬁted and assessed for recoverability by determining whether the amortization of the goodwill balance over its remaining life could be recovered through undiscounted future operating cash ﬂows of the acquired operation. All other intan- gible assets were amortized on a straight-line basis. The amount of goodwill and other intangible asset impairment, if any, was measured by the amount by which the carrying amount of the assets exceeded the fair value of the assets. Fair value was deter- mined based on projected discounted future operat- ing cash ﬂows using a discount rate reﬂecting our average cost of funds. I M P A I R M E N T O F L O N G - L I V E D A S S E T S SFAS No. 144 provides a single accounting model for long-lived assets to be disposed of. SFAS No. 144 also changes the criteria for classifying an asset as held for sale; and broadens the scope of businesses to be disposed of that qualify for reporting as discontinued operations and changes the timing of recognizing losses on discontinued operations. We adopted SFAS No. 144 on January 1, 2002. The adoption of SFAS No. 144 did not affect our results of operations or ﬁnancial position. In accordance with SFAS No. 144, long-lived assets, such as property, plant, and equipment, and pur- chased intangibles subject to amortization, are reviewed for impairment whenever events or changes in circumstances indicate that the amount we have recorded for an asset may not be recover- able. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of an asset to estimated undiscounted future cash ﬂows expected to be generated by the asset. If the carrying amount of an asset exceeds its estimated future cash 26 ﬂows, an impairment charge is recognized by the amount by which the carrying amount of the asset exceeds the fair value of the asset. Assets to be dis- posed of would be separately presented in the bal- ance sheet and reported at the lower of the carrying amount or fair value less costs to sell, and are no longer depreciated. The assets and liabilities of a dis- posed group classiﬁed as held for sale would be pre- sented separately in the appropriate asset and liability sections of the balance sheet. Prior to the adoption of SFAS No. 144, we accounted for long-lived assets in accordance with SFAS No. 121, “Accounting for Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of.” C O S T S O F C O M P U T E R S O F T W A R E Software development costs have been accounted for in accordance with SFAS No. 86, “Accounting for the Costs of Computer Software to be Sold, Leased, or Otherwise Marketed.” Under SFAS No. 86, capitalization of software development costs begins upon the establishment of technological fea- sibility and prior to the availability of the product for general release to customers. We capitalized software development costs of approximately $7.2 million during 2002, $6.2 million during 2001 and $6.7 million during 2000. Software development costs primarily consist of personnel costs, rent for related ofﬁce space and capitalized interest cost. We begin to amortize capitalized costs when a product is available for general release to cus- tomers. Amortization expense is determined on a product-by-product basis at a rate not less than straight-line basis over the product's remaining estimated economic life. Amortization of software development costs was approximately $2.8 million during 2002, $1.7 million during 2001 and $622,000 during 2000. F A I R V A L U E O F F I N A N C I A L I N S T R U M E N T S We used the following methods and assumptions to estimate the fair value of each class of ﬁnancial instruments at the balance sheet date: Our available-for-sale investments are recorded at fair value based on quoted market prices. • Long-term obligations: Cost/carrying values approximates fair value either due to the variable nature of their stated interest rates or the stated interest rates approximate market rates. These estimated fair value amounts have been determined using available market information or other appropriate valuation methodologies. • We do not have any derivative ﬁnancial instruments, including those for speculative or trading purposes. C O N C E N T R A T I O N S O F C R E D I T R I S K A N D U N B I L L E D R E C E I V A B L E S Concentrations of credit risk with respect to receiv- ables are limited due to the wide variety of cus- tomers and markets into which our products and services are provided, as well as their dispersion across many different geographic areas. Historically our credit losses have not been signiﬁcant. As a result, as of December 31, 2002, we do not believe we have any signiﬁcant concentrations of credit risk. Our property appraisal outsourcing service contracts can range up to three years in duration. In connec- tion with these percentage of completion contracts and for certain software service contracts, we may perform the work prior to when the services are bill- able and/or payable pursuant to the contract. We have recorded retentions and unbilled receivables (costs and estimated proﬁt in excess of billings) of approximately $6.2 million and $7.5 million at December 31, 2002 and 2001, respectively, in connec- tion with such contracts. Retentions are included in trade accounts receivable and amounted to $2.6 mil- lion at December 31, 2002, of which $168,000 is expected to be collected in excess of one year. One customer accounted for approximately 10% during 2002 and 13% during 2001, of our total con- solidated revenues. No single customer accounted for greater than 10% of total consolidated revenues during 2000. • Cash and cash equivalents, accounts receivables, trade accounts payables, deferred revenues and certain other assets: Costs approximate fair value because of the short maturity of these instruments. R E C L A S S I F I C A T I O N S Pursuant to Financial Accounting Standards Board Emerging Issues Task Force (“EITF”) Issue No. 01- N O T E S T O C O N S O L I D A T E D F I N A N C I A L S T A T E M E N T S ( C O N T I N U E D ) 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 rev- enues and the related costs in cost of revenues. Because these additional net revenues are offset by the associated reimbursable expenses included in cost of revenues, the adoption of EITF No. 01-14 in 2002 did not impact income (loss) from continuing operations or net income (loss) for all periods pre- sented. Net revenues and cost of revenues for 2001 and 2000 were recast to reclassify certain reim- bursable expenses to conform to the current year presentation in accordance with EITF No. 01-14. See Note 17 – Quarterly Financial Information. In addition, certain other amounts for previous years have been reclassiﬁed to conform to the current year presentation. ( 2 ) A C Q U I S I T I O N S On November 4, 1999, we acquired selected assets and assumed selected liabilities of Cole Layer Trumble Company (“CLT”) from a privately held company (“Seller”). Part of the purchase price con- sisted of the issuance of 1.0 million restricted shares of Tyler common stock and included a price protection on the sale of the stock. The price pro- tection, which expired November 4, 2001, was equal to the difference between the actual sale proceeds of the Tyler common stock and $6.25 on a per share basis. The price protection was limited to $2.75 mil- lion. During the year ended December 31, 2001, we received a claim from the Seller under the price protection provision, which qualiﬁed for the maxi- mum amount of the price protection. Contingent consideration of this nature does not change the recorded costs of the acquisition and the claim is ﬁrst recorded when submitted. Accordingly, the claim submitted in 2001 of $2.75 million, net of the deferred tax beneﬁt of $963,000, was charged to paid-in capital during 2001. The purchase agree- ment contained a number of post-closing adjust- ments which resulted in a receivable of approxi- mately $1.4 million due to us from the Seller. During the year ended December 31, 2001 and concurrent with the settlement of the price protec- tion provision, we paid the Seller $1.35 million in cash on a net basis and eliminated the $1.4 million receivable due to us. We entered into a mutual release agreement with the Seller to fully settle 28 the price protection and related purchase agree- ment provisions. In January 2000 we paid $3.0 million in cash (among other consideration) for Capital Commerce Reporter, Inc. (“CCR”) which was included in our information and property records services segment that was dis- continued in December 2000. We have used the purchase method of accounting for all of our business combinations. Results of opera- tions of acquired entities are included in our consoli- dated ﬁnancial statements from the respective dates of acquisition. ( 3 ) D I S C O N T I N U E D O P E R A T I O N S Discontinued operations includes the operating results of the information and property records serv- ices segment which we discontinued in December 2002, two non-operating subsidiaries relating to a formerly owned subsidiary that we sold in December 1995 and an automotive parts distributor that we sold in March 1999. On September 29, 2000, we sold certain net assets of Koﬁle, Inc. and another subsidiary, our interest in a certain intangible work product, and a building and related building improvements (“Koﬁle Sale”) for a cash sale price of $14.4 million. Effective December 29, 2000, we sold for cash our land records business unit, consisting of Business Resources Corporation (“Resources”), to an afﬁliate of Afﬁliated Computer Services, Inc. (the “Resources Sale”). The Resources Sale was valued at approximately $71.0 million. Concurrent with the Resources Sale, our manage- ment 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 sys- tems and services segment and to reduce debt. The businesses and assets divested or identiﬁed for dives- ture 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 remain- ing businesses and assets of the information and property records services segment to be disposed of by December 29, 2001. The estimated loss on the dis- posal 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 con- sisted of an estimated loss on disposal of the busi- nesses of $11.5 million (net of an income tax beneﬁt of $2.7 million) and a provision of $2.1 million (after an income tax beneﬁt of $1.1 million) for anticipated operating losses from the measurement date of December 29, 2000 to the estimated disposal dates. On May 16, 2001, we sold all of the common stock of one of the businesses in the discontinued information and property records services segment. In connection with the sale, we received cash proceeds of $575,000, approximately 60,000 shares of Tyler common stock, a promissory note of $750,000 payable in 58 monthly installments at an interest rate of 9%, and other con- tingent consideration. On September 21, 2001, we sold all of the common stock of CCR for $3.1 million in cash. We renegotiated certain aspects of the May 16, 2001 sale transaction and as a result of this rene- gotiation 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 consider- ation received in connection with this previous sale. The subordinated note is payable in 16 equal quarterly principal payments with interest at a rate of 6%. Because the subordinated note receiv- able is highly dependent upon future operations of the buyer, we are recording its value when the cash is received which is our historical practice. During 2002, we received payments of $46,000 on the sub- ordinated note. During the year ended December 31, 2002, the IRS issued temporary regulations that in effect allowed us to deduct for tax purposes losses attributable to the March 1999 sale of our automotive parts sub- sidiary that were previously not allowed. The tax beneﬁt of allowing the deduction of this loss amounted to approximately $970,000. In addition, we renegoti- ated a note receivable and certain contingent consid- eration 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 con- sideration when the loss on the disposal of the dis- continued operation was ﬁrst established in 2000 and when the note was ﬁrst received in 2001. In addition, we settled in the fourth quarter of 2002 our asbestos litigation for an amount that was approximately $200,000 less than the liability initially established for this matter (See Note 16 – Commitments and Contingencies). The aggregate effects of these events, net of the related tax effects, and other minor adjustments to the reserve for discontinued operations resulted in a credit to discontinued opera- tions of $1.8 million in 2002. In our opinion and based on information available at this time, we believe that our net liabilities related to discontinued operations are adequate. The income tax expense or beneﬁt associated with the gains or losses on the respective sales of the businesses in the information and property records services segment differs from the statutory income tax rate of 35% due to the elimination of deferred taxes related to the basis difference between amounts reported for income taxes and ﬁnancial reporting purposes and the utilization of available capital loss carryforwards which were fully reserved in the valu- ation account prior to the respective sales. Net assets of discontinued operations of the informa- tion and property records services segment and two of our non-operating subsidiaries included in the consolidated balance sheets as of December 31, 2002 and 2001 includes the following: 2 0 0 2 2 0 0 1 Restricted asbestosis settlement cash with offsetting amount in current liabilities Accounts receivable Deferred taxes Other current liabilities primarily consisting of asbestosis settlement obligations (see Note 16) $ 1,325 -- 1,705 $ 2,310 100 2,192 (3,472) (5,183) Net current liabilities (442) (581) Property and equipment held for sale -- 1,000 Net (liability) assets $ (442) $ 419 N O T E S T O C O N S O L I D A T E D F I N A N C I A L S T A T E M E N T S ( C O N T I N U E D ) The condensed statements of operations relating to the information and property records services segment for the year ended December 31, 2000 is presented below: Revenues Costs and expenses Loss before income tax beneﬁt Income tax beneﬁt Net loss 2 0 0 0 $ 39,680 44,635 (4,955) (704) $ (4,251) Other. One of our non-operating subsidiaries is involved in various claims for work-related injuries and physical conditions relating to a formerly owned subsidiary that was sold in 1995. We recorded net losses, net of related tax effect, of $3,000 during 2001 and $748,000 in 2000 for trial and related costs. See Note 16 – Commitments and Contingencies. ( 4 ) R E L A T E D P A R T Y T R A N S A C T I O N S On September 29, 2000, we sold for cash of $14.4 mil- lion certain net assets of Koﬁle and another subsidiary, our interest in a certain intangible work product, and a building and related building improvements to invest- ment entities beneﬁcially owned by a principal share- holder of Tyler, who was also a director at the time. From time to time, we charter aircraft from busi- nesses in which a member of management is an owner. We recorded rental expense related to such arrangements with a non-corporate ofﬁcer manage- ment member of $69,000 during 2002, $83,000 during 2001 and $81,000 during 2000. During 2000, we chartered an aircraft from a former director. The rental expense related to these charters was $325,000. As disclosed in Note 11 – Shareholders' Equity, we purchased 1.5 million shares of our common stock from a former director in 2002. We have three ofﬁce building lease agreements with various shareholders and non-corporate ofﬁcer man- agement members. Total rental expense related to such leases was $1.2 million during 2002, $1.1 mil- lion during 2001 and $679,000 during 2000. Total future minimum rental under noncancelable related party operating leases as of December 31, 2002, are as follows: 2003 2004 2005 2006 2007 Thereafter $ 1,204 1,198 1,136 1,149 1,179 2,778 ( 5 ) P R O P E R T Y A N D E Q U I P M E N T Property and equipment consists of the following at December 31: Land Transportation equipment Computer equipment and purchased software Furniture and ﬁxtures Building and leasehold improvements Accumulated depreciation and amortization Property and equipment, net U S E F U L L I V E S ( Y E A R S ) -- 5 3-7 3-7 3-35 2 0 0 2 $ 115 385 8,909 3,797 1,751 14,957 (8,138) 2 0 0 1 $ 115 390 7,542 3,515 1,338 12,900 (5,933) $ 6,819 $ 6,967 Depreciation and amortization expense was $2.4 million during 2002, $2.3 million during 2001 and $2.0 million during 2000. 30 ( 6 ) I N V E S T M E N T S E C U R I T Y A V A I L A B L E - F O R - S A L E Pursuant to an agreement with two major sharehold- ers of H.T.E., Inc. (“HTE”), we acquired approxi- mately 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 share- holders of HTE. On November 16, 2000, the share- holders 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 pur- ported 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 com- plaint 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 judg- ment 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 out- standing 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 redemp- tion of our shares. In addition, HTE agreed to dis- miss and release us from the tort claims it alleged against us as disclosed in previous ﬁlings. On December 11, 2002, the court issued a further order declaring that all of our HTE shares are “control shares” and therefore none of our shares have voting rights. The court further ruled that voting rights would be restored to our HTE shares if we were to sell or otherwise transfer our HTE shares to an unafﬁliated third party in a transaction that did not constitute a “control share acquisition.” During 2002 we incurred approximately $704,000 of legal and other related costs associated with these matters which are classiﬁed as non-operating expenses. Under GAAP, a 20% investment in the voting stock of another company creates the presumption that the investor has signiﬁcant inﬂuence over the operating and ﬁnancial policies of that company, unless there is evidence to the contrary. Our management has concluded that we do not have such inﬂuence. Accordingly, we account for our investment in HTE pursuant to the provisions of SFAS No. 115, “Accounting for Certain Investments in Debt and Equity Securities.” These securities are classiﬁed as available-for-sale and are recorded at fair value as determined by quoted market prices for HTE common stock. Unrealized holding gains and losses, net of the related tax effect, are excluded from earnings and are reported as a separate component of shareholders’ equity until the securities are sold. Realized gains and losses from the sale of available-for-sale securities are determined on a speciﬁc identiﬁcation basis. A decline in the market value of any available-for-sale security below cost that we consider to be other than tempo- rary 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. N O T E S T O C O N S O L I D A T E D F I N A N C I A L S T A T E M E N T S ( C O N T I N U E D ) 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. December 31, 2002 December 31, 2001 February 21, 2003 Q U O T E D M A R K E T P E R S H A R E $ 4.84 2.00 6.93 C O S T F A I R V A L U E $ 15.8 15.8 15.8 $ 27.2 11.2 38.9 G R O S S U N R E A L I Z E D H O L D I N G G A I N S ( L O S S E S ) $ 11.4 (4.6) 23.1 On February 4, 2003, we entered into an agreement with SunGard Data Systems, Inc. (“SDS”) in which we agreed to tender all of our HTE shares in the ten- der 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 con- summation 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 ( 7 ) G O O D W I L L A N D O T H E R I N T A N G I B L E A S S E T S 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 acquisi- tion 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. Goodwill, other intangible assets and related accumulated amortization consists of the following at December 31: Gross carrying amount of acquisition intangibles: Goodwill Customer base Software acquired Workforce Non-compete agreements Accumulated amortization Acquisition intangibles, net Post acquisition software development costs Accumulated amortization Post acquisition software costs, net 2 0 0 2 2 0 0 1 $ 46,298 17,997 12,158 -- 163 76,616 (13,066) $ 63,550 $ 51,063 17,997 12,158 6,191 163 87,572 (20,314) $ 67,258 $ 24,560 (5,224) $ 19,336 $ 17,369 (2,416) $ 14,953 Total amortization expense was $6.1 million during 2002, $8.6 million during 2001 and $7.5 million during 2000. As discussed in Note 1 – Summary of Signiﬁcant Accounting Policies, on January 1, 2002, we adopted the provisions of SFAS No. 141, “Business Combinations” and SFAS No. 142, “Goodwill and Other Intangible Assets.” Under SFAS No. 142, assembled workforce, net of related deferred taxes, is subsumed into goodwill upon the 32 adoption of the Statement as of January 1, 2002. If we had accounted for goodwill (including workforce) under the non-amortization approach of SFAS No. 142, our net income (loss) and related per share amounts would have been as follows for the years ended December 31, 2001 and 2000: Reported net income (loss) Add back goodwill amortization, net of income taxes Adjusted net income (loss) Basic and diluted net income (loss) per share Goodwill amortization, net of income taxes, per share Basic and diluted net income (loss) per share $ 2 0 0 1 269 2,960 2 0 0 0 $(24,597) 2,934 $ 3,229 $(21,663) $ $ 0.01 0.06 0.07 $ (0.54) 0.06 $ (0.48) SFAS No. 142’s transitional goodwill impairment evaluation required us to perform an assessment of whether there was an indication that goodwill was impaired as of the date of adoption. To accomplish this, we identiﬁed our reporting units and deter- mined the carrying value of each reporting unit by assigning the assets and liabilities, including the existing goodwill and intangible assets, to those reporting units as of January 1, 2002. We determined the fair value of each reporting unit and compared it to the carrying amount of the reporting unit and concluded there was no impairment. In addition to the transitional goodwill impairment test, we are required to perform, at least annually, a goodwill impairment test and designate a consistent date for such annual testing. We determined the fair value of each reporting unit and compared it to the carrying amount of the reporting unit at March 31, 2002 and concluded there was no impairment. The allocation of acquisition intangible assets following our adoption of SFAS No. 142 is summarized in the following table: AS OF DECEMBER 31, 2002 Intangibles no longer amortized: Goodwill Amortizable intangibles: Customer base Software acquired Non-compete agreements G R O S S C A R R Y I N G A M O U N T $ 46,298 17,997 12,158 163 W E I G H T E D A V E R A G E A M O R T I Z A T I O N P E R I O D A C C U M U L A T E D A M O R T I Z A T I O N -- $ -- 21 years 5 years 4 years The changes in the carrying amount of goodwill for the year ended December 31, 2002 are as follows: Balance as of December 31, 2001 (cost of $51,063 and accumulated amortization of $7,771) Goodwill adjustments during 2002 relating to workforce (cost of $6,191 and accumulated amortization of $2,808 at January 1, 2002), net of deferred taxes of $377, being subsumed into goodwill upon the adoption of SFAS No. 142 on January 1, 2002 Balance as of December 31, 2002 3,352 9,561 153 $ 43,292 3,006 $ 46,298 N O T E S T O C O N S O L I D A T E D F I N A N C I A L S T A T E M E N T S ( C O N T I N U E D ) ( 7 ) G O O D W I L L A N D O T H E R I N T A N G I B L E A S S E T S ( C O N T I N U E D ) Estimated annual amortization expense relating to acquisition intangibles is as follows: YEARS ENDING DECEMBER 31, 2003 2004 2005 2006 2007 ( 8 ) A C C R U E D L I A B I L I T I E S Accrued liabilities consists of the following at December 31: Accrued wages and commissions Other accrued liabilities Current portion of long-term obligations Total accrued liabilities ( 9 ) L O N G - T E R M O B L I G A T I O N S Long-term obligations consists of the following at December 31: $ 2,800 1,500 900 900 900 $ 2 0 0 2 7,667 3,079 440 $ 2 0 0 1 7,071 2,580 123 $ 11,186 $ 9,774 $ 2 0 0 2 2,520 470 2,990 440 $ 2 0 0 1 2,800 233 3,033 123 $ 2,550 $ 2,910 10% promissory notes payable due January 2005 Other Total obligations Less current portion Total long-term obligations Long-term debt outstanding at December 31, 2002 matures as follows: 2003 - $440,000; 2004 - $30,000; and the remainder in 2005. We paid interest of $377,000 in 2002, $814,000 in 2001 and $8.8 million in 2000. On March 5, 2002, we entered into a revolving bank credit agreement. Our credit agreement matures January 1, 2005 and provides for total availability of up to $10.0 million. Borrowings bear interest at either prime rate or at the London Interbank Offered Rate plus a margin of 3% and are limited to 80% of eligible accounts receivable. The credit agree- ment is secured by substantially all of our personal property, by a pledge of the common stock of our operating subsidiaries, and is also guaranteed by 34 our operating subsidiaries. The credit agreement requires us to maintain certain ﬁnancial ratios and other ﬁnancial conditions and prohibits us from making certain investments, advances, cash divi- dends or loans. At December 31, 2002, our bank has issued outstand- ing letters of credit totaling $3.7 million under our credit agreement to secure performance bonds required by some of our customer contracts. Our borrowing base under the credit agreement is limited by the amount of eligible receivables and was reduced by the letters of credit at December 31, 2002. At December 31, 2002, we had no outstanding bank borrowings under the credit agreement and had an available borrowing base of $6.3 million. ( 1 0 ) I N C O M E T A X The income tax provision (beneﬁt) on income (loss) from continuing operations consisted of the following: YEARS ENDED DECEMBER 31, Current: Federal State Deferred 2 0 0 2 2 0 0 1 2 0 0 0 $ -- 485 485 3,384 $ -- 282 282 1,258 $ -- 80 80 (2,890) $ 3,869 $ 1,540 $ (2,810) Reconciliation of the U.S. statutory income tax rate to our effective income tax expense (beneﬁt) rate for continu- ing operations follows: YEARS ENDED DECEMBER 31, Income tax expense (beneﬁt) at statutory rate State income tax, net of federal income tax beneﬁt Non-deductible amortization Non-deductible business expenses Other, net $ 2 0 0 2 3,514 315 -- 40 -- $ 2 0 0 1 634 183 635 83 5 2 0 0 0 $ (3,611) 52 640 110 (1) $ 3,869 $ 1,540 $ (2,810) The tax effects of the major items recorded as deferred tax assets and liabilities as of December 31 are: Deferred income tax assets: Net operating loss carryforward Capital loss carryfoward Basis difference on investment security Operating expenses not currently deductible Employee beneﬁt plans Minimum tax credits Research tax credits Other Net deferred income tax assets before valuation allowance Less valuation allowance Net deferred income tax assets Deferred income tax liabilities: Basis difference on investment security Property and equipment Intangible assets Other Total deferred income tax liabilities Net deferred income tax liabilities 2 0 0 2 2 0 0 1 $ 3,734 1,114 -- 865 345 268 78 -- 6,404 (1,114) 5,290 (3,995) (1,148) (7,363) -- (12,506) $ 3,667 -- 1,591 967 299 268 78 100 6,970 (1,690) 5,280 -- (1,069) (6,442) (15) (7,526) $ (7,216) $ (2,246) N O T E S T O C O N S O L I D A T E D F I N A N C I A L S T A T E M E N T S ( C O N T I N U E D ) ( 1 0 ) I N C O M E T A X ( C O N T I N U E D ) ( 1 1 ) S H A R E H O L D E R S ’ E Q U I T Y At December 31, 2002, we had available approxi- mately $10.7 million of net tax operating loss carry- forwards for federal income tax purposes. These car- ryforwards, which may provide future tax beneﬁts, expire from 2011 through 2022. During the year ended December 31, 2002, we claimed a deduction for the write off of preferred stock which was deemed worthless for tax purposes. The preferred stock had an initial tax value of $3 million and was received in connection with the sale of our discontin- ued automotive parts subsidiary which was sold in March 1999. At December 31, 2002, we had available approximately $3.2 million of capital loss carryfor- wards for federal income tax purposes which expire December 31, 2006. Although realization is not assured, we believe it is more likely than not that all the deferred tax assets, except for the asset relating to the capital loss carry- forward will be realized. Accordingly, we believe no valuation allowance is required for the remaining deferred tax assets. However, the amount of the deferred tax asset considered realizable could be adjusted in the future if estimates of reversing tax- able temporary differences are revised. We paid income taxes, net of refunds received, of $455,000 in 2002 and $273,000 in 2001. In 2000 we received a refund of prior years' income taxes of $2.7 million. In May 2000, we sold 3.3 million shares of common stock and 333,380 warrants in a private placement for approximately $10.0 million in gross cash pro- ceeds, before deducting commissions and offering expenses of approximately $730,000. Each warrant is convertible into one share of common stock at an exercise price of $3.60 per share. The warrants expire in May 2005. As of December 31, 2002, we have an additional war- rant outstanding to purchase 2.0 million shares of our common stock at $2.50 per share. This warrant expires in September 2007. In August 2002, we consummated an agreement to purchase 1.1 million of our common shares from William D. Oates, a former director of Tyler, for a cash purchase price of $4.0 million. In October 2002, we repurchased an additional 400,000 of our shares as part of the initial agreement by assigning our rights and obligations under a Data License and Update Agreement associated with our discontinued information property records service business to eiStream. eiStream is an afﬁliate of William D. Oates. The repurchase of all 1.5 million shares was charged to treasury stock to the extent cash was paid. In August 2002, our Board of Directors approved a plan to repurchase up to 1.0 million shares of our common stock. Subsequent to December 31, 2002 and through February 21, 2003, we have repur- chased 339,000 shares for an aggregate purchase price of $1.4 million. 36 ( 1 2 ) S T O C K O P T I O N P L A N We have a stock option plan that provides for granting stock options to key employees and directors. Options become fully exercisable after three to eight years of continuous employment and expire ten years after the grant date. Once exercisable, the employee can purchase shares of our common stock at the market price on the date we granted the option. As of December 31, 2002 there were 1.2 million shares available for future grants under the plan from the original 6.5 million shares approved by the stockholders. The following table summarizes our stock option plan’s transactions for the three-year period ended December 31, 2002: Options outstanding at December 31, 1999 Granted Forfeited Exercised Options outstanding at December 31, 2000 Granted Forfeited Exercised Options outstanding at December 31, 2001 Granted Forfeited Exercised Options outstanding at December 31, 2002 Exercisable options: December 31, 2000 December 31, 2001 December 31, 2002 N U M B E R O F S H A R E S 3,418 498 (417) (5) W E I G H T E D - A V E R A G E E X E R C I S E P R I C E S 5.55 $ 2.76 6.16 3.88 3,494 2,185 (933) (108) 4,638 280 (322) (491) 4,105 1,385 1,504 1,910 5.08 1.70 5.18 2.13 3.54 4.86 5.65 3.29 $ 3.49 $ 5.04 5.20 4.26 The following table summarizes information concerning outstanding and exercisable options at December 31, 2002: R A N G E O F E X E R C I S E P R I C E S W E I G H T E D A V E R A G E R E M A I N I N G C O N T R A C T U A L L I F E N U M B E R O F O U T S T A N D I N G O P T I O N S W E I G H T E D A V E R A G E P R I C E O F O U T S T A N D I N G O P T I O N S N U M B E R O F E X E R C I S A B L E O P T I O N S $ 0.00 - $2.19 2.19 - 3.28 3.28 - 4.38 4.38 - 5.47 5.47 - 6.56 6.56 - 7.66 7.66 - 8.75 9.84 - 10.19 8.3 years 8.4 7.1 6.5 6.0 5.1 5.8 5.3 2,018 140 527 720 448 216 6 30 $1.64 2.62 4.02 5.24 6.18 7.63 7.75 10.19 634 38 283 432 321 173 5 24 W E I G H T E D A V E R A G E P R I C E O F E X E R C I S A B L E O P T I O N S $ 1.63 2.63 3.99 5.26 6.22 7.63 7.75 10.19 We previously granted an employee 50,000 shares of restricted common stock with a fair value of $303,000 at the grant date. We recorded annual compensation expense of $151,500 for the year ended December 31, 2000, based on the service period provided for in the agreement and the vesting period over which the restrictions lapse. N O T E S T O C O N S O L I D A T E D F I N A N C I A L S T A T E M E N T S ( C O N T I N U E D ) ( 1 3 ) E A R N I N G S ( L O S S ) P E R S H A R E Basic earnings and diluted earnings (loss) per common share data was computed as follows: Numerator: Income (loss) from continuing operations for basic and diluted earnings per share Denominator: Denominator for basic earnings per share – Weighted-average shares Effect of dilutive securities: Employee stock options Warrants Potentially dilutive common shares Denominator for diluted earnings per share – Adjusted weighted-average shares Y E A R S E N D E D D E C E M B E R 3 1 , 2 0 0 2 2 0 0 1 2 0 0 0 $ 6,172 $ 272 $ (7,507) 47,136 47,181 45,380 1,386 971 2,357 593 210 803 -- -- -- 49,493 47,984 45,380 Basic earnings (loss) per common share from continuing operations Diluted earnings (loss) per common share from continuing operations $ $ 0.13 0.12 $ $ 0.01 0.01 $ $ (0.17) (0.17) Stock options issuable under the stock option plan representing common stock equivalents of 1.3 million during 2002, 2.3 million during 2001 and 3.5 million during 2000 had exercise prices greater than the average quoted market price of our common stock. These common stock equivalents were outstanding during 2002, 2001 and 2000 but were not included in the computation of diluted earnings per share because their inclusion would have had an antidilutive effect. Additionally, warrants to purchase 333,380, and 2.3 million shares of our common stock for 2001 and 2000, respective- ly, were not included in the computation of diluted earnings per share because the effect would have been antidilutive. ( 1 4 ) L E A S E S ( 1 5 ) E M P L O Y E E B E N E F I T P L A N S We lease ofﬁces, transportation, computer and other equipment for use in our operations. Most of these leases are noncancelable operating lease agreements and expire at various dates through 2012. In addi- tion to rent, the leases generally require us to pay taxes, maintenance, insurance and certain other operating expenses. Rent expense was approximately $3.4 million in 2002, $2.8 million in 2001 and $2.1 million in 2000. Future minimum lease payments under all non- cancelable leases at December 31, 2002 are: F I S C A L Y E A R 2003 2004 2005 2006 2007 Thereafter O P E R A T I N G L E A S E S 3,504 $ 3,171 2,972 2,682 2,572 9,538 Total future minimum lease payments $ 24,439 We provide a deﬁned contribution plan for the major- ity of our employees meeting minimum service requirements. The employees can contribute up to 15% of their current compensation to the plan subject to certain statutory limitations. We contribute up to a maximum of 2% of an employee’s compensation to the plan. We made contributions to the plan and charged continuing operations $881,000 during 2002, $868,000 during 2001, and $761,000 during 2000. ( 1 6 ) C O M M I T M E N T S A N D C O N T I N G E N C I E S One of our non-operating subsidiaries, Swan Transportation Company (“Swan”), has been and is currently involved in various claims raised by hun- dreds 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 phys- ical conditions resulting from alleged exposure to sil- ica, asbestos, and/or related industrial dusts during the plaintiff's employment at the foundry. We sold the operating assets of the foundry on December 1, 38 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 peri- ods 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 sub- stantially 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 pur- suant 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 reor- ganization were held on December 9, 2002. The plan of reorganization received the afﬁrmative vote of approximately 99% of the total votes cast. All objec- tions to the plan were resolved prior to the conﬁrma- tion hearing, and the ﬁnal conﬁrmation order will therefore not be subject to appeal. The conﬁrmation order will discharge, release, and extinguish all of the foundry-related obligations and liabilities of Tyler, Swan, their affected afﬁliates, and the insurers participating in the funding of the trust. Further, the conﬁrmation order will include the issuance of injunctions that channel all present and future foundry-related claims into the trust and forever bar any such claims from being asserted, either now or in the future, against Swan, Tyler, their affected afﬁliates, and the participating insurers. In order to receive the beneﬁts described above, we have agreed, among other things, to transfer all of the capital stock of Swan to the trust (net assets of Swan at December 31, 2002 were $309,000) so that the trust can directly pursue claims against insurers who have not participated in the funding of the trust. In addi- tion, 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 dis- trict court judges, which is expected to occur by the end of the ﬁrst quarter of 2003. Our ultimate settle- ment obligation under the plan of reorganization of $1.5 million is approximately $200,000 less than the remaining carrying amount of the liability initially recorded for this matter. Accordingly, $200,000 ($130,000 net of tax) was included in the $1.8 million credit recorded for discontinued operations in 2002. See Note 3 – Discontinued Operations. We initially provided for estimated claim settlement costs when minimum levels can be reasonably esti- mated. If the best estimate of claim costs could only be identiﬁed within a range and no speciﬁc amount within that range could be determined more likely than any other amount within the range, the mini- mum of the range was accrued. Based on an initial assessment of claims and contingent claims that may result in future litigation, a reserve for the minimum amount of $2.0 million for claim settlements was ini- tially recorded in 1996. Legal and related profession- al services costs to defend litigation of this nature have been expensed as incurred. Other than ordinary course, routine litigation inci- dental to our business and except as described here- in, there are no material legal proceedings pending to which we or our subsidiaries are parties or to which any of our properties are subject. N O T E S T O C O N S O L I D A T E D F I N A N C I A L S T A T E M E N T S ( C O N T I N U E D ) ( 1 6 ) C O M M I T M E N T S A N D C O N T I N G E N C I E S ( C O N T I N U E D ) See Note 6 – Investment Securities Available-for-Sale, for discussion of litigation in connection with HTE’s attempted cash redemp- tion of all shares of HTE common stock currently owned by Tyler. ( 1 7 ) Q U A R T E R L Y F I N A N C I A L I N F O R M A T I O N ( u n a u d i t e d ) The following tables contain selected ﬁnancial information from unaudited consolidated statements of operations for each quarter of 2002 and 2001. Revenues (1) Gross proﬁt Income (loss) from continuing 2 0 0 2 2 0 0 1 Q U A R T E R E N D E D D E C 3 1 $ 36,396 14,228 S E P T 3 0 $ 34,974 12,312 J U N E 3 0 $ 33,605 11,708 M A R 3 1 $ 28,922 9,734 D E C 3 1 $ 31,463 11,346 S E P T 3 0 $ 28,658 9,920 J U N E 3 0 $ 31,237 10,132 M A R 3 1 $ 27,458 8,621 operations before income taxes 4,086 2,922 2,116 Income (loss) from continuing operations Income (loss) from discontinued 2,581 1,739 1,290 operations 1,817 -- -- 917 562 -- 1,310 163 35 614 251 745 372 (857) (514) (23) (1) (14) Net income (loss) $ 4,398 $ 1,739 $ 1,290 $ 562 $ 198 $ 228 $ 371 $ (528) Diluted earnings (loss) from continuing operations $ 0.05 $ 0.04 $ 0.03 $ 0.01 $ 0.00 $ 0.01 $ 0.01 $ (0.01) Diluted earnings (loss) from discontinued operations Net earnings (loss) per diluted share Shares used in computing 0.04 -- -- -- 0.00 (0.01) (0.00) (0.00) $ 0.09 $ 0.04 $ 0.03 $ 0.01 $ 0.00 $ 0.00 $ 0.01 $ (0.01) diluted earnings (loss) per share 48,482 49,372 50,405 49,725 48,915 48,396 47,425 47,179 (1) Previously reported amounts for revenues and cost of revenues for quarterly periods prior to October 1, 2002 have been reclassiﬁed to report certain reimbursable customer expenses as revenues and as cost of revenue in accordance with EITF 01-14 as discussed in Note 1 – Summary of Signiﬁcant Accounting Policies. We increased quarterly revenues and the related cost of revenues from the previously reported amounts for the following three-month periods ended: $ 186 260 223 259 266 289 281 March 31, 2001 June 30, 2001 September 30, 2001 December 31, 2001 March 31, 2002 June 30, 2002 September 30, 2002 40 S E L E C T E D F I N A N C I A L D A T A FOR THE YEARS ENDED DECEMBER 31, (In thousands, except per share data) Statement of Operations Data (1) Revenues (2) Costs and expenses: Cost of revenues (2) Selling, general and administrative expenses Amortization of acquisition intangibles (3) Operating income (loss) Legal fees associated with afﬁliated investment Interest (income) expense, net Income (loss) from continuing operations before income taxes Income tax provision (beneﬁt) Income (loss) from continuing operations Income (loss) from continuing operations per diluted share 2 0 0 2 2 0 0 1 2 0 0 0 1 9 9 9 1 9 9 8 $ 133,897 $ 118,816 $ 93,933 $ 71,416 $ 23,440 85,915 33,914 3,329 10,739 704 (6) 10,041 3,869 6,172 0.12 $ $ $ $ 78,797 30,830 6,898 2,291 -- 479 1,812 1,540 272 0.01 59,658 32,805 6,903 (5,433) -- 4,884 (10,317) (2,810) 37,027 29,404 4,966 19 -- 1,797 (1,778) 188 13,143 11,680 1,499 (2,882) -- 234 (3,116) (652) $ (7,507) $ (1,966) $ (2,464) $ (0.17) $ (0.05) $ (0.08) Weighted average diluted shares outstanding 49,493 47,984 45,380 39,105 32,612 Other Data: EBITDA (4) Statement of Cash Flows Data: Cash ﬂows from operating activities Cash ﬂows from investing activities Cash ﬂows from ﬁnancing activities Balance Sheet Data: (1) AS OF DECEMBER 31 Total assets Long-term obligations, less current portion Shareholders' equity $ 18,557 $ 13,203 $ 4,253 $ 6,130 $ (890) $ 19,845 (7,974) (3,398) $ 12,744 (9,706) (5,984) $ (7,126) $ 65,401 (52,022) 715 (24,743) 24,955 $ 1,758 (36,787) 27,893 $ 169,845 2,550 118,656 $ 146,975 2,910 100,884 $ 150,712 7,747 96,122 $ 243,260 61,530 138,904 $ 124,328 37,189 76,346 (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 opera- tions 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-pock- et 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 amor- tized 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. S E L E C T E D F I N A N C I A L D A T A ( C O N T I N U E D ) (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 per- formance such as operating income, cash ﬂows from operating activities, or any other measure for determining operating per- formance 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, Income (loss) from continuing operations before income taxes Amortization of acquisition intangibles Depreciation and amortization included in cost of revenues and selling, general and administrative expenses Interest (income) expense, net EBITDA 2 0 0 2 2 0 0 1 2 0 0 0 1 9 9 9 1 9 9 8 $ 10,041 3,329 $ 1,812 6,898 $ (10,317) $ (1,778) $ 6,903 4,966 (3,116) 1,499 5,193 (6) 4,014 479 2,783 4,884 1,145 1,797 493 234 $ 18,557 $ 13,203 $ 4,253 $ 6,130 $ (890) 42 M A N A G E M E N T ' S D I S C U S S I O N A N D A N A L Y S I S O F F I N A N C I A L C O N D I T I O N A N D R E S U L T S O F O P E R A T I O N S F O R W A R D - L O O K I N G S T A T E M E N T S In addition to historical information, this Annual Report 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 uncertain- ties that could cause actual results to differ material- ly from those reﬂected in the forward-looking state- ments. 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 pub- licly release the results of any revision to these for- ward-looking statements. Readers should carefully review the risk factors described in our Form 10-K and other documents we ﬁle from time to time with the SEC. When used in this Annual Report, the words “beli- eves,” “plans,” “estimates,” “expects,” “anticipates,” “intends,” “continue,” “may,” “will,” “should,” “proj- ects,” “forecasts,” “might,” “could” or the negative of such terms and similar expressions are intended to identify forward-looking statements. G E N E R A L 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, coun- ties, 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 out- sourced hosting for some of our applications at one of our data centers through an applications service provider (“ASP”) arrangement. We provide profes- sional IT services to our customers, including soft- ware 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 con- tinuing customer support services to ensure proper product performance and reliability. C R I T I C A L A C C O U N T I N G P O L I C I E S A N D E S T I M A T E S Our discussion and analysis of ﬁnancial condition and results of operations is based upon our consoli- dated ﬁnancial statements, which have been pre- pared in accordance with accounting principles gen- erally 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 vari- ous other assumptions that we believe to be reason- able under the circumstances, the results of which form the basis for making judgments about the car- rying 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, post- contract customer support/maintenance and services that typically range from installation, training and basic consulting to software modiﬁcation and cus- tomization to meet speciﬁc customer needs. For mul- tiple element software arrangements, which do not entail the performance of services that are consid- ered 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 war- ranties, which are provided at the time the revenue M A N A G E M E N T ' S D I S C U S S I O N A N D A N A L Y S I S O F F I N A N C I A L C O N D I T I O N A N D R E S U L T S O F O P E R A T I O N S ( C 0 N T I N U E D ) Intangible Assets and Goodwill. Our business acquisi- tions typically result in the creation of goodwill and other intangible asset balances, and these balances affect the amount and timing of future period amor- tization 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 tan- gible and intangible assets based on estimated fair value, with the excess allocated to goodwill. Accordingly, we have a signiﬁcant balance of acquisi- tion date intangible assets, including software, cus- tomer 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 gen- erally measured by a comparison of the carrying amount of an asset to its fair value generally deter- mined by estimated future net cash ﬂows expected to be generated by the asset. Recoverability of other intangible assets is generally measured by compari- son of the carrying amount to estimated undiscount- ed future cash ﬂows. The assessment of recoverabili- ty 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 tech- nologies developed by others may render our soft- ware products obsolete or non-competitive. is recognized. Since most of our customers are gov- ernmental entities, we rarely incur a loss resulting from the inability of a customer to make required payments. Occasionally, customers may become dis- satisﬁed with the functionality of the software prod- ucts and/or the quality of the services and request a reduction of the total contract price or similar con- cession. 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 cus- tomer'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 sub- stantially 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 rev- enues, 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. 44 A N A L Y S I S O F R E S U L T S O F O P E R A T I O N S A N D O T H E R 2002 Compared to 2001 The following table includes items from our audited consolidated ﬁnancial statements and the relevant percent- age change in the amounts between the periods presented. The amounts shown in the table are in thousands, except the per share data: Y E A R S E N D E D D E C E M B E R 3 1 , 2 0 0 2 2 0 0 1 % C H A N G E Revenues: Software licenses Software services Maintenance Appraisal services Hardware and other Total revenues Cost of revenues: Software licenses Software services and maintenance Appraisal services Hardware and other Total cost of revenues % of revenues Gross proﬁt % of revenues Selling, general and administrative expenses % of revenues Amortization of acquisition intangibles Operating income Legal fees associated with afﬁliated investment Interest (income) expense Income before income taxes Income tax provision Effective income tax rate Income from continuing operations Diluted earnings per share from continuing operations 25% 19 11 7 (8) 13 33 9 7 (0) 9 20 10 (52) 369 $ 24,278 25,703 40,667 37,319 5,930 $ 19,491 21,538 36,587 34,727 6,473 133,897 118,816 5,482 50,175 25,512 4,746 85,915 4,130 46,024 23,894 4,749 78,797 64.2% 66.3% 47,982 35.8% 33,914 25.3% 3,329 10,739 704 (6) 10,041 3,869 40,019 33.7% 30,830 25.9% 6,898 2,291 -- 479 1,812 1,540 38.5% 85.0% $ 6,172 $ 272 $ 0.12 $ 0.01 Cash ﬂows provided by operating activities $ 19,845 $ 12,744 Cash balance at December 31 Capital expenditures: Software development costs Property and equipment 13,744 5,271 7,210 2,508 6,225 3,101 M A N A G E M E N T ' S D I S C U S S I O N A N D A N A L Y S I S O F F I N A N C I A L C O N D I T I O N A N D R E S U L T S O F O P E R A T I O N S ( C 0 N T I N U E D ) Maintenance revenues. For the year ended December 31, 2002, maintenance revenue increased $4.1 mil- lion, 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 relat- ing to past services. Excluding this settlement, main- tenance revenue increased approximately 13% for the year ended December 31, 2002 compared to the prior year. Appraisal services revenues. Appraisal services rev- enues 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 mil- lion 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 the Nassau County contract had been completed as of December 31, 2002. C O S T O F R E V E N U E S 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 sev- eral 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. Development costs mainly consist of personnel costs, such as salary and beneﬁts paid to our software developers, rent for related ofﬁce space and capital- ized interest costs. R E V E N U E S The following table compares the components of revenue as a percentage of total revenues for the periods presented: YEARS ENDED DECEMBER 31, Software licenses Software services Maintenance Appraisal services Hardware and other 2 0 0 2 18.1% 19.2 30.4 27.9 4.4 2 0 0 1 16.4% 18.1 30.8 29.2 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 enhance- ments. 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 instal- lation 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 approx- imately $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 con- tract 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. 46 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 sup- port 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%, com- pared 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. G R O S S P R O F I T For the years ended December 31, 2002 and 2001, our overall gross margin was 36% and 34%, respec- tively. The 2002 gross margin beneﬁted from a prod- uct 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 hard- ware. 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 soft- ware development amortization during 2002. S E L L I N G , G E N E R A L A N D A D M I N I S T R A T I V E E X P E N S E S 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. A M O R T I Z A T I O N O F A C Q U I S I T I O N I N T A N G I B L E S 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 Account- ing 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. I N T E R E S T ( I N C O M E ) E X P E N S E Our cash balances have increased signiﬁcantly during 2002 due to cash generated from operations, the receipt of proceeds from the sale of certain discontin- ued 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 inter- est 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 com- pared 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. I N C O M E T A X P R O V I S I O N 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 good- will amortization in periods prior to 2002. D I S C O N T I N U E D O P E R A T I O N S Discontinued operations consists of the operating results of the information and property records serv- M A N A G E M E N T ' S D I S C U S S I O N A N D A N A L Y S I S O F F I N A N C I A L C O N D I T I O N A N D R E S U L T S O F O P E R A T I O N S ( C 0 N T I N U E D ) ices 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 pro- gram 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 opera- tions 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 remain- ing businesses and assets of the information and property records services segment to be disposed of by December 29, 2001. The estimated loss on the dis- posal 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 con- sisted of an estimated loss on disposal of the busi- nesses 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 pro- ceeds of $575,000, approximately 60,000 shares of 48 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 subordi- nated note receivable is highly dependent upon future operations of the buyer, we are recording its value when the cash is received which is our histori- cal 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 sub- sidiary that were previously not allowed. The tax beneﬁt of allowing the deduction of this loss amount- ed to approximately $970,000. In addition, we rene- gotiated 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 con- tingent 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 initial- ly established for this matter (See Note 16 in Notes to Consolidated Financial Statements). The aggre- gate 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 dis- continued operations are adequate. The income tax expense or beneﬁt associated with the gains or losses on the respective sales of the busi- nesses in the information and property records serv- ices 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 valu- ation account prior to the respective sales. 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 dis- continued 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). I N V E S T M E N T S E C U R I T Y A V A I L A B L E - F O R - S A L E Pursuant to an agreement with two major sharehold- ers of H.T.E., Inc. (“HTE”), we acquired approxi- mately 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 share- holders of HTE. On November 16, 2000, the share- holders 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, pursu- ant 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 pur- ported 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 com- plaint 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 judg- ment 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 out- standing 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 redemp- tion 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 there- fore 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 trans- fer 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 operat- ing 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. M A N A G E M E N T ' S D I S C U S S I O N A N D A N A LY S I S O F F I N A N C I A L C O N D I T I O N A N D R E S U L T S O F O P E R A T I O N S ( C 0 N T I N U E D ) 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 ten- der 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 con- summation 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. N E T I N C O M E Net income was $8.0 million in 2002 compared to $269,000 in 2001. For 2002 and 2001, diluted earn- ings per share was $0.16 and $0.01, respectively. Net income for 2002 included a gain on disposal of dis- continued 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 R E V E N U E S 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. quarter. For the year ended December 31, 2001, soft- ware 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 soft- ware 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. 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 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 50 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 depend- ent on the contract size and on varying customer hardware needs. 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 esti- mated useful lives. Amortization expense of acquisi- tion intangibles was $6.9 million in 2001 and 2000. C O S T O F R E V E N U E S N E T I N T E R E S T E X P E N S E For the year ended December 31, 2001, cost of rev- enues 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 soft- ware development costs. S E L L I N G , G E N E R A L A N D A D M I N I S T R A T I V E E X P E N S E S 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 percent- age 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 acqui- sition-related costs such as legal and travel expens- es and lower research and development costs which are expensed. A M O R T I Z A T I O N O F A C Q U I S I T I O N I N T A N G I B L E S We accounted for all of our past acquisitions using the purchase method of accounting for business com- binations. Prior to the adoption of SFAS No. 142, the 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. I N C O M E T A X P R O V I S I O N 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 amortiza- tion. 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%. N E T I N C O M E Net income was $269,000 in 2001 compared to a net loss of $24.6 million in 2000. For 2001, diluted earn- ings per share was $0.01 and, for 2000, diluted loss per share was $0.54. Income from continuing opera- tions 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. A C C O U N T I N G P R O N O U N C E M E N T S N O T Y E T A D O P T E D 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 retire- ment obligation as a liability in the period in which it incurs a legal obligation associated with the retire- ment of tangible long-lived assets that result from the acquisition, construction, development, and/or M A N A G E M E N T ' S D I S C U S S I O N A N D A N A LY S I S O F F I N A N C I A L C O N D I T I O N A N D R E S U L T S O F O P E R A T I O N S ( C 0 N T I N U E D ) 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 exist- ing 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-lease- back accounting for certain lease modiﬁcations that have economic effects similar to sale-leaseback trans- actions. 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. In June 2002, the FASB issued SFAS No. 146, “Accounting for Costs Associated with Exit or Disposal Activities.” SFAS No. 146 addresses ﬁnan- cial 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 interpreta- tion of FASB Statements No. 5, 57 and 107 and a 52 rescission of FASB Interpretation No. 34. This Interpretation elaborates on the disclosures to be made by a guarantor in its interim and annual ﬁnan- cial statements about its obligations under guarantees issued. The Interpretation also clariﬁes that a guaran- tor is required to recognize, at inception of a guaran- tee, a liability for the fair value of the obligation undertaken. The initial recognition and measurement provisions of the Interpretation are applicable to guar- antees 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 annu- al 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. F I N A N C I A L C O N D I T I O N A N D L I Q U I D I T Y On March 5, 2002, we entered into a new $10.0 mil- lion 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 agree- ment 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 receiv- able 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 receiv- able 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 develop- ment costs. The other expenditures related to com- puter equipment and expansions related to internal growth. Capital expenditures were funded principally from cash generated from operations. 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 opera- tions under noncancelable operating lease agree- ments expiring at various dates through 2012. Most leases contain renewal options and some con- tain purchase options. Following are the future obligations under noncancelable leases and maturi- ties of long-term obligations at December 31, 2002 (in millions): 2003 2004 2005 2006 2007 Thereafter F U T U R E R E N T A L P A Y M E N T S U N D E R O P E R A T I N G L E A S E S $ 3.5 3.2 3.0 2.7 2.5 9.5 $ 24.4 N O T E S P A Y A B L E A N D O T H E R $ 0.5 0.0 2.5 -- -- -- $ 3.0 T O T A L $ 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 repur- chased 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 ten- der 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 approxi- mately $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 oppor- M A N A G E M E N T ' S D I S C U S S I O N A N D A N A LY S I S O F F I N A N C I A L C O N D I T I O N A N D R E S U L T S O F O P E R A T I O N S ( C 0 N T I N U E D ) tunities 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. C A P I T A L I Z A T I O N 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 mil- lion of shareholders’ equity. Our total debt-to-capital ratio (total debt divided by the sum of total share- holders’ equity and total long-term obligations) was 2% at December 31, 2002. 54 C O R P O R A T E O F F I C E R S T R A N S F E R A G E N T A N D R E G I S T R A R John M. Yeaman President and Chief Executive Officer Theodore L. Bathurst Vice President and Chief Financial Ofﬁcer Brian K. Miller Vice President – Finance and Treasurer Equiserve Trust Company, N.A. P.O. Box 43023 Providence, Rhode Island 02940-3023 816.843.4299 equiserve.com I N D E P E N D E N T A U D I T O R S H. Lynn Moore, Jr. Vice President – General Counsel and Secretary Ernst & Young LLP Dallas, Texas Rick L. Hoff Chief Technology Ofﬁcer Terri L. Alford Controller L E G A L C O U N S E L Gardere Wynne Sewell LLP Dallas, Texas B O A R D O F D I R E C T O R S I N V E S T O R I N F O R M A T I O N The Company’s Annual Report on Form 10-K is available on the Company’s Web site at tylertechnologies.com. A copy of the Form 10-K or other information may be obtained by contacting the Investor Relations Department at corporate headquarters. I N V E S T O R R E L A T I O N S Tyler Technologies, Inc. 972.713.3700 info@tylertechnologies.com C O M M O N S T O C K Listed on the New York Stock Exchange under the symbol “TYL” G. Stuart Reeves Chairman of the Board Retired Executive Vice President Electronic Data Systems Corporation Ben T. Morris President and Chief Executive Ofﬁcer Sanders Morris Harris Glenn A. Smith President – Courts & Justice Division Tyler Technologies, Inc. John M.Yeaman President and Chief Executive Ofﬁcer Tyler Technologies, Inc. John S. Marr, Jr. President – Large Financial Division Tyler Technologies, Inc. Michael D. Richards Chairman and Chief Executive Ofﬁcer Reunion Title Company C O R P O R A T E H E A D Q U A R T E R S 5949 Sherry Lane, Suite 1400 Dallas, Texas 75225 972.713.3700 tylertechnologies.com T Y L E R T E C H N O L O G I E S 5949 Sherry Lane Suite 1400 Dallas, Texas 75225 972.713.3700 tylertechnologies.com

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