Tyler Technologies - 10-Q quarterly report FY

We had no realized losses for the three and six months ended June 30, 2005, respectively, compared to $14,000 and $10,000 during the three and six months ended June 30, 2004 in connection with the disposition of certain of our short term investments.

We have $7.5 million invested in a certificate of deposit with a maturity date in excess of one year included in other assets, of which $4.8 million is restricted to collateralize letters of credit required under our surety bond program. These letters of credit expire in 2006.

As of June 30, 2005, we have authorization from our board of directors to repurchase up to 941,000 additional shares of Tyler common stock.

In May 2004, the shareholders of Tyler voted to adopt the Tyler Technologies, Inc. Employee Stock Purchase Plan (“ESPP”). Under the ESPP, participants may contribute up to 15% of their annual compensation to purchase common shares of Tyler. In January, April and July 2005, Tyler issued approximately 48,000, 44,000, and 42,000 shares of common stock, respectively to the ESPP. On March 8, 2005, the board of directors amended the plan to the effect that the purchase price of the shares is equal to 85% of the closing price of Tyler common stock on the last day of each quarterly offering period. Previously, the purchase price of the shares was equal to 85% of the closing price of Tyler common stock on either the first or last day of each quarterly offering period, whichever was lower.

Comprehensive income is comprised of net income and unrealized gains and losses on investment securities. For the three and six months ended June 30, 2004 comprehensive income is $2.9 million and $5.1 million which includes unrealized losses, net of income tax benefit, on investment securities of $30,000 and $15,000, respectively. In 2005 we had no unrealized gains or losses and comprehensive income was the same as net income.

We made federal and state income tax payments, net of refunds, of $3.2 million in the six months ended June 30, 2005, compared to $3.3 million in net payments for the same period of the prior year. The effective income tax rates were different from the statutory United States federal income tax rate of 35% primarily due to the state income taxes and non-deductible meals and entertainment costs.

FORWARD-LOOKING STATEMENTS

The statements in this discussion that are not historical statements are “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995. These forward-looking statements include statements about our business, financial condition, business strategy, plans and the objectives of our management, and future prospects. In addition, we have made in the past and may make in the future other written or oral forward-looking statements, including statements regarding future operating performance, short- and long-term revenue and earnings growth, the timing of the revenue and earnings impact for new contracts, backlog, the value of new contract signings, business pipeline, and industry growth rates and our performance relative thereto. Any forward-looking statements may rely on a number of assumptions concerning future events and be subject to a number of uncertainties and other factors, many of which are outside our control, which could cause actual results to differ materially from such statements. These include, but are not limited to: our ability to improve productivity and achieve synergies from acquired businesses; technological risks associated with the development of new products and the enhancement of existing products; changes in the budgets and regulating environments of our governmental customers; competition in the industry in which we conduct business and the impact of competition on pricing, revenues and margins; with respect to customer contracts accounted for under the percentage-of-completion and proportionate performance methods of accounting, the performance of such contracts in accordance with our cost and revenue estimates; our ability to maintain health and other insurance coverage and capacity due to changes in the insurance market and the impact of increasing insurance costs on the results of operations; the costs to attract and retain qualified personnel, changes in product demand, the availability of products, economic conditions, costs of compliance with corporate governance and public disclosure requirements as issued by the Sarbanes-Oxley Act of 2002 and New York Stock Exchange rules, changes in tax risks and other risks indicated in our filings with the Securities and Exchange Commission. The factors described in this paragraph and other factors that may affect Tyler, its management or future financial results, as and when applicable, are discussed in Tyler’s filings with the Securities and Exchange Commission, on its Form 10-K for the year ended December 31, 2004. Except to the extent required by law, we are not obligated to update or revise any forward-looking statements whether as a result of new information, future events or otherwise. When used in this Quarterly Report, the words “believes,” “plans,” “estimates,” “expects,” “anticipates,” “intends,” “continue,” “may,” “will,” “should,” “projects,” “forecast,” “might,” “could” or the negative of such terms and similar expressions as they relate to Tyler or our management are intended to identify forward-looking statements.

GENERAL

We provide integrated information management solutions and services for local governments. We develop and market a broad line of software products and services to address the information technology (IT) needs of cities, counties, schools and other local governmental entities. In addition, we provide professional IT services to our customers, including software and hardware installation, data conversion, training and for certain customers, product modifications, along with continuing maintenance and support for customers using our systems. We also provide property appraisal outsourcing services for taxing jurisdictions.

CRITICAL ACCOUNTING POLICIES AND ESTIMATES

The discussion and analysis of our financial condition and results of operations are based upon our condensed consolidated financial statements. These condensed consolidated financial statements have been prepared following the requirements of accounting principles generally accepted in the United States (GAAP) for interim periods and require us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities. On an on going basis, we evaluate our estimates, including those related to revenue recognition and amortization and potential impairment of intangible assets and goodwill. As these are condensed financial statements, one should also read our Form 10-K for the year ended December 31, 2004 regarding expanded information about our critical accounting policies and estimates.

ANALYSIS OF RESULTS OF OPERATIONS

The following table sets forth the key components of our revenues for the periods presented as of June 30:

Software licenses. Software license revenues for the three months ended June 30, 2005 increased $469,000 compared to the prior year period due to small increases across all product lines. Although software license revenues for the six months ended June 30, 2005 were flat compared to the prior year period, we experienced a moderate increase in revenues from our Odyssey courts and justice software product which was offset by lower license revenues from appraisal and tax software products. Since March 2004, we have added eight new Odyssey contracts totaling an estimated $11.8 million, for which we are recognizing revenue using the percentage of completion method of contract accounting in which the contract revenues are spread over the service period. Appraisal and tax product software license in the first quarter of 2004 included $450,000 related to the installation of our Automated Valuation Model (“AVM”) at the Valuation Office Agency of the United Kingdom. We had no comparable AVM sales in the first six months of 2005. During March through December 2004 we introduced additional modules of our Orion appraisal and tax products and the acceptance of these new products in the marketplace is on-going. While we have signed a number of contracts for our new Orion software, certain of the installations of that product have taken longer than we initially anticipated and, therefore, we have been unable to recognize revenue on those contracts. In addition, we are recognizing revenue on our Orion contracts using contract accounting.

In June 2005, we entered into a contract with the state of New Jersey to implement a statewide Property Assessment Management System valued at nearly $10.0 million. The contract includes ouriasWorld assessment and tax software, along with related professional services and is expected to be completed by mid — 2008. We recorded only a minor amount of software license revenue related to this contract in June 2005.

Software services. Changes in software services revenues consist of the following components:

Maintenance. We provide maintenance and support services for our software products and third party software. Maintenance revenues increased due to growth in our installed customer base and slightly higher maintenance rates on certain product lines.

The following table sets forth a comparison of the key components of our cost of revenues and gross margins, and those components stated as a percentage of related revenues:

The following table sets forth a comparison of our selling, general and administrative expenses:

Selling, general and administrative expenses as a percent of revenues increased 2% for the six months ended June 30, 2005 compared to the prior year period, mainly due to the level of costs associated with the appraisal and tax business, where revenues have declined. In late April 2005, we made significant organizational changes to areas of our business that were not performing to our expectations in an effort to bring costs in line with expected levels of revenue. See “Restructuring Charge.”

The following table sets forth a comparison of amortization of acquisition intangibles:

In May 2005, we sold certain assets of our appraisal and tax software division to a private investor for $75,000 in cash plus future contingent consideration. Proceeds consisted of $75,000 cash at closing and the remainder is payable in sixteen quarterly payments of $25,000, which are subject to reduction in the event of customer contract losses. Because the collection of the remaining proceeds is highly dependent upon future operations of the buyer and due to certain capitalization characteristics of the

buyer, we are unable to estimate the degree of recoverability and will record the value of the contingent payments as cash is received. We recorded a gain on sale of $62,000 during the quarter ended June 30, 2005. Revenues and expenses related to these assets were insignificant.

The following table sets forth a comparison of our income tax provision:

FINANCIAL CONDITION AND LIQUIDITY

On February 11, 2005, we entered into a new revolving bank credit agreement. The credit agreement matures February 11, 2008 and provides for total borrowings of up to $30.0 million. Borrowings bear interest at either prime rate or at LIBOR plus a margin of 1.5%. As of June 30, 2005, our effective interest rate was 4.8%. The credit agreement is secured by substantially all of our

personal property and contains covenants that require us to maintain certain financial ratios and other financial conditions and prohibits us from making certain investments, advances, cash dividends or loans. As of June 30, 2005, we are in compliance with those covenants. The new credit agreement also includes a $10.0 million Letter of Credit facility under which the banks will issue cash collateralized letters of credit.

At June 30, 2005, we had no outstanding bank borrowings under the credit agreement and our bank had issued letters of credit totaling $4.8 million to secure surety bonds required by some of our customer contracts. All of the outstanding letters of credit were collateralized with a certificate of deposit; thus, we had available credit of $30.0 million under the credit agreement.

We made federal and state income tax payments, net of refunds of $3.2 million in the six months ended June 30, 2005 compared to $3.3 million in the comparable prior year.

In May 2005, we sold certain assets of our appraisal and tax software division to a private investor for $75,000 in cash plus future contingent consideration. Proceeds consisted of $75,000 cash at closing and the remainder is payable in sixteen quarterly payments of $25,000, which are subject to reduction in the event of customer contract losses. Because the collection of the remaining proceeds is highly dependent upon future operations of the buyer and due to certain capitalization characteristics of the buyer, we are unable to estimate the degree of recoverability and will record the value of the contingent payments as cash is received. We recorded a gain on sale of $62,000 during the quarter ended June 30, 2005.

We maintain disclosure controls and procedures designed to ensure that we are able to collect the information we are required to disclose in the reports we file with the Securities and Exchange Commission (“SEC”), and to process, summarize and disclose this information within the time periods specified in the rules of the SEC. Based on an evaluation of our disclosure controls and procedures as of the end of the period covered by this report conducted by our management, with the participation of the Chief Executive and the Chief Financial Officer, the Chief Executive and Chief Financial Officer believe that these controls and procedures are effective to ensure that we are able to collect, process and disclose the information we are required to disclose in the reports we file with the SEC within the required time periods.

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We held our annual meeting of stockholders on May 19, 2005. The results of the matters voted on at the meeting are as follows:

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